DMCI Holdings, Inc. vs. Commissioner of Internal Revenue

DECISION

REYES-FAJARDO, J.:

This Petition for Review 1 dated February 23, 2022 aims to nullify the Final Decision on Disputed Assessment (FDDA) dated December 20, 2021, issued by the Commissioner of Internal Revenue (CIR) against DMCI Holdings, Inc. Said FDDA found the latter liable for deficiency internal revenue taxes in the total amount of P199,283,071.13, inclusive of interest, for Taxable Year ended December 31, 2016 (TY 2016).

FACTS

Petitioner DMCI Holdings, Inc. is a corporation duly organized and existing under and by virtue of the laws of the Philippines, with principal office address at 3rd Floor Dacon Building, 2281 Don Chino Roces Avenue, Makati City.2 It is a publicly listed holding company 2 Docket (Vol 1), pp. 1-40.

Exhibit "P-2a." Id. at p. 89.

with a certificate of permit to offer securities for sale issued by the Securities and Exchange Commission (SEC) on August 17, 1995.3 Respondent is the duly appointed CIR, authorized to perform the duties of his office, including, among others, acting on disputed tax assessments and entering into a compromise with respect to, or abating, tax liabilities as provided by law.4 On May 21, 2018, OIC -

Assistant Commissioner Large

Taxpayer's Service Teresita M. Dizon (ACIR-LTS Dizon) issued a Letter of Authority (LOA) SN: eLA201600030598, authorizing Revenue Officers (ROs) Ernesto Nacpil and Agnes Sison under Group Supervisor (GS) Erlita Maria Vergara, to examine petitioner's books of accounts and other accounting records for all internal revenue taxes for the periods January 1, 2016 to December 31, 2016.5 On May 30, 2019, ACIR-LTS Dizon issued LOA SN: eLA201700005622] LOA-125-2019-00000221, authorizing ROs Hannah Thea Tulio-Binangon, Limuel Miguel, and GS Bryan Francis Lim, to examine petitioner's books of accounts and other accounting records for the periods January 1, 2016 to December 31, 2016.6 On June 30, 2020, the Bureau of Internal Revenue (BIR) issued a Notice of Informal Conference on petitioner? On

January

15, 2021, petitioner received

Assistant

Commissioner- Large Taxpayer's Service Manuel V. Mapoy (ACIR- LTS Mapoy)'s Preliminary Assessment Notice with Details of Discrepancies (PAN) dated January 11,2021, containing the proposed deficiency income tax (IT), value-added tax (VAT), final withholding tax (FWT), expanded withholding tax (EWT), withholding tax on compensation (WTC), fringe benefits tax (FBT), documentary stamp 3 ' 6 7 Par. 2, Stipulated Facts, joint Stipulation of Facts and Issues (JSFI), Docket (Vol. III), p. 888.

Par. 1, Stipulated Facts, )SF!. /d. at p. 888. Exhibit "R-1." BIR Records- Folder 1 (Exhibit "R-15"), p. 4. Exhibit "P-3," Docket (Vol. I), p. 92; and Exhibit "R-2," BIR Records - Folder 1 (Exhibit "R-15"), p. 93.

Exhibit "R-6." BIR Records- Folder 1 (Exhibit "R-15"), p. 380.

tax (DST) assessments, and miscellaneous charges (MC) forTY 2016, with surcharges with respect to FWT, amounting to P452,664,985.26.8 On January 29, 2021, petitioner submitted its reply of even date, contesting ACIR-LTS Mapoy's PAN.9 On March 23, 2021, petitioner received10 Deputy Commissioner - Operations Group Arne! SD Guballa (DCIR Guballa)'s Formal Letter of Demand and Final Assessment Notices, with Details of Discrepancies (FLD /FAN) 11 dated March 18, 2021, assessing the former for deficiency IT, VAT, FWT, EWT, WTC, FBT, DST, and MC for TY 2016, in the total amount of N55,982,952.58, inclusive of surcharges and interests.

On April 22, 2021, petitioner lodged its Protest/Request for Reinvestigation,12 challenging DCIR Guballa's FLD/FAN, followed by its submission13 of documents in support thereof on June 17, 2021. During reinvestigation, petitioner paid deficiency internal revenue taxes found m FLD/FAN,14 with the following particulars: portions of the

DCIR Guballa's

Tax Type

Amount

FBT

P1,187,010.18

EWT

P180,526,81

WTC

Pl,Ol2,710.43

VAT

P7,443,164.61

IT

P247,788.49 On January 24, 2022, petitioner received 15 respondent's FDDA,16 demanding payment of deficiency IT, FWT, EWT, DST, and 10 11 12 13 14 15 Exhibit "P-4," Docket (Vol. !), p. 93-104; and Exhibit "R-8," BIR Records - Folder 1 (Exhibit "R-15"), pp. 435-446.

Exhibit "P-5," Docket (Vol. I), pp. 105-108. Exhibit "P-6," Docket (Vol. !), at p. 121; and Exhibit "R-10," BIR Records - Folder 1 (Exhibit "R-15"), at p. 523.

Exhibit "P-6," Docket (Vol.!), pp. 121 to 141; and Exhibits "R-10," "R-10-A," "R-11," and "R-11-A" to "R-11-G," BIR Records- Folder 1 (Exhibit "R-15"), pp. 503 to 523. Exhibit "P-7." Docket (Vol. I), pp. 142-178. Par. 8, Stipulated Facts, )SF!, Docket (Vol. III), p. 889; and Exhibit "P-8," Docket (Vol. !), pp. 179-183.

Par. 9, Stipulated Facts, )SF!. Docket (Vol. III), p. 889. Exhibit "P-1," Docket (Vol. !), p. 64; and Exhibit "R-13," BIR Records- Folder 1 (Exhibit "R-15"), at p. 868.

MC covering TY 2016, in the total sum of P199,283,071.13, inclusive of interestY On February 23, 2022, petitioner filed its Petition for Review,18 docketed as CTA Case No. 10784, which was met by respondent's Answer (Re: Petition for Review dated 23 February 2022),19 posted on May 13,2022.

Meanwhile, petitioner received the BIR's Warrant of Distraint and/or Levy No. 125-2022-037 (WDL) on April 7, 2022. 20 In view thereof, petitioner moved, 21 and We granted, 22 its plea to suspend collection of tax and/ or to enjoin the enforcement of the WDL, sans the required bond.

On August 17, 2022, pre-trial conference was held.23 There, the parties jointly submitted, and We adopted the issue to be addressed in this case. The scheduled presentation of the parties' evidence and the date of commissioner's hearing for the marking of their respective exhibits were as well set. Additionally, the parties were directed to submit their Joint Stipulation of Facts and Issues not later than September 16, 2022.

On September 16, 2022, the parties submitted, 24 and We admitted and approved,25 their Joint Stipulation of Facts and Issues, thereby terminating pre-trial. Accordingly, a Pre-Trial Order26 was issued on November 22, 2022.

16 17 18 19 20 21 22 23 25 26 Trial followed.

Exhibit "P-1," Docket (Vol. I), pp. 64-77; and Exhibits "R-13," "R-14," and "R-14-A" to "R- 14-E," BIR Records- Folder 1 (Exhibit "R-15"), pp. 855-868. Par. 10, Stipulated Facts, JSFI, Docket (Vol. III), p. 890. Suprn note 1.

Docket (Vol. II), pp. 636-649.

Per Manifestation filed on May 19, 2022. Docket (Vol. II), pp. 653-656. Petitioner's Urgent Motion to Suspend the Collection of Tax and/ or to Enjoin the Enforcement of Warrant of Distraint and/ or Levy filed on April13, 2022. I d. at pp. 600- 609.

Resolution dated December 7, 2022. Docket (Vol. III), pp. 969-978. Order dated August 17, 2022. Docket (Vol. II), pp. 872-874. Docket (Vol. III), pp. 888 to 902.

Resolution dated October 17, 2022. Id. at p. 926.

Petitioner presented the following witnesses: (1) Mary Grace M. Garcia,27 its Finance Officer; (2) April A. Arriola/8 its Accounting and Administrative Officer; and (3)

Independent Certified Public

Accountant29 Emmanuel Y. Mendoza (ICP A Mendoza).30 On May 5, 2023, petitioner filed its Offer of Documentary Evidence,31 to which respondent filed his Comment (Re: Offer of Documentary Evidence dated 05 May 2023) on May 11, 2023.32 By Resolution dated June 21, 2023,33 the evidence offered by petitioner was admitted, save for: (1) Exhibit "P-2," for failure to submit the duly marked exhibit; (2) Exhibits "P-lOw," "P-37 series," and "P-38 series," for not being found in the records of the case; and

(3) Exhibits "P-39 series," "P-40 series," "P-41 series," "P-42 series," "P-45 series," and "P-60 series to P-69 series," for not being found in the records of the case and for failure to identify. Petitioner rested its case.

Respondent presented Revenue Officer Hannah Thea Tulio- Binangon34 as witness.

On March 13, 2024, respondent filed his Formal Offer of Evidence,35 to which petitioner filed its Comment/Opposition (re: Formal Offer of Evidence dated March 13, 2024) on March 25, 2024.36 Under Resolution37 dated June 4, 2024, the evidence offered by respondent were admitted. Respondent rested his case. 27 28 29 30 31 32 33 " 35 36 37 Exhibit "P-64," Docket (Vol. II), pp. 691-701; Identified during the hearing held on March 30, 2023, per Order of even date, Docket (Vol. III), pp. 1021-1022. Exhibit "P-46," Docket (Vol.!), pp. 45-63; Identified during the hearing held on March 2, 2023, per Order of even date, Docket (Vol. III), pp. 986-987. Oath of Commission dated january 26, 2023 [Docket (Vol. III), p. 980]; and Order dated january 26, 2023, I d. at p. 981-982. Exhibit "P-124," I d. at pp. 992-1018. Identified during the hearing held on April 20, 2023, per Order of even date, I d. at pp. 1023-1025. Id. at pp. 1039-1052.

I d. at pp. 1078-1080.

I d. at pp. 1086-1089.

Exhibit "R-16," Docket (Vol. II), pp. 666-677. Identified during the hearing held on March 12, 2024, per Order of even date. Docket (Vol. III), pp. 1098-1099. Docket (Vol. Ill), pp. 1100-1109.

Id. at pp. 1112-1121.

Page 6 o£73 On August 5, 2024, CTA Case No. 10784 was submitted for decision,38 considering: (1) respondent's Manifestation39 filed on July 10, 2024, saying that he is adopting the arguments in his Answer as his Memorandum; and (2) petitioner's Memorandum40 filed on July 18,2024.

ISSUE41

Is petitioner liable to pay the deficiency IT, VAT, EWT, FWT, DST, and MC, in the total amount of One Hundred Ninety-Nine Million Two Hundred Eighty-Three Thousand, Seventy-One Pesos and Thirteen Centavos (P199,283,071.13) found by respondent forTY 2016?

ARGUMENTS

Petitioner argues that the deficiency internal revenue tax assessments found in respondent's FDDA covering TY 2016 should be cancelled because it is wanting in legal and factual bases, explaining in this wise:

38

a. The BIR unjustifiably ignored its actual net loss in computing its adjusted taxable income in its 2016 Annual Income Tax Return (AITR);

b. It properly, accurately, and timely reported its income in its 2016 AITR;

c. The BIR's pro rata approach in allowing the proportional deduction of expenses imputed to income subject to regular IT lacks foundation in fact and law;

d. It subjected, and paid the EWT corresponding to its professional fees;

e. The dividends it declared for TY 2016 are exempted from IT; hence, it is not required to withhold final income taxes thereon; f.

Some of the expenses disallowed by the BIR are exempt from imposition of EWT;

g. The expenses disallowed by the BIR, for failure to subject the same to FBT under Section 33 of the 1997 National Internal Revenue Code Minute Resolution dated August 5, 2024. Id. at p. 1180. I d. at pp. 1128-1130.

I d. at pp. 1132-1176.

See Stipulated Issue, JSFI, Docket (Vol. III), pp. 890-891.

(NIRC), as amended, is not subject to said tax, because those expenses are not fringe benefits on the part of the recipient thereof. Rather, they are simply its business expenses;

h. The DST imposed on the transaction, i.e., receivables from its subsidiary, was already settled by such subsidiary; and

1. The MC (Compromise Penalties) slapped by the BIR against it is incorrect because it did not agree to the imposition thereof. On the other hand, respondent counters that the findings and results of petitioner's 2016 deficiency internal revenue taxes, are sufficiently supported by legal and factual bases; thus, the FDDA embodying these results and findings should stand.

RULING

We partly grant the Petition.

First. Did We obtain jurisdiction over CIA Case No. 10784? Yes.

Section 7(a)(1) of Republic Act (RA) No. 1125,42 as amended by RA No. 9282, endows the CIA exclusive appellate jurisdiction over respondent's or his duly authorized representative's decision on disputed assessments:43 Sec. 7. Jurisdiction. -The CTA shall exercise:

a. Exclusive appellate jurisdiction to review by appeal, as herein provided:

1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue;

An Act Creating the Court of Tax Appeals. See Philippine Amusemwt and Gaming Corporation v. Bureau of Internal Revenue, G.R. No. 208731, january 27, 2016.

44 Section 3(a)(1), Rule 4 of the Revised Rules of the Court of Tax Appeals45 clarified that the CT A in Division has jurisdiction over respondent's or his duly authorized representative's decision involving disputed assessments, among others.46 For the decision of respondent or his duly authorized representative to be raised on appeal before the CIA in Division, there must first be a disputed assessment. 47 To correctly dispute a final assessment, a valid administrative protest by the taxpayer must be made pursuant to Section 228 of the NIRC, as amended, which states: Section 228. Protesting of Assessment. - ...

If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an assessment based on his findings.

Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of the one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable48 In turn, the validity of the administrative protest rests upon the confluence of two (2) conditions, namely: first, it must be filed within 45 46 47 48 Boldfacing ours.

A.M. No. 05-11-07-CTA.

SEC. 3. Cases within the jurisdiction of the Court in Divisions. - The Court in Divisions shall exercise:

(a) Exclusive appellate jurisdiction to review by appeal the following:

(1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws, administered by the Bureau of Internal Revenue; (Boldfacing ours) See Commissioner of Internal Revenue v. Liqnigaz Philippines Corporation, G.R. No. 215534, April18, 2016.

Boldfacing ours.

30 days from the receipt of the final assessment; and second, it must be in such form and manner as may be prescribed by implementing rules and regulations.49 Subsection 3.1.4 of Revenue Regulations (RR) No. 18-2013, echoed the period to institute an administrative protest before the BIR, as well as the form and manner thereof, in this wise: 3.1.4 Disputed Assessment. - The taxpayer or its authorized representative or tax agent may protest administratively against the aforesaid FLD/FAN within thirty (30) days from date of receipt thereof. The taxpayer protesting an assessment may file a written request for reconsideration or reinvestigation defined as follows: (i) Request for reconsideration - refers to a plea of re- evaluation of an assessment on the basis of existing records without need of additional evidence. It may involve both a question of fact or of law or both.

(ii) Request for reinvestigation - refers to a plea of re- evaluation of an assessment on the basis of newly discovered or additional evidence that a taxpayer intends to present in the reinvestigation. It may also involve a question of fact or of law or both. The taxpayer shall state in his protest (i) the nature of protest whether reconsideration or reinvestigation, specifying newly discovered or additional evidence he intends to present if it is a request for reinvestigation, (ii) date of the assessment notice, and (iii) the applicable law, rules and regulations, or jurisprudence on which his protest is based, otherwise, his protest shall be considered void and without force and effect.

Indeed, the taxpayer has thirty (30) days from receipt of the final assessment to file a valid administrative protest. Upon the taxpayer's receipt of the FDDA, it has another thirty (30) days to seek redress with the CTA in Division.

