BDB Law’s “Tax Law For Business” appears in the opinion section of BusinessMirror every

Thursday.

Defense of prescription

The right of the government to assess prescribes after three years from the time of the
filing of the return or from the last day prescribed by law for the filing of such return,
whichever comes later.
The prescriptive period to assess or to begin a court proceeding for the assessment of a
tax is increased to 10 years when a false or fraudulent return with the intent of evading
the tax is filed or when no return was filed at all. In such cases, the 10-year period
begins to run only from the date of discovery by the Bureau of Internal Revenue (BIR) of
the falsity, fraud or omission.
Such falsity or fraud cannot be presumed and it must be established by clear and
sufficient evidence.
This is so because as explained by the court in Aznar v. Court of Tax Appeals (CTA)
(GR No. L-20569), it is very easy for revenue officers to claim that there was falsity in the
return filed by the taxpayer that would allow the assessment of tax within ten years from
date of discovery. The court required that in order to render a return made by a taxpayer
a “false return” within the meaning of Section 222 of the Tax Code, there must appear a
design to mislead or deceive on the part of the taxpayer, or at least culpable negligence.
In fact, the Supreme Court held that mere falsity of a return does not merit the
application of the 10-year prescriptive period. The element of fraud as in the case of a
taxpayer’s intent to evade the payment of the correct amount of tax must be clearly
established. [Commissioner v. BF Goodrich Phils., 303 SCRA 546 cited in Atty. Victorino
Mamalateo, Tax Rights and Remedies, 2005].
As defined in the Aznar case, the CTA clarified that a false return implies a deviation
from the truth, whether intentional or not. In this case, the CTA applied the 10-year
prescriptive period not because the returns were false—which incidentally the BIR failed
to establish—but because there were absence of entries in the returns where tax
liabilities should be declared. The court treated such failure as omission to file returns
within the purview of the 10-year prescriptive period under Section 222(a) of the Tax
Code. (United Coconut Planters Bank v. Commissioner of Internal Revenue, CTA 7259).
The three-year prescriptive period to make an assessment is extended by the issuance
of a valid waiver, where the taxpayer and the BIR agree in writing to a certain period
within which the BIR could make an assessment even beyond the three-year period. The
law on prescription is strictly construed. Thus, failure to conform to the requisites set by
Revenue Memorandum Order (RMO) No. 20-90, which refers to the issuance of a valid
waiver, renders it defective and ineffectual. The usual flaws of waivers are lack of
signature of the commissioner of Internal Revenue (CIR) or the defective manner by
which the other revenue official has accepted and agreed to the waiver, absence of
dates of such acceptance by the BIR and failure to show that the taxpayer received its
copies of the waiver. The CTA has been consistently ruling on the strict implementation
of the requisites of a valid waiver in relation to prescription as a defense against tax
assessments. It has even ruled that the issue of prescription may be tried with the
implied consent of the BIR.
In the recent case of CIR v. Bovis Lend Lease Projects Pte. Ltd., CTA EB No. 374, the
CTA noted that the BIR failed to object to the admissibility of the Waivers of Statute of
Limitations offered by the taxpayer. The BIR’s failure to make a timely objection to the
introduction of the testimonial and documentary evidence tending to prove that the BIR’s
right to assess had already prescribed, constitutes an implied consent on the part of the
BIR to include the issue of prescription in the trial of the case, although it was not raised
by the taxpayer in the pleading. A reading of the original petition for review filed by the
taxpayer reveals that the issue of prescription was not alleged therein. The issue of
prescription was only raised during the direct examination of the taxpayer’s witness. But
the BIR waived its opportunity to cross examine the witness and object to the
introduction of prescription as part of the issue because the counsel for the BIR was not
present at that time. The BIR was also given time to comment on the Formal Offer of
Evidence but the BIR did not file its comment. Thus, the CTA found that there was
clearly an implied consent to include the issue of prescription.
These rules on prescription are put in place to check the government’s right to assess
taxes primarily to safeguard taxpayers from harassment by not indefinitely extending the
period of assessment and depriving the taxpayer of the peace of mind that it will no
longer be subjected to further scrutiny for taxes after the expiration of three or 10 years.
A taxpayer should be aware of this right. He should also not forget to allege it in court for
it is a potent legal defense.