With the increase in the target collections of the Bureau of Internal Revenue (BIR), taxpayers should be vigilant of their rights and the remedies available to them during a tax investigation.
Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. In the absence of proof of any irregularities in the performance of duties, an assessment duly made by a BIR examiner and approved by his superior officers will not be disturbed. All presumptions are in favor of the correctness of tax assessments.
Section 203 of the Tax Code mandates the BIR to assess internal revenue taxes within three years from the last day prescribed by law for the filing of the tax return or the actual date of filing of the return, whichever comes later. Hence, an assessment notice issued after the three-year prescriptive period is no longer valid and effective, unless the taxpayer executes a waiver of the statute of limitations prior to the prescriptive period.
To a certain extent, a waiver of the statute of limitations is a derogation of the taxpayers’ right to security against prolonged and unscrupulous investigations, and must therefore be carefully and strictly construed. The waiver of the statute of limitations is not a waiver of the right to invoke the defense of prescription. It is considered an agreement between the taxpayer and the BIR to extend the authority of the latter to examine the taxpayer’s records and issue an assessment over an agreed period.
The waiver does not mean that the taxpayer relinquishes the right to invoke prescription unequivocally, particularly where the language of the document is equivocal. For the purpose of safeguarding taxpayers from any unreasonable examination, investigation, or assessment, our Tax Code and pertinent regulations provide a statute of limitations in the assessment of taxes. Thus, the law on prescription, being a remedial measure, should be liberally construed in order to afford such protection. As a corollary, the exceptions to the law on prescription should perforce be strictly construed.
In the execution of the waiver, the provisions of Revenue Memorandum Order (RMO) No. 20-90 (April 4, 1990) and Revenue Delegated Authority Order (RDAO) No. 05-01 (August 2, 2001) must be faithfully complied with in order for any waiver to be considered valid and binding between the BIR and the taxpayer. Among these conditions are the following:
1.The waiver must be in proper form prescribed by RMO No. 20-90. The phrase “but not after_____20__”, which indicates the expiry date of the period agreed upon to assess/collect the tax after the regular three-year period of prescription, should be filled up.
2. The waiver must be signed by the taxpayer himself, or his duly authorized representative. In the case of a corporation, the waiver must be signed by any of its responsible officials.
3. The waiver must be duly notarized.
4. The Commissioner of Internal Revenue or the revenue official authorized by him must sign the waiver indicating the BIR’s acceptance and agreement to the waiver. The date of such acceptance by the BIR should be indicated.
5. Both the date of execution by the taxpayer and the date of acceptance by the BIR should be prior to the expiration of the period of prescription, or before the lapse of the period agreed upon in case a subsequent agreement is executed.
6. The waiver must be in three copies: the original copy to be attached to the docket of the case, the second for the taxpayer, and the third for the Office accepting the waiver.
Thus, in case of failure to comply with the procedures laid down in RMO No. 20-90 and RDAO No. 05-01, the waivers shall be considered invalid and the BIR assessments shall be deemed to have been issued beyond the three-year prescriptive period and, therefore, void.
However, in the case of Commissioner of Internal Revenue v. Next Mobile, Inc. (G.R. No. 212825, December 7, 2015), the waivers executed by the taxpayer and the BIR were held to be “valid” despite the noted defects or infirmities in the waivers in question. The Supreme Court found the following deficiencies in the waivers in the instant case: (a) the official of the company who executed the waivers had no notarized written board authority form to sign the waivers on behalf of the company, and (b) the date of acceptance of the taxpayer was not indicated on the waiver.
As a general rule, while a waiver that does not comply with the requisites under RMO No. 20-90 and RDAO No. 05-01 shall be considered invalid and ineffective in extending the prescriptive period to assess taxes, the SC decided to treat the case as an exception to the general rule and, thus, held the waivers valid for the following reasons:
1. The taxpayer and BIR are in equal fault. The official of the company executed five waivers and the official’s authority to sign the waivers was not presented upon the submission of the waivers to the BIR. Later on, the BIR questioned the official’s authority to sign the waivers. According to the SC, both parties knew the infirmities of the waiver and yet they continued to deal with each other without bothering to rectify the infirmities.
