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CIR v. LA FLOR DELA ISABELA

FACTS:

The case involves a dispute between La Flor Corporation and the Commissioner of Internal Revenue (CIR) regarding the assessment of deficiency taxes. La Flor argues that the assessments for the expanded withholding tax (EWT) and withholding tax on compensation (WTC) had already prescribed because they were issued beyond the prescriptive period provided under the National Internal Revenue Code (NIRC). La Flor also argues that the waivers executed by the corporation should not be considered because they were not offered in evidence and did not comply with the requirements under Revenue Memorandum Order (RMO) No. 20-90.

On the other hand, the CIR asserts that the assessments had not prescribed because La Flor executed three waivers extending the prescriptive period under the NIRC. The CIR argues that the waivers should be considered because they were included as annexes in its Answer filed before the Court of Tax Appeals (CTA) Division. The CIR also argues that failure to comply with RMO No. 20-90 does not invalidate the waivers.

La Flor counters the CIR's arguments by pointing out procedural infirmities in the CIR's petition for review. It argues that the petition did not comply with Bar Matter (B.M.) No. 1922 because the date of issue of the Mandatory Continuing Legal Education (MCLE) compliance of the CIR's counsels was not indicated. La Flor also argues that the paragraphs in the CIR's petition were not numbered, violating Section 2, Rule 7 of the Rules of Court.

The CIR, in its Reply, brushes aside the allegations of procedural infirmities and argues that failure to indicate the date of issue of MCLE compliance is no longer a ground for dismissal. The CIR also points out that the Rules of Court does not penalize the failure to number paragraphs in pleadings.

La Flor believes that the CIR's petition for review should be dismissed outright on procedural grounds, pointing out the alleged failure to include the date of issue of the MCLE compliance number of a counsel and the failure to number paragraphs in the petition. However, the Court clarifies that failure to indicate the number and date of issue of the counsel's MCLE compliance will not result in the dismissal of the case but will subject the counsel to appropriate penalty and disciplinary action. The Court also finds that the perceived procedural irregularities in the petition do not justify its outright dismissal.

Regarding the merits of the case, the Court agrees with the CTA in invalidating the assessments against La Flor. The CIR argues that withholding taxes are not considered under Section 203 of the NIRC, which provides for the ordinary prescriptive period for the assessment and collection of taxes, but the Court rejects this argument. The relevant provisions in the NIRC concerning the prescriptive period for the assessment of internal revenue taxes provide for an ordinary and extraordinary period for assessment.

ISSUES:

  1. Whether the ordinary prescriptive period of three years under Section 203 of the National Internal Revenue Code (NIRC) applies to the assessment of withholding taxes.

  2. Whether withholding taxes are considered as internal revenue taxes.

  3. Whether the liability of the withholding agent is independent from that of the taxpayer.

  4. Whether withholding tax assessments on the petitioner are considered penalties for its failure to withhold taxes from the Japanese shipbuilders.

  5. Whether the penalties under Section 257 of the National Internal Revenue Code (NIRC) can be imposed solely for the purpose of imposing penalties and not for the collection of internal revenue taxes.

  6. Whether the waivers extending the prescriptive period of tax assessments executed by the taxpayer are valid and compliant with RMO No. 20-90 and relevant jurisprudence.

RULING:

  1. The Court held that the ordinary prescriptive period of three years under Section 203 of the NIRC applies to the assessment of withholding taxes. The Court emphasized that the NIRC provides for an ordinary and extraordinary period for assessment, and that the assessment for the collection of withholding taxes should not be initiated after the expiration of the three-year period, with the exception of cases where the return is filed beyond the prescribed period, in which case the three-year period starts from the day the return was filed.

  2. The Court ruled that withholding taxes are considered as internal revenue taxes. The Court explained that the withholding tax system is a method of collecting income tax that is sanctioned by tax laws. It was devised to provide a convenient manner for taxpayers to meet their income tax liabilities, ensure the collection of income tax, and improve the government's cash flow. The withholding agent acts as the government's agent for the collection of the tax in order to ensure its payment.

