Jelac Construction & Development Corporation

March 18, 2008 BIR RULING [DA-172-08] RR 3-2005; Sec. 203 & 223 (c), 1993 Tax Code; DA-225-04 Jelac Construction & Development Corporation Unit 209 Heart of the City Condominium No. 40 Sgt. Esguerra Avenue cor. Scout Albano Street South Triangle, Diliman, Quezon City Attention: Ms. Consuelo G. Lacson President Gentlemen : This refers to your letter dated February 21, 2008 stating that JELAC CONSTRUCTION & DEVELOPMENT CORPORATION (JELAC for brevity) is a corporation duly organized and existing under the laws of the Philippines; that you applied for the issuance of a Tax Clearance Certificate, for and in behalf of JELAC, for bidding and collection purposes on January 11, 2008; that you were able to secure a Temporary Clearance and for specific purpose only since as early as February 5, 2007, you already secured a Verification Slip indicating that JELAC has income tax and value-added tax liabilities for taxable year 1993; that as a gesture of good faith to help the government to raise revenues, you decided to avail of the Amnesty Program pursuant to Republic Act (RA) No. 9480, however, after examination of JELAC's records, it was disclosed that its income tax and VAT liabilities for the taxable year 1993 has been the subject already of an Administrative Compromise pursuant to Revenue Memorandum Order (RMO) No. 61-97 and that it paid already the amount of ten percent (10%) of the basic tax based on the jeopardy assessment; that the availment of said compromise was favorably recommended to the Revenue National Approval Committee (RNAC) for approval by the Chief, Assessment Division and the Regional Director of Revenue Region No. 13, on February 20, 1998; and that the above availment of the administrative compromise was never approved by the RNAC. Based on the foregoing, it is your opinion that although there was no final approval by the RNAC of the above availment of the administrative compromise as required under RMO 61-97, nevertheless, in keeping with reason, logic and law, JELAC should not be made to suffer and be adversely affected by the unwarranted delay (ten (10) years from 1997) by the Commissioner in acting on the said administrative compromise. Moreover, it is your position that assuming arguendo that the administrative compromise was not approved, the fact remains that it was not acted upon by the Bureau within the five-year period from the date of assessment within which the government has the right to collect the taxes. In other words, the right of the government to collect from JELAC, income tax and VAT liabilities for the taxable year 1993 has already prescribed. Hence, it is your request that a cancellation of such assessment be made and the corresponding Letter of Termination be issued in order for JELAC to obtain a Tax Clearance for bidding purposes. TSEAaD In reply, please be informed that Revenue Regulations (RR) No. 3-2005, prescribes, among others, the requirement of securing a Tax Clearance by private entities which seek to have and/or continue contracts and obligations with government entities. Said revenue regulation was issued to implement Executive Order (EO) No. 398, dated January 2, 2005, which requires all persons, natural or juridical, local or foreign, desiring to enter into or participate in any contract with the government, its departments, bureaus, offices and agencies, including state universities and colleges, government-owned and/or controlled corporations, government financial institutions and local government units, to submit, among others, a Tax Clearance from the Bureau of Internal Revenue to prove full and timely payment of taxes. Specifically, Item No. 3.4 of the said regulations provides thus: "3.4 Tax Clearance "Refers to the clearance issued by the Collection Enforcement Division (CED) attesting that the taxpayer has no outstanding Final Assessment Notice and/or delinquent account." The situation whereby a Tax Clearance may be issued, and its appurtenant effect, is concisely expounded on by the Supreme Court, in the case of In Re: Petition for Assistance in the Liquidation of the Rural Bank of Bokod (Benguet), Inc., Philippine Deposit Insurance Corporation vs. Bureau of Internal Revenue, G.R. No. 158261, dated December 16, 2006, as quoted below: "The BIR can only issue a certificate of tax clearance when the taxpayer had completely paid off his tax liabilities. The certificate of tax clearance attests that the taxpayer no longer has any outstanding tax obligations to the Government." Seemingly, per Collection Enforcement Division (CED) records, JELAC has existing obligations for income tax and VAT for the taxable year 1993. Hence, it was given only a Temporary Tax Clearance, for a limited period, for bidding purposes. In order for JELAC to obtain not just a temporary clearance it availed the tax amnesty under RA 9480. After verification of its tax records, it was disclosed that JELAC's 1993 tax liabilities were already a subject of an administrative compromise which, unfortunately, was not acted by the RNAC or the Commissioner for quite a long time. From the foregoing, this Office, in the interest of justice and fair play, is of the considered opinion that the right of the government to collect the tax has already prescribed. ITCHSa Sections 203 and 223 (c) of the Tax Code of 1993, as amended, the applicable laws in the case at bar, provide thus: "Section 203. Period of limitation upon assessment and collection. Except as provided in the succeeding section, internal revenue taxes shall be assessed within three years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period. . . ." "Section 223. Exception as to Period of Limitation of Assessment and Collection of Taxes. xxx xxx xxx (c) Any internal revenue tax which has been assessed within the period of limitation above prescribed may be collected by distraint or levy or by proceeding in court within three years following the assessment of tax. . . ." In the codified 1993 Tax Code, the prescriptive period for collection has been reduced from five (5) to three (3) years to be counted from the date of assessment. 