Significance of prescriptive period of assessment

Most taxpayers have six days left before the deadline for filing the Annual Income Tax Return (AITR) for the calendar year 2022, the last day for which is April 17. With the filing of the AITR, the power of the Bureau of Internal Revenue (BIR) to assess and examine whether correct taxes were paid begins. However, the power of the BIR to assess deficiency taxes is not limitless.

Taxes are the lifeblood of the government and must be collected without hindrance. Taxes are the government’s primary means of generating the funds needed to support its operations and see to the general well-being of the people.

Nevertheless, the Supreme Court (SC) held that, in the case of Kepco Philippines Corp. v. Commissioner of Internal Revenue (CIR), G.R. Nos. 225750-51, the power of taxation should be exercised with caution to minimize the proprietary rights of a taxpayer. It must be exercised fairly, equally, and uniformly, lest the tax collector kill the goose that lays the golden egg. To maintain the general public’s trust and confidence in the government, this power must be used justly and not treacherously.

The National Internal Revenue Code (NIRC), as amended, provides protection to taxpayers against tax audits by the BIR. Among the rules that protect taxpayers are the Statute of Limitations, which refers to the period during which the BIR can assess and collect taxes. The prescriptive period in making an assessment depends upon (a) whether a tax return was filed, (b) whether the tax return filed was either false or fraudulent, or (c) whether a waiver of the statute of limitations was executed.

Section 203 of the NIRC provides that an assessment of internal revenue tax under ordinary circumstances must be made within three years counted from the period fixed by law for the filing of the tax return or the actual date of filing, whichever is later.

Thus, the three-year period starts to run differently for the various tax types. For example, an annual income tax return for a taxpayer observing the calendar year filed on April 15 will start the clock on the prescriptive period on this day. However, for a quarterly VAT return filed on April 25, the period is counted from that date.

Similarly, the Court of Tax Appeals (CTA), En Banc, held in the case of CIR v. Carmona, C.T.A. EB Case No. 1324, that the Final Assessment Notice issued on July 25, 2011 and received by the taxpayer on Aug. 11, 2011, for all the pertinent quarters for the year 2007 was invalid. The CTA counted the three years from the various dates that the quarterly VAT Returns and the Income Tax Returns were filed. The BIR had only until Jan. 31, 2011 and April 15, 2011, at the latest, within which to issue the FAN against the taxpayer for deficiency VAT and Income Tax, respectively. As such, BIR’s right to assess the taxpayer within the three-year prescriptive period had prescribed.

Consequently, taxpayers should check the prescriptive period for each tax type as some may prescribe earlier than others.

The exceptions to the three-year prescriptive period of assessment are (1) in case of extraordinary circumstance and (2) the execution of a waiver of the statute of limitations.

I. Extraordinary circumstance

The first exception is found in Section 222 (a) of the NIRC which explains that BIR may assess the tax within a period of 10 years from the discovery of a false or fraudulent return with the intent to evade tax or failure to file a return. This basically makes these circumstances imprescriptible, as the 10-year period starts from discovery. Hence, there may be assessments that can be made decades after the taxable years because of fraud or a failure to file a return.

However, it is important to note that the BIR cannot simply avail of this period without including the basis for its allegations of falsity, fraud, and omissions committed by the taxpayer in the assessment notice.

The SC held in the case of CIR v. Fitness by Design, Inc., G.R. No. 215957, that to avail of the extraordinary period of assessment in Section 222 (a) of the NIRC, the Commissioner of Internal Revenue has the burden of proving that the facts exist to evidence fraud. In this case the assessment for taxable year 1995 was issued only in 2004. However, the Supreme Court did not apply the 10-year period for the failure of the Commissioner to prove that the taxpayer deliberately failed to reflect its true income in 1995.

Nonetheless, the SC ruled in the case of CIR v. Estate of Toda, Jr., G.R. No. 147188, that “fraud” in its general sense, is deemed to comprise anything calculated to deceive, including all acts, omissions, and concealment involving a breach of legal or equitable duty, trust, or confidence justly reposed, resulting in the damage of another, or by which an undue and unconscionable advantage is taken of another. In this case, the SC applied the 10-year prescriptive period. The BIR was able to prove that the sale of the property first to Altonaga then to Royal Match, Inc., was merely a tax ploy, a sham, and without business purpose and economic substance. Doubtless, the two sales were executed to mislead the BIR with the end in view of reducing the consequent income tax liability and without any business purpose. In effect, the transactions resulted more in the mitigation of tax liabilities than for legitimate business purposes which constitutes tax evasion.

II. Waiver of statute of limitations

The second exception is provided under Section 222 (b) of the NIRC which allows the execution of the waiver of the defense of prescription. The waiver is a bilateral agreement between a taxpayer and the BIR to extend the period of assessment to a certain date beyond the three-year period. There is no limitation as to the length of the extension as long as it is agreed upon by the taxpayer and the BIR. In addition, the extended period may be further extended by the execution of another before the expiration of the original or the first extension. Hence, it is not uncommon to expect the BIR to request a new waiver before the current waiver expires.

In case the BIR requests a waiver, the taxpayer should always assess whether a waiver is advantageous to him or if it will just unnecessarily lengthen the assessment process. Factors to consider may be the time needed to produce the additional documents requested by the BIR, if any, or additional time needed to discuss and controvert the remaining findings of the BIR.

Nevertheless, the waiver of the statute of limitations is not a waiver of the right to invoke the defense of prescription. In the case of Universal Weavers Corp. v. Commissioner of Internal Revenue, G.R. No. 233990, the SC ruled that a waiver of the statute of limitations under the NIRC, to a certain extent, is a derogation of the taxpayers’ right to security against prolonged and unscrupulous investigations conducted by revenue officers. Make no mistake, it is not a renunciation of the right to invoke the defense of prescription. The SC further ruled that it is, therefore, imperative that the waiver is carefully and strictly construed and duly compliant with the present guidelines and procedural requirements prescribed by the BIR to serve its purpose of affording protection to the taxpayer.

In summary, the purpose of the statute of limitations on the assessment is to safeguard the interest of the taxpayer from unreasonable examination, investigation, or assessment. Accordingly, the government must assess internal revenue taxes on time to prevent extending indefinitely the period of assessment. Taxpayers must be given the assurance that they will no longer be subjected to further investigation for taxes after the expiration of the reasonable periods set by law. Thus, when the assessment is issued beyond the prescriptive period, the government’s right to collect deficiency taxes also prescribes. Simply put, the failure of the BIR to comply with the aforesaid prescriptive periods ends its power to assess and starts the taxpayers’ right to invoke prescription.

Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.


Penelope Germaine D. Sernande is an associate from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.