CIR vs. Eron Subic Power Corporation, GR No. 166387, 19 January 2009 bases of the assessment.
the assessment. Enron likewise questioned the substantive validity
DOCTRINE: The Tax Code provides that a taxpayer shall be informed in
writing of the law and the facts on which the assessment is made; otherwise,
the assessment shall be void. The use of the word “shall” indicate the
mandatory nature of the requirement.
In this case, the CIR merely issued a formal assessment and indicated therein
the supposed tax, surcharge, interest and compromise penalty due thereon.
The Revenue Officers of the [the CIR] in the issuance of the Final Assessment
Notice did not provide Enron with the written bases of the law and facts on
which the subject assessment is based. It did not bother to explain how it
arrived at such an assessment. Moreso, he failed to mention the specific
provision of the Tax Code or rules and regulations which were not complied
with by Enron. The advice of tax deficiency, given by the CIR to an employee
of Enron, as well as the preliminary five-day letter, were not valid substitutes
for the mandatory notice in writing of the legal and factual bases of the
assessment.
The law requires that the legal and factual bases of the assessment be stated
in the formal letter of demand and assessment notice. Thus, such cannot be
presumed. Otherwise, the express provisions of Article 228 of the NIRC and
RR No. 12-99 would be rendered nugatory. The alleged “factual bases” in the
advice, preliminary letter and “audit working papers” did not suffice.
In view of the absence of a fair opportunity for Enron to be informed of the legal
and factual bases of the assessment against it, the assessment in question
was void.
FACTS: Enron, a domestic corporation registered with the Subic Bay
Metropolitan Authority as a freeport enterprise,2 filed its annual income tax
return for the year 1996 on April 12, 1997. It indicated a net loss of P7,684,948.
Subsequently, the Bureau of Internal Revenue, through a preliminary five-day
letter,3 informed it of a proposed assessment of an alleged P2,880,817.25
deficiency income tax. Enron disputed the proposed deficiency assessment in
its first protest letter.
On May 26, 1999, Enron received from the CIR a formal assessment notice
requiring it to pay the alleged deficiency income tax of P2,880,817.25 for the
taxable year 1996. Enron protested this deficiency tax assessment.
Due to the non-resolution of its protest within the 180-day period, Enron filed
a petition for review in the Court of Tax Appeals (CTA). It argued that the
deficiency tax assessment disregarded the provisions of Section 228 of the
National Internal Revenue Code (NIRC), as amended,8 and Section 3.1.4 of
Revenue Regulations (RR) No. 12-999 by not providing the legal and factual
of the assessment.
CTA granted the ordered the cancellation of the assessment. The CIR insists
that an examination of the facts shows that Enron was properly apprised of its
tax deficiency. During the pre-assessment stage, the CIR advised Enron’s
representative of the tax deficiency, informed it of the proposed tax deficiency
assessment through a preliminary five-day letter and furnished Enron a copy
of the audit working paper14 allegedly showing in detail the legal and factual
bases of the assessment. The CIR argues that these steps sufficed to inform
Enron of the laws and facts on which the deficiency tax assessment was
based.
ISSUE: W/N the advice of tax deficiency, given by the CIR to an employee of
Enron, as well as the preliminary five-day letter, were valid substitutes for the
mandatory notice in writing of the legal and factual bases of the assessment.
RULING: NO. Both the CTA and the CA concluded that the deficiency tax
assessment merely itemized the deductions disallowed and included these in
the gross income. It also imposed the preferential rate of 5% on some items
categorized by Enron as costs. The legal and factual bases were, however,
not indicated.
The Tax Code provides that a taxpayer shall be informed in writing of the law
and the facts on which the assessment is made; otherwise, the assessment
shall be void. The use of the word “shall” indicate the mandatory nature of the
requirement. The law requires that the legal and factual bases of the
assessment be stated in the formal letter of demand and assessment notice.
