(BDB Laws Tax Law For Business appears in the opinion section of BusinessMirror every

Thursday. BDB Law is an affiliate of Punongbayan & Araullo (P&A).

The Best Evidence Obtainable Rule

Time and again, it has been held that taxes are the lifeblood of the nation. Taxes are
what we pay for a civilized society. Without taxes, the government would be paralyzed
for lack of motive power to activate and operate it. Thus, the assessment of correct taxes
due from a taxpayer cannot be hampered by failure to file or, otherwise, by filing of a
false or fraudulent return or other document prescribed by law.
It is important to note that the Commissioner of Internal Revenue (CIR) is not just
empowered but also duty-bound to assess the proper tax on the best evidence
obtainable when a report required by law as a basis for the assessment of any national
internal-revenue tax is not forthcoming within the time fixed by laws or regulations, or
when there is a reason to believe that any such report is false, incomplete or erroneous.
This is more commonly known as the Best Evidence Obtainable Rule found under
Section 6(B) of the 1997 National Internal Revenue Code (NIRC).
For the purpose of obtaining best evidence to determine the correct tax liabilities of
taxpayers, the CIR or his delegated officer is given vast powers to obtain information.
These powers include summoning, examining and taking testimonies of third persons
save for inquiring into bank deposit accountswhich is only allowed in specific cases
provided in the Tax Code.
Thereafter, the CIR may make a return or amend any return filed by a taxpayer on the
basis of the best evidence obtained by him. The return so made or amended is prima
facie good and sufficient for all legal purposes. Hence, corollary thereto, the burden of
proof is upon the taxpayer to show clearly that the assessment is erroneous. Failure to
present proof of error in the assessment will justify the judicial affirmation of the
assessment.

In the case CIR of Internal Revenue v. Hantex Trading Co. Inc., GR 136975 dated
March 31, 2005, the Supreme Court held that the best evidence envisaged in the rule
include the corporate and accounting records of the taxpayer who is the subject of the
assessment process, as well as the accounting records of other taxpayers engaged in
the same line of business, including their gross profit and net profit sales. Such evidence
also contemplates data, records, papers, documents or any evidence gathered by
internal-revenue officers from other taxpayers who had personal transactions or from
whom the subject taxpayer received any income. Moreover, the CIR may also obtain
and use records, data, documents and information secured from government offices or
agencies such as the Securities and Exchange Commission, the Bangko Sentral ng
Pilipinas and the Bureau of Customs. It was further stated that the law allows the Bureau
of Internal Revenue (BIR) to access all relevant or material records and data in the
person of the taxpayer. It places no limit or condition on the type or form of the medium
by which the record subject to the order of the BIR is kept.
The Court of Tax Appeals (CTA) has upheld the use of a taxpayers audited financial
statements as basis for assessing his correct tax liabilities. In Prudential Bank v.
Commissioner of Internal Revenue, CTA Case 7372 dated August 7, 2007, the CTA
ruled that the taxpayers audited financial statements constitute data which may be
relevant or material, citing the ruling of the Supreme Court in the Hantex Trading case.
In this regard, it is well to note that the ruling of the Supreme Court in the Hantex Trading
case is that administrative agencies, such as the BIR, are not bound by the technical
rules of evidence in judicial proceedings where the Rules of Court are strictly observed
and, therefore, the best evidence obtainable may consist of hearsay evidence. However,
it did not go to the extent of allowing the CIR to base his preliminary and final taxdeficiency assessments on mere photocopies of records or documents. The Supreme
Court categorically stated that such copies are mere scraps of paper and are of no
probative value as basis for any deficiency income or business taxes against a taxpayer.
Furthermore, while, as a general rule, tax assessments by tax examiners are presumed
correct and made in good faith, the prima facie correctness of a tax assessment does
not apply upon proof that an assessment is utterly without foundation, meaning it is
arbitrary and capricious. Thus, in the more recent case of Wintelecom, Inc. v.
Commissioner of Internal Revenue, CTA Case 7056 dated February 20, 2008, the CTA
ratiocinated that considering the enormous power given to the CIR and the leniency in
the kinds of evidence the CIR may utilize as basis for his assessments, there is no
excuse for failing to present to the court the third-party information on which the BIR
examiners allegedly based their assessments. The CTA noted that it must not be
forgotten that an assessment must be based on actual facts.
In a nutshell, the Best Evidence Obtainable Rule is a mechanism for unhampered
assessment and collection of taxes by the CIR and other officers of the BIR. However,
the exercise thereof is still subject to tests of reasonableness, and has to be in
accordance with the provisions of the NIRC, existing rules and jurisprudence.