CS Garment v. CIR

Facts: Petitioner is registered with PEZA. Petitioner received a Letter of Authority from respondent authorizing the examination of petitioner’s books of accounts and other accounting records for all internal revenue taxes covering 1998. Then, petitioner received 5 formal demand letters requiring it to pay the alleged deficiency VAT, Income, DST and withholding tax assessments for taxable year 1998. Petitioner filed a protest. Respondent failed to act, thus, petitioner appealed before the CTA via PetRev. CTA Second Division cancelled respondent’s assessment against CS Garments for deficiency expanded withholding taxes and partially cancelled the deficiency DST assessment. However, the Second Division upheld the validity of the deficiency income tax assessments by subjecting the disallowed expenses and a portion of the undeclared local sales to income tax at the special rate of 5%. The remainder of undeclared local sales was subjected to income tax at the rate of 34%. The total liability was also subject to 20% delinquency interest pursuant to Section 249(C)(3). Petitioner filed a motion for partial reconsideration but it was denied.

Petitioner appealed the case to the CTA en banc and alleged the following: (1) the Formal Assessment Notices (FAN) issued by the Commissioner of Internal Revenue (CIR) did not comply with the requirements of the law; (2) the income generated by CS Garment from its participation in the Cavite Export Processing Zone’s trade fairs and from its sales to employees were not subject to 10% VAT; (3) the sale of the company vehicle to its general manager was not subject to 10% VAT; (4) it had no undeclared local sales in the amount of P1,541,936.60; and (5) Rule XX, Section 2 of the PEZA Rules and Regulations allowed deductions from the expenses it had incurred in connection with advertising and representation; clinic and office supplies; commissions and professional fees; transportation, freight and handling, and export fees; and licenses and other taxes. 

The CTA en banc affirmed the Decision and Resolution of the CTA Second Division. CS Garment filed the present Petition for Review assailing the Decision of the CTA en banc. However, while the case was pending, petitioner filed a Manifestation and Motion stating that it had availed itself of the government’s tax amnesty program under the 2007 Tax Amnesty Law. 

Issue: Whether or not CS Garment is already immune from paying the deficiency taxes stated in the 1998 tax assessments of the CIR, as modified by the CTA. 

Held: Tax amnesty refers to the articulation of the absolute waiver by a sovereign of its right to collect taxes and power to impose penalties on persons or entities guilty of violating a tax law. Tax amnesty aims to grant a general reprieve to tax evaders who wish to come clean by giving them an opportunity to straighten out their records. In 2007, Congress enacted R.A. 9480, which granted a tax amnesty covering “all national internal revenue taxes for the taxable year 2005 and prior years, with or without assessments duly issued therefor, that have remained unpaid as of December 31, 2005.” These national internal revenue taxes include (a) income tax; (b) VAT; (c) estate tax; (d) excise tax; (e) donor’s tax; (f) documentary stamp tax; (g) capital gains tax; and (h) other percentage taxes. Pursuant to Section 6 of the 2007 Tax Amnesty Law, those who availed themselves of the benefits of the law became “immune from the payment of taxes, as well as additions thereto, and the appurtenant civil, criminal or administrative penalties under the National Internal Revenue Code of 1997, as amended, arising from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years.” 

The law contains two types of conditions — one suspensive, the other resolutory. Borrowing from the concepts under our Civil Code, a condition may be classified as suspensive when the fulfillment of the condition results in the acquisition of rights. On the other hand, a condition may be considered resolutory when the fulfillment of the condition results in the extinguishment of rights. In the context of tax amnesty, the rights referred to are those arising out of the privileges and immunities granted under the applicable tax amnesty law. 

Taxpayers with pending tax cases are still qualified to avail themselves of the tax amnesty program. 

Considering the completion of the aforementioned requirements, we find that petitioner has successfully availed itself of the tax amnesty benefits granted under the Tax Amnesty Law. Therefore, we no longer see any need to further discuss the issue of the deficiency tax assessments. CS Garment is now deemed to have been absolved of its obligations and is already immune from the payment of taxes — including the assessed deficiency in the payment of VAT, DST, and income tax as affirmed by the CTA en banc — as well as of the additions thereto (e.g., interests and surcharges). Furthermore, the tax amnesty benefits include immunity from “the appurtenant civil, criminal, or administrative penalties under the NIRC of 1997, as amended, arising from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years.”