Waiver from the Defense of Prescription in Philippines

By: Tax and Accounting Center Philippines

As a matter of right under Section 203 of the Tax Code of the Philippines, as amended (Tax Code), the Bureau of Internal Revenue (BIR) has the power to examine the books of accounts and other accounting records of the taxpayers and make an assessment within three years, and we quote:

“SECTION 203.   Period of Limitation Upon Assessment and Collection. — Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day.

To illustrate the counting of the three year period, let us take up the taxable calendar year ending December 2009. Income tax return filing for said 2009 is not later than April 15, 2010. Counting the three-year period, the BIR can make as assessment (issuance of Formal Assessment Notice and Formal Letter of Demand or FAN-FLD) up to April 2013, (April 2011 is year 1, April 2012 is year 2). Should BIR fail to issue an assessment within said period, then, it will lose its right to assess and the taxpayer will no longer be assessed for said taxable year.

The above three-year period of the BIR to assess is not however absolute. Under Section 222(b) of the Tax Code, the taxpayer and the Commissioner of Internal Revenue (CIR) may agree in writing for the timing of the assessment executed before the expiration of the three-year period. This is what we call as “Waiver from the Defense of Prescription” or simply “Waiver”. Under BIR Revenue Memorandum Order No. 20-1990 (RMO 20-90) and Revenue Delegation Administrative Order No. 09-2001 (RDAO 05-01), the following procedures and requirements should be observed for the execution of a VALID waiver from the defense of prescription:

1. The waiver must be in the proper form prescribed by RMO 20-90. The phrase “but not after ______ 19 ___”, which indicates the expiry date of the period agreed upon to assess/collect the tax after the regular three-year period of prescription, should be filled up.

2. The waiver must be signed by the taxpayer himself or his duly authorized representative. In the case of a corporation, the waiver must be signed by any of its responsible officials. In case the authority is delegated by the taxpayer to a representative, such delegation should be in writing and duly notarized.

3. The waiver should be duly notarized.

4. The CIR or the revenue official authorized by him must sign the waiver indicating that the BIR has accepted and agreed to the waiver. The date of such acceptance by the BIR should be indicated. However, before signing the waiver, the CIR or the revenue official authorized by him must make sure that the waiver is in the prescribed form, duly notarized, and executed by the taxpayer or his duly authorized representative.

5. Both the date of execution by the taxpayer and date of acceptance by the Bureau should be before the expiration of the period of prescription or before the lapse of the period agreed upon in case a subsequent agreement is executed.

6. 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 copy for the Office accepting the waiver. The fact of receipt by the taxpayer of his/her file copy must be indicated in the original copy to show that the taxpayer was notified of the acceptance of the BIR and the perfection of the agreement.

In a number of court decisions (e.g. CIR vs. Kudos Metal Corporation), G.R. No. 178087 dated May 5, 2010), the above requirements for a valid waiver from the defense of prescription in the Philippines has been upheld. Failure to follow the same should invalidate the waiver and the same will not extend the three-year period of assessment.

For taxpayers, execution of a Waiver from the defense of prescription in the Philippines is voluntary on its part. On practical considerations, taxpayers execute a waiver if the same is favorable on its part, such as when certain material schedules and documents are to be prepared and submitted to the BIR that would tend to lower down the assessment and time is of the essence.  On such instance, the taxpayer should see to it that the Waiver complies with the above requirements and procedures.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances.