McDonald's Philippines Realty Corporation v.

Commissioner of
Internal Revenue

Background:

McDonald's Philippines Realty Corporation (MPRC), a foreign corporation

licensed to operate in the Philippines, was assessed by the Bureau of Internal
Revenue (BIR) for deficiency Value-Added Tax (VAT) for the year 2007. The
dispute arose from interest income derived from long-term advances and
unpaid rentals from Golden Arches Development Corporation (GADC), which
the BIR considered subject to VAT.

After an audit, the BIR initially assessed MPRC for deficiency income tax, VAT,
and documentary stamp tax (DST), but later removed the IT and DST
liabilities, leaving only the VAT deficiency. The Final Decision on Disputed
Assessment (FDDA) ordered MPRC to pay ₱3,595,275.39, which was later
modified by the Court of Tax Appeals (CTA) Division.

CTA Division Ruling:

 The CTA Division found that MPRC’s interest income from GADC was
taxable under VAT laws.

 It ruled that while the standard period for tax assessment is three
years, MPRC filed "false" VAT returns by omitting significant taxable
income, thereby extending the assessment period to 10 years.

 The CTA Division recalculated MPRC's liability, reducing the deficiency

VAT to ₱2,224,211.02.

CTA En Banc Ruling:

 The CTA En Banc affirmed the CTA Division’s ruling, maintaining that
the 10-year assessment period applied due to the under declaration of
income.

 The total tax liability was modified, ordering MPRC to pay

₱9,206,213.06, including deficiency VAT, surcharge, and interests.

 It applied the 12% delinquency interest rate under the TRAIN Law for
unpaid amounts starting January 1, 2018.

Main Legal Issues:

1. Did the BIR validly invoke the 10-year assessment period for false tax
returns under Section 222(a) of the 1997 Tax Code?
2. If not, was the assessment issued within the standard three-year
period under Section 203 of the Tax Code?

HELD:

The Supreme Court of the Philippines addressed the applicable prescriptive

period for tax assessments in instances of alleged misstatements in tax
returns. The Court ruled that the 10-year period for tax assessments applies
only when the tax return contains deliberate or willful misstatements
intended to evade taxes. In the absence of such fraudulent intent, the
standard 3-year prescriptive period is applicable.

In this case, the Bureau of Internal Revenue (BIR) issued a preliminary

assessment notice in September 2010, alleging that McDonald's Philippines
Realty Corporation (MPRC) was liable for deficiency income tax, value-added
tax (VAT), and documentary stamp tax for the calendar year 2007. The BIR
and MPRC executed waivers extending the assessment period to March 2012.
However, the Supreme Court found no evidence of willful intent by MPRC to
evade taxes. Consequently, the Court held that the BIR's authority to assess
MPRC for deficiency VAT for 2007 had prescribed, as the 3-year period had
lapsed, leading to the cancellation of the deficiency VAT assessment.

This decision emphasizes that only intentional and deliberate errors in tax
returns justify the application of the extended 10-year assessment period
under Section 222(a) of the 1997 Tax Code. Unintentional errors or
misstatements do not warrant this extended period, thereby reinforcing the
importance of establishing fraudulent intent for longer assessment periods.

Commissioner of Internal Revenue v. Next Mobile, Inc.

Case Background:

The Bureau of Internal Revenue (BIR) issued a Formal Letter of Demand (FLD)
and Assessment Notices against Next Mobile, Inc. for deficiency income tax
and withholding taxes for the year 2001, amounting to ₱313,339,610.42. The
company contested the assessment, arguing it was issued beyond the three-
year prescriptive period under Section 203 of the National Internal Revenue
Code (NIRC).

Next Mobile executed five waivers of the statute of limitations to extend the
period for assessment, but the Court of Tax Appeals (CTA) First Division and
CTA En Banc ruled the waivers invalid due to procedural defects, thus
canceling the tax assessments. The CTA also rejected BIR’s claim that Next
Mobile filed fraudulent returns, which would have extended the assessment
period to 10 years under Section 222(a) of the NIRC.

