G.R. No. 247737 - McDonald's Philippines Realty Corporation vs. Commissioner of Internal Revenue

Petitioner McDonald's Philippines Realty Corporation (MPRC) is a Delaware, USA foreign corporation licensed to do business in the Philippines. It established its Philippine branch to purchase and lease back two restaurant sites to Golden Arches Development Corporation (GADC).
Prior to 2007, MPRC extended long-term advances to GADC, which purchased land and equipment for restaurant operations.
GADC acknowledged unpaid rentals due to MPRC.

In 2008, Bureau of Internal Revenue (BIR) began auditing MPRC’s books for CY 2007.
On September 15, 2010, BIR issued a Preliminary Assessment Notice (PAN) finding deficiencies totaling P33,432,243.06 for income tax, VAT, and documentary stamp tax.
Two waivers extending the prescriptive period for assessment were executed by MPRC and the CIR, extending until March 31, 2012.
On March 30, 2012, MPRC received the Formal Letter of Demand and Audit/Assessment Notice (FLD/FAN), which deleted income tax and documentary stamp tax assessments but assessed deficiency VAT of P3,104,836.70 mainly due to undeclared interest/rental income of P11,080,687.70.
CIR imposed a 50% surcharge and 20% deficiency interest instead of compromise penalty.

MPRC protested the assessment on April 26, 2012.
CIR issued Final Decision on Disputed Assessment (FDDA) dated January 16, 2014 confirming deficiency VAT of P3,595,275.39.

MPRC filed judicial protest with the CTA.
The CTA Third Division upheld that interest income from loans to GADC is subject to VAT as part of MPRC's trade or business.
On prescription, CTA applied a 10-year extraordinary assessment period based on false returns doctrine (Aznar v. CTA).
The tax deficiency was reduced because of VAT overpayment for the 4th quarter.
CTA Division ruled imposition of 50% surcharge improper due to absence of deliberate tax evasion; imposed 25% surcharge instead.

Affirmed CTA Division’s application of 10-year prescriptive period based on falsity of VAT returns due to undeclared interest income but denied fraud.
Ordered MPRC to pay P9,206,213.06 inclusive of deficiency VAT, surcharge, deficiency and delinquency interests.
Modified delinquency interest rate from 20% to 12% pursuant to the TRAIN Law.

Contended that the 10-year period should not apply because there was no delinquency with intent to evade tax.
Argued that interest income was declared in income tax returns and thus there was no concealment.
Asserted that the CIR failed to properly notify or prove the 30% substantial underdeclaration threshold.

Asserted that failure to declare interest income in VAT returns constitutes a false return, justifying 10-year period.
Relied on statutory presumption of false returns for substantial underdeclarations exceeding 30%.
Disputed MPRC’s claims of honest mistake or lack of intent.

Whether CIR satisfied the requirements to invoke the extraordinary 10-year assessment period under Section 222(a) of the 1997 Tax Code due to false or fraudulent returns.
If not entitled to the 10-year period, whether the tax assessment was issued within the basic 3-year prescription period under Section 203 of the 1997 Tax Code.
Whether MPRC’s interest income from loans to GADC was subject to VAT.