Last week, I discussed the Revenue Memorandum Circular (RMC) which extended the deadlines for taxpayers to submit responses or protests to assessment notices, including documents to support requests for reinvestigation. In this article, let’s discuss another guideline released by the BIR concerning tax assessments.
On March 30, RMC 34-2020 suspended the running of the statute of limitations for tax assessments from March 16 until 60 days from the lifting of the state of national emergency. This was echoed by Revenue Regulation Nos. (RR) 7-2020 and 10-2020 and amended by RR 11-2020.
What is the statute of limitations? Under the law, the Bureau of Internal Revenue (BIR) has three years to assess deficiency taxes by issuing a Formal Assessment Notice (FAN). The three years are counted from the last day prescribed by the law to file the returns, or the day the returns were actually filed (including any amendments filed), whichever comes later. Thus, any deficiency tax assessment arising from a FAN that is issued beyond this three-year prescriptive period is considered void.
For income tax assessments, the prescriptive period is applied on an annual basis (i.e., from the filing of the annual income tax return). On the other hand, the prescriptive period for VAT shall be reckoned quarterly, counted from the date of filing of the quarterly VAT returns which is due every 25th of the month following the close of a taxable quarter. For withholding taxes, prescription shall be reckoned from the monthly filing deadlines of the returns.
There are, however, exceptions to the three-year prescriptive period. One is when the taxpayer and the BIR have agreed to extend the period through the execution of a waiver of the defense of the statute of limitations. Executing a waiver to extend the prescription of assessment of taxes is mutually beneficial to the parties. For the taxpayer, the extension provides the taxpayer time to retrieve or prepare the documents to support the tax treatment of its transactions. It also affords the BIR revenue examiners ample chance to evaluate the taxpayer’s records and documents and reduce/cancel assessments before the issuance of the FAN.
Another exception to the three-year period of prescription is the intentional filing of a false or fraudulent return, or failure to file the required return. In these cases, the prescriptive period can be extended from three years to 10 years from the time the falsity, fraud and/or omission is discovered.
Now, let’s discuss the implications of RMC 34-2020 and related RRs on prescribing tax assessments.
Based on the RMC, the World Health Organization’s declaration of the coronavirus disease 2019 (COVID-19) as a pandemic, and the government’s proclamation of a state of national emergency under Republic Act No. 11469, together with Presidential Proclamation Nos. 922 and 929, are circumstances warranting the suspension of the statute of limitations, effectively prohibiting the BIR from issuing tax assessments and collecting deficiency taxes. Under Section 223 of the Tax Code, the running of the statute of limitations can be suspended for the period during which the Commissioner of Internal Revenue (CIR) is prohibited from making the assessment and 60 days after.
Consequently, under RMC 34-2020, RRs. 7-2020 and 10-2020, the statute of limitations was suspended starting March 16, when Luzon was placed under enhanced community quarantine (ECQ), until 60 days from the lifting of the state of emergency. By way of amendment, RR 11-2020 provides that the suspension shall be until “60 days from the lifting of the quarantine.” The term “quarantine” includes, but is not limited to, “community quarantine,” “ECQ,” “modified community quarantine,” and “general community quarantine (GCQ).”
Based on these issuances, if the quarantine runs only until May 31 without further extensions, the statute of limitations shall be suspended up until the 60th day after the lifting of the quarantine, or on July 30. This is a total of 136 days counting from March 16.
The suspension of the statute of limitations under the RMC and RRs may prevent taxpayers from raising the defense of prescription on prescribed tax assessments. However, such a move by the government is understandable. With taxpayers confined at home and many business operations suspended, submission of documents required for tax audits have been put on hold. Taxpayers were given consideration and extended tax filing deadlines because of the limitations imposed by the ECQ. Why shouldn’t the BIR be given the same consideration? After all, BIR examiners also face challenges in continuing tax audits given their limited mobility while under quarantine.
That said, some may argue that taxpayers and the BIR are, in fact, not given the same consideration. While the extension is a welcome relief for taxpayers with ongoing tax investigations, it appears that the BIR examiners may have some advantage in terms of the extension granted.
As I mentioned in last week’s article, taxpayers with ongoing tax audits are given an extension of 30 days from the lifting of the quarantine to submit their protests and additional documents. On the other hand, the BIR is given 60 days from the lifting of the quarantine to validly issue their tax assessments. In fact, since some areas have already transitioned from ECQ to modified ECQ and GCQ, some BIR examiners can now resume working on their tax audit cases even though the 60-day extension period has yet to commence.
To be fair to taxpayers, the BIR might consider giving taxpayers with requests for reinvestigation an additional 30 days (for a total of 60 days) from the lifting of the quarantine to submit supporting documents, consistent with their extension to issue tax assessments. This would ensure that the 60-day period granted to such taxpayers to submit supporting documents is protected regardless of when their due dates fall within the quarantine period.
After all, as a former US Supreme Court Associate Justice put it, fairness is what justice really is.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only and should not be used as a substitute for specific advice.
Kathrine Joy Capales is a manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.