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Tax Updates August 2022 (SyCipLaw Tax Issues And Practical Solutions (T.I.P.S.) Vol. 19) – Withholding Tax


1. Can a corporation which availed itself of the tax amnesty
under Republic Act No. 9480 be held liable for deficiency
withholding taxes?

Yes. In Bureau of Internal Revenue vs. Samuel Cagang
(G.R. No. 230104, March 16, 2022)
, the Supreme Court
upheld the deficiency withholding tax assessment against a
taxpayer, notwithstanding the fact that the taxpayer availed itself
of a tax amnesty. In this case, the Bureau of Internal Revenue
(BIR) assessed deficiency income taxes, VAT, and expanded
withholding taxes against CEDCO, Inc., where Samuel Cagang
(Cagang) acted as treasurer. CEDCO argued that since it
had already filed its amnesty tax return and paid the corresponding
taxes thereon, it cannot be assessed deficiency taxes.

The Supreme Court ruled that the tax amnesty under Republic Act
No. 9480 applies only to income taxes, VAT, estate taxes,
donor’s tax, capital gains tax, excise tax, and other
percentage taxes. It does not extend to withholding taxes. As
provided in Republic Act No. 9480, the following are disqualified
from availing themselves of the tax amnesty:

  1. Withholding agents with respect to their withholding tax
    liabilities;

  2. Those with pending cases falling under the jurisdiction of the
    Presidential Commission on Good Government;

  3. Those with pending cases involving unexplained or unlawfully
    acquired wealth, revenue or income under the Anti-Graft and Corrupt
    Practices Act;

  4. Those with pending cases filed in court involving violation of
    the Anti-Money Laundering Law;

  5. Those with pending criminal cases for tax evasion and other
    criminal offenses under Chapter II of Title X of the National
    Internal Revenue Code of 1997, as amended, and the felonies of
    frauds, illegal exactions, and transactions, and malversation of
    public funds and property under Chapters III and IV of Title VII of
    the Revised Penal Code; and

  6. Tax cases subject of final and executory judgment by the
    courts.

When CEDCO availed itself of the tax amnesty, only its
liabilities for unpaid income taxes and VAT were deemed fully
settled. Its liabilityfor deficiency withholding taxes remained
since Republic Act No. 9480 expressly disqualified withholding
agents from availing of the taxamnesty with respect to their
withholding tax liabilities.

SyCipLaw TIP 1:

A taxpayer who wishes to avail itself of a tax amnesty under a
law must review the law granting the amnesty and its implementing
rules to ensure that, first, it is qualified and not disqualified
from availing itself of the amnesty and, second, all of its tax
liabilities are covered by the amnesty. Tax amnesty laws typically
provide who are disqualified from availing of the tax amnesty.
While nothing prevents the Congress from declaring otherwise,
withholding agents are usually disqualified from availing
themselves of a tax amnesty with respect to their withholding tax
obligations. This is because a withholding agent collects and pays
taxes on behalf of another person and not for his/her own behalf.
Therefore, a tax amnesty usually does not apply to the liability of
a withholding agents as such.

2. May a company treasurer be held criminally liable for the
corporation’s failure to withhold taxes?

Yes. In the Cagang case discussed above, as the
treasurer of CEDCO, Cagang was criminally prosecuted for failure to
file tax returns and pay taxes of CEDCO. Cagang’s main defense
was that CEDCO cannot be assessed deficiency taxes since CEDCO
availed of the tax amnesty under Republic Act No. 9480, which
covers “all unpaid internal revenue taxes for the taxable year
2005 and prior years, with or without assessments duly issued
therefor, and have remained unpaid as of December 31,
2005”.

The Supreme Court held that, since withholding taxes were not
covered by the amnesty, CEDCO remains liable for deficiency
withholding taxes. As the treasurer of CEDCO, Cagang may be
criminally charged for failure to file tax returns and pay taxes as
regards withholding taxes.

SyCipLaw TIP 2:

If a corporation violates certain provisions of the National
Internal Revenue Code, as amended (Tax Code), criminal
liability may be imposed on the partner, president, generalmanager,
branch manager, treasurer, officer-in-charge, and the employees
responsible for the violation. The identity of these officers may
be establishedbased on corporate records, including board
resolutions appointing such officers and the General Information
Sheets submitted by corporations to the Securities and Exchange
Commission. For these named corporate officers, the mere fact of
having occupied the position during the period of the
corporation’s tax violation is sufficient to give rise to
probable cause to file criminal charges against such officers for
the corporation’s violations of the Tax Code.

3. Is a court order allowing the production and inspection of
documents considered a separate tax audit if a Letter of Authority
has been previously issued against the taxpayer for the same
taxable period?

