COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. COVANTA ENERGY PHILIPPINE HOLDINGS, INC., RESPONDENT.

Commissioner of Internal Revenue versus Covanta Energy Philippine Holdings

The Case

This is a petition for review on certiorari brought by the Commissioner of Internal Revenue against Covanta Energy Philippine Holdings, Incorporated. The Commissioner asks the Supreme Court to reverse the Court of Tax Appeals en banc, which had affirmed the cancellation and withdrawal of deficiency tax assessments against Covanta on the strength of the tax amnesty granted by Republic Act Number 9480. The case matters because it fixes the precise moment a taxpayer acquires the immunities of the 2007 tax amnesty, and it allocates the burden of proving that a taxpayer understated its net worth.

Procedural History

The Commissioner issued formal letters of demand and assessment notices against Covanta for deficiency value-added tax and expanded withholding tax for the taxable year 2001, and later for deficiency minimum corporate income tax for the same year. Covanta protested, the protests went unacted upon, and Covanta filed separate petitions for review before the Court of Tax Appeals, which were consolidated. Covanta then filed a supplemental petition informing the Court of Tax Appeals that it had availed of the tax amnesty under Republic Act Number 9480.

The Second Division of the Court of Tax Appeals partially granted the petitions. It cancelled and withdrew the deficiency value-added tax and minimum corporate income tax assessments, but held Covanta liable for deficiency expanded withholding tax, with surcharge and interest, because tax amnesty does not extend to withholding agents with respect to their withholding tax liabilities. The Commissioner moved for reconsideration, which was denied. The Commissioner then appealed to the Court of Tax Appeals en banc, which denied the appeal and affirmed. The Commissioner's motion for reconsideration was likewise denied. The Commissioner then elevated the matter to the Supreme Court by petition for review on certiorari under Rule 45.

Facts

On December 6, 2004, the Commissioner issued formal letters of demand and assessment notices against Covanta for deficiency value-added tax and expanded withholding tax for the taxable year 2001, in the aggregate amount of 754,496 pesos and 99 centavos. Covanta protested on January 19, 2005. On January 11, 2005, the Commissioner issued another formal letter of demand and assessment notice, this time for deficiency minimum corporate income tax for the same year, and Covanta protested on February 16, 2005.

Because the protests remained unacted upon, Covanta filed separate petitions before the Court of Tax Appeals, one for the value-added tax and expanded withholding tax, and another for the minimum corporate income tax. The cases were consolidated upon the Commissioner's motion.

On October 7, 2008, Covanta filed a supplemental petition informing the Court of Tax Appeals that it had availed of the tax amnesty under Republic Act Number 9480, and it submitted the relevant documents. It was undisputed that Covanta submitted all the documentary requirements and paid the corresponding amnesty tax. The Commissioner, however, argued that Covanta's Statement of Assets, Liabilities and Net Worth left blank the columns for Reference and Basis of Valuation, and that this omission disqualified Covanta from the amnesty.

Issues

• Whether or not Covanta fully complied with the documentary requirements of the tax amnesty law despite leaving blank the Reference and Basis of Valuation columns in its Statement of Assets, Liabilities and Net Worth.
• Whether or not Covanta is entitled to the immediate enjoyment of the immunities and privileges of the tax amnesty program.
• Whether or not the Commissioner proved that Covanta understated its net worth to the extent required by law to forfeit those immunities.

Applicable Provisions

Section 3 of Republic Act Number 9480 provides:

SEC. 3. What to Declare in the SALN — The SALN shall contain a declaration of the assets, liabilities and networth as of December 31, 2005, as follows: 1. Assets within or without the Philippines, whether real or personal, tangible or intangible, whether or not used in trade or business: Provided, That property other than money shall be valued at the cost at which the property was acquired: Provided, further, That foreign currency assets and/or securities shall be valued at the rate of exchange prevailing as of the date of the SALN; 2. All existing liabilities which are legitimate and enforceable, secured or unsecured, whether or not incurred in trade or business; and 3. The networth of the taxpayer, which shall be the difference between the total assets and total liabilities.

