Commissioner of Internal Revenue vs. La Flor dela Isabela, Inc.

Withholding taxes such as Expanded Withholding Tax (EWT) and Withholding Tax on Compensation (WTC) are internal revenue taxes subject to the ordinary three-year prescriptive period for assessment under Section 203 of the National Internal Revenue Code (NIRC), and not merely penalties imposed on withholding agents; consequently, deficiency assessments for such taxes must comply with the statutory period or be validly extended through waivers that strictly adhere to the requirements of Revenue Memorandum Order (RMO) No. 20-90, particularly the specification of the nature and amount of tax involved.

La Flor dela Isabela, Inc., a domestic corporation, filed monthly returns for Expanded Withholding Tax (EWT) and Withholding Tax on Compensation (WTC) for calendar year 2005. To facilitate examination of its internal revenue liabilities for that year, the corporation executed three Waivers of the Statute of Limitations on September 3, 2008, February 16, 2009, and December 2, 2009, purportedly extending the period for assessment. On November 20, 2009, the Bureau of Internal Revenue (BIR) issued a Preliminary Assessment Notice, followed by Formal Letters of Demand and Final Assessment Notices dated December 17, 2009, assessing deficiency EWT and WTC taxes plus penalties for late filing and payment. La Flor contested these assessments administratively and subsequently before the Court of Tax Appeals, arguing that the assessments were issued beyond the three-year prescriptive period and that the waivers were invalid.

• Nature of the Taxpayer: La Flor dela Isabela, Inc. is a domestic corporation duly organized under Philippine law, engaged in business activities requiring it to file monthly returns for Expanded Withholding Tax (EWT) and Withholding Tax on Compensation (WTC).
• Execution of Waivers: On September 3, 2008, La Flor executed a Waiver of the Statute of Limitations regarding internal revenue liabilities for calendar year 2005. On February 16, 2009, it executed a second Waiver purporting to extend the period of assessment until December 31, 2009. A third Waiver was executed on December 2, 2009.
• Issuance of Assessment Notices: On November 20, 2009, La Flor received a Preliminary Assessment Notice for deficiency taxes for taxable year 2005. On January 7, 2010, it received Formal Letters of Demand and Final Assessment Notices (FANs) dated December 17, 2009, covering: (1) penalties for late filing and payment of WTC; (2) penalties for late filing and payment of EWT; (3) deficiency assessment for EWT; and (4) deficiency assessment for WTC.
• Administrative Protest: La Flor filed a Letter of Protest on January 15, 2010, contesting the assessments. The CIR issued a Final Decision on Disputed Assessment (FDDA) on July 20, 2010, sustaining the deficiency withholding tax assessments aggregating ₱6,835,994.76.
• Lower Court Findings: The CTA Division found that based on the dates La Flor filed its returns, the prescriptive period for assessment expired between February 15, 2008 and March 1, 2009, rendering the December 17, 2009 assessments time-barred. It further found that the September 3, 2008 and December 2, 2009 Waivers were inadmissible having never been offered in evidence, and that the February 16, 2009 Waiver was defective for failing to state the nature and amount of tax due as required by RMO No. 20-90.

• Applicability of Section 203 NIRC: The CIR argued that Section 203 of the NIRC does not apply to withholding agents such as La Flor, contending that amounts collected from withholding agents are not taxes but penalties. It maintained that Section 203 refers only to assessment of taxes, not penalties, and that La Flor was liable as a withholding agent, not as a taxpayer.
• Validity of Waivers: The CIR maintained that even applying Section 203, the assessments had not prescribed because La Flor executed three valid Waivers extending the prescriptive period. It argued that the CTA erred in disregarding the Waivers dated September 3, 2008 and December 2, 2009 merely because they were not formally offered in evidence, asserting that documents forming part of the records may be considered by the CTA which is not strictly governed by technical rules of evidence. It further contended that failure to comply with RMO No. 20-90 does not invalidate the Waivers.
• Procedural Defenses: In its Reply, the CIR brushed aside allegations of procedural infirmities regarding Mandatory Continuing Legal Education (MCLE) compliance and paragraph numbering, arguing that these do not warrant dismissal.

• Procedural Infirmities: La Flor countered that the petition should be denied outright for failure to comply with Bar Matter No. 1922 (MCLE compliance date not indicated) and Section 2, Rule 7 of the Rules of Court (paragraphs not numbered).
• Prescription: La Flor asserted that the assessments prescribed under Section 203 of the NIRC, having been issued beyond the three-year period from the filing of the returns.
• Invalidity of Waivers: La Flor argued that the Waivers should not be considered because they were neither offered in evidence nor compliant with RMO No. 20-90, particularly regarding the specification of the tax type and amount.

• Applicability of Prescriptive Period to Withholding Taxes: Whether the prescriptive period under Section 203 of the NIRC applies to EWT and WTC assessments against withholding agents.
• Bar by Prescription: Whether La Flor's EWT and WTC assessments for 2005 were barred by prescription.
• Validity of Waivers: Whether the Waivers executed by La Flor effectively extended the prescriptive period for assessment.