On March 23, 2021, petitioner received 50 DCIR Guballa's FLDjFAN.s1 Counting thirty (30) days therefrom, petitioner had until April 22, 2021 to file an administrative protest thereto; thus, he timely52 lodged his administrative protest on the FLD /FAN on April 22, 2021. Said protest, too, contained: (1) a statement seeking reinvestigation of the assessment, citing various documents and certifications in support thereof; (2) the legal and factual grounds of 49 50 51 52 See Commissioner ~f Internal Revenue v. Court ~f Tax Appeals - Third Division and Citysuper Incorporated, G.R. No. 239464, May 10, 2021. Supra note 10.

Supra note 11.

Supra note 12.

such protest; and (3) the date of FAN. 53 Therefore, petitioner registered a valid administrative protest on the FLD/FAN, thereby transmuting the assessment to a disputed assessment. On January 24, 2022, petitioner received 54 respondent's FDDA.55 Counting thirty (30) days therefrom, petitioner had until February 23, 2022 to seek judicial recourse. Therefore, the timely56 filing of petitioner's Petition for Review on February 23, 2022, clad Us with jurisdiction over CIA Case No. 10784. Second. Is petitioner liable to pay 2016 deficiency IT, EWT, FWT, FBI, DST, and MC found by respondent? Yes, albeit in part.

In his FDDA,57 respondent slapped petitioner with deficiency internal revenue taxes, inclusive of increments, and MC for TY 2016, amounting to t'199,283,071.13, summarized as follows:

Tax Type

Basic Deficiency Tax

Surcharge

Interest

Total

IT

1'23,792,897.36 - 1'14,554,734.58 1'38,347,631.94

FWT

78,963,024.89 - 52,197,804.50 131,160,829.39

EWT

1,932,351.37 - 1,277,363.67 3,209,715.04

FBT

1,716,615.27 - 1,134,753.24 2,851,368.51

DST

12,241,729.56 1'3,060,432.39 8,159,364.29 23,461,526.25

MC

252,000.00

Total

1'118,646,618.45 1'3,060,432.39 1'77,324,020.28 1'199,283,071.13 Our finding on each item of deficiency internal revenue tax, and corresponding justifications therefor shall proceed in seriatim. I. IT

Petitioner's

2016 deficiency

IT

liability amounting to t'38,347,631.94, inclusive of interest, was calculated by respondent in the following manner:ss 53 54 55 56 57 58 Ibid.

Supra note 15.

Supra note 16.

Supra note 1.

Supra note 16.

Exhibit "P-1." Docket (Vol. I), p. 64.

Net Income per ITR

Add: Adjustments

Undeclared Income

Disallowed Expense - Unnecessary Expense

Disallowed Expenses due to non-withholding of tax

Adjusted Taxable Income

Tax Rate

Tax Due

Add: Tax Payments/Credits

Prior year excess credit

Excess Minimum Corporate Income Tax (MCIT)

applied this current taxable year

Creditable Tax Withheld- Three (3) Quarters

MC!T Paid Carried Forward in the succeeding year

Basic Tax Due

Add: Interest

20% (Apr. 16, 2017 to Dec. 31, 2017) 12% (Jan. 01, 2018 to Nov. 30, 2021)

TOTAL AMOUNT DUE

!' !' 3,457,050.81 54,520,492.51 21,332,114.53 79,309,657.85 !'79,309,657.85 0.30 !'23,792,897.36 !'8,940,226.00 787,500.00 (56,861.00) (9,670,865.00) !'23,792,897.36 3,376,635.84 11,178,098.74 14,554,734.5959 !'38,347,631.95 What we can refract therefrom is that the 2016 deficiency IT found by respondent against petitioner originated from the following items:

1. Net Income per ITR nil

2. Undeclared Income P3,457,050.81

3. Disallowed Expense - Unnecessary Expense 54,520,492.51

4. Disallowed Expense due to non-withholding tax 21,332,114.53

5. Minimum Corporate Income Tax (MCIT) Paid 56,861.00

6. Carried Forward in the succeeding year 9,670,865.00 I.l. Net Income per ITR (nil) To recall, in its AITR for TY 2016,60 petitioner reported net loss of !'51,720,118.00 for said year, computed as follows:

Line

No.

30 31 32 33 59 60

Particulars

Net Sales/Revenues/Fees

Less: Cost of Sales/Services

Gross Income from Operations Add: Other Taxable Income Not Subjected to Final Tax Actual footing is !'14,554,734.58; With a difference of !'0.01. Exhibit "P-34," Docket (Vol. II), pp. 504-512.

Amount

1"4,200,000.00 9,339,206.00 (1"5,139,206.00) 7,982,238.00

34

Total Gross Income

P2,843,032 00 35

Less: Ordinary Allowable Itemized Deductions

54,563,150.00 40

Net Taxable Income

(P51,720,118.00) Respondent omitted petitioner's reported net loss amounting to f'51,720,118.00. 61 Instead, the former set the latter's net income to zero (0), resulting in corresponding IT deficiency on the part of petitioner. Respondent must be corrected.

Section 228 of the NIRC, as amended, pertinently states that "[t]he taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void."

No explanation was provided by respondent in the FLD/FAN62 and FDDA63 to rationalize his total deletion of petitioner's net loss amounting to f'51,720,118.00, reported in its 2016 AITR, as well as fixing petitioner's net taxable income at zero (0). It means that petitioner was not informed of the suppose reasons for said actions, offensive of its right to due process. By this premrse alone, petitioner's reported net loss of P51,720,118.00 in its 2016 AITR may still be used in computing its IT liability for said year. Besides, petitioner was able to show that its reported net loss in the amount of f'51,720,118.00 for TY 2016, represents the excess of allowable deductions over its gross income for said year; hence, it is the net operating loss contemplated by Section 34(D)(3)64 of the NIRC, as amended.65 ICPA Mendoza's presentation is hereby adopted:66 61 62 63 64 65 Suprn note 16.

Details of Discrepancy (FLD/FAN), Exhibit "P-6," Docket (Vol.!), pp. 125-130. Exhibit "P-1," Id. at pp. 64-71.

SEC. 34. Deductions from Gross Income.- ... (D) Losses. - 3) Net Operating Loss Carry-Over. -The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss: ...

For purposes of this subsection, the term 'net operating loss' shall mean the excess of allowable deduction over gross income of the business in a taxable year, Item V.A.2. of the !CPA Report (Exhibit "P-123"), Binder, p. 16.

Revenues:

Dividend income Finance income Management fees Foreign currency exchange gains (loss)·- net Pension income Gain on sale of property and equipment

Less: Expenses

General and administrative expenses Professional fees Salaries, wages, and employee benefits Depreciation and amortization Entertainment, amusement, and recreation Contribution and donation

Rent

Taxes and licenses Transportation and travel Repairs and maintenance

Supplies

Advertising and promotions Communication, light, and water Contracted services Fuel and oil Bank charges

Miscellaneous

Loss on liquidation of subsidian;

!"6,348,634,046.00 96,047,480.00 4,200,000.00 494,519.00 430,461.00 348,214.00 18,916,387.00 16,463,930.00 5,308,810.00 3,866,766.00 3,160,326.00 3,132,592.00 2,678,038.00 2,629,669.00 2,488,550.00 1,930,792.00 1,852,498.00 1,201,643.00 949,399.00 545,250.00 3,918.00

I

5,342,551.00 Income before income tax

Reconciling Items:

Add: Non-deductible expenses/taxable other income Entertainment, amusement, and recreation 3,824,766.00

Others

2,593,555,7 45.00 Less: Non-taxable income and income subiected to final tax Dividend income 6,348,634,046.00

Others

89,764,765.00

Net Operating Loss

!"6,450,154,720.00 70,471,119.00 2,590,385,419.00 P3,789,298,182.00 2,597,380,511.00 6,438,398,811.00 (P51,720,118.00) Considering that petitioner had net operating loss amounting to !'51,720,118.00 for TY 2016, Section 34(D)(3) 67 of the NIRC, as amended, too, permits the carry-over thereof for three (3) succeeding taxable years. However, petitioner did not report said sum in its 66 67 Table 12 of the !CPA Report (Exhibit "P-123"), Binder, pp. 11-16. Supra note 64.

AITR for 2017, 2018, and 2019, albeit it was reported as a disclosure in its 2017, 2018, and 2019 AFS.® Neither did petitioner utilize its 2016 net operating loss of P51,720,118.00 in 2017, 2018, and 2019. As illustrated by ICPA Mendoza:”

Year Expiration NOLCO NOLCO

Vear Amount Applied/Expired

Exhibit 2015 2018 P48 432,539.00 - Exhibit | Exhibit 2016 2019 51,720,118.00 Exhibit Exhibit 1,617,162.00 159,048,709.00 “P.48774 “P-51775 Exhibit Exhibit 2018 2021 - 48,432,539.00 “p_4g” % “P_52"77 Exhibit 51,720,118.00 “p.5Q”78 “P5379

Cumulative

Balance

P210,526,253.00 259,201,366.00 101,769,819.00 53,337,280.00 1,617,162.00 On these accounts, petitioner’s net operating loss for TY 2016 amounting to P51,720,118.00 stands and should indeed be considered in computing its 2016 IT liability.

1.2. Undeclared Income (P3,457,050.81) Respondent computed petitioner’s undeclared income, by comparing the Other Income subjected to VAT and the Other Income per AFS/ITR, tabled below:®¢ Total 1st Quarter Sales P6,157,265.10 Sale of Company Vehicle (net of VAT) P348,214.29 Possible Collection from Management Fee Receivable 2,352,000.00 2,700,214,29 Possible Undeclared Income subject to Regular Corporate Income Tax (RCIT P3,457,050.81 68 Item V.A.3. of the ICPA Report (Exhibit “P-123”), Binder, pp. 16-17. 69 Ibid.

70 Ibid.

7 Note 15, p. 34, USB (Exhibit ”P-124-2”). 72 Note 15, Docket (Vol. II}, p. 554. 73 Line 37, Id. at p. 506.

74 Note 15, p. 32, USB (Exhibit “P-124-2”). 73 Line 37, p. 3, USB (Exhibit “P-124-2”). 76 Note 15, p. 38, USB (Exhibit “P-124-2”). 7 Line 37, p. 6, USB (Exhibit “P-124-2”). 7% Note 15, pp. 28 to 29, USB (Exhibit “P-124-2”).

Petitioner asserts that it properly declared its taxable income for 2016, invoking the following reconciliation:81 Total 1st Quarter Sales per 2016 BIR Form No.

2550-Q

Gain on Sale of Investment Property (2015 ITR)

Gain on Sale of Fully depreciated service vehicle (2016)

Collection of Management Fees (2016)

Possible Undeclared Income subject to RCIT Petitioner is correct.

f'4,759,050.91 348,214.29 1,050,000.00 f'6,157,265.10 6,157,265.1082 PO.OO The specifics of petitioner's immediately preceding reconciliation can be traced to the following presentation made by

ICP A Mendoza:83

Amount Per

Amount Per 2015

Particulars

Reference

2016 AFS/ITR

AFSjiTR

Total

Remarks

It is petitioner's internal policy -- that it has the option to sell fully depreciated vehicle at 20% of cost.

Cost~

1'1,741.071.4384

X20%

Gain on sale

Gain=

348,214.29 of vehicle, net

VAT~

41 785.71

of VAT

Annex A-1

1'348,214.29 1'- 1'348,214.29

Price=

1'390,000.00 Gain on sale

Price-

1'28,477,000.00 of land to

Cost=

23,146,863.0986

DMCl

Gain=

5,330,136.91 Mining, net

VAT=

(571,086.10)

of VAT

Annex A-1

- 4,759,050.8385 4,759,050.83

Net=

1'4 759,05.0.8.3

Management

fee collected

Annex A-1

1,050,000.00 1,050,000.00

Total

1"1,398,214.29 1"4,759,050.83 1"6,157,265.1087 Our validation of petitioner's reconciliation and ICP A Mendoza's examination and presentation generated the following results:

81 82 83 84 85 86 87 Par. 26, Petition for Review, Docket (Vol. I), pp. 16-17. Actual footing is 1'6,157,265.20; With a difference of 1'0.10. Item V.B.2 of the !CPA Report (Exhibit "P-123"), Binder, pp. 17-18. Note 8 of AFS, Exhibit "P-35," Docket (Vol. II), p. 543. 1'4,759,050.00, Line 1, Schedule 3, Exhibit "P-9," Docket (Vol.!), p. 188. Note 7 of AFS, Exhibit "P-35," Docket (Vol. II), p. 542. Actual footing is 1'6,157,265.12; With a difference of 1'0.02.

One. Petitioner's AITR8S and AFS89 for TY 2015 reveal that the gain from the sale of real property 90 in 2015, amounting to !'4,759,050.00, was recorded as gain on sale of investment properties, and already recognized as income by petitioner for said year. Two. The sale of fully depreciated vehicle to Herbert M. Consunji was supported by Official Receipt (OR) No. 47 91 and Statement of Account (SOA) No. 44.92 The gain thereon amounting to !'348,214.29, was properly recorded in petitioner's AITR93 and AFS94 forTY 2016.

Three. The collection of management fees from DMCI Project Developers, Inc. for the 1st quarter of TY 2016 amounting to P1,050,000.00 was supported by OR No. 5095 and SOA No. 45.96 These management fees were properly reported and included in the total Management Fees received for 2016, and declared in petitioner's AITR for the TY 2016.97 Ergo, the IT imposed on petitioner's undeclared income in the total amount of !'3,457,050.81 should be cancelled. I.3 Disallmued Expense - Unnecessary Expense (?54,520,492.51) Respondent theorizes that only those expenses attributable to petitioner's active income must be permitted, whereas expenses imputable to petitioner's passive income must be disallowed. Given that only 0.08% of petitioner's total income constitutes its active income, only 0.08% of petitioner's reported expenses per 2016 AITR should be allowed. As such, 99.92% of its reported expenses 88 89 90 91 92 93 " 95 96 97 Line 1, Schedule 3, Exhibit "P-9," Docket- Vol. I, p. 188. Parent Company Statements of Comprehensive Income, Exhibit "P-47," p. 5, USB (Exhibit "P-124-2").

Exhibit "P-28," Docket (Vol. III), pp. 1072-1077. Exhibit "P-13-a," Docket (Vol. I), p. 279. Exhibit "P-13-b," id. at p. 280.

Line 1, Schedule 3, Exhibit "P-34," Docket (Vol. II), p. 508. Parent Company Statements of Comprehensive Income, Exhibit "P-35," Id. at p. 518. Exhibit "P-13-c," Docket (Vol. 1), p. 282. Exhibit "P-13-d," id. at p. 281.

Included in the amount of 1'4,200,000.00 Sale of Services, Line 2, Schedule 1, Exhibit "P- 34," Docket (Vol. II), p. 507; Refer to Exhibits "P-13-c" to "P-13-j," Docket (Vol. 1), pp. 282- 288.

amounting to P54,520,492.51 was disallowed. Respondent provided the following table:98

Computation of Rate:

Total

Active Income

Passive Income

Dividend

Income

1"6,348,634,046.00 1"6,348,634,046.00

Finance Income

96,047,480.00 96,047,480.00

Management

Fees

4,200,000.00 1"4,200,000.00

Forex Gain

494,519.00 494,519.00

Pension Income

430,461.00 430,461.00

Gain on Sale of

PPE

348,214.00 348,214.00

Total

P6,450,154,720 P5,042,733.00 P6,445,111,987.00

Rate

100";(, 0.08% 99.92'\'{, Total Expenses claimed in the !TR 1"54,563, 150.00

Rate for Passive Income

99.92% Disallowed expense -Unnecessary Expense P54,520,492.51 Petitioner retorts that the determination of whether an expense is necessary is factual in nature. It cannot be made to depend on respondent's arbitrary allocation formula. Respondent is in error.

The relevant portion of Section 34(A)(l)(a) of the NIRC, as amended, reads:

98 SEC. 34. Deductions from Gross Income. - (A) Expenses. -

(1) Ordinary and Necessary Trade, Business or Professional Expenses.-

(a) In General. - There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/ or conduct of the trade, business or exercise of a profession, ... Exhibit "P-1," Docket (Vol. 1), p. 65.