  3. The Court affirmed that the liability of the withholding agent is independent from that of the taxpayer. The withholding agent is considered a tax collector, not a taxpayer. The liability of the withholding agent arises from its failure to withhold and remit the proper amount of tax, but the liability for the tax itself remains with the taxpayer because the income subject to withholding tax is earned by the taxpayer. The Court emphasized that the withholding agent's liability is for the enforcement of the withholding provision, not for the collection of income tax.

  4. No, withholding tax assessments are not penalties but rather unpaid income taxes. The liability of the withholding agent is distinct and separate from the tax liability of the income earner. The withholding agent is personally liable for the correct amount of tax that should be withheld and is also subject to deficiency assessments, surcharges, and penalties if the amount withheld is found to be less than what should have been withheld. Withholding tax assessments aim to collect unpaid income taxes and are not penalties imposed on the withholding agent. Thus, the petitioner is liable for its omission as the withholding agent.

  5. The Court held that the penalties under Section 257 of the NIRC are imposed on top of the deficiency tax assessments, including deficiency withholding tax assessments. It is wrong for the Commissioner of Internal Revenue (CIR) to restrict the assessments only for the purpose of imposing penalties and not for the collection of internal revenue taxes.

  6. The waivers extending the prescriptive period of tax assessments executed by the taxpayer are invalid and non-compliant with RMO No. 20-90 and relevant jurisprudence. The waivers failed to indicate the specific kind and amount of tax due, which is necessary for their validity. Thus, the assessments against the taxpayer had prescribed as there was no valid waiver.

PRINCIPLES:

  • Section 203 of the NIRC provides for an ordinary prescriptive period of three years for the assessment of internal revenue taxes.

  • Withholding taxes are considered as internal revenue taxes and are collected through the withholding tax system.

  • The liability of the withholding agent is independent from that of the taxpayer, and the withholding agent is considered a tax collector, not a taxpayer. The withholding agent's liability is for the enforcement of the withholding provision, not for the collection of income tax.

  • A withholding agent may protect themselves by withholding the tax due and inquiring with the Commissioner of Internal Revenue if the income paid to an individual is subject to withholding. If the Commissioner decides that no withholding tax is required, the withholding agent may remit the amount of tax withheld. (Philippine Guaranty Co. v. Commissioner of Internal Revenue)

  • Exempting provisions from taxation should be strictly construed as the law generally frowns upon exemptions. (Philippine Guaranty Co. v. Commissioner of Internal Revenue)

  • Withholding tax liability is distinct and separate from the tax liability of the income earner. The withholding agent is directly and independently liable for the correct amount of tax that should be withheld and is also liable for deficiency assessments, surcharges, and penalties. (Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation)

  • A person liable for tax is considered a taxpayer and has the legal interest to bring a suit for refund of taxes believed to be illegally collected. (Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation)

  • Withholding tax assessments aim to collect unpaid income taxes and not to impose penalties on withholding agents for their failure to comply with their statutory duty. (Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation)

  • The Tax Code recognizes that withholding tax assessments for deficiency taxes are different and independent from penalties that may be imposed for the failure of withholding agents to withhold and remit taxes. (Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation)

  • Title X, Chapter I of the Tax Code provides for additions to the tax or deficiency tax, which is applicable to all taxes, fees, and charges under the Tax Code. (Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation)

  • If the withholding agent is the government or any of its agencies, political subdivisions, or instrumentalities, the employee responsible for withholding and remittance of tax shall be personally liable for additions to the tax. (Section 247(b) of the Tax Code)

  • Failure of a withholding agent to collect and remit tax results in the withholding agent's liability. (Section 251 of the Tax Code)

  • Penalties under Section 257 of the NIRC are imposed on top of deficiency tax assessments and cannot be limited solely for the purpose of imposing penalties and not for the collection of internal revenue taxes.

  • Waivers extending the prescriptive period of tax assessments must be valid and compliant with RMO No. 20-90 and relevant jurisprudence, including indicating the specific kind and amount of tax due. Failure to comply with these requirements renders the waivers invalid and the assessments may prescribe.