Philippine Supreme Court Jurisprudence


Philippine Supreme Court Jurisprudence > Year 2005 > April 2005 Decisions > PNOC v. CA: 109976 : April 26, 2005 : J. Carpio : En Banc : Dissenting Opinion:




PNOC v. CA: 109976 : April 26, 2005 : J. Carpio : En Banc : Dissenting Opinion

PHILIPPINE SUPREME COURT DECISIONS

EN BANC

[G.R. NO. 109976 : April 26, 2005]

PHILIPPINE NATIONAL OIL COMPANY, Petitioner, v. THE HON. COURT OF APPEALS, THE COMMISSIONER OF INTERNAL REVENUE and TIRSO SAVELLANO, Respondents.

[G.R. NO. 112800 : April 26, 2005]

PHILIPPINE NATIONAL BANK, Petitioner, v. THE HON. COURT OF APPEALS, COURT OF TAX APPEALS, TIRSO B. SAVELLANO and COMMISSIONER OF INTERNAL REVENUE, Respondents.

DISSENTING OPINION

CARPIO, J.:

I dissent from the majority opinion penned by Justice Minita V. Chico-Nazario.

First, the withholding tax liability of Philippine National Oil Company (PNOC') is a delinquent account that falls within the coverage of Executive Order No. 44 ("EO No. 44"), the tax compromise law.

Second, PNOC filed its application for tax compromise under EO No. 44 within the period prescribed by EO No. 44 and its implementing regulations.

Third, the tax compromise agreement made by PNOC with the Bureau of Internal Revenue ("BIR") is now res judicata. The parties to the compromise agreement have fully implemented the agreement in good faith.

Fourth, the BIR failed to collect the tax from within the three-year prescriptive period. Thus, the collection of the tax is now barred by prescription.

PNOC's Tax Liability Falls under EO No. 44

On 16 January 1991, BIR Commissioner Jose U. Ong declared void the tax compromise agreement that his predecessor Commissioner Bienvenido A. Tan made with PNOC more than three years earlier. The compromise agreement, dated 22 June 1987, settled the P385,961,580.82 tax liability of PNOC and the Philippine National Bank (PNB') arising from PNB's failure to withhold the final tax on interest income on money market placements of PNOC covering the years 1984 to August 1986.1 Under the compromise agreement, PNOC paid the BIR P93,955,479.12 in full settlement of the tax liability arising from PNB's failure to withhold the final tax.

Article 2028 of the Civil Code defines a compromise as 'a contract whereby the parties, by making reciprocal concessions, avoid litigation or put an end to one already commenced. The purpose of compromise is to settle the claims of the parties and bar all future disputes and controversies.2 ςrνll

In the present case, the BIR and PNOC entered into the tax compromise agreement in accordance with the provisions of Executive Order No. 44 (EO No. 44'), Revenue Memorandum Order No. 39-86 (RMO No. 39-86') and Revenue Memorandum Order No. 4-87 (RMO No. 4-87'). The relevant provisions read:

Executive Order No. 44

SECTION 1. The Commissioner of Internal Revenue or his duly authorized representatives may compromise any disputed assessment or delinquent account pending as of December 31, 1985, upon the payment of an amount equal to thirty percent (30%) of the basic tax assessed. In such cases, the Commissioner of Internal Revenue or his duly authorized representatives shall condone the corresponding interests and penalties. (Emphasis supplied)

x x x

SECTION 4. Section 246 of the National Internal Revenue Code, as amended, is hereby suspended with respect to the disputed assessments and delinquent accounts referred to herein for the duration of the effectivity hereof.

SECTION 5. All laws, orders, issuances, rules and regulations or any part thereof inconsistent with this Executive Order is hereby repealed or modified accordingly.

SECTION 6. This Executive Order shall take effect immediately and shall remain effective until March 31, 1987.

Revenue Memorandum Order No. 39-86

1. Coverage. - This Order shall apply only to (1) delinquent tax accounts; or (2) disputed tax assessments pending as of December 31, 1985 within the purview of Executive Order No. 44 and its implementing regulations. (Emphasis supplied)

1. x x x

2. Disqualification.'

3.1. There are pending assessments for withholding taxes.

By operation of law, the relationship between the Government and the withholding agent is one of agency for which reason the withholding agent only holds the funds withheld by him in trust for the Government. Accordingly, a withholding tax assessment issued against a withholding agent (1) who withheld the tax (2) but did not remit the same to the Government, shall not qualify for compromise settlement herein prescribed, even if the assessment was issued as of December 31, 1985, because under this situation he is being made accountable not as a taxpayer but as an agent. The disputed or delinquency cases covered by Executive Order No. 44 refer only to those where the person assessed is himself the taxpayer rather than a mere agent.

3.2. There is, however, another situation whereby a withholding agent did not withhold the tax either because of neglect, ignorance of law or his belief that he is not required by law to withhold a tax. Under this situation, such person is made directly accountable for the tax. This latter situation shall, however, qualify for compromise settlement, subject to the provisions of paragraph 1 hereof, in relation to implementing revenue regulations of Executive Order No. 44. (Emphasis supplied)

x x x

8. Clearance.'

8.1. 30% compromise settlement rate. - If the compromise settlement rate is equivalent to 30% of the basic tax assessed, immediate action shall be taken on the taxpayer-applicant's application. After payment of the compromise amount, the revenue office which passed upon the application as referred to in paragraph 5.2 hereof, shall issue to the taxpayer a letter, signed by the chief of the said revenue office, confirming the payment and advising that the case is already closed. (Emphasis supplied)

x x x

Revenue Regulations No. 17-86

a) Delinquent account - Refers to the amount of tax due on or before December 31, 1985 from a taxpayer who failed to pay the same within the time prescribed for its payment arising from (1) a self assessed tax, whether or not a return was filed, or (2) a deficiency assessment issued by the BIR which has become final and executory. (Emphasis supplied)

Revenue Memorandum Order No. 4-87

2.0 Notwithstanding the lapse of Executive Order No. 41 as amended, pre-assessment notices, assessment notices and letters of demand issued after August 21, 1986 which are not otherwise covered by the availment of the amnesty, may nevertheless be compromised under Sec. 246 of the Tax Code by paying 30% of the basic tax assessed or pre-assessed.

RMO No. 39-86 expressly provides that a compromise shall include a 'situation whereby a withholding agent did not withhold the tax either because of neglect, ignorance of law or his belief that he is not required by law to withhold a tax. In the present case, the majority opinion states that the 'BIR held the PNB personally accountable for its failure to withhold the tax on the interest earnings and/or yields from PNOCs money placements.

PNB did not withhold and keep the tax for itself. PNB's case is a failure to withhold, not a failure to remit to the BIR what it withheld for PNB withheld nothing. PNB is not the taxpayer here but merely a withholding agent, burdened by law with a public duty to collect the tax for the government. PNB is not only the withholding agent of the BIR, but also the agent of the taxpayer in preparing the return and paying the tax. In Philippine Guaranty Co., Inc. v. Commissioner of Internal Revenue ,3 the Court held:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

x x x Thus, the withholding agent is constituted the agent of both the Government and the taxpayer. With respect to the collection and/or withholding of the tax, he is the Government's agent. In regard to the filing of the necessary income tax return and the payment of the tax to the Government, he is the agent of the taxpayer. The withholding agent, therefore, is no ordinary government agent especially because under Section 53(c) he is held personally liable for the tax he is duty bound to withhold; whereas, the Commissioner of Internal Revenue and his deputies are not made liable by law. (Emphasis supplied)

For failure to withhold the tax, PNB is made directly liable to pay the tax, not because it is the taxpayer, but because it failed to comply with the law.4 PNB's legal duty is to withhold the tax, file the prescribed quarterly return, and remit the tax to the BIR.5 ςrνll

PNB, which at that time was a government-owned and controlled corporation, did not withhold because of an honest belief that there was no withholding tax on the interest income of a wholly owned government corporation like PNOC. PNOC's application for restoration of its tax-exempt status was then pending with the Fiscal Incentives Review Board.

