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SC gets strict in scrutinizing waiver of defense of prescription

It is a basic principle in law that every right or privilege may be waived. A waiver is a voluntary and intentional relinquishment or abandonment of a known legal right or privilege (Castro v. Del Rosario, et al., No. L-17915, January 31, 1967). In taxation, one of the rights or privileges that may be waived by the taxpayer is the defense of prescription under Section 203 of the National Internal Revenue Code (NIRC). Generally, the Bureau of Internal Revenue (BIR) has a period of three (3) years, counted from the period fixed by law for the filing of the tax return or the actual date of filing whichever is later, within which an assessment may be issued. Under Section 222 (B) of the NIRC, the three-year prescriptive period may be waived upon agreement in writing both by the Commissioner of Internal Revenue and taxpayer. To implement Sections 203 and 222 (B) of the NIRC, the BIR issued Revenue Memorandum Order (“RMO”) No. 20-90 dated April 4, 1990 [Re: Proper Execution of the Waiver of the Statute of Limitations under the National Internal Revenue Code]. Recently, the Supreme Court, in the case of Commissioner of Internal Revenue vs. FMF Development Corporation, G.R. No. 167765, June 30, 2008, declared that the procedures prescribed in RMO 20-90 should be applied in determining the validity of a waiver of the defense of prescription. Essentially, the following are the procedures enumerated in RMO 20-90 that must be strictly followed:

1. The waiver must be in the form identified in RMO 20-90 as Annex “A”;

2. The waiver shall be signed by the taxpayer himself or his duly authorized representative. In the case of a corporation, the waiver must be signed by any of its responsible officials.

Soon after the waiver is signed by the taxpayer, the Commissioner of Internal Revenue or the revenue official authorized by him shall sign the waiver indicating that the BIR has accepted and agreed to the waiver. The date of such acceptance by the BIR should be indicated. Both the date of execution by the taxpayer and date of acceptance by the BIR should be before the expiration of the period of prescription or before the lapse of the period agreed upon in case a subsequent agreement is executed.

3. The following revenue officials are authorized to sign the waiver:

A. In the National Office For tax cases involving not more than P500,000, the waiver must be signed by the Assistant Commissioners for Internal Revenue (ACIRs) for Collection, Special Operations, National Assessment, Excise and Legal on tax cases pending before their respective offices. In the absence of the ACIR, the Head Executive Assistant (HREA) may sign the waiver. For tax cases involving not more than P500,000.00 but not more than P1 Million, the waiver must be signed by a Deputy Commissioner of the BIR National Office. For tax cases involving more than P1 Million, the waiver must be signed by the Commissioner of Internal Revenue.

B. For cases in the regional offices which are still pending investigation and the period to assess is about regardless of amount, the waiver should be signed by the Revenue District Officer.

4. The waiver must be executed in three (3) copies, the original copy to be

attached to the docket of the case, the second copy for the taxpayer and the third copy for the Office accepting the waiver. The fact of receipt by the taxpayer of his/her file copy shall be indicated in the original copy (Underscoring added).

In the aforementioned case, FMF Development Corporation, through its President, executed a waiver of the three-year prescriptive period within which the BIR may assess internal revenue taxes for the taxable year 1995 until October 31, 1999. On October 25, 1999, FMF Development Corporation received the BIR’s Formal Letter of Demand and Assessment Notice setting forth the former’s alleged deficiency in taxes and accrued interests totaling to P2,053,698.25. FMF Development Corporation filed a protest letter against the assessment invoking, among others, the defense of prescription by reason of the invalidity of the waiver. Applying RMO 20-90, the Supreme Court ruled that the waiver was defective and did not validly extend the original three-year prescriptive period. Firstly, it was not proven that FMF Development Corporation was furnished a copy of the BIR-accepted waiver. Secondly, the waiver was signed only by a Revenue District Officer, when it should have been signed by the Commissioner as mandated by the NIRC and RMO 20-90, considering that the case involves an amount of more than P1 Million, and the period to assess was not yet prescribe. Lastly, it did not contain the date of acceptance by the Commissioner of Internal Revenue, a requisite necessary to determine whether the waiver was validly accepted before the expiration of the original three-year period. The Supreme Court declared that the waiver was a bilateral agreement, thus necessitating

the very signatures of both the Commissioner and the taxpayer to give birth to a valid agreement. Absent the consent of the Commissioner, such waiver had no binding effect on FMF Development Corporation. As enunciated by the Supreme Court in the case of Philippine Journalists, Inc. vs. Commissioner of Internal Revenue (G.R. No. 162852, December 16, 2004), a waiver of the statute of limitations under the NIRC, to a certain extent, being a derogation of the taxpayer’s right to security against prolonged and unscrupulous investigations. Hence, taxpayers who executed a waiver of the defense of prescription must carefully scrutinize and determine if the procedures prescribed in RMO 20-90 were strictly followed.