Indeed, there is no requirement in Section 34(A)(1)(a) of the NIRC, as amended, that only expenses allocable to a taxpayer's active income would be allowed as an expense deduction, whereas those expenses imputable on its passive income would be disallowed as an expense deduction. In fact, the very act of allocating expenses is not even mentioned therein. Therefore, respondent's disallowance of 99.92% of petitioner's reported expenses per its 2016 AITR, in the amount of P54,520,492.51, is wanting in legal foundation. Our conclusion finds solace in the following dictum in Department of Finance (DOF), et al. v. Asia United Bank, et al. (AUB): 99 Under Section 34 (A) (1) of the Tax Code, the taxpayer has the right to claim as deductions from its gross income all the ordinary and necessary expenses paid or incurred in carrying on, or which are directly attributable to the development, management, operation and/ or conduct of its trade or business, to arrive at the correct amount of taxable income.

We agree with respondents that common expenses should be deductible in full against its income subject to regular tax. As currently worded, all expenses are deducted directly and in full without any allocation or attribution between the different income streams. There is no requirement to allocate the common expenses to its income subject to Final Withholding Tax or exempt income. There is no distinction for common expenses among income streams, as these are, after all, common expenses. Thus, there can be no allocation of expenses between different income in the same trade or business unit.JDD Above and beyond, ICPA Mendoza verified that the deductible expenses amounting to P54,563,150.00, as reported in petitioner's AITR for TY 2016, were tied up with the amount of expenses disclosed in petitioner's 2016 AFS. ICP A Mendoza likewise confirmed that said expenses were directly related to and properly classified as ordinary and necessary in the conduct of petitioner's business.101 Respondent contends that the apportionment he made on petitioner's expenses is warranted, based on: (1) Commissioner of Internal Revenue v. Court of Tax Appeals and Smith Kline & French 99 100 101 G.R. Nos. 240163 & 240168-69, December 1, 2021. Boldfacing ours.

Item V.C.1. of the !CPA Report (Exhibit "P-123"), Binder, pp. 18-21.

Overseas Co. (Philippine Branch);102 (2) Citytrust Banking Corporation v. Commissioner of Internal Revenue;103 and (3) RR No. 16-86. The contention is specious.

Smith Kline is inapplicable in this case due to variance in factual milieu. Particularly, said case involves the BIR' s allocation of expenses between a Philippine branch of a foreign corporation vis-a- vis its head office, based on the ratio of Philippine gross income vis-a- vis worldwide gross income. Here, however, the BIR allocated the expenses of a single taxpayer, i.e., petitioner, based on different income streams. Besides, the case at hand does not involve apportionment of expense between a Philippine branch of a foreign corporation and its head office.

Neither could the ruling in Citytrust be adopted here. There, the BIR disallowed three (3) deductions claimed by therein taxpayer. These are: (1) Foreign Currency Deposit Unit Expense; (2) trading loss; and (3) allocated expenses to non-taxable income. Of these three

(3) deductions, therein taxpayer impugned the allocated expenses before the CTA, insisting that the allocation used by the BIR is not a requirement under the old Tax Code. The BIR countered that attribution of said expenses is proper because it pertained to therein taxpayer's tax-exempt income. The CTA agreed with the BIR, mainly holding that in the absence of adequate evidence on which to base a more reasonable allocation of office expenses between taxable and non-taxable income, such expenses are held allocable to each type of income in the proportion that each type bears to the total taxable and non-taxable income for the year, and that portion allocated to the non-taxable income is non-deductible. Yet, the CTA's ruling cannot prevail over the following pronouncement of the Supreme Court in AUB:1o4 102 103 104 We agree with respondents that common expenses should be deductible in full against its income subject to regular tax. As currently worded, all expenses are deducted directly and in full without any allocation or attribution between the different income streams. There is no requirement to allocate the common expenses to its income subject to Final Withholding Tax or exempt income. There G. R. No. L-54108, January 17, 1984. Smith Kline for brevity. CTA Case No. 5261, January 28, 1998. Citytrust for brevity. Supra note 99. Boldfacing ours.

is no distinction for common expenses among income streams, as these are, after all, common expenses. Thus, there can be no allocation of expenses between different income in the same trade or business unit.

Nor could the allocation of expenses sanctioned by RR No. 16- 86105 save the day for respondent. This regulation applies only to transactions involving a Philippine branch of a foreign corporation and its head office. Petitioner is a domestic,106 and not a branch of a foreign corporation.

All told, respondent's disallowance of unnecessary expenses amounting to :1'54,520,492.51 should be cancelled for lack of legal and factual basis.

1.4

Disallowed

Expense

Due

to

Non-Withholding of Tax

(!'21,332, 114.53) Initially, DC Guballa's FLD/FAN disallowed expenses claimed by petitioner forTY 2016 due to non-withholding of tax, in the total amount of :1'22,073,844.03, with basic deficiency EWT of :1'2,043,610.80. Said expenses are composed of: (a) payment of professional fees (:1'12,339,203.03); (b) purchase of services (:1'9,538,394.00); and (c) purchase of goods (!"196,247.00). 107 Petitioner recognized that it needed to pay the EWT corresponding to :1'741,729.50 worth of professional fees; thus, it voluntarily paid108 the 15% EWT thereon in the sum of :1'111,259.43. Consider the ensuing table: 109 105 106 107 108 109 110

Professional Fees per AFS

1'18, 916,387.00110 Professional Fees subjected to EWT • Professional fees subjected to EWT 1'10,726,037.50 • Professional fees (GPPs) 7,448,620.00 18,174,657.50

Difference

1'741,729.50

Tax Rate

15%

EWTDue

1'111,259.43 SUBJECT: Amendment to Section 160 of the Income Tax Regulations (Rev. Regulations No. 2) Regarding the Basis of Determining Ratable Part of Overseas Overhead Expenses Apportioned under Section 37(b) of the National Internal Revenue Code. Supra note 2.

Schedule 9, Details of Discrepancy (FLO/FAN). Supra note 11. Exhibits "P-30" to "P-30-a," Docket (Vol. II), pp. 488-491. Annex "C," Exhibit "P-7," Docket (Vol. I), p. 160. Note 13 of AFS, Exhibit "P-35," Docket (Vol. II), p. 553.

Respondent acknowledged petitioner's voluntary payment of EWT in the sum of !>111,259.43; hence, the former removed in his FDDA, the professional fees pertaining thereto amounting to !>741,729.50. Precisely, the total expenses disallowed by respondent due to non-withholding of tax was reduced from !>22,073,844.03 to !>21,332,114.53, viz.:

Income Payment

Income payment subject of Income payment

Nature per FLDm

petitioner's perFDDA112 voluntary EWT payment

Payment of

Professional Fees

Pl2,339 ,203.03 P741,729.50 P11,597,473.53

Purchase of Service

9,538,394.00 - 9,538,394.00

Purchase of Goods

196,247.00 - 196,247.00

Total

P22,073,844.03 P741,729.50 P21,332,114.53 Respondent is obstinate in disallowing income payments amounting to !>21,332,114.53, claiming that petitioner failed to subject the same to EWT.

Petitioner ripostes that it already paid the remaining EWT due; thus, respondent has no basis to maintain that the amount of !>11,597,473.53 in professional fees was not subjected to EWT. We partly uphold respondent's disallowance. Section 34(K) of the NIRC, as amended, provides that "any amount paid or payable which is otherwise deductible from, or taken into account in computing the gross income or for which depreciation or amortization maybe allowed under this Section, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in accordance in this Section of this Code." Inversely, failure to withhold taxes on, inter alia, expenses expended by income- payor/withholding agent would lead to the disallowance thereo£.113 111 112 113 Exhibit "P-6," Docket (Vol. 1), at p. 127. Exhibit "P-1," id. at p. 66.

See Green Valley Marketing Corporation v. Commissioner of Internal Revenue, CTA EB Nos. 1801 and 1808, October 14, 2019.

a.

b.

c.

Relatedly, Section 57(B) of the NIRC, as amended, states that "[t]he Secretary of Finance may, upon the recommendation of the Commissioner, require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by law ... " The items of income payments referred to in said provision is found on Section 2.57.2 of RR No. 2-98,114 as amended. ICP A Mendoza classified the expenses not subjected to withholding tax amounting to I'21,332,114.53, 115 into specific categories, based on petitioner's 2016 AFS. ICP A Mendoza also compared each classification to the corresponding amounts declared in petitioner's Monthly Alphalist of Payees (MAP)116 and Monthly Remittance Return of Creditable Income Taxes Withheld (Expanded) (BIR Form No. 1601-E),m generating the following summation:118

Amount of

Amount of

Difference -

Expense Per

Expense Per

Admitted

Amount Disallowed

General Expense

AFS

16011'/MAP

and Paid by the BIR

Accounts

Reference

[a]

Reference

[b] [c] [d=a-b-c]

Professional

Annex A-5

Annex A-6

fees

P18,916,387.34

P6,577,183.80 P741,729.50 rn,597,474.04

Annex A-5

Annex A-6

Ser\'ices

17,129,433.00

7,591,039.00 - 9,538,394.00

Annex A-5

Annex A-6

Goods

3,677,683.58

3,481,438.00 - 196,245.58

Total

1'39,723,503.92 1'17,649,660.80 1'741,729.50 1'21,332,113.62 I.4.a Professional Fees (?11,597,474.04) ICPA Mendoza relayed that these professional fees include payments made by petitioner for director's fees and allowances, professional fees, as well as legal and audit fees, broken down as follows: 119 114 115 116 117 118 119 SUBJECT: Implementing Republic Act No. 8424, "An Act Amending the National Internal Revenue Code, as Amended" Relative to the Withholding on Income Subject to the Expanded Withholding Tax and Final Withholding Tax, Withholding of Income Tax on Compensation, Withholding of Creditable Value-Added Tax and Other Percentage Taxes.

Amount per summary on Table 19 of the !CPA Report (Exhibit "P-123"), Binder, p. 23; With a difference of 1'0.91 per actual sum of annexes. Exhibits "P-55-1" to "P-55-12," USB (Exhibit "P-124-2"). Exhibits "P-56-1" to "P-56-12," "P-57-1" to "P-57-11," and "P-58-1" to "P-58-12," USB (Exhibit "P-124-2").

Table 19 of the !CPA Report (Exhibit "P-123"), Binder, p. 23. Table 20 of the !CPA Report (Exhibit "P-123"), Binder, p. 23.

Amount of

Expense Per

Difference -

Specific

Amount of

16011'/MAP

Amount

Expense

Expense Per

Subjected to

Assessed by the

Accounts

Reference

AFS

Reference

EWT

Reference

BIR

a.l. Director 1s fees and

Annex A-5

Annex A-6

Annex A-7

allowance

1'5,770,000.00

1'2,360,000.00

1'3,410,0DO.OO a.2.

Professional

Annex A-5

Annex A-6

Annex A-7

fees

8,236,167.34

4,217,183.80

4,018,983.54 a.3. Legal and

Annex A-5

Annex A-7

audit fees

4,910,220.00 -

4,910,220.00

Sub-total

1'18,916,387.34 1'6,577,183.80 1'12,339,203.54

Less: Admitted

and paid 741,729.50

Total

1'11,597,474.04 I.4.a.1 Director's fees and allowances- ?3,410,000.00 This pertains to per diem payments granted to various individual directors of petitioner. 120 Petitioner also subjected these fees and allowances to 10% EWT, in the amount of P341,000.00.121 Yet, petitioner erred in using the 10% EWT rate. For the 10% EWT rate to be applied, Section 2.57.2(A) 122 of RR No. 2-98, as amended by RR No. 30-2003, requires a duly executed 120 121 122 Annex A-8 of the !CPA Report (Exhibit "P-123"). Page 2, Annex A-6 of the !CPA Report (Exhibit "P-123"). Section 2.57.2(A), RR No. 2-98, as amended by RR No. 30-2003, provides in part that "Furthermore, in order to determine the applicable tax rate (10% or 15%) to be applied/withheld by the withholding agent, every individual professional/ talent/ corporate directors herein enumerated, shall periodically disclose his gross income for the current year to the Bureau of Internal Revenue (BIR) by submitting a notarized sworn declaration attached as Annex' A' hereof in three (3) copies (two (2) copies for the BIR and one (1) copy for the taxpayer), copy furnished all the current payors of the declaration duly stamped received by the BIR (Collection Division of the Regional Office having jurisdiction over the place where the income earner is registered/Large Taxpayers Collection Division for large taxpayers in Metro Manila/LTDO for large taxpayers outside Metro-Manila). Sworn declaration may likewise be filed by the income payor on behalf of the professionals/ talents/ directors whose services were being rendered exclusively to the aforesaid payor. The disclosure should be filed on June 30 of each year or within fifteen (15) days after the end of the month the professional/ talent/ director's income reaches P720,000, whichever comes earlier. In case his total gross income is less than P720,000 as of June 30, he/she shall submit a second disclosure within fifteen (15) days after the end of the month that his/her gross income for the current year to date reaches P720,000. The payee - professional/talent/ director shall furnish each payor a copy of the BIR duly stamped received sworn declaration not later than five (5) days from the date of receipt by the BIR. In case of failure to submit the June 30 annual declaration/disclosure to the BIR, and to furnish the payor/s a copy thereof, the payor shall withhold the tax at the rate of 15'Y,,," (Boldfacing ours) sworn declaration submitted by the income payees, attesting that their gross receipts or sales does not exceed the P720,000.00 threshold; otherwise, the applicable EWT rate is 15%.123 The director's fee and allowances amounting to P3,410,000.00 was subjected to 10% EWT by petitioner; hence, should be allowed as the latter's deduction. However, for petitioner's failure to provide the requisite duly executed sworn declaration referred to in Section 2.57.2(A) of RR No. 2-98, as amended by RR No. 30-2003, the applicable EWT rate is 15%.

Accordingly, petitioner is liable for deficiency EWT in the reduced amount of P170,500.00, computed as follows:

Required EWT

Tax Withheld

Deficiency

Particulars

Annex

Gross Amount

15% 10'\"o

EWT

Director's

fees

A-8

l"3,410,000.00 P511,500.00 l"341,000.00 l"170,500.00

Total

P170,500.00 I.4.a.2 Professional fees- ?4,018,983.41 This 124 represents payments made by petitioner for various services, including consultancy, technical assistance, audit fees, and appraisal fees, itemized as follows:

Annexed to the ICP A

Report (Exhibit "P-

Particulars

Amount

123")

Annex A-9

Technical Assistance

l"S,OOO.OO

Annex A-10

General Professional

661,700.00

Partnerships

Annex A-ll

Service Fees

330,000.00

AnnexA-12

Consultancy Fees

390,000.00

Annex A-13

Consultancy Fees

38,783.41

Annex A-14

Appraisal Fees

2,593,500.00

Total

P4,018,983.41 One. Technical Assistance (Annex A-9) - The amount of P5,000.00, paid by petitioner to Philippine International Software Corporation, corresponds to the services the latter rendered in retrieving petitioner's 2013 books and records from its General Ledger (GL) 123 124 Item V.D.2.a.1 of the !CPA Report (Exhibit "P-123"), Binder, pp. 23 to 24. Amount per summary on Table 20 of the !CPA Report (Exhibit "P-123"), Binder, p. 23; With a difference of 1'0.13 per actual sum of annexes.

system. Clearly, said transaction falls under payments made to certain contractors or persons engaged in the sale of computer services, computer programmers, software/ program, developer/ designer, internet service providers, web page designing, computer data processing, conversion or base services and other computer related activities. Section 2.57.2(E)(4)(m) of RR No. 2-98, as amended by RR 14-2002, imposes 2% EWT on these transactions.125 Since these technical fees were subjected by petitioner to 2% EWT,126 respondent erred in disallowing the same as deductible expense. Two. General Professional Partnerships (Annex A-10) - the sum of !'661,700.00 represents audit fees paid by petitioner to SGV and Co., a

General Professional Partnership (GPP)_127

Income payments made to GPPs are exempt from EWT, because their income is exempted from IT under Section 26128 of the NIRC, as amended. Section 2.57.5 of RR No. 2-98, as amended by RR No. 14-2002129 confirmed:

Sec. 2.57.5. Exemption from Withholding. - The withholding of creditable withholding tax prescribed in these Regulations shall not apply to income payments made to the following: (B) Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special, such as but not limited to the following:

(4) General professional partnerships The income payments made by petitioner to SGV and Co. pertain to professional fees paid to a GPP; hence, not subject to IT, 125 126 127 128 129 Item V.D.2.a.2 of the !CPA Report (Exhibit "P-123"), Binder, p. 24. Page 10 of Annex A-6 of the !CPA Report (Exhibit "P-123"), Binder. Item V.D.2.a.2 of the !CPA Report (Exhibit "P-123"), Binder, p. 24. SEC. 26. Tax Liability of Members of General Professional Partnerships.- A general professional partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities. Underscoring ours.