This is the provision that fixes what the Statement of Assets, Liabilities and Net Worth must contain, and the Court measured Covanta's submission against it.

Section 6 of Department Order Number 29-07, the implementing rules, provides:

SEC. 6. Method of Availment of Tax Amnesty. – Forms/Documents to be filed. – To avail of the general tax amnesty, concerned taxpayers shall file the following documents/requirements: Notice of Availment in such forms as may be prescribed by the BIR. [SALN] as of December 31, 2005 in such forms, as may be prescribed by the BIR. Tax Amnesty Return in such form as may be prescribed by the BIR. Place of Filing of Amnesty Tax Return. – The Tax Amnesty Return, together with the other documents stated in Sec. 6 (1) hereof, shall be filed as follows: Residents shall file with the Revenue District Officer (RDO)/Large Taxpayer District Office of the BIR which has jurisdiction over the legal residence or principal place of business of the taxpayer, as the case may be. Non-residents shall file with the office of the Commissioner of the BIR, or with the RDO. At the option of the taxpayer, the RDO may assist the taxpayer in accomplishing the forms and computing the taxable base and the amnesty tax payable, but may not look into, question or examine the veracity of the entries contained in the Tax Amnesty Return, [SALN], or such other documents submitted by the taxpayer. Payment of Amnesty Tax and Full Compliance. – Upon filing of the Tax Amnesty Return in accordance with Sec. 6 (2) hereof, the taxpayer shall pay the amnesty tax to the authorized agent bank or in the absence thereof, the Collection Agents or duly authorized Treasurer of the city or municipality in which such person has his legal residence or principal place of business. The RDO shall issue sufficient Acceptance of Payment Forms, as may be prescribed by the BIR for the use of-or to be accomplished by – the bank, the collection agent or the Treasurer, showing the acceptance by the amnesty tax payment. In case of the authorized agent bank, the branch manager or the assistant branch manager shall sign the acceptance of payment form. The Acceptance of Payment Form, the Notice of Availment, the SALN, and the Tax Amnesty Return shall be submitted to the RDO, which shall be received only after complete payment. The completion of these requirements shall be deemed full compliance with the provisions of RA 9480. Time for Filing and Payment of Amnesty Tax. – The filing of the Tax Amnesty Return, together with the SALN, and the payment of the amnesty tax shall be made within six (6) months from the effectivity of these Rules.

This is the procedure whose completion the Court treated as full compliance, triggering the amnesty's benefits.

Section 8 of the implementing rules provides:

SEC. 8. Contents of the SALN. – The SALN shall contain a true and complete declaration of assets, liabilities and networth of the taxpayer as of December 31, 2005, as follows: Assets within or without the Philippines, whether real or personal, tangible or intangible, whether or not used in trade or business: Real properties shall be accompanied by a description of their classification, exact location, and valued at acquisition cost, if acquired by purchase or the zonal valuation or fair market value, whichever is higher, if acquired through inheritance or donation; Personal properties other than money, shall be accompanied by a specific description of the kind and number of assets (i.e. automobiles, shares of stock, etc.) or other investments, indicating the acquisition cost less depreciation or amortization, in proper cases, if acquired by purchase, or the fair market price or value at the time of receipt, if acquired through inheritance or donations; Assets denominated in foreign currency shall be converted into the corresponding Philippine currency equivalent, at the rate of exchange prevailing as of December 31, 2005; and Cash on hand and in bank in peso as of December 31, 2005, as well as Cash on Hand and in Bank in foreign currency, converted to peso as of December 31, 2005. All existing liabilities which are legitimate and enforceable, secured and unsecured, whether or not incurred in trade or business, disclosing or indicating clearly the name and address of the creditor and the amount of the corresponding liability. The total networth of the taxpayer, which shall be difference between the total assets and total liabilities.

This is the provision that supplied the detail the Commissioner said was missing from Covanta's submission.

