Davao Sugar Central Co., Inc.

September 20, 2007 BIR RULING [DA-503-07] Sec. 219, Lifting of Tax Lien Davao Sugar Central Co., Inc. East West Bank Building, Phase 1 Insular Village, Davao City Attention: Atty. Andrew James Gerard Dulay Ruiz Gentlemen : This refers to your letters dated October 2, 2006 and January 5, 2007, requesting confirmation of your opinion that the issuance of a Tax Clearance from the Collection Enforcement Division (CED), BIR National Office, in favor of Davao Sugar Central Co., Inc. ("DSCC" for brevity), is sufficient in form and substance to enforce the lifting of a tax lien previously issued against its property in the years 1978 and 1981. The facts of the case as represented are as follows: DSCC is a corporation duly organized and existing under the laws of the Republic of the Philippines, and is engaged in the milling of raw sugarcane, and the subsequent sales of its milled products. DSCC maintains its millsite in Guihing, Hagonoy, Davao del Sur. DSCC likewise owns the land on which its mill sites are located. The ownership of DSCC was changed through the acquisition of all its shares by another corporation sometime in 1992. Recently, the owners of DSCC caused a review of the documents of DSCC, particularly the documents pertaining to its real properties. Upon examination of said documents, it was found that one of the Transfer Certificates of Title (TCT) of DSCC, particularly TCT No. T-(15175) 3307, has the following tax liens annotated thereon: a. Notice of tax lien executed by Efren I. Plana, Acting CIR, "tax lien in the total amount of P3,575,604.34 for 1975 in favor of the Republic of the Philippines . . .", instrument dated April 3, 1978, inscription dated May 31, 1978. b. Notice of tax lien executed by Romulo M. Villa, DCIR, "tax lien in the amount of P277,077.50 and P76,072.50 as deficiency income tax and as balance of income tax, respectively, for the year 1976 . . .", instrument dated September 3, 1981, inscription dated October 30, 1981. CaDATc On August 23, 2006, a Tax Clearance was issued by the Collection Enforcement Division (CED), BIR National Office, in favor of DSCC, stating that DSCC has no outstanding tax liability with the BIR based on the available records of the CED as of the same date and that it has no delinquent accounts from the Revenue Regional Offices and Revenue District Offices as of May 31, 2006. 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." The Collection Enforcement Division (CED) of the BIR National Office is tasked to maintain the appropriate records of all delinquent accounts (tax assessments) of tax payers, and effectively coordinates the collection efforts of said accounts. Considering that the CED has the records monitoring delinquent accounts, it is in the best position to state as to whether or not a particular taxpayer is still remiss in the payment of its tax assessments, if any. Thus, if the CED issues a Tax Clearance for a particular taxpayer, then said clearance is sufficient to indicate that the said taxpayer has no outstanding delinquent tax liabilities. Considering the nature of the Tax Clearance, the issuance thereof signifies the fact that DSCC has no pending tax liabilities due to the government. Hence, there is no longer any basis to maintain the tax liens on the real properties of DSCC. Since the tax liens were ordered annotated by the BIR National Office, then the BIR National Office, after examining its records on delinquent accounts through the CED, and thus allowing the issuance of a Tax Clearance, has the appropriate authority to order the lifting of said tax liens on the real properties. The Tax Clearance is sufficient in form and substance to enforce the lifting of a tax lien previously issued against DSCC's property in the years 1978 and 1981 as this obviously shows that the tax liabilities covered in the above tax liens had already been settled. Since the CED did in fact issue the corresponding tax clearance, it is in effect attesting to the fact that DSCC has no pending deficiency taxes for collection by the BIR. It should be noted that a tax lien is a legal claim or charge on property (whether real or personal) established by law as a security for the payment of tax obligations ( Hongkong & Shanghai Banking Corp. vs. Rafferty , 39 Phil. 145). Under the (then applicable) Omnibus Tax Bill of 1972, otherwise known as the Tax Code of 1972, as amended by Presidential Decree (PD) No. 69, dated November 24, 1972, Section 315 of said Tax Code provides: "Sec. 315. Nature and extent of tax lien . If any person, corporation, partnership, joint-account ( cuenta en participacion ) association, or insurance company liable to pay an internal revenue tax, neglects or refuses to pay the same after demand, the amount shall be a lien in favor of the Government of the Philippines from the time when the assessment was made by the Commissioner of Internal Revenue until paid, with interest, penalties, and costs that may accrue in addition thereto upon all property and rights to property belonging to the taxpayer: Provided, That this lien shall not be valid against any mortgagee, purchaser, or judgment creditor until notice of such lien shall be filed by the Commissioner in the office of the register of deeds of the province or city where the property of the taxpayer is situated or located. Based on the afore-cited provision, the lien attaches when the taxpayer neglects or refuses to pay the tax after demand, but relates back from the time when the assessment was made by the Commissioner of Internal Revenue. TSIDaH On the other hand, Section 331 of the then applicable Tax Code of 1972, as amended, provides thus: "Section 331. Period of limitation upon assessment and collection . Except as provided in the succeeding section, internal-revenue taxes shall be assessed within five years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after expiration of such period. For the purposes of this section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day: Provided, That this limitation shall not apply to cases already investigated prior to the approval of this Code." The interpretation of the inclusion of this 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 recommend the approval of the law." 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: TADIHE "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." The process of collection does not end with the annotation of a tax lien on the title to real property; if at all, the process of collection begins with said annotation. The term "collection" means the actual payment of the taxes due, effectively from the proceeds of the sale of real or personal property. Thus the Bureau had five (5) years from the dates of annotation of the said tax liens, 1978 and 1981, within which to effect the collection of taxes due through the sale of said real properties. In the instant case, more than twenty (20) years have elapsed since the annotations of said tax liens on the real property. As such, the Bureau has lost its right to collect the aforementioned deficiency taxes. Further, DSCC did actually inquire and subsequently secure a Tax Clearance from the BIR National Office (Collection Enforcement Division). A Tax Clearance was issued by the Collection Enforcement Division (CED), BIR National Office, in favor of DSCC, dated August 23, 2006, stating that DSCC has no outstanding tax liability with the BIR based on the available records of the CED as of the same date and that it has no delinquent accounts from the Revenue Regional Offices and Revenue District Offices as of May 31, 2006. Such being the case, this Office authorizes the Register of Deeds of the Province of Davao del Sur to cause the lifting of the above Notices of Tax Lien by canceling the annotations of the same on TCT No. T-(15175) 3307 registered under the name of DSCC. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. EDSAac Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service