Waiver on prescription by the taxpayer

For many businesses, it is not uncommon to receive dreaded “love letters” from the Bureau of Internal Revenue (BIR) in the form of the Letters of Authority to Audit (LoA) the taxes of business. These letters arrive either annually or biennially.

The period within which the BIR is allowed by law to make an assessment is three years from the last day the taxpayer is allowed to file the tax return, or from the day the tax return was filed, whichever comes later. Any assessment notice issued after the three-year prescriptive period is not valid and no longer effective.

The exceptions to the three-year period are (a) cases of false or fraudulent returns with the intent to evade the tax or for failure to file a tax return, giving the BIR 10 years from the discovery of the falsity, fraud or omission, to assess or file a case in court for tax collection and (b) a written waiver between the taxpayer and the BIR for an extension of the period to assess and collect taxes. (Sec. 203 and 222 of the Tax Code)

Under Revenue Memorandum Order 20-90 issued on April 4, 1990 and Revenue Delegation Authority Order 05-01 issued on Aug 2, 2001, the BIR provided the procedure for making a proper waiver.

1. The waiver of prescription is a written agreement between the taxpayer and the BIR made before the expiration of the three year period or agreed extension.

2. The BIR revenue official shall ensure that the waiver is duly accomplished by the taxpayer or its authorized representative, whose authority is in writing and duly notarized, before affixing its signature to signify acceptance.

3. The waiver must indicate the date of execution by the taxpayer, the date of acceptance by the BIR, both of which are before the expiration of the period of prescription or before the lapse of any extension, and the expiry date of the period agreed upon to assess/collect the tax after the regular three year period of prescription.

4. The fact of receipt by the taxpayer of its copy shall be indicated in the original copy with the BIR.

5. The waiver should be notarized, and the BIR should not accept it otherwise.

The rules stipulate that the procedure and requirements shall be strictly complied with.

Later, the BIR issued RMO 14- 2016, April 4, 2016 which is the revised policy on waivers to address the practice by taxpayers of contesting the validity of their own waivers, and it now provides:

1. Strict compliance of waivers with the form provided for by RMO 20-90 or RDAO 05-01 is not necessary
2. Most of the requirements under RMO 20-90 and RDAO 05-01 were retained but several significant changes were made such as :

• Two material dates that need to be present on the waiver are the date of execution of the waiver by the taxpayer or its authorized representative, and the expiry date of the period that the taxpayer waives after the three year period;
• Notarization is no longer required;
• Taxpayer has the duty to retain a copy of the waiver;
• The particular taxes or amounts, except for collection of taxes, need not be specified and it may simply state “all internal revenue taxes”;
• The taxpayer has the responsibility of ensuring that the waiver is validly executed. The waiver shall be binding upon the taxpayer upon execution and it cannot contest the authority of the signatory for purposes of invalidating the waiver;
• The waiver is a voluntary act of the taxpayer and it shall take legal effect and be binding on the taxpayer upon its execution, and
• The taxpayer shall have the duty to submit the duly executed waiver to the proper BIR official as designated the LOA, who shall then indicate acceptance by signing the same.

In the case of Commissioner of Internal Revenue v. Next Mobile Inc. (G.R. No. 212825, Dec 07, 2015), the Supreme Court stated that the general rule is that waivers that do not comply with the requisites for validity specified in the regulations are invalid and ineffective to extend the prescriptive period to assess the deficiency taxes.

However, due to peculiar circumstances of the case, the court treated the case as an exception to the rule and considered the waivers, while containing several defects, as valid for the following reasons.

The defects in the waiver were (a) the taxpayer’s representative signed the waivers without any notarized written authority from respondent’s Board of Directors, and the BIR did not require the taxpayer to present any notarized written authority before accepting it, (b) the dates of acceptance by the BIR were not indicated, and (c) other irregularities such as the fact of receipt by the taxpayer of its copy of the second waiver, were not indicated on the face of the original second waiver, the taxpayer received its copy of the first and the third waivers on the same day, May 23, 2005, and the taxpayer received its copy of the fourth and the fifth waivers on the same day, May 13, 2005.

The taxpayer questioned the validity of the waiver with the aim of invalidating it to claim the defense of prescription against the BIR assessment of the taxes. The Supreme Court upheld the validity of the waiver on the following grounds:

First, the taxpayer and the BIR were found to be in equal fault.

Second, parties must come to court with clean hands and, in this case, the taxpayer should not be allowed to benefit from the flaws in its own Waivers to evade its responsibility to pay taxes.

Third, the taxpayer is estopped from questioning the validity of its Waivers as it executed five Waivers and delivered them to the BIR. It allowed the BIR to rely on them and did not raise any objection against their validity until it was assessed taxes and penalties.

The court found that the waivers were to the advantage of ATC as it provided ATC time to gather and produce voluminous records for the audit. It would be unfair for ATC to be permitted to assail the waivers after an adverse assessment.

Finally, the Supreme Court declared that it cannot tolerate this highly suspicious situation where the taxpayer, after voluntarily executing waivers, insisted on their invalidity by raising the defects it caused, and where the BIR had failed to exact from respondent compliance with its rules. The court observed that the BIR’s negligence in the performance of its duties was so gross that it amounted to malice and bad faith, and it seemed that it consented to the mistakes in the waivers. Such a situation is dangerous and open to abuse by unscrupulous taxpayers.

In Asian Transmission Corp (ATC) v. Commissioner of Internal Revenue (GR No. 230861, Sept 19, 2018), the Supreme court upheld the validity of a waiver of prescription despite the waiver on prescription not having been property made.

It was found that the eight waivers of ATC contained the following defects:

1. The waivers were improperly notarized
2. The waivers failed to indicate the date of acceptance by the BIR
3. The Waivers were not signed by the proper revenue officer
4. The Waivers failed to specify the type of tax and the amount of tax due

The Supreme Court found that the case was similar to the Next Mobile Case and that defects were not solely attributable to the BIR.

While RDAO 01-05 states that the waiver should not be accepted by the BIR unless duly notarized, a careful reading of RDAO 01-05 indicates that the proper preparation of the waiver was primarily the responsibility of the taxpayer.

The court applied the principle of estoppel and declared that the waivers for the benefit of the taxpayer as it gave it time to gather and produce voluminous records for the audit. It would be unfair to allow ATC to assail the waivers only after an adverse assessment.

The court found that after having benefitted from the defective waivers, the taxpayer should not be allowed to assail them thereby applying the equitable principles of in pari delicto, unclean hands, and estoppel as enunciated in Commissioner of Internal Revenue v. Next Mobile case.

(The author, Atty. John Philip C. Siao, is a practicing lawyer and founding Partner of Tiongco Siao Bello & Associates Law Offices, an Arbitrator of the Construction Industry Arbitration Commission of the Philippines, and teaches law at the De La Salle Tañada-Diokno School of Law. He may be contacted at [email protected]. The views expressed in this article belong to the author alone.)