Supreme Court Ruling:

The Supreme Court held that the CTA En Banc erred in invalidating the
assessment notices. It found the waivers executed by the respondent valid
despite procedural lapses, such as the absence of a notarized written
authority and failure to follow the mandated procedure for waiver execution.
This was due to both parties being in pari delicto—or equally at fault—but
favored enforcing the waivers to uphold the public interest in the collection
of taxes. The Court emphasized the principle that taxes are the lifeblood of
the government, and as such, procedural lapses by the BIR, and acts of bad
faith by the taxpayer should not prevent tax collection. The Supreme Court
granted the petition, reversed the CTA En Banc’s decision, and remanded the
case to the CTA for further proceedings to review the merits of the
respondent’s petition against the formal letter of demand and assessment
notices.

Doctrine: The waiver of the statute of limitations on tax assessment and

collection must be in strict compliance with the prescribed format and
procedure under Revenue Memorandum Order No. 20-90 and Revenue
Delegation Authority Order No. 05-01 to be valid and binding. However, in
cases where both parties are in pari delicto, the public interest in the
collection of taxes may prevail, allowing a departure from strict procedural
compliance.

1. Prescriptive Periods for Tax Assessment and Collection: According to

Section 203 of the 1997 National Internal Revenue Code (NIRC), taxes should
be assessed within three years from the filing of the tax return. Exceptions
provided under Section 222 allow for an extended period under certain
conditions, including a written agreement to extend.

2. Waivers of the Statute of Limitations: The validity of waivers is contingent

upon strict adherence to procedural requirements, including proper
execution, signature by duly authorized persons, and acknowledgment by
the BIR before the expiration of the original prescriptive period.

3. Doctrine of Estoppel and Pari Delicto: This case illustrates the application
of estoppel and the principle of pari delicto in situations where both the
taxpayer and the BIR have contributed to procedural faults in extending the
period for tax assessment and collection.

Historical Background: This decision underscores the evolving interpretative

stance of the Philippine Supreme Court toward the procedural aspects of tax
law enforcement and collection. It highlights the tension between ensuring
procedural fairness to taxpayers and fulfilling the state’s fiscal objectives.
The decision reiterates the importance of the government’s revenue
collection powers while recognizing the reality of administrative and
procedural lapses.

Commissioner of Internal Revenue v. Systems Technology Institute,

Inc.

Case Background:

The Bureau of Internal Revenue (BIR) issued a Formal Assessment Notice

against Systems Technology Institute, Inc. (STI) for deficiency income tax,
expanded withholding tax (EWT), and value-added tax (VAT) for fiscal year
2003, amounting to ₱161,835,737.98. STI challenged the assessment,
arguing it was issued beyond the three-year prescriptive period under
Section 203 of the National Internal Revenue Code (NIRC).

To extend the assessment period, STI executed three waivers, but the Court
of Tax Appeals (CTA) Second Division ruled these waivers were defective for
failing to comply with Revenue Memorandum Order (RMO) No. 20-90 and
Revenue Delegation Authority Order (RDAO) No. 05-01. Consequently, the
CTA canceled the tax assessments for being issued beyond the prescriptive
period. The CTA En Banc affirmed this ruling.

Supreme Court Ruling:

The Supreme Court upheld the CTA's decision, ruling that the waivers were
invalid because:

1. Late Execution – The first waiver took effect on June 2, 2006, but the
deadline to assess EWT and VAT had already lapsed in April and May
2006.

2. Lack of Proper Authorization – STI's representative signed the

waivers without a notarized board authority.
3. Missing Tax Details – The waivers did not specify the kind or amount
of tax due, making them incomplete agreements.

Since the defective waivers did not extend the assessment period, the tax
assessments issued in June 2007 were void for being time-barred.

