Commissioner of Internal Revenue v. FMF Development Corp.

NINTH DIVISION [CA-G.R. SP No. 79675. January 31, 2005.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . FMF DEVELOPMENT CORPORATION , respondent . D E C I S I O N DEL CASTILLO, M. , J p : The Solicitor General for the Commissioner of Internal Revenue (CIR), by this Petition for Review, assails the Court of Tax Appeals' Decision and Resolution 1 in CTA Case No. 6153 canceling the deficiency income and withholding taxes for the taxable year 1995 imposed by the government against FMF Development Corporation (FMF), a domestic corporation organized and existing under and by virtue of the laws of the Philippines located in Makati City. FMF declared a PhP3,348,932.00 loss in its 1995 corporate income tax return. 2 On May 8, 1996, it amended its tax return and declared its loss to be PhP2,826,541.00 3 , computed as follows: Gross Income P8,086,128.00 Less Deductions 10,912,669.00 Net Loss P2,826,541.00 In connection with this, the Bureau of Internal Revenue (Revenue Region No. 6, Manila), sent pre-assessment notices, all dated October 6, 1998, informing FMF of its alleged tax liabilities: DEFICIENCY INCOME TAX 4 Net income per investigation (P2,826,541.00) Add: Unallowable Deductions/ Additional Income Total Expenses P10,912,669.00 Disallowed Portion x 81% Total Adjustments P8,839,261.89 Net income per investigation P6,012,720.89 Less: Personal & Additional Exemptions -0- P6,012,720.89 Income Tax Due (35%) 2,104,452.00 Less: Amount already assessed 154,995.30 TOTAL TAX DUE(excl. increments) P2,461,820.87 A. INCREMENTS ON LATE PAYMENT OF WITHHOLDING TAX AND COMPENSATION (dividend bonus payable) Basic Tax P304,891.10 25% surcharge (Sec. 248) P87,016.20 Interest (1/26/96 to 11/7/96) (Sec. 249) + 60,343.02 Compromise Penalty (Sec. 254) 16,000.00 TOTAL P163,359.22 B. INCREMENTS ON LATE PAYMENT OF EXPANDED WITHHOLDING TAX ON MANAGEMENT FEE Management Fee per financial Statement P4,104,800.00 Less: Management fee subj. to EWT (1995) 260,640.00 Mgmt. Fee is not subject to P3,844,160.00 EWT until 10-15-96 Basic Tax (10%) P384,416.00 25% surcharge (Sec. 248) 96,104.00 Interest (1-26-96 to 10-15-96) (Sec. 249) 69,942.35 Compromise Penalty (Sec. 254) 16,000.00 Total P182,046.35 INCREMENTS DUE (A + B) P345,405.57 5 FMF promptly filed with the BIR its protest against these notices and requested for a reconsideration/reinvestigation 6 . On January 22, 1999, Revenue District Officer (RDO) Rogelio Zambarrano wrote FMF informing it that the reinvestigation has been referred to Revenue Officer Alberto Fortaleza. He also further advised FMF to attend the informal conference set on February 2, 1999 to allow it to present evidence to dispute the BIR assessments 7 . HTSaEC As a requirement for reinvestigation, FMF President Enrique Fernandez executed on February 9, 1999 a Waiver of the 3-year prescriptive period to assess internal revenue taxes 8 , hence extending the assessment period until October 31, 1999 9 , which was accepted and signed by the RDO District Officer Rogelio Zambarrano. The waiver is now the major subject of legal controversy. tax2005 On October 18, 1999, FMF received the amended pre-assessment notices dated October 6, 1999, containing the following findings: Net Income per Investigation (P2,826,541.00) Add: Adjustment/Disallowances Management Fees-Not necessary (Sec. 29) 4,104,800.00 Employee Benefitsunsupported (Sec. 29) 58,611.55 Salaries and WagesNo EWT (Sec. 29) 1,059,118.50 Withholding Taxunaccounted (Sec. 28) 348,813.43 Cash Overdraftunaccounted (Sec. 28) 254,853.96 Transportation Exp.unaccounted (Sec. 28) 22,390.16 Representation Exp.unaccounted (Sec. 29) 14,772.59 Miscellaneous Exp.unsupported (Sec. 29) 69,404.65 5,932,764.44 Net Taxable Income P3,106,223.44 Income Tax Due Thereon P1,087,178.20 Less Tax Credit/Paid 154,995.30 Income Tax Due Thereon (excluding increments) P932,182.90 A. Increments on Late Payment of Withholding Tax on Compensation (dividend bonus payable) Basic P304,891.10 25% surcharge (Sec. 248) 87,016.20 Interest (1/26/96 to 11/7/96 (Sec. 249) 60,343.02 Compromise Penalty Sec. 254) 16,000.00 Total P163,359.22 B. Increments on Late Payment of Expanded Withholding Tax on Management Fee Management Fee per financial Statement P4,104,800.00 Less: Management Fee subj. to EWT (1995) 260,640.00 Difference (Mgmt. fee subj. to EWT until 10-15-96) P3,844,160.00 Basic Tax (P3,844,160.00 x 10%) P384,416.00 25% Surcharge (Sec. 248) 96,104.00 Interest (1-2-96 to 10-15-96) (Sec. 249) 69,942.35 Compromise Penalty (Sec. 254) 16,000.00 Total P182,046.35 TOTAL INCREMENTS ON LATE PAYMENTS(A + B) P345,405.57 FMF filed its protest on these pre-assessment notices on November 3, 1999. On the same day, it received BIR's Demand Letter and Assessment Notice No. 33-1-00487-95 dated October 25, 1995 10 . The computation therein already whopped to a total of Php2,053,698.25, which consists of the amount of deficiency taxes due as reflected in the pre-assessment notices and the interests already accrued: Income Tax Assessment Compromise Penalty on Income P1,608,015.50 11 Tax Assessment 20,000.00 Increments on the Withholding Tax on Compensation 184,132.26 12 Compromise Penalty on Increments On Withholding Tax in Compensation 16,000.00 Increments on Withholding Tax on Management Fees 209,550.49 13 Compromise Penalty on Increments on Withholding Tax on Management Fees 16,000.00 TOTAL P2,053,698.25 On November 24, 1999, FMF again filed a letter of protest 14 on the assessment invoking, inter alia 15 , the defense of prescription by reason of the invalidity of the Waiver. In reply to FMF's protest, the BIR clarified each contention the corporation raised. It insisted that the Waiver is valid, being signed by the RDO, a duly authorized representative of the CIR. It then ordered FMF to settle its tax liabilities immediately, otherwise, judicial action will be taken 16 . Treating this as BIR's final decision, FMF filed before the CTA a Petition for Review. EcICDT After due proceedings, the CTA granted FMF's Petition and cancelled Assessments Notice No. 33-1-00487-95 for the sole reason that the Waiver FMF executed has no bidding effect for the following factual findings and formal infirmities, violating Revenue Memorandum Order No. 20-90: 1. The waiver failed to state the date of acceptance by the CIR; 2. There was no showing that FMF was furnished copy of the waiver signed by RDO Zambarrano; 3. Considering that the case involves more than 1 million pesos, the waiver should have been signed by the CIR himself. The CTA declared that CIR only had 3 years from April 15, 1996 to exercise the right to assess. Thus, the October 25, 1999 Assessment Notice was already time-barred 17 . TEcHCA The CIR's Motion for Reconsideration having been denied by the CTA on September 17, 2003, the Sol-Gen raises: I. THE COURT OF TAX APPEALS ERRED IN CANCELLING AND SETTING ASIDE THE ASSESSMENTS ISSUED TO RESPONDENT AS EVIDENCE SHOW THAT PETITIONER COMPLIED WITH REVENUE MEMORANDUM ORDER (RMO) NO. 20-90. II. THE COURT OF TAX APPEALS ERRED IN NOT PASSING UPON THE VALIDITY OF THE ASSESSMENTS. 18 We affirm the CTA decision. Petitioner opines that this case should be decided on the merits and not on mere technicalities, considering that taxes constitute the lifeblood of the nation. To the Sol Gen, the RMO is only directory and cannot go beyond the provisions of the NIRC because Section 222(b) does not even require the date of acceptance to be indicated in the waiver. Furthermore, RMO 20-90 only provides for an administrative case against the revenue official and will not invalidate the waiver that failed to comply with the procedure mandated by the RMO. We disagree. RMO 20-90, which the CTA heavily relied upon for its judgment, enumerates the procedure in executing waiver of the Statute of Limitations: In the execution of the said waiver, the following procedures should be followed: 2. The waiver shall be signed by the taxpayer himself or his duly authorized representative. In the case of a corporation, the waiver must be signed by any of its responsible officials. Soon after the waiver is signed by the taxpayer; the Commissioner of Internal Revenue or the revenue official authorized by him, as hereinafter provided, shall sign the waiver indicating that the Bureau has accepted and agreed to the waiver. The date of such acceptance by the Bureau should be indicated. Both the date of execution by the taxpayer and date of acceptance by the Bureau should be before the expiration of the period of prescription or before the lapse of the period agreed upon in case a subsequent agreement is executed. 