October 2010 Philippine Supreme Court Decisions on Tax Law

Here are selected October 2010 rulings of the Supreme Court of the Philippines on tax law:

Assessment; validity of assessment notice; lack of control number.  The formality of a control number in the assessment notice is not a requirement for its validity; rather the contents thereof should inform the taxpayer of the declaration of deficiency tax against the taxpayer. Both the formal letter of demand and the notice of assessment shall be void if the former failed to state the fact, the law, rules and regulations or jurisprudence on which the assessment is based, which is a mandatory requirement under section 228 of the National Internal Revenue Code. Commissioner of Internal Revenue vs Hon. Raul M. Gonzalez, Secretary of Justice, L.M. Camus Engineering Corporation (represented by Luis M. Camus and Lino D. Mendoza), G.R. No. 177279, October 13, 2010.

Income tax; irrevocability of option to carry-over of excess income tax credits; prospective application. Section 76 (on irrevocability of option to carry-over excess income tax credit) of the 1997 National Internal Revenue Code (1997 NIRC) and its companion provisions should be applied following the general rule on the prospective application of laws such that they operate to govern the conduct of corporate taxpayers the moment the 1997 NIRC took effect on January 1, 1998. At the time the taxpayer filed its final adjustment return for 1997 on April 15, 1998, the 1997 NIRC was already in force. Thus, section 76 of the same is controlling . Commissioner of Internal Revenue vs McGeorge Food Industries, Inc., G.R. No. 174157, October 20, 2010.

Income tax; irrevocability of option to carry-over of excess income tax credits; changes from previous provision. Section 76 (on irrevocability of option to carry-over excess income tax credit) of the 1997 National Internal Revenue Code (1997 NIRC) wrought two changes to its predecessor,  section 69 of the 1977 National Internal Revenue Code: (i) it mandates that the taxpayer’s exercise of its option to either seek refund or crediting is irrevocable and (ii) the taxpayer’s decision to carry-over and apply its current overpayment to future tax liability continues until the overpayment has been fully applied, no matter how many cycles it takes. Commissioner of Internal Revenue vs McGeorge Food Industries, Inc., G.R. No. 174157, October 20, 2010.

Value-added tax; refund or credit of unutilized input value-added tax; start of prescriptive period. Section 112 (A) of the National Internal Revenue Code (NIRC) is the applicable provision in determining the start of the two-year period for claiming a refund or credit of unutilized input value-added tax (VAT). Sections 204 (C) and 229 of the NIRC are inapplicable as both provisions apply only to instances of erroneous payment or illegal collection of internal revenue taxes. Thus, the two-year period should be reckoned from the close of the taxable quarter when the sales were made. Commissioner of Internal Revenue vs Aichi Forging Company of Asia, Inc., G.R. No. 184823, October 6, 2010.

Value-added tax; refund or credit of unutilized input value-added tax; meaning of “year” in prescriptive period.  As between the Civil Code, which provides that a year is 365 days, and the Administrative Code of 1987, which states that a year is composed on 12 calendar months, it is the latter that must prevail being the more recent law. Applying the same to the present case, the two-year period to file a claim for tax refund or credit for the period July 1, 2002 to September 30, 2002 expired on September 30, 2004. In this case, taxpayer’s administrative claim which was filed on September 30, 2004 was timely filed.. Commissioner of Internal Revenue vs Aichi Forging Company of Asia, Inc., G.R. No. 184823, October 6, 2010.

Value-added tax; when judicial claim may be filed. Section 112(D) of the National Internal Revenue Code clearly provides that the Commissioner of Internal Revenue (CIR) has “120 days, from the date of the submission of the complete documents in support of the application [for tax refund/credit,” within which to grant or deny the claim. However, if after the 120-days period, the CIR fails to act on the application for tax refund or credit, the remedy of the taxpayer is to appeal the inaction of the CIR to the Court of Tax Appeals (CTA within 30 days. In this case, the administrative and the judicial claims were simultaneously filed on September 30, 2004. Taxpayer did not wait for the decision of the CIR or the lapse of the 120-day period. Therefore, the filing of the judicial claim with the CTA was premature.  Commissioner of Internal Revenue vs Aichi Forging Company of Asia, Inc., G.R. No. 184823, October 6, 2010.

