DISCLAIMER: This article does not create an attorney-client relationship between the author and the reader.  The answer of the author on the issue is just an expression of his general opinion based on Philippine law and hence does not constitute legal advice.

My previous articles are common issues on taxes and employee benefits.  This time allow me to share article about prescription of tax, an issue which is not common to many but of significance to business.

This article is primarily written for the benefit of accountants handling tax cases with the Bureau of Internal Revenue (BIR).  Take this case.

The extended 3-year prescription for the BIR to assess the income tax of the Company for its 2018 taxable year was March 25, 2023.  On February 14, 2023, the Company has executed waiver of the defense of prescription under the Statute of Limitations prescribed under Sections 203 and 222 of the National Internal Revenue Code (NIRC) extending the conduct of the audit and assessment period not later than December 30, 2023.

On December 4, 2023, the BIR issued its Final Assessment Notice/Formal Letter of Demand (FAN/FLD).  On December 28, 2023, the Company protested the FAN/FLD contesting that the right of the BIR to assess has already prescribed as the BIR failed to furnish the Company a copy of the accepted waiver on or before the prescription date of March 25, 2023.

Was the Company correct?

The Statute of Limitations prescribed under Sections 203 and 222 and other related provisions of the NIRC provides that, unless extended by a valid waiver, the right of the BIR to conduct audit of taxpayer or issue tax deficiency assessment ends on the date of prescription.  In the instant case, the right of the BIR to assess has already prescribed.

Under Revenue Memorandum Order (RMO) No. 20-90, the waiver of the defense of prescription under the Statute of Limitation is an Agreement between the BIR and the taxpayer extending the period of assessment or collection of deficiency tax.  The RMO further provides that the acceptance by the BIR of the waiver should be indicated on the waiver and that the date of the waiver and its acceptance must be made on or before the expiration of the period of prescription or the lapse of any extension.

Since the RMO clearly requires BIR’s acceptance to be indicated on the waiver itself, the Agreement between the BIR and the taxpayer extending the period of assessment or collection clearly falls within the ambit of Cognition Theory where it provides that an offer made in writing is perfected only from the moment the person making the offer has come to his knowledge that his offer has been accepted by the offeree.  The Cognition Theory is embodied under Article 1319 of the Civil Code which reads “x x x Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. The contract, in such a case, is presumed to have been entered into in the place where the offer was made x x x”

Applying the provision of the Civil Code, the offer of the Company dated February 14, 2023 extending the prescription period was deemed to have lapsed and was never perfected for failure of the BIR to notify the Company of its written acceptance of the waiver on or before the prescription date of March 25, 2023. Note further, the RMO requires that the second copy of the accepted waiver be furnished to the taxpayer, and this fact shall be indicated in the original copy of the waiver.  This requirement of the RMO is mandatory as held in Philippine Journalists, Inc. vs CIR (G.R. No. 162852, December 16, 2004).

Hence, the Company was correct in its Protest.  The right of the BIR to issue FAN/FLD has already prescribed.

But what if the BIR still denied the Protest, in whole or in part.  What is the next remedy of the taxpayer in the instant case?

If the Protest is denied by the Commissioner of the BIR (CIR), the remedy of the taxpayer is to file a petition for review with the Court of Tax Appeals (CTA) within 30 days from receipt of the denial of the Protest. If the Protest is denied by the representative of the CIR, the taxpayer has the option either to request for reconsideration of the denial with the CIR within 30 days from receipt of the denial of the Protest or to file a petition for review with the CTA within 30 days from receipt of the said denial.

(March 30, 2024)