SC: 10-year tax assessment period only for returns with willful errors

The Supreme Court (SC) has ruled that the 10-year tax assessment period can only apply to tax returns that contain deliberate or willful misstatements.

In a 46-page decision promulgated last August, the Supreme Court En Banc overruled its previous decision as it granted the petition for certiorari of McDonald's Philippines Realty Corporation (MPRC).

The MPRC's petition challenged the ruling of the Court of Tax Appeals (CTA) En Banc that ordered it to pay P9.2 million in basic deficiency Value-Added Tax (VAT) for calendar year (CY) 2007, among others.

"The decision… of the CTA… [is] hereby reversed and set aside," the Court ruled.

"Accordingly, the deficiency value-added tax assessment against petition for calendar year 2007 is hereby canceled and set aside on the ground of prescription," the SC said.

In September 2010, the SC said the Bureau of Internal Revenue (BIR) issued a preliminary assessment notice (PAN) that found the petitioner liable for deficiency income tax (IT), VAT, and documentary stamp tax (DST) for CY 2007 in the amount of P33.4 million, inclusive of compromise penalty and interest.

The MPRC and the Commissioner of Internal Revenue (CIR) then executed a waiver that extended the assessment period to December 2011.

Following this, they executed another waiver that again extended the assessment period to March 2012.

However, the Court said that before the deadline of the second waiver, the MPRC received a formal demand letter from the CIR which stated that the MPRC failed to subject P11 million worth of VAT gross receipts.

Though the MPRC protested the assessment in April 2012, the CIR denied the administrative protest.

This prompted the MPRC to elevate the case to the CTA, where the latter applied the 10-year assessment period and found the MPRC liable for deficiency VAT in the amount of P2.2 million and delinquency interest in the amount of P2.2 million.

The CTA En Banc in October 2018 affirmed the CTA decision.

Meanwhile, in ruling over the case, the Supreme Court said that the 10-year assessment period could not be applied in the present case and that the CIR's authority to assess the MPRC for deficiency VAT for CY 2007 has prescribed.

According to the SC, the ruling in Aznar v. CTA applied the 10-year period to false returns in general, regardless of whether the deviation was intentional.

The Court said that under Section 222(a) of the 1997 Tax Code, the 10-year period applies to a false return when it contains an error or a misstatement and that such error was deliberate or willful.

The high tribunal found no proof of such willful intent on the part of the MPRC.

"That a misstatement has been sizeable, cannot, on its own, be regarded as sufficient proof of an intention to evade tax," the Court said.

The Court said only intentional and deliberate errors may invoke the 10-year period under Section 222(a).

"Certainly, a return may contain errors. However, if the CIR fails to establish that the misstatement was willful on the part of the taxpayer, plain errors — such as that committed by MPRC but expressly recognized by the tax court as not arising from a deliberate attempt to evade tax — cannot justify the application of the 10-year period," it said. - VDV, GMA Integrated News