Filipinas Synthetic Fiber Corporation vs. Court of Appeals

The governing principle is that the liability to withhold tax at source on income payments to non-resident foreign corporations arises upon accrual of the income, not upon actual remittance. The Court held that because the petitioner adopted the accrual method of accounting and deducted the accrued interest and royalties as business expenses, it was estopped from claiming that the duty to withhold arose only upon actual payment or remittance.

Filipinas Synthetic Fiber Corporation (Filsyn), a domestic corporation, received a letter of demand from the Commissioner of Internal Revenue on December 27, 1979, assessing it for deficiency withholding tax at source. The assessment covered the periods from the fourth quarter of 1974 to the fourth quarter of 1975, and the fourth quarter of 1975 to the fourth quarter of 1976. The bulk of the deficiency assessment consisted of interest and compromise penalties for alleged late payment of withholding taxes on interest, royalties, and guarantee fees paid to non-resident foreign corporations. Filsyn protested the assessment, but the CIR denied the protest, ruling that the liability to withhold attaches at the time of accrual, not at the time of actual payment or remittance.

• Nature: Two consolidated Petitions for Review on Certiorari challenging the Court of Appeals' affirmance of the Court of Tax Appeals' decisions on deficiency withholding tax assessments.
• The Assessment: On December 27, 1979, the CIR assessed Filsyn for deficiency withholding tax at source amounting to P829,748.77 (for Q4 1974 to Q4 1975) and P379,700.68 (for Q4 1975 to Q4 1976). The assessment covered interest, royalties, and guarantee fees paid to non-resident foreign corporations, including penalties for late payment.
• The Protest: Filsyn protested the assessment through its auditor, SGV and Company. On May 14, 1985, the CIR denied the protest, citing BIR Ruling No. 71-003 and Construction Resources of Asia, Inc. v. CIR, which held that liability to withhold attaches at the time of accrual.
• Accounting Method: Filsyn used the accrual method of accounting. It had already written off the amounts due to the foreign corporations as business expenses in its books, deducting them from gross income, even before actual remittance.

Petitioner maintained that its liability to withhold income tax for interest, royalties, and dividends payable to non-resident foreign corporations attached only when the amounts became due and demandable under the applicable contracts or upon actual remittance abroad, not upon their "setting-up" or accrual in the books.

Respondent countered that the liability to withhold and pay income tax withheld at source from payments due to a foreign corporation attaches at the time of accrual, not at the time of actual payment or remittance, citing BIR Rulings and Construction Resources of Asia, Inc. v. CIR.

• Procedural Issues: N/A
• Substantive Issues: Whether the liability to withhold tax at source on income payments to non-resident foreign corporations arises upon remittance of the amounts due or upon accrual thereof.

• Procedural: N/A
• Substantive: The Court ruled that the liability to withhold tax at source arises upon accrual. Section 53 of the National Internal Revenue Code was silent on when the duty to withhold arises. However, under the accrual basis method of accounting, income is reportable when all events fixing the right to receive it have occurred and the amount can be determined with reasonable accuracy. The requisites of accrual are: (1) the right to receive must be valid, unconditional, and enforceable; (2) the amount must be reasonably susceptible of accurate estimate; and (3) there must be a reasonable expectation of payment. The Court found that there was a definite liability and certainty that the foreign corporation would earn income at the loan's maturity, which Filsyn had already deducted as a business expense. Having taken advantage of the deduction under the accrual method, Filsyn was estopped from claiming the duty to withhold arose only upon remittance. The withholding agent is personally liable for the tax and acts as an agent of both the government and the taxpayer.

• Withholding Tax at Source — Personal Liability of Withholding Agent — Under Section 53(c) of the NIRC, the withholding agent is personally liable for the income tax withheld. The law sets no condition for this personal liability to attach, compelling the agent to withhold under all circumstances. The agent acts as the government's agent for collection/withholding and the taxpayer's agent for filing returns and payment.
• Accrual Method of Accounting — Requisites — Under the accrual basis, income is reportable when the right to receive it is fixed and the amount can be determined with reasonable accuracy. The requisites are: (1) the right to receive must be valid, unconditional, and enforceable; (2) the amount must be reasonably susceptible of accurate estimate; and (3) there must be a reasonable expectation of payment.
• Estoppel in Tax Deductions — A taxpayer who adopts the accrual method of accounting and deducts accrued interest and royalties as business expenses is estopped from claiming that the duty to withhold tax on such amounts arises only upon actual remittance rather than accrual.

• "The law sets no condition for the personal liability of the withholding agent to attach. The reason is to compel the withholding agent to withhold the tax under all circumstances. In effect, the responsibility for the collection of the tax as well as the payment thereof is concentrated upon the person over whom the Government has jurisdiction." — This passage articulates the rationale behind the personal liability of the withholding agent, emphasizing the policy of ensuring tax collection.
• "under the accrual basis method of accounting, income is reportable when all the events have occurred that fix the taxpayer's right to receive the income, and the amount can be determined with reasonable accuracy. Thus, it is the right to receive income, and not the actual receipt, that determines when to include the amount in gross income." — This defines the accrual method of accounting and its application to determining when income is reportable.
• "Petitioner cannot now claim that there is no duty to withhold and remit income taxes as yet because the loan contract was not yet due and demandable. Having 'written-off' the amounts as business expense in its books, it had taken advantage of the benefit provided in the law allowing for deductions from gross income. Moreover, it had represented to the BIR that the amounts so deducted were incurred as a business expense in the form of interest and royalties paid to the foreign corporations. It is estopped from claiming otherwise now." — This passage establishes the doctrine of estoppel preventing a taxpayer from claiming that the duty to withhold arises only upon remittance after deducting the accrued amounts as business expenses.

• Phil. Guaranty Co., Inc. v. Commissioner of Internal Revenue, 15 SCRA 1 — Cited as controlling authority for the principle that the withholding agent is personally liable for the tax and acts as an agent of both the government and the taxpayer, with no conditions attached to this personal liability.
• Construction Resources of Asia, Inc. v. Commissioner of Internal Revenue (CTA Case No. 3307) — Cited by the CIR as the basis for denying the protest, holding that liability to withhold attaches at the time of accrual.

• Section 53(b)(2), National Internal Revenue Code (1975) — Imposes a 35% withholding tax on income of non-resident foreign corporations not engaged in trade or business in the Philippines.
• Section 53(c), National Internal Revenue Code — Makes the withholding agent personally liable for the tax withheld and required to be withheld, constituting the agent as the agent of both the government and the taxpayer.
• Section 54(a), National Internal Revenue Code — Requires quarterly returns and payment of taxes withheld, stating that taxes deducted and withheld shall be held as a special fund in trust for the Government until paid.

Melo, Vitug, and Panganiban, JJ.