Can a defective waiver be valid?

Does your company have an on-going tax assessment covering tax year 2012? If yes, then it is likely that you have already been asked to execute a waiver on the statute of limitations.

Following the general three-year period to assess, Final Assessment Notice for taxable year 2012 must be made not later than April 15, 2016. Thus, since this is merely three months away, the Bureau of Internal Revenue (BIR) will normally ask the taxpayer to execute a waiver.

Under the Tax Code, after the lapse of the applicable period, the BIR’s right to assess the taxpayer is deemed to have prescribed, unless the taxpayer executes a waiver of the statute of limitations prior to the prescriptive period.

By executing the waiver, the taxpayer is, in effect, allowing the BIR to continue with its investigation and to issue an assessment even after the original three-year period. The taxpayer thereby waives his right to invoke the defense of prescription for the assessments issued after the prescribed period to assess.

In several cases, the Court has consistently ruled that for a waiver to be valid and binding, the same must faithfully comply with the provisions of Revenue Memorandum Order (RMO) No. 20-90 and Revenue Delegation Authority Order (RDAO) No. 05-01.

Thus, in several cases, waivers which failed to comply with the requirements listed below of RMO No. 20-90 and RDAO No. 05-01 were considered defective and extension of the period to assess invalid.

• The waiver must be in the form as provided under RDAO No. 05-01.

• The phrase “but not after ________ 20__” should be filled up.

• The waiver shall be signed by the taxpayer himself or his duly authorized representative.

In the case of a corporation, the waiver must be signed by any of its responsible officials.

• The same must be accepted by the Revenue District Office (RDO) or the Regional Director, as applicable.

• The date of acceptance by the Bureau, which must be before the expiration of the period of prescription or before the lapse of the period agreed upon in case a subsequent agreement is executed, should be clearly indicated.

However, on Dec. 7, 2015, the Third Division of the Supreme Court promulgated a decision on the case of Next Mobile, Inc. (formerly Nextel Communications Phils., Inc.) vs. CIR, which departed from the general rule on the compliance with the above requirements for a waiver to be valid and effective.

Under the general rule, a defective waiver cannot extend the prescriptive period. However, due to the peculiar circumstances of the case, the Court held that though the waivers have some defects, they shall still be considered valid.

So what would make a defective waiver valid?

In its decision, the Court agreed with the flaws in the waiver found by Court of Tax Appeals, i.e. (1) they were executed without a notarized board authority; (2) the dates of acceptance by the BIR were not indicated therein; and (3) the fact of receipt by the Company of its second of the five waivers was not indicated on the face of the original Second Waiver.

With the flaws stated above, the Court found both parties to be at fault.

On the first defect, the party questioning the authority of the signatory is the same party which caused the unauthorized person to sign the five waivers. Thus, the Company failed to comply with the requirement that it must be signed by the responsible official of the Company duly authorized to sign. Likewise, the BIR failed for five times to ensure through a written delegation that the signatory to the waiver was duly authorized by the company.

The Court also pointed out that both parties, despite the defects in the waiver, continued with the assessment relying on the waiver. The company did not even question the validity of the waiver in its protest letter. Yet, after being able to submit additional documents due to its execution of the waiver, the company questioned in court the validity of the same waiver. On the other hand, the BIR should have been prudent enough to ensure compliance on the waiver requirements.

Thus, both parties have been pointed out to be in pari delicto or “in equal fault”. They should have no action against each other. However, relying on the basic principle of taxation that taxes are the lifeblood of the government, the Court ruled that it would be more equitable to consider the waiver valid in order to support said basic principle. Also, following this principle, the company is estopped from questioning validity of its own waivers.

In addition, the company should have come to court with clean hands. Thus, it cannot benefit from successfully insisting on the invalidity of the waiver to evade paying deficiency taxes. By not raising any objection against the validity of the five waivers executed until the BIR assessed them deficiency taxes, the company is estopped from questioning the same. Again, the court ruled that application of the doctrine of estoppel in this case would cause undue harm to the government.

Finally, the court ruled that this highly suspicious situation cannot be tolerated. Taxpayers who intend to escape the responsibility of paying taxes may do so by merely hiding behind technicalities. On other hand, BIR’s failure to exercise diligence, as provided in RMO No. 20-90, must be addressed by imposing administrative penalties upon the responsible officers.

With this new development, the general rule that the waiver of the statute of limitations is a derogation of the taxpayer’s rights to security against prolonged and unscrupulous investigations, and therefore must be carefully and strictly construed, may no longer suffice. Taxpayers questioning the validity of the same must also be prudent enough to ensure compliance on their part.

Ma. Lourdes Politado-Aclan is a senior manager of the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.