Ruling

On the first issue, the Court held that Covanta substantially complied. The information required by Section 3 of Republic Act Number 9480 was reflected in its submission. While the Reference and Basis for Valuation columns were left blank, Covanta attached schedules to its original and amended Statement of Assets, Liabilities and Net Worth, and those schedules supplied the required information. The Court noted that the information called for in those columns is really the specific description of the declared assets, and so the columns were deemed filled when Covanta referred to the attached schedules. The Commissioner could not simply disregard the submission.

On the second issue, the Court held that the amnesty law contains two kinds of conditions, one suspensive and the other resolutory. A suspensive condition is one whose fulfillment results in the acquisition of rights; a resolutory condition is one whose fulfillment results in the extinguishment of rights. The filing of the requirements and payment of the amnesty tax are suspensive conditions. Once fulfilled, the taxpayer immediately enjoys the immunities and privileges of the program. The Court quoted its earlier ruling in CS Garment, Incorporated against the Commissioner of Internal Revenue:

This clarification, however, does not mean that the amnesty taxpayers would go scot-free in case they substantially understate the amounts of their net worth in their SALN. The 2007 Tax Amnesty Law imposes a resolutory condition insofar as the enjoyment of immunities and privileges under the law is concerned. Pursuant to Section 4 of the law, third parties may initiate proceedings contesting the declared amount of net worth of the amnesty taxpayer within one year following the date of the filing of the tax amnesty return and the SALN. Section 6 then states that "All these immunities and privileges shall not apply x x x where the amount of networth as of December 31, 2005 is proven to be understated to the extent of thirty percent (30%) or more, in accordance with the provisions of Section 3 hereof." Accordingly, Section 10 provides that amnesty taxpayers who willfully understate their net worth shall be (a) liable for perjury under the Revised Penal Code; and (b) subject to immediate tax fraud investigation in order to collect all taxes due and to criminally prosecute those found to have willfully evaded lawful taxes due.

On the third issue, the Court held that the Statement of Assets, Liabilities and Net Worth is presumed true and correct, and that the burden of overturning that presumption lies on the party claiming an underdeclaration. The underdeclaration must be proven either through proceedings initiated by parties other than the Bureau of Internal Revenue or its agents within one year from the filing of the Statement and the Tax Amnesty Return, or through findings or admissions in congressional hearings, administrative proceedings, or courts. The Commissioner offered only bare allegations, with no evidence that Covanta's net worth was understated by at least 30 percent. The Court acknowledged that tax amnesty is in the nature of a tax exemption, strictly construed against the taxpayer, but held that it could not disregard the plain text of the law.

Doctrine

First, the tax amnesty under Republic Act Number 9480 is acquired upon full compliance with the suspensive conditions: the filing of the Notice of Availment, the Statement of Assets, Liabilities and Net Worth, and the Tax Amnesty Return, and the payment of the amnesty tax. Upon such compliance, the taxpayer immediately enjoys the immunities and privileges of the program.

Second, the enjoyment of those immunities is subject to a resolutory condition. The immunities cease only upon proof that the taxpayer understated its net worth as of December 31, 2005 by 30 percent or more, in accordance with Section 3 of the law.

Third, the Statement of Assets, Liabilities and Net Worth is presumed true and correct. The burden of proving underdeclaration rests on the party alleging it, and the proof must come from proceedings initiated by parties other than the Bureau of Internal Revenue or its agents within one year from filing, or from findings or admissions in congressional, administrative, or court proceedings.

Fourth, substantial compliance suffices where the required information appears in schedules attached to the Statement of Assets, Liabilities and Net Worth, even if a particular column is left blank.

Disposition

The petition was denied for lack of merit, and the decision and resolution of the Court of Tax Appeals en banc were affirmed, with Covanta retaining the cancellation and withdrawal of the deficiency value-added tax and minimum corporate income tax assessments while remaining liable for the deficiency expanded withholding tax.

Remember This

Memorize the line that the amnesty is acquired upon full compliance with the suspensive conditions and lost only upon proof of a 30 percent underdeclaration, which is a resolutory condition. Examiners use this case to test the suspensive and resolutory conditions of the 2007 tax amnesty, the presumption of truth of the Statement of Assets, Liabilities and Net Worth, and who bears the burden of proving underdeclaration.