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Validity check on executed waiver

Validity check on executed waiver by: Marietta B. Saludaga

The Bureau of Internal Revenue (BIR) has recently intensified its audit activities to meet its collection targets.

With this development, taxpayers should be aware of their rights and of the remedies available to them during tax investigation. Such awareness should include the pivotal role of the waiver of defense of prescription in assessment cases.

The law mandates that tax authorities should make an assessment for deficiency taxes within three years from the last day prescribed by law to file the tax return or the actual date of filing of such return, whichever comes later.  Thus, any assessment notice issued beyond this three-year prescriptive period is not valid except those cases mentioned in Section 222 of the Tax Code, which have a longer prescriptive period of 10 years.

The regular three-year prescriptive period, however, can be extended upon a written agreement between the tax authorities and taxpayer through the execution of the waiver of defense of prescription. For this purpose, Revenue Memorandum Order No.(RMO) 20-90 dated April 4, 1990 and Revenue Delegation Authority Order No. (RDAO) 05-01 dated August 2, 2001 were issued to set the rules for the proper execution of the waiver. Among these rules are the following:

    1.  The waiver must be in proper form prescribed by RMO 20-90. The phrase “but not after_____19__” which indicates the expiry date of the period agreed upon to assess/collect the tax after the regular three-year period of prescription, should be filled up;

    2. The waiver must be signed by the taxpayer himself or his duly authorized  representative;

    3. The waiver must be duly notarized;

    4. The Commissioner of Internal Revenue or the revenue official authorized by him must sign the waiver indicating the BIR’s acceptance and agreement to the waiver. The date of such acceptance  by the BIR should be indicated;

    5. Both the date of execution by the taxpayer and the date of acceptance by the BIR should be prior to the expiration of the period of prescription or before the lapse of the period agreed upon in case a subsequent agreement is executed; and

    6.  The waiver must be in three copies: the original copy to be attached to the docket of the case, the second copy for the taxpayer, and the third copy for the Office accepting the waiver.

Failure to comply with such rules will render the waiver invalid and will not therefore extend the prescriptive period.

The importance of waiver and strict compliance with above rules laid down under RMO 02-90 were the focus of a court decision recently promulgated by the Supreme Court (SC) on May 5, 2010.  In this particular case, the SC held that due to the defects noted in the waiver, the period to assess or collect taxes was not extended and consequently, assessments issued by the BIR beyond the three-year period are void.

The court likewise addressed an important issue raised in this case and that is, whether a taxpayer is estopped from questioning the validity of the waiver and raising the prescription issue when it agreed to the audit during the period specified in the waiver.

The SC held that the doctrine of estoppel cannot be applied in this case as an exception to the statute of limitations on the assessment of taxes. This is because there is a detailed procedure for the proper execution of waiver, which the BIR must strictly follow.

The court has consistently held that the doctrine of estoppel is predicated on and has its origin in equity which is justice according to natural law and right. As such, it cannot give validity to an act that is prohibited by law or one that is against public policy.

It further clarified that the BIR cannot invoke the doctrine of estoppel to cover its failure to comply with RMO 20-90 and RDAO-05-01, which the BIR itself issued. It had emphasized that a waiver of the statute of limitations, being a derogation of taxpayer’s right to security against prolonged and unscrupulous investigations, must be carefully and strictly construed.

Though this court decision tackles strict compliance with the set rules, it must also be mentioned that the execution of waiver by taxpayer should be encouraged in assessment cases. The waiver will be beneficial not only to tax authorities but also to taxpayer. It will extend the prescriptive period thereby giving taxpayer ample time to collate supporting documents and refute issued findings for tax deficiency.

In assessment cases, if a taxpayer refuses to execute a waiver, the tax authorities will have no recourse but to formalize its findings and issue a formal assessment notice before the expiration of prescriptive period. Taxpayer will therefore lose more opportunities in the administrative level to resolve its tax investigation.

So next time the tax authorities ask for a waiver, taxpayer should then make an assessment if its execution would be for its own advantage or that of tax authorities.

This article is not intended to be a substitute for professional advice.  For comments and inquiries, you may e-mail the author at Marietta.Saludaga@ph.gt.com.  For other tax concerns, please check out our other tax services.