Thus, such cannot be presumed. Otherwise, the express provisions of Article
228 of the NIRC and RR No. 12-99 would be rendered nugatory. The alleged
“factual bases” in the advice, preliminary letter and “audit working papers” did
not suffice.
In this case, the CIR merely issued a formal assessment and indicated therein
the supposed tax, surcharge, interest and compromise penalty due thereon.
The Revenue Officers of the [the CIR] in the issuance of the Final Assessment
Notice did not provide Enron with the written bases of the law and facts on
which the subject assessment is based. It did not bother to explain how it
arrived at such an assessment. Moreso, he failed to mention the specific
provision of the Tax Code or rules and regulations which were not complied
with by Enron. The advice of tax deficiency, given by the CIR to an employee
of Enron, as well as the preliminary five-day letter, were not valid substitutes
for the mandatory notice in writing of the legal and factual bases of the
assessment. In view of the absence of a fair opportunity for Enron to be
informed of the legal and factual bases of the assessment against it, the
assessment in question was void.
CIR vs. ASALUS CORPORATION, G.R. No. 221590, 22 Feb 2017
DOCTRINE: When there is a showing that a taxpayer has substantially
underdeclared its sales, receipt or income, there is a presumption that it has
filed a false return. As such, the CIR need not immediately present evidence
to support the falsity of the return, unless the taxpayer fails to overcome the
presumption against it. Here, there was a prima facie showing that the returns
filed by Asalus were false, which it failed to controvert. Also, it was adequately
informed that it was being assessed within the extraordinary prescriptive
period. As such, the assessment was timely within the 10-year prescriptive
period.
FACTS: On December 16, 2010, respondent Asalus Corporation (Asalus)
received a Notice of Informal Conference from Revenue District Office (RDO)
No. 47 of the Bureau of Internal Revenue (BIR). It was in connection with the
investigation conducted by Revenue Officer Fidel M. Bañares II (Bañares) on
the Value-Added Tax (VAT) transactions of Asalus for the taxable year 2007.
Asalus filed its Letter-Reply,5 dated December 29, 2010, questioning the basis
of Bañares’ computation for its VAT liability.
On January 10, 2011, petitioner Commissioner of Internal Revenue (CIR)
issued the Preliminary Assessment Notice (PAN) finding Asalus liable for
deficiency VAT for 2007 in the aggregate amount of P413,378,058.11,
inclusive of surcharge and interest. Asalus filed its protest against the PAN but
it was denied by the CIR.
On August 26, 2011, Asalus received the Formal Assessment Notice (FAN)
stating that it was liable for deficiency VAT for 2007 in the total amount of
P95,681,988.64, inclusive of surcharge and interest. Consequently, it filed its
protest against the FAN, dated September 6, 2011. Thereafter, Asalus filed a
supplemental protest stating that the deficiency VAT assessment had
prescribed pursuant to Section 203 of the National Internal Revenue Code
(NIRC).
On October 16, 2012, Asalus received the Final Decision on Disputed
Assessment8 (FDDA) showing VAT deficiency for 2007 in the aggregate
amount of P106,761,025.17, inclusive of surcharge and interest and
P25,000.00 as compromise penalty. As a result, it filed a petition for review
before the CTA Division.
CTA Division: The CTA Division ruled that the VAT assessment issued on
August 26, 2011 had prescribed and consequently deemed invalid. It opined
that the ten (10)-year prescriptive period under Section 222 of the NIRC was
inapplicable as neither the FAN nor the FDDA indicated that Asalus had filed
a false VAT return warranting the application of the ten (10)-year prescriptive
period. MR denied.
CTA En banc: It sustained the CTA Division decision.
The CIR, through the Office of the Solicitor General (OSG), argues that the
VAT assessment had yet to prescribe as the applicable prescriptive period is
the ten (10)-year prescriptive period under Section 222 of the NIRC, and not
the three (3)-year prescriptive period under Section 203 thereof. It claims that
Asalus was informed in the PAN of the ten (10)-year prescriptive period and
that the FAN made specific reference to the PAN.