Under paragraph 3.2 of RMO No. 39-86, a mere failure to withhold by the withholding agent shall 'qualify for compromise settlement. Thus, PNB's failure to withhold expressly falls within the coverage of EO No. 44. What is outside the coverage of EO No. 44 is the failure of a withholding agent to remit what it had withheld. In such a situation, the withholding agent absconds with trust funds in its possession. Such a situation is definitely not subject to a tax compromise under EO No. 44. RMO No. 39-86 provides that 'a withholding tax assessment issued against a withholding agent (1) who withheld the tax (2) but did not remit the same to the Government, shall not qualify for compromise settlement. PNB's case, however, is not a failure to remit the withheld tax but a plain failure to withhold the tax. PNB did not withhold the tax and thus did not abscond with public or trust funds.

EO No. 44, issued on 4 September 1986, is a special law enacted when then President Corazon C. Aquino exercised legislative powers. EO No. 44 is separate and distinct from the authority of the BIR Commissioner to compromise taxes under the Tax Code.6 EO No. 44 is a one-time tax compromise scheme, 'effective until March 31, 1987 and covering only 'disputed assessment or delinquent account pending as of December 31, 1985. EO No. 44 was issued to generate immediate revenues for the new government following the 1986 EDSA revolution, as well as to clear the tax dockets of the BIR as of 31 December 1985. Thus, the whereas clauses of EO No. 44 state in part:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

x x x

WHEREAS, there is a need to clear this backlog of pending cases of disputed assessments and delinquent accounts;

WHEREAS, there is a further need to raise revenues.

x x x.

The power of the BIR Commissioner to compromise under EO No. 44 is broader than his power to compromise under the Tax Code. Under Section 204 of the Tax Code,7 the BIR Commissioner can compromise a tax only if there is reasonable doubt as to its validity or if the taxpayer's financial position shows a clear inability to pay the tax. EO No. 44 does not require these conditions. A compromise under Section 204 requires an examination of the legal basis of the assessment or the financial capacity of the taxpayer to pay the assessment. EO No. 44 does not require such examination.

The conditions in EO No. 44 are straightforward and require no examination of the legal basis of the assessment or financial capacity of the taxpayer. The conditions in EO No. 44 are plain and simple: first, the disputed assessment or delinquent account is pending as of 31 December 1995; and second, the taxpayer is willing to pay thirty percent of the basic tax assessed. EO No. 44 prescribed simple, plain and straightforward conditions precisely to encourage taxpayers to avail of the tax compromise program under EO No. 44.

EO No. 44 is a special law that prevails over Section 204 of the Tax Code. Section 4 of EO No. 44 states:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

Section 4. Section 246 (now 204) of the National Internal Revenue Code, as amended, is hereby suspended with respect to the disputed assessments and delinquent accounts referred to herein for the duration of the effectivity hereof.

The stringent standards prescribed in Section 204 of the Tax Code do not apply to compromise agreements under EO No. 44. The law expressly suspended the effectivity of Section 204 of the Tax Code during the effectivity of EO No. 44.

Thus, during the effectivity of EO No. 44, the only tax compromise possible for delinquent accounts as of 31 December 1985 is under EO No. 44. PNOC filed its application with the BIR for a tax compromise during the effectivity of EO No. 44. Obviously, PNOC's application for a tax compromise of its delinquent accounts as of 31 December 1985 meant a tax compromise under EO No. 44. The BIR had no authority to entertain any other tax compromise.

RR No. 17-86 defines a 'delinquent account to include a 'self-assessed tax. The majority opinion adopts respondents' argument that PNOC's withholding tax liability is not a 'self-assessed tax because the BIR investigated the taxpayer and assessed the tax. Here lies the fundamental error of the majority opinion. The majority opinion states:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

PNOC's tax liability could not be considered a delinquent account since (1) it was not self-assessed, because the BIR conducted an investigation and assessment of PNOC and PNB after obtaining information regarding the non-withholding of tax from private respondent Savellano; x x x. (Emphasis supplied)

The majority opinion's thesis is contrary to the very concept of a self-assessed tax.

A self-assessed tax, as the term implies, is self-assessed by the taxpayer without the intervention of an assessment by the taxing authority to create the tax liability. A self-assessed tax means a tax that the taxpayer himself assesses or computes and pays to the taxing authority. In Tupaz v. Ulep ,8 this Court explained that a self-assessed tax is one where 'no further assessment by the government is required to create the tax liability. A self-assessed tax falls due without need of any prior assessment by the BIR, and non-payment of a self-assessed tax on the date prescribed by law results in penalties even in the absence of any assessment by the BIR.

A clear example of a self-assessed tax is the annual income tax, which the taxpayer himself computes and pays without the intervention of any assessment by the BIR. The annual income tax becomes due and payable without need of any prior assessment by the BIR. The BIR may or may not investigate or audit the annual income tax return filed by the taxpayer. The taxpayer's liability for the income tax does not depend on whether or not the BIR conducts such subsequent investigation or audit.

However, if the taxing authority is first required to investigate, and after such investigation to issue the tax assessment that creates the tax liability, then the tax is no longer self-assessed. This is not the case of the final withholding tax on interest income on money market placements.

The computation of the amount of the final withholding tax on interest income does not require any assessment by the BIR. The taxpayer can easily determine the amount of the tax since it is a flat rate based on the interest paid. In fact, the bank automatically computes the amount of the final withholding tax, deducts the tax from the taxpayer's interest income, and remits the tax to the BIR. The BIR does not make any assessment. Plainly, the final withholding tax on interest payment is a self-assessed tax.

The taxpayer's failure to pay when due a self-assessed tax, while it may result in a subsequent investigation and assessment by the BIR, does not remove the character of the tax as a self-assessed tax. The tax liability of the taxpayer arises on due date of the tax, and the non-payment of the self-assessed tax on due date does not prevent the tax liability from attaching. The tax liability is created by operation of law, even in the absence of an investigation and assessment by the BIR. The subsequent BIR investigation and assessment is for the purpose of collecting a past due tax, and not for the purpose of creating the tax liability. Of course, the computation by the taxpayer of his tax liability under a self-assessed tax is not conclusive on the BIR. After investigation or audit, the BIR can issue an assessment for any deficiency tax still due from the taxpayer.

In Tupaz v. Ulep ,9 the Court declared that 'internal revenue taxes are self-assessing. The final withholding tax on interest income is an internal revenue tax. Indeed, the Tax Code follows the pay-as-you-file system of taxation under which the taxpayer computes his own tax liability, prepares the return, and pays the tax as he files the return. The pay-as-you-file system is a self-assessing tax system.

EO No. 44 is a general tax compromise program covering all delinquent taxes and disputed assessments under the Tax Code as of 31 December 1985. EO No. 44 does not distinguish between delinquent accounts that are or are not the subject of subsequent investigation and assessment by the BIR. Where the law does not distinguish, courts should not distinguish. To remove from the coverage of EO No. 44 delinquent accounts that became the subject of subsequent investigation and assessment would severely limit the coverage of EO No. 44, a limitation that is not found in the language or intent of EO No. 44. Indeed, such a limitation would defeat the avowed purpose of EO No. 44 to clear the tax dockets of the BIR. The big delinquent accounts, such as PNOC's tax liability, which normally go through subsequent investigation and assessment, would not qualify for the general tax compromise program, preventing EO No. 44 from attaining its objectives.

Clearly, PNOC's tax liability is a delinquent account within the coverage of EO No. 44 because it is a self-assessed tax unpaid as of 31 December 1985.10 There can be no dispute that the final withholding tax on interest payments by PNB on PNOC's money market placements does not require the intervention of the BIR for its assessment and remittance to the BIR.

Thus, the compromise agreement between PNOC and BIR falls within the coverage of EO No. 44 and its implementing rules. The non-payment of the final withholding tax has resulted in a delinquent tax account of PNOC. In addition, the failure of PNB to withhold the tax falls within the coverage of RMO No. 39-86.

However, the majority opinion insists that PNOC's withholding tax liability is outside the coverage of EO 44 because there is no proof that PNOC or PNB filed the tax return in compliance with the self-assessment system. The majority opinion states:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

Neither PNOC nor PNB, the taxpayer and the withholding agent, respectively, complied with the system and conducted self-assessment in this case. There is no showing that in the absence of tax assessment issued by the BIR against them, that PNOC and/or PNB would have voluntarily admitted their tax liabilities, already amounting to P385,961,580.82, as of 15 November 1986, and would have offered to compromise the same. In fact, both PNOC and PNB were conspicuously silent about their tax liabilities until they were assessed thereon. (Emphasis supplied)

The majority opinion conveniently forgets that the tax compromise under EO 44 and its implementing rules covers "a self-assessed tax, whether or not a return was filed." Revenue Regulations No. 17-86 provides:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

Delinquent account - Refers to the amount of tax due on or before December 31, 1985 from a taxpayer who failed to pay the same within the time prescribed for its payment arising from (1) a self assessed tax, whether or not a return was filed, or (2) a deficiency assessment issued by the BIR which has become final and executory.