No. In Smart Communications, Inc. v. Hon. Arreza (CTA
EB No. 2386, August 15, 2022)
, the Court of Tax Appeals
(CTA) En Banc upheld the grant of a motion for production and
inspection of documents in a case pending in court, notwithstanding
that a Letter of Authority (LOA) had already been issued against
the taxpayer.

In this case, the City of Makati issued a Notice of Assessment
against the taxpayer for deficiency franchise taxes, fees, and
charges for taxable years 2012 to 2015. The taxpayer contested the
assessment, asserting that it already paid its tax liabilities.
Previously, the City of Makati issued a LOA, which compelled the
taxpayer to produce its books of account, financial statements,
summary/breakdown of gross sales per calendar year, and proof of
payment of franchise taxes in other localities. As the taxpayer was
unable to produce a summary/breakdown of gross sales, as well as
proof of payment of franchise tax in other localities, despite
repeated demands, the City of Makati assessed the taxpayer
deficiency franchise taxes based on the total gross receipts of the
taxpayer appearing on its financial statements. The assessment is
based on Section 7A.08 of the Revised Makati Revenue Code, which
provides for a presumptive assessment.

The taxpayer assailed the assessment before the Regional Trial
Court of Makati (RTC). The City of Makati filed with the
RTC a motion for production and inspection of documents, seeking to
compel the taxpayer to produce its books of account, financial
statements, summary/breakdown of gross sales per calendar year, and
proof of payment of franchise taxes in other localities. The RTC
granted the motion.

On appeal to the CTA, the taxpayer questioned the grant of the
motion for production and inspection of documents arguing that it
is tantamount to another examination or audit of the taxpayer’s
books of account for the same taxable period, as well as the
conduct of anexamination without a valid LOA, which are not allowed
by the Local Government Code and the Revised Makati Revenue
Code.

In ruling that the motion for production and inspection of
documents was properly granted, the CTA held that when the taxpayer
contested the tax assessment before the RTC, the City of Makati had
every right to assert its power to examine the taxpayer’s
records to ascertain the correct tax liabilities due. The grant of
the motion would not amount to another tax audit since it was an
exercise of the RTC’s power of judicial review. As a court of
competent jurisdiction, the RTC has the authority to look into the
correctness of the tax assessment against the taxpayer and to
require the production of material and relevant evidence necessary
for its determination of the factual issues involved in the
assessment case, such as the documents in this case.

SyCipLaw TIP 3:

A taxpayer should properly maintain and keep records of its
books of account and other accounting records and should be ready
to present such books of account and accounting records in the
event of a tax audit. In case a court case is filed as regards a
disputed assessment, the court can still compel the production of
these documents even if the taxpayer did not present the documents
to the BIR or the local government during the tax audit. Failure to
obey the court’s order may result in contempt of court, which
is punishable by imprisonment and/or fine.

4. Can a local taxing authority require the production and
inspection of documents of a taxpayer’s nationwide sales and
receipts, as well as its sales and receipts in other
localities?

Yes. In the Smart case discussed above, the CTA ruled
that the City of Makati cannot simply accept the taxpayer’s
self-assessment as a true and accurate declaration of the
taxpayer’s income. The local taxing authority has the power to
issue a LOA to compel the examination of books, records, and
otheraccounts to ascertain the amount paid, including books,
records, and other accounts pertaining to other localities. In this
regard, the local taxing authority’s examination power under
Section 171 of the Local Government Code and Section 7A.07 of the
Revised Makati Revenue Code is extensive and necessary to enforce
local tax laws. Accordingly, the City of Makati has the authority
to compel production of documents showing nationwide sales and
receipts, including those documents in localities other than the
City of Makati as these documents are relevant and material to the
determination of the correct basis and computation of anydeficiency
local tax in the City of Makati.

SyCipLaw TIP 4:

Taxpayers should be mindful that, while a local government unit
(LGU) exercises taxing power only within its territorial
jurisdiction, it can request the production and inspection of
documents showing nationwide revenues, as well as revenues in other
localities outside of the LGU’s territorial jurisdiction, in
order to determine the correct amount of taxes due to the LGU.

5. Is an audit investigation conducted pursuant to a Mission
Order, but without a Letter of Authority, valid?

No. An audit and examination of a taxpayer’s books and
accounting records, to be valid, must be based on a valid LOA.

In Commissioner of Internal Revenue v. Autostrada
Motore, Inc. (CTA EB No. 2375, July 21, 2022)
, the CTA En
Banc invalidated an assessment that was based solely on a Mission
Order and conducted without a LOA. The CTA En Banc ruled thatthe
absence of an LOA violates the taxpayer’s right to due process
and renders the entire assessment void.

