1. Can a corporation which availed itself of the tax amnesty under Republic Act No. 9480 be held liable for deficiency withholding taxes?

Yes. In Bureau of Internal Revenue vs. Samuel Cagang (G.R. No. 230104, March 16, 2022), the Supreme Court upheld the deficiency withholding tax assessment against a taxpayer, notwithstanding the fact that the taxpayer availed itself of a tax amnesty. In this case, the Bureau of Internal Revenue (BIR) assessed deficiency income taxes, VAT, and expanded withholding taxes against CEDCO, Inc., where Samuel Cagang (Cagang) acted as treasurer. CEDCO argued that since it had already filed its amnesty tax return and paid the corresponding taxes thereon, it cannot be assessed deficiency taxes.

The Supreme Court ruled that the tax amnesty under Republic Act No. 9480 applies only to income taxes, VAT, estate taxes, donor's tax, capital gains tax, excise tax, and other percentage taxes. It does not extend to withholding taxes. As provided in Republic Act No. 9480, the following are disqualified from availing themselves of the tax amnesty:

  1. Withholding agents with respect to their withholding tax liabilities;
  2. Those with pending cases falling under the jurisdiction of the Presidential Commission on Good Government;
  3. Those with pending cases involving unexplained or unlawfully acquired wealth, revenue or income under the Anti-Graft and Corrupt Practices Act;
  4. Those with pending cases filed in court involving violation of the Anti-Money Laundering Law;
  5. Those with pending criminal cases for tax evasion and other criminal offenses under Chapter II of Title X of the National Internal Revenue Code of 1997, as amended, and the felonies of frauds, illegal exactions, and transactions, and malversation of public funds and property under Chapters III and IV of Title VII of the Revised Penal Code; and
  6. Tax cases subject of final and executory judgment by the courts.

When CEDCO availed itself of the tax amnesty, only its liabilities for unpaid income taxes and VAT were deemed fully settled. Its liabilityfor deficiency withholding taxes remained since Republic Act No. 9480 expressly disqualified withholding agents from availing of the taxamnesty with respect to their withholding tax liabilities.

SyCipLaw TIP 1:

A taxpayer who wishes to avail itself of a tax amnesty under a law must review the law granting the amnesty and its implementing rules to ensure that, first, it is qualified and not disqualified from availing itself of the amnesty and, second, all of its tax liabilities are covered by the amnesty. Tax amnesty laws typically provide who are disqualified from availing of the tax amnesty. While nothing prevents the Congress from declaring otherwise, withholding agents are usually disqualified from availing themselves of a tax amnesty with respect to their withholding tax obligations. This is because a withholding agent collects and pays taxes on behalf of another person and not for his/her own behalf. Therefore, a tax amnesty usually does not apply to the liability of a withholding agents as such.

2. May a company treasurer be held criminally liable for the corporation's failure to withhold taxes?

Yes. In the Cagang case discussed above, as the treasurer of CEDCO, Cagang was criminally prosecuted for failure to file tax returns and pay taxes of CEDCO. Cagang's main defense was that CEDCO cannot be assessed deficiency taxes since CEDCO availed of the tax amnesty under Republic Act No. 9480, which covers "all unpaid internal revenue taxes for the taxable year 2005 and prior years, with or without assessments duly issued therefor, and have remained unpaid as of December 31, 2005".

The Supreme Court held that, since withholding taxes were not covered by the amnesty, CEDCO remains liable for deficiency withholding taxes. As the treasurer of CEDCO, Cagang may be criminally charged for failure to file tax returns and pay taxes as regards withholding taxes.

SyCipLaw TIP 2:

If a corporation violates certain provisions of the National Internal Revenue Code, as amended (Tax Code), criminal liability may be imposed on the partner, president, generalmanager, branch manager, treasurer, officer-in-charge, and the employees responsible for the violation. The identity of these officers may be establishedbased on corporate records, including board resolutions appointing such officers and the General Information Sheets submitted by corporations to the Securities and Exchange Commission. For these named corporate officers, the mere fact of having occupied the position during the period of the corporation's tax violation is sufficient to give rise to probable cause to file criminal charges against such officers for the corporation's violations of the Tax Code.

3. Is a court order allowing the production and inspection of documents considered a separate tax audit if a Letter of Authority has been previously issued against the taxpayer for the same taxable period?

