Amendments and assessments: Revisiting the nature of substantial changes
In tax litigation, one of the first questions we ask when elevating an assessment from the Bureau of Internal Revenue (BIR) to the Court of Tax Appeals (CTA) is, “Was the assessment made within the prescriptive period?” This is because when prescription is properly established, we no longer have to argue on the other merits of the case (but we do it anyway, at least to make sure that all bases are covered).
For the uninitiated, an “assessment” is the BIR’s finding that a taxpayer still has taxes to pay on top of the ones it has already paid voluntarily. On the other hand, when an assessment has “prescribed,” it means that the deadline for making the assessment has lapsed. In other words, when prescription sets in, the BIR can no longer run after the deficiency even if its findings would have been valid.
Generally, the prescriptive period (or the statute of limitations) for the BIR to make an assessment is three years from the last day provided by the Tax Code to file the return for that particular tax, or from the actual date of the filing, whichever is later.
For example, if under the Tax Code, a particular tax return should be filed by April 15, 2020, then the BIR has until April 14, 2023 to make an assessment. However, if the taxpayer filed that return on July 15, 2020, then the BIR has until July 14, 2023 to issue the assessment.
But what if the taxpayer amended the return after the filing? Should the prescriptive period start from the date when the original return was filed, or from the date the amended return was filed? Does it matter if the amendment was substantial or just formal? What even is a “substantial” amendment?
In the recent case of Lapanday Foods Corporation v. Commissioner of Internal Revenue (G.R. No. 186155, Jan. 17, 2023), the Supreme Court answered these questions, removing ambiguities in definitions along the way.
The case involved an assessment on VAT for which, prior to 2023, taxpayers were required to file monthly declarations and quarterly returns. While the Petitioner intended to file its 1st Quarterly Return on the last day to file the quarterly VAT return for that period, it instead filed a Monthly VAT Return (BIR Form 2550M) on April 25, 2000.
Almost 17 months later, realizing the mistake, the Petitioner filed an amended 1st Quarterly Return on Sept. 4, 2001. This filing was meant to serve as a correction to the mistaken filing of a Monthly declaration, instead of a Quarterly VAT Return, on April 25, 2000.
The BIR’s assessment for deficiency VAT covering the 1st Quarter of 2000 didn’t come until Jan. 21, 2004, which was more than three years from the filing of the original return on April 25, 2000.
SUBSTANTIAL VS FORMAL AMENDMENT
The Petitioner claimed that it only introduced a “formal” amendment, or one that merely involved a change in the VAT return’s form, but not its substance. Thus, the Petitioner argued, the prescriptive period for assessment should still be reckoned from the filing of the original return (April 25, 2000), citing the Supreme Court’s 1965 ruling in Commissioner of Internal Revenue v. Phoenix Assurance Co., Ltd.
In Phoenix Assurance, the Court ruled that the prescriptive period for assessment should be reckoned from the date of the filing of the amended return because it was “substantially different from the original return.”
On this basis, the Petitioner in Lapanday argued that the BIR’s right to make an assessment on its VAT return should be considered prescribed, because the last day to assess should have been on April 24, 2003. It claimed that there were no substantial changes in the amount it would have paid based on the monthly return it filed.
When the Supreme Court compared the Petitioner’s original and “amended” returns (one being a monthly declaration and the other a quarterly return), it found that even the reported figures were different, not just the form used.
Despite this, the Court still considered these changes as not “substantial” enough for the prescriptive period to be reckoned from the date of the filing of the amended return. In other words, although the amendment was “substantive” — since it referred to the substance of the returns — the Court did not deem it “substantial” enough to warrant an interruption of the prescriptive period.
According to the Supreme Court, even with the original return that used the wrong form, the BIR could still have properly determined the Petitioner’s deficiency tax. After all, it also had the Petitioner’s monthly VAT declarations from the past three months to verify any unreported receipts. Thus, despite the changes in the figures, the two returns were declared to be not substantially different.
All in all, the Supreme Court ultimately ruled that the BIR’s assessment for the 1st Quarter of 2000 was barred by prescription. After ruling that prescription had set in, the Court did not even go into the merits of the assessment itself.
Fortunately, with the passage of the TRAIN Law, we no longer need to worry about making the same “formal” mistake. Beginning 2023, VAT-registered taxpayers only need to file Quarterly VAT Returns, without Monthly VAT declarations.
Nonetheless, the Court’s discussion on the nature of an amendment that interrupts the prescriptive period is still relevant. An amendment of a return, even if it involves changes in the figures and computations, is not “substantial” if the tax payable for the period remains the same.
Prescription, which more or less refers to a “deadline,” is one of the most basic safeguards that the law provides for taxpayers. Considering the many returns taxpayers are required to file, not to mention potential exceptions under the law, some confusion is understandable. Nonetheless, this recent case law, among many others, reinforces why it should still be one of the first arguments to consider in disputing assessments.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Ferdinand Jomilla, Jr. is an associate at the Tax Services department of Isla Lipana & Co., the Philippine member firm of the PwC network.
+63 (2) 8845-2728