Commissioner of Internal Revenue vs. Unioil Corporation

A tax assessment is void where the Commissioner fails to issue a Preliminary Assessment Notice (PAN) in accordance with Section 228 of the NIRC and Revenue Regulations No. 12-99, or where the Final Assessment Notice is issued beyond the three-year prescriptive period under Section 203 of the NIRC, absent any valid exception. The requirement to state the factual and legal bases for an assessment is substantive and mandatory; non-compliance renders the assessment invalid and unenforceable.

Unioil Corporation, a domestic corporation engaged in the petroleum business, underwent audit investigation by the Bureau of Internal Revenue for taxable year 2005. The audit allegedly revealed underdeclared taxable salaries and various income payments not subjected to expanded withholding tax. On January 26, 2009, Unioil received a Formal Letter of Demand and Final Assessment Notice demanding payment of deficiency withholding taxes totaling P536,801.10 inclusive of interests. Unioil contested the assessment administratively and subsequently before the Court of Tax Appeals, asserting non-receipt of a Preliminary Assessment Notice and prescription of the right to assess.

• Nature of the Parties: Unioil Corporation is a domestic corporation duly organized under Philippine laws. The Commissioner of Internal Revenue is the head of the Bureau of Internal Revenue.
• The Assessment: On January 26, 2009, Unioil received a Formal Letter of Demand and Final Assessment Notice (FAN) assessing it for deficiency withholding tax on compensation in the amount of P451,834.31 (inclusive of interest) and deficiency expanded withholding tax of P84,966.79 (inclusive of interest), totaling P536,801.10 for taxable year 2005. The assessment was based on alleged underdeclaration of taxable salaries amounting to P2,547,667.64 and failure to subject various income payments (professional fees, payments to contractors) to expanded withholding tax.
• Administrative Protest: Unioil filed a protest to the FAN on February 25, 2009, and submitted supporting documents on April 24, 2009. When the Commissioner failed to act on the protest within 180 days, Unioil filed a Petition for Review before the CTA Third Division on November 20, 2009.
• Commissioner's Evidence: During trial before the CTA, the Commissioner offered only a draft Preliminary Assessment Notice (PAN) and a PAN dated November 27, 2008, but failed to prove these were sent to or received by Unioil through personal delivery or registered mail. The Commissioner relied on a rubber stamp mark on Unioil's protest letter as evidence of receipt.
• Belated Proof in Supreme Court: For the first time in the Supreme Court, the Commissioner submitted proof that a PAN was issued on November 27, 2008, and received by Unioil on December 15, 2008, prompting a protest on December 22, 2008. This evidence was not offered or admitted before the CTA.
• Prescriptive Period: The withholding tax returns for November 2005 were filed in December 2005. The three-year prescriptive period to assess under Section 203 of the NIRC expired on December 9, 2008, for the monthly returns, and on January 15, 2009, for the December 2005 return. The FAN was issued on January 26, 2009.
• Defective Assessment Notices: The assessment notices cited Section 72(e) of the NIRC, which does not exist. The notices failed to specify the dates of filing of tax returns or whether the assessment was based on monthly, quarterly, or annual returns.

• Due Process Compliance: The Commissioner maintained that Unioil was not denied due process, arguing that a PAN was duly issued on November 27, 2008, and actually received by Unioil on December 15, 2008, as evidenced by Unioil's filing of a protest thereto on December 22, 2008.
• Question of Fact: The Commissioner contended that the CTA erred in finding no valid receipt of the PAN, asserting that this was a question of fact that the CTA had erroneously resolved.
• Substantive Liability: The Commissioner argued that Unioil is liable for the deficiency taxes because it failed to submit all relevant documents to rebut the assessment, and that assessments are presumed correct.
• Prescription: The Commissioner invoked Section 72 of the NIRC to argue that the assessment had not prescribed, implying that Unioil filed false or fraudulent returns, and alternatively contended that the issuance of the PAN before the expiration of the three-year period interrupted prescription.

• Question of Law: Unioil countered that the issue of whether there was valid receipt of the PAN is a question of fact not cognizable in a petition for review on certiorari under Rule 45, which is limited to questions of law.
• Prescription: Unioil maintained that the assessment prescribed because the PAN (even if received on December 15, 2008) and the FAN (issued January 26, 2009) were both beyond the three-year prescriptive period under Section 203 of the NIRC, which expired on December 9, 2008, for monthly returns filed in December 2005.
• Void Assessment: Unioil argued that the PAN and FAN were void for failing to state the facts, law, rules, and regulations upon which they were based, violating Section 228 of the NIRC and Revenue Regulations No. 12-99.
• Lack of Fraud: Unioil contended that the Commissioner failed to substantiate allegations of fraud necessary to extend the prescriptive period under Section 222 of the NIRC, and that mere understatement of tax is not proof of fraud.

• Due Process in Assessment: Whether the Commissioner complied with the mandatory requirement to issue a Preliminary Assessment Notice (PAN) prior to the Final Assessment Notice (FAN) under Section 228 of the NIRC.
• Prescription of Assessment: Whether the right to assess the deficiency withholding taxes had prescribed under Section 203 of the NIRC.
• Validity of Assessment Notice: Whether the Formal Letter of Demand and FAN were void for failure to state the factual and legal bases of the assessment as required by Section 228 of the NIRC and Revenue Regulations No. 12-99.

