(BDB Law’s “Tax Law For Business” appears in the opinion section of BusinessMirror every
second and fourth Thursday of the month. BDB Law is an affiliate of Punongbayan & Araullo (P&A).
Prescription and imposition of 50-percent
surcharge on tax assessments
D
oes an allegation of falsity or fraud committed by taxpayers automatically warrant the
extens extension of the Bureau of Internal Revenue’s three-year period to assess to 10
years and the imposition of the 50-percent surcharge?
The Philippine Tax Code authorizes the examination of internal revenue taxes within three
years after the last day prescribed by law for the filing of the return. However, in case of a
false or fraudulent return with intent to evade tax or of failure to file a return, the assessment
may be made within 10 years from the discovery of falsity, fraud or omission.
Likewise, a 50-percent surcharge, normally referred to as fraud penalty, is imposed in case of
willful neglect to file a return or willful filing of a false or fraudulent return.
Thus, in cases wherein no assessment within the regular three-year prescriptive period is
made, some revenue examiners would try to justify the application of the 10-year period by
merely alleging fraud. And by alleging fraud, they would also impose the 50-percent fraud
penalty.
Considering the financial impact and legal consequences of the fraud penalty upon taxpayers,
this brings us to the question raised earlier. Furthermore, on the assumption that the 50percent fraud penalty applies, does it necessarily follow that the 10-year prescriptive period
also applies? And assuming that the 10-year prescriptive period applies, does it follow that
the 50-percent fraud penalty can also be imposed?
A perusal of the cases decided by Philippine courts on this issue shows that the imposition
of the 50-percent fraud penalty and the application of the 10-year prescriptive period may
not necessarily be a twin effect of a taxpayer’s single act.
The fraud penalty of 50 percent may not necessarily be imposed even if the 10-year
prescriptive period is applicable. And to some extent, it could be said also that the 10-year
prescriptive period may not be applicable even if the imposition of the 50-percent fraud
penalty is justified.
The Philippine Supreme Court, in the 1974 case of Aznar vs. Court of Tax Appeals, ruled
that where there is a deviation from the truth, whether intentional or not, the period of 10
years should be enforced. At the same time, the Court ruled that there was no basis for the
imposition of the 50-percent fraud penalty.
Fraud, as contemplated by law, is actual and not constructive, must be intentional, consists
of deception, and is willfully and deliberately done or resorted to in order to induce another
to give up some legal right.
Negligence, whether slight or gross, is not equivalent to fraud, which amounts to intentional
wrongdoing with the sole object of avoiding the tax.
Fraud is never imputed, and the courts never sustain findings of fraud upon circumstances,
which creates only suspicion, and the mere understatement of a tax is not in itself proof of
fraud for the purpose of tax evasion.
In short, notwithstanding the applicability of the 10-year prescriptive period from the
discovery of fraud, falsity or omission, no 50-percent final surcharge should be imposed in
the absence of a willful fraudulent act on the part of the taxpayer.
The ruling with regard to the fraud penalty in the Aznar case was reiterated in the more
recent case of CIR vs. Air India (GR No. 72443 dated January 29, 1988) where the Supreme
Court held that there being no cogent basis to find willful neglect to file the return on the
part of the private respondent, the 50-percent surcharge or fraud penalty imposed upon the
respondent is improper. Fraudulent intent to evade payment of taxes, considering that the
same is accompanied by legal consequences, cannot be presumed.
In a recent case decided by the Court of Tax Appeals (CTA), the 10-year prescriptive period
was further clarified. The CTA, in this case, ruled the applicability of the extended period of
10 years because of the false returns filed by the petitioners, but disallowed the imposition of
the 50-percent surcharge penalty because “there were no indicia of fraud” in the case.
In effect, the Tax Court’s ruling in the case followed the same rationale laid down by the
Supreme Court in the Aznar case. Nonetheless, the Courts had also advanced the view that
in order to render the return made by a taxpayer a “false return,” there must appear, on the
part of the taxpayer, a design to mislead or deceive. Mere falsity of the return does not merit
the application of the 10-year prescriptive period as the element of fraud must be clearly
established.
The rulings laid down by the above-cited cases only show that the 50-percent surcharge can
be imposed only in clear cases of actual and intentional fraud, willfully and deliberately
resorted to in order to evade payment of taxes.
The BIR has the burden of proving the commission of fraud and cannot simply impose this
civil penalty absent a clear showing of a taxpayer’s fraudulent intent to evade payment of
taxes. The same degree of culpability should be established in order that the 10-year
prescriptive period may be applied.