Where no return was filed, the taxpayer shall be considered delinquent as of the time the tax on such return was due, and in availing of the compromise, a tax return shall be filed as a basis for computing the amount of compromise to be paid. (Emphasis supplied)

Clearly, the tax compromise under EO No. 44 applies to a self-assessed tax, whether or not a return was filed, because Revenue Regulations No. 17-86 expressly so provides.

Revenue Regulations No. 17-86 even states, "Where no return was filed, the taxpayer shall be considered delinquent as of the time the tax on such return was due, and in availing of the compromise, a tax return shall be filed as a basis for computing the amount of compromise to be paid." If the taxpayer failed to file the return, he can avail of the tax compromise by filing a return, which shall serve as basis for computing the compromise amount. Revenue Regulations No. 17-86 expressly applies to delinquent accounts of taxpayers who failed to file the returns.

EO No. 44 and its implementing rules do not require that PNOC or PNB must have "complied with the system and conducted self-assessment" before they could avail of the tax compromise. The BIR could not have required the thousands of taxpayers who availed of the tax compromise under EO No. 44 to show proof that they filed their tax returns. There is no such requirement in EO No. 44 or in its implementing rules. On the contrary, Revenue Regulations No. 17-86 expressly states "whether or not a return was filed" - which means that the filing of a tax return is not a condition for the availment of the tax compromise. The BIR never required the thousands of taxpayers who availed of EO No. 44 to prove that they filed their tax returns. For the majority opinion to require now PNOC and PNB to prove that they filed the tax returns would constitute denial of equal protection of the law.

The tax compromise under EO No. 44 and its implementing rules applies to self-assessed taxes, whether or not the corresponding tax returns were filed. The definition of a delinquent account that is subject to the tax compromise expressly includes a self-assessed tax "whether or not a return was filed." There can be no clearer language than this to express that the taxpayer is not required to prove that he filed the tax return. There is absolutely no legal basis in requiring PNOC or PNB to show proof that they filed the proper tax returns before they could avail of the tax compromise. The majority opinion is patently wrong in holding that PNOC and PNB must prove that they filed the tax returns before they can avail of the tax compromise.

The majority opinion also insists that PNOC's withholding tax liability is outside the coverage of EO No. 44 because the BIR subsequently investigated and assessed PNOC for the withholding tax liability. The majority opinion states:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

It is important to remember that, in this case, any attempt by PNOC and PNB to assess and declare by themselves their tax liabilities had already been overtaken by the BIR's conduct of its audit and investigation and subsequent issuance of the assessments, dated 8 August 1986 and 8 October 1986, against PNOC and PNB, respectively. The said tax assessments, uncontested and undisputed, already presented the results of the BIR audit and investigation and the computation of the total amount of tax liabilities of PNOC and PNB, and should be controlling in this case. They should not be so easily and conveniently ignored and set aside. 'It would be a contradiction to claim that the tax liabilities of PNOC and PNB are self-assessed and, at the same time, BIR-assessed; when it is clear and simple that it had been the BIR that conducted the assessment and determined the tax liabilities of PNOC and PNB.

The majority opinion theorizes that a taxpayer with a delinquent account consisting of a self-assessed tax cannot avail of EO No. 44 if the BIR issued an assessment against the taxpayer because the BIR assessment is allegedly controlling.

The majority opinion's theory that a subsequent BIR assessment removes a delinquent account from the coverage of EO No. 44 collides directly with Revenue Memorandum Order No. 39-8611 which implements EO No. 44. Revenue Memorandum Order No. 39-86 expressly recognizes that the delinquent accounts subject to compromise under EO No. 44 may be "covered by a letter of demand and assessment notice" by the BIR. Revenue Memorandum Order No. 39-86 provides:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

x x x

6. Base of the compromise settlement rate. - The compromise settlement rate shall be applied against the basic tax assessed referred to under paragraph 5.1 hereof. In no case may any revenue office passing upon cases covered hereunder cause any computational adjustment or adjustments in determining the basic tax before applying the compromise settlement rate, any error in the assessment and demand being compromised notwithstanding. In all instances, the compromise settlement rate shall be applied against the basic tax assessed. If the assessment is covered by a letter of demand and assessment notice, the compromise settlement rate shall be applied against the basic tax assessed as shown in the said letter of demand and assessment notice.

7. Allowable compromise settlement rates below thirty percent (30%). - The Evaluation Committee shall apply exclusively the compromise settlement rates prescribed hereunder:

7.1 "Jeopardy" tax assessment as defined under RMO 17-85 (while RMO 17-85 speaks only of income tax assessments, this compromise settlement shall, however, apply to all internal revenue tax assessments in the nature of a "jeopardy" tax assessment) - 10%

7.2 Arbitrary assessments which have been issued only and primarily to forestall prescription - 10%

7.3 Tax assessments of doubtful validity whether as to law or as to facts - 15%

x x x.

Paragraph 6 of Revenue Memorandum Order No. 39-86 expressly provides, "If the assessment is covered by a letter of demand and assessment notice, the compromise settlement rate shall be applied against the basic tax assessed as shown in the said letter of demand and assessment notice." The BIR assessment is even made the basis in applying the 30% settlement rate under EO No. 44. Indisputably, a subsequent BIR assessment does not remove a delinquent account from the coverage of EO No. 44.

With or without a BIR assessment, a delinquent account qualifies for tax compromise under EO NO. 44 provided it is a self-assessed tax unpaid as of 31 December 1985. EO No. 44 and its implementing rules do not exclude delinquent accounts that were issued BIR assessments. On the contrary, Revenue Memorandum Order No. 39-86 expressly states that the BIR assessment shall serve as basis in applying the compromise settlement rate under EO No. 44. The majority opinion is mistaken in holding that EO No. 44 and its implementing rules exclude BIR-assessed delinquent accounts from the coverage of the tax compromise. Revenue Memorandum Order No. 39-86 even expressly includes within the coverage of EO No. 44 jeopardy assessments, arbitrary assessments, and doubtful assessments issued by the BIR. Clearly, a subsequent BIR assessment - indeed any kind of subsequent BIR assessment - does not remove a delinquent account from the coverage of EO No. 44.

Thousands of taxpayers availed of the tax compromise under EO No. 44 although the BIR had issued them assessments, whether regular assessments, jeopardy assessments, arbitrary assessments or doubtful assessments. For the majority opinion to exclude PNOC or PNB from availing of the same tax compromise because the BIR issued PNOC an assessment would constitute a denial of equal protection of the law. PNOC's and PNB's withholding tax liability clearly falls within the coverage of EO No. 44 and its implementing rules.

The majority opinion further claims that PNOC does not fall under EO No. 44 but under Revenue Memorandum Circular No. 31-86 because the assessment against PNOC was issued on 8 August 1986. The majority opinion states:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

As has already been discussed in the main opinion, the assessment against PNOC, issued on 08 August 1986, is more appropriately covered by the following provision of Revenue Memorandum Circular (RMC) No. 31-86:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

[T]axpayers against whom assessments had been issued from January 1 to August 21, 1986 may settle their tax liabilities by way of compromise under Section 246 of the Tax Code as amended by paying 30% of the basic tax assessment excluding surcharge, interest, penalties and other increments thereto. (Emphasis supplied)

The majority opinion gratuitously states that PNOC is "more appropriately covered" by Revenue Memorandum Circular No. 31-86. However, the majority opinion then declares that PNOC is still not qualified for tax compromise under Revenue Memorandum Circular No. 31-86, thus:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

However, even though the tax assessment against it was issued on 08 August 1986, PNOC would still not be entitled to compromise its tax liability under the above-quoted provision of RMC No. 31-86 because it failed to allege, must less present any evidence that: (1) there existed a reasonable doubt as to the validity of the claim against it; or (2) its financial position demonstrated a clear inability to pay the assessed tax, as required by Section 246 of the Tax Code of 1977, as amended.