• Withholding Taxes as Internal Revenue Taxes: Section 203 of the NIRC applies to withholding taxes. Withholding taxes such as EWT and WTC are internal revenue taxes, not merely penalties imposed on withholding agents. The liability of the withholding agent is distinct from that of the income earner, but the assessment of deficiency withholding taxes aims to collect unpaid income taxes and falls squarely within the definition of internal revenue taxes subject to the three-year prescriptive period under Section 203.
• Bar by Prescription: The assessments were barred by prescription. The Final Assessment Notices dated December 17, 2009 were issued beyond the three-year period from the filing of the monthly returns for 2005, which expired between February 15, 2008 and March 1, 2009.
• Invalidity of Waivers: The Waivers did not effectively extend the prescriptive period. A waiver of the statute of limitations is a bilateral agreement requiring strict compliance with RMO No. 20-90. The Waivers dated September 3, 2008, February 16, 2009, and December 2, 2009 were defective for failing to specify the kind and amount of tax due, rendering them invalid. The inadmissibility of the September and December waivers became immaterial because even if admitted, their defectiveness would still result in the conclusion that the assessments had prescribed.

• Nature of Withholding Taxes: Withholding taxes are internal revenue taxes subject to the ordinary prescriptive period for assessment under Section 203 of the NIRC. While the withholding agent acts as a tax collector and its liability is distinct from the taxpayer-income earner, deficiency assessments for withholding taxes are not merely penalties but are intended to collect unpaid income taxes.
• Strict Compliance with Waiver Requirements: Waivers of the statute of limitations for tax assessments must strictly comply with the mandatory requirements of RMO No. 20-90. A valid waiver must be a bilateral agreement indicating the specific nature and exact amount of the tax to be assessed or collected; absence of these details renders the waiver invalid as there can be no true agreement without specification of the subject matter.
• Distinction Between Tax and Penalty: Under the NIRC, penalties (such as those under Sections 247 and 251) are amounts collected in addition to deficiency tax assessments, not substitutes therefor. The withholding agent's liability for deficiency taxes is separate from penalties for failure to withhold or remit.

• "Withholding taxes do not cease to become income taxes just because it is collected and paid by the withholding agent." — Clarifies that the nature of the tax is not altered by the mechanism of collection through withholding agents.
• "A waiver of the statute of limitations is a bilateral agreement between the taxpayer and the BIR to extend the period to assess or collect deficiency taxes on a certain date. Logically, there can be no agreement if the kind and amount of the taxes to be assessed or collected were not indicated." — Establishes the rationale for requiring strict specificity in waivers.
• "The withholding agent is merely a tax collector, not a taxpayer... [but] a 'person liable for tax' has been held to be a 'person subject to tax' and properly considered a 'taxpayer.'" — Explains the dual status of withholding agents in the tax system.

• Commissioner of Internal Revenue v. Systems Technology Institute, Inc., G.R. No. 220835, July 26, 2017 — Controlling precedent establishing that waivers must strictly comply with RMO No. 20-90 and must indicate the nature and amount of tax due; followed regarding the mandatory nature of waiver requirements.
• Commissioner of Internal Revenue v. Standard Chartered Bank — Cited for the proposition that waivers must specify the kind and amount of tax due and must be signed by the CIR (not just an Assistant Commissioner) to be valid; distinguished or applied to show the defects in La Flor's waivers.
• Rizal Commercial Banking Corporation v. Commissioner of Internal Revenue, 672 Phil. 514 (2011) — Controlling precedent regarding the nature of withholding agents as tax collectors with distinct liability from the taxpayer; followed in rejecting the CIR's penalty theory.
• Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation, 281 Phil. 425 (1991) — Established that withholding agents are personally liable for the tax that should be withheld and are subject to deficiency assessments; followed to support the ruling that withholding agents are taxpayers for purposes of assessment.
• National Development Company v. Commissioner of Internal Revenue, 235 Phil. 477 (1987) — Distinguished; the CIR cited this for the proposition that withholding taxes are penalties, but the Court clarified that the term "penalty" was used only to describe the dynamics of the withholding system, not to exclude withholding taxes from the definition of internal revenue taxes.

• Section 203, National Internal Revenue Code (NIRC) — Provides for the three-year ordinary prescriptive period for assessment of internal revenue taxes; applied to hold that withholding taxes are covered by this provision.
• Section 222(a), National Internal Revenue Code (NIRC) — Provides for the ten-year extraordinary prescriptive period in cases of false, fraudulent returns, or failure to file; cited to contrast with the ordinary period.
• Section 247(b) and Section 251, National Internal Revenue Code (NIRC) — Provisions regarding penalties for failure to withhold and remit taxes; cited to distinguish penalties from the underlying tax liability.
• Revenue Memorandum Order (RMO) No. 20-90 — Prescribes the requirements for valid waivers of the statute of limitations; applied strictly to invalidate the waivers for failure to specify the nature and amount of tax.

Carpio, Senior Associate Justice (Chairperson), Perlas-Bernabe, Caguioa, and Hernando, JJ.