Afp General Insurance Corporation v. Revenue

INTING, J.:

This resolves the Petition for Review on Certiorari1 under Rule 45 of the Rules of Court filed by AFP General Insurance Corporation (AGIC) assailing the Decision2 dated January 4, 2016 of the Court of Tax Appeals (CTA) En Banc in CTA EB Case No. 1223 (CTA Case No. 8191). The assailed Decision modified the Amended Decision3 dated September 1, 2014 of the CTA Third Division (CTA Division) in CTA Case No. 8191 which ordered AGIC to pay deficiency tax assessments, plus surcharge and interests, under respondent Commissioner of Internal Revenue's (CIR) Formal Letter of Demand (FLD)4 dated April 6, 2010. The Antecedents The CIR, through Deputy CIR Gregorio V. Cabantac, issued Letter of Authority (LOA) No. 000219645 dated May 7, 2008, empowering Bureau of Internal Revenue (BIR) Revenue Officers Mercedes J. Espina and Jonas P. Punza to examine AGIC's books of account and records in relation to taxable year 2006.6 It contained the following notation: "[t]his [LOA] becomes void if it contains erasures, or if not served to the taxpayer within 30 days from the date hereof, or if dry seal of BIR office is not present."

As a result of the audit investigation, the CIR issued a Preliminary Assessment Notice7 (PAN) against AGIC. AGIC responded to the PAN through a Letter8 dated January 25, 2010 addressed to the CIR. In turn, the CIR issued a Revised PAN9 dated February 19, 2010, with attached details of discrepancies,10 finding AGIC liable for deficiency income tax (IT), documentary stamp tax (DST) on the increase of capital stock, value-added tax (VAT), late remittance of DST on insurance policies, expanded withholding tax (EWT) amounting to ₱13,158,571.63,11 ₱486,833.25,12 ₱8,730,457.05,13 ₱2,212,705.47,14 and ₱785,077.29,15 respectively, inclusive of penalties,16 surcharge, and interest.

Subsequently, the CIR issued a Formal Letter of Demand (FLD)17 dated April 6, 2010, with attached details of discrepancy18 and assessment notices,19 requesting AGIC to pay deficiency internal revenue taxes amounting to ₱25,647,389.04, computed as follows: Tax Type Basic Tax Surcharge Interest Compromise Penalty Subtotal IT ₱8,294,889.09 - ₱4,976,933.45 ₱25,000.00 ₱13,296,822.54 DST 250,000.00 62,500.00 162,500.00 16,000.00 491,000.00 VAT 4,092,402.38 2,046,201.19 2,660,061.55 - 8,798,665.12 DST 316,237.83 1,114,521.99 710,216.39 77,000.00 2,217,976.21 EWT 470,863.74 - 306,061.43 16,000.00 792,925.17 Civil Penalty - - - - 50,000.00 Total - - - - ₱25,647,389.04 DST on the increase of capital stock late remittance of DST on insurance policies AGIC formally protested these assessments on April 22, 2010 (administrative protest).20 Due to the CIR's alleged inaction on its protest, AGIC elevated the assessment case to the CTA docketed as CTA Case No. 8191.21 In turn, the CIR filed an answer to AGIC's petition.

Ruling of the CTA Division Decision22 dated March 13, 2014. After trial, the CTA Division partially granted AGIC's petition.23 It ruled as follows: First , the assessment for unremitted DST on insurance policies must be cancelled. It pertains to taxable year 2005; thus, outside the coverage of the subject LOA, which was issued for "the examination of books of accounts and other accounting for the taxable year 2006."24 Second, the period for assessment for deficiency VAT had already prescribed by the time the CIR issued the FLD on April 6, 2010.

Third, in contrast, the CIR timely assessed AGIC for its late remittance of DST on insurance policies pertaining to January, February, and May 2006, as well as deficiency DST on the increase in capital stock.

Fourth, AGIC failed "to substantiate its claims of undue disallowance of its legitimate expenses [in relation to IT], erroneous assessment for [EWT], and the correct computation of its deficiency [IT and EWT]."25 Fifth, the amounts of compromise penalty for each tax type must be cancelled because there is no showing that the parties mutually agreed on the imposition thereof.26 Sixth, AGIC applied for the tax amnesty program under Republic Act No. (RA) 9480, which covered all unpaid internal revenue taxes for taxable year 2005 and prior years. However, AGIC failed to submit its Statement of Assets, Liabilities and Net worth (SALN), a required attachment to the taxpayer's application under RA 9480. Failure to fully comply with the documentary requirements of the amnesty law disqualifies AGIC from availing itself of RA 9480's benefits.27 Based on its findings, the CTA Division reduced the total assessment to ₱12,746,567.80.28 In addition, it ordered AGIC to pay the following: (a) 20% deficiency interest on the amount of basic deficiency tax (IT, DST on increase of capital stock, and EWT) as prescribed under Section 249(B) of the National Internal Revenue Code of 1997 (Tax Code); (b) 20% delinquency interest on the amount of basic deficiency tax (IT, DST on increase of capital stock, and EWT) plus surcharge, as prescribed under Section 249(C) of the Tax Code; (c) 20% delinquency interest on the incremental amounts resulting from the late remittance of DST on insurance policies, as prescribed under Section 249(C) of the Tax Code; and (d) 20% delinquency interest on the total amount of deficiency interest computed under (a) above, as prescribed under Section 249(C) of the Tax Code.

