Commissioner of Internal Revenue vs. Standard Chartered Bank

A waiver of the Statute of Limitations under Section 222(b) of the NIRC must strictly comply with RMO No. 20-90; noncompliance renders the waiver invalid and does not extend the three-year prescriptive period under Section 203, making assessments issued thereafter void. Partial payment of some deficiency taxes does not estop the taxpayer from questioning the validity of the waivers as to the remaining assessments where the taxpayer consistently raises prescription and the payment is accepted without opposition.

Standard Chartered Bank is a taxpayer assessed by the Commissioner of Internal Revenue for deficiency taxes covering taxable year 1998, including deficiency income tax, final income tax on its Foreign Currency Deposit Unit, expanded withholding tax, withholding tax on compensation, and final withholding tax. The Commissioner is the official charged with assessing and collecting national internal revenue taxes under the National Internal Revenue Code of 1997, as amended. Sections 203 and 222(b) of the NIRC limit the period for assessment to three years but allow extension by a written agreement between the Commissioner and the taxpayer. RMO No. 20-90 and RDAO No. 05-01 prescribe the mandatory procedure for executing such a waiver.

On July 14, 2004, respondent Standard Chartered Bank received petitioner Commissioner of Internal Revenue's Formal Letter of Demand dated June 24, 2004 for alleged deficiency income tax, final income tax FCDU, withholding tax on compensation, expanded withholding tax, final withholding tax, and increments for taxable year 1998 in the aggregate amount of P33,326,211.37. The assessment was broken down into income tax of P7,423,208.67; final income tax FCDU of P24,207,292.30; withholding tax on compensation of P117,733.07; expanded withholding tax of P1,446,443.21; and final withholding tax of P131,534.12.

On August 12, 2004, respondent protested the assessment by filing a letter-protest dated August 9, 2004 addressed to the BIR Deputy Commissioner for Large Taxpayers Service, stating the factual and legal bases of the assessment and requesting that it be withdrawn and cancelled. As of the filing of the Petition for Review, petitioner had not rendered a decision on respondent's protest. On March 9, 2005, respondent filed a Petition for Review before the CTA.

On October 14, 2005, respondent filed a Motion for Leave of Court to Serve Supplemental Petition, with an attached Supplemental Petition for Review under Rule 10 of the 1997 Rules of Civil Procedure, as amended, in view of alleged payments made through the BIR's Electronic Filing and Payment System for its deficiency withholding tax on compensation and final withholding tax assessments in the amounts of P124,967.73 and P139,713.11, respectively. Respondent sought to be fully credited for those payments, leaving the remaining assessments for deficiency income tax, final income tax FCDU, and expanded withholding tax in the modified total amount of P33,076,944.18. The motion was granted, and the Supplemental Petition for Review was admitted in a Resolution dated December 12, 2005.

Respondent presented Chona G. Reyes, its Vice-President, as witness, and documentary exhibits admitted by the CTA in its Resolutions dated October 1, 2007 and January 31, 2008. Petitioner presented Juan M. Luna, Jr., Revenue Officer II of the BIR LTAID I, as witness, and documentary evidence marked as Exhibits 1 to 4. Thereafter, the parties were ordered to file their simultaneous memoranda, and the case was deemed submitted for decision on November 12, 2008.

The CTA found that the First and Second Waivers of the Statute of Limitations dated July 20, 2001 and April 4, 2002, respectively, failed to strictly comply with RMO No. 20-90. The waivers were signed by Assistant Commissioner-Large Taxpayers Service Virginia L. Trinidad and Assistant Commissioner-Large Taxpayers Service Edwin R. Abella, not by the Commissioner of Internal Revenue; the dates of acceptance by the BIR were not indicated; the waivers did not specify the kind and amount of tax due; and the tenor of the waiver signed by respondent's authorized representative spoke of a request for extension of time within which to present additional documents, rather than the approval by the Commissioner of Internal Revenue of the taxpayer's request for reinvestigation and/or reconsideration. Because the First and Second Waivers were invalid, the subsequent waivers did not cure the defects or extend the prescriptive period. Respondent paid the deficiency WTC and FWT assessments but continued to raise the issue of prescription in its Pre-Trial Brief filed on August 15, 2005, Joint Stipulations of Facts and Issues filed on September 1, 2005, direct testimonies of its witness, and Memorandum filed on October 24, 2008. Petitioner did not consider such payment as a waiver of the defense of prescription, but merely raised the issue of estoppel in its Motion for Reconsideration.