SUBJECT: Amending Further Pertinent Provisions of Revenue Regulations No. 2-98, as amended.

and consequently to EWT. For this reason, respondent erred m disallowing the same as deductible expense. Three.

Service fees

(Annex A-11) -

this income payment amounting to !'330,000.00 was made by petitioner to Securities Transfer Services, Inc. (STSI),130 and was subjected by petitioner to 10% EWT; thus, respondent erred in disallowing the same as petitioner's expense.

At any rate, considering that petitioner failed to present duly executed sworn declaration made by STSI, attesting that its gross receipts or sales did not exceed the !'720,000.00 threshold, mandated by Section 2.57.2(A) of RR No. 2-98, as amended by RR No. 30-2003, the applicable EWT rate is 15%.131 Four. Consultancy fees (Annex A-12) - this income payment amounting to !'390,000.00 was made by petitioner to Mr. David Siddharta C. Reyes (Mr. Reyes),132 and was subjected by petitioner to 10% EWT; 133 thus, respondent erred in disallowing the same as petitioner's expense.

In any event, with petitioner's failure to provide the duly executed sworn declaration submitted by Mr. Reyes, attesting that his gross receipts or sales did not exceed the !'720,000.00 threshold, the applicable EWT rate is 15%.134 Five. Consultancy fees (Annex A-13) - given that no proof was produced by petitioner to establish that said fees amounting to !'38,783.41 were subjected to EWT, 135 the disallowance thereof as petitioner's expense must be upheld. Six. Appraisal fees (Annex A-14) - no proof was adduced by petitioner to establish that such fees in the sum of !'2,593,500.00 were 130 131 132 133 134 135 Annex A-11 of the !CPA Report (Exhibit "P-123"), Binder. Supra note 122.

Annex A-12 of the !CPA Report (Exhibit "P-123"), Binder. Pages 12 to 13 of Annex A-6 of the !CPA Report (Exhibit "P-123"), Binder. Supra note 122.

Annex A-13 of the !CPA Report (Exhibit "P-123"), Binder.

subjected to EWT;136 thus, the disallowance thereof as petitioner's expense must be upheld.

Seven. We condense the foregoing discussion as follows: For one, the following disallowances on professional fees amounting to Pl,386,700.00 are cancelled, viz.:

Annexed to the

ICPA Report

(Exhibit "P-123")

Particulars

Amount

Annex A-9

Technical Assistance

!'5,000.00

Annex A-10

General Professional Partnerships (GPPs)

661,700.00

Annex A-ll

Service Fees

330,000.00

Annex A-12

Consultancy Fees

390,000.00

Total

Pl,386,700.00 For another, petitioner is liable for deficiency EWT m the amount of !'430,842.51, computed as follows:

Gross

Required EWT

Deficiency

Particulars

Annex

Amount

-15%

Tax Withheld

EWT

Service Fees

A-11

!'330,000.00 !'49,500.00 1'33,000.00 1'16,500.00

Consultancy

Fees

A-12

390,000.00 58,500.00 39,000.00 19,500.00

Consultancy

Fees

A-13

38,783.41 5,817.51 - 5,817.51

Appraisal

Fees

A-14

2,593,500.00 389,025.00 - 389,025.00

Total

P430,842.51 I.4.a.2 Legal and audit fees - !'4,910,220.00 ICP A Mendoza explained that the legal and audit fees incurred by petitioner represent payments made to various audit and legal firms, as well as disbursements to individuals through petty cash replenishments,m with the following itemization: 136 137 Annex A-14 of the !CPA Report (Exhibit "P-123"), Binder. Item V.D.2.a.3 of the !CPA Report (Exhibit "P-123"), Binder, p. 25.

Annexed to the ICP A

Report (Exhibit "P-

123")

AnnexA-15

Annex A-16

Annex A-17

Annex A-18

Particulars

Amount

GPPs

1"3,606,350.00

GPPs

40,940.00

GPPs

1,257,830.00

Notarial Fees

5,100.00

Total

!'4,910,220.00 One. GPPs under Annexes A-15 and A-17. - since the income payments corresponding thereto, amounting to P3,606,350.00 and P1,257,830.00, respectively, were made to GPPs, it is exempt from IT, and consequently, to EWT, under Section 26 of the NIRC, as amended in relation to Section 2.57.5 of RR No. 2-98, as amended by RR No. 14-2002. Thus, respondent's disallowance thereof as petitioner's expense is incorrect.

Two. GPPs under Annex A-16.- since the amount of P40,940.00 is supported only by a Journal Voucher, 138 it cannot be ascertained whether the same was paid to a GPP. Thus, respondent is correct in disallowing the same as petitioner's expense. Three. Notarial fees under Annex A-18.- the amount of P5,100.00 represents petty cash replenishments for payment made to various individual lawyers for notarial services_139 However, no supporting documents were submitted to support the claim; hence, respondent is correct in disallowing the same as petitioner's expense. Four. petitioner is liable for deficiency EWT in the amount of P6,906.00, computed as follows:

Gross

Required

Tax

Particulars

Annex

Amount

EWT-15%

Withheld

GPP

A-16

1"40,940.00 1"6,141.00 -

Notarial Fees

A-18

5,100.00 765.00 -

Total

1.4.b Services (?9,538,394.00) Exhibit "P-75," USB (Exhibit "P-124-2"). 138 139 Item V.D.2.a.3 of the !CPA Report (Exhibit "P-123"), Binder, p. 25.

Deficiency

EWT

1"6,141.00 765.00 P6,906.00 ICP A Mendoza traced respondent's disallowance of services amounting to P9,538,394.00 for failure to withhold tax from the following items of service fees, tabled as follows:14o

Expense Accounts

Reference

Amount of Expenses Per

AFS

b.1. Contracted services

Exhibit "P-35"

1:' 949,399.00 b.2. Representation

Exhibit "P-35"

3,866,766.00 b.3. Transportation

Exhibit "P-35"

2,629,669.00 b.4. Advertising

Exhibit "P-35"

1,852,498.00 b.5. Repairs

Exhibit "P-35"

2,488,550.00 b.6. Miscellaneous

Exhibit "P-35"

5,342,551.00 Total amount of expense per AFS 17,129,433.00 Amount of income payments subjected by the Petitioner to 2% EWT on services based

Annex A-6-

on MAP for taxable year 2016 page 10 7,591,039.00

Difference

P9,538,394.75141 ICP A Mendoza proceeded to account the income payments made by petitioner for service fees subjected to 2% EWT based on its MAP, which respondent used in computing the disallowed portion of petitioner's expenses, particularized below:142

Income Payments Subjected to 2% EWT

Reference on Services by the Petitioner

b.1. Contracted services b.2. Representation Annex A-6 page 5 b.3. Transportation Annex A-6 page 5 b.4. Advertising Annex A-6 page 5 b.5. Repairs Annex A-6 page 6 b.6. Miscellaneous Annex A-6 page 7 b.7. Advances to suppliers Annex A-6 page 7 b.8. Communication, light, and water Annex A-6 page 9 b.9. Development cost Annex A-6 page 9 b.10. Fuel and oil Annex A-6 page 9 b.l1. Leasehold improvement Annex A-6 page 9 b.12. Office supplies Annex A-6 page 10 b.13. Other employee benefits Annex A-6 page 10 b.14. Business licenses Annex A-6 page 10 b.15. Professional fees Annex A-6 page 10 b.16. Training and dev. course Annex A-6 page 10 140 141 142 Table 24 of the !CPA Report (Exhibit "P-123"), Binder, p. 26. Actual footing is 1'9,538,394.00; With a difference of 1'0.75. Table 25 of the !CPA Report (Exhibit "P-123"), Binder, p. 27.

Amount of Income

Payments Subjected to 2'Vu EWT on

Services by the

Petitioner Per

1601F/MAP

1:' - 51,495.50 85,546.00 748,961.00 390,790.50 142,439.00 443,928.50 1,088,386.50 1,607.14 39,906.50 1,706,843.50 682,876.11 126,149.00 2,000,000.00 5,000.00 77,109.00

Total I

P7,591,039.00143 I ICP A Mendoza then noted that the total income payments related to contracted services, representation expenses, transportation expense, advertising expense, repairs and maintenance, and miscellaneous expense subjected to 2% EWT on services only amounted to '1"1,419,232.00 (sum of b.1 to b.6 of immediately preceding table). On the other hand, the remaining '1"6,171,806.25 (sum of b.7 to b.16 of immediately preceding table) were not related to the expense accounts being faulted by the BIR. With this notation, ICP A Mendoza concluded that respondent's disallowances should have been computed as follows:144

Amount of

Income

Difference -

Amount of

Payments

Should be

Expense Accounts

Reference

Expenses Per

Reference

Subjected to

Amount of

AFS (Exhibit "P-

2'Vn EWTon

Disallowances

35)

Services by the by the BIR

Petitioner Per

1601F/MAP

Exhibit "P-

b.1. Contracted services 35" 1"949,399.00

P-

1"949,399.00

Exhibit "P-

Annex A-6

b.2. Representation 35" 3,866,766.00 pageS 51,495.50 3,815,270.50

Exhibit "P-

Annex A-6

b.3. Transportation 35" 2,629,669.00 page 5 85,546.00 2,544,123.00

Exhibit "P-

AnnexA-6

b.4. Advertising 35" 1,852,498.00 page 5 748,961.00 1,103,537.00

Exhibit "P-

Annex A-6

b.S. Repairs 35" 2,488,550.00 page6 390,790.50 2,097, 759.50

Exhibit "P-

Annex A-6

b.6. Miscellaneous 35" 5,342,551.00 page 7 142,439.00 5,200,112.00

Total

Pl7,129,433.00 P1,419,232.00 P15,710,201.00 I.4.b.l Contracted Services- ?949,399.00 The contracted services amounting to '1"949,399.00,145 represent payments to multi-purpose and service cooperatives for the services they performed,I46 thus:

H3

144 145 146 Actual footing is 1'7,591,038.25; With a difference of 1'0.75. Table 26 of the !CPA Report (Exhibit "P-123") Binder, p. 27. Amount per summary on Table 26 of the !CPA Report (Exhibit "P-123"), Binder, p. 27; With a difference of 1'0.23 per actual sum of annexes. Item V.D.2.b.1 of the !CPA Report (Exhibit "P-123"), Binder, pp. 27-28.

Annexed to the ICP A

Report (Exhibit "P-

Particulars

Amount

123")

Annex A-19

Cooperatives

1'860,429.90

Annex A-20

Cooperatives

88,969.33

Total

1'949,399.23 These transactions are governed by Sections 7 to 10 of the Joint Rules and Regulations Implementing Articles 60, 61, and 144 of RA No. 9520 (Joint IRR), as circularized by Revenue Memorandum Circular (RMC) No. 12-2010, 147 whereby cooperatives are granted exemptions from IT, VAT, donor's tax, and DST, inter alia. However, for a cooperative to enjoy these tax exemptions, the Joint IRR and RMC No. 12-2010 demand presentation of a valid Certificate of Tax Exemption/Ruling (CTER).

Petitioner did not withhold the EWT on payments made to cooperatives. Neither did petitioner produced the required valid CTER of the cooperatives who rendered services to it. This means that petitioner failed to substantiate said cooperatives' tax exemption, rendering the income payments to them subject to 2% EWT. For this reason, respondent's disallowance of contracted services in the amount of f'949,399.23 as petitioner's expense is sustained. I.4.b.2 Representation- ?3,815,270.50 The f'3,815,270.50148 worth of representation expense incurred by petitioner, falls within the scope of representation expense as defined under Section 2 of RR No. 10-2002. 149 This expense is comprised of food and beverage consumed during meetings and conferences,1so listed as follows:

148 149 150

SUBJECT:

Circularizing the Full Text of JOINT RULES AND REGULATIONS IMPLEMENTING ARTICLES 60, 61 AND 144 OF REPUBLIC ACT NO. 9520, OTHERWISE KNOWN AS THE "PHILIPPINE COOPERATIVE CODE OF 2008" IN RELATION TO RA NO. 8424 OR THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED.

Amount per summary on Table 26 of the !CPA Report (Exhibit "P-123"), Binder, p. 27; With a difference of 1'0.58 per actual sum of annexes. SUBJECT: Implementing the Provisions of Section 34(A)(1)(a)(iv) of the Tax Code of 1997, Authorizing the Imposition of a Ceiling on "Entertainment, Amusement and Recreational

Expenses"

Item V.D.2.b.2 of the !CPA Report (Exhibit "P-123"), Binder. p. 28.

Annexed to the ICP A Report

(Exhibit "P-123")

Annex A-21

Annex A-22

Annex A-23

Particulars

Amount

Representation- Purchase of goods f'57,098.15 Representation - Purchase of goods 148,000.00

Representation

3,610,171.77

Total

P3,815,269. 92 We note that the amounts of P57,098.15 (Annex A-21) and P148,000.00 (Annex A-22), with the total sum of P205,098.15, were subjected by petitioner to 1% EWT, 151 since these representation expenses were classified as purchases of goods. We likewise observe that as for representation expense worth P3,610,171.77 (Annex A-23), no EWT was withheld due to petitioner's failure to provide adequate substantiation. Being so, it cannot be ascertained whether such transaction pertained to purchase of goods or services. In the absence of such classification, the higher EWT rate of 2% is deemed applicable.J52 Despite the immediately preceding observation, petitioner only claimed and deducted the amount of N2,000.00 as representation expense in its 2016 AITR. This claim is in accordance with the allowable ceiling on entertainment, amusement and recreation (EAR) expenses enjoined by Section 34(A)(1)(a)(iv) 153 of the NIRC, as amended, as implemented by Section 5 of RR No. 10-2002. We quote with approval ICPA Mendoza's tabulation:154

Transaction

EAR Ceiling

Computation of EAR Ceiling

[For taxpayers engaged in] 0.50 percent(%) of net sales (i.e., gross sales less sales Sale of goods or returns/ allowances and properties 151 152 153 sales discounts) Page 12 of Annex A-6 of the !CPA Report (Exhibit "P-123"), Binder. Item V.D.2.b.2 of the !CPA Report (Exhibit "P-123"), Binder, p. 28. SEC. 34. Deductions from Gross Income. - ... (A) Expenses. -

(1) Ordinary and Necessary Trade, Business or Professional Expenses.-

(a) In General. - (iv) A reasonable allowance for entertainment, amusement and recreation expenses during the taxable year, that are directly connected to the development, management and operation of the trade, business or profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his or its trade, business or exercise of a profession not to exceed such ceilings as the Secretary of Finance ... Table 29 of the !CPA Report (Exhibit "P-123"), Binder, p. 29.

