Written by Lawrence C. Biscocho, 12 January 2007
As the jovial mood of the holiday season fades, the Bureau of Internal Revenue (BIR) lifts the suspension of examination and opens a new year with the hope of improved collection.
For most taxpayers this is not a delightful news since not even an ounce of prevention will thwart the trouble of uninterestingly obstinate tax investigations.
A very important issue in tax assessment cases is prescription. Prescription refers to the period prescribed under the Tax Code, i.e., three (3) years for regular assessments or ten (10) years for fraud assessments, within which the BIR may issue an assessment for deficiency tax for a particular year. Thus, unlike the spirit of Christmas, tax assessments are time bound and prescription sets in once the right to issue the former is exercised after the lapse of the required period.
The prescription period may, however, be extended when both the Commissioner of Internal Revenue and the taxpayer agree to execute a “Waiver of the Statute of Limitations” (Waiver). The BIR has prescribed the requirements and conditions for the issuance of a valid Waiver under Revenue Memorandum Order (RMO) No. 20-90.
In practice, some Revenue Examiners fail to strictly comply with the formalities of a valid Waiver as provided under said RMO which thus give rise to the issue of whether the assessment issued is valid or not.
Technically, the assessment is invalid because it was issued based on an invalid Waiver which does not comply with the requirement of RMO No. 20-90. Notwithstanding this infirmity, however, the case remains unresolved because normally, the BIR would not cancel an assessment simply on the ground of prescription.
In this situation, the question that confronts the taxpayer is should the taxpayer simply ignore the deficiency tax assessment which is considered invalid by reason of an invalid Waiver for non-compliance with RMO 20-90 or still pursue judicial recourse to seek the final cancellation of the invalid assessment which is a costly option?
The decision of the Supreme Court (SC) in the case of Philippine Journalists, Inc. (PJI) vs. Commissioner of Internal Revenue, G.R. No. 162852, December 16, 2004, is relevant.
In this particular case, the BIR assessed the taxpayer for deficiency income, withholding and value-added taxes for the 1994 calendar year. In September 1997, the taxpayer executed a Waiver extending the three-year prescriptive period to assess. However, the Waiver did not state the expiration date of the Waiver. In December 1998, the BIR issued a final assessment notice, which the taxpayer received in January 1999. The taxpayer contested the assessment on the basis of prescription but was denied by the BIR.
The taxpayer appealed the BIR’s decision to the Court of Tax Appeals (CTA) which noted that the Waiver did not comply with the following requirements of RMO No. 20-90:
- The waiver did not contain a definite expiration date;
- The waiver failed to state the date of acceptance by the BIR;
- The taxpayer was not furnished a copy of the waiver; and
- The fact that the taxpayer had received its file copy was not indicated in the original copy.
On this basis, the CTA declared the Waiver for non-compliance with the requirements of RMO No. 20-90 and thus, ordered the cancellation of the assessment.
The CTA decision was reversed by the Court of Appeals but was later affirmed upon final review by the SC.
The SC ruled that the Waiver was invalid and therefore it did not toll the period within which the BIR can assess deficiency taxes. Consequently, as the assessment was made invalid, the warrant of distraint and levy issued pursuant thereto was also considered invalid.
The
SC emphasized that the prescriptive period safeguards taxpayers from unreasonable examination or assessment and the law should be liberally construed in order to afford such protection.
For this reason, strict conformity with the formalities required under RMO No. 20-90 is essential to the validity of the Waiver. When the Waiver is not signed by the proper BIR authority, or the acceptance date is not indicated, there is still uncertainty about the subject matter and whether an agreement has been reached. Moreover, furnishing the taxpayer a copy of the Waiver is important because this serves as a notice of the existence of the document and of the acceptance by the BIR and the perfection of the agreement to extend the prescription period.
As a consequence of this decision, the BIR issued Revenue Memorandum Circular No. 06-05 dated February 2, 2005 which emphasised compliance with the requirements of a valid Waiver prescribed under RMO No. 20-90. The CTA has likewise consistently applied this requirement in its subsequent decisions involving the same issue.
The foregoing jurisprudence, court decisions and issuances would seem to suggest that the issue of prescription need not be appealed to the Courts if on the face of the Waiver non-compliance with the requirements of RMO No. 20-90 is already evident. In fact in the PJI case, the Supreme Court indicated that a taxpayer's legal standing will be unaffected if they ignore a prescribed assessment.
This is consistent with a key principle in tax assessment cases, namely that seeking administrative remedies will often be the most expedient option to resolve issues. Rules of procedure are less strict than for judicial remedies, and the process is quicker than awaiting a court ruling. The decision clarified that taxpayers may try to resolve prescribed assessments outside of the adversarial environment of the courts.
Thus, from a practical standpoint, taxpayers should exhaust efforts to have the assessment cancelled at the administrative level.
However, since cancellation of an assessment on the ground of prescription does not sit well with the BIR, in certain cases it might be prudent for taxpayers to seek judicial relief in order to put a definitive closure on the issue.
Nonetheless, the prohibitive cost of litigation may prevent them from actively pursuing judicial appeal as an avenue to seek final cancellation of an assessment. Therefore, taxpayers may have to weigh the cost against the benefit in determining the appropriate strategy to employ in a particular case.
