As taxpayers may be aware, the tax audits conducted by the Bureau of Internal Revenue (BIR) involve a tedious and long process. Taxpayers dedicate plenty of time and effort in retrieving documents and presenting reconciliations to address the BIR’s findings. However, there are instances wherein the taxpayers would later discover that there was actually no point in proceeding with a BIR audit, because the BIR no longer has the right to audit the taxpayer due to prescription.
Court rulings have established prescription as a valid grounds for rejecting audit findings. As a refresher, what is the defense of prescription?
Prescription can be raised by a taxpayer when the BIR conducts or issues assessment notices beyond three years from the deadline of filing of the tax return as fixed by law or the actual date of filing of the tax return, whichever is later. This is the regular prescription period. When the BIR raises the issue of fraudulent or false return, or non-filing of tax returns, the applicable prescription period is 10 years from discovery.
There have been cases in the past in which the BIR brought up the use of the longer 10-year prescription period, as the BIR’s assessment was issued only after the regular three-year period. However, it will be noted that the 10-year period cannot be readily used by the BIR.
In one case involving the sale of real property, the BIR alleged that the taxpayer submitted an inaccurate tax return by reflecting a sale price at less than fair market value, thereby allowing it to apply the 10-year period. However, the taxpayer explained that it was compelled to sell the property at less than market value to minimize losses. The court ruled that the BIR failed to show that the taxpayer filed fraudulently with intent to evade the payment of the correct amount of tax.
There was also another court case involving a taxpayer engaged in real estate, in which the sale was not recorded in the 1998 financial statements but in 2000. Here, the BIR claimed that the taxpayer filed a fraudulent tax return in 1998. The BIR also sought to apply the 10-year prescription period; however, the court held that the error committed by the taxpayer stemmed from the wrong application of the rules for recognizing revenue for installment payments, and is not an indication of their intent to evade payment.
In the above case, the court further explained that if there really was an intent to evade payment, the taxpayer would not have reported the transaction and subsequently paid the income tax, albeit in the wrong year.
In another case, the BIR alleged the taxpayer filed a false or fraudulent return after the BIR compared third-party data with the taxpayer’s declaration in its VAT returns. However, the court, considering the circumstances, explained that it did not find enough evidence to prove fraud or intentional falsity by the taxpayer.
A recent case featured an argument raised by the BIR that it did not lose its right to assess the taxpayer for deficiency value-added tax (VAT) and expanded withholding tax (EWT), which had prescribed under the three-year period, by reason of the taxpayer’s non-filing of another return involving the documentary stamp tax, a type of tax that is different from VAT and EWT. In this case, the court was unconvinced by the BIR’s assertion that the taxpayer’s non-filing of the DST return should trigger the 10-year assessment period for all its deficiency tax liabilities. According to the court, a plain reading of the relevant Tax Code provisions would show that the prescriptive periods are reckoned from the last day of each return for each type of tax.
The above cases are just few examples of situations wherein a court decided in favor of the taxpayer after not applying the 10-year prescription period. It will be noted, in summary, that fraud is a question of fact that should be alleged and duly proven. Fraudulent intent to evade the payment of taxes, considering that the same is accompanied by legal consequences, cannot just be presumed.
The defense of prescription available to the taxpayer must be recognized and respected. It is anchored on the rationale that tax assessments should avoid the conduct of the tax audit or investigation for an unreasonable length of time. The taxpayers should have a feeling of security against unwarranted audits that will result in unnecessary time and effort on the part of the taxpayers.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Lorenzo V. Matibag is a manager of the Tax Advisory & Compliance Practice Area of P&A Grant Thornton. P&A Grant Thornton is one of the leading audit, tax, advisory, and outsourcing firms in the Philippines, with 29 Partners and more than 1000 staff members.
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