ISSUE: W/N the VAT assessment had prescribed
RULING: NO. Under Section 248(B) of the NIRC, there is a prima facie
evidence of a false return if there is a substantial underdeclaration of taxable
sales, receipt or income. The failure to report sales, receipts or income in an
amount exceeding 30% what is declared in the returns constitute substantial
underdeclaration. A prima facie evidence is one which that will establish a fact
or sustain a judgment unless contradictory evidence is produced.
In other words, when there is a showing that a taxpayer has substantially
underdeclared its sales, receipt or income, there is a presumption that it has
filed a false return. As such, the CIR need not immediately present evidence
to support the falsity of the return, unless the taxpayer fails to overcome the
presumption against it.
Applied in this case, the audit investigation revealed that there were
undeclared VATable sales more than 30% of that declared in Asalus’ VAT
returns. Moreover, Asalus’ lone witness testified that not all membership fees,
particularly those pertaining to medical practitioners and hospitals, were
reported in Asalus’ VAT returns. The testimony of its witness, in trying to justify
why not all of its sales were included in the gross receipts reflected in the VAT
returns, supported the presumption that the return filed was indeed false
precisely because not all the sales of Asalus were included in the VAT returns.
Hence, the CIR need not present further evidence as the presumption of falsity
of the returns was not overcome. Asalus was bound to refute the presumption
of the falsity of the return and to prove that it had filed accurate returns. Its
failure to overcome the same warranted the application of the ten (10)-year
prescriptive period for assessment under Section 222 of the NIRC. To require
the CIR to present additional evidence in spite of the presumption provided in
Section 248(B) of the NIRC would render the said provision inutile.
As to the notice requirement, the CIR substantially complied with said
requisite.
It is true that neither the FAN nor the FDDA explicitly stated that the applicable
prescriptive period was the ten (10)-year period set in Section 222 of the NIRC.
They, however, made reference to the PAN, which categorically stated that
“[t]he running of the three-year statute of limitation as provided under Section
203 of the 1997 National Internal Revenue Code (NIRC) is not applicable x x
x but rather to the ten (10)-year prescriptive period pursuant to Section 222(A)
of the tax code x x x.
Thus, substantial compliance with the requirement as laid down under Section
228 of the NIRC suffices, for what is important is that the taxpayer has been
sufficiently informed of the factual and legal bases of the assessment so that
it may file an effective protest against the assessment. In the case at bench,
Asalus was sufficiently informed that with respect to its tax liability, the
extraordinary period laid down in Section 222 of the NIRC would apply. This
was categorically stated in the PAN and all subsequent communications from
the CIR made reference to the PAN. Asalus was eventually able to file a protest
addressing the issue on prescription, although it was done only in its
supplemental protest to the FAN.
Considering the existing circumstances, the assessment was timely made
because the applicable prescriptive period was the ten (10)-year prescriptive
period under Section 222 of the NIRC. To reiterate, there was a prima facie
showing that the returns filed by Asalus were false, which it failed to controvert.
Also, it was adequately informed that it was being assessed within the
extraordinary prescriptive period.
CIR vs. Hantex Trading Co., Inc. G.R. No. 136975, 31 March 2005
DOCTRINE: The “best evidence” envisaged in Section 16 of the 1977 NIRC,
as amended, includes the corporate and accounting records of the taxpayer
who is the subject of the assessment process, the accounting records of other
taxpayers engaged in the same line of business, including their gross profit
and net profit sales. The best evidence obtainable under Section 16 of the
1977 NIRC, as amended, does not include mere photocopies of
records/documents.
Here, the petitioner, in making a preliminary and final tax deficiency
assessment against a taxpayer, cannot anchor the said assessment on mere
machine copies of records/documents. Mere photocopies of the Consumption
Entries have no probative weight if offered as proof of the contents thereof.