The majority opinion wants to deprive PNOC from availing of the tax compromise under EO No. 44 just because the BIR issued the assessment on 8 August 1986. There is nothing in EO No. 44 or in Revenue Regulations No. 17-86 that excludes from the tax compromise delinquent accounts as of 31 December 1985 that were the subject of assessments issued after 31 December 1985. On the contrary, Revenue Regulations No. 17-86 expressly provides that the delinquent accounts may be covered by regular assessments, jeopardy assessments, arbitrary assessments and doubtful assessments. Revenue Regulations No. 17-86 does not state that these assessments should be issued before 1 January 1986.

In fact, taxes falling due in the fourth quarter of 1985 could never be issued assessments before 1 January 1986. The assessments for most of the taxes falling due in tax year 1985 could only be issued from 1 January 1986 onwards. To exclude unpaid taxes falling due in 1985 just because the BIR issued assessments on these accounts from 1 January 1986 onwards would render the tax compromise under EO No. 44 inutile.

The period from 1 January to 21 August 1986 in Revenue Memorandum Circular No. 31-86 refers to those who could not avail of the tax amnesty under Executive Order No. 4112 which was issued on 22 August 1986. The cut-off date is 21 January 1986 because this is the day before EO No. 41 was issued. However, this period has become irrelevant because EO No. 41, which originally covered only tax years 1981 to 1985, was amended by Executive Order No. 9513 to extend the tax amnesty up to 31 January 1987.

Clearly, the reference to 1 January to 21 August 1986 has nothing to do with EO No. 44 which is different from EO No. 41. EO No. 44 is a tax compromise while EO No. 41 is a tax amnesty and they cover different taxable years. PNOC's tax delinquency for the period 1 January 1986 onwards is not covered by EO No. 44 which applies only to unpaid taxes as of 31 December 1985. This is why in its letter of 26 September 1986 to the BIR requesting for a tax compromise PNOC also invoked Section 246 of the Tax Code to cover the period from 1 January 1986 onwards.

Although PNB is not a signatory to the compromise agreement, the subject matter of the compromise falls expressly within the coverage of EO No. 44 and its implementing rules. The compromise agreement absolved PNOC from any tax liability after PNOC paid the compromise amount. The BIR can no longer recover the foregone tax, either from PNOC or from PNB. Unless an express reservation is made in the compromise agreement and there is none here, the compromise amount stands in the place of the amount originally assessed against PNOC.

PNOC Filed its Tax Compromise Application on Time

The majority opinion states that PNOC filed its application for tax compromise under EO No. 44 out of time. The majority opinion asserts:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

More importantly, even assuming arguendo that the liabilities of PNOC and PNB qualify as delinquent accounts, the application for compromise filed by PNOC on 09 June 1987, and accepted by then BIR Commissioner Tan on 22 June 1987, was filed way beyond 31 March 1987, the expiration date of the effectivity of E.O. No. 44 and the deadline for filing of applications for compromise under Revenue Memorandum Order (RMO) No. 39-86. (Emphasis supplied)

Revenue Memorandum Order No. 39-86 fixes the period for availing of the tax compromise under EO No. 44. Paragraph 2 of Revenue Memorandum Order No. 39-86 provides:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

2. Period for availment. - Filing of application for compromise settlement under the said law shall be effective only until March 31, 1987. Applications filed on or before this date shall be valid even if the payment or payments of the compromise amount shall be made after the said date, subject, however, to the provisions of Executive Order No. 44 and its implementing Revenue Regulations No. 17-86.

The deadline for filing the application is 31 March 1987. Applications filed on or before 31 March 1987 "shall be valid" even if the compromise amount is paid after 31 March 1987.

Contrary to the majority opinion's claim that the effectivity of EO No. 44 expires on 31 March 1987, Revenue Memorandum Order No. 39-86 provides that applications filed on or before 31 March 1987 shall be valid even if the payment is made after 31 March 1987. Thus, the crucial issue is whether PNOC filed any application to avail of the tax compromise under EO No. 44 on or before the deadline of 31 March 1987.

On 25 September 1986, long before the 31 March 1987 deadline, PNOC wrote the BIR submitting a compromise settlement pursuant to EO No. 44 as well as Section 246 of the Tax Code. PNOC's letter reads:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

We would like to amicably settle this liability with the BIR. In this regard, we wish to invoke the authority vested by law in your office, particularly under Section 246 of the National Internal Revenue Code, as amended, and the spirit underlying Executive Order No. 44 dated September 4, 1986. Consequently, we hereby request for a compromise settlement and submit our offer for compromise of the matter, as follows: x x x.14 ςrνll

More than five months before the deadline of 31 March 1987, PNOC had already applied with the BIR for a tax compromise under EO No. 44 and Section 246 of the Tax Code. Apparently, PNOC invoked EO No. 44 for its delinquent tax liability from 15 October 1984 to 31 December 1985, and Section 246 of the Tax Code for its tax liability from 1 January 1986 onwards since EO No. 44 covered only delinquent accounts as of 31 December 1985.

PNOC filed its application for tax compromise on 25 September 1986, during the effectivity of EO No. 44. EO No. 44 suspended during the effectivity of EO No. 44 the BIR Commissioner's power to enter into tax compromises under Section 204 of the Tax Code. This suspension refers to delinquent accounts as of 31 December 1985, the delinquencies covered under EO No. 44. Thus, when PNOC applied for tax compromise of its delinquent accounts as of 31 December 1985, the application for tax compromise could only have referred to EO No. 44 and not to any other tax compromise law. During the effectivity of EO No. 44, the BIR Commissioner had no power to compromise tax delinquencies as of 31 December 1985 under any law except EO No. 44. PNOC's application for tax compromise of its delinquent accounts as 31 December 1985 was clearly based on EO No. 44 as the only law then governing tax compromises for such delinquencies.

After the BIR received PNOC's letter of 26 September 1986, several meetings took place between the BIR and PNOC on PNOC's request to avail of the tax compromise under EO No. 44. On 14 October 1986, PNOC reiterated its compromise settlement proposal to the BIR. There were also several exchanges of communications between the BIR and PNOC. On 9 June 1987, the PNOC wrote again the BIR in this manner:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

If your office will recall, our Company (even under the administration of then PNOC Chairman and President Vicentc T. Paterno) had originally requested in writing and negotiated for the compromise of the subject tax assessment pursuant to the beneficial provisions of E.0. No. 44, as early as September, 1986, shortly after the effectivity of Executive Order.

It appears, however, that the provisions of BIR Revenue Memorandum Order No. 39-86 may not have been applied or considered at length in evaluating the legal basis and merits of our compromise request, in our favor, since most of the negotiations and the earlier decisions of your office were made prior to the promulgation of BIR Revenue Memorandum Order No. 39-86 on November 18, 1986. (In fact, the last letter in the 1986 series of correspondences between your office and our Company is dated November 11, 1986.)

We cite in particular the provisions of Section 3.2 of your Revenue Memorandum Order No. 39-86, by virtue of which the subject tax assessment is qualified for compromise settlement under E.0. No. 44. Under these provisions, the tax liability resulting from the situation "whereby a withholding agent did not withhold the tax either because of neglect, ignorance of law or his belief that he is not required by law to withhold a tax," is deemed qualified for compromise settlement under E.O. No. 44.

The case contemplated by the cited provisions of BIR Revenue Memorandum Order No. 39-86 squarely covers our present case, considering that the final withholding tax on the interest earnings of our Company's placements with PNB were not withheld by PNB because of PNB's honest belief then, that it was not required by law to commence withholding the tax. At that time, it was the clear impression and understanding of both PNB and our Company that PNOC's tax exemptions continued to subsist during the pendency of PNOC's tax exemption restoration application with the Fiscal Incentives Review Board (FIRB), until and unless the application is categorically denied or resolved to the contrary. In fact, it was only in the course of the subject BIR tax assessment that the effective loss of PNOC's tax exemptions was categorically raised by the BIR.