The Supreme Court also rejected BIR’s argument that STI was estopped from
invoking prescription due to its request for reinvestigation. Unlike the RCBC
case, where partial payment implied waiver of prescription, STI made no
such payment, and mere participation in the review process did not negate
its right to contest the late assessment.

Final Outcome: The Supreme Court ruled in favor of STI, affirming that the
tax assessments were issued beyond the prescriptive period and were
therefore void.

Asian Transmission Corporation v. Commissioner of Internal Revenue

Case Background:

The Bureau of Internal Revenue (BIR) conducted an audit of Asian

Transmission Corporation (ATC) for the taxable year 2002. The deadline for
assessing ATC’s tax liability was in the first quarter of 2006. However, ATC
executed eight successive waivers extending the assessment period until
December 31, 2008. Based on these waivers, the BIR issued a Formal Letter
of Demand in July 2008, assessing ATC for deficiency withholding tax on
compensation (WTC), expanded withholding tax (EWT), and final withholding
tax (FWT).

ATC initially protested the assessment on procedural grounds but did not
challenge the validity of the waivers. However, when the case reached the
Court of Tax Appeals (CTA), ATC argued that the waivers were defective and
did not validly extend the prescriptive period.

CTA Ruling:

 The CTA Second Division ruled in ATC’s favor, canceling the tax
assessments due to prescription, citing defects in the waivers.
 The CTA En Banc reversed the decision, reinstated the tax
assessments, and remanded the case for further proceedings to
determine ATC’s actual tax liability.

Supreme Court Ruling:

The Supreme Court affirmed the CTA En Banc’s decision, ruling that:

1. Both parties were at fault – The waivers had defects, but ATC continued
executing them over four years without raising objections.

2. ATC was estopped from questioning the waivers – It allowed the BIR to
proceed with its investigation based on these waivers and only raised
their invalidity after an unfavorable decision.

3. The doctrine of in pari delicto and estoppel applied – Since ATC

benefited from the waivers by delaying its tax liability, it could not later
claim their invalidity to escape assessment.

Final Outcome: The Supreme Court denied ATC’s motion for

reconsideration, upholding the tax assessments and ruling that ATC could not
use technicalities to evade tax liability.

Key Differences Between the STI and ATC Cases

Aspect STI Case (CIR v. ATC Case (Asian Transmission

Systems Technology Corp. v. CIR)
Institute, Inc.)

Defects in - No notarized written - Notarization did not comply with

the authority from STI’s the 2004 Rules on Notarial
Waivers board of directors. Practice.
- Waivers did not - Waivers lacked proper
specify the type and acceptance dates.
amount of tax due. - Signed by the wrong revenue
- Waivers lacked proper officer.
BIR acceptance. - Failed to specify tax type and
amount.

Taxpayer's STI immediately ATC only questioned the

Conduct challenged the waivers waivers' validity after an
in the CTA proceedings. unfavorable ruling from the CIR.

Supreme The waivers were Despite defects, the waivers were

Court invalid, so the tax upheld because ATC was estopped
Ruling assessment was void from questioning them.
due to prescription.

Application Not applied – STI did Applied – ATC repeatedly

of Estoppel not benefit from the executed waivers and allowed the
waivers and timely BIR to proceed with its
raised their defects. investigation but challenged their
validity only later.

Final STI won – tax ATC lost – waivers were upheld,

Outcome assessments were and tax assessments were
declared void. reinstated.

Key Takeaways

 Timely Objection Matters – STI challenged the waivers early, while

ATC only raised the issue after receiving an unfavorable ruling, leading
to estoppel.

 Taxpayer’s Conduct Affects the Outcome – Since ATC benefited

from the waivers by delaying its tax liability, the Court ruled against it.

 Strict Compliance with Waiver Requirements – Both cases

highlight that waivers must comply with legal requirements, but
estoppel could override defects if the taxpayer acted in bad faith.