The reason for this is that such copies are mere scraps of paper and are of no
probative value as basis for any deficiency income or business taxes against
a taxpayer. The rule is that in the absence of the accounting records of a
taxpayer, his tax liability may be determined by estimation. However, rule does
not apply where the estimation is arrived at arbitrarily and capriciously.
FACTS: Sometime in October 1989, Lt. Vicente Amoto, Acting Chief of
Counter-Intelligence Division of the Economic Intelligence and Investigation
Bureau (EIIB), received confidential information that the respondent had
imported synthetic resin amounting to P115,599,018.00 but only declared
P45,538,694.57. According to the informer, based on photocopies of 77
Consumption Entries furnished by another informer, the 1987 importations of
the respondent were understated in its accounting records. Amoto submitted
a report to the EIIB Commissioner recommending that an inventory audit of
the respondent be conducted by the Internal Inquiry and Prosecution Office
(IIPO) of the EIIB.
EIIB issued a Mission Order for the audit and investigation of the importations
of Hantex for 1987. The IIPO issued subpoena duces tecum and ad
testificandum for the president and general manager of the respondent to
appear in a hearing and bring the following:
1. Books of Accounts for the year 1987;
2. Record of Importations of Synthetic Resin and Calcium Carbonate for the
year 1987;
3. Income tax returns & attachments for 1987; and
4. Record of tax payments.
However, Hantex refused to comply.
IIPO forthwith secured certified copies of the Profit and Loss Statements for
1987 filed by the respondent with the Securities and Exchange Commission
(SEC). However, the IIPO failed to secure certified copies of the respondent’s
1987 Consumption Entries from the Bureau of Customs since, according to
the custodian thereof, the original copies had been eaten by termites. IIPO
requested the Chief of the Collection Division, Manila International Container
Port, and the Acting Chief of the Collection Division, Port of Manila, to
authenticate the machine copies of the import entries supplied by the
informer. However, Chief of the Collection Division Merlita D. Tomas could not
do so because the Collection Division did not have the original copies of the
entries.
Bienvenido G. Flores, Chief of the Investigation Division, and Lt. Leo Dionela,
Lt. Vicente Amoto and Lt. Rolando Gatmaitan conducted an investigation.
They relied on the certified copies of the respondent’s Profit and Loss
Statement for 1987 and 1988 on file with the SEC, the machine copies of the
Consumption Entries, Series of 1987, submitted by the informer, as well as
excerpts from the entries certified by Tomas and Danganan.
Based on the documents/records on hand, inclusive of the machine copies of
the Consumption Entries, the EIIB found that for 1987, the respondent had
importations totaling P105,716,527.00 (inclusive of advance sales tax).
Compared with the declared sales based on the Profit and Loss Statements
filed with the SEC, the respondent had unreported sales in the amount of
P63,032,989.17, and its corresponding income tax liability was
P41,916,937.78, inclusive of penalty charge and interests.
CIR sent a Letter dated April 15, 1991 to the respondent demanding payment
of its deficiency income tax of P13,414,226.40 and deficiency sales tax of
P14,752,903.25, inclusive of surcharge and interest.
Respondent later filed a protest. The respondent questioned the assessment
on the ground that the EIIB representative failed to present the original, or
authenticated, or duly certified copies of the Consumption and Import Entry
Accounts, or excerpts thereof if the original copies were not readily available;
or, if the originals were in the official custody of a public officer, certified copies
thereof as provided for in Section 12, Chapter 3, Book VII, Administrative
Procedure, Administrative Order of 1987. It stated that the only copies of the
Consumption Entries submitted to the Hearing Officer were mere machine
copies furnished by an informer of the EIIB.
CTA: denied. respondent was burdened to prove not only that the assessment
was erroneous, but also to adduce the correct taxes to be paid by it.