2. The taxpayer should not be allowed to benefit from the flaws on its own waivers and successfully insist on their invalidity in order to evade its responsibility to pay taxes.
3. The taxpayer is estopped from questioning the validity of the waivers. The SC explained that the taxpayer executed five waivers, which the BIR relied on to make an assessment, and the taxpayer did not raise any objection against their validity until the BIR assessed taxes and penalties against it. The SC maintained that the application of estoppel in this case is necessary to prevent undue injury that the government would suffer because of the cancellation of the taxpayer’s assessed tax liabilities.
4. The SC expressed that it cannot tolerate the highly suspicious situation surrounding the waivers. In this case, the taxpayer, after voluntarily executing the waivers, insisted on the invalidity of the documents by raising the very same defects it caused. On the other hand, the SC pointed out that the BIR’s negligence in the performance of its duties was so gross that it amounted to malice and bad faith. According to the SC, the BIR was so lax that it seemed as if it consented to the mistakes in the waivers.
In line with this SC decision and considering the rampant practice of taxpayers contesting the validity of their own waivers of the statute of limitations after having availed of the benefits thereof, the BIR deemed it necessary to revise the procedures for the proper execution of such waivers. In this regard, the BIR issued RMO No. 14-2016 (April 4, 2016) providing a new set of rules on the proper execution of waivers.
Under the new simplified rules, the waiver may be, but not necessarily, in the form prescribed by RMO 20-90 or the related RDAO No. 05-01. In RMO No. 14-2016, the BIR emphasized that failure on the part of the taxpayer to follow the prescribed forms will not invalidate the executed waiver, as long as the following minimum conditions are complied with:
1. The waiver of the Statute of Limitations shall be executed before the expiration of the period to assess or to collect taxes. The date of execution shall specifically be indicated in the waiver.
2. The waiver shall be signed by the taxpayer himself or his duly authorized representative. In the case of a corporation, the waiver must be signed by any of its responsible officials.
3. The expiry date of the period agreed upon to assess/collect the tax after the regular three-year period of prescription should be indicated.
With the new simplified rules, the taxpayer carries the burden of ensuring that the waivers are executed validly by the authorized representatives. The BIR no longer requires that the delegation of authority to a representative be in writing and notarized. In addition, it shall be the duty of the taxpayer to submit the duly executed waiver to the Commissioner of Internal Revenue or official/s previously designated in existing issuances or the concerned revenue district officer or group supervisor as designated in the Letter of Authority/Memorandum of Assignment, who shall then indicate acceptance by signing the same. Further, the date of acceptance of the signed waiver by the BIR is no longer required to be indicated. The said rule only considers two material dates: 1) the date of the execution of the waiver by the taxpayer or its authorized representative; and 2) the expiry date of the period the taxpayer waives the statute of limitations.
The takeaway is quite clear: With the old rules, the importance of waiver and strict compliance with the set rules laid down under RMO No. 20-90 and RDAO No. 05-01 were the focus of the court decisions. Hence, any defect as defined under the regulations shall render the waiver invalid, and therefore a defective waiver shall not toll or interrupt the running of the period of prescription. Thus, in several cases, due to the defects noted in the waiver, the period to assess or collect taxes was not extended and, consequently, assessments issued by the BIR beyond the three-year period were void. To a certain extent, the waiver is a derogation of the taxpayers’ right to security against prolonged and unscrupulous investigations. We can say that the old rules are in favor of the taxpayer.
But, with the new simplified and relaxed rules, taxpayers should make careful assessments – whether the execution of a Waiver of Statute of Limitations will be beneficial to them, to the BIR, or to both. Hence, during a tax audit, when the tax authorities request for a waiver, a taxpayer should carefully consider if acceding would be to its own advantage or if doing so will only benefit the tax authorities.
The author is a Senior Manager with the Tax & Corporate Services division of Navarro Amper & Co., the local member firm of Deloitte Southeast Asia Ltd. – a member firm of Deloitte Touche Tohmatsu Limited – comprising Deloitte practices operating in Brunei, Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.