Consequently, we reiterate our previous request for compromise under E.O. No. 44, and convey our preparedness to settle the subject tax assessment liability by payment of the compromise amount of P91,003,129.89, representing thirty percent (30%) of the basic tax assessment of P303,343,766.29, in accordance with E.O. No. 44 and its implementing BIR Revenue Memorandum Order No. 39-86.15 (Emphasis supplied)

PNOC's letter of 9 June 1987 explains why the BIR could not immediately act on its 26 September 1986 request for tax compromise under EO No. 44. When PNOC wrote the 26 September 1986 letter, only EO No. 44 and Revenue Regulations No. 17-86 were in existence. The BIR Commissioner had not yet issued Revenue Memorandum Order No. 39-86 which clarified that the failure to withhold taxes did not prevent the taxpayer or withholding agent from availing of the tax compromise under EO No. 44, which was the situation of PNOC and PNB. It was only during the course of the negotiations between PNOC and the BIR that the BIR Commissioner issued Revenue Memorandum Order No. 39-86.

As a result of the negotiations, PNOC reiterated its 26 September 1986 application for tax compromise under EO No. 44 by writing the 9 June 1987 letter to the BIR. In turn, the BIR Commissioner approved the tax compromise on 22 June 1987. Thereafter, PNOC paid the full amount of the tax compromise in three installments from June to October 1987. Revenue Regulations No. 17-86 authorized the instalment payment because the compromise amount was over P50,000.16 Clearly, PNOC's 26 September 1986 letter-request for tax compromise under EO No. 44 culminated successfully on 22 June 1987 in the approval of the tax compromise under EO No. 44. This is actual compliance with the requirement that the application for tax compromise under EO No. 44 should be filed on or before 31 March 1987.

Indeed, the BIR knew that PNOC filed its application for tax compromise "under E.O. 44 as early as September 1986." The Memorandum dated 16 January 199117 submitted by Venancia M. Pangilinan, Chief of the BIR Litigation Division, and approved by BIR Commissioner Ong, states:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

PNOC, through the letter of its legal counsel dated June 9, 1987, offered to pay P91,003,129.89 representing 30% of the basic withholding tax of P303,343,766.29 pursuant to E.O. 44 which took effect on September 4, 1986, to be paid on installment basis, viz:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

x x x

x x x From the tenor of the above letter, it appears PNOC has made a previous offer of settlement of this case under E.O. 44 as early as September 1986, shortly after the effectivity of said E.O. (Emphasis supplied)

The Tax Compromise is now Res Judicata

A compromise agreement constitutes a final and definite settlement of the controversy between the parties.18 A compromise agreement, even if not judicially approved, has the effect of res judicata on the parties. Article 2037 of the Civil Code provides:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

A compromise has upon the parties the effect and authority of res judicata ; but there shall be no execution except in compliance with a judicial compromise. (Emphasis supplied)

The compromise agreement has the force of law between the parties and no party may discard unilaterally the compromise agreement.19 Under Section 8.1 of RMO No. 39-86, upon payment of the compromise amount, the tax 'case is already closed. The Solicitor General, who withdrew as counsel for the BIR, maintains that the compromise agreement is valid.

Where a party has received the consideration for the compromise agreement, such party is estopped from questioning its terms and asking for the reopening of the case on the ground of mistake.20 As explained in McCarthy v. Barber Steamship Lines :21 ςrνll

Hence it is general rule in this country, that compromises are to be favored, without regard to the nature of the controversy compromised, and that they cannot be set aside because the event shows all the gain to have been on one side, and all the sacrifice on the other, if the parties have acted in good faith, and with a belief of the actual existence of the rights which they have respectively waived or abandoned; and if a settlement be made in regard to such subject, free from fraud or mistake, whereby there is a surrender or satisfaction, in whole or in part, of a claim upon one side in exchange for or in consideration of a surrender or satisfaction of a claim in whole or in part, or of something of value, upon the other, however baseless may be the claim upon either side or harsh the terms as to either of the parties, the other cannot successfully impeach the agreement in a court of justice * * *. Where the compromise is instituted and carried through in good faith, the fact that there was a mistake as to the law or as to the facts, except in certain cases where the mistake was mutual and correctable as such in equity, cannot afford a basis for setting a compromise aside or defending against a suit brought thereon * * *

xxx

And whether one or the other party understood the law of the case more correctly than the other, cannot be material to the validity of the bargain. For if it were, then it would follow that contracts by the parties settling their own disputes, would at last be made to stand or fall, according to the opinion of the appellate court how the law would have determined it. (Emphasis supplied)

In People v. Magdaluyo ,22 the BIR Commissioner approved the agreement which compromised the taxpayer's violation of the Tax Code. The taxpayer paid the compromise amount before the filing of the criminal information in court. The Court ruled that the government could no longer prosecute the taxpayer for violation of the Tax Code.

The same principle holds true in the present case. The parties to the compromise agreement have voluntarily settled the tax liability arising from PNB's failure to withhold the final tax on PNOC's interest income. The parties have fully implemented in good faith the compromise agreement. The new BIR Commissioner cannot just annul the legitimate compromise agreements made by his predecessors in the performance of their regular duties where the parties entered into the compromise agreements in good faith and had already fully implemented the compromise agreements.23 ςrνll

To rule otherwise would subject the validity and finality of a tax compromise agreement to depend on the different interpretations of succeeding BIR Commissioners. Such lack of finality of tax compromises would discourage taxpayers from entering into tax compromises with the BIR, considering that compromises entail admissions by taxpayers of violations of tax laws. A tax compromise cannot be invalidated except in case of mistake, fraud, violence, undue influence, or falsity of documents. Article 2038 of the Civil Code provides:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

Article 2038. A compromise in which there is mistake, fraud, violence, intimidation, undue influence, or falsity of documents, is subject to the provisions of Article 1330 of this Code.

x x x (Emphasis supplied)

Article 1330 of the Civil Code makes compromises tainted with such circumstances voidable.24 In the present case, there is no mistake because PNOC's delinquent account clearly falls within the coverage of EO No. 44. Also, PNOC clearly filed its application for tax compromise before the deadline. Thus, none of the circumstances that make a compromise voidable is present in this case.

PNB was a government-owned and controlled corporation when it failed to withhold the tax. PNOC, the taxpayer primarily liable for the tax, was then also a government-owned and controlled corporation, and remains so until now. PNB did not abscond with any tax money because this is a case of failure to withhold the tax and not a failure to remit a withheld tax. No fraud or bad faith is ascribable to PNB or PNOC in the execution of the compromise agreement.

Collection of Tax is Barred by Prescription

PNB regularly filed its quarterly returns covering the final withholding tax on all money market placements with PNB for the years 1984 to 1985.25 Under Revenue Regulations No. 12-80, PNB prepared its quarterly returns using BIR Form No. 1745,26 as follows:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

SECTION 4. Manner of Computation of Tax Base. 'For purposes of Section 3 above, tax bases of the following taxes shall be computed in the following manner:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

(a) Final withholding tax on savings deposits. 'x x x

x x x

(c) Final withholding tax on yield of deposit substitutes.- The final withholding tax on yield of deposit substitute shall be based on the adjusted gross interest or yield paid or accrued by banks or non-bank financial intermediaries on all of its deposit substitute debt instruments issued.

The adjusted gross interest or yield paid or accrued is arrived at after deducting from the total interest or yield paid or accrued on deposit substitutes, the sum of'

(1) All interest and/or yield paid or accrued on deposit substitute earned by tax-exempt entities;

(2) All interest and/or yield paid or accrued on inter-bank loans, including those between or among quasi-banks;chanroblesvirtuallawlibrary

(3) All interest and/or yield paid or accrued on borrowings from World Bank, Asian Development Bank, International Finance Corporation and similar institutions; andcralawlibrary

(4) All interest and/or yield paid or accrued on deposit substitutes exempt from withholding tax.

The adjusted gross interest and/or yield paid or accrued on deposit substitute debt instruments shall further be detailed as to amount subjected in full to the twenty per centum (20%) final withholding tax and amount subjected to preferential final withholding tax rates in the prescribed from (B.I.R. Form No. _____). (Emphasis supplied)

Thus, the computation for the quarterly returns already took into account '[A]ll interest and/or yield paid or accrued on deposit substitute earned by tax-exempt entities, including interest income of PNOC on its money market placements since PNB believed in good faith that PNOC was exempt from the withholding tax. After filing of the quarterly returns, the BIR had every opportunity to investigate and audit the correctness of the PNB's computation.

The last day for filing the quarterly return for the last quarter of 1985 was 25 January 1986. The BIR and PNOC signed the compromise agreement on 22 June 1987. BIR Commissioner Ong abrogated the compromise agreement on 16 January 1991, the same day the BIR issued the final assessment against PNOC and PNB for the P294,958,450.73 foregone tax. From 25 January 1986, the last day for PNB to file the fourth quarter return for 1985, to the issuance of the final assessment for the foregone tax on 16 January 1991, more than four years had lapsed. The Tax Code requires the BIR to assess and collect the tax within three years from the last day of filing of the tax return.

