In an en banc decision on July 30 (CTA En Banc Case No. 1191), the Court of Tax Appeals (CTA) reiterated the legal principle that allegations of falsity or fraud in the filing of tax returns must be proven to exist by clear and convincing evidence and cannot be justified by mere speculation. The fraud or falsity contemplated by law is actual and not constructive in nature. Therefore, it must be intentional i.e. a willful and deliberate act of deception with the sole objective of avoiding tax.
The burden of proof in establishing whether the taxpayer is guilty of filing false or fraudulent returns with intent to evade tax is with the Commissioner of Internal Revenue or its duly authorized representative. Negligence per se on the part of the taxpayer, whether slight or gross, is not equivalent to filing of false or fraudulent returns under the law.
A quick look at the period of limitation for assessment under the Tax Code shows that the Bureau of Internal Revenue (BIR) has three years from the last day prescribed by law for the filing of the return to assess internal revenue taxes. However, the three-year period shall be extended in cases where taxpayers are found to have filed false or fraudulent returns with intent to evade tax or in case of failure to file a return. In cases like these, the taxes may be assessed, or a proceeding in court for the collection of such taxes may be filed without assessment at any time within 10 years after the discovery of the falsity, fraud or omission.
In the foregoing en banc case, the BIR sought to collect deficiency internal revenue taxes from the taxpayer, claiming that even if the three-year period had already lapsed, the assessment was still valid since the applicable period of limitation for assessment of false returns is 10 years. The BIR further argued that falsity arises as long as there is some deviation from the truth, whether it is due to mistake, ignorance, or carelessness.
In this case, the CTA ruled against the BIR. It held that falsity, like fraud, is also a question of fact, and thus, should never be lightly presumed. It was pointed out that the allegation that the taxpayer filed false returns was mere speculation because the BIR did not present any witnesses or evidence to support such falsity. Further, the Final Assessment Notice (FAN) and subsequently, the Final Decision on Disputed Assessments (FDDA) failed to indicate that the taxpayer filed false tax returns. Thus, even if it was shown that the Preliminary Assessment Notice (PAN) of the BIR alleged the filing of false returns, the allegation cannot be considered since a PAN is a notice preparatory to the issuance of the FAN and therefore is not, legally speaking, an assessment.
For taxpayers, it is important to note it is the FAN or the Formal Letter of Demand (FLD) that constitutes a legal assessment subject to formal protest; otherwise, it becomes final and executory. Thus, any allegation of falsity or fraud should be indicated in the FAN and FDDA.
The Supreme Court, in earlier rulings, had strictly held that fraud or falsity must be alleged and proven, at least satisfactorily, if not conclusively by the one who alleges its existence. (48 Phil. 58; 18 Phil. 484)
The Courts also noted that the rule was founded on public policy which guards against the speculative tendencies of the human mind and its readiness to accept as facts theories that appeal to the imagination. (G.R. No. L-6397 dated 31 August 1955; CTA Case No. 84 dated 8 July 1958).
Applying this principle, in the absence of concrete proof of falsity or fraud, penalties cannot be imposed and the period of limitations for assessment cannot be extended.
In another earlier case (CTA Case No. 7123 dated 18 July 2007), the CTA stated that in order to render a return filed by a taxpayer a “false return,” there must appear a design to mislead or deceive on the part of the taxpayer, or at least culpable negligence. A mistake that is not culpable in respect of its value would not constitute a false return.
Relative to the recent case, the BIR’s failure to submit clear and convincing evidence proved fatal to their claim to collect deficiency taxes. Its allegation of falsity which was indicated only in the PAN, but was not later on discussed or mentioned in the FAN and FDDA, would not warrant the application of the 10-year assessment period. There was no basis to extend the three-year prescriptive period. Considering that the FAN was issued beyond the three-year period, the BIR’s right to assess deficiency taxes had prescribed. The assessment was considered void.
An important note to take from this case is that despite the BIR’s very high revenue goal, tax investigations and procedures for the assessment of deficiency taxes should still strictly adhere to the basic rules set by law. This is especially applicable for such serious charges as fraud or falsity. Taxpayers should find comfort that Philippine courts do not tolerate mere speculation on the part of the BIR and in fact, firmly require conclusive supporting documents before finding culpability for fraud or falsity of returns.
Maria Jonas S. Yap is an assistant manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
maria.jonas.s.yap@ph.pwc.com
source: Businessworld
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