Management Fee -

Multiply by limit

EAR Ceiling

Representation

expense per books

EAR Ceiling

Excess/ unclaimed !'4,200,000.00 1% !'42.000.00 !'3,866,766.00 42,000.00 representation expense !'3,824766 00 One (1) percent(%) of net Sale of services, use or revenue (i.e., gross revenue Claimed deduction lease of properties less discounts)

per 2016 AITR

!'42,000.00 Again, of the !'3,866,766.00 worth of representation expenses per petitioner's books, the latter only claimed !'42,000.00- the maximum representation expense that it is allowed to claim as deduction under the law and regulations. Petitioner took the initiative of not claiming the remaining and excess representation expense of !'3,824,766.00 as deduction, a portion of which, already comprises the BIR' s disallowance of !'3,815,270.50. 155 Simply put, there is nothing more for the BIR to disallow here. For this reason, respondent is incorrect in disallowing representation expenses amounting to !'3,815,270.50.

I.4.b.3 Transportation - ?2,544,123.00

Petitioner's

claimed transportation expenses totaling !'2,544,123.00156 pertains to airfare ticket, hotel accommodation, per diem allowances for various meetings and conferences:

Annexed to the ICP A

Report (Exhibit "P-

Particulars

Amount

123") Transportation- out of

Annex A-24

pocket expenses 1'9,382.00

Annex A-25

Transportation

2,534,741.09

Total

P2,544,123.09 One. The transportation- out of pocket expenses (Annex A-24) in the sum of !'9,382.00 represented out-of-pocket reimbursements advanced by Castillo Laman Tan Pantaleon Law Office (Castillo). 155 156 Item V.D.2.b.2 of the !CPA Report (Exhibit "P-123"), Binder, p. 29. Amount per summary on Table 26 of the !CPA Report (Exhibit "P-123"), Binder, p. 27; With a difference of !'0.09 per actual sum of annexes.

In this regard, Section 2.57.2(A) of RR No. 2-98 and Question and Answer No. 21 of RMC No. 72-2004157 consider unsubstantiated transportation expenses, including reimbursable amounts not properly supported by third-party receipts issued in the name of the client (herein petitioner) as part of the service provider's gross income; hence, subject to 2% EWT.

Petitioner's Statements of Account and Acknowledgement

Receipts reflected the amount of P9,382.00. Yet, the absence of Castillo's receipts issued in the name of petitioner renders the documentation insufficient to exempt said sum from EWT. Otherwise stated, said sum is liable for EWT. Two. Transportation expense (Annex A-25) amounting to P2,534,741.09lacked proper substantiation. In a nutshell, petitioner failed to withhold 2% EWT on transportation expenses totaling P2,544,123.09. 158 Therefore, respondent's disallowance thereof as petitioner's transportation expense is sustained.

I.4.b.4 Advertising- ?1,103,537.00 Petitioner incurred P1,103,537.00 159 worth of advertising expenses, which pertains to photo coverage, design, and execution of its annual report, detailed as follows: 157 158 159

Annexed to the ICP A

Report (Exhibit "P-

Particulars

Amount

123")

Annex A-26

Advertising

f'135,766.67

Annex A-27

Advertising

967,770.06

Total

P1,103,536.73

SUBJECT:

Clarification of Issues on the Additional Transactions Subject to Creditable Withholding Tax under Revenue Regulations No. 17-2003 (RR 17-2003), as Amended by RR 30-2003, RR 1-2004 and RR 3-2004. Item V.D.2.b.3 of the !CPA Report (Exhibit "P-123"), Binder, p. 30. Amount per summary on Table 26 of the !CPA Report, Exhibit "P-123," Binder, p. 27; With a difference of 1'0.27 per actual sum of annexes.

CIA Case No. 10784

One. The advertising expense amounting to !'135,766.67 (Annex A-26)160 was subjected to EWT at a rate of 10%;161 hence, respondent erred in disallowing the same as petitioner's expense. Nevertheless, considering that petitioner failed to present duly executed sworn declaration submitted by the payee thereof, attesting that its gross receipts or sales did not exceed the !'720,000.00 threshold, mandated by Section 2.57.2(A) of RR No. 2-98, as amended by RR No. 30-2003, the applicable EWT rate is 15%.162 Two. The advertising expense in the sum of !'967,770.06 (Annex A-27) was not subjected by petitioner to EWT. Neither did petitioner provide supporting documents to substantiate the same. Therefore, the disallowance thereof by respondent as petitioner's advertising expense is proper.163 Three. Petitioner's deficiency EWT liability on its advertising expense in the amount of !'26,143.73, is condensed as follows:

Required

Gross

EWT-

Deficiency

Particulars

Annex

Amount

15''l'o/2%

Tax Withheld

EWT

Advertising

A-26

1"135,766.67 1"20,365.00 1"13,576.67 1"6,788.33

Advertising

A-27

967,770.06 19,355.40 - 19,355.40

Total

1"26,143.73 I.4.b.5 Repairs- ?2,097,759.50 The amount of !'2,097,759.50 164 relates to repairs and maintenance expense of petitioner's various offices and vehicles, broken down as follows:

160 161 162 163 16-!

Annexed to the ICP A

Report (Exhibit "P-

Particulars

123")

Annex A-28

Repairs and Maintenance

Page 13 of Annex A-6 of the !CPA Report (Exhibit "P-123"). Item V.D.2.b.4 of the !CPA Report (Exhibit "P-123"), Binder, p.30. Supra note 122.

Item V.D.2.b.4 of the !CPA Report (Exhibit "P-123"), Binder, p. 30.

Amount

1"8,482.14 Amount per summary on Table 26 of the !CPA Report (Exhibit "P-123"), Binder, p. 27; With a difference of 1'2.91 per actual sum of annexes.

AnnexA-29

Repairs and Maintenance

59,758.93

Annex A-30

Repairs and Maintenance

2,029,521.34

Total

1'2,097,762.41 ICPA Mendoza opined that: (1) petitioner subjected the amounts of P8,482.14165 and P59,758.93,166 aggregating to P68,241.07, which represents repairs and maintenance to 1% EWT;167 and (2) petitioner did not submit supporting documents to substantiate the expenses amounting to P2,029,521.34,16S We partly agree with ICPA Mendoza.

An examination of the supporting documents shows that only repairs and maintenance amounting to P59,758.93 (Annex A-29) was indeed subjected by petitioner to 1% EWT. Thus, respondent erred in disallowing the same as petitioner's expense. In contrast, petitioner failed to subject repairs and maintenance amounting to P8,482.14 (Annex A-28) and P2,029,521.34 (Annex A-30) to EWT; hence, the disallowances made by respondent in the total amount of P2,038,003.48169 as petitioner's expense is correct. In fine, petitioner is liable for deficiency EWT in the amount of P40,760.07, computed as follows:

Required

Gross

EWf -l'Vu or

Particulars

Annex

Amount

21Yn

Repairs &

Maintenance

A-28

1'8,482.14 1'169.64

Repairs &

Maintenance

A-29

59,758.93 597.59

Repairs &

Maintenance

A-30

2,029,521.34 40,590.43 165 Annex A-28 of the !CPA Report (Exhibit "P-123"), Binder. Annex A-29 of the !CPA Report (Exhibit "P-123"), Binder.

Tax

Withheld

- 597.58 -

Total

Page 12 of Annex A-6 of the !CPA Report (Exhibit "P-123"), Binder. Item V.D.2.b.5 of the !CPA Report (Exhibit "P-123"), Binder, p. 31.

Deficiency

EWf

1'169.64 - 40,590.43 1'40,760.07 166 167 168 169 Sum of Annexes A-28 and A-30 of the !CPA Report (Exhibit "P-123"), Binder.

I.4.b.6 Miscellaneous- ?5,200,112.00 The amount of P5,200,112.00 170 represents petitioner's miscellaneous expense, such as various out-of-pocket expenses of audit and legal firms, donations, online subscriptions, and petty cash reimbursement of expenses,171 tabulated below:

Annexed to the ICP A

Report (Exhibit "P-

Particulars

Amount

123")

Annex A-31

Goods

p 15,813.00

Annex A-32

Donation

1,520,000.00

Annex A-33

Miscellaneous

24,025.72

Annex A-34

Miscellaneous

100.00 f.-Annex A-35

: GPP

546,105.00

Annex A-36

Miscellaneous

3,094,069.42

Total

P5,200,113.14 One. Petitioner properly subjected the amounts of P15,813.00 (Annex A-31) 172 and P24,025.72 (Annex A-33)173 to 1% EWT since these pertain to purchase of goods; thus, respondent's disallowance thereof as petitioner's expense is incorrect. Two. The sum of P1,520,000.00 (Annex A-32) refers to alleged donations made by petitioner to the Teodoro F. Valencia Foundation, Inc., the Palayan City Water District, and Department of Health. Indeed, gifts or donations are excluded from IT imposition, and consequently to EWT, because these gifts or donations given by the donor - transferor, are not income on the part of the donee - transferee. Section 32(B)(3) of the NIRC, as amended, attests to this discussion:

170 171 172 173 SEC. 32. Gross Income. - Amount per summary on Table 26 of the !CPA Report (Exhibit "P-123"), Binder, p. 27; With a difference of 1'1.14 per actual sum of annexes. Item V.D.2.b.6 of the !CPA Report (Exhibit "P-123"), Binder, p. 31. Page 12 of Annex A-6 of the !CPA Report (Exhibit "P-123"). Pages 11 and 12 of Annex A-6 of the !CPA Report (Exhibit "P-123").

(B) Exclusions from Gross Income. - The following items shall not be included in gross income and shall be exempt from taxation under this Title:

3) Gifts, Bequests, and Devises. - The value of property acquired by gift, bequest, devise, or descent: Provided, however, That income from such property, as well as gift, bequest, devise or descent of income from any property, in cases of transfers of divided interest, shall be included in gross income. However, no valid Deed of Donation 174 was adduced by petitioner to prove said suppose gratuitous transaction; hence, the alleged donation or gift totaling P1,520,000.00 (Annex A-32) is subject to EWT. Petitioner failed to subject said amount to EWT; thus, it must be disallowed as expense.

Three. The miscellaneous expense of P100.00 (Annex A-34) corresponds to payment made to Securities Transfer Services, Inc. ICPA Mendoza noted that petitioner subjected said sum to 10% EWT on professional fees; hence, it must be allowed as expense. Nevertheless, considering that petitioner failed to present duly executed sworn declaration submitted by the payee attesting that its gross receipts or sales did not exceed the P720,000.00 threshold, mandated by Section 2.57.2(A) of RR No. 2-98, as amended by RR No. 30-2003, the applicable EWT rate is 15%.175 Four.

ICPA Mendoza validated that out-of-pocket cost amounting to P546,105.00 (Annex A-35) paid to SGV and Co., a GPP, was not subjected to EWT; thus, must be disallowed as petitioner's expense. To repeat, the absence of a third-party official receipts or invoices to substantiate the reimbursed expenses renders the entire amount subject to EWT.

Five. ICP A Mendoza, too, verified that the miscellaneous amount of P3,094,069.42 (Annex A-36) was not subjected to EWT by petitioner; hence, should be disallowed as petitioner's expense. 174 173 Exhibits "P-86-1," "P-86-2" and "P-86-2-a," USB (Exhibit "P-124-2"). Supra note 122.

Six. Petitioner's deficiency EWT liability in the sum of P103,208.49, is broken down, in this wise:

Gross

Required EWf

Tax

Deficiency

Particulars

Annex

Amount

1%/2%/15%

Withheld

EWf

Goods

A-31

1'15,813.00 f'158.13 f'158.13 -

Donations

A-32

1,520,000.00 30,400.00 - f'30,400.00

Miscellaneous

A-33

24,025.72 240.26 240.26 -

Miscellaneous

A-34

100.00 15.00 10.00 5.00

GPP

A-35

546,105.00 10,922.10 - 10,922.10

Miscellaneous

A-36

3,094,069.42 61,881.39 - 61,881.39

Total

f'103,208.49 I.4.c Goods- 1'196,245.58 The BIR disallowed petitioner's expenses on purchases of goods amounting to P196,245.58. ICPA Mendoza recaptured said amount based on available records, as follows:I76

Amount of

Expense Accounts

Reference

Expenses Per

AFS

c.1. Fuel and oil

Exhibit "P-35"

f'545,250.00 c.2. Office supplies

Exhibit "P-35"

1,930,792.00 c.3. Communication, light, and water

Exhibit "P-35"

1,201,643.00 Total amount of expense per AFS 3,677,685.00 Amount of income payments subjected by the Petitioner to 1% EWTon goods based

Annex A-6

on MAP forTY 2016 page 12 3,481,438.00

Difference

1'196,247.00177 ICP A Mendoza proceeded to account for the income payments made by petitioner for goods subjected to 1% EWT, based on its MAP, which respondent used in computing the disallowed portion of petitioner's expenses,178 itemized as follows: 176 177 178

Income Payments Subjected to

1% EWf on Goods by the

Reference

Petitioner

Table 34 of the !CPA Report (Exhibit "P-123"), Binder, p. 33. With a difference of 1'1.42 from respondent's findings. Table 35 of the !CPA Report (Exhibit "P-123"), Binder, p. 33.

Amount of Income

Payments Subjected

to 1 ''i(, EWf on

Goods by the

Petitioner Per

1601F/MAP

c.l. Fuel and oil Annex A-6 page 11 1"379,081.00 c.2. Office supplies Annex A-6 page 11 521,902.00 c.3. Communication, light, and water - c.4. Advances to suppliers Annex A-6 page 11 22,500.00 c.5. Miscellaneous Annex A-6 page 12 24,026.00 c.6. Other employee benefits Annex A-6 page 12 30,982.00 c.7. PPE Annex A-6 page 12 2,205,314.00 c.8. ReE_airs and maintenance Annex A-6 page 12 76,722.00 c.9. Representation Annex A-6 page 12 205,098.00 c.10. Subscription/ periodicals Annex A-6 page 12 15,813.00

Total

P3,481,438.00 ICP A Mendoza then observed that the total income payments related to fuel and oil, office supplies, and communication, light, and water subjected to 1% EWTon goods, only amounted to P900,983.00 (sum of c.l to c.3 of the immediately preceding table). On the other hand, the remaining P2,580,455.00 (sum of c.4 to c.lO of the immediately preceding table) were not related to the expense accounts being faulted by the BIR. Accordingly, ICPA Mendoza concluded that respondent's disallowance should have been computed as follows:179

Amount of

Income

Difference -

Amount of

Payments

Should be

Expense Accounts

Reference

Expenses Per

Reference

Subjected to

Amount of

l'Yo EWTon

AFS

Goods by the

Disallowance by the BIR

Petitioner Per

1601F/MAP

Exhibit No.

Annex A-6

c.1. Fuel and oil 11P-35u 1"545,250.00 page 11 1"379,081.00 1"166,169.00 Exhibit No.

Annex A-6

c.2. Office supplies

"P-35"

1,930,792.00 page 11 521,902.00 1,408,890.00 c.3. Communication, Exhibit No.

light, and water

"P-35"

1,201,643.00 - 1,201,643.00

Total

P3,677,685.00 P900,983.00 P2,776,702.00 I.4.c.1 Fuel and oil- ?166,169.00 ICP A Mendoza pointed out that this account consists of purchases of fuel and oil from Pilipinas Shell Petroleum Corp., to wiuso 179 180 Table 36 of the !CPA Report (Exhibit "P-123"), Binder, p. 33. Item V.D.2.c.1 ofthe !CPA Report (Exhibit "P-123"), Binder, p. 34.