• Estoppel by Partial Payment: Petitioner maintained that respondent is estopped from questioning the validity of the waivers of the Statute of Limitations executed by its representatives because it made partial payments on the deficiency taxes sought to be collected in the Formal Letter of Demand and Assessment Notices dated June 24, 2004, particularly the deficiency withholding tax on compensation and final withholding tax in the amounts of P124,967.73 and P139,713.11.
• Reversible Error: Petitioner argued that the CTA En Banc committed reversible error in not holding respondent estopped, and sought reversal of the CTA En Banc Decision and Resolution.

• Prescription: Respondent argued that petitioner's right to assess deficiency income tax, final income tax FCDU, and expanded withholding tax for taxable year 1998 had prescribed under Section 203 of the NIRC because the waivers of the Statute of Limitations failed to comply with RMO No. 20-90 and did not validly extend the three-year period.
• Non-Waiver of Defense: Respondent maintained that its partial payments of deficiency withholding tax on compensation and final withholding tax did not waive the defense of prescription as to the remaining tax deficiencies, as it continued to raise prescription in its Pre-Trial Brief, Joint Stipulations of Facts and Issues, direct testimonies, and Memorandum.
• Credit of Payments: Respondent sought full credit for payments made through the BIR's Electronic Filing and Payment System for deficiency withholding tax on compensation and final withholding tax, leaving only the deficiency income tax, final income tax FCDU, and expanded withholding tax in the modified total amount of P33,076,944.18.

• Prescription: Whether petitioner's right to assess respondent for deficiency income tax, final income tax FCDU, and expanded withholding tax covering taxable year 1998 has already prescribed under Section 203 of the NIRC of 1997, as amended, for failure to comply with the requirements set forth in RMO No. 20-90 pertaining to the proper and valid execution of a waiver of the Statute of Limitations.
• Estoppel: Whether respondent is estopped from questioning the validity of the waivers of the Statute of Limitations executed by its representatives in view of the partial payments it made on the deficiency taxes, particularly the withholding tax on compensation and final withholding tax, sought to be collected in petitioner's Formal Letter of Demand and Assessment Notices dated June 24, 2004.

• Prescription: Yes. The right to assess had prescribed. The waivers did not validly extend the three-year period under Section 203 because they violated RMO No. 20-90; the June 24, 2004 assessments for deficiency income tax, final income tax FCDU, and expanded withholding tax were void.
• Estoppel: No. Partial payments of withholding tax on compensation and final withholding tax did not estop respondent from questioning the waivers as to the remaining assessments; respondent consistently raised prescription, and petitioner accepted the payments without opposition, extinguishing only those obligations.

