McDonald's Philippines Realty Corporation v. CIR

10-YEAR PRESCRIPTION REQUIRES BIR TO DISCLOSE BASIS OF THE MISSTATEMENT; FALSE RETURN
MUST BE COUPLED WITH INTENT TO EVADE TAX. The BIR has 3 years to assess the taxpayer, unless the
10-year extraordinary period applies in case of fraud, false return or failure to file tax. Presumption of
fraud or falsity arises if there is under declaration of sales or overstatement of expenses exceeding the
30% threshold (amount declared). Before presumption arises, the BIR must observe due process by
providing computation by which it ascertained the misstatement. Moreover, the BIR cannot adopt a
position inconsistent with the invocation of the 10-year period (i.e. extension of waivers and issuance
of assessment a day prior to the lapse of 3-year period). On the other hand, the presumption may be
overcome by good faith, mistake, carelessness or ignorance. Not all types of error or falsehood in a
return will make available the 10-year exception. Thus, where the assessment did not provide
computation giving rise to the presumption and the alleged undeclared receipts was not actually
collected by the taxpayer as it relates to VAT assessment, the 10-year period shall not apply (McDonald’s
Philippines Realty Corporation v. CIR, G.R. No. 247737, August 8, 2023)
Fortunately, in the recent en banc decision of the SC in the case of McDonald’s Philippines Realty Corp.
vs. the CIR (G.R. No. 247737), this issue has finally been settled. The Court ruled that for purposes of
invoking the extraordinary period under Section 222(a), the BIR must be able to prove that such
misstatement or error is intentional and deliberate.
As clearly explained by the Court, the purpose of the examination of the taxpayer’s books by the tax
authorities is to determine the correct amount of taxes. Each audit will necessarily expose varying errors
and/or irregularities in how the taxpayer computes its tax liabilities. If the BIR’s position is followed (i.e.,
unintentional errors will be considered false returns under Section 222(a)), then all such inaccuracies
committed by the taxpayer — including mere clerical or typographical errors or arithmetic calculations,
no matter how trivial — render the return false and may be used as grounds to invoke the exceptional
10-year period. This creates an opportunity for the tax authorities to find errors at whim, renders the
basic three-year assessment period under Section 203 of the Tax Code, as amended, superfluous and
inoperative, and extends that assessment period virtually in all tax audits.
Accordingly, the SC specifically stated that the Court’s ruling in the Aznar case, which applied the
extraordinary 10-year assessment period under Section 222(a) to false return in general, i.e., regardless
of whether the deviation is intentional or not, has been abandoned. The extraordinary period should
apply to a false return when: (1) the return contains an error or misstatement, and (2) such error or
misstatement was deliberate or willful. Both conditions should be complied with. Otherwise, the regular
three-year prescriptive period applies.
Moreover, the SC pointed out that the BIR has the burden to establish the existence of the above-
mentioned statutory requisites with clear and convincing evidence. The BIR, however, may be relieved
from such burden of proof when there is prima facie evidence of falsity or fraud as defined under
Section 248(B) of the Tax Code, as amended. There is prima facie evidence of false or fraudulent return
if BIR is able to ascertain that there is substantial under-declaration of taxable sales, receipts, or income,
or substantial overstatement of deductions of expense. The misstatement may be considered
substantial if it exceeds 30% of the amount declared in the return.
Accordingly, the burden of proof is shifted to the taxpayer if there is prima facie evidence of falsity or
fraud. If, however, the taxpayer was able to successfully overturn the presumption (e.g., he was able to
demonstrate that the misstatement ascertained by the BIR had been inadvertent or attributable to an
honest mistake or was not deliberate or willful), the tax authorities cannot rely on the presumption in
proving the taxpayer’s intent to evade taxes.
Moreover, the SC emphasized that the assessment notice issued to the taxpayer must clearly state that
the extraordinary prescriptive period is being applied on the basis of the allegation of falsity or fraud.
The BIR should also not have acted in a manner that is inconsistent with the invocation of the
extraordinary period to assess or has misled the taxpayer that the basic period will be applied. All these
due process requirements must be complied with. Otherwise, a regular three-year prescriptive shall be
applied.
This recent decision of the SC hopefully clarifies and provides guidelines to both the tax authorities and
taxpayers on what constitutes a false return for purposes of applying the 10-year prescriptive period.
Nevertheless, it is still important that the taxpayer ensure that all items reported in a return are correct
to avoid any issues as to whether or not such an error or omission constitutes a false return. Otherwise,
such falsity may indeed result in severe consequences.

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10-YEAR PRESCRIPTION REQUIRES BIR TO DISCLOSE BASIS OF THE MISSTATEMENT; FALSE RETURN

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