Both parties moved to reconsider the aforementioned Decision. For its part, AGIC insisted that the CTA Division failed to resolve the principal issue of the case: LOA No. 00021964's validity. According to AGIC, the subject LOA is invalid "for failure of the concerned [r]evenue [o]fficer to have the same revalidated after x x x 120 days [i.e.

, within which the tax authorities must issue an audit investigation report], pursuant to Revenue Memorandum Order No. [RMO] 38-88 dated August 24, 1988, as reiterated in Revenue Memorandum Circular [RMC] No. 40-2006, dated July 13, 2006."29 The CIR countered that "the non-revalidation of a [LOA] would only warrant a disciplinary action against the concerned [r]evenue [o]fficer, and not render the same invalid or void."30 On the other hand, respondent CIR pointed out that "[a]s proven during trial, [AGIC] never filed a return for [DST on] insurance policies for taxable year 2005."31 Thus, the applicable prescriptive period is 10 years counted from the discovery of the falsity, fraud, or omission (non-filing). Further, the discrepancies between the audited financial statements and the unregistered general ledger resulted in an under-declaration of gross income subject to [VAT].32 Amended Decision dated September 1, 2014.

Ruling on the parties' motions, the CTA Division held as follows: first, the revenue officers' failure to have the LOA revalidated after the 120-day reglementary period does not nullify the LOA. Under the aforecited tax issuances, such failure gives rise to administrative sanctions/penalties, but does not invalidate the LOA itself.33 Second, the cancellation of the assessment for unremitted DST on insurance policies for taxable year 2005 was proper inasmuch as the subject LOA only covered taxable year 2006. Third, in the PAN and Memoranda filed before the CTA Division, respondent CIR clearly alleged that the deficiency VAT assessment was grounded on the "substantial [under-declaration] of taxable sales, receipts or income and failure to report sales, receipts or income in an amount exceeding x x x 30% of that declared per return."34 However, AGIC failed to refute the assessments, including the alleged under-declaration.

Consequently, the CTA reinstated the deficiency tax assessment and ordered AGIC to pay deficiency VAT amounting to ₱6,138,603.57,35 inclusive of 50% surcharge and the following interests: 20% deficiency interest on the amount of basic deficiency VAT, as prescribed under Section 249(B) of the Tax Code; (b) 20% delinquency interest on the amount of basic deficiency VAT plus surcharge, as prescribed under Section 249(C) of the Tax Code.36 Aggrieved, AGIC brought the case before the CTA En Banc. Ruling of the CTA En Banc In its assailed Decision, the CTA En Banc modified the CTA Division ruling to reduce the amount of deficiency VAT assessment to ₱5,912,622.72, inclusive of 50% surcharge, plus applicable interests.37 The court a quo ruled as follows: first, when the concerned revenue officers failed to submit their report within 120 days after service of the LOA, they likewise failed to submit the subject LOA for revalidation.

However, their failure to do so did not affect the LOA's validity. RMO 38-88 and RMC 40-06 do not treat an LOA as void once it is not revalidated within the said period.38 Second, verily, Revenue Audit Memorandum Order No. (RAMO) 01-00 invalidates an LOA that: (a) remains unserved 30 days after its issuance, and (b) is not submitted for revalidation. However, there is proof that AGIC received the LOA dated May 7, 2008 on May 13, 2008 or within 30 days from its issuance.39 Third, AGIC did not present its DST returns for taxable year 2006.

"Having failed to do so, [AGIC] failed to prove that the subject deficiency DST assessment is already barred by prescription x x x."40 Fourth, AGIC failed to establish that it withheld the proper taxes on its expenses. "[T]he consequence of non-withholding of taxes is the disallowance of the related expense as deduction from gross income, resulting in an increase in taxable income and consequently to the income tax due."41 Fifth, the tax authorities alleged that, for VAT purposes, AGIC failed to report gross receipts for VAT purposes by 38.88%.42 This under-declaration is prima facie evidence of a false return, which allowed the BIR 10 years, instead of the usual three, to assess. Likewise, AGIC failed to dispute the output VAT it allegedly did not remit.43 Thus, AGIC was properly assessed therefor.

After evaluation, the CTA En Banc upheld the assessments for IT, EWT, and DST, amounting to ₱12,746,567.80,44 as computed in the CTA Division Decision dated March 13, 2014. In addition, it ordered AGIC to pay deficiency VAT amounting to ₱5,912,622.72,45 which brought the total assessment to ₱18,659,190.52 computed as follows: Tax Type Basic Tax Surcharge Sec. 248(A)(3) 20% Interest Sec. 249 Subtotal IT ₱8,294,889.09 ₱2,073,722.27 ₱10,368,611.36 DST 250,000.00 62,500.00 312,500.00 EWT 470,863.74 117,715.94 588,579.68 DST - 1,035,462.53 441,414.23 1,476,876.76 CTA Division ₱9,015,752.83 ₱3,289,400.47 ₱441,414.23 ₱12,746,567.80 VAT 3,941,748.48 1,970,874.24 5,912,622.72 Total ₱12,957,501.31 ₱5,260,274.98 ₱441,414.23 ₱18,659,190.52 on increase of capital stock late remittance of DST on insurance policies