• Prescription: Section 203 of the NIRC limits the period to assess internal revenue taxes to three years after the last day prescribed by law for the filing of the return; if the return is filed beyond the prescribed period, the three-year period is counted from the day the return was filed, and a return filed before the last day prescribed by law is considered filed on such last day. This period safeguards taxpayers from unreasonable investigation by not indefinitely extending the period of assessment. Section 222(b) provides an exception: if before the expiration of the Section 203 period both the Commissioner and the taxpayer have agreed in writing to assessment after such time, the tax may be assessed within the period agreed upon, and the period may be extended by subsequent written agreement made before the expiration of the period previously agreed upon. A waiver of the Statute of Limitations is not automatically a renunciation of the right to invoke prescription; it is a bilateral agreement requiring the signatures of both the Commissioner and the taxpayer, and the date of acceptance by the BIR must be indicated to determine whether the waiver was executed before the expiration of the three-year prescriptive period. No implied consent can be presumed. RMO No. 20-90 and RDAO No. 05-01 outline the mandatory procedure for a valid waiver: the waiver must be in the proper form prescribed by RMO No. 20-90 with the expiry date filled up; it must be signed by the taxpayer or duly authorized representative, and in the case of a corporation, by any responsible official, with delegated authority in writing and duly notarized; it must be duly notarized; the Commissioner or authorized revenue official must sign indicating that the BIR accepted and agreed to the waiver, with the date of acceptance indicated; both the date of execution by the taxpayer and the date of acceptance by the BIR must be before the expiration of the prescriptive period or the period previously agreed upon; and the waiver must be executed in three copies, with the fact of receipt by the taxpayer of the file copy indicated in the original. Failure to comply with any requisite renders the waiver defective and ineffectual. Applying these rules, the First and Second Waivers dated July 20, 2001 and April 4, 2002 were defective because they were signed by Assistant Commissioner-Large Taxpayers Service Virginia L. Trinidad and Assistant Commissioner-Large Taxpayers Service Edwin R. Abella, not by the Commissioner of Internal Revenue; the dates of acceptance were not indicated; they did not specify the kind and amount of tax due; and their tenor spoke of a request for extension of time to present additional documents rather than the approval of a request for reinvestigation and/or reconsideration. The period to assess respondent's tax liabilities for taxable year 1998 was therefore never extended. The subsequent waivers could not be considered subsequent written agreements under Section 222(b) because there was no period previously agreed upon. Prescription had already set in when the June 24, 2004 Formal Letter of Demand and Assessment Notices were issued, rendering them void.
• Estoppel: Petitioner's argument that respondent is estopped from impugning the validity of the waivers because it made partial payments on the deficiency withholding tax on compensation and final withholding tax lacks merit. Although respondent paid those assessments, it did not waive the defense of prescription as to the remaining tax deficiencies; it continued to raise prescription in its Pre-Trial Brief filed on August 15, 2005, Joint Stipulations of Facts and Issues filed on September 1, 2005, direct testimonies, and Memorandum filed on October 24, 2008. Petitioner itself did not consider the payment as a waiver of the defense of prescription, but merely raised estoppel in its Motion for Reconsideration. Upon payment, respondent filed a Motion for Leave of Court to Serve Supplemental Petition, with an attached Supplemental Petition for Review, seeking full credit for the payments; the motion was granted and the supplemental petition was admitted, and petitioner never questioned the acceptance of the payments. The CTA decision covered only the remaining questioned assessments, namely income tax, final income tax FCDU, and expanded withholding tax. The payment of the deficiency withholding tax on compensation and final withholding tax was made together with the reiteration in the petition for cancellation of the assessment notices on the alleged deficiency income tax, final income tax FCDU, and expanded withholding tax. When respondent paid those assessments, petitioner accepted the payment without opposition, effectively extinguishing respondent's obligation to pay those taxes under Article 1232 of the Civil Code, which provides that payment means not only the delivery of money but also the performance, in any other manner, of an obligation. The question regarding the income tax, final income tax FCDU, and expanded withholding tax was kept unaffected by the payment. From the conduct of both parties, there can be no estoppel. The waivers being void, the supposed suspensions of the prescriptive periods were not legally effected.

• Strict Construction of Prescription Exceptions and Waiver of Statute of Limitations — Section 203 of the NIRC imposes a three-year prescriptive period for the assessment and collection of internal revenue taxes. Section 222(b) permits extension only by a written agreement between the Commissioner and the taxpayer executed before the expiration of the prescriptive period. Because prescription is a remedial measure protecting taxpayers from unreasonable investigation, the law is liberally construed in favor of the taxpayer and exceptions are strictly construed. A waiver is not an automatic renunciation of the right to invoke prescription; it is a bilateral agreement requiring the signatures of both the Commissioner and the taxpayer and the date of BIR acceptance, with no implied consent. Applied to the case, the waivers did not validly extend the period, and the assessments were time-barred.
• RMO No. 20-90 Compliance — RMO No. 20-90 and RDAO No. 05-01 outline mandatory requirements for a valid waiver: proper form with expiry date; signature by the taxpayer or duly authorized representative, including a responsible corporate official, with delegated authority in writing and notarized; notarization; acceptance and signature by the Commissioner or authorized revenue official with the date of acceptance; both dates before the expiration of the prescriptive period or the period previously agreed upon; and execution in three copies with proof of receipt by the taxpayer. Failure to comply with any requisite renders the waiver defective and ineffectual. Applied to the case, the First and Second Waivers were invalid due to multiple defects, so no extension of the prescriptive period occurred.
• Estoppel — Estoppel did not arise from respondent's partial payments. The taxpayer continued to raise prescription in its pleadings and evidence, and the Commissioner accepted the payments without opposition and did not treat them as a waiver. The payments extinguished only the withholding tax on compensation and final withholding tax obligations and did not affect the remaining assessments. Thus, respondent was not estopped from questioning the waivers.
• Payment Extinguishes Obligation — Under Article 1232 of the Civil Code, payment means not only the delivery of money but also the performance, in any other manner, of an obligation. The Commissioner's acceptance of respondent's payments for deficiency withholding tax on compensation and final withholding tax extinguished those obligations, but it did not waive or extinguish the remaining deficiency income tax, final income tax FCDU, and expanded withholding tax assessments.

