Guidelines for Implementation of Executive Order No. 44 Re Compromise Settlement of (1) Delinquent Tax Accounts; or (2) Disputed Tax Assessments, as of December 31, 1985

November 18, 1986 REVENUE MEMORANDUM ORDER NO. 39-86 SUBJECT : Guidelines for Implementation of Executive Order No. 44 Re Compromise Settlement of (1) Delinquent Tax Accounts; or (2) Disputed Tax Assessments, as of December 31, 1985 TO : All Internal Revenue Officers and Others Concerned This memorandum order is issued, pursuant to Sections 1 and 2 of Executive Order No. 44 which took effect on September 4, 1986 and in accordance with its implementing Revenue Regulations No. 17-86, dated October 8, 1986. cd i 1. Coverage . - This Order shall apply only to (1) delinquent tax accounts; or (2) disputed tax assessments pending as of December 31, 1985 within the purview of Executive Order No. 44 and its implementing regulations. 2. Period for availment . - Filing of application for compromise settlement under the said law shall be effective only until March 31, 1987. Applications filed on or before this date shall be valid even if the payment or payments of the compromise amount shall be made after the said date, subject, however, to the provisions of Executive Order No. 44 and its implementing Revenue Regulations No. 17-86. 3. Disqualification . - 3.1 There are pending assessments for withholding taxes. By operation of law, the relationship between the Government and the withholding agent is one of agency for which reason the withholding agent only holds the funds withheld by him in trust for the Government. Accordingly, a withholding tax assessment issued against a withholding agent (1) who withheld the tax (2) but did not remit the same to the Government, shall not qualify for compromise settlement herein prescribed, even if the assessment was issued as of December 31, 1985, because under this situation he is being made accountable not as a taxpayer but as an agent. The disputed or delinquency cases covered by Executive Order No. 44 refer only to those where the person assessed is himself the taxpayer rather than a mere agent. aisa dc 3.2 There is, however, another situation whereby a withholding agent did not withhold the tax either because of neglect, ignorance of law or his belief that he is not required by law to withhold a tax. Under this situation, such person is made directly accountable for the tax. This latter situation shall, however, qualify for compromise settlement, subject to the provisions of paragraph 1 hereof, in relation to implementing revenue regulations of Executive Order No. 44. 4. Evaluation Committee . - pursuant to Section 2 of Executive Order No. 44, whereby a compromise settlement rate lower than 30% but in no case lower than 10% may be allowable as the circumstances warrant, Evaluation Committees are hereby created in the following revenue offices for the purpose of passing upon cases involving compromise settlement rate below 30%. In determining applicable compromise settlement rate, The Committee shall be guided by the rates schedule prescribed in the succeeding paragraphs. cdt 4.1 National Office Evaluation Committee Chairman Revenue Service Chief (Collection) Members Asst. Rev. Service Chief (Assessment Office) Asst. Rev. Service Chief (Legal Office) Asst. Rev. Service Chief (Sectoral Office) 4.2 Regional Office Evaluation Committee Chairman Asst. Regional Director Members Asst. Chief (Collection Branch) Asst. Chief (Legal Branch) Asst. Chief (Assessment Branch) 4.3 Where there are two or more assistant chiefs in the foregoing offices, the Chairman shall designate one of the said assistant chiefs as a member of the Evaluation Committee. 5. Mode of procedures . - 5.1 Allowable compromise settlement rate in general . - In general, the allowable compromise settlement rate shall be equal to 30% of the basic tax assessed. This means that the surcharge, interest or compromise penalty included in the amount assessed, if any, shall be excluded in computing for the base upon which the compromise settlement rate shall be applied. 5.2 Approving authority . - Except for compromise settlement involving a compromise settlement rate of thirty percent (30%) prescribed under paragraph 5.1 above, all applications for compromise settlement under Executive Order No. 44 shall be subject to approval by the Commissioner of Internal Revenue. Cases where the compromise settlement rate applied is equal to thirty percent (30%) of the basic tax assessed shall be considered closed on the day the compromise amount is paid. This case needs no evaluation or approval by any revenue office other than the revenue office which had processed the application in accordance with the guidelines herein prescribed and the implementing regulations of Executive Order No. 44. cd i 5.3 Application involving compromise settlement rate which is below 30% . - All applications involving a compromise settlement rate which is lower than 30% of the basic tax assessed shall be subject to evaluation by the appropriate Evaluation Committee. 