SIGNIFICANT DECISIONS OF THE COURT OF TAX APPEALS

November 2012

Assessment and Collection

1. The issuance of Preliminary Assessment Notice is mandatory in tax assessments

except in a few instances, specifically enumerated by law, where it is not required.

Taxpayer received Final Assessment Notice (FAN) assessing it for deficiency taxes.
However, it denied receiving a Preliminary Assessment Notice (PAN) prior to receiving the
FAN. Thus, it contends that its right to due process had been violated. The BIR, on the other
hand, argued that it had issued the PAN.

In ruling in favor of the taxpayer, the CTA En Banc ruled that since the taxpayer denied
receiving the PAN, it was incumbent upon the BIR to prove the contrary. While it is correct
that a mailed letter is deemed received by the addressee in the ordinary course of mail, still
this is merely a disputable presumption, subject to controversion, and a direct denial of the
receipt thereof shifts the burden upon the party favored by the presumption to prove that the
mailed letter was indeed received by the addressee.1 Since the BIR failed to prove the
receipt of the PAN by the taxpayer, the latter was effectively denied of its right to due
process. Section 228 of the Tax Code clearly requires that the taxpayer must first be
informed that he is liable for deficiency taxes through the sending of a PAN. He must be
informed of the facts and the law upon which the assessment is made. The law imposes a
substantive, not merely a formal, requirement. To proceed heedlessly with tax collection
without first establishing a valid assessment is evidently violative of the cardinal principle in
administrative investigations – that taxpayers should be able to present their case and
adduce supporting evidence. The sending of a PAN to taxpayer to inform him of the
assessment made is but part of the ‘due process requirement in the issuance of a deficiency
tax assessment,’ the absence of which renders nugatory any assessment made by the tax
authorities.2 (Commissioner of Internal Revenue vs. Unioil Corporation, CTA EB Case
No. 857, November 13, 2012)

2. An assessment that does not state the factual and legal bases is void and cannot
give rise to an obligation to pay deficiency taxes.

Assessments are prima facie presumed correct and made in good faith. In the absence of
proof of any irregularities in the performance of official duties, an assessment duly made by
the BIR examiner and approved by his superior will not be disturbed. However, the same is
not applicable to the instant case since the BIR failed to comply with the requirements of due
process under the law, that is, assessments in order to be valid must have legal and factual
bases.

1
Citing Republic of the Philippines vs. Court of Appeals and Nielson & Company, Inc., G.R. No. L-38540, April
30, 1987.
2
Citing Commissioner of Internal Revenue vs. Metro Star Superama, Inc., G.R. No. 185371, December 8, 2010.
The law requires that the legal and factual bases of the assessment be stated in the formal
letter of demand and assessment notice. Thus, such cannot be presumed. Otherwise, the
express provisions of Article 228 of the NIRC and RR No. 12-99 would be rendered
nugatory.3 A void assessment cannot give rise to an obligation to pay deficiency taxes, and it
divests the taxing authority of the right to collect them. (Liquigaz Philippines Corporation
vs. Commissioner of Internal Revenue, CTA Case No. 8141, November 22, 2012)

3. The running of the statute of limitations shall not be suspended or interrupted

unless the taxpayer’s request for reinvestigation is acted upon by the Commissioner.

Taxpayer was issued a formal assessment notice (FAN) dated January 21, 2003, covering
the year 1999. Taxpayer submitted its protest, dated March 5, 2003. On November 11, 2010,
taxpayer received a copy of the Final Decision on Disputed Assessment. Among the issues
presented before the Court is whether the five-year period for the BIR to collect the tax has
elapsed. According to the BIR, it did not lose its right to collect since the taxpayer protested
the findings in the FAN.

In ruling against the BIR, the Tax Court held that the running of the statute of limitations on
the making of assessment and the beginning of distraint or levy or a proceeding in court for
collection of deficiency taxes shall be suspended for the period during which the
Commissioner is (1) prohibited from making the assessment or beginning distraint or levy or
a proceeding in court, (2) when the taxpayer requests a reinvestigation which is granted by
the Commissioner, and (3) when the taxpayer cannot be located in the address given by him
in the return filed upon which a tax is being assessed or collected.