3. The following revenue officials are authorized to sign the waiver. A. In the National Office 1. ACIRs for Collection, For taxes involving not more than Special Operations P500,000.00 National Assessment, Excise and Legal on tax cases pending before their respective offices. In the absence of the ACIR, the Head Executive Assistant may sign the waiver. 2. Deputy Commissioner For tax cases involving more than P500,000.00 but not more than P1M 3. Commissioner For tax cases involving more than P1M B. In the Regional Offices 1. The Revenue District Officer with respect to tax cases still pending investigation and the period to assess is about to prescribe regardless of amount. 2. The Regional Director, the Assistant Regional Director, the Chief, Assessment Branch or the Chief, Legal Branch with respect to cases still pending review and the period to assess/collect is about to prescribe, regardless of amount. 3. The Regional Director, the Assistant Regional Director, the Chief, Collection Branch or the Chief, Legal Branch with respect to cases still pending collection and the period to assess/collect is about to prescribe regardless of amount. 4. The waiver must be executed in three (3) copies, the original copy to be attached to the docket of the case, the second copy for the taxpayer and the third copy for the Office accepting the waiver. The fact of receipt by the taxpayer of his/her file copy shall be indicated in the original copy. ICESTA 5. The foregoing procedures shall be strictly followed. Any revenue official found not to have complied with this Order resulting in prescription of the right to assess/collect shall be administratively dealt with. The pertinent governing provision implemented by the RMO is Section 222(b) of the NIRC: Sec. 222. Exceptions as to the Period of Limitation of Assessment and Collection of Taxes. xxx xxx xxx (b) If before the expiration of the time prescribed in Section 203 for the assessment of the tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such time, the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon. A reading of the RMO explicitly shows its mandatory nature, requiring strict compliance. Moreover, it is in keeping with Section 222(b). Indicating in the waiver the date of acceptance by the BIR is necessary in order to determine whether the parties (the taxpayer and the government) had entered into a waiver " before the expiration of the time prescribed in Section 203 (the 3-year prescriptive period) for the assessment of the tax ." As correctly pointed out by the CTA: This is because when the period of prescription has expired, then there will be no more need to execute a waiver as there will be nothing more to extend 19 . One good reason why the law provided for prescription is to give taxpayers a peace of mind, that is, to safeguard them from unreasonable examination, investigation, or assessment. Hence, waivers necessitate a strict construction: "the law on prescription, being a remedial measure, should be liberally construed in order to afford such protection. As a corollary, the exceptions to the law on prescription should perforce be strictly construed." 20 Coming now to another contention brought by the Petitioner: Is a waiver automatically a renunciation of the right to invoke the defense of prescription and thus, estoppel can be invoked against FMF? The answer for both is a categorical "No" as held in Philippine Journalists, Inc . vs . Commissioner of Internal Revenue . 21 A waiver of the statute of limitations is nothing more but 'an agreement between the taxpayer and the BIR that the period to issue an assessment and collect the taxes due is extended to a date certain.' Lastly, even if We assume that the testimony of Revenue Officer Fortaleza had sufficiently established that the execution of the waiver by FMF and the acceptance by RDO Zambarrano were done within the 3-year period to assess, the waiver is still defective for not strictly complying with RMO 20-90 because: 1) Petitioner failed to rebut the CTA's factual finding that FMF was never furnished with a copy of the signed waiver and 2) When the period to assess is not yet about to prescribed, as in this case, tax cases amounting to more than Php1,000,000 should be conformed to by the CIR and not the RDO. This case is conditioned upon the validity of the government's assessment against the taxpayer. Being held to be a patent nullity, discussing the merits of the case at bar is already unnecessary. EcaDCI WHEREFORE, finding the instant petition not impressed with merit, the same is DENIED DUE COURSE and is hereby DISMISSED. No costs. SO ORDERED. Brawner and De Leon, JJ ., concur. Footnotes 1. Rollo, pp. 54-75. Dated March 20 and September 17, 2003, respectively. Penned by Judge Juanito Castaeda and concurred by Ernesto Acosta and Lovell Bautista. 2. Ibid, pp. 76-87. Computed as follows: Gross Income P7,370,230.00 Less: Deductions 10,719,162.00 Net Loss P3,348,932.00 3. Ibid, pp. 88-105. 4. Ibid, p. 111. 5. Ibid, p. 117. 6. Ibid, pp. 111-116 and 118. 7. Ibid, p. 119. 8. Section 203, National Internal Revenue Code (NIRC): Period of Limitation Upon Assessment and Collection. Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) 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: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3) year period shall be counted from the day the return was filed. For 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. 9. Supra, p. 120. 10. Ibid, pp. 129-137. 11. P932,182.90 plus P675,832.60 (20% interest from ___ to 11-25-99) (Sec. 249) 12. P87,016.20 + 60,343.02 plus P36,773.04 (Interest from 11-8-96 to 11-25-99) 13. P96,104.00 + 69,942.35 plus P43,504.14 (Interest from 10-16-96 to 11-25-99) 14. Supra, pp. 138-147. 15. Nullity of the Assessment Notice for want of legal or factual basis: a) That the taxpayer was not informed in writing of the law and facts on which the assessment was based; b) The BIR's erred in disallowing business expenses as deductions (management fees, cash overdraft, salaries, etc.) c) That withholding tax should only be upon actual payment of compensation and not upon its accrual; and d) That the withholding tax on management fees paid to another corporation (i.e., IPCP) should be only 5% and not 10% 16. Supra, pp. 148-151. In rebutting the other contentions, the BIR argued that: a) The words like "not necessary," "unsupported," and "unaccounted" followed by the specific provision of the NIRC are sufficient to inform the taxpayer of the nature and jurisprudence on which the assessment was based. b) As to deductions, only those deductions identifiable only to taxable income are allowed; The Management Fees are not ordinary and necessary expenses; Cash overdraft is said to be unaccounted because it is not permitted in the Phils. and violates generally accepted accounting principles. c) The term 'payment' implies actual and constructive payment. Thus, withholding of taxes on compensation accrued required. d) Indeed 5% should be imposed as a withholding tax on a juridical person. However, it was found that FMF withheld on its income payment to IPCP at 10%. FMF as a withholding agent should remit whatever amount it withheld subject to refund or availment of tax credit by IPCP. 17. Supra, pp. 66-70. 18. Ibid, pp. 21-22. 19. Ibid, p. 67. 20. CIR vs . B.F. Goodrich Phils . , Inc . , G.R. No. 104171, February 24, 1999. 21. G.R. No. 162852, DECEMBER 16, 2004.