By: Atty. Xela Leona D. Laqui on April 18,2024

Under Section 222 of the National Internal Revenue Code, as amended (“Tax Code”), the ten-year prescriptive period for the Commissioner of Internal Revenue (CIR) to assess tax applies in cases where a taxpayer files a false or fraudulent return with intent to evade tax or fails or omits to file a return. This ten-year period is an exception to the general rule prescribed under Section 203 of the Tax Code, which provides that internal revenue taxes shall be assessed within three years from the day the return was actually filed, or the last day for filing the return stated under the Tax Code.

It should be noted that Section 222 speaks of three distinct cases when the extraordinary ten-year assessment period may be invoked by the CIR: (1) filing a false return, (2) filing a fraudulent return, or (3) omitting to file a return.

In the landmark case of Aznar v. Court of Tax Appeals (157 Phil. 510-536, August 23, 1974) (the “Aznar Case”), the Supreme Court held that a false return implies a deviation from the truth, which may either be intentional or not. It also held that a fraudulent return is one which implies an intentional or a deceitful entry with intent to evade payment of tax.

For this article, we focus on how a “false return” is defined or applied for purposes of invoking the ten-year prescriptive period under Section 222, since mistakes or inaccuracies may commonly be found in tax returns.

In the case of Samar-I Electric Cooperative. v. Commissioner of Internal Revenue (749 Phil. 772-790, December 10, 2014), the taxpayer’s substantial under declaration of withholding taxes was held to have constituted “falsity” in the subject returns giving the CIR the benefit of the period under Section 222 of the Tax Code to assess the correct amount of tax “at any time within ten years after the discovery of the falsity, fraud or omission.”  In this case, the audit investigation revealed that there were undeclared sales subject to value-added tax (VAT) of more than 30% of that declared in the taxpayer’s VAT returns.

However, in the case of Commissioner of Internal Revenue v. B.F. Goodrich Phils., Inc (363 Phil. 169-181, February 24, 1999), the Supreme Court held that, while the properties were sold for a price less than its declared fair market value, this fact “did not constitute a false return which contains wrong information due to mistake, carelessness, or ignorance.”  The Supreme Court explained that “[i]t is possible that real property may be sold for less than adequate consideration for a bona fide business purpose. The Court noted that the taxpayer was compelled to sell the property at a lower price and that, while it did not declare any taxable donation, it nonetheless reported the sale in its income tax return.

In the fairly recent case of McDonald’s Philippines Realty Corp. v. Commissioner of Internal Revenue (G.R. No. 247737, August 8, 2023) (the “McDonald’s Case”), the Supreme Court abandoned the long-standing pronouncements in the Aznar Case which applied the ten-year assessment period for false returns in general, regardless of whether the deviation from the truth is intentional or not.

In the McDonald’s Case, it was made clear that only intentional errors in the return may justify the application of the ten-year assessment period. Thus, the failure of the taxpayer to report interest income in its quarterly value-added tax (“VAT”) returns was deemed not to warrant the application of the ten-year assessment period because the CIR failed to prove that the failure of the taxpayer to report interest income in its VAT returns was deliberate or willful. The Supreme Court explained that Section 222 allows the application of the extended period only in the case of a false or fraudulent return with intent to evade tax or a failure to file a return. Under this interpretation, mere clerical or typographical errors or arithmetic miscalculations shall not render the return false and may not be used as a ground to invoke the exceptional 10-year period. The Supreme Court considered that tax returns are presumed to have been prepared and filed by the taxpayer in good faith and in compliance with applicable rules and regulations.

In compliance with due process in tax assessments, the tax authorities bear the burden of establishing, with clear and convincing proof, the existence of grounds warranting the application of the 10-year period on the basis of “falsity” in the filed returns. Thus, the Supreme Court emphasized that the CIR and examiners of the Bureau of Internal Revenue (BIR) must comply with the following due process requirements: (1) first, that the assessment notice issued to the taxpayer must clearly state that the extraordinary ten-year prescriptive period (not the basic three-year period) is being applied, and the bases for allegations of falsity or fraud; and (2) second, that the tax authorities have not acted in a manner that is inconsistent with the invocation of the extraordinary prescriptive period or have otherwise misled the taxpayer that the basic period will be applied.

However, it must be noted that the CIR may be relieved of proving willful intent if the misstatement is substantial, i.e., it exceeds the corresponding amount declared in the return by 30% consistent with Section 248(B) of the Tax Code.

In conclusion, a false return which justifies the application of the ten-year period does not refer to just any mistake in the return. There is a false return only when the return contains a deliberate or willful error or misstatement. 

Xela Leona D. Laqui is a Junior Associate of Mata-Perez, Tamayo & Francisco (MTF Counsel). This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you may email the author at info@mtfcounsel.com or visit MTF website at www.mtfcounsel.com

https://www.manilatimes.net/2024/04/18/business/top-business/what-is-a-false-tax-return/1942043