The prescriptive period provided by law to make a collection is interrupted only when a
taxpayer requests for reinvestigation of the assessment and the same is granted by the
Commissioner. A mere request for “reinvestigation” without the corresponding action on the
part of the Commissioner does not interrupt the running of the prescriptive period. The
request should first be granted in order to effect suspension. The burden of proof that the
request for reinvestigation had been actually granted shall be on the respondent. Such grant
may be expressed in the communications with the taxpayer or implied from the action of the
BIR Commissioner or her authorized representative in response to the request for
reinvestigation.

When the FAN was issued, the BIR had 5 years within which to enforce collection. However,
it was only in November 2010 or after the lapse of 7 years that the BIR rendered a decision
denying the protest. Since the protest failed to suspend the period to collect the tax, the right
of the BIR to collect the same is deemed to have prescribed. (Bravo Alabang, Inc. vs.
Commissioner of Internal Revenue, CTA Case No. 8199, November 29, 2012)

3
Citing Commissioner of Internal Revenue vs. Enron Subic Power Corporation, G.R. No. 166387, January 19,
2009.
 Tax Refund

4. Although the excess tax credits were not carried over to the succeeding year and
may be the proper subject of a claim for refund or issuance of TCC, it is still
necessary for the taxpayer to show compliance with the conditions for the refund or
issuance of TCC.

In accordance with settled jurisprudence and Section 2.58 of Revenue Regulations No. 2-98,
as amended, the refund or issuance of TCC for unutilized creditable withholding taxes is
dependent on the taxpayer’s compliance with the following conditions:

a. That the claim for refund was filed within the two-year prescriptive period prescribed
under Section 204 (C), in relation to Section 229 of the NIRC of 1997, as amended;
b. That the fact of withholding is established by a copy of a statement duly issued by the
payor (withholding agent) to the payee, showing the amount paid and the amount of
tax withheld therefrom; and
c. That it is shown on the return of the recipient that the income payment received was
declared as part of the gross income.

As cases filed before the CTA are litigated de novo, party-litigants should prove every minute
aspect of their cases. In this case, the Court found that the taxpayer failed to prove
compliance with the third requirement on the basis that in Schedule 1 (Schedule of
Sales/Revenues/Receipts/Fees) of the income tax return, there is no entry in the “Creditable
Tax Withheld” column. According to the Court, this declaration, at the very least, can be
taken to mean, that no part of the gross income reported therein were ever subjected to
creditable withholding tax. (Orix Auto Leasing Philippines Corporation vs.
Commissioner of Internal Revenue, CTA Case No. 8001, November 28, 2012)

5. In case of dissolution of a corporation, the 2-year prescriptive period for refund

begins thirty (30) days after the approval by SEC of its plan for dissolution.

Taxpayer is a general partnership composed of general partners. On March 29, 2010, the
Securities and Exchange Commission approved the withdrawal of a partner, which
effectively dissolved the Taxpayer as a corporate entity. On April 15, 2010, Taxpayer filed a
written application for the issuance of tax clearance with a claim for refund or issuance of tax
credit certificate for its excess creditable withholding tax for 2008 and 2009. On March 31,
2011, taxpayer filed its judicial claim for refund before the Court of Tax Appeals.

The Court of Tax Appeals ruled that in case of dissolution of a corporation, the two-year
period within which to file a claim for refund begins thirty (30) days after the approval by the
SEC of its plan for dissolution.4 Counting thirty days from March 29, 2010, the start of the
two-year prescriptive period is on April 29, 2010. Taxpayer had until April 29, 2012 within
which to file claim for refund or issuance of tax credit certificate, both in the administrative
and judicial levels. Therefore, the claim for refund filed on April 15, 2010 and the petition for
review filed on March 31, 2011 are well within the prescriptive period.

The CTA, however, denied the petition for failure of the taxpayer to present documents to
support its alleged tax payments in 2008. (Mindanao I Geothermal Partnership vs.
Commissioner of Internal Revenue, CTA Case No. 8250, November 9, 2012)

4
Citing Bank of the Philippine Islands vs. Commissioner of Internal Revenue, G.R. No. 144653, August 28, 2001.
6. The period to file a claim for refund of excess creditable withholding taxes by a
tax-exempt entity is not reckoned from the filing of the final adjustment return, but
from the time the taxes were erroneously withheld.

