Balancing the tug of war between the government and the taxpayer

TOP OF MIND By Reychelle May B. Medina

It is said that while the power of taxation is supreme and plenary, it must be exercised fairly, lest the tax collector kill the hen that lays the golden egg (Roxas v. Court of Tax Appeals, G.R. No. L-25043, April 26, 1968). Although the government’s power to collect taxes is deemed as an attribute of sovereignty in order to support its very existence, it must be exercised cautiously to protect the taxpayers against possible abuses that are likely to arise from this otherwise unlimited power.

This seems to be the sentiment of the Supreme Court in the case of Commissioner of Internal Revenue v. Philippine Daily Inquirer, Inc. (PDI). In the said case, PDI was assessed by the BIR of deficiency value-added and income taxes for taxable year 2004. The assessment stemmed from the computerized matching the BIR conducted on the information and data provided by third party sources against PDI’s declaration on its VAT returns. After submitting reconciliation reports to contest the assessment, PDI executed three waivers of the Statute of Limitations, allowing the BIR to assess and/or collect taxes from it until April 30, 2008.

Weeks before the said date, PDI received a Formal Letter of Demand from the BIR, demanding payment of alleged deficiency VAT and income tax in the aggregate amount of P4,679,005.55. Several months after filing its protest, PDI filed a Petition for Review with the Court of Tax Appeals against the commissioner of internal revenue (CIR), alleging that the 180-day period within which the BIR should act on its protest had already lapsed. The First Division of the CTA ruled that because the waivers were defective, the period within which the BIR may assess PDI of the said deficiency taxes was not extended.

Aggrieved, the commissioner filed a Petition for Review before the Supreme Court. The commissioner contended that PDI filed a false or fraudulent return, and as such, the prescriptive period for assessment is 10 years from the discovery of the falsity of the return. Hence, the Formal Letter of Demand that it issued was well within the prescriptive period to assess.

Ruling in favor of PDI, the Supreme Court held that mere understatement of a tax is not, in itself, a proof of fraud. The fraud contemplated by law must be actual and deliberate in nature. Absent enough evidence of intent to evade taxes, PDI’s understatement in its tax returns does not connote fraud or intentional falsity. Further, the Supreme Court affirmed that the three waivers executed by the PDI were defective for failure to comply with Revenue Memorandum Order No. 20-90 and Revenue Delegation Authority Order No. 05-01. The said issuances lay down the procedure for executing a waiver of the Statute of Limitations in tax assessment cases. Under the said RMO and RDAO, the waiver must be executed in three copies: the original copy to be attached to the docket of the case, the second copy for the taxpayer, and the third for the Office accepting the waiver. In PDI’s case, the commissioner failed to provide the office accepting the first and second waivers with their respective office, as they were found still attached to the docket of the case. Additionally, the third waiver was not executed in three copies.

Given these circumstances, according to the Supreme Court, the waivers executed by the PDI could not have extended the three-year period given by law to the BIR to assess deficiency taxes. While the court recognizes that the power of taxation is deemed inherent in order to support the government, it reminded the BIR that the execution of the waiver does not ipso facto imply that the taxpayer relinquishes his rights to invoke the defense of prescription unequivocally.

The BIR has the burden of ensuring compliance with the proper procedures set forth in its issuances as they have the burden of securing the right of the government to assess and collect taxes. The Supreme Court reminded that the legislature has provided safeguards and remedies beneficial to both the taxpayer, to protect against abuse; and the government, to promptly act for the availability and recovery of revenues. The government cannot hide behind the presumption of regularity, at the expense of the taxpayer who has to part with its hard-earned income in order to support the needs of the government.

When it comes to taxes, people may view the government as their nemesis, because they are daunted by this seemingly unlimited power that could potentially take away the money they worked so hard to make. And while it may be true that in this seemingly endless tug of war between the government and the taxpayer, the government’s power to tax prevails in most instances, the Supreme Court reminds the taxpayer not to give up just yet. The law ensures the taxpayer is not left without any remedy so that he may have a fighting chance in the battle.

Reychelle May B. Medina is a supervisor from the tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice, Tier 1 transfer pricing practice, Tier 1 leading tax transactional firm and the 2016 National Transfer Pricing Firm of the Year in the Philippines by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email or

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