In the present case, the BIR had until 25 January 1990 to assess and collect the tax. Otherwise, the right of the government to assess or collect the tax would prescribe. Section 318 of the Tax Code, the section governing prescription during the taxable years 1984 and 1985, then provided as Section 20327 of the Tax Code now similarly provides:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

Sec. 318. Period of limitation upon assessment and collection Except as provided in the succeeding section, internal revenue taxes shall be assessed within three 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 case where a return is filed beyond the period prescribed by law, the three-year period shall be counted from the day the return was filed. For the 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.

The law prescribes two conditions for the collection of internal revenue taxes. First, the BIR must assess the tax on the taxpayer within three years from the last day of filing of the tax return. Second, the BIR must collect judicially or administratively the tax also within three years from the last day of filing of the tax return. In short, the BIR must institute both the assessment and the collection case within three years from the last day of filing of the return, but the assessment must precede the collection case. One textbook writer put it succinctly in this manner:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

As mandated by law (Sec. 203, 1997 NIRC), the Government must assess on time, that is to say, not later than three years counted from and after the period fixed by law for the filing of the tax return or the actual date of filing, whichever is the later date.

x x x

In the case of self-assessed taxes like the income tax that the taxpayer himself assesses and reflects on his return, the collection thereof may proceed without any further assessment; in which case, therefore, the prescriptive period of collection applies. Hence, the BIR must collect such tax, either by summary or judicial remedies, within three (3) years from the date of filing of the tax return. This is so because the date of assessment in the case of self-assessed taxes would be the date of the actual filing of the return as it is on such date when the tax is said to have been assessed (Sec. 222[c], 1997 NIRC).28 (Emphasis supplied)

Since more than four years had lapsed since the filing of the last quarterly return on 25 January 1986, the BIR could no longer assess the foregone tax on PNOC when the BIR abrogated the compromise agreement on 16 January 1991. The reckoning date for the three-year prescriptive period for withholding taxes due before the last quarter of 1985 is even earlier than 25 January 1986. Even assuming that the BIR had assessed the tax within the three-year prescriptive period, the BIR could no longer collect the foregone tax when it demanded payment from PNOC and PNB on 16 January 1991, the date the BIR abrogated the compromise agreement. The BIR must issue the tax assessment, and judicially collect the assessed tax, within three years from the last day of filing of the last quarterly return.

Of course, the BIR may also administratively collect the assessed tax by distraint of personal property or levy on real property.29 However, the BIR must take these summary remedies within the three-year prescriptive period for collecting the assessed tax. In the present case, the BIR issued the warrant of garnishment against PNB on 12 August 1991, more than five years from the last day of filing of the last quarterly return on 25 January 1986. Thus, the garnishment of PNB's account with the Central Bank on 23 August 1991 is void since the right of the BIR to collect the tax had already prescribed by then.

Section 318 (now 203) of the Tax Code clearly provides that the three-year prescriptive period is counted from the due date of the filing of the return. The BIR must assess and collect the tax within three years from the filing of the tax return.

In the present case, the majority opinion expressly admits that the BIR issued the assessment against PNB on 8 October 1986, and that the BIR had until 7 October 1989, or three years from the issuance of the assessment, to collect the tax. The majority opinion declares:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

Neither has the three-year prescriptive period for the collection of the tax prescribed. Considering that the assessment against PNB was issued on 8 October 1986, the BIR had until 7 October 1989 to enforce collection based thereon. (Emphasis and underscoring supplied)

The majority opinion is mistaken in stating that the three-year period is counted from the date of issuance of the assessment. Section 318 (now 203) of the Tax Code clearly states that the three-year period is counted from the due date of the filing of the return. This means that the prescriptive period in the present case expired on 24 January 1989 since the last quarterly return was due on 25 January 1986. This is almost 9 months earlier than the 7 October 1989 expiry date that the majority opinion claims.

The majority opinion further claims that there is no proof that PNB filed its quarterly withholding tax returns. The majority opinion asserts:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

In making its conclusions that the assessment and collection in this case has prescribed, the dissenting opinion has taken liberties to assume the following facts even in the absence of allegations and evidences to the effect that: (1) PNB filed returns for its withholding tax obligations for taxable year 1985; (2) PNB reported in the said returns the interest earnings of PNOC's money placements with the bank; and (3) that the returns were filed on or before the prescribed date, which was 25 January 1986.

Contrary to the majority opinion's claim, the BIR audit report on PNB's failure to withhold the tax from 1984 to 1985 does not state that PNB failed to file its quarterly return. Had PNB failed to file its quarterly return, the tax assessment against PNB would have been increased by a penalty equivalent to either 25% or 50% of the tax due as mandated by Section 248 of the Tax Code, thus:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

SEC. 248. Civil Penalties. '(A) There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to twenty-five percent (25%) of the amount due, in the following cases:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

(1) Failure to file any return and pay the tax due thereon as required under the provisions of this Code or rules and regulations on the date prescribed; or

x x x

(B) In case of willful neglect to file the return within the period prescribed by the Code or by the rules and regulations, x x x the penalty to be imposed shall be fifty percent (50%) of the tax x x x.

The tax assessment against PNB, made after the investigation and audit of PNB's failure to withhold the tax for the years 1984 and 1985, does not include the 25% or 50% penalty for failure to file the return. The assessment letter to PNB dated 8 October 1986 states:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

Please be informed that upon investigation, there was found due from you as a withholding agent within the provisions of Section 31 of the National Internal Revenue Code, the total sum of P376,301,133.23, representing deficiency withholding final tax inclusive of interests, as the yield of the deposit substitutes placed with your Bank by the Philippine National Oil Company, as shown below:

Deficiency withholding final

Tax on the total yield of

P1,960,881,332.25 covering

the period from October 15,

1984 to July 31, 1986 - P298,863,332.51

Interests due - computed up

to October 15, 1986 - P 77,455,580.72

Total Deficiency Amount P 376,301,133.23

As you will note the interest due on the deficiency withholding final tax was computed up to October 15, 1986. Should you fail to pay the total deficiency amount on due date, the provisions of Section 283, NIRC, provide that in case of failure to pay "a deficiency tax, or any surcharge or interest therein, on due date appearing in the notice and demand of the Commissioner, there shall be assessed and collected, on the unpaid amount, interest at the rate prescribed in paragraph (a) hereof until the amount is fully paid, which amount shall form part of the tax." x x x.30 ςrνll

Nowhere in the assessment letter does it state that PNB failed to file the returns and thus should be liable for the mandatory 25% or even 50% penalty. This only means that PNB did not fail to file the quarterly returns.

Even assuming for the sake of argument that PNB failed to file the quarterly returns, PNOC filed an amended return when the BIR Commissioner approved on 22 June 1987 the tax compromise. Under Revenue Regulations No. 17-86, the taxpayer who avails of the tax compromise under EO No. 44 must file a tax return for the income covered by the delinquent account. Section 2 (a) of Revenue Regulations No. 17-86 provides:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

a) x x x

Where no return was filed, the taxpayer shall be considered delinquent as of the time the tax on such return was due, and in availing of the compromise, a return shall be filed as a basis for computing the amount of compromise to be paid. (Emphasis and underscoring supplied)ςrαlαωlιbrαrÿ

Thus, PNOC for sure filed a return in June 1987 even assuming its agent, PNB, failed to file the return on 25 January 1986. Under the worst-case scenario that PNB failed to file the return on 25 January 1986, the BIR still had only until June 1990 to collect the tax from PNOC and PNB, applying the three-year period from PNOC's actual filing of the return in June 1987. This is the rule in Section 318 (now 203) of the Tax Code, which provides:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

x x x Provided, That in 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. x x x. (Emphasis supplied)

Whether the BIR had only until 24 January 1989, or 7 October 1989, or even until the end of June 1990 to collect the tax would not really matter. The collection of the tax would still be time-barred in the present case under any of these three prescriptive periods.

