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Unintentional falsity not a false return

In one of the seminars I attended, a participant asked about the seemingly unbridled right of the Bureau of Internal Revenue (BIR) to assess and collect internal revenue taxes. To the amusement of the whole group, the participant further drove the point that every time the BIR loses its authority to assess and collect taxes on the ground of prescription, an escape route is readily available by invoking the 10-year extraordinary period of prescription under Section 222(a) of the National Internal Revenue Code (Tax Code). Such an extraordinary exception to the period of limitation to assess and collect taxes is so broad that it can be subject to abuse.

As a rule, prescriptive periods under the Tax Code aim to protect the interest of the taxpayers from unreasonable tax investigation.

Section 203 of the Tax Code, as amended, states that the right of the BIR to issue assessment shall be within three years counted from the period fixed by law for the filing of the tax return or the actual date of filing, whichever is later. Conversely, Section 222(a) provides that in the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed at any time within 10 years after the discovery of the falsity, fraud, or omission. It is this particular provision that encountered conflicting interpretations by the courts as to its application. To safeguard the interest of the government to assess and collect taxes on time, while keeping in mind the concomitant right of the taxpayers to due process, when alleging fraud, falsity, or omission, how should the BIR allege it properly?

The Supreme Court (SC) had revisited the rule on applying the 10-year extraordinary prescription to assess and collect internal revenue taxes in the case of filing a false and fraudulent return in the case of Philippine Daily Inquirer, Inc. [PDI] (G.R. No. 213943 dated March 22, 2017). In this case, the BIR assessed PDI for deficiency Income Tax and Value-added Tax (VAT) for the taxable year 2004. The BIR alleged that PDI filed a false or fraudulent return due to the over-declaration of input VAT credits and under-declaration of gross income, which were generated through the computerized matching conducted by its office using information and data from third-party sources, a common BIR audit tool. As such, Section 222 of the Tax Code should apply to this case, and the applicable prescriptive period is 10 years from the discovery of the falsity of the return.

The SC, however, had a different view, since there was not enough evidence to prove fraud or intentional falsity on the part of PDI. It ratiocinated that the mere understatement of a tax is not itself proof of fraud for the purpose of tax evasion. Thus, while the filing of a fraudulent return necessarily implies that the act of the taxpayer was intentional and done with intent to evade the taxes due, the filing of a false return can be intentional or due to an honest mistake.

In addition, the SC underscored the following points, as already pronounced from its previous rulings, in not allowing the application of the 10-year extraordinary prescriptive period for assessment due to the filing of a false or fraudulent return Section 222 of the Tax Code.

The fraud contemplated by law is actual and not constructive. It must be intentional fraud, consisting of deception willfully and deliberately done or resorted to in order to induce another to give up some legal right. Negligence, whether slight or gross, is not equivalent to fraud with intent to evade the tax contemplated by law. It must amount to intentional wrongdoing with the sole object of avoiding the tax.

That there is a difference between “false return” and “fraudulent return” cannot be denied. While the first implies deviation from the truth, whether intentional or not, the second implies intentional or deceitful entry with intent to evade the taxes due.

The Court stated that the entry of wrong information due to mistake, carelessness, or ignorance, without intent to evade tax, does not constitute a false return.

The ordinary period of prescription of five years within which to assess tax liabilities under Sec. 331 of the Tax Code should be applicable to normal circumstances but, whenever the government is placed at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities due to false returns, fraudulent return intended to evade payment of tax, or failure to file returns, the period of 10 years provided for in Sec. 332(a) of the Tax Code, from the time of discovery of the falsity, fraud, or omission even seems to be inadequate and should be the one enforced.

Based on the foregoing cases, it appears that the SC upheld the rule of law by safeguarding the right of taxpayers to due process, especially when there is an allegation of fraud and false returns. As aptly mandated, the SC in the same case — although it is recognized that the power of taxation is deemed inherent in order to support the government — tax provisions are not all about raising revenue. Our legislature has provided safeguards and remedies beneficial to both the taxpayer to protect against abuse, and the government to promptly act for the availability and recovery of revenues. A statute of limitations on the assessment and collection of internal revenue taxes was adopted to serve a purpose that would benefit both the taxpayer and the government.

Thus, taxpayers should not fret over asserting rights and remedies available under the law. Nevertheless, taxpayers are reminded about being careful and conscious in matters affecting their tax obligations. Mere unintentional or inadvertent mistakes may cost unwanted deficiency taxes, interest, surcharges and, accusations of fraud in conducting one’s business.

Daryl Matthew A. Sales is a manager of the Tax Advisory and Compliance of P&A Grant Thornton.


As published in BusinessWorld, dated 14 November 2017