An LOA is the authority given to the appropriate revenue officer
assigned to perform assessment functions. Unless authorized by the
Commissioner of Internal Revenue (CIR) himself, or by his duly
authorized representative, through a LOA, an examination of the
taxpayer cannot ordinarily be undertaken. Due process requires the
identification of the names of the tax agents authorized to conduct
the examination and assessment of the taxpayer’s books and
accounting records through a LOA. Identifying the authorized
revenue officers in the LOA is a jurisdictional requirement of a
valid audit or investigation by the BIR. There must be a link
between the LOA and the revenue officer who will conduct an
examination of the taxpayers’ books of accounts and accounting
records.

The CTA En Banc explained that the purpose of a Mission Order is
different from a LOA. A Mission Order is issued to authorize the
surveillance pursuant to Section 6(C) of the Tax Code, not the
audit and the assessment of the taxpayer. The allowable acts
covered by a Mission Order include the tax agent’s observation
and surveillance of the taxpayer’s businessoperations,
verification of specific documents, and the determination of
whether the taxpayer complies with the pertinent tax laws and
regulations, without conducting a full-blown audit.

In this case, the authority of the revenue officers under the
Mission Order was limited to the exercise of the CIR’s
verification and surveillance powers. The revenue officers were not
authorized by a LOA to conduct an examination and inspection of the
taxpayer’s books of accounts. Thus, the assessments resulting
therefrom are void.

SyCipLaw TIP 5:

Taxpayers undergoing an audit investigation should first check
whether a LOA has been issued, granting authority to the revenue
officer or tax agent conducting the audit investigation. The
revenue officer named in the LOA must be the same officer
conducting the examination and assessment of the taxpayer’s
books of accounts and accounting records. Otherwise, the audit
investigation and resulting assessment is void for violating the
taxpayer’s right to due process.

6. Can the reversal of a Bureau of Internal Revenue ruling be
given retroactive application if the same would be prejudicial to
the taxpayer?

No. Section 246 of the Tax Code prohibits the retroactive
application of a reversal of a BIR ruling if the same would be
prejudicial to the taxpayer, unless the exceptions under the
provision are present, namely, misstatement or misrepresentation of
material facts and bad faith. Any change of opinion or position by
the CIR with respect to a BIR ruling, which is prejudicial to the
taxpayer, shall only be applied prospectively.

In Commissioner of Internal Revenue v. Meridien
East Realty & Development Corporation (CTA EB No. 2287,July 14,
2022)
, the CTA En Banc rejected the retroactive
application of Revenue Memorandum Circular No. 20-2010 (RMC No.
20-2010), which overturned BIR Ruling No. DA-245-05. In the BIR
ruling, the BIR initially opined that the transaction was not a
sale subject to income tax, expanded withholding tax, documentary
stamp tax, and value-added tax. However, RMC No. 20-2010 abandoned
the prior position and set out a new one declaring that the
transaction was part of a pre-selling arrangement, hence, subject
to the aforementioned taxes. Accordingly, the retroactive
application of RMC No. 20-2010 would be prejudicial to the
taxpayer.

In this case, the CTA En Banc ruled that the CIR failed to prove
the existence of any of the exceptions under Section 246 of the Tax
Code which would allow retroactive application of the RMC. The CIR
failed to adduce evidence that: (1) the taxpayer deliberately
misstated or omitted material facts from its return or in any
document required of it by the BIR; (2) the facts subsequently
gathered by the BIR are materially different from the facts on
which the BIR ruling was based; or (3) that the taxpayer acted in
bad faith. The CTA En Banc found that the change of position made
by the CIR was not brought about by a subsequent learning of a fact
misrepresented or withheld by the taxpayer. Rather, the reversal
was merely due to a change of opinion by the CIR on the tax
consequences of the same set of facts, which the taxpayer presented
in obtaining the ruling. Thus, the deficiency tax assessments
against the taxpayer were declared null and void as they arose from
the retroactive application of the RMC.

SyCipLaw TIP 6:

A taxpayer has the right to rely upon a BIR ruling issued in his
favor until the same has been reversed, amended or overruled by the
CIR or by the Supreme Court. However, a reversal of a BIR ruling
cannot be retroactively applied if doing so would be prejudicial to
the taxpayer, unless the taxpayer deliberately misstates or omits
material facts from his return or any document required of him by
the BIR, the facts subsequently gathered by the BIR are materially
different from the facts on which the ruling is based, or the
taxpayer acted in bad faith in securing the BIR ruling. While the
general rule is that the government cannot be estopped by mistakes
or errors by its officials or agents, this rule is not without an
exception, such as the provision in the Tax Code on the
non-retroactivity of a revocation, modification, or reversal of a
BIR ruling.

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about your specific circumstances.



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