Annexed to the ICP A

Report (Exhibit "P-

Particulars

Amount

123")

Annex A-37

Fuel and Oil

I' 39,906.71

Annex A-38

Fuel and Oil

126,262.29

Total

P166,169.00 One. Petitioner subjected to 2% EWT (instead of 1% applicable rate), the fuel and oil expenses181 amounting to 1'39,906.71 (Annex A- 37).182 Being so, there is no deficiency EWT on said transaction. Accordingly, this should be allowed as an expense deduction. Two. ICP A Mendoza confirmed that remaining fuel and oil expenses totaling 1'126,262.29 (Annex A-38) was not subjected to EWT and no supporting documents were submitted to validate the expense. Therefore, this should be disallowed as petitioner's expense. Three. Petitioner 1s liable for deficiency EWT of 1'2,525.25, computed as follows:

Particulars

Annex

Gross

Required

Tax

Deficiency

Amount

EWT-1'/'u

Withheld

EWT

Fuel & Oil

A-37

1'39,906.71 1'399.07 798.13 -

Fuel & Oil

A-38

126,262.29 1,262.63 - 1'1,262.63

Total

P1,262.63 I.4.c.2 Office supplies- ?1,408,890.00 This pertains to purchases of various office supplies, such as printing services for business cards, cleaning materials, and kitchen supplies, among others,183 in the amount of 1'1,408,890.00,184 detailed as follows:

181 182 183 184

Annexed to the ICP A

Report (Exhibit "P-

Particulars

123")

Annex A-39

Office Supplies

Annex A-40

Office Supplies

Exhibits "P-90," "P-90-a," and "P-90-b," USB (Exhibit "P-124-2"). Page 9 of Annex A-6 of the !CPA Report (Exhibit "P-123"). Item V.D.2.c.2 of of the !CPA Report (Exhibit "P-123"), Binder, p. 34.

Amount

1'81, 992.45 600,883.14 Amount per summary on Table 36 of the !CPA Report (Exhibit "P-123"), Binder, p. 33; With a difference of 1'0.43 per actual sum of annexes.

AnnexA-41

Office Supplies

20,287.00

Annex A-42

Office Supplies

705,727.84

Total

1'1,408,890.43 One. Petitioner subjected 185 2% EWT on the office supplies amounting to !'81,992.45 (Annex A-39)186 and !'600,883.14 (Annex A- 40),187 with a total sum of !'682,875.59. Billing statements and ORs confirmed that these expenses relate to printing services; hence, petitioner correctly applied the 2% EWT rate on income payments pertaining to services. On this account, the same should be allowed as petitioner's deduction.

Two. In contrast, petitioner failed to subject the out-of-pocket expenses and unsubstantiated office supplies in the amounts of !'20,287.00 (Annex A-41)188 and !'705,727.84 (Annex A-42),189 with the total sum of !'726,014.84 to 1% EWT; thus, the disallowance thereof as expense is proper.

Three. Petitioner is liable for deficiency EWT in the amount of !'7,260.15, computed as follows:

Required

Deficiency

Particulars

Annex

Gross Amount

EWT- 2'Yo/1%

Tax Withheld

EWT

Office Supplies

A-39

1'81, 992.45 1'1,639.85 1'1,639.85

Office Supplies

A-40

600,883.14 12,017.66 12,017.66 - -

Office Supplies

A-41

20,287.00 202.87 - 1'202.87

Office Supplies

A-42

705,727.84 7,057.28 - 7,057.28

Total

P7,260.15 I.4.c.3 Communication, light, and water- !'1,201,643.00 ICPA Mendoza explicated that this account amounting to !'1,201,643.00 190 pertains to the purchase of servrces for various utilities such as electricity, telephone or mobile charges, and water,191 itemized as follows:

185 Page 10 of Annex A-6 of the !CPA Report (Exhibit "P-123"), Binder. 186 Annex A-39 of the !CPA Report (Exhibit "P-123"), Binder. 187 Annex A-40 of the !CPA Report (Exhibit "P-123"), Binder. 188 Annex A-41 of the !CPA Report (Exhibit "P-123"), Binder. 189 Annex A-42 of the !CPA Report (Exhibit "P-123"), Binder. !90 Amount per summary on Table 36 of the !CPA Report (Exhibit "P-123"), Binder, p. 33; With a difference of 1'0.47 per actual sum of annexes. 191 Item V.D.2.c.3 of of the !CPA Report (Exhibit "P-123"), Binder, p. 35. ~

Annexed to the ICP A

Report (Exhibit "P-

123")

Annex A-43

AnnexA-44

Annex A-45

Annex A-46

Annex A-47

AnnexA-48

Particulars

Cellphone charges

Communication

Communication

Cell phone charges

Communication

Communication

Amount

f' 11,344.50 1,053,242.23 14,799.03 9,000.20 5,081.50 108,175.07

Total

!'1,201,642.53 One. Petitioner correctly subjected the amounts of P11,344.50 (Annex A-43), '1'1,053,242.23 (Annex A-44), '1'14,799.03 (Annex A-45), and '1'9,000.20 (Annex A-46), with a total of P1,088,385.96,192 to 2% EWT because these are payments for services, rather than goods.193 Therefore, these items are allowed as expense deduction. Two. Quite the opposite, the amounts of '1'5,081.50 (Annex A-47) and '1'108,175.07 (Annex A-48), with a total of '1'113,256.57, were not subjected to 2% EWT.194 Thus, these communication, light and water expense, to the extent of '1'113,256.57195 must be disallowed as expense deduction.

Three. Petitioner is liable for deficiency EWT of '1'2,265.13, computed as follows:

Particulars

Annex

Gross Amount

Required

Tax Withheld

Deficiency

EWT-2%

EWT

Cell phone

Charges

A-43

1"11,344.50 1"226.89 1"226.89

Communication

A-44

1,053,242.23 21,064.84 21,064.87

Communication

A-45

14,799.03 295.98 295.97 Cell phone

Charges

A-46

9,000.20 180.00 180.00 - - - -

Communication

A-47

5,081.50 101.63 - 1"101.63

Communication

A-48

108,175.07 2,163.50 - 2,163.50 192 193 194 195

Total

1"2,265.13 Pages 7 to 9 of Annex A-6 of the !CPA Report (Exhibit "P-123"), Binder; Sum of Annexes A-43, A-44, A-45 and A-46 of the !CPA Report (Exhibit "P-123"), Binder. Item V.D.2.c.3 of the !CPA Report (Exhibit "P-123"), Binder, p. 35. Item V.D.2.c.3 of of the !CPA Report (Exhibit "P-123"), Binder, p. 35. Sum of Annex A-47 amounting to 1'5,081.50 and Annex A-48 amounting to 1'108,175.07.

No.

a.

a.1 a.2 a.3 b.

b.1 b.2 b.3 b.4

Abridging Our exhaustive discussion, the following are the results of our examination of petitioner's expenses:

Tax

EWTper

EWT

Particulars

Annex

Gross Amount

Rate

verification remitted EWT still due

PROFESSIONAL FEES

i Director's Fees

Director's Fees

A-8

I

1'3,410,000.00 15% 1'511,500.00 1'341,000.00 1'170,500 00

Subtotal I

1'3,410,000.00 1'170,500.00

Professional Fees

Technical

Assistance

A-9

5,000.00 2% 100.00 100.00 -

GPPs

A-10

661,700.00 - - - -

Service Fees

A-ll

330,000.00 15% 49,500.00 33,000.00 16,500.00

Consultancy

15%

Fees

A-12

390,000.00 58,500.00 39,000.00 19,500.00

Consultancy

15%

Fees

A-13

38,783.41 5,817.51 - 5,817.51

Appraisal Fees

A-14

2,593,500.00 15% 389,025.00 - 389,025.00

Subtotal

1'4,018,983.41 1'430,842.51

Legal and Audit Fees

GPPs

A-15

3,606,350.00 - - - -

GPPs

A-16

40,940.00 15% 6,141.00 - 6,141.00

GPPs

A-17

1,257,830.00 - - - -

Notarial Fees

A-18

5,100.00 15% 765.00 - 765.00

Subtotal

1'4,910,220.00 1'6,906.00

Total

1'12,339,203.41 1'608,248.51

SERVICES

Contracted Services

Cooperatives

A-19

860,429.90

2% I

17,208.60 - 17,208.60

Cooperatives

A-20

88,969.33 2% 1,779.39 - 1,779.39

Subtotal

1'949,399.23 1'18,987.99

Representation

Representation

- purchase of goods

A-21

57,098.15 1% 570.98 570.98 -

Representation

- purchase of goods

A-22

148,000.00 1% 1,480.00 1,480.00 -

Representation

A-23

3,610,171.77 2% 72,203.44 - 72,203.44

Subtotal

1'3,815,269.92 1'72,203.44

Transportation

Transportation

- out-of-pocket

A-24

9,382.00 2% 187.64 - 187.64

Transportation

A-25

2,534,741.09 2% 50,694.82 - 50,694.82

Subtotal

1'2,544,123.09 1'50,882.46

Advertising

Advertising

A-26

135,766.67 15% 20,365.oo I 13,576.67 6,788.33

Advertising

A-27

967,770.06 2% 19,355.40 1 - 19,355.40

Subtotal

1'1,103,536.73 1'26,143.73

| b.5_| Repairs maintenance | oe maintenance 8,482.14 | 2% 169.64 maintenance 59,758.93 597.58 - || nenance aso | maintenance A-30 2,029,521.34 | 2% 40,590.43 40,590.43 || Subtotal P2,097,762.41 P40,760.07 | b.6 | Miscellaneous | | Goods ss] A381 | 15,813.00 | 1% 158.13 | 158.13 - [Donations | A32 | __1,520,000.00[ 2% | 30,400.00 | 30,400.00 | | Miscellaneous | A-33 | 24,025.72 1 1% 240.26 240.26 - |__| Miscellaneous | A34 [| 100.00] 15% | 15.00 10.00 5.00 [cee __{aas_|sieas00 {an [rog210] : 10,922.10 Miscellaneous - 61,881.39 Subtotal P103,208.49 Total P15,710,204.52 P312,186.18

c. | GOODS c1 | Fuel and Oil _ | Fuelandoil | A-37_| 39,906.71 | 1% _| 399.07 Fuel and oil 126,262.29 | 1% 1,262.63 ey ee eo Subtotal| 1661600; —SSSS~C~S~SSSC« 262.63

Office Supplies

|__| Office Supplies | A-39 81,992.45 | 2% | 1,639.85 1,639.85 - Office Supplies | A-40 600,883.14 | 2% 12,017.66 . Office Supplies 20,287.00 | 1% 20287 | | 202.87 |__| Office Supplies | A-42 | 705,727.84 | 1% 7,057.28 7,057.28 || Subtotal P7,260.15 c.3 | Communication, light, and water

Cellphone

charges A-43 11,344.50 | 2% 226.89 226.89 - Communication | A-44 1,053,242.23 | 2% 21,064.84 1479903 | 2% [ 29598, ess [SC

Cellphone 2%

charges A-46 9,000.20 180.00 180.00 - Communication | A-47 5,081.50 | 2% 101.63 101.63 Communication | A-48 108,175.07 | 2% | 2,163.50 po 2,163.50 P1,201,642.53 Total P2,776,701.96 P10,787.91 P931,222.60 196 Total expenses examined by the ICPA P30,826,109.89 Less: Reconciling i Professional fees - voluntarily paid by petitioner (Exhibits “P-30" to “P-30-a,” Docket - Vol. II, pp. 488 to 491) Services not related to the assessed amount by respondent (Table 25, ICPA Report - Exhibit “P- 123,” p. 27; Sum of b.7 to b.16) | Goods not related to the assessed amount by respondent (Table 35, ICPA Report - Exhibit “P- 123”; Sum of c.4 to c.10) P741,729.50 6,171,806.25 2,580,455.00 9,493,990.75 We, thus, hold: (1) expenses totaling ?15,303,327.39 must be disallowed as petitioner’s deduction due to non-withholding of tax, pursuant to Section 34(K) of the NIRC, as amended; and (2) said disallowed expenses generated deficiency EWT amounting to P645,725.83. Ponder on the following presentation:

Annex Gross Amount Rate EWT Due

esfeional ees Sf Consultancy Fees P5,817.51 Appraisal Fees 389,025.00 GPPs A-16 ~ 40,940.00 6,141.00 Notarial Fees A-18 5,100.00 765.00

Sewiees _____| _| ____a

Cooperatives A-20

Transportation - out of pocket expenses A-24 9,382.00 2% 187.64 Transportation A-25 2,934,741.09 50,694.82 Advertising A-27 967,770.06 | 2% 19,355.40 Repairs and maintenance A-28 8,482.14} 2% Repairs and maintenance | A-30 2,029,521.34 Donations A- 32 1,520,000.00 popp__ AS 546,105.00 | 2% 10,922.10 2%

Goods:

Fuel and Oil A-38 126,262.29 | 1% | 1,262.63 | Office Supplies A-42 705,727.84 | 1% 7,057.28 2% 101.63 108,175.07 | 2% 2,163.50 P15,303,327.39 | | P 645,725.83 | Moreover, upon further verification, petitioner is liable for additional deficiency EWT in the amount of P285,496.77, as computed below:

Particulars EWT Paid

Professional Fees: ee Directors’ Fees ~ P511,500.00 P341,000.00 P170,500.00 Service Fees 49,500.00 33,000.00 16,500.00

Services:

Representation

Advertising

98,500.00 39,000.00 19,500.00 72,203.44 6,788.33 72,203.44 20,365.00 13,576.67 Total expenses assessed by respondent P21,332,114.53 (Exhibit “P-1," Docket - Vol. I, p. 66); *With a difference of £4.61 P21,332,119.14*

Miscellaneous

I A-34

15.00 10.00 5.00

Total

1'712,083.44 1'426,586.67 1'285,496.77 1.5 MCIT Paid- P56,861.00; and 1.6 Excess Credits Carried Forward to succeeding year - P9,670,865.00 Respondent's FDDAI97 is empty of any legal and factual ground, justifying his imposition of deficiency IT, due to disallowance of the Minimum Corporate Income Tax (MCIT) amounting to P56,861.00, and excess credits carried forward in the succeeding year amounting to P9,670,865.00, from the available tax credits of petitioner. Therefore, respondent's deficiency IT against petitioner emanating therefrom must be set aside. As Section 228 of the NIRC, as amended, puts it: "[t]he taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void."

All in all, We sustain the disallowance of the amount of Pl5,303,327.39 due to non-withholding of tax. Even if said figure were to be considered, petitioner is still in a net loss position; thus, would not be subject to regular corporate income tax, computed as follows:

Particulars

Amount

Net Sales/Revenues/Fees (per ITR)

1"4,200,000.00

Less: Cost of Sales/Services (per ITR)

(9,339,206.00) Gross Income from Operations (1'5,139,206.00) Add: Other Taxable Income Not Subjected to Final Tax 7,982,238.00

Total Gross Income

1'2,843,032.00

Less: Ordinary Allowable Itemized Deductions

(54,563,150.00) Add: Disallowed expenses due to non-withholding 15,303,327.39

Adjusted Net Taxable Income (Loss)

(!'36,416,790.61) Significantly, even if one is in a net loss position, a 2% MCIT may still be imposed on the taxpayer under Section 27(E)(1)198 of the 197 198 Exhibit "P-1," Docket (Vol. I), pp. 64-71. SEC. 27. Rates of Income Tax on Domestic Corporations. - (E) Minimum Corporate Income Tax on Domestic Corporations. -

(1) Imposition of Tax. - A minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when

NIRC, as amended, as interpreted by Section 2.27(E)(1)199 of Section 2.27(E) of RR No. 9-98,200 as amended by RR No. 12-2007.201 Chamber of Real Estate and Builders' Associations, Inc. v. Han. Romulo 2o2 acknowledged:

RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative taxable income, merely defines the coverage of Section 27(E). This means that even if a corporation incurs a net loss in its business operations or reports zero income after deducting its expenses, it is still subject to an MCIT of 2% of its gross income. This is consistent with the law which imposes the MCIT on gross income notwithstanding the amount of the net income. But the law also states that the MCIT is to be paid only if it is greater than the normal net income. Obviously, it may well be the case that the MCIT would be less than the net income of the corporation which posts a zero or negative taxable income. Here, petitioner possesses sufficient tax credits to answer for its 2016 MCIT liability, computed as follows:

MCITperiTR

f'56,861.00 Less: Tax credits/Payments Prior year's excess credits other than

MCIT

(8,940,226.00) Creditable tax withheld from previous quarters per BIR form No. 2307 (787,500.00)

Excess Tax Credits/Overpayment

(P9,670,865.00) Ergo, petitioner is not liable for deficiency IT imposed by respondent forTY 2016.