Taxpayer secured a ruling that as a “business league, chamber of commerce, or board or

trade, not organized for profit and no part of the net income of which inures to the benefit of
any private stockholder or member,” it is exempt from the payment of income tax received by
it as such organization. On April 13, 2007, taxpayer filed its Annual Income Tax Return (ITR)
for the taxable year 2006. On March 4, 2009, it filed a written claim for cash refund or
issuance of tax credit certificate for its alleged excess creditable withholding taxes, arising
from the erroneous withholding of taxes on payments made by several locators.

In several cases, the rulings are to the effect that the counting of the two-year prescriptive
period is reckoned from the time of the filing of the final adjustment return. The premise is
that the subject taxpayer would know if there is a refundable amount only after a final
adjustment return is accomplished or filed. The rule does not apply to this case. The
taxpayer need not wait for the filing of its final adjustment return for taxable year 2006 to
know whether a tax refund can be claimed, since it has been earlier confirmed by the BIR
that petitioner is exempt from income tax under Section 30(F) of the NIRC of 1997. From the
time the taxes were withheld from the association dues and other fees paid to petitioner, the
latter can already determine the amount of tax to be refunded, which is exactly the same as
the amount of tax withheld. (LISP-1 Locators’ Association Incorporated vs.
Commissioner of Internal Revenue, CTA Case No. 7905, November 29, 2012)

7. The two-year prescriptive period under Section 229 of the NIRC may be suspended
for reasons of equity and other special circumstances.

In 1994, the Energy Regulatory Board (ERB) granted taxpayer a provisional rate increase of
P0.184 per kwh. In 1998, the ERB adopted the recommendations of the Commission on
Audit and authorized taxpayer to adopt a rate adjustment of P0.017 per kwh beginning 1994.
The ERB directed taxpayer to credit the excess average amount of P0.167 per kwh to its
customers. The said ruling was affirmed by the Supreme Court, whose decision became
final and executory on May 5, 2003. As a result, taxpayer alleged that its gross electric
revenue in the years 1994-1998 and 2000 were reduced. On November 27, 2003, taxpayer
filed a claim for refund or credit of the supposed excess income tax payments for the years
mentioned.

The CTA En Banc granted taxpayer’s petition, holding that the two-year prescriptive period
was suspended prior to the Supreme Court decision, and in the light of the applicability of
the principle of solutio indebiti. It is only when the High Court’s decision became final and
executory that the amount of the refund claim of respondent was ascertained. While Section
229 is mandatory, the prescriptive period had not commenced to run as the same was
suspended due to the special circumstances obtaining in this case.

Tax refunds are based on the principle of quasi-contract or solutio indebiti. When money is
paid to another under the influence of a mistake of a specific fact, that is to say, on the
mistaken supposition of the existence of a specific fact, where it would not have been known
that the fact was otherwise, it may be recovered. The Government comes within the scope of
solutio indebiti. (Commissioner of Internal Revenue vs. Manila Electric Company, Inc.,
CTA EB No. 773, November 13, 2012)
 Exemption from Documentary Stamp Tax

8. The sale, barter or exchange of shares of stocks listed and traded through the
local stock exchange is exempt from DST.

Under Section 199 (e) of the NIRC of 1997, as amended by R.A. 9243, the sale, barter or
exchange of shares of stocks listed and traded through the local stock exchange shall be
exempt from DST for a period of five (5) years from the date of effectivity of R.A. 9243. The
said law took effect on March 20, 2004. Correspondingly, the exemption shall be only until
March 20, 2009. On June 30, 2009, R.A. 9648 was enacted. The law exempts the sale,
barter or exchange of shares of stock listed and traded through the local stock exchange
from DST retroactive to March 20, 2009. In view thereof, the said transactions shall remain
exempt from DST even after March 20, 2009. (SB Equities, Inc. vs. Commissioner of
Internal Revenue, CTA Case No. 8258, November 20, 2012)

Tax Amnesty

9. Delinquent accounts considered as assets of the Government are not included

among the exceptions to the coverage of the Tax Amnesty Law.

The CTA has consistently ruled that R. A. 9480 and Department Order No. 29-07 are the
governing law and regulation as regards the subject Tax Amnesty Program, and both
explicitly do not include “Delinquent Accounts/Accounts Receivable considered as assets of
the BIR/Government, including self-assessed tax” as one of the exceptions to the coverage
of R. A. 9480. A regulation or any portion thereof not adopted pursuant to law is no law and
has neither the force nor the effect of law. Therefore, both RMC No. 69-2007 and RMC No.
19-2008 have neither the force nor the effect of law insofar as they included delinquent
accounts and self-assessed taxes in the exceptions to the Tax Amnesty Law. (Philippine
Aluminum Wheels, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 7817,
November 12, 2012)

Local Taxes

10. A corporation with no business operation, and is merely an investor in another

corporation, is not liable for local business tax.