• Due Process in Assessment: The assessment was void due to the Commissioner's failure to establish the fact of issuance of the PAN. Evidence of the PAN's issuance and receipt was belatedly raised only in the Supreme Court and not proffered before the Court of Tax Appeals; hence, it could not be considered. The CTA's finding that no PAN was issued was a factual determination conclusive upon the Supreme Court in a Rule 45 petition.
• Prescription of Assessment: The right to assess had prescribed. The three-year period under Section 203 of the NIRC expired on January 15, 2009, for the December 2005 tax return. The FAN, issued on January 26, 2009, was therefore void. The PAN, even if received on December 15, 2008, did not toll the prescriptive period because the assessment contemplated by Sections 203 and 222 refers to the service of the FAN, not the PAN.
• Validity of Assessment Notice: The Formal Letter of Demand and FAN were void for non-compliance with the substantive requirement under Section 228 of the NIRC and Section 3 of RR No. 12-99 to state the facts and law upon which the assessment was based. The notices erroneously cited Section 72(e) of the NIRC (which does not exist) and failed to specify the dates of filing of returns or the nature of the returns assessed.

• Mandatory Preliminary Assessment Notice (PAN) — The issuance of a PAN is an integral part of procedural due process under Section 228 of the NIRC and Revenue Regulations No. 12-99, laying down the factual and legal basis for the proposed assessment. Failure to issue a PAN or to prove its issuance before the tax court effectively voids the subsequent Final Assessment Notice.
• Assessment Defined for Prescription Purposes — Under Sections 203 and 222 of the NIRC, the term "assessment" refers to the service of the Final Assessment Notice (FAN) upon the taxpayer, not the Preliminary Assessment Notice (PAN). The FAN contains a demand for payment and signals when penalties and interests begin to accrue, whereas the PAN merely informs the taxpayer of initial findings.
• Substantive Due Process in Taxation — Section 228 of the NIRC imposes a substantive, not merely formal, requirement that the taxpayer be informed in writing of the law and facts on which the assessment is made. An assessment that fails to comply with this requirement is void ab initio and bears no valid fruit.
• Prescription of Withholding Taxes — Withholding taxes are internal revenue taxes subject to the three-year prescriptive period for assessment under Section 203 of the NIRC, reckoned from the last day prescribed by law for filing the return.
• Fraud as Exception to Prescription — The ten-year prescriptive period under Section 222(a) of the NIRC applies only where there is a false or fraudulent return with intent to evade tax. Fraud is never presumed; it must be established by clear and convincing evidence. Mere understatement of tax is not proof of fraud.

• "A void assessment bears no valid fruit." — The Court invoked this principle to emphasize that assessments issued in violation of mandatory procedural requirements under the NIRC are invalid and unenforceable.
• "The requirement set by law to state in writing the factual and legal bases for the assessment is not a hollow exhortation. The law imposes a substantive, not merely a formal, requirement." — The Court stressed that compliance with Section 228 is mandatory and substantive, not merely directory.
• "Fraud is never imputed. The Court has refrained from sustaining findings of fraud upon circumstances which, at most, create only suspicion." — The Court reiterated the high standard required to prove fraud necessary to extend the prescriptive period.
• "The assessment contemplated in Sections 203 and 222 of the National Internal Revenue Code refers to the service of the FAN upon the taxpayer." — The Court clarified the distinction between PAN and FAN for purposes of the prescriptive period.

• Commissioner of Internal Revenue v. Transitions Optical Philippines, Inc., 821 Phil. 664 (2017) — Followed for the distinction between a Preliminary Assessment Notice (PAN) and a Final Assessment Notice (FAN), holding that for purposes of prescription under Sections 203 and 222 of the NIRC, "assessment" refers to the service of the FAN.
• Commissioner of Internal Revenue v. Avon Products Manufacturing, Inc., G.R. Nos. 201398-99 & 201418-19 (2018) — Applied to emphasize that administrative due process requires the Commissioner to give due consideration to the taxpayer's defenses and to state the reasons for rejecting them; mere inaction or perfunctory issuance of assessment notices violates due process.
• Commissioner of Internal Revenue v. Reyes, 516 Phil. 176 (2006) — Held that failure to comply with Section 228 of the NIRC renders the assessment void and finds no validation in any provision of the Tax Code; the requirement is substantive, not merely formal.
• Commissioner of Internal Revenue v. La Flor Dela Isabela, Inc., G.R. No. 211289 (2019) — Established that withholding taxes are internal revenue taxes covered by the prescriptive period under Section 203 of the NIRC.

• Section 228, National Internal Revenue Code — Mandates that taxpayers be informed in writing of the law and facts on which an assessment is made; otherwise, the assessment is void. The Court applied this to invalidate the assessments for lack of proper notice and failure to state factual and legal bases.
• Section 203, National Internal Revenue Code — Prescribes the three-year period of limitation for assessment and collection of internal revenue taxes, reckoned from the last day prescribed for filing the return.
• Section 222, National Internal Revenue Code — Provides exceptions to the three-year prescriptive period, allowing assessment within ten years in cases of false or fraudulent returns or failure to file a return.
• Section 3, Revenue Regulations No. 12-99 — Implements Section 228 by detailing the due process requirements in the issuance of deficiency tax assessments, including the mandatory issuance of a Preliminary Assessment Notice and the requirement that the Formal Letter of Demand state the facts and law on which the assessment is based.

• Perlas-Bernabe, S.A.J. (Chairperson)
• Inting, J.
• Gaerlan, J.
• Rosario, J.