199 200 201 202 the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year.

Sec. 2.27(E) [MCIT] on Domestic Corporations. -

(1) Imposition of the Tax. - ... The MCIT shall be imposed whenever such corporation has zero or negative taxable income or whenever the amount of [MCIT] is greater than the normal income tax due from such corporation. (Boldfacing ours).

SUBJECT:

Implementing Republic Act No. 8424, "An Act Amending the National Internal Revenue Code, as Amended" Relative to the Imposition of the Minimum Corporate Income Tax (MCIT) on Domestic Corporations and Resident Foreign Corporations.

SUBJECT:

Amending Certain Provisions of Revenue Regulations No. 9-98 Relative to the Due Date Within Which to Pay Minimum Corporate Income Tax (MCIT) Imposed on Domestic Corporations and Resident Foreign Corporations Pursuant to Section 27(E) and Section 28(A){2) of the 1997 National Internal Revenue Code, as Amended. G.R. No. 160756, March 9, 2010.

II.FWT Respondent found petitioner liable for deficiency FWT for TY 2016,203 with the following computation:

Tax

Tax Withheld by

Should be FWT (if

Gross Dividend

no documentation)

Rate

Petitioner at 30'Vo

Corporation

China with Tax

- !'8,195,191.20 - !'2,458,557.36

Treaty

Corporation

China with Tax

0.15 10,495,176.00 1,574,276.40 3,148,552.80

Treaty

Cayman

Corporation

without Tax 0.15 121,068,685.92 18,160,302.89 36,320,605.78

Islands

Treaty

Corporation

France with Tax

15% 1,804,632.00 270,694.80 541,389.60

Treaty

Corporation

24,821,832.00

Kuwait

without Tax - 7,446,549.60

Treaty

Corporation

Netherlands with Tax

15% 2,632,536.00 394,880.40 789,760.80

Treaty

NoW/Tax-

Philippines

Domestic

- 85,909,161.60 - Corp.

NoW/Tax-

Philippines

Domestic

- 482,476,089.12 - Corp.

Resident

Corporation

Alien

- 16,932,649.92 - 5,079,794.98

Singapore

Government

5,071,924.80 1,521,577.44

Institution

- -

Singapore

Corporation

- 54,658,824.00 - 16,397,647.20 without Tax

Corporation

Singapore with Tax

15% 34,253,3 7 6. 00 5,138,006.40 10,276,012.80

Treaty

Corporation

Switzerland with Tax

15% 1,469,712.00 220,456.80 440,913.60

Treaty

United Arab

Government

20,871,096.00 6,261,328.80

Emirates

Institution

- -

United

Corporation

States with Tax

15% 46,796,506.08 14,038,951.82

Treaty

Total

!'917,457,392.64 !'25,758,617.69 l'104,721,642.58

FWT

25,758,617.69 FWT still due !'78,963,024.89

Relevantly, ICP A Mendoza identified and classified the shareholders/beneficial owners, corresponding to each Philippine

Central

Depository

(PCD)

Nominee

Corporation

listed in respondent's assessment,204 itemized below:20S

Country

China

Kuwait

Singapore

Singapore

United Arab

Emirates

China

Cayman

Islands

France

Netherlands

United

States

Singapore

Switzerland

No details provided 204 205 206

Payee/Shareholder

Payee

Gross Dividends

Classification

People's Bank of China

Foreign

(PBOC)

government !'8,195,191.20 institution

Kuwait Investment

Foreign

Authority (KIA)

government 24,821,832.00 institution

Monetary Authority of

Foreign

Singapore (MAS)

government 5,071,924.80 institution

Foreign

GIC Private Limited

government 54,658,824.00 institution

Abu Dhabi Investment

Foreign

Authority (ADIA)

government 20,871,096.00 institution

Nonresident

Best Investment

Foreign

10,495,176.00

Corporation (BIC)

Corporation

(NRFC)

Cartica Investors, L.P.

and Cartica Capital

NRFC

121,068,685.92 Partners Master, L.P.

BNP Paribas Arbitrage

NRFC

1,804,632.00

SNC

Stichting Depositary

APG Emerging Markets

NRFC

2,632,536.00

Equity Pool

Cartica Corporate

Governance Fund, L.P.

NRFC

46,796,506.08 and Cartica Investors II, L.P.

Corporation- no name/

NRFC

34,253,376.00 details provided Corporation- no name/

NRFC

1,469,712.00 details provided Corporation- no name/

NRFC

details provided 16,932,649.92

Total

!'349,072,141.00206 Schedule 4, Exhibit "P-1,"id. at p. 67; Exhibit "P-16," id. at pp. 338-341. Table 40 of the !CPA Report (Exhibit "P-123"), Binder, p. 36. Actual footing is !'349,072,141.92; With a difference of !'0.92.

FWT at30% per BIR

!'2,458,557.36 7,446,549.60 1,521,577.44 16,397,647.20 6,261,328.80 3,148,552.80 36,320,605.78 541,389.60 789,760.80 14,038,951.82 10,276,012.80 440,913.60 5,079,794.98 !'104,721,642.58

Respondent posits that the imposition of 30% FWT on the dividend payouts made by petitioner to the foregoing entities is warranted, because petitioner failed to prove the eligibility of the beneficial owners of the dividends for tax exemption or preferential tax treaty rates. 207 Petitioner retorts that the names, countries of residence, and tax status of the beneficial owners are identifiable and that their entitlement to tax exemption or tax treaty relief may be confirmed from the documents submitted to petitioner by the various participating brokers and custodians of the Philippine Depository and Trust Corporation (PDTq.zos We partly sustain the 2016 deficiency FWT assessment. To determine whether: (1) petitioner is required to withhold final income taxes on the dividend pay outs it made to the entities specified in the immediately preceding table; and (2) the proper final income tax rate petitioner is required to withhold, the following provisions of law must be consulted. First. Section 32(B)(7)(a) of the NIRC, as amended, which exempts from IT, "[i]ncome derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments."

Second. Section 28(B)(1)2D9 of the NIRC, as amended, which generally imposes 30% 210 final income tax on dividends received by a 207 208 209 Exhibit "P-1," id. at p. 66.

Par. 58, Petition for Review. /d. at pp. 27-28. SEC.

28.

Rates

of

Income Tax on

Foreign Corporations. - (B) Tax on Nonresident Foreign Corporation. -

(1) In General. - Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty- five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, ... : Provided, That effective january 1, 2009, the rate of income tax shall be thirty percent (30% ). (Boldfacing ours) non-resident foreign corporation (NRFC) from another corporation. By way of exception, the tax-sparing rule in Section 28(B)(5)(b)211 of the same Code, reduces the final income tax rate from 30% to 15% of said dividends, if the domiciliary country of the NRFC recipient of the dividends, "allows" a credit against the tax due from said NRFC deemed paid in the Philippines. The amount of tax due from NRFC deemed paid in the Philippines is 15% (the difference between the 30% regular income tax on NRFC and 15% tax covered by the tax-sparing rule) of said dividends.

Third. Section 32(B)(5) of the NIRC, as amended, which exempts from IT, "[i]ncome of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." Here, petitioner presented the following pieces of evidence in support of its stance:

Country

China

210 211

Payee/

Payee

Gross Dividends

Supporting

Exhibit No.

Shareholder

Classification

Documents

BIR Ruling No.

"P-98-1"

1300-18 of PBOC

Consularized

People's Bank

Foreign

Indemnity

"P-98-2"

of China

government !'8,195,191.20

Undertaking

(PBOC)

institution

Application for

BIR Ruling

received by the

"P-98-3"

BIRon Nov. 27, 2012 Now 25%, per Section 7 of Republic Act No. 11534. The dividend pay-outs here were made prior to the effectivity of said law. SEC. 28. Rates of Income Tax on Foreign Corporations. (B) Tax on Nonresident Foreign Corporation. -

(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. -

(b) Intercorporate Dividends. - A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and/ or property dividends received from a domestic corporation, which shall be collected and paid as provided in Section 57(A) of this Code, subject to the condition that the country in which the nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines equivalent to twenty percent (20% ), which represents the difference between the regular income tax of thirty-five percent (35%) and the fifteen percent (15%) tax on dividends as provided in this subparagraph: Provided, That effective January 1. 2009, the credit against the tax due shall be equivalent to fifteen percent (15%), which represents the difference between the regular income tax of thirty percent (30''l\,) and the fifteen percent (15%) tax on dividends.

Kuwait

Investment

Kuwait

Authority

(KIA)

Monetary

Singapore

Authority of

Singapore

(MAS)

GIC Private

Singapore

Limited (GPL)

Abu Dhabi

United Arab

Investment

Emirates

Authority

(ADIA)

Best

China

Investment

Corporation

(BIC)

Car tic a Investors, LP.

Cayman and Cartica

Islands

Capital

Partners

Master, L.P.

BNP Paribas

France

Arbitrage

SNC (BPAS)

Foreign

government 24,821,832.00 institution

Foreign

government 5,071,924.80 institution

Foreign

government 54,658,824.00 institution

Foreign

government 20,871,096.00 institution

NRFC

10,495,176.00

NRFC

121,068,685.92

NRFC

1,804,632.00

Deutsche Bank

"P-98-4"

Certification

BIR Ruling No.

"P-99-1"

495-2012 of KIA

Consularized

Indemnity

"P-99-2"

Undertaking

Certificate of

"P-99-3"

Residency

Article of Law,

Dividend

"P-99-4"

Citibank

"P-99-5"

Certification

BIR Ruling No.

"P-100-1"

405-2013 of MAS

Consularized

Indemnity

"P-100-2"

Undertaking

Deutsche Bank

Certification

"P-100-3"

Consularized

Indemnity

"P-101"

Undertaking

BIR Ruling No.

"P-102-1"

162-2011 of ADIA

Consularized

Indemnity

"P-102-2"

Undertaking

Tax Treaty Relief

Application

(TRRA) for

Dividend BIR

"P-103-1"

Form No. 0901-D stamped received

by the BIRon May

27,2016

HSBC

"P-103-2"

Certification

Indemnity

"P-103-3"

Undertaking

Deutsche Bank

"P-105"

Certification

Tax Treaty Relief

Application

(TRRA) for

Dividend BIR

"P-104-1"

Form No. 0901-D received by the BIRon May 20, 2016

Consularized

Certificate of

"P-104-2"

Residency

Consularized

Indemnity

"P-104-3"

Undertaking

Stichting

Depositary

PDTC Summary

Netherlands

APG

NRFC

2,632,536.00

of Withholding

"P-16"

Emerging

Tax Report dated

Markets

june 3, 2016

Equity Pool

Cartica

Confirmation

Corporate

Request Letter

United

Governance

received by the

"P-106-1"

States

Fund, L.P. and

NRFC

46,796,506.08 BIRon June 1,

Cartica

2016 Investors II,

Deutsche Bank

"P-106-2"

L.P.

Certification

Corporation -

PDTC Summary

Singapore

no name/

NRFC

34,253,376.00

of Withholding

"P-16"

details Tax Report dated provided June 3, 2016

Corporation-

PDTC Summary

Switzerland

no name/

NRFC

1,469,712.00

of Withholding

"P-16"

details Tax Report dated provided june 3, 2016

Corporation -

PDTC Summary

No details no name/

Resident

16,932,649.92 of Withholding

"P-16"

provided details

Alien212

Tax Report dated provided June 3, 2016

Total

1"349,072,141.92 Our perusal of petitioner's evidence bore the following findings: First. There is no sufficient proof that PBOC, KIA, MAS, GPL, and ADIA are financing institutions owned, controlled, or enjoys refinancing from foreign governments; hence, the IT exemption under Section 32(B)(7)(a) of the NIRC, as amended, remained inoperative.

Specifically, petitioner presented BIR Ruling Nos. 1300-18 (PBOC), 213 495-2012 (KIA), 214 405-2013 (MAS), 21s and 162-2011 (ADIA)216 as evidence in support thereof. However, petitioner was not the party to whom these rulings were addressed and issued. Being so, petitioner may not employ the same to establish adherence 212 213 214 215 216 Based on the PDTC Summary of Withholding Tax Report, the shareholder was classified as "Corporation- Resident Alien," however, due to inconsistency of such classification under the NIRC, as amended, it is deemed appropriately classified as "Resident Foreign Corporation." Nonetheless, due to petitioner's failure to present sufficient evidence to prove that it is a resident foreign corporation licensed to do business in the Philippines, the shareholder is deemed classified as a Non-Resident Foreign Corporation subject to a FWT rate of 30%.

Exhibit "P-98-1."

Exhibit "P-99-1."

Exhibit "P-100-1."

Exhibit "P-102-1."

with Section 32(B)(7)(a) of the NIRC, as amended. As held in San Miguel Corporation v. Commissioner of Internal Revenue:217 "[i]t is a basic rule that a taxpayer cannot utilize for themselves specific BIR Rulings made for another, as only the taxpayer who sought such BIR Ruling may invoke the same."

Likewise, a consularized indemnity undertaking, 218 and nothing more, is deficient to prove that GPL is a financing institution owned, controlled, or enjoys refinancing from a foreign government. Second. Neither could the tax sparing rule set forth in Section 28(B)(5)(b) of the NIRC, as amended, be applicable, with respect to the entities who received dividends from petitioner. The reason-the respective foreign tax laws of these entities were not adduced as evidence; thus, it cannot be ascertained whether the domiciliary country of these entities "allow" as credit, the 15% tax deemed paid in the Philippines. Kuckscar v. Sekito, Jr. 219 decreed: ... [I]t is settled that foreign laws do not prove themselves in this jurisdiction, and our courts are not authorized to take judicial notice of them. Like any other fact, they must be properly pleaded and proved. Under the Rules of Court, the record of public documents of a sovereign authority or tribunal may be proved by

(1) an official publication thereof, or (2) a copy attested by the officer having the legal custody thereof. Such official publication or copy must be accompanied, if the record is not kept in the Philippines, with a certificate that the attesting officer has the legal custody thereof. The certificate may be issued by any of the authorized Philippine embassy or consular officials stationed in the foreign country in which the record is kept, and authenticated by the seal of his office. The attestation must state in substance, that the copy is a correct copy of the original, or a specific part thereof, as the case may be, and must be under the official seal of the attesting officer.

Besides, save for KIA and BP AS, none of these entities have their corresponding proof of residency; hence, their domiciliary country for purposes of tax-sparing rule may not be determined with certainty.

217 218 219 G.R. No. 257697, April12, 2023.

Exhibit "P-101."

G.R. No. 237449, December 2, 2020.

Third. Petitioner produced KIA's Certificate of Residency22o and BPAS' 221 Consularized Certificate of Residency. These certificates show that KIA is a resident of Kuwait, whereas BPAS is a resident of France. Considering that they received their dividends from a Philippine resident like petitioner, a review of the applicable Tax Treaties relative to said transactions is in order.

KIA

Paragraph 2, Article 10 of RP- Kuwait Tax Treaty,222 states:

ARTICLE 10

Dividends

2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed:

a) 10 per cent of the gross amount of the dividends if the beneficial owner is a company (excluding partnerships) which holds directly at least 10 per cent of the capital of the paying company;

b) 15 per cent of the gross amount of the dividends in all other cases.

Following Article 10(2) of RP -

Kuwait Tax Treaty, the dividends paid by petitioner to KIA may be taxed in the Philippines. However, the tax imposed is not the 30% FWT found by the BIR. Rather, said dividends should be taxed at 15% of the gross amount thereof, because there is no proof that KIA directly holds at least 10% of petitioner's capital.

22o Exhibit "P-99-3."

221 Exhibit "P-104-2."

m CONVENTION BETWEEN THE GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES AND THE GOVERNMENT OF THE STATE OF KUWAIT FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME.

BPAS

Paragraph 2, Article 10 of the RP- France Tax Treaty,223 reads:

ARTICLElO

Dividends

2.