The BIR garnished PNB's funds with the Central Bank on 2 September 1992, long after the prescriptive period had expired under any of the three prescriptive periods. The garnishment was thus void since the BIR's right to collect the tax had already prescribed. The BIR did not also file any collection case in court against PNB within any of the three prescriptive periods. The present case is not even a collection case against PNB or PNOC. Before 2004, the year Republic Act No. 9282 took effect, the Court of Tax Appeals had no jurisdiction to enforce the collection of taxes. Prior to 2004, judicial action to collect internal revenue taxes fell under the jurisdiction of the regular trial courts.

In the case of PNOC, the BIR issued the assessment even earlier, on 8 August 1986. If we follow the majority opinion's erroneous computation that the three-year period begins from the issuance of the assessment, the BIR had only until 7 August 1989 to collect from PNOC the tax administratively or judicially. If we assume, for the sake of argument, that there was a failure to file the return, the BIR had also only until 7 August 1989, or three years after the issuance of the assessment, to collect the tax from PNOC. This is pursuant to Section 319 (now 222) of the Tax Code, which provided:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

Sec. 319. Exceptions as to period of limitation of assessment and collection of taxes - (a) In the case of x x x failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten years after discovery of the x x x omission: x x x

x x x

(a) Any internal revenue tax which has been assessed within the period of limitation above-specified may be collected within three years following the assessment of the tax.31 (Emphasis supplied)

Until now, after a lapse of more than 18 years, the BIR has made no distraint or levy on PNOC's assets. Neither has the BIR filed any collection case in court against PNOC. In short, the pleadings and the evidence on record clearly establish that prescription had long set in to bar the collection of the tax against PNB and PNOC.

The majority opinion, however, claims that prescription cannot bar the collection of PNOC's or PNB's withholding tax liability because neither PNOC nor PNB raised the defense of prescription. The majority opinion contends:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

The undersigned believes that the defense of prescription of the period for the assessment and collection of tax liabilities should be considered waived since it was not raised in the answers or any other pleadings filed by PNOC and PNB. Such a defense had not been properly pleaded and the facts alleged and evidences submitted by the parties were not sufficient to support a finding by the Cout on the matter. In Querol v. Collector of Internal Revenue, this Court ruled that prescription, being a matter of defense, imposes on the taxpayer to prove that the full period of the limitation has expired, and this requires him to positively establish the date when the period started running and when the same was fully accomplished.

The majority opinion is clearly mistaken.

While the rule is that prescription is waived if not raised as a defense, the present case falls under the express exception to this rule. Section 1, Rule 9 of the 1997 Rules of Civil Procedure provides:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

Section 1. Defenses and objections not pleaded. - Defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed waived. However, when it appears from the pleadings or the evidence on record that the court has no jurisdiction over the subject matter, that there is another action pending between the same parties for the same cause, or that the action is barred by prior judgment or by the statute of limitations, the court shall dismiss the claim. (Emphasis and underscoring supplied)ςrαlαωlιbrαrÿ

Thus, if the pleadings or evidence on record show that the action is barred by prescription, the court is mandated to dismiss the action even if prescription is not raised as a defense.

Justice Florence D. Regalado, in Volume I of his Remedial law Compendium,32 explains this exception as follows:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

Under the amended provision, the following defenses are not waived even if not raised in a motion to dismiss or in the answer: (a) lack of jurisdiction over the subject matter; (b) litis pendentia; (c) res judicata; and (d) prescription of the action.

x x x

Res judicata and prescription of the claim have also been added as exceptions since they are grounds for extinguishment of the claim. It would appear to be unduly technical, if not contrary to the rule on unjust enrichment, to have the defending party respond all over again for the same claim which has already been resolved or is no longer recoverable under the law. It is worth mentioning in this connection that, in Sec. 5 of Rule 16 as amended, an order granting a motion to dismiss on the grounds, inter alia, of res judicata or prescription shall bar the refiling of the same action or claim.

The presence of any of these four grounds authorizes the court to motu proprio dismiss the claim, that is, the claims asserted in the complaint, counterclaim, crossclaim, third (fourth, etc.) - party complaint or complaint-in-intervention (see Sec. 2, Rule 6). In order that it may do so, it is necessary, however, that such grounds be raised in a motion to dismiss or in the answer with evidence duly adduced to prove the same, or where such grounds appear in the other pleadings filed or in the evidence of record in the case.

Specifically with respect to the defense of prescription, the present provision is similar to the rule adopted in civil cases, but dissimilar to the rule and rationale in criminal cases. In civil cases, it has been held that the defense of prescription may be considered only if the same is invoked in the answer, except where the fact of prescription appears in the allegations in the complaint or the evidence presented by the plaintiff, in which case such defense is not deemed waived (Ferrer v. Ericta, et al., L-41767, Aug. 23, 1978; Garcia v. Mathis, et al., L-48577, Sept. 30, 1980). It would thus appear that the non-waiver is dependent on the timeliness of the invocation of the defense, or where such defense is a matter of record or evidence. (Emphasis supplied)

The ruling of this Court in Gicano, et al. v. Gegato, et al. ,33 decided in January 1988, became the basis of the present Section 1 of Rule 9. In Gicano this Court ruled:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

x x x We have ruled that trial courts have authority and discretion to dismiss an action on the ground of prescription when the parties' pleadings or other facts on record show it to be indeed time-barred; (Francisco v. Robles, Feb. 15, 1954; Sison v. McQuaid, 50 O.G. 97; Bambao v. Lednicky, Jan. 28, 1961; Cordova v. Cordova, Jan. 14, 1958; Convets, Inc. v. NDC, Feb. 28, 1958; 32 SCRA 529; Sinaon v. Sorongan, 136 SCRA 408); and it may do so on the basis of a motion to dismiss, or an answer which sets up such ground as an affirmative defense; or even if the ground is alleged after judgment on the merits, as in a motion for reconsideration; or even if the defense has not been asserted at all, as where no statement thereof is found in the pleadings, or where a defendant has been declared in default. What is essential only, to repeat, is that the facts demonstrating the lapse of the prescriptive period, be otherwise sufficiently and satisfactorily apparent on the record: either in the averments of the plaintiffs complaint, or otherwise established by the evidence. (Emphasis supplied)

Thus, even before the adoption of the present Section 1 of Rule 9, prevailing jurisprudence had already recognized the exceptions laid down in Section 1 of Rule 9.

The majority opinion further claims that the running of the prescriptive period was suspended when petitioner filed with the Court of Tax Appeals on 8 April 1988 the present petition to declare void the tax compromise between the BIR and PNOC. The majority opinion asserts that the running of the prescriptive period remains suspended up to now. The majority opinion contends:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

x x x However, the running of the prescriptive period for the collection of the assessment against PNB is for the meantime suspended during the pendency of the case before the CTA, then before the Court of Appeals, and finally before this Court, because the issue for resolution by the courts is whether or not the assessment should actually be enforced.

The majority opinion's contention collides with the applicable provision of the Tax Code. Section 223 of the Tax Code governs the suspension of the running of the prescriptive period to assess and collect internal revenue taxes. Section 223 provides:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

SEC. 223. 'Suspension of Running of Statute of Limitations. 'The running of the Statute of Limitations provided in Sections 203 and 222 on the making of assessment and the beginning of distraint or levy or a proceeding in court for collection, in respect of any deficiency, shall be suspended for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for sixty (60) days thereafter; when the taxpayer requests for a reinvestigation which is granted by the Commissioner; when the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected: Provided, That, if the taxpayer informs the Commissioner of any change in address, the running of the Statute of Limitations will not be suspended; when the warrant of distraint or levy is duly served upon the taxpayer, his authorized representative, or a member of his household with sufficient discretion, and no property could be located; and when the taxpayer is out of the Philippines. (Emphasis supplied)

Section 223 suspends the running of the prescriptive period if the BIR Commissioner "is prohibited from x x x beginning distraint or levy or a proceeding in court" to enforce collection of the tax assessed. In the present case, the Court of Tax Appeals, Court of Appeals and this Court never prohibited the BIR Commissioner from commencing a distraint, levy or civil suit against PNB or PNOC to collect the tax. No court ever issued an order prohibiting the BIR from collecting the tax from PNB or PNOC. In Republic v. Ret,34 this Court ruled:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

