In a significant ruling, the Supreme Court affirmed that the Commissioner of Internal Revenue (CIR) has a limited time to collect assessed taxes. This case underscores that the government’s right to collect taxes is not indefinite; it is bound by statutory prescriptive periods. The Court emphasized the importance of adhering to these timelines to protect taxpayers from perpetual uncertainty regarding their tax liabilities. This decision clarifies the interplay between assessment and collection periods, providing critical guidance for both taxpayers and tax authorities in the Philippines.

The Taxman’s Clock: Questioning the Deadline for Tax Collection

This case revolves around QL Development, Inc.’s (QLDI) challenge to a deficiency tax assessment for taxable year 2010. The central issue is whether the CIR’s right to collect these taxes had already prescribed, thus rendering the assessment unenforceable. The CIR argued that QLDI’s failure to file a timely protest made the assessment final and beyond judicial review. However, QLDI contended that the CIR’s collection efforts were initiated beyond the prescriptive period, making them invalid.

The timeline is crucial: QLDI received a Letter of Authority on November 12, 2012, and a Preliminary Assessment Notice on November 28, 2014. The Formal Assessment Notice (FAN) was sent on December 12, 2014, but QLDI did not file a protest within the required 30-day period. Subsequently, the CIR issued a Final Decision on Disputed Assessment (FDDA), received by QLDI on March 3, 2015. QLDI’s request for reconsideration was denied on February 4, 2020, leading to their Petition for Review before the Court of Tax Appeals (CTA) Division. The CTA Division ruled in favor of QLDI, canceling the assessment due to prescription, a decision the CIR challenged.

At the heart of the matter is the jurisdiction of the CTA and the applicable prescriptive periods for tax collection. The CIR directly filed a petition for certiorari and prohibition with the Supreme Court, bypassing the CTA En Banc, arguing that the CTA Division’s resolutions were interlocutory. However, the Court clarified that the CTA resolutions canceling the assessment were final judgments, making an appeal to the CTA En Banc the proper remedy. This procedural misstep was a significant factor in the Court’s decision.

“A ‘final’ judgment or order is one that finally disposes of a case, leaving nothing more to be done by the Court in respect thereto… Conversely, an order that does not finally dispose of the case… is ‘interlocutory,’” the Supreme Court reiterated, citing Denso (Phils.), Inc. v. Intermediate Appellate Court. Given this distinction, the CTA resolutions cancelling the assessment based on prescription were deemed final, not interlocutory.

Even if the Court were to disregard the procedural issue, the CIR’s petition would still fail on its merits. The CIR argued that QLDI’s failure to file a valid protest rendered the assessment final and unappealable, thus depriving the CTA of jurisdiction. However, the Court emphasized that the CTA’s jurisdiction extends to “other matters arising under the National Internal Revenue Code (NIRC),” as provided in Section 7(a)(1) of Republic Act No. (RA) 1125, as amended by RA 9282.

SEC. 7. Jurisdiction. – The CTA shall exercise:

(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:

(1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue [Code] or other laws administered by the Bureau of Internal Revenue[.] (Emphasis supplied)

The Court, citing CIR v. Hambrecht & Quist Philippines, Inc., clarified that the issue of prescription falls under these “other matters.” The Court explained that the finality of an assessment due to the taxpayer’s failure to protest only precludes questioning the assessment’s validity, not the CIR’s right to collect the assessed tax within the prescribed period.

Regarding the applicable period for tax collection, the CTA Division applied a five-year period, reasoning that the CIR had five years from the date of the assessment notice to collect the assessed tax. However, the Supreme Court clarified that the applicable period is three years, not five, citing Section 203 of the NIRC. The Court emphasized the distinction between assessments issued within the ordinary three-year period and those issued within the extraordinary ten-year period in cases of fraud or failure to file a return.

