Time heals all wounds. In the realm of taxation, however, time does something more powerful: it heals liabilities. The statute of limitations on tax cases is designed to draw the line between the government’s right to assess tax and the taxpayer’s right to finality. While taxes are the lifeblood of the government, its citizens must not be drained by perpetual uncertainty. The state’s remedy expires once that prescriptive period lapses, allowing the taxpayer to finally rest easy. But what happens when time is no longer the shield it is meant to be?
Tax laws provide not only the rules on how taxes are assessed and collected, but also the limits within which the government may enforce its right to collect. One of these limits is the statute of limitations, which sets a definite period for the Bureau of Internal Revenue (BIR) to assess and collect taxes. This principle exists to protect taxpayers from indefinite extensions and to ensure fairness in tax enforcement. However, the law allows exceptions to this protection. Among these is the voluntary waiver of the statute of limitations, executed by the taxpayer in favor of the government. This waiver essentially extends the period within which the BIR may issue an assessment or enforce collection. Because this waiver involves the relinquishment of a legal right, strict compliance with statutory and regulatory requirements is essential for its validity. In Philippine Journalists, Inc. v. Commissioner of Internal Revenue (CIR), G.R. No. 162852, the Supreme Court underscored that such waivers must be carefully and strictly construed, as they derogate the taxpayer’s right to protection against prolonged and potentially abusive investigations.
The statutory basis for the concept of a waiver is found in Section 222(b) of the 1997 National Internal Revenue Code (NIRC), which permits the government to extend the period for assessment, provided that both the CIR and the taxpayer have agreed in writing to such an extension. This provision highlights that a waiver primarily serves the interests of the government, as it grants the BIR additional time to issue an assessment beyond the standard three-year prescriptive period. Since this extension is a concession granted to the government rather than a right of the taxpayer, it logically follows that the BIR bears the responsibility of ensuring that waivers fully comply with all formal requirements before they are accepted as valid.
To operationalize this provision, the BIR has issued administrative guidelines. Revenue Memorandum Order (RMO) No. 20-90 and Revenue Delegation of Authority Order (RDAO) No. 05-01 set the guidelines for executing a valid waiver. In Republic v. First Gas Power Corp., G.R. No. 214933, the Court emphasized that the provisions of the RMO No. 20-90 and RDAO No. 05-01 are mandatory and require strict compliance; hence, failure to comply with any of the requisites renders a waiver defective and ineffectual, and as a consequence, the three-year prescriptive period to assess may not be extended.
Despite clear rules, several issues arise in practice. Many waivers are defective, lacking essential elements such as the BIR’s signature or clear dates. The BIR sometimes proceeds with assessments relying on such defective waivers, which courts later strike down. Others sign waivers without full awareness of their legal consequences, effectively giving up statutory protection without informed consent. In CIR v. The Stanley Works Sales (Phils.), Inc., G.R. No. 187589, the Court emphasized that the BIR has the burden of ensuring compliance with the requirements of RMO No. 20-90, as it bears the responsibility of securing the government’s right to assess and collect tax deficiencies. This right would be prescribed in the absence of a valid extension of the period set by law.
The Supreme Court, in several decisions, invalidated waivers for failure to conform with RMO No. 20-90 and RDAO No. 15-01. In CIR v. Kudos Metal Corp., G.R. No. 178087, the Court invalidated the waivers due to the lack of a date of acceptance by the BIR. In CIR v. Systems Technology Institute, Inc., G.R. No. 220835, the waivers were invalidated because the taxpayer’s signatory had no notarized written authority. Further, in CIR v. Standard Chartered Bank, G.R. No. 192173, the Court held that the waiver was a clear violation of RMO No. 20-90, as it did not specify the kind and amount of the tax due.
These rulings collectively affirm that the burden of ensuring strict compliance with the procedural and substantive requirements for a valid waiver lies with the BIR. Any deviation from these standards, whether in form or in substance, renders the waiver invalid and ineffective for purposes of extending the prescriptive period for tax assessment or collection.
In response to these challenges, the BIR issued RMO No. 14-2016, as later reiterated and clarified by Revenue Memorandum Circular (RMC) No. 141-2019, which effectively repealed the previous rules governing the execution of waivers of the statute of limitations. These issuances were prompted by the widespread practice among taxpayers of subsequently challenging the validity of their waivers after benefiting from them.
The BIR significantly relaxed the formal requirements for a waiver’s validity under the revised guidelines. Specifically, the waiver need not strictly follow the format prescribed under RMO No. 20-90 or RDAO No. 05-01. A taxpayer’s failure to adhere to these formats does not render the waiver invalid, provided the following essential conditions are met:
a) The waiver of the statute of limitations must be executed before the original period to assess or collect taxes expires, and the exact date of execution must be clearly stated in the waiver.
b) The waiver must be signed either by the taxpayer personally or by a duly authorized representative, and in the case of a corporation, it should be signed by any of its responsible officials.
c) The waiver must indicate the specific expiry date of the extended period agreed upon for the assessment or collection of taxes beyond the standard three-year prescriptive period.
Correspondingly, taxpayers are no longer required to indicate the type or amount of taxes involved, nor is the date of acceptance by the BIR essential for the waiver’s validity. Moreover, the authority of the taxpayer’s representative does not need to be notarized and cannot be challenged later to invalidate the waiver. The revised guidelines also underscore that, as the execution of a waiver is a voluntary act by the taxpayer, it will be legally binding upon execution.
It must be emphasized, however, that as provided under Section 222 of the NIRC, a waiver is intended to operate as a bilateral agreement requiring the mutual consent of both the taxpayer and the BIR. Under the revised guidelines, the execution of a waiver has been framed more as a unilateral act of the taxpayer, which becomes legally binding upon execution, departing from the very essence of a consensual undertaking. This revision ought to be carefully revisited in light of the well-settled principle that a waiver of the statute of limitations under the NIRC constitutes a derogation of the taxpayer’s right to security against prolonged and potentially abusive investigations and must therefore be strictly construed in accordance with established legal principles.
In this regard, taxpayers must be reminded that the execution of the waiver now heavily rests on their shoulders. With the relaxation of formal requirements, the burden of ensuring the waiver is validly and properly executed is no longer equally shared with the BIR but has shifted significantly to the taxpayer. More importantly, taxpayers must also recognize the consequence of their action; by signing the waiver, they are voluntarily giving up the statutory safeguard of prescription, thereby extending the government’s right to assess and collect taxes beyond the period originally set by law. This is not a mere procedural formality but a substantial concession that can expose them to prolonged investigation and assessment. Thus, taxpayers should exercise prudence, seek proper advice, and carefully weigh whether the waiver serves their best interest.
In the end, the statute of limitations exists to strike a balance between the government’s right to collect what is due and the taxpayer’s right to certainty and peace of mind. To waive it is to tip that balance, often at the expense of the taxpayer. Thus, the option to waive must never be taken lightly, for in choosing to extend time, the taxpayer may also be choosing to extend uncertainty.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Stephanie Joy D. Carrion is an associate from the Tax Advisory & Compliance practice area of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.