Value-added tax; zero-rated sales; input value-added tax refund or credit; failure to print “zero-rated” on invoice.  Consistent with previous decision on this matter (i.e. Panasonic Communications Imaging Corporation of the Philippines vs. Commissioner of Internal Revenue), failure to print the word “zero-rated” on the invoices or receipts is fatal to a claim for credit or refund of input value-added tax on zero-rated sales.  J.R.A. Philippines, Inc. vs Commissioner of Internal Revenue, G.R. No. 177127, October 11, 2010.

Value-added tax; zero-rated sales; input value-added tax refund or credit; Revenue Regulations 7-95; invoicing requirements.  When taxpayer filed its claim for refund or tax credit, Revenue Regulations No. 7-95 was already in force. Section 4.108-1 of the said regulations required, among others, the tax identification number (TIN) of the seller and the word “zero-rated” to be imprinted on invoice covering zero-rated sales. The said regulations also provide that only VAT-registered persons are required to print their TIN followed by the word “VAT” in their invoices or receipts and this shall be considered as a “VAT invoice.” All purchases covered by invoices other than a “VAT invoice” shall not give rise to any input tax. In this case, the taxpayer’s export sales invoices did not indicate the seller’s TIN followed by the word “VAT.” The word “zero-rated” was also not imprinted on the invoices. The Court of Tax Appeals found that the invoices were not duly registered with the Bureau of Internal Revenue. Thus, taxpayer failed to establish the factual basis of its claim for refund or tax credit.  Hitachi Global Storage Technologies Philippines Corp. (formerly Hitachi Computer Products (Asia) Corporations) vs Commissioner of Internal Revenue, G.R. No. 174212, October 20, 2010.

Tax evasion; failure to comply with subpoena duces tecum not relevant to tax evasion; forum shopping. A violation of section 266 (failure to obey summons) of the National Internal Revenue Code (NIRC) involves a separate offense and hence litis pendencia is not present considering that the outcome of this complaint is not determinative of the issue as to whether probable cause exists to charge the taxpayer with the crimes of attempt to evade or defeat tax and willful failure to supply correct and accurate information and pay tax defined and penalized under sections 254 and 255, respectively, of the NIRC. For the crime of tax evasion in particular, compliance by the taxpayer with such subpoena, if any had been issued, is irrelevant. Thus, the Secretary of Justice erred in holding that the Commissioner of Internal Revenue committed forum shopping when it filed the complaint for tax evasion during the pendency of its appeal from the City Prosecutor’s dismissal of the complaint involving the act of disobedience to the summons in the course of the preliminary investigation on the taxpayer’s correct tax liabilities for the taxable years 1997, 1998 and 1999. Commissioner of Internal Revenue vs Hon. Raul M. Gonzalez, Secretary of Justice, L.M. Camus Engineering Corporation (represented by Luis M. Camus and Lino D. Mendoza), G.R. No. 177279, October 13, 2010.

Tax evasion; lack of consent by taxpayer under investigation.  Lack of consent by the taxpayer under investigation does not imply that the Bureau of Revenue (BIR) obtained the information from third parties illegally or that the information received is false or malicious. Nor does the lack of consent preclude the BIR from assessing deficiency taxes on the taxpayer based on the documents. In the same vein, the taxpayer cannot be allowed to escape criminal prosecution under sections 254 and 255 of the National Internal Revenue Code (NIRC) by mere imputation of a “fictitious” or disqualified informant under section 282 of the NIRC simply because other than disclosure of the official registry number of the third party “informer,” the BIR insisted on maintaining the confidentiality of the identity and personal circumstances of said “informer.” Commissioner of Internal Revenue vs Hon. Raul M. Gonzalez, Secretary of Justice, L.M. Camus Engineering Corporation (represented by Luis M. Camus and Lino D. Mendoza), G.R. No. 177279, October 13, 2010.

