Waivers of the statute of limitations that did not comply with the requirements of Revenue Memorandum Order No. 20-90 and Revenue Delegation Authority Order No. 05- 01 have no binding effect on the taxpayer.

To extend the prescriptive period for the BIR to assess taxpayer’s tax liabilities, the BIR requested the taxpayer to execute a series of waivers of the statute of limitations. But the Court declared the waivers executed by the taxpayer as defective for the following reasons, among others: (1) the signatory signed the waivers without any notarized written authority from the taxpayer’s Board of Directors; (2) the respective dates of their acceptance by the BIR were not indicated in the waivers. The waivers, being defective, have no binding effect on the taxpayer. (Next Mobile, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 7965, December 11, 2012) 

Payment of management and consultancy fees to a foreign corporation without a permanent establishment in the Philippines is not subject to withholding taxes.

The taxpayer was assessed for deficiency final withholding taxes on management and consultancy fees paid to a foreign corporation based in Spain. The same fee was disallowed as deduction for income tax purposes for failure to withhold. The Court agreed with the taxpayer that the said management and consultancy fee is not subject to withholding tax, considering that the recipient of the income is a resident of Barcelona, Spain. In this case, the Court applied Article 7 and Article 5 of the Philippines – Spain Tax Treaty, and held that in the absence of a permanent establishment in the Philippines, the fees are not subject to tax in the Philippines. (Penn Philippines, Inc. vs. Commissioner of Internal Revenue, C.T.A. Case No. 7686, December 11, 2012)  

In an assessment for income tax, adding back the net loss carry over (NOLCO) in the year of loss to arrive at the adjusted taxable income is erroneous.

In arriving at the adjusted taxable income for the year 2003, the BIR added back the net operating loss carry-over (NOLCO) incurred in the same year. This is to recapture the tax benefit purportedly realized by the taxpayer in carrying this amount to the succeeding taxable year. The Court did not agree with this assessment. According to the Court, the BIR failed to prove that the taxpayer used its 2003 NOLCO in the succeeding year. Granting that the taxpayer actually deducted the 2003 net loss as NOLCO in the succeeding year 2004 and the said deduction is not proper as the taxpayer did not incur a net loss, the same can only be the subject of assessment, when it was claimed as deduction in the year 2004 and not in the year 2003. Hence, adding back the net loss to the taxpayer’s taxable income for 2003 is erroneous. (Philippine Aerospace Development Corporation vs. Commissioner of Internal Revenue, CTA Case No. 7830, December 11, 2012) 

An undeclared income cannot be imputed from an alleged unaccounted expenses.

Among the assessments made by the BIR against the taxpayer is an alleged undeclared income from an alleged unaccounted expenses. In arriving at the alleged unaccounted expenses, the BIR compared the expenses for rent, professional fee and brokerage as reflected in the taxpayer’s income tax return (ITR) and financial statements (FS) with the same types of expenses subjected to withholding taxes as reported in the taxpayer’s alphabetical list (aplhalist). Since the amounts per alphalist were higher than the amounts per ITR/FS, the BIR inferred that there was undeclared income. In ruling against the BIR, the Court noted that the imputation of alleged undeclared income is based on a mere presumption that since there were undeclared expanses, there were likewise undeclared income corresponding to these expenses. Even if these alleged unaccounted expenses are to be considered as income, the same may be offset by recording the equivalent payments as expenses. Hence, no taxable income will result from the said transactions. (Philippine Aerospace Development Corporation vs. Commissioner of Internal Revenue, CTA Case No. 7830, December 11, 2012) 

To be subject to expanded withholding tax, the income payment must be one of the items enumerated in the withholding tax regulations and must have been made to a person residing in the Philippines.

The assessment for expanded withholding tax (“EWT”) against the taxpayer includes an assessment for 2% EWT on freight, insurance and others based on Bureau of Customs (BOC) data. In ordering the cancellation of the assessment, the Court said that payments for freight and insurance in connection with importations are not among those which are subject to the 2% EWT. The said income payment of taxpayer was not made to any of the contractors mentioned in paragraph (E) of Section 2.57.2 of Revenue Regulations (RR) 2-98. In addition, the payments were made to entities not residing in the Philippines. Considering that the suppliers/payees are not residents of the Philippines, income payments to them are not subject to the EWT at 2% under Section 2.57.2 of RR 2-98, especially under paragraphs (M) and (N) which require that the pertinent supplier must be “local/resident”. (Isuzu Philippines Corporation vs. CIR, CTA Case No. 8025, December 11, 2012) 

Taxpayer’s failure to file a petition for review with the CTA within the statutory period renders the disputed assessment final, executory and demandable.

The BIR issued Formal Letter of Demand (“FLD”) and Final Assessment Notice (“FAN”), all dated March 31, 2006, assessing the taxpayer for deficiency expanded withholding tax and VAT for the taxable year 2002. Taxpayer received the said FLD and FAN on April 10, 2006. The taxpayer manifested its willingness to pay a portion of the assessment but protested the rest of the assessment, specifically the VAT assessment on the alleged disposition of its property and equipment. On November 22, 2006, a Preliminary Collection Letter was signed and issued by the Revenue District Officer (“RDO”) for the collection of taxpayer’s internal revenue tax liabilities. On December 21, 2006, a Final Notice Before Seizure signed by the RDO was issued against the taxpayer, which the latter received on January 4, 2007.

In a letter dated January 15, 2007, the taxpayer wrote the RDO requesting that the case be referred back to BIR Region No. 13. On January 29, 2007, a Warrant of Distraint and/or Levy signed by the RDO was issued against the taxpayer , which was received by the latter on February 21, 2007. After several exchanges of communication, the BIR proceeded with the auction sale of taxpayer’s M/V Philippine Dream. On October 31, 2007, taxpayer filed a petition for review with the CTA, with a prayer for the issuance of TRO and/or Preliminary Injunction, which the Court treated as motion to suspend collection of taxes. One of the issues resolved by the Court was whether the assessment in question has become final and executory. In ruling that the assessment has become final and executory, the Court noted that a Preliminary Collection Letter was issued by the RDO on November 22, 2006. However, the records do not show that the same was received by the taxpayer. However, the taxpayer received a Final Notice Before Seizure on January 4, 2007. The Court treated this as the final decision on disputed assessment. Although the tenor of the Final Notice Before Seizure signified a character of finality which is tantamount to denial of taxpayer’s protest, the taxpayer failed to file an appeal to the CTA within 30 days upon receipt. Considering that it was only on October 31, 2007 that taxpayer filed a petition for review with the CTA, the final decision on disputed assessment had become final, executory and demandable. (Philippine Dream Company, Inc. vs. Bureau of Internal Revenue, CTA Case No. 7700, December 06, 2012)

The Waiver of Statute of Limitations must indicate the date of execution by the taxpayer and the date of acceptance by the Commissioner of Internal Revenue (CIR) to be valid and effective as prescribed by RMO No. 20-90.

The taxpayer, through its Controller, executed two "Waivers of the Defense of Prescription" under the Statute of Limitations of the National Internal Revenue Code (NIRC). These documents were accepted by Revenue District Officer, who failed to indicate his date of acceptance. The Court ruled that the waivers were defective and could not validly extend the original three-year prescriptive period wherein the CIR may assess the taxpayer. The date of acceptance must be indicated to determine whether the waiver was validly accepted before the expiration of the original three-year period. If the acceptance was made beyond the prescriptive period, the waiver is defective and cannot validly extend the original three-year period for the respondent to issue an assessment. (East Asia Power Resources Corporation vs. Commissioner of Internal Revenue, CTA Case No. 7956, December 26, 2011)