The taxpayer’s income comes from foreign exchange gains from its foreign currency bank
deposit, interest income also from bank deposit and dividends received from shareholdings.
The taxpayer was assessed local business tax for the said income by the City of Makati. The
City classified the taxpayer as a contractor und under Section 143(e) of the Local
Government Code, specifically as a “Holding Company – Management Service.”

The Court of Tax Appeals ruled that under Section 143, in relation to Section 131, of the
Local Government Code, for an entity to be liable for local business tax, such entity must be
a contractor whose activity consists essentially of sale of all kinds of services for a fee. In
determining whether Orleyte is a “Holding Company-Management Service,” taxpayer’s
actual operations, rather than simply inferring from a reading of the primary purpose clause
stated in its Articles of Incorporation. A perusal of the records shows that taxpayer has
consistently submitted an affidavit of non-operation with its application for business permit.
Taxpayer never conducted any business or commercial operation in the Philippines.
Taxpayer merely invested in a company, which under its primary purpose, it is authorized to
do so. In addition, taxpayer’s non-operation is further shown by its financial statements
showing that it had only three sources of revenues; namely, equity in net earnings of another
company, foreign exchange gain, and interest income. Clearly, taxpayer is not a contractor
engaged in providing a service for a fee. Taxpayer’s foreign exchange gain, interest income
and dividend income do not form part of the gross receipts subject to local business tax.
Hence, taxpayer’s dividend income, gain from foreign exchange and interest income are not
subject to local business tax. (Orleyte Company (Philippine Branch) vs. City of Makati
and Dulce P. Cruz, in her capacity as Treasurer of Makati, CTA AC No. 80, November
14, 2012)

11. Taxpayer has 60 days from the date of receipt of the assessment to file a protest;
failing which, the assessment shall become final and executory.

On September 12, 2005, an assessment was issued against taxpayer for deficiency taxes
for the period covering 1999 to 2005. On December 29, 2005, the lessee of the property
owned by taxpayer filed a letter addressed to the municipal treasurer of Cainta, in response
to the assessment. On July 4, 2006, the municipal treasurer issued a Denial of Protest and
Ultimate Demand to Settle Delinquency Taxes. On August 2, 2006, taxpayer filed a petition
for review before the RTC of Antipolo City. The petition was dismissed for lack of jurisdiction
due to the failure of taxpayer to comply with the procedural requirements. Taxpayer filed a
petition for review before the CTA, averring that it filed a judicial action only after the receipt
of the denial of its protest, in compliance with the procedure under Section 195 of the Local
Government Code. Section 195 states that the taxpayer has sixty (60) days from receipt of
the notice of assessment to file a written protest, which the municipal treasurer must decide
within sixty (60) days. It further states that the taxpayer has 30 days, either from the receipt
of the denial or from the lapse of 60 days, within which to appeal with the court of competent
jurisdiction.

Counting 60 days from the date of receipt of the assessment, taxpayer had until November
11, 2005, within which to file a protest. Taxpayer, however, failed to do so. It was only on
December 29, 2005 that a response letter from the lessee was received by the municipal
treasurer. As a result, the assessment has become final and executory. It cannot be
conveniently said that taxpayer had complied with the 30-day period from receipt of denial of
its protest within which to elevate its appeal with the court of competent jurisdiction, without,
first and foremost, complying with the 60-day period to file a protest on the assessment.
(SPC Realty Corporation vs. Municipal Treasurer of Cainta, CTA AC No. 77, November
15, 2012)

Tariff and Customs

12. Being “freely importable” does not mean that the goods are exempt from customs
duties.

Under Section 7(1) of Central Bank Circular no. 1389, “freely importable commodities” are
those importations which are neither regulated nor prohibited and may be effected without
the prior approval of or clearance from any government agency. Hence, there is no reason
for the Court to consider importer’s claim for exemption from customs duties on the mere
basis that the original cargo is in the nature of “Toys” which are “freely importable.” (Unimex
Micro-Electronics GmBH vs. Republic of the Philippines, CTA Case No. 8412,
November 14, 2012)