5.4 Evaluation Committee Mode of Procedures . - The Evaluation Committee shall evaluate the case and submit its recommendation, subject to approval (or disapproval) by the Commissioner of Internal Revenue, payment/s already made by the applicant-taxpayer shall not be considered final but shall be considered subject to approval of the Commissioner for purposes of closing the case. If the application for a lower compromise settlement rate, as recommended by the Evaluation Committee, is disapproved by the Commissioner, the said payment/s shall be automatically credited in favor of the taxpayer for purposes of determining the additional compromise amount that may be legally suggested against the taxpayer, if qualified for compromise settlement under Executive Order No. 44, or for purposes of assessing the additional deficiency or delinquency internal revenue tax, if disqualified for compromise settlement. cd i If the case is qualified for compromise settlement and the only reason for disapproval is in connection with a suggested compromise settlement rate, such disapproval shall in no case be considered as nullifying taxpayer's right to avail of the compromise settlement granted under Executive Order No. 44. 6. Base of the compromise settlement rate . - The compromise settlement rate shall be applied against the basic tax assessed referred to under paragraph 5.1 hereof. In no case may any revenue office passing upon cases covered hereunder cause any computational adjustment or adjustments in determining the basic tax before applying the compromise settlement rate, any error in the assessment and demand being compromised notwithstanding. In all instances, the compromise settlement rate shall be applied against the basic tax assessed. If the assessment is covered by a letter of demand and assessment notice, the compromise settlement rate shall be applied against the basic tax assessed as shown in the said letter of demand and assessment notice. 7. Allowable compromise settlement rates below thirty percent (30%) . - The Evaluation Committee shall apply exclusively the compromise settlement rates prescribed hereunder: 7.1 '"Jeopardy'" tax assessment as defined under RMO 17-85 (while RMO 17-85 speaks only of income tax assessments, this compromise settlement shall, however, apply to all internal revenue tax assessments in the nature of a '"jeopardy'" tax assessment) 10% 7.2 Arbitrary assessments which have been issued only and primarily to forestall prescription 10% 7.3 Tax assessments of doubtful validity whether as to law or as to facts 15% 7.4 If taxpayer (i) is an individual; (ii) whose only source of income is from employment; and (iii) whose monthly salary, if single, is P4,000 or less, or if married, whose salary together with his spouse is P8,000 per month, or less 10% 7.5 If taxpayer is an individual without any source of income 10% 7.6 Where the taxpayer is financially incapable to pay: 7.6.1 Zero networth 10% 7.6.2 Negative networth 10% 7.6.3 Dissolved corporations 10% 7.6.4 Already non-operating companies as of the year 1985 10% 7.6.5 Corporations suffering from impairment of capital 10% 7.6.6 With positive networth and with accumulated profits (if corporate) but suffering from working capital requirement. Determination should be based on '"Current Ratio'", i.e., the ratio of current assets to current liabilities. Use normal current ratio computation. Do not use '"acid test ratio'". a) Current ratio (P1: P1 or below) 20% b) Current ratio (P2:P1 or above) 25% 7.7 Documentary requirements . - 7.7.1 If application for compromise is premised under paragraph 7.4, the taxpayer-applicant shall submit with his application (a) a certification from his/their employer/s on his/their prevailing monthly salary, including allowances; and (b) a sworn statement that he/they have no other sources of income other than from employment. 7.7.2 If application is premised under paragraph 7.5, taxpayer-applicant shall submit with his application a sworn statement that he derives no income from any source whatever. 7.7.3 If application is premised under paragraph 7.6, a copy of the applicant's latest balance sheet filed with the BIR shall be submitted with the application. 7.8 For other meritorious cases not embraced under paragraphs 7.1 to 7.6 hereof, the Evaluation Committee may recommend a compromise settlement rate lower than thirty percent (30%) but in no case may the rate be lower than ten percent (10%). 7.9 For purposes of computing current ratios prescribed under paragraph 7.6.6 hereof, a fraction involving P.50 or more shall be considered as P1.00 while a fraction involving less than P.50 shall be disregarded. 7.10 Computation of the networth and current ratio referred to in paragraph 7.6 shall be exclusively based on the face of the balance sheet submitted with the application as referred to in paragraph 7.7.3. Such determination shall be exclusively in conformity with the accounting presentation as shown in the said balance sheet, any opinion as to how the same should have been presented, accounting wise, notwithstanding. In no case may the Evaluation Committee readjust the accounting presentation as shown in the said balance sheet. 8. Clearance . - 8.1 30% compromise settlement rate . - If the compromise settlement rate is equivalent to 30% of the basic tax assessed, immediate action shall be taken on the taxpayer-applicant's application. After payment of the compromise amount, the revenue office which passed upon the application as referred to in paragraph 5.2 hereof, shall issue to the taxpayer a letter, signed by the chief of the said revenue office, confirming the payment and advising that the case is already closed. 8.2 Below 30% compromise settlement rate . - If the recommended compromise settlement rate is below 30%, the Evaluation Committee shall forward to the Office of the Commissioner the complete docket of the case, together with (a) its report and recommendation; and (b) a letter to the taxpayer-applicant, for the signature of the Commissioner, advising of action taken on the case. Action on these cases shall be taken by the Evaluation Committee as early as possible. This Memorandum Order shall take effect immediately. BIENVENIDO A. TAN, JR. Commissioner