1. May a revenue officer ("RO") conduct an examination of a taxpayer's accounts based on a Letter of Authority ("LOA") that contains the name of another RO and a Memorandum Referral signed by the Revenue District Officer?

No. In Republic of the Philippines vs. Robiegie Corporation (G.R. No. 260261, October 3, 2022), the Supreme Court ("SC") held that a new LOA is needed if the Bureau of Internal Revenue ("BIR") will reassign, from one RO to another, the examination or investigation of a taxpayer's records. In this case, the SC also explained that the reassignment of an RO may be delegated by the Commissioner of Internal Revenue ("CIR") to his or her duly authorized representatives under the National Internal Revenue Code of 1997, as amended ("NIRC").

Robiegie Corporation is a corporation engaged in operating a drugstore. The BIR issued an LOA dated July 27, 2009 (the "2009 LOA") authorizing RO Jose Francisco David, Jr. ("RO David") to examine Robiegie Corporation's books of account and other accounting records. Subsequently, the 2009 LOA was reassigned to RO Cecille D. Dy ("RO Dy") pursuant to a Memorandum Referral signed by the BIR Revenue District Officer.

In light of the findings of RO Dy pursuant to the 2009 LOA, the CIR assessed Robiegie Corporation with a total tax deficiency of PhP10,804,991.21, consisting of deficiency value added tax, deficiency expanded withholding tax, and compromise penalty. Failing to find any leviable or garnishable property of Robiegie Corporation, the BIR filed a complaint before the Court of Tax Appeals ("CTA") to collect deficiency taxes.

Robiegie Corporation argued that the assessments made by RO Dy were null and void because she had no authority to conduct an investigation. It argued that the 2009 LOA authorized only RO David, not RO Dy, to examine Robiegie Corporation's books of account. Without a valid LOA, any investigation is not permitted. On the other hand, the CIR argued that an investigation conducted by an RO pursuant to a memorandum of assignment under an LOA issued in favor of another RO is valid.

The SC ruled against the CIR and upheld the ruling of the CTA finding that the assessments made by RO Dy were null and void for lack of authority. The SC agreed with the CTA's finding that a validly issued LOA is needed for the valid conduct of a taxpayer investigation. Citing its previous decisions, the SC echoed that the reassignment of the examination of a taxpayer's books of accounts to another RO necessitates the issuance of a new LOA pursuant to existing law (Sections 5, 6 (A) and 13 of the NIRC) and BIR regulations.

The SC held that the investigatory powers of the ROs flow from an LOA, which is the statutorily designated means by which the CIR delegates its investigative powers to the BIR ROs. Differently stated, an RO may only examine taxpayers in the course of carrying out, in conformance to or agreement with, or according to, a validly issued LOA. The SC further explained that the CIR's power to reassign BIR officers and employees under Section 17 of the NIRC cannot be invoked to defeat the statutory LOA requirement. While Section 17 gives the CIR the power to reassign ROs who perform assessment or collection functions, such mandate is separate and distinct from the CIR's investigatory power, which is governed by other provisions of the NIRC (i.e., Sections 5, 6(A) and 13) requiring the issuance of a new LOA in favor of a new RO.

The SC also disagreed with the CIR's arguments that issuing new LOAs would overburden the CIR and would violate the "one LOA per taxable year" rule of the BIR. The SC explained that the CIR may validly delegate the power to his or her duly authorized representatives, such as the Deputy Commissioners and the Revenue Regional Directors. Moreover, the "one LOA per taxable year" rule of the BIR provides that the CIR has the discretion to determine which among the LOAs will prevail in case there are multiple LOAs. Hence, the CIR or his or her duly authorized representatives may issue a new LOA to a newly assigned RO and make such LOA prevail over the old one.

Given the absence of a valid LOA issued in RO Dy's name, the SC dismissed the petition and affirmed the dismissal of the complaint against Robiegie Corporation.

SyCipLaw TIP 1:

When subject to an audit by the BIR, a taxpayer should make sure that the examining RO has been duly authorized by the CIR or his duly authorized representative to make the examination or investigation. Thus, the taxpayer should, among others, check if the examining RO is the same person named in the LOA.

2. May an isolated transaction of a corporation be subject to value-added tax ("VAT")?

Yes, if it is clearly established that the isolated transaction is related or connected with the corporation's main business activity which is subject to VAT. In Lapanday Foods Corporation v. CIR (G.R. No. 186155, January 17, 2023), the SC ruled that, although merely occasional or isolated, a transaction may be still be embraced in the definition of the phrase "in the course of the trade or business of the taxpayer" – thus, subject to VAT- so long as it may be established that such transaction is incidental to the seller's or service provider's main business activity.

Lapanday Foods Corporation ("Lapanday") is a management services company primarily engaged "in the managing, promoting, administering, or assisting in any business or activity of corporations, partnerships, association, individual or firms." Lapanday used its credit line to facilitate inter-company loans to its affiliates, i.e., its parent company and two subsidiaries.

The CIR assessed Lapanday deficiency VAT on its interest income from these inter-company loans. On appeal, the CTA affirmed the deficiency VAT assessment and ruled that the intercompany loans were incidental to the business of Lapanday, and any interest income earned through the related party loans was subject to VAT.