No. In Smart Communications, Inc. v. Hon. Arreza (CTA EB No. 2386, August 15, 2022), the Court of Tax Appeals (CTA) En Banc upheld the grant of a motion for production and inspection of documents in a case pending in court, notwithstanding that a Letter of Authority (LOA) had already been issued against the taxpayer.

In this case, the City of Makati issued a Notice of Assessment against the taxpayer for deficiency franchise taxes, fees, and charges for taxable years 2012 to 2015. The taxpayer contested the assessment, asserting that it already paid its tax liabilities. Previously, the City of Makati issued a LOA, which compelled the taxpayer to produce its books of account, financial statements, summary/breakdown of gross sales per calendar year, and proof of payment of franchise taxes in other localities. As the taxpayer was unable to produce a summary/breakdown of gross sales, as well as proof of payment of franchise tax in other localities, despite repeated demands, the City of Makati assessed the taxpayer deficiency franchise taxes based on the total gross receipts of the taxpayer appearing on its financial statements. The assessment is based on Section 7A.08 of the Revised Makati Revenue Code, which provides for a presumptive assessment.

The taxpayer assailed the assessment before the Regional Trial Court of Makati (RTC). The City of Makati filed with the RTC a motion for production and inspection of documents, seeking to compel the taxpayer to produce its books of account, financial statements, summary/breakdown of gross sales per calendar year, and proof of payment of franchise taxes in other localities. The RTC granted the motion.

On appeal to the CTA, the taxpayer questioned the grant of the motion for production and inspection of documents arguing that it is tantamount to another examination or audit of the taxpayer's books of account for the same taxable period, as well as the conduct of anexamination without a valid LOA, which are not allowed by the Local Government Code and the Revised Makati Revenue Code.

In ruling that the motion for production and inspection of documents was properly granted, the CTA held that when the taxpayer contested the tax assessment before the RTC, the City of Makati had every right to assert its power to examine the taxpayer's records to ascertain the correct tax liabilities due. The grant of the motion would not amount to another tax audit since it was an exercise of the RTC's power of judicial review. As a court of competent jurisdiction, the RTC has the authority to look into the correctness of the tax assessment against the taxpayer and to require the production of material and relevant evidence necessary for its determination of the factual issues involved in the assessment case, such as the documents in this case.

SyCipLaw TIP 3:

A taxpayer should properly maintain and keep records of its books of account and other accounting records and should be ready to present such books of account and accounting records in the event of a tax audit. In case a court case is filed as regards a disputed assessment, the court can still compel the production of these documents even if the taxpayer did not present the documents to the BIR or the local government during the tax audit. Failure to obey the court's order may result in contempt of court, which is punishable by imprisonment and/or fine.

4. Can a local taxing authority require the production and inspection of documents of a taxpayer's nationwide sales and receipts, as well as its sales and receipts in other localities?

Yes. In the Smart case discussed above, the CTA ruled that the City of Makati cannot simply accept the taxpayer's self-assessment as a true and accurate declaration of the taxpayer's income. The local taxing authority has the power to issue a LOA to compel the examination of books, records, and otheraccounts to ascertain the amount paid, including books, records, and other accounts pertaining to other localities. In this regard, the local taxing authority's examination power under Section 171 of the Local Government Code and Section 7A.07 of the Revised Makati Revenue Code is extensive and necessary to enforce local tax laws. Accordingly, the City of Makati has the authority to compel production of documents showing nationwide sales and receipts, including those documents in localities other than the City of Makati as these documents are relevant and material to the determination of the correct basis and computation of anydeficiency local tax in the City of Makati.

SyCipLaw TIP 4:

Taxpayers should be mindful that, while a local government unit (LGU) exercises taxing power only within its territorial jurisdiction, it can request the production and inspection of documents showing nationwide revenues, as well as revenues in other localities outside of the LGU's territorial jurisdiction, in order to determine the correct amount of taxes due to the LGU.

5. Is an audit investigation conducted pursuant to a Mission Order, but without a Letter of Authority, valid?

No. An audit and examination of a taxpayer's books and accounting records, to be valid, must be based on a valid LOA.

In Commissioner of Internal Revenue v. Autostrada Motore, Inc. (CTA EB No. 2375, July 21, 2022), the CTA En Banc invalidated an assessment that was based solely on a Mission Order and conducted without a LOA. The CTA En Banc ruled thatthe absence of an LOA violates the taxpayer's right to due process and renders the entire assessment void.