CA: reversed. income and sales tax deficiency assessments issued by the
petitioner were unlawful and baseless since the copies of the import entries
relied upon in computing the deficiency tax of the respondent were not duly
authenticated by the public officer charged with their custody, nor verified
under oath by the EIIB and the BIR investigators.
ISSUE: W/N the assessments made were valid.
RULING: NO. The “best evidence” envisaged in Section 16 of the 1977 NIRC,
as amended, includes the corporate and accounting records of the taxpayer
who is the subject of the assessment process, the accounting records of other
taxpayers engaged in the same line of business, including their gross profit
and net profit sales. Best evidence obtainable may consist of hearsay
evidence, such as the testimony of third parties or accounts or other records
of other taxpayers similarly circumstanced as the taxpayer subject of the
investigation, hence, inadmissible in a regular proceeding in the regular
courts.72 Moreover, the general rule is that administrative agencies such as
the BIR are not bound by the technical rules of evidence. It can accept
documents which cannot be admitted in a judicial proceeding where the Rules
of Court are strictly observed. It can choose to give weight or disregard such
evidence, depending on its trustworthiness. However, the best evidence
obtainable under Section 16 of the 1977 NIRC, as amended, does not include
mere photocopies of records/documents.
Here, the petitioner, in making a preliminary and final tax deficiency
assessment against a taxpayer, cannot anchor the said assessment on mere
machine copies of records/documents. Mere photocopies of the Consumption
Entries have no probative weight if offered as proof of the contents thereof.
The reason for this is that such copies are mere scraps of paper and are of no
probative value as basis for any deficiency income or business taxes against
a taxpayer.
The rule assumes more importance in this case since the xerox copies of the
Consumption Entries furnished by the informer of the EIIB were furnished by
yet another informer. While the EIIB tried to secure certified copies of the said
entries from the Bureau of Customs, it was unable to do so because the said
entries were allegedly eaten by termites. The Court can only surmise why the
EIIB or the BIR, for that matter, failed to secure certified copies of the said
entries from the Tariff and Customs Commission or from the National Statistics
Office which also had copies thereof.
The rule is that in the absence of the accounting records of a taxpayer, his tax
liability may be determined by estimation. The petitioner is not required to
compute such tax liabilities with mathematical exactness. However, rule does
not apply where the estimation is arrived at arbitrarily and capriciously. All
presumptions are in favor of the correctness of a tax assessment. It is to be
presumed, however, that such assessment was based on sufficient evidence.
In fine, the petitioner based her finding that the 1987 importation of the
respondent was underdeclared in the amount of P105,761,527.00 on the
worthless machine copies of the Consumption Entries. Aside from such
copies, the petitioner has no other evidence to prove that the respondent
imported goods costing P105,761,527.00. The petitioner cannot find solace on
the certifications of Tomas and Danganan because they did not authenticate
the machine copies of the Consumption Entries, and merely indicated therein
the entry numbers of Consumption Entries and the dates when the Bureau of
Customs released the same. The certifications of Tomas and Danganan do
not even contain the landed costs and the advance sales taxes paid by the
importer, if any. Comparing the certifications of Tomas and Danganan and the
machine copies of the Consumption Entries, only 36 of the entry numbers of
such copies are included in the said certifications; the entry numbers of the
rest of the machine copies of the Consumption Entries are not found therein.
Thus, the computations of the EIIB and the BIR on the quantity and costs of
the importations of the respondent in the amount of P105,761,527.00 for 1987
have no factual basis, hence, arbitrary and capricious. As such, SC remanded
the case to the CTA for further proceedings, to enable the petitioner to adduce
in evidence certified true copies or duplicate original copies of the
Consumption Entries for the respondent’s 1987 importations, if there be any,
and the correct tax deficiency assessment thereon, without prejudice to the
right of the respondent to adduce controverting evidence, so that the matter
may be resolved once and for all by the CTA.