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Prescription of the collection of taxes

By: Ellaine Anne Bernardino on June 9,2022

THE right of a taxpayer to due process includes those of being subjected to Bureau of Internal Revenue (BIR) tax assessment and collection efforts only within the prescriptive period provided by law.

The prescription period within which to assess taxes is different from that to collect taxes. There has also been confusion on the prescriptive period for the collection of alleged deficiency taxes.

Section 203 of the National Internal Revenue Code (the Tax Code) states that all internal revenue taxes should be assessed within three years after the last day prescribed by law for the filing of the return. If a return is filed beyond the prescribed period, the three years will be counted from the day the return was filed. Section 203 is silent as to the period of the BIR’s right to collect taxes.

Paragraph (c) of Section 222 of the Tax Code, meanwhile, states that “any internal revenue tax, which has been assessed within the period prescribed in paragraph (a) hereinabove, may be collected by distraint or levy or by a proceeding within five (5) years following the assessment of the tax.” Paragraph (a) tackles assessments involving fraud or false returns, for which the prescription to assess is 10 years from discovery of the fraud or falsity.

Moreover, Paragraph (d) of Section 222 of the Tax Code reiterates the same five-year period to collect taxes in cases where there is a waiver of the statute of limitations executed by the taxpayer extending the period to assess.

In the case of Commissioner of Internal Revenue (CIR) vs Sunnyphil Inc.(CTA EB 2232, May 24, 2022) (Sunnyphil case), the Court of Tax Appeals (CTA) ruled that the period of tax collection remained contentious due to the vagueness of Section 203. A plain reading will show that no period for collection is specified for assessments where no fraud is involved or where no extensions were agreed upon. Hence, the CTA held that the five-year period should still be considered to apply to regular assessments (where no fraud is involved) since Section 222(d) extended the applicability of the five-year period even in circumstances even where fraud is absent.

The Sunnyphil case even cited the Supreme Court case of Bank of the Philippine Islands vs CIR (GR 181836, July 9, 2014), where the high court held that in the collection of taxes pursuant to a regular assessment, Section 319(c) — now Section 222(c) — of the Tax Code applied. In the said case, the Supreme Court made reference to the fact that Section 222(c) of the Tax Code, as amended, was a recreation of Section 319(c) of the then 1977 Tax Code except for the amendment of the prescriptive period to collect from three years to five years.

Likewise, in Solid-One Mills Phils. Inc. vs CIR (CTA Case 8507, May 29, 2014), the CTA held that the BIR had five years to collect the tax assessed even when the assessment was made within the three-year regular period (thus, no fraud was involved).

Contrary to the Sunnyphil and Solid-One Mills cases, however, the recent Supreme Court ruling in CIR vs CTA Second Division and QL Development Inc. (GR 258947, March 29, 2022) (QLI case) held that the three-year period applied for the collection of taxes and thus the BIR’s right to collect had prescribed. In this case, the CTA division ruled that when an assessment was timely issued, the CIR had five years to collect the assessed tax, reckoned from the date the assessment notice was released, mailed, or sent by the BIR to the taxpayer. The Supreme Court disagreed and applied the three-year period.

Citing the case of CIR v United Salvage and Towage (Phils.) Inc. (GR 197515, July 2, 2014), the high court held that in cases of assessments issued within the three-year ordinary period, the CIR only had another three years within which to collect taxes. Hence, the CTA division erred when it applied the five-year period to collect taxes. The Supreme Court clarified Section 222(c) should be read in relation to Section 222(a) of the Tax Code. Therefore, the five-year period to collect taxes only applied to assessments issued within the extraordinary period of 10 years in cases of false or fraudulent return or failure to file a return.

It is noteworthy that in the QLI case, the CIR even averred that the final decision on disputed assessment received by the taxpayer effectively operated as a collection letter. However, the Supreme Court emphasized that collection efforts by the BIR are initiated by distraint, levy, or court proceeding. Hence, since no warrant of distraint and/or levy (WDL) was served to the taxpayer and no judicial proceedings were initiated by the CIR within the prescriptive period to collect, the right to collect had prescribed.

In view of the foregoing, taxpayers should be mindful that there is also a prescriptive period within which the BIR can validly collect taxes. Thus, they should seek proper advice once they receive any collection letter or WDL from the BIR.

Ellaine Anne L. Bernardino is a junior associate of Mata-Perez, Tamayo & Francisco (MTF Counsel).

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