SEC. 203. Period of Limitation Upon Assessment and Collection. – Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period…

In CIR v. United Salvage and Towage (Phils.), Inc., the Court established that when an assessment is validly issued within the three-year period, the CIR has another three years to collect the tax due. Since the FAN/FLD was mailed on December 12, 2014, the CIR had until December 12, 2017, to enforce collection. As the CIR initiated collection efforts only in 2020, the right to collect had already prescribed.

Even if the five-year period applied, as the CTA Division erroneously held, the CIR’s collection efforts would still be barred by prescription. The Court rejected the CIR’s argument that the FDDA served as a collection letter, emphasizing that collection efforts are initiated through distraint, levy, or court proceeding. Since no warrant of distraint or levy was served, and no judicial proceedings were initiated within the prescriptive period, the CIR’s argument was untenable.

The Court also addressed the CIR’s claim that the CTA Division lacked the authority to enjoin the collection of taxes. While Section 218 of the NIRC generally prohibits injunctions to restrain tax collection, Section 11 of RA 1125, as amended by RA 9282, provides an exception. The CTA may suspend collection if it believes that collection may jeopardize the interest of the government or the taxpayer. As QLDI had posted a surety bond, the CTA Division’s act of enjoining the CIR from collecting deficiency taxes was deemed valid.

FAQs

What was the key issue in this case?	The key issue was whether the Commissioner of Internal Revenue’s (CIR) right to collect deficiency taxes from QL Development, Inc. (QLDI) for the taxable year 2010 had already prescribed. This involved determining the applicable prescriptive period and whether the CIR’s collection efforts were initiated within that period.
What is the prescriptive period for collecting taxes in the Philippines?	Generally, the CIR has three years from the date of assessment to collect taxes, provided the assessment was issued within the ordinary three-year prescriptive period. A five-year period applies only when the assessment was issued within the extended ten-year period for cases involving fraud or failure to file a return.
What happens if the CIR fails to collect taxes within the prescriptive period?	If the CIR fails to collect taxes within the prescribed period, the right to collect those taxes is extinguished. This means the taxpayer is no longer legally obligated to pay the assessed deficiency, and the CIR cannot enforce collection through distraint, levy, or court proceedings.
What is the role of the Court of Tax Appeals (CTA) in tax collection disputes?	The CTA has exclusive appellate jurisdiction to review decisions of the CIR involving disputed assessments and other matters arising under the National Internal Revenue Code. This includes determining whether the CIR’s right to collect taxes has prescribed.
Can the CTA issue injunctions against the CIR?	While injunctions are generally not available to restrain tax collection, the CTA can suspend collection if it believes that collection may jeopardize the interest of the government or the taxpayer. The taxpayer may be required to deposit the amount claimed or file a surety bond.
What is the difference between an assessment and a collection of taxes?	An assessment is the process by which the CIR determines the amount of tax a taxpayer owes. Collection, on the other hand, is the process by which the CIR enforces payment of the assessed tax, typically through distraint, levy, or court proceedings.
What is a Formal Assessment Notice (FAN)?	A Formal Assessment Notice (FAN) is a written communication from the CIR informing a taxpayer of a deficiency tax assessment. It includes details of the discrepancies found and demands payment of the assessed amount.
What should a taxpayer do upon receiving a FAN?	Upon receiving a FAN, a taxpayer should carefully review the assessment and, if they disagree with it, file a protest within 30 days from receipt. Failure to file a timely protest may result in the assessment becoming final and demandable.

This case reinforces the principle that tax authorities must act within the bounds of the law, particularly the prescriptive periods for tax collection. It highlights the importance of timely action on the part of the CIR and the protection afforded to taxpayers under the law. The Supreme Court’s decision underscores the balance between the government’s power to tax and the taxpayer’s right to certainty and security.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: COMMISSIONER OF INTERNAL REVENUE VS. COURT OF TAX APPEALS SECOND DIVISION AND QL DEVELOPMENT, INC., G.R. No. 258947, March 29, 2022