1 The Tax Code provides for two main period of prescription. The first refers to assessment and the second refers to the remedies of collection. (BIR Ruling No. 225-04 dated April 29, 2004) In the case at bar, what is at issue is the period of collection and there is no question with respect to the issuance of the assessment. Thus, it is noted that JELAC has paid already ten percent (10%) of the basic tax based on a jeopardy assessment in accordance with RMO 61-97 on December 12, 1997. Although the same was not finally approved by the RNAC or the Commissioner, nevertheless, the fact remains that it has been eleven (11) years that had elapsed since August 1996, the time the assessment was made by the BIR. The Bureau, at the time of the payment made by JELAC under the administrative compromise, could have disapproved the same and made a deficiency assessment based on the offer of compromise. However, by the inaction on the part of RNAC on the said offer of compromise made by JELAC, the Bureau loses its right to further collect the balance of the taxes it assessed against JELAC in August 1996, as the period within which to collect the same had lapsed three years thereafter, or on August 1999. CHaDIT The interpretation of the inclusion of the provision limiting the period within which deficiency taxes may be collected has been stated by the Supreme Court in the case of Republic of the Philippines vs. Ablaza, G.R. No. L-14519, dated July 26, 1960. This case involved the attempt by the then Collector of Internal Revenue to collect deficiency taxes for the years 1945 to 1948. The Supreme Court, in stating that the right of the Collector of Internal Revenue to collect deficiency taxes had prescribed, stated as follows: ". . . The provision of law on prescription was adopted in our statute books upon recommendation of the tax commissioner of the Philippines which declares: 'Under the former law, the right of the Government to collect the tax does not prescribe. However, in fairness to the taxpayer, the Government should be estopped from collecting the tax where it failed to make the necessary investigation and assessment within 5 years after the filing of the return and where it failed to collect the tax within 5 years from the date of assessment thereof, just as the government is interested in the stability of its collection, so also are the taxpayers entitled to an assurance that they will not be subjected to further investigation for tax purposes after the expiration of a reasonable period of time. (Vol. II, Report of the Tax Commission of the Philippines, pp. 321-322)' "The law prescribing a limitation of actions for the collection of the income tax is beneficial both to the Government and to its citizens; to the Government because tax officers would be obliged to act promptly in the making of assessment, and to citizens because after the lapse of the period of prescription citizens would have a feeling of security against unscrupulous tax agents who will always find an excuse to inspect the books of taxpayers, not to determine the latter's real liability, but to take advantage of every opportunity to molest peaceful, law-abiding citizens. Without such legal defense taxpayers would furthermore be under obligation to always keep their books and keep them open for inspection subject to harassment by unscrupulous tax agents. The law on prescription being a remedial measure should be interpreted in a way conducive to bringing about the beneficient purpose of affording protection to the taxpayer within the contemplation of the Commission which recommended the approval of the law." Moreover, in the case of Bank of the Philippine Islands vs. Commissioner of Internal Revenue, GR No. 139736, dated October 17, 2005, the Supreme Court made the following pronouncement, citing the case of Basilan Estates v. Commissioner of Internal Revenue, 21 SCRA 17, September 5, 1967: cCSTHA "As enunciated in these statutory provisions, the BIR has three years, counted from the date of actual filing of the return or from the last date prescribed by law for the filing of such return, whichever comes later, to assess a national internal revenue tax or to begin a court proceeding for the collection thereof without an assessment. In case of a false or fraudulent return with intent to evade tax or the failure to file any return at all, the prescriptive period for assessment of the tax due shall be 10 years from discovery by the BIR of the falsity, fraud, or omission. When the BIR validly issues an assessment, within either the three-year or ten-year period, whichever is appropriate, then the BIR has another three years after the assessment within which to collect the national internal revenue tax due thereon by distraint, levy, and/or court proceeding. The assessment of the tax is deemed made and the three-year period for collection of the assessed tax begins to run on the date the assessment notice had been released, mailed or sent by the BIR to the taxpayer." (Emphasis supplied) Further, although JELAC did voluntarily expose itself to examination after it availed the amnesty program under RA 9480, which was prompted by its application for a Tax Clearance from the CED for bidding purposes in January 1998, this fact, however, should not be construed as a waiver on the part of JELAC on the prescription of the right of the government to collect taxes. In the case of Republic vs. Felix Acebedo (L-204207, March 29, 1968), the Supreme Court said that "it is necessary that the waiver be executed by the parties before the lapse of the three-year prescription period. A waiver is ineffective if it is executed beyond the original prescriptive period." Moreover, the law does not authorize the extension of the prescriptive period once prescription has set in ( Republic v. Rita Lim de Yu, L-17438 April 30, 1964). Finally, this ruling shall serve as your authority to request from the CED the cancellation of the 1993 income tax and VAT liabilities of JELAC and the issuance of the corresponding Termination Letter thereof. Please be guided accordingly. HICcSA Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. In the 1997 Tax Code, as amended, the period of limitation of collection of taxes has been reverted to five (5) years reckoned from the time of the assessment thereof.