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CIR v. UNITED SALVAGE

FACTS:

Respondent United Salvage and Towage (Phils.), Inc. (USTP) is engaged in the business of sub-contracting work for service contractors engaged in petroleum operations in the Philippines. USTP had entered into contracts and/or sub-contracts with petroleum service contractors for the supply of service vessels. The Commissioner of Internal Revenue found USTP liable for deficiency income tax, withholding tax, value-added tax (VAT), and documentary stamp tax (DST) for taxable years 1992, 1994, 1997, and 1998. USTP filed administrative protests against the 1994 and 1998 withholding tax assessments.

USTP later appealed to the Court in action and alleged that the notices of assessment were void and the government's right to assess and collect deficiency taxes had prescribed due to the failure to issue a valid notice of assessment within the applicable period. USTP availed of the Tax Amnesty Program but the Court partially granted the motion to withdraw the petition, allowing the remaining issue on deficiency withholding tax for taxable years 1992, 1994, and 1998 to proceed.

The Court held that the preliminary assessment notices (PANs) for deficiency withholding tax for 1994 and 1998 were not formally offered as evidence and the final assessment notices (FANs) for deficiency withholding tax for 1994 and 1998 were declared void for failure to comply with the Tax Code. The assessment for 1992 was declared to have already prescribed.

The CTA En Banc affirmed with modification the ruling of the CTA-Special First Division, upholding the 1998 withholding tax assessment. The Commissioner then filed the present petition, raising issues on the technical rules of evidence, the validity of the 1994 withholding tax assessment, and the prescription of the right to collect withholding tax for 1992.

Upon careful review of the records and evidence, the Supreme Court found no basis to overturn the decision of the CTA En Banc. It ruled that the PANs should have been formally offered as evidence, as required by the rules on documentary evidence. The Supreme Court held that the petitioner's failure to do so, without any justifiable reason, is fatal to its case. While the CTA is not strictly governed by the technical rules of evidence, the presentation of PANs is not a mere procedural technicality but is essential for the taxpayer to be informed of their liability and to present their case.

ISSUES:

  1. Whether the petitioners' failure to comply with the rule on admissibility of evidence is a violation of the efficient, effective, and expeditious dispensation of justice.

  2. Whether the EWT assessment issued for taxable year 1994 has factual and legal basis.

  3. Whether Enron was properly informed of the legal and factual bases of the deficiency tax assessment.

  4. Whether Revenue Regulation No. 12-99, which requires the legal and factual bases of the assessment to be stated, is applicable retroactively.

  5. Whether the deficiency EWT assessment for taxable year 1998 complied with the requirements of the Tax Code and Revenue Regulation No. 12-99.

  6. Whether the right to collect the EWT for taxable year 1992 has prescribed.

  7. Whether the statute of limitations was properly applied in this case, considering the request for reinvestigation and the period of inaction by the petitioner.

  8. Whether the elevation of the protest to the Court of Tax Appeals interrupted the running of the prescriptive period for tax collection.

  9. Whether the power to tax has its limits despite its plenitude.

  10. Whether the statute of limitations on the collection of taxes benefits and protects taxpayers.

RULING:

  1. The petitioners' failure to comply with the rule on admissibility of evidence is a violation of the efficient, effective, and expeditious dispensation of justice.

  2. The EWT assessment issued for taxable year 1994 does not have factual and legal basis.

  3. The deficiency tax assessment against Enron was void because Enron was not properly informed of the legal and factual bases of the assessment. Although the Commissioner of Internal Revenue issued an advice, preliminary letter, and final notice, these did not sufficiently state the legal and factual bases of the assessment as required by law.

  4. Revenue Regulation No. 12-99 is applicable retroactively. It merely implements the law and does not create or take away vested rights. Therefore, it may be applied even if it was issued after the pre-assessment notice and formal letter of demand were issued.

  5. The deficiency EWT assessment for taxable year 1998 complied with the requirements of the Tax Code and Revenue Regulation No. 12-99. It stated the factual account and legal basis for the assessment, thus fulfilling the legal requirement.

  6. The right to collect the EWT for taxable year 1992 has not yet prescribed. The prescriptive period was interrupted when the taxpayer filed a request for reinvestigation, thereby extending the time within which the government can collect the tax.

  7. The statute of limitations on assessment and collection of national internal revenue taxes is three years from the date of actual filing of the tax return or from the date of assessment notice. In this case, the Preliminary Collection Letter for deficiency taxes for taxable year 1992 was issued beyond the three-year prescriptive period. The request for reinvestigation was also acted upon by petitioner beyond the three-year period from the date of the assessment notice. Thus, the collection of the assessed tax is already barred by prescription.

  8. The elevation of the protest to the Court of Tax Appeals does not interrupt the running of the prescriptive period for tax collection. The taxpayer has the right to resort to the proper court and the exercise of such right does not prevent the collection of taxes by the petitioner.

  9. Yes, the power to tax has its limits and must be exercised reasonably and in accordance with the prescribed procedure.

  10. Yes, the statute of limitations on the collection of taxes benefits and protects taxpayers.

PRINCIPLES:

  • The taxpayer must be informed in writing of the legal and factual bases of the tax assessment made against him. Failure to provide such information renders the assessment void. (Section 228 of the Tax Code; Revenue Regulation No. 12-99)

  • The requirement to inform the taxpayer in writing of the legal and factual bases of the assessment is mandatory. (use of the word "shall" in the legal provisions)

  • A mere tabulation of alleged deficiency taxes without further detail regarding the assessment is not sufficient. The assessment should include a detailed notice of discrepancy or an explanation of how the amount is collectible and how it was arrived at. (Commissioner of Internal Revenue v. Enron Subic Power Corporation)

  • The taxpayer must be properly informed of the legal and factual bases of a deficiency tax assessment. Failure to do so renders the assessment void. (Article 228 of the National Internal Revenue Code and Revenue Regulation No. 12-99)

  • Revenue regulations that interpret a statute are given retroactive effect as of the date of the effectivity of the statute. (Commissioner of Internal Revenue v. Reyes)

  • Tax officials are required to inform the taxpayer, in writing, of both the law and facts on which an assessment is based. This requirement is not difficult to fulfill. (Commissioner of Internal Revenue v. Reyes)

  • The right to collect a tax is subject to a prescriptive period, which may be interrupted by certain actions of the taxpayer. (Commissioner of Internal Revenue v. Reyes)

  • The three-year prescriptive period for assessment and collection of internal revenue taxes begins to run from the date of actual filing of the tax return or from the date of assessment notice.

  • The request for reinvestigation must be granted or at least acted upon in due course before the suspension of the statute of limitations may set in.

  • The elevation of the protest to the Court of Tax Appeals does not interrupt the running of the prescriptive period for tax collection.

  • The scales must tilt in favor of the individual when balancing the perceived transgressors of the law and the constitutional rights of a citizen to due process of law and the equal protection of the laws.

  • Taxes are the lifeblood of the government but the power to tax has its limits.

  • The power to tax must be exercised reasonably and in accordance with the prescribed procedure.

  • The statute of limitations on the collection of taxes was enacted to benefit and protect taxpayers.

  • The government should be estopped from collecting the tax if it failed to make the necessary investigation and assessment within a certain prescribed time.