However, such dividends may be taxed in the Contracting State of which the company paying the dividends in a resident, and according to the law of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed:

a) 15 [now 10] per cent of the gross amount of the dividends if the recipient is a company (excluding partnership) which holds directly at least 10 per cent of the voting shares of the company paying the dividends;

b) in all other cases, 25 [now 15] per cent of the gross amount of the dividends224 Consistent with Article 10(2) of RP - France Tax Treaty, the dividends paid by petitioner to BP AS may be taxed in the Philippines. However, the tax imposed is not the 30% FWT found by the BIR. Rather, said dividends should be taxed at 15% of the gross amount thereof, because there is no proof that BPAS holds at least 10% of petitioner's voting shares.

We now chart the proper final income tax rate on the dividends paid by petitioner in favor of the entities listed below, as follows:

Country

Payee/Shareholder

Payee

Exempt

Preferential

30n/u FWT

Classification

Rate

Rate

China

People's Bank of China

Foreign

government

No

No

(PBOC)

institution 22' CONVENTION BETWEEN THE GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES AND THE GOVERNMENT OF THE FRENCH REPUBLIC FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL 224 EVASION WITH RESPECT TO TAXES ON INCOME. The tax rates for dividends under paragraph 2, Article 10 of the original RP-France Tax Treaty, was amended by Article 5 of The Protocol to the Tax Convention between the Government of the Republic of the Philippines and the Government of the French Republic Signed on January 9, 1976.

Yes

Kuwait Investment

Kuwait

Authority (KIA)

Monetary Authority of

Singapore

Sing a pore (MAS)

Singapore

GIC Private Limited

United Arab

Abu Dhabi Investment

Emirates

Authority (ADIA)

China

Best Investment Corporation

(BIC)

Cayman

Cartica Investors, L.P. and

Islands

Cartica Capital Partners

Master, L.P.

France

BNP Paribas Arbitrage SNC

Stichting Depositary APG

Netherlands

Emerging Markets Equity

Pool

Cartica Corporate

United States

Governance Fund, L.P. and Cartica Investors II, L.P.

Singapore

Corporation- no name/ details provided

Switzerland

Corporation- no name/ details provided No details Corporation- no name/ provided details provided

Foreign

government

No

Yes at15%

institution

Foreign

government

No

No

institution

Foreign

government

No

No

institution

Foreign

government

No

No

institution

NRFC

No

No

NRFC

No

No

NRFC

No

Yes at 15%

NRFC

No

No

NRFC

No

No

NRFC

No

No

NRFC

No

No

NRFC

No

No

Petitioner's basic FWT liability on dividends for TY 2016 stands at P100,727,672.98. However, petitioner only paid P25,758,617.69.225 Therefore, petitioner is liable for the remaining deficiency FWT in the amount of P74,969,055.29, computed as follows:

No

Yes

Yes

Yes

Yes

Yes

No

Yes

Yes

Yes

Yes

Yes

PayeejShareho

Payee

Gross Dividends

FWTDueper

FWT remitted by

Under (Over)

Ider

Classification

verification

Petitioner

Remittance

People's Bank

Foreign of China

government !'8,195,191.20 1'2,458,557.36 - !'2,458,557.36

(PBOC)

institution

Kuwait Forei

Investment government Authority ae (KIA) institution

Monetary

Authority of

Singapore

(MAS)

GIC Private

Limited

Abu Dhabi

Investment

Authority

(ADIA)

Foreign

government institution

Foreign

governinent institution

Foreign

government institution

Best

Investment

Corporation

(BIC)

Cartica

Investors, L.P.

and Cartica

Capital

Partmers

Master, L.P.

BNP Paribas

Arbitrage SNC

NRFC

NREFC

NRFC

Stichting

Depositary

APG Emerging

Markets Equity

Pool

NRFC

Cartica

Corporate

Governance

Fund, L.P. and

Cartica

Investors II, LP.

Corporation -

no name/ details provided

Corporation -

no name/ details provided

Corporation -

no name/ details provided Total P349,072,141.92 P100,727,672.98 226 227

NRFC

NRFC

NRFC

Resident Alien

—+— 24,821,832.00 5,071,924.80 54,658,824.00 20,871,096.00 10,495,176.00 121,068,685.92 1,804,632.00 2,632,536.00 3,723,274.80226 1,521,577.44 16,397,647.20 6,261,328.80 3,148,552.80 36,320,605.78 270,694 .80°27 789,760.80 46,796,506.08 34,253,376.00 1,469,712.00 16,932,649.92 14,038,951.82 10,276,012.80 440,913.60 5,079,794.98 P1,574,276.40 18,160,302.89 270,694.80 394,880.40 5,138,006.40 220,456.80 P25,758,617.69 3,723,274.80 1,521,577.44 16,397,647.20 6,261,328 .80 1,574,276.40 18,160,302.89

Stn SS

394,880.40 14,038,951 .82 5,138,006.40 220,456.80 5,079,794.98 | P74,969,055,29 Subjected to the preferential rate of 15% FWT pursuant to Article 10(2) of RP - Kuwait Tax Treaty. Supra note 222.

Subjected to the preferential rate of 15% FWT pursuant to Article 10(2) of RP ~ France Tax Treaty, as amended. Supra notes 223 and 224.

Ill. EWT Respondent found petitioner liable for deficiency EWT covering TY 2016, in the amount of P1,932,351.37,778 computed as follows:

Income payment Voluntary Income payment (per FLD)”? Payment Made _{per FDDA)*°

Nature

P1,739,621.03 Service 9,538,394.00 9,538,394.00 190,767.88

Purchase of

Goods 196,247.00 - 196,247.00 | 1% 1,962.47 Total P22,073,844.03 P741,729.50 P21,332,114.53 P1,932,351.38

Payment of

Professional

Fees P12,339,203.03 P741,729.50 P11,597,473.53

Purchase of

We finished tackling petitioner’s 2016 deficiency EWT liability under item 1.4 of deficiency IT assessment. To repeat, petitioner is liable for deficiency EWT totaling P931,222.60, composed of: (a) EWT due to non-withholding in the amount of P645,725.83; and (b) additional EWT identified upon further verification amounting to P285,496.77, as summarized in the table below:

a.) EWT due to non-withholding

Professional Fees:| | |

Consultancy Fees P38,783.41 A-14 2,593,500.00

Appraisal Fees

A-16 40,940.00 5,100.00 P5,817.51 389,025.00 6,141.00 15% 765.00

Notarial Fees

Services:

Cooperatives 860,429.90 peratives A-20 88,969.33

Transportation -

out of pocket expenses A-24 9,382.00 2% 2,534,741.09 2% 967,770.06

Repairs and

maintenance 169.64

Repairs and

maintenance 17,208.60 1,779.39 8,482.14 2,029,521.34 40,590.43 1,520,000.00 30,400.00 546,105.00 10,922.10

Miscellaneous

Goods:

Fuel and Oil

Office Supplies

Office Supplies

Communication

Communication

A-36

3,094,069.42

A-38

126,262.29

A-41

20,287.00

A-42

705,727.84

A-47

5,081.50

A-48

108,175.07

Subtotal

1'15,303,327.39 (b.) Additional EWT upon further verification

Particulars

Annex

Should be EWT

Professional Fees:

Directors' Fees

A-8

!'511,500.00

Service Fees

A-11

49,500.00

Consultancy Fees

A-12

58,500.00

Services:

Representation

A-23

72,203.44

Advertising

A-26

20,365.00

Miscellaneous

A-34

15.00

Subtotal

P712,083.44 IV. FBT 2% 61,881.39 1% 1,262.63 1% 202.87 1% 7,057.28 2% 101.63 2% 2,163.50 P645,725.83

EWTPaid

EWTDue

!'341,000.00 !'170,500.00 33,000.00 16,500.00 39,000.00 19,500.00 - 72,203.44 13,576.67 6,788.33 10.00 5.00 P426,586.67 P285,496.77

Total

P931,222.60 Respondent found petitioner liable for deficiency FBT covering TY 2016, in the amount of P1,716,615.27. He asserts that petitioner's expenditures on golf club memberships, foreign travels, and motor vehicle provided to its officers and directors, were not subjected to the proper FBT,231 computed as follows:

Payment of Golf Club Memberships and Travels

!'6,279,545.27 Motor Vehicle FBI (as computed) 229,234.82

Total

!'6,508,780.09

Taxable Base per FBI Returns

1,306,409.01 Benefits not subjected to FBT !'5,202,371.08

Divisor

68% Tax Base/Grossed up Value !'7,650,545.71

Tax Rate

32%

FBTperFLD

!'2,448,174.63 Payment by DMCI on August 5, 2021 731,559.36

FBT Still Due

P1,716,615.27 ICP A Mendoza then traced respondent's findings to the entries in petitioner's GL, and unearthed the following details:232 231 232 Exhibit "P-1," id. at p. 68.

Table 49 of the JCPA Report (Exhibit "P-123"), Binder, p. 48.

Particulars

Travels

a.l Deutsche Bank conference in Singapore a.2 Berong Palawan Site Visit for annual report a.3 UBS-Hongkong/ Singapore conference a.4 Business conference in London Golf membership b.l Corporate membership fees in Baguio

Country Club

Motor vehicle

I

Amount Assessed by the BIR

1'500,430.85 57,300.91 188,165.41 484,435.46 1'1,230,332.63 2,188,240.00 2,188,240.00 229,234.82

Total

3,647,807.45

Divisor

68% Tax base/ grossed-up value 5,364,422.72 Tax rate 32% Total FBT due 1'1,716,615.27 IV.1 Travels- ?1,230,332.63

I

Booking in GL

Account no.

603001- transportation and travel Account no.

602026- membership dues Petitioner argues that as a publicly listed company, its officers are invited to various local and foreign investor conferences commonly referred to as "road shows," to promote the company. They attend such events to provide prospective investors with a better understanding of the company. Thus, these foreign travels do not constitute fringe benefits granted to the officer, but rather form part of their core functions to represent the company to potential investors, as provided under Section 2.33(B)(7) of RR No. 03-98.233 We partly agree with petitioner.

ICP A Mendoza verified that the travel account amounting to P1,230,332.63, consists of the following:

Annexed to the

Event

!CPA Report

Particulars

Amount

(Exhibit "P-123")

a.1 Deutsche Bank

AnnexA-49

Hotel

1'43,512.88

Conference in

Annex A-53

Accommodation

32,530.38

Singapore

Annex A-50

Airfare

276,899.99

Annex A-52

Per diem allowances 147,487.20

Subtotal

1'500,430.45 a.2 Berong Palawan site visit

Annex A-54

Airfare

57,300.91

Subtotal

1'57,300.91 a.3 UBS-Hong

Annex A-55

Per diem allowances 37,421.60

Kong/Singapore

Hotel

Conference

AnnexA-56

Accommodations

65,773.69

Annex A-57

Airfare

84,970.12

Subtotal

1'188,165.41

a.4 Business conference

Annex A-51

Airfare

320,628.00

in London

Annex A-58

Per diem allowances 148,966.40

AnnexA-59

Visa application 14,841.06

Subtotal

1'484,435.46

Total

P1,230,332.23234 Of the l"1,230,332.63 falling under travel account, l"62,829.87 pertains to expenses incurred by Mr. VictorS. Limlingan, petitioner's Managing Director, in connection with his participation in Access Philippines Corporate Day held in Singapore. This expense is supported by official event invitation,235 a Statement of Account236 and Official Receipt237 issued by Cristina Travel Corporation for airfare, and a Tax Invoice issued by The Fullerton Hotel Singapore23S for accommodation. These documents substantiate that the travel expense was undertaken for business purposes; thus, does not constitute a taxable fringe benefit and is not subject to FBT under Section 33(A) of the NIRC, as amended, and Section 2.33(B)(7) of RR No. 3-98.239 Consider:

Particulars

Annex

Exhibit Reference Nos.

Amount

Accommodation

A-49

"P-110-1", "P-110-1-a", "P-110-1-b" 1'43,512.88

Airfare

A-50

"P-111-1", "P-111-1-a" 19,316.99 Travel expenses verified as business related P62,829.87 On the other hand, the remaining amount of I'l,l67,502.76240 under travel account should be subjected to FBT, due to insufficient substantiation, and failure to establish that the expenses are business related.

IV.2 Golf Membership - ?2,188,240.00 ICP A Mendoza explained that the P2,188,240.00 falling under golf membership account pertains to the club membership shares owned by petitioner. Being an owner of these club shares, petitioner 234 235 236 237 238 239 240 With a difference of 1'0.40 (Total amount of 1'1,230,332.63 per !CPA v. actual sum of 1'1,230,332.23).

Exhibit "P-110-1-b," USB (Exhibit "P-124-2"). Exhibit "P-111-1-a," USB (Exhibit "P-124-2"). Exhibit "P-111-1," USB (Exhibit "P-124-2"). Exhibit "P-110-1 ," USB (Exhibit "P-124-2"). SUBJECT: Implementing Section 33 of the National Internal Revenue Code, as Amended by Republic Act No. 8424 Relative to the Special Treatment of Fringe Benefits. Total assessed amount of 1'1,230,332.63 reduced by duly substantiated travel expenses of 1'62,829.87.

may use the club facilities for the entertainment of clients and investors. In addition, these are also supported by billing invoice and acknowledgement receipts.241 Moreover, these are not fringe benefits borne by petitioner for the benefit of its employees; rather, these are treated as ordinary and necessary business expenses of the petitioner and thus not subject to FBT.242 We sustain the FBT assessment on golf membership account. Petitioner submitted its Acknowledgement Receipts 243 and Billing Invoice 244 to support its stance. These documents merely prove payment of club fees for Baguio Country Club IFO Baguio Country Club and one (1) corporate share of Baguio Country Club IFO Dianel T. Domingo. 245 It means that petitioner fell short in demonstrating that these are ordinary and necessary business expenses and used exclusively for business purposes. More, the purpose and professional or business relationship of these expenses were not even proven. Therefore, the golf membership in the entire amount of 1'2,188,240.00, is deemed a taxable fringe benefit subject to FBT, pursuant to Section 33(A) of the NIRC, as amended, Section 2.33(B)(6) of RR No. 3-98 and Section 2 of RR No. 10-2002. IV.3 Motor Vehicle- ?229,234.82 ICP A Mendoza clarified that the vehicle subject of the FBT assessment is a Honda Odyssey acquired by petitioner on January 27, 2016. Based on this acquisition, respondent calculated the deficiency FBT on motor vehicle as follows:246 241 242 243 24!

245 246

Particulars

Amount

Acquisition cost of the vehicle 1"2,065,178.57

Add: 12% VAT

Less: 1% EWT

Total- acquisition per BIR computation Divide by 5 years estimated life of the vehicle

Multiplied by 50%

Item V.G.2.b.1 of the !CPA Report (Exhibit "P-123"), Binder, p. 49. Item V.G.2.b.2 of the !CPA Report (Exhibit "P-123"), Binder, p. 50. Exhibits "P-119-1" and "P-119-2-a," USB (Exhibit "P-124-2"). Exhibit "P-119-2," USB (Exhibit "P-124-2"). Annex A-60 of the !CPA Report (Exhibit "P-123"), Binder. Table 52 of the !CPA Report (Exhibit "P-123"), Binder, p. 50. 247,821.43 (20,651.79) 2,292,348.21 5 458.469.64 50%

I Monetary value per BIR computation

I

P229,234.

We note that respondent used an acquisition cost inc lusive of value of 2,348.21.

12% VAT and net of 1% EWT in computing the monetary the motor vehicle, leading to the acquisition cost at 1'2,29 However, Vehicle Sales Invoice No. 94197, 247 states the correct s proper vehicle quisition s for the acquisition cost thereof at 1'2,065,178.57 and should be used a basis for computing the monetary value of the motor pursuant to Section 2.33(B)(3)(e) of RR No. 3-98. Using the ac cost of 1'2,065,178.57, the monetary value to be used as basi computation of FBT is 1'206,517.86, computed as follows:

Particulars

Acquisition cost of the vehicle Divide bv 5 vears estimated life of the vehicle

Annