Following the imposition of Enhanced Community Quarantine (ECQ) in Luzon, the largest island housing its capital, Metro Manila, the Philippine government enacted Republic Act No. 11469, otherwise known as the Bayanihan to Heal As One Act, declaring a state of national emergency and granting the President special powers to mitigate local transmission of Coronavirus Disease 2019(COVID-19). Among its salient features is the authority granted to the President to move statutory deadlines and timelines for the filing and submission of any document, the payment of taxes, fees, and other charges required by law to be filed or paid. Implementing this provision, the Bureau of Internal Revenue (BIR) extended the deadline for the filing of tax returns, submission of documents, and payment of various taxes, with the most recent issuance extending the deadlines to May and June of 2020. In case the ECQ is further extended, the deadline for the filing of returns and payments of taxes has been provided to then be extended by a period of thirty (30) from the lifting of the ECQ [Revenue Regulation No. 10-2020].

While the reprieve is a welcome development to taxpayers, it comes with the concomitant prolonged exposure to possible assessment or collection of deficiency taxes. Previously, and immediately after the enactment of the Republic Act No. 11469, the BIR issued Revenue Memorandum Circular No. 34-2020 announcing the suspension of the running of the statute of limitations with respect to the assessment and collection of deficiency taxes starting 16 March 2020 until the lifting of the state of national emergency, and for a period of sixty (60) days thereafter. This issuance is anchored on Section 223 of the National Internal Revenue Code of 1997 (NIRC), which mandates that the prescriptive period for assessment and collection of deficiency taxes shall be suspended for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding  for collection in court, and for sixty (60) days thereafter. Thus, the prescriptive period to assess and collect deficiency taxes is also currently tolled and shall resume to run only after sixty (60) days from the lifting of the state of national emergency.

With the looming extension of the ECQ for certain areas in Luzon where there is COVID-19 outbreak, there is a real possibility for a company to sustain serious losses and go under, and render it unable to meet forthcoming obligations when the ECQ is lifted. After all, the ECQ has caused serious repercussions on income and cashflow of various businesses. For such a company, rehabilitation proceedings may help alleviate the situation by suspending the enforcement of all claims against the distressed corporation, including taxes, while it continues to operate to resuscitate its business.

Suspension of All Claims Against a Rehabilitating Company

Under rehabilitation, a financially distressed corporation is given the opportunity to recover from its losses by giving it a reprieve from its obligations while it tries to form a feasible plan for restructuring and rehabilitation, ultimately with the end in view of settling the claims of its creditors from its earnings. Its commencement entails, among others, the suspension of all actions or proceedings, in court or otherwise, for the enforcement of claims against the financially distressed corporation, including those of the government [See Sections 4(c) and 16, Financial Rehabilitation and Insolvency Act (FRIA); Section 8(V)(i), Implementing Rules and Regulations of the Financial Rehabilitation and Insolvency Act (FRIA IRR)]. Under the rules governing rehabilitation, a government agency must interpose its claim with the rehabilitation court in order to receive a share in the distribution arising from the proceedings [Section 12, Rule 2, FRIA IRR]. This means that any claim for accrued taxes (those which have already been assessed against the financially distressed company) which the BIR may have against a corporation at the time of the commencement of rehabilitation proceedings must be ventilated before the rehabilitation court. [Bureau of Internal Revenue vs. Lepanto Ceramics, Inc., 824 SCRA 125 (2017)]

With respect to deficiency taxes which have not yet been assessed, the assessment and  subsequent collection of any such deficiency taxes are likewise barred and suspended during the pendency of rehabilitation proceedings. The assessment and collection of deficiency taxes from a delinquent taxpayer has been characterized as an action or proceeding for the enforcement of a claim which is likewise suspended upon commencement of rehabilitation proceedings [Bureau of Internal Revenue vs. Lepanto Ceramics, Inc., supra]. Consistent with this position, the Philippine Court of Tax Appeals En Banc declared void an Assessment Notice against a taxpayer which was under rehabilitation, emphasizing that to allow the BIR to pursue a separate proceeding for the assessment and collection of deficiency taxes would be to undermine the purpose of rehabilitation and “would only add to the burden of the management committee or rehabilitation receiver, whose time, effort and resources would be wasted in defending claims against the corporation instead of being directed toward its restructuring and rehabilitation.” [Commissioner of Internal Revenue vs. Pacific Plans, Inc., C.T.A. EB Case No. 502 (6 January 2010)]

However, this does not mean that the BIR has no recourse against a financially distressed corporation with respect to deficiency taxes which have not yet been assessed at the time of the commencement of rehabilitation proceedings. It only means that the BIR cannot initiate the process for assessment and collection of deficiency taxes against a distressed corporation pending rehabilitation proceedings. The BIR must wait for the rehabilitation proceedings to be terminated before it can assess the taxpayer, and subsequently collect in case of deficiency taxes, with the remaining prescriptive period at the time of the commencement of the rehabilitation proceedings being reinstated upon termination of the rehabilitation proceedings.

Suspension of Prescriptive Period for Assessment of Taxes

As a general rule, the BIR has a period of three (3) years from the filing of a tax return to make an assessment. [Section 203, NIRC] This period is extended to ten (10) years in case a taxpayer files a false return or fraudulent return with intent to evade tax, or the taxpayer fails to file a return. In such instances, the ten (10) year period shall be reckoned from discovery of the falsity, fraud, or omission. [Section 222, NIRC]

As is the case with the current state of national emergency, a rehabilitation proceeding is an event that triggers the suspension of the running of the prescriptive period for assessment and collection as provided under the NIRC. By express judicial pronouncement, the BIR is prevented from making an assessment and collection of deficiency taxes from a delinquent taxpayer upon commencement of rehabilitation proceedings. [Bureau of Internal Revenue vs. Lepanto Ceramics, Inc., supra] Accordingly, the prescriptive period for assessment and collection of deficiency taxes will be tolled and the remainder of the period shall resume to run only upon the termination of rehabilitation proceedings, after which the BIR may validly assess deficiency taxes that the corporation is liable to pay.

Thus, should a financially distressed corporate taxpayer opt to file for rehabilitation as a consequence of the economic impact of the ECQ, it will enjoy the benefit of suspending the enforcement of all claims of its creditors, including taxes due to the BIR. However, such corporate taxpayer will remain susceptible to assessment and collection of deficiency taxes which have not prescribed after the termination of rehabilitation proceedings.