G.R. No. 247737, August 8, 2023
McDonald’s Philippines Realty Corporation, Petitioner, vs. Commissioner of Internal Revenue, Respondent.

FACTS

Petitioner McDonald’s Philippines Realty Corporation (MPRC), a foreign corporation licensed to do business in the Philippines, established a Philippine branch to purchase and lease back restaurant sites to Golden Arches Development Corporation (GADC). Prior to 2007, MPRC granted long-term advances to GADC and had unpaid rentals due from GADC. For calendar year 2007, the Bureau of Internal Revenue (BIR) audited MPRC and issued a Preliminary Assessment Notice (PAN) on September 15, 2010, finding MPRC liable for deficiency taxes. MPRC and the Commissioner of Internal Revenue (CIR) executed two waivers extending the assessment period to March 31, 2012. On March 30, 2012, MPRC received a Formal Letter of Demand/Assessment Notice (FLD/FAN) assessing it for deficiency Value-Added Tax (VAT) only, in the amount of ₱3,104,836.70, alleging MPRC failed to subject to VAT gross receipts from interest/rental income amounting to ₱11,080,687.70. The CIR imposed a 50% surcharge, stating the omission rendered MPRC’s VAT returns “false or fraudulent.” MPRC protested. The CIR issued a Final Decision on Disputed Assessment (FDDA) on January 16, 2014, reiterating the assessment. MPRC filed a judicial protest with the Court of Tax Appeals (CTA). The CTA Third Division ruled that MPRC’s interest income from loans due from GADC was subject to VAT as it arose from transactions incidental to its leasing business. It found the assessment was issued beyond the regular 3-year period but applied the 10-year prescriptive period for false returns, citing Aznar v. Court of Tax Appeals. However, it deleted the 50% surcharge, finding no deliberate intent to evade tax, and reduced MPRC’s liability. The CTA En Banc upheld the CTA Division’s decision with modifications, applying the 10-year prescriptive period and ordering MPRC to pay ₱9,206,213.06.

ISSUE

Whether the CIR’s right to assess deficiency VAT for calendar year 2007 had prescribed.

RULING

The Supreme Court granted the petition. It held that the CIR’s right to assess had prescribed under the three-year period. The Court ruled that for the extraordinary ten-year prescriptive period under Section 222(a) of the National Internal Revenue Code to apply, the government must prove, by clear and convincing evidence, that the taxpayer filed a false or fraudulent return with intent to evade tax, or failed to file a return. The mere underdeclaration of receipts does not automatically constitute a false return. A “false return” under Aznar implies a deviation from the truth, which may be intentional or not, while a “fraudulent return” implies an intentional or deceitful entry with intent to evade tax. The CIR failed to prove that MPRC’s VAT returns were fraudulent or filed with intent to evade tax. The CTA Division itself found no deliberate attempt to evade tax, as MPRC reported the interest income in its Income Tax Return, indicating an honest belief it was not subject to VAT. The CIR’s bare allegation of falsity in the FLD/FAN and FDDA was insufficient. The waivers executed by MPRC were invalid for not strictly complying with Revenue Memorandum Order No. 20-90 requirements. Consequently, the FLD/FAN issued on March 30, 2012, was issued beyond the three-year prescriptive period, which expired on April 25, 2010, for the first quarter of 2007. The assessment was therefore void.