CASE BrieF 2019-0016

CASE: Commissioner of Internal Revenue vs. La Flor Dela Isabela, Inc. [G.R. No. 211289, January 14, 2019]

PONENTE: Reyes, Jr., J.:

SUBJECT:

  1. NIRC:
    i. Prescriptive Period – Section 203;
    ii. Expanded Withholding Tax and Withholding Tax on Compensation
  2. MCLE Certificate of Compliance

“Withholding tax assessments such as EWT and WTC clearly contemplate deficiency internal revenue taxes. Their aim is to collect unpaid income taxes and not merely to impose a penalty on the withholding agent for its failure to comply with its statutory duty.”


FACTS: Respondent La Flor dela Isabela, Inc. (La Flor) is a domestic corporation. It filed monthly returns for the Expanded Withholding Tax (EWT) and Withholding Tax on Compensation (WTC) for calendar year 2005.

On September 3, 2008, La Flor executed a Waiver of the Statute of Limitations (Waiver) in connection with its internal revenue liabilities for the calendar year ending December 31, 2005. On February 16, 2009, it executed another Waiverto extend the period of assessment until December 31, 2009.

On November 20, 2009, La Flor received a copy of the Preliminary Assessment Notice for deficiency taxes for the taxable year 2005. Meanwhile, on December 2, 2009, it executed another Waiver.

On January 7, 2010, La Flor received Formal Letter of Demand and Final Assessment Notice for late filing and payment of WTCs and EWTs. The above-mentioned assessment notices were all dated December 17, 2009 and covered the deficiency taxes for the taxable year 2005.

La Flor filed its Letter of Protest contesting the assessment notices. The Commissioner of Internal Revenue (CIR) issued the Final Decision on Disputed Assessment (FDDA) involving the alleged deficiency withholding taxes in the aggregate amount of P6,835,994.76. Aggrieved, La Flor filed a petition for review before the CTA Division.

The CTA Division ruled in favor of La Flor and cancelled the deficiency tax assessments against it. It noted that based on the dates La Flor had filed its returns for EWT and WTC, the CIR had until February 15, 2008 to March 1, 2009 to issue an assessment pursuant to the three-year prescriptive period under Section 203 of the National Internal Revenue Code (NIRC). The CTA Division pointed out that the assessment was issued beyond the prescriptive period considering that the CIR issued the FANs only on December 17, 2009.

The CTA Division ruled further that the Waivers entered into by the CIR and La Flor did not effectively extend the prescriptive period for the issuance of the tax assessments. It pointed out that the Waivers dated September 3, 2008 and December 2, 2009 were never presented or offered in evidence, while the Waiver dated February 16, 2009 did not comply with the provisions of Revenue Memorandum Order (RMO) No. 20-90 because it failed to state the nature and amount of the tax to be assessed.

The CIR moved for reconsideration but it was denied by the CTA Division. Undeterred, it filed a Petition for Reviewbefore the CTA En Banc.

The CTA En Banc affirmed the Decision of the CTA Division. Thus, the CIR filed a petition for review on certiorari under Rule 45 of the Rules of Court.

The CIR argued that the prescriptive period under Section 203 of the NIRC does not apply to withholding agents such as La Flor. It explained that the amount collected from them is not the tax itself but rather a penalty. The CIR pointed out that the provision of Section 203 of the NIRC only mentions assessment of taxes as distinguished from assessment of penalties. It highlighted that La Flor was made liable for EWT and WTC deficiencies in its capacity as a withholding agent and not in its personality as a taxpayer.

On the other hand, the CIR maintained that even applying the periods set in Section 203 of the NIRC, the EWT and WTC assessment of La Flor had not yet prescribed. It pointed out that La Flor had executed three Waivers extending the prescriptive period under the NIRC. The CIR lamented that the CTA erred in disregarding them because evidence not formally offered may be considered if they form part of the records. It noted that in the Answer it filed before the CTA Division, the subject Waivers were included as annexes. In addition, the CIR assailed that failure to comply with RMO No. 20-90 does not invalidate the Waivers.

In its Comment, other than challenging the merits of the CIR’s petition, La Flor believes that the former’s petition for review on certiorari should be dismissed outright on procedural grounds. It points out that failure to include the date of issue of the MCLE compliance number of a counsel in a pleading is a ground for dismissal. Further, La Flor highlights that the paragraphs in the CIR’s petition for review on certiorari were not numbered.

ISSUES:

  1. Whether the failure to include the date of issue of the MCLE compliance number of a counsel in a pleading is a ground for dismissal.
  2. What are the prescriptive periods for collection and assessment of taxes?
  3. Whether the prescriptive period under Section 203 of the NIRC do not apply to EWT and WTC assessments because they are not considered as internal revenue taxes but “penalties”.
  4. Whether La Flor’s EWT and WTC Assessments for 2005 were barred by prescription.

RULING:

A. In People v. Arrojado, the Court had already clarified that failure to indicate the number and date of issue of the counsel’s MCLE compliance will no longer result in the dismissal of the case, to wit:

“In any event, to avoid inordinate delays in the disposition of cases brought about by a counsel’s failure to indicate in his or her pleadings the number and date of issue of his or her MCLE Certificate of Compliance, this Court issued an En Banc Resolution, dated January 14, 2014 which amended B.M. No. 1922 by repealing the phrase “Failure to disclose the required information would cause the dismissal of the case and the expunction of the pleadings from the records” and replacing it with “Failure to disclose the required information would subject the counsel to appropriate penalty and disciplinary action.” Thus, under the amendatory Resolution, the failure of a lawyer to indicate in his or her pleadings the number and date of issue of his or her MCLE Certificate of Compliance will no longer result in the dismissal of the case and expunction of the pleadings from the records. Nonetheless, such failure will subject the lawyer to the prescribed fine and/or disciplinary action.”