• "The law on prescription, being a remedial measure, should be liberally construed in order to afford such protection. As a corollary, the exceptions to the law on prescription should perforce be strictly construed." — This passage states the canon of construction that governed the Court's treatment of the waiver, requiring strict compliance with the exception to the three-year prescriptive period.
• "A waiver of the Statute of Limitations is nothing more than an agreement between the taxpayer and the Bureau of Internal Revenue (BIR) that the period to issue an assessment and collect the taxes due is extended to a date certain. It is a bilateral agreement, thus necessitating the very signatures of both the CIR and the taxpayer to give birth to a valid agreement." — This defines the nature of a waiver and explains why the defective waivers in the case could not validly extend the prescriptive period.
• "The provisions of the RMO and RDAO explicitly show their mandatory nature, requiring strict compliance. Hence, failure to comply with any of the requisites renders a waiver defective and ineffectual." — This is the Court's canonical formulation of the strict-compliance rule for waivers of the Statute of Limitations under RMO No. 20-90 and RDAO No. 05-01.
• "From the conduct of both parties, there can be no estoppel in this case." — This resolves the Commissioner's estoppel argument, holding that the taxpayer's partial payments did not bar it from questioning the validity of the waivers as to the remaining assessments.

• Philippine Journalists, Inc. vs. CIR, 488 Phil. 219 (2004) — The Court relied on this landmark case for the rule that a waiver of the Statute of Limitations is not automatically a renunciation of the right to invoke prescription; it is a bilateral agreement requiring the signatures of both the Commissioner and the taxpayer and the date of BIR acceptance, and RMO No. 20-90 must be strictly followed.
• CIR vs. FMF Dev't. Corp., 579 Phil. 174 (2008) — Cited to explain that the three-year period under Section 203 safeguards taxpayers from unreasonable investigation by not indefinitely extending the period of assessment.
• CIR vs. B.F. Goodrich Phils., Inc., 363 Phil. 169 (1999) — Cited for the rule that the law on prescription is remedial and should be liberally construed in favor of the taxpayer, while exceptions are strictly construed.
• CIR vs. Kudos Metal Corporation, 634 Phil. 314 (2010) — Cited for the requirements under RMO No. 20-90 and for the conclusion that defective waivers render assessments void for being issued beyond the prescriptive period.
• Republic of the Philippines vs. Ablaza, 108 Phil. 1105 (1960) — Cited for the principle that the statute of limitations benefits both the Government and taxpayers, giving taxpayers security against unscrupulous tax agents after the lapse of the prescriptive period.

• Section 203, National Internal Revenue Code of 1997, as amended — Provides that internal revenue taxes shall be assessed within three years after the last day prescribed by law for the filing of the return; no proceeding in court without assessment for collection shall be begun after the expiration of such period; if the return is filed beyond the prescribed period, the three-year period is counted from the day the return was filed; and a return filed before the last day prescribed by law is considered filed on such last day. Applied to the case, the Commissioner had three years to assess, and no valid waiver extended that period; the June 24, 2004 assessments were issued beyond the prescriptive period.
• Section 222(b), National Internal Revenue Code of 1997, as amended — Allows extension of the prescriptive period if, before the expiration of the Section 203 period, both the Commissioner and the taxpayer agree in writing to assessment after such time; the period may be extended by subsequent written agreement made before the expiration of the period previously agreed upon. Applied to the case, the invalid waivers meant there was no period previously agreed upon, so the subsequent waivers could not operate as extensions.
• Revenue Memorandum Order No. 20-90 (April 4, 1990) — Outlines the mandatory procedure for the proper execution of a waiver of the Statute of Limitations. Applied to the case, the First and Second Waivers failed to comply with its requirements and were therefore invalid.
• Revenue Delegation Authority Order No. 05-01 (August 2, 2001) — Also outlines the procedure for the proper execution of a waiver. Applied to the case, strict compliance was required, and failure to comply rendered the waivers defective.
• Article 1232, Civil Code — Provides that payment means not only the delivery of money but also the performance, in any other manner, of an obligation. Applied to the case, the Commissioner's acceptance of the withholding tax on compensation and final withholding tax payments extinguished those obligations but did not affect the remaining assessments.
• Article 1231(1), Civil Code — Provides that obligations are extinguished by payment or performance. Applied to the case, payment of the withholding tax on compensation and final withholding tax extinguished those obligations.
• Section 18, Republic Act No. 1125, as amended by Republic Act No. 9282 — Cited as the basis for the appeal to the CTA En Banc. Applied to the case, the Commissioner filed a Petition for Review with the CTA En Banc.

Leonardo-De Castro (Acting Chairperson), Peralta, Bersamin, and Perlas-Bernabe, JJ., concur. Per Special Order No. 2102 dated 13 July 2015; Peralta acted as member per Special Order No. 2103 dated 13 July 2015.