06/12/2023
SC: Extended 10-Year Tax Assessment Period Applies Only to Tax Returns with Intentional Errors |
Abandoning its previous ruling in the 1974 case of Aznar v. CTA, the Supreme Court has ruled that the extraordinary 10-year tax assessment period applies only to false tax returns that contain deliberate or willful misstatements.
Thus ruled the Supreme Court En Banc, in a Decision penned by Justice Henri Jean Paul B. Inting, granting the petition for review on certiorari filed by McDonald’s Philippines Realty Corporation (MPRC). The petition challenged the rulings of the Court of Tax Appeals (CTA) En Banc ordering MPRC to pay the amount of PhP9,206,213.06 in basic deficiency Value-Added Tax (VAT) for calendar year (CY) 2007, among others.
In granting MPRC’s petition, the Court held that only intentional errors in the tax return may justify the application of the 10-year assessment period.
The Court declared that its ruling in Aznar v. CTA which applied the extraordinary 10-year assessment period to false returns in general, regardless of whether the deviation is intentional or not, is now abandoned.
Rather, consistent with Section 222(a) of the 1997 Tax Code, the extraordinary 10-year assessment period applies to a false return when: (1) the return contains an error or misstatement; and (2) such error or misstatement was deliberate or willful, all of which lie on the CIR to establish with clear and convincing evidence.
However, this burden shifts to the taxpayer when there is prima facie evidence of falsity or fraud under Section 248(B) of the 1997 Tax Code such as when (1) there is an understatement/underdeclaration of sales, receipts, or income or overstatement/overdeclaration of expenses or other deductions, and (2) the misstatement is substantial, such that it exceeds the corresponding amount declared in the return by 30%.
The Court further stressed that the assessment notice issued to the taxpayer must comply with two sets of due process requirements. Under the first due process requirement, the notice must clearly state that (a) the extraordinary prescriptive period is being applied and (b) the bases for the allegations of falsity or fraud.
Under the second due process requirement, the tax authorities must not have acted in a manner that is inconsistent with the invocation of the extraordinary prescriptive period or have otherwise misled the taxpayer that the basic period will be applied.
Applying the foregoing to MPRC, the Court found there was no prima facie evidence of a false return since the misstatement did not meet the 30% threshold as required under Section 248(B) of the 1997 Tax Code. Hence, the burden is on the CIR to establish that MPRC filed a false return with intent to evade tax.
Read more at https://sc.judiciary.gov.ph/sc-extended-10-year-tax-assessment-period-applies-only-to-tax-returns-with-intentional-errors/.
Read the Decision in full at https://sc.judiciary.gov.ph/247737-mcdonalds-philippines-realty-corporation-vs-commissioner-of-internal-revenue/.