B. Section 203 of the NIRC provides for the ordinary prescriptive period for the assessment and collection of taxes, to wit:

SEC. 203. Period of Limitation Upon Assessment and Collection. — Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day.

On the other hand, Section 222(a) of the NIRC provides for instances where the ordinary prescriptive period of three years for the assessment and collection of taxes is extended to 10 years, i.e., false return, fraudulent returns, or failure to file a return. In short, the relevant provisions in the NIRC concerning the prescriptive period for the assessment of internal revenue taxes provide for an ordinary and extraordinary period for assessment.

C. It is true that withholding tax is a method of collecting tax in advanceand that a withholding tax on income necessarily implies that the amount of tax withheld comes from the income earned by the taxpayer/payee.Nonetheless, the Court does not agree with the CIR that withholding tax assessments are merely an imposition of a penalty on the withholding agent, and thus, outside the coverage of Section 203 of the NIRC.

The liability of the withholding agent is distinct and separate from the tax liability of the income earner. It is premised on its duty to withhold the taxes paid to the payee. Should the withholding agent fail to deduct the required amount from its payment to the payee, it is liable for deficiency taxes and applicable penalties. In Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation the Court explained:

It thus becomes important to note that under Section 53 (c) of the NIRC, the withholding agent who is “required to deduct and withhold any tax” is made “personally liable for such tax” and indeed is indemnified against any claims and demands which the stockholder might wish to make in questioning the amount of payments effected by the withholding agent in accordance with the provisions of the NIRC. The withholding agent, P&G-Phil., is directly and independently liable for the correct amount of the tax that should be withheld from the dividend remittances. The withholding agent is, moreover, subject to and liable for deficiency assessments, surcharges and penalties should the amount of the tax withheld be finally found to be less than the amount that should have been withheld under law.

A “person liable for tax” has been held to be a “person subject to tax” and properly considered a “taxpayer.” The terms “liable for tax” and “subject to tax” both connote legal obligation or duty to pay a tax. It is very difficult, indeed conceptually impossible, to consider a person who is statutorily made “liable for tax” as not “subject to tax.” By any reasonable standard, such a person should be regarded as a party in interest, or as a person having sufficient legal interest, to bring a suit for refund of taxes he believes were illegally collected from him.

Thus, withholding tax assessments such as EWT and WTC clearly contemplate deficiency internal revenue taxes. Their aim is to collect unpaid income taxes and not merely to impose a penalty on the withholding agent for its failure to comply with its statutory duty.

D) The assessments against La Flor had prescribed. The requirements under RMO No. 20-90 are mandatory.

In Commissioner of Internal Revenue v. Systems Technology Institute, Inc., the Court had ruled that waivers extending the prescriptive period of tax assessments must be compliant with RMO No. 20-90 and must indicate the nature and amount of the tax due, to wit:

“These requirements are mandatory and must strictly be followed. To be sure, in a number of cases, this Court did not hesitate to strike down waivers which failed to strictly comply with the provisions of RMO 20-90 and RDAO 05-01. x x x x”

The Court also invalidated the waivers executed by the taxpayer in the case of Commissioner of Internal Revenue v. Standard Chartered Bank, because: (1) they were signed by Assistant Commissioner-Large Taxpayers Service and not by the CIR; (2) the date of acceptance was not shown; (3) they did not specify the kind and amount of the tax due; and (4) the waivers speak of a request for extension of time within which to present additional documents and not for reinvestigation and/or reconsideration of the pending internal revenue case as required under RMO No. 20-90.

In the present case, the September 3, 2008, February 16, 2009 and December 2, 2009 Waivers failed to indicate the specific tax involved and the exact amount of the tax to be assessed or collected. As above-mentioned, these details are material as there can be no true and valid agreement between the taxpayer and the CIR absent these information. Clearly, the Waivers did not effectively extend the prescriptive period under Section 203 on account of their invalidity.

————————————————-

THINGS DECIDED:

A)       The failure of a lawyer to indicate in his or her pleadings the number and date of issue of his or her MCLE Certificate of Compliance will no longer result in the dismissal of the case and expunction of the pleadings from the records. Nonetheless, such failure will subject the lawyer to the prescribed fine and/or disciplinary action.”.

B)       The liability of the withholding agent is distinct and separate from the tax liability of the income earner. It is premised on its duty to withhold the taxes paid to the payee. Should the withholding agent fail to deduct the required amount from its payment to the payee, it is liable for deficiency taxes and applicable penalties.

C)      Withholding tax assessments such as EWT and WTC clearly contemplate deficiency internal revenue taxes. Their aim is to collect unpaid income taxes and not merely to impose a penalty on the withholding agent for its failure to comply with its statutory duty.

D)      Waivers extending the prescriptive period of tax assessments must be compliant with RMO No. 20-90 and must indicate the nature and amount of the tax due. These requirements are mandatory and must strictly be followed. 

 ‘Stand by things decided’ ~ Stare Decisis


For more Case Briefs visit us at Stare Decisis or like us on Facebook @staredecisispage

======================

Stare Decisis