The SC reversed the ruling of the CTA and held that Lapanday's inter-company loans were not subject to VAT.

The SC explained that while isolated transactions may be subject to VAT and the definition of the phrase "in the course of trade or business" includes transactions incidental to the main business activity, the CTA erred in holding that the inter-company loans made by Lapanday were incidental to the latter's main line of business as a management service provider. The SC emphasized that its conclusion is rooted not only in the fact that the loans were merely isolated and not for commercial or economic purpose, but also on the apparent lack of any showing of a connection between the granting of financial assistance and Lapanday's primary purpose of providing management services to clients. The SC applied the principle of ejusdem generis in interpreting the term "assisting" in Lapanday's primary purpose (which term, according to the court, should be bestowed a meaning similar to those of "managing," "administering," or "promoting") and even considered the proviso, which precludes Lapanday from managing its clients' funds, securities, portfolios, and similar assets.

Given its findings, the SC set aside the finding of the CTA and nullified the assessment for deficiency VAT.

SyCipLaw TIP 2:

The SC decision in Lapanday Foods highlights the broad scope of VAT because of the definition of the phrase "in the course of trade or business," which means "the regular conduct or pursuit of a commercial or economic activity, including transactions incidental thereto." When entering into any transaction with its affiliates, especially transactions that are not part of its regular business, a taxpayer should not only ensure that the transaction is within its corporate powers and authority, but also consider all possible tax implications, including any VAT.

3. In assailing a tax assessment, can a taxpayer who receives a Warrant of Distraint and/or Levy, instead of a Final Decisionon Disputed Assessment, already elevate the case to the CTA?

Yes. In Yap v. BIR (CTA Case No. 10019, March 9, 2023), the CTA First Division ruled that "[i]n instances when respondent, without categorically deciding the taxpayer's protest or request for reconsideration or reinvestigation, proceeds with distraint and levy or institutes an action for collection in the ordinary courts, the SC has considered this an implied denial [and] [t]he taxpayer's remedy then was to appeal to this Court within thirty (30) days from the date that it was notified of the warrant or collection suit."

In this case, the taxpayer received several Formal Letters of Demand ("FLDs") finding it liable for deficiency taxes for taxable years 2011, 2012, and 2013. The taxpayer filed a protest to assail the tax assessment with the BIR. On July 10, 2018, the BIR issued a Preliminary Collection Letter ("PCL"), demanding the payment of the taxpayer's tax liabilities. On January 31, 2019, the taxpayer received a Warrant of Distraint and/or Levy ("WDL"). After receipt of the WDL, the taxpayer immediately filed a petition for review before the CTA on February 1, 2019.

The BIR argued that the CTA has no jurisdiction over the case because the 30-day period to file a petition for review should be counted from July 10, 2018, or the date of the taxpayer's receipt of the PCL. Accordingly, the BIR asserts that the petition for review was filed out of time. On the other hand, the taxpayer argued that the 30-day period should be counted from January 31, 2019, or the date of its receipt of the WDL. Accordingly, the taxpayer asserts that the petition for review was timely filed.

In ruling in favor of the taxpayer, the CTA First Division cited Section 7(a)(1) of Republic Act ("RA") No. 1125, as amended by RA No. 9282 (the "CTA Law"), which confers upon the CTA jurisdiction to decide not only cases on disputed assessments and refunds of internal revenue taxes, but also "other matters" arising under the NIRC, as amended. The CTA First Division cited Philippine Journalists, Inc. v. CIR (G.R. No. 162852, December 16, 2004), where the SC expressly ruled that Section 7(a)(1) of the CTA Law "gives the CTA the jurisdiction to determine if the warrant of distraint and levy issued by the BIR is valid and to rule if the Waiver of Statute of Limitations was validly effected." The CTA First Division concluded that "the validity of a WDL is an issue that falls under 'other matters arising from the NIRC' that is within the jurisdiction of [the CTA] to decide upon." The CTA First Division also ruled that "[i]n instances when respondent, without categorically deciding the taxpayer's protest or request for reconsideration or reinvestigation, proceeds with distraint and levy or institutes an action for collection in the ordinary courts, the SC has considered this an implied denial [and] [t]he taxpayer's remedy then was to appeal to this Court within thirty (30) days from the date that it was notified of the warrant or collection suit."

It is worth noting that the CTA First Division also acknowledged cases like CIR v. Avon Products Manufacturing, Inc. (G.R. No. 201398-99 and 201418-19, October 3, 2018), where a collection letter having the character of finality, such as the PCL here, has been considered by the Supreme Court as the CIR's final decision that is appealable to the CTA. The CTA First Division ruled that it is clear "that such collection letter may fall under the category of 'other matters' pursuant to the earlier quoted Philippine Journalists case, which, as shown, categorically ruled that [the CTA's] jurisdiction also includes the power 'to determine if the warrant of distraint and levy issued by the BIR is valid.'"

The CTA First Division cautioned, however, that the SC is still the final arbiter on the issue on whether the 30-day period to file a petition for review should be counted from the date of the taxpayer's receipt of the PCL or the WDL.

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