Voluntary Assessment Program; Revenue Regulations No. 2-99; Economic Recovery Assistance Payment (ERAP) Program; immunity.  Revenue Regulations No. 2-99 explained in its Policy Statement that considering the scarcity of financial and human resources as well as the time constraints within which the Bureau of Internal Revenue (BIR) has to “clean the [BIR’s] backlog of unaudited tax returns in order to keep updated and be focused with the most current accounts” in preparation for the full implementation of a computerized tax administration, the said revenue regulation was issued “providing for last priority in audit and investigation  of tax returns” to accomplish the said objective “without, however, compromising the revenue collection that would have been generated from audit and enforcement activities.” The program granted immunity from audit and investigation of income tax, VAT and percentage tax returns for 1998. It expressly excluded withholding tax returns. Since such immunity from audit and investigation does not preclude the collection of revenues generated from audit and enforcement activities, it follows that the BIR is likewise not barred from collecting any tax deficiency discovered as a result of tax fraud investigations. Commissioner of Internal Revenue vs Hon. Raul M. Gonzalez, Secretary of Justice, L.M. Camus Engineering Corporation (represented by Luis M. Camus and Lino D. Mendoza), G.R. No. 177279, October 13, 2010.

Voluntary Assessment Program; immunity.  Availment by the taxpayer of the voluntary assessment program (VAP) under Revenue Regulations No, 8-2001, as amended, did not amount to settlement of its assessed tax deficiencies for the period 1997 to 1999, nor immunity from prosecution for filing fraudulent return and attempt to evade or defeat tax. From the express terms of the said revenue regulations, taxpayer is not qualified to avail of the VAP granting taxpayers the privilege of last priority in the audit and investigation of all internal revenue taxes for the taxable year 2000 and all prior years under certain conditions, considering that, first, it was issued a preliminary assessment notice (PAN) on February 19, 2001, and, second, it was the subject of investigation as a result of verified informed filed by a tax informer under section 282 of the National Internal Revenue Code duly recorded in the BIR official registry even prior to the issuance of the PAN, which are excepted from coverage of the VAP under said regulations. Moreover, the taxpayer cannot invoke the availment of VAP to foreclose any subsequent audit of its account books and other accounting records in view of the strong finding of underdeclaration in its payment of the correct income tax liability by more than 30% as supported by the written report of the Tax Fraud Division. Under the regulations, a taxpayer who has availed of the VAP shall not be audited except upon authorization and approval of the Commissioner of Internal Revenue when there is strong evidence or finding of understatement in the payment of its correct tax liability by more than 30% as supported by a written report of the appropriate office detailing the facts and the law on which such finding is based. Commissioner of Internal Revenue vs Hon. Raul M. Gonzalez, Secretary of Justice, L.M. Camus Engineering Corporation (represented by Luis M. Camus and Lino D. Mendoza), G.R. No. 177279, October 13, 2010.

Voluntary Assessment Program; estoppel.  Given the explicit conditions for the grant of immunity from audit under the said revenue regulations, the Secretary of Justice erred in declaring that the Commissioner of Internal Revenue is estopped from assessing any tax deficiency against the taxpayer after the issuance of the documents of immunity from audit/investigation and settlement of tax liabilities. The State can never be in estoppel, and this is particularly true in matters involving taxation. The errors of certain administrative officers should never be allowed to jeopardize the government’s financial position. Commissioner of Internal Revenue vs Hon. Raul M. Gonzalez, Secretary of Justice, L.M. Camus Engineering Corporation (represented by Luis M. Camus and Lino D. Mendoza), G.R. No. 177279, October 13, 2010.

Voluntary Assessment Program; exception to rule that examination and inspection should be made only once a taxable year.  The discovery of substantial underdeclarations of income by the taxpayer for taxable years 1997, 1998 and 1999 upon verified information provided by an “informer” under section 282 of the National Internal Revenue Code (NIRC), as well as the necessity of obtaining information from third parties to ascertain correctness of the return filed or evaluation of tax compliance in collecting taxes (as a result of the disobedience to the summons issued by the Bureau of Internal Revenue against the taxpayer) are circumstances warranting exception from the general rule in section 235 of the NIRC. Commissioner of Internal Revenue vs Hon. Raul M. Gonzalez, Secretary of Justice, L.M. Camus Engineering Corporation (represented by Luis M. Camus and Lino D. Mendoza), G.R. No. 177279, October 13, 2010.

(This post will be updated after the other October 2010 cases become available.)

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