An LOA is the authority given to the appropriate revenue officer assigned to perform assessment functions. Unless authorized by the Commissioner of Internal Revenue (CIR) himself, or by his duly authorized representative, through a LOA, an examination of the taxpayer cannot ordinarily be undertaken. Due process requires the identification of the names of the tax agents authorized to conduct the examination and assessment of the taxpayer's books and accounting records through a LOA. Identifying the authorized revenue officers in the LOA is a jurisdictional requirement of a valid audit or investigation by the BIR. There must be a link between the LOA and the revenue officer who will conduct an examination of the taxpayers' books of accounts and accounting records.

The CTA En Banc explained that the purpose of a Mission Order is different from a LOA. A Mission Order is issued to authorize the surveillance pursuant to Section 6(C) of the Tax Code, not the audit and the assessment of the taxpayer. The allowable acts covered by a Mission Order include the tax agent's observation and surveillance of the taxpayer's businessoperations, verification of specific documents, and the determination of whether the taxpayer complies with the pertinent tax laws and regulations, without conducting a full-blown audit.

In this case, the authority of the revenue officers under the Mission Order was limited to the exercise of the CIR's verification and surveillance powers. The revenue officers were not authorized by a LOA to conduct an examination and inspection of the taxpayer's books of accounts. Thus, the assessments resulting therefrom are void.

SyCipLaw TIP 5:

Taxpayers undergoing an audit investigation should first check whether a LOA has been issued, granting authority to the revenue officer or tax agent conducting the audit investigation. The revenue officer named in the LOA must be the same officer conducting the examination and assessment of the taxpayer's books of accounts and accounting records. Otherwise, the audit investigation and resulting assessment is void for violating the taxpayer's right to due process.

6. Can the reversal of a Bureau of Internal Revenue ruling be given retroactive application if the same would be prejudicial to the taxpayer?

No. Section 246 of the Tax Code prohibits the retroactive application of a reversal of a BIR ruling if the same would be prejudicial to the taxpayer, unless the exceptions under the provision are present, namely, misstatement or misrepresentation of material facts and bad faith. Any change of opinion or position by the CIR with respect to a BIR ruling, which is prejudicial to the taxpayer, shall only be applied prospectively.

In Commissioner of Internal Revenue v. Meridien East Realty & Development Corporation (CTA EB No. 2287,July 14, 2022), the CTA En Banc rejected the retroactive application of Revenue Memorandum Circular No. 20-2010 (RMC No. 20-2010), which overturned BIR Ruling No. DA-245-05. In the BIR ruling, the BIR initially opined that the transaction was not a sale subject to income tax, expanded withholding tax, documentary stamp tax, and value-added tax. However, RMC No. 20-2010 abandoned the prior position and set out a new one declaring that the transaction was part of a pre-selling arrangement, hence, subject to the aforementioned taxes. Accordingly, the retroactive application of RMC No. 20-2010 would be prejudicial to the taxpayer.

In this case, the CTA En Banc ruled that the CIR failed to prove the existence of any of the exceptions under Section 246 of the Tax Code which would allow retroactive application of the RMC. The CIR failed to adduce evidence that: (1) the taxpayer deliberately misstated or omitted material facts from its return or in any document required of it by the BIR; (2) the facts subsequently gathered by the BIR are materially different from the facts on which the BIR ruling was based; or (3) that the taxpayer acted in bad faith. The CTA En Banc found that the change of position made by the CIR was not brought about by a subsequent learning of a fact misrepresented or withheld by the taxpayer. Rather, the reversal was merely due to a change of opinion by the CIR on the tax consequences of the same set of facts, which the taxpayer presented in obtaining the ruling. Thus, the deficiency tax assessments against the taxpayer were declared null and void as they arose from the retroactive application of the RMC.

SyCipLaw TIP 6:

A taxpayer has the right to rely upon a BIR ruling issued in his favor until the same has been reversed, amended or overruled by the CIR or by the Supreme Court. However, a reversal of a BIR ruling cannot be retroactively applied if doing so would be prejudicial to the taxpayer, unless the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the BIR, the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based, or the taxpayer acted in bad faith in securing the BIR ruling. While the general rule is that the government cannot be estopped by mistakes or errors by its officials or agents, this rule is not without an exception, such as the provision in the Tax Code on the non-retroactivity of a revocation, modification, or reversal of a BIR ruling.

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