As heretofore stated, the plaintiff-appellant made the assessment on January 20, 1951 and had up to January 20, 1956 to file the necessary action. It was only on September 5, 1957, that an action was filed in Court for the collection of alleged deficiency income tax - far beyond the 5 year period. This notwithstanding, plaintiff-appellant argues that during the pendency of the criminal cases, it was prohibited from instituting the civil action for the collection of the deficiency taxes. This contention is untenable. The present complaint against the defendant-appellee is not for the recovery of civil liability arising from the offense of falsification; it is for the collection of deficiency income tax. The provisions of Section 1, Rule 107 (supra) that "after a criminal action has been commenced, no civil action arising from the same offense can be prosecuted", is not applicable. The said criminal cases would not affect, one way or another, the running of the prescriptive period for the commencement of the civil suit. The criminal actions are entirely separate and distinct from the present civil suit. There is nothing in the law which would have stopped the plaintiff-appellant from filing this civil suit simultaneously with or during the pendency of the criminal cases. Assuming the applicability of the rule, at most, the prosecution of the civil action would be suspended but not its filing within the prescribed period. Section 332 of the Tax Code provides: "the running of the statutory limitation. .. shall be suspended for the period during which the Collector of Internal Revenue is prohibited from making the assessment, or beginning distraint or levy or a proceeding in court, and for sixty days thereafter". As heretofore stated, the plaintiff-appellant was not prohibited by any order of the court or by any law from commencing or filing a proceeding in court. x x x (Emphasis supplied)

The BIR could have filed a collection suit against PNB or PNOC with the proper regional trial court, which before 2004 had jurisdiction over tax collection cases. At the very least, the BIR should have filed with the proper regional trial court a collection case ad cautelam during the pendency of the present case in court. This would have suspended the running of the prescriptive period. However, the BIR neglected to file a collection case before 7 October 1989, the expiration of the prescriptive period to collect the tax from PNB.

The BIR could also have administratively collected the tax from PNB and PNOC. In fact, during the pendency of the case in the Court of Tax Appeals, the BIR Commissioner administratively garnished PNB's funds with the Central Bank, although the garnishment is void because the prescriptive period had already expired even by the majority opinion's own computation of the prescriptive period. This only proves that nothing prevented the BIR from administratively garnishing PNB's or PNOC's accounts even during the pendency of the present case. However, the BIR garnished PNB's funds only after the prescriptive period had expired on 7 October 1989.

Obviously, the BIR failed to collect the tax before 7 October 1989 because of the fault or negligence of the BIR, and not because a court order prevented the BIR from collecting the tax before the expiration of the prescriptive period on 7 October 1989. The BIR was free at any time to distrain or levy on the assets of PNB or PNOC, as well as to file a collection suit before the regular courts against PNB or PNOC, even during the pendency of the present petition in the various courts.

In particular, the BIR could have distrained or levied on the assets of PNB at any time because PNB was not even a party to the tax compromise between the BIR and PNOC. Indeed, the BIR did garnish the funds of PNB, but only after the expiration of the prescriptive period. The BIR simply slept on its rights.

Neither PNOC nor PNB instituted the present case against the BIR to prevent the collection of the tax. Private respondent Tirso B. Savellano, who is not the taxpayer, originally filed this petition against the BIR Commissioner only, and later on impleaded PNOC and PNB. This Court has applied Section 223 of the Tax Code suspending the running of the prescriptive period in cases where the taxpayer sued the BIR Commissioner to prevent the collection of a tax, as when the taxpayer disputed the validity or amount of the assessment before the Court of Tax Appeals.35 This is not the situation in the present case since PNOC and PNB have not sued the BIR Commissioner to prevent the collection of the tax, and they do not dispute the validity or amount of the assessment issued against them.

Nothing legally prevented the BIR from collecting the tax, administratively or judicially, from PNOC or PNB at any time before 7 October 1989. Thus, the BIR cannot invoke Section 223 of the Tax Code to claim the suspension of the running of the prescriptive period during the pendency of the present case in the courts.

Conclusion

To conclude, the compromise agreement between the BIR and PNOC falls within the coverage of EO No. No. 44 and its implementing rules. The compromise agreement is not contrary to law, morals, good customs, public order, or public policy.36 Thus, the compromise agreement is valid, and has the effect of res judicata on the BIR and PNOC. In any event, the collection of the foregone tax is barred by prescription.

Accordingly, I dissent from the majority opinion. I vote to grant the petition, to declare valid the 22 June 1987 tax compromise between PNOC and the BIR, and to deny the claim of private respondent Tirso B. Savellano for an additional informer's reward of P43,800,915.25.

Endnotes:


1 Executive Order No. 44 covers the tax liability from 1984 to 31 December 1985, while Revenue Memorandum Circular No. 31-86 covers the tax liability from 1 January 1986 to 21 August 1986.

2 Araneta v. Perez, No. L-16187, 30 April 1963, 7 SCRA 923.

3 G.R. No. L-22074, 6 September 1965.

5 Sections' 57 and 58, Tax Code.

6 National Internal Revenue Code.

7 Section 204 of the Tax Code provides: 'Authority of the Commissioner to compromise, abate, and refund/credit taxes. 'The Commissioner may

(1) Compromise the payment of any internal revenue tax, when:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

(a) A reasonable doubt as to the validity of the claim against the taxpayer exists; or

(b) The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax.

x x x.

8 316 SCRA 118 (1999), citing Vitug and Acosta, Tax Law and Jurisprudence, 1st Edition, 1997, p. 267.

9 Ibid.

10 The withholding tax liability from 1 January 1986 to 21 August 1986 is not covered by EO No. 44 but by Revenue Memorandum Circular No. 31-86.

11 Guidelines for implementation of Executive Order No. 44 re compromise settlement of (1) delinquent accounts; or (2) disputed tax assessments, as of December 31, 1985.

12 Declaring A One-Time Tax Amnesty Covering Unpaid Income Taxes For The Years 1981 To 1985. The amnesty tax amount is 10% of the taxpayer's net worth from 31 December 1980 to 31 December 1985.

13 Section 1 of Executive Order No. 95 dated 17 December 1986 provides: "The period within which taxpayers may avail themselves of the expanded tax amnesty under Executive Order No. 41, as amended, is hereby extended up to January 31, 1987."

14 Exhibit "4", PNOC, CTA Records, p. 199.

15 Exhibit "1", PNOC, CTA Records, pp.196-197.

16 Section 5 of Revenue Regulations No. 17-86 provides: "Mode of Payment. - x x x. chanroblesvirtuallawlibrary

Deferred or staggered payments of compromise amounts over P50,000 may be considered on a case to case basis in accordance with the extant regulations of the Bureau upon approval of the Commissioner of Internal Revenue, his Deputy or Assistant as delineated in their respective jurisdictions.

17 Annex "Y" of Omnibus Motion dated 21 February 1991 submitted by Tirso B. Savellano with the Court of Tax Appeals, CTA Records, pp. 449-450.

18 Republic of the Philippines v. Hon. Estenzo, 134 Phil. 139 (1968).

19 Hernaez v. Yan Kao, 123 Phil. 1147 (1966).

20 Sabino v. Cuba, 125 Phil. 140 (1966).

21 45 Phil. 488 (1923).

22 111 Phil. 609 (1961).

23 See Republic v. Sandiganbaya, G.R. No. 108292, 10 September 1993, 226 SCRA 314.

24 Article 1330 of the Civil Code states: "A contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is voidable."

25 Section 58(A) of the Tax Code provides in part: 'The return for final withholding tax shall be filed and the payment made within twenty-five (25) days from the close of each calendar quarter, x x x.

26 Revenue Regulations No. 1-84.

27 Section 203 of the Tax Code provides: '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 case where a return is filed beyond the period prescribed by law, the three-year prescriptive 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.

28 Benjamin B. Aban, The Law of Basic Taxation in the Philippines, pp. 267-268 (2001).

29 Section 207, Tax Code.

30 Annex 'A of Petition for Review dated 5 April 1988 filed by Tirso B. Savellana with the Court of Tax Appeals, CTA Records, pp. 1-16.

31 Under the present Section 222(c) of the Tax Code as amended by RA No. 8424 which took effect on 1 January 1998, this period has been increased to five years.

32 7th Edition, 1999.

33 G.R. No. L-63575, 20 January 1988, 157 SCRA 140.

34 G.R. No. L-13754, 31 March 1962, 4 SCRA 783.

35 Protector's Services v. Court of Appeals, 386 Phil. 611 (2000); Republic v. Ker & Company, 124 Phil. 822 (1966).

36 Article 1306 of the Civil Code.




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