When is a tax return considered a false return? If a taxpayer commits a mistake or an error in filing his tax return, does it automatically mean he submitted a false return and, hence, committed a fraudulent act?
In the case of Commissioner of Internal Revenue (CIR) vs Hoya Glass Disk Philippines (2017), the Court of Tax Appeals (CTA) found no evidence to prove that the company filed a false return that would warrant the application of the 10-year prescriptive period. It deemed the assessment for penalties and interest already prescribed, having been issued beyond the three-year prescriptive period.
As an exception to the three-year prescriptive period, Section 222 of the Tax Code provides that in case of a false or fraudulent return with intent to evade tax payments or of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment, at any time within the 10 years after the discovery of the falsity, fraud, or omission.
In the case, the Bureau of Internal Revenue (BIR) alleged that the company filed a false return because of the late payment of final withholding tax (FWT) on dividends that it declared in favor of its stockholders on December 22, 2006, which was paid on February 2, 2007. In relation to this, the company filed its FWT return (BIR Form No. 1601-F) and paid the tax on the cash dividends through the eFiling and Payment System (eFPS), with the payment confirmed on March 12, 2007.
The BIR assessed the company with a surcharge of 50 percent and a 20-percent interest for late payment of the FWT on cash dividends. This was pursuant to the preliminary assessment notice and assessment notice and final letter of demand, which the company received on January 28, 2013, and February 27, 2013, respectively. The BIR maintained that the company should have filed its FWT return and paid the tax on February 10, 2007, instead of March 10, 2007, pursuant to Section 2.57.4 of Revenue Regulations No. (RR) 2-98, as amended.
The BIR asserted that the taxpayer willfully filed a false return when it indicated that the FWT return was for the month of February 2007 instead of January 2007, which warrants the imposition of the 50-percent surcharge. The BIR further contended that the false entry in the FWT return is sufficient to justify the application of the 10-year prescriptive period, following the definition of a false return as merely a deviation from the truth whether intentional or not, as explained in the Supreme Court (SC) case of Aznar vs Court of Tax Appeals.
The company however maintained that the assessment was already barred by prescription since the assessment notice was issued almost three years after the expiration of the three-year prescriptive period. It maintained that it did not file a false return with intent to evade tax, which would justify the application of the 10-year prescriptive period.
While the CTA is aware of the recent SC decision in CIR vs Asalus Corp. (G.R. No. 221590, February 22, 2017), which reiterated the declaration in the Aznar case that a “mere showing that the returns filed by the taxpayer were false, notwithstanding the absence of intent to defraud, is sufficient to warrant the application of the 10-year prescriptive period,” it maintained that in the case of CIR vs Philippine Daily Inquirer (G.R. No. 213943, 22 March 2017), the SC stated that the entry of wrong information due to mistake, carelessness, or ignorance, without intent to evade tax, does not constitute a false return.
According to the CTA, each and every error does not and should not result in the operation of the 10-year prescriptive period. Otherwise, on the strength of the Aznar definition of “false returns,” BIR examiners conducting regular tax audits, who, as a matter of course always come up with tax findings of either under-declaration of income or over-declaration of deductions, or both, could mercilessly and arbitrarily raise the argument of “false return” giving rise to the 10-year prescriptive period.
Thus, in this case, while the CTA agreed that the act of considering the cash dividends as income payments for the month of February (instead of January) and paying the withholding tax due only on March 10, 2007 (instead of February 10, 2007) was a mistake, it does not consider such mistake a falsity that would trigger the operation of the 10-year prescriptive period considering the following:
a. There was no design to mislead or deceive on the part of the company, since the mistake in filing arose from the company’s mistake in applying RR 2-98 with respect to the period in which to withhold the FWT.
b. There was no intentional non-disclosure or omission so as to put the BIR at a disadvantage in the investigation since the BIR was not prevented from issuing the deficiency assessment within the general three-year prescriptive period.
c. There was no evidence or proof that the company intentionally declared its dividend transaction in March 2007 instead of February 2007, which would have established fraudulent intent or willful intent to evade the payment of the correct amount of tax, or the penalties and interest.
Considering that the CTA found no evidence to prove that the company filed a false return, which would warrant the application of the 10-year prescriptive period, it deemed the assessment for penalties and interest already prescribed, having been issued beyond the three-year prescriptive period.
In light of the above case, taxpayers should be aware that committing a mistake or an error does not automatically constitute a false or fraudulent act. With this basic knowledge, taxpayers can arm themselves in cases where they are being assessed beyond the reglementary period of three years and avoid paying unnecessary taxes and penalties.
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.