CASE DIGEST: CIR vs. Next Mobile (G.R. No. 212825, December 07, 2015)


PRINCIPLE: Section 203 of the 1997 NIRC mandates the BIR to assess internal revenue taxes within 3 years from the last day prescribed by law for the filing of the tax return or the actual date of filing of such return, whichever comes later. Hence, an assessment notice issued after the three-year prescriptive period is not valid and effective. Exceptions to this rule are provided under Section 222 of the NIRC.

FACTS: After submission of its returs for the year 2001, NM received a copy of the LOA given by the BIR to Revenue Officer (RO) NLC, covering January to December of 2001. 5 waivers were signed by NM's finance director to extend the prescriptive period of assessment.

In 2005, BIR sent NM a Preliminary Assessment Notice (PAN) to which the latter replied. Later, NM received a Formal Letter of Demand (FLD) to pay various tax deficiencies amounting to 313 million pesos.

On November 23, 2005, NM filed its protest against the FLD and requested the reinvestigation. BIR denied the protest. NM filed a Petition for Review before the CTA.

In the CTA, NM argued that the CIR's right to assess NM's deficiency taxes had already prescribed, invoking the lack of authority on the part of the person who signed the waviers. The CTA ruled in favor of NM and said that the 5 waivers of the statute of limitations were not valid and binding; thus, the three-year period of limitation within which to assess deficiency taxes was not extended. It also held that the records belie the allegation that respondent filed false and fraudulent tax returns; thus, the extension of the period of limitation from 3 to 10 years does not apply.

ISSUE #1: Had the CIR's right to assess respondent's deficiency taxes already prescribed?

No, the CIR's right to assess NM's deficiency taxes had NOT yet prescribed.

Section 222(b) of the NIRC provides that the period to assess and collect taxes may only be extended upon a written agreement between the CIR and the taxpayer executed before the expiration of the three-year period. This is a waiver.

RMO No. 20-90 and RDAO 05-01 must be strictly complied with in order for such a waver to be valid. Thus, a waiver of assessment period is invalid if, for example:

[1] It does not specify a definite agreed date between the BIR and the taxpayer within which the former may assess and collect revenue taxes;
[2] It has been signed only by a revenue district officer, not the Commissioner;
[3] It has no date of acceptance;
[4] The taxpayer was not furnished a copy of the BIR-accepted waiver;
[5] The person who executed the waivers had no notarized written board authority to sign the waivers in behalf of the corporation; or
[6] The fact of receipt by the taxpayer of its file copy was not indicated in the original copies of the waivers.

In this case, both are at fault because NM deliberately executed defective waivers and raised the same problem to avoid its tax liablity. On the other hand, the BIR's negligence or failure to comply with the abovementioned regulations is so gross that it amounts to malice and bad faith.

Although it is true that waivers of this kind must be carefully and strictly construed because they are in derogation of the taxpayer's right to security against prolonged and unscrupulous investigations, there are 5 reasons why the CTA's decision should be reversed.

[1] The parties in this case are in pari delicto or "in equal fault." In pari delicto connotes that the two parties to a controversy are equally culpable or guilty and they shall have no action against each other.
[2] To uphold the validity of the waivers parties must come to court with clean handswould be consistent with the public policy embodied in the principle that taxes are the lifeblood of the government.
[3] Parties must come to court with clean hands. NM should not be allowed to benefit from the defects in its own waivers.
[4] NM is estopped from questioning the validity of its own waivers. It allowed the government to rely on the defective waivers without raising them as soon as possible. In fact, in its protest, it did not mention this.
[5] Finally, this is a highly suspicious situation. The BIR miserably failed to exact from NM compliance with its own rules while NM raised the same invalidity it caused to avoid its tax liability. Such a situation is dangerous and open to abuse by unscrupulous taxpayers who intend to escape their responsibility to pay taxes by mere expedient of hiding behind technicalities.

ISSUE #2: Is the 10-year period of limitation for assessments of false and fraudulent returns applicable in this case?

No, the longer 10-year period is not applicable. Applicable is the normal 3-year period.

Records failed to establish, even by prima facie evidence, that NM filed false and fraudulent returns on the ground of substantial under-declaration of income in respondent Next Mobile's Annual ITR for taxable year ending December 31, 2001.

SUMMARY: Next Mobile (NM) lost the case. The CIR succeeded in convincing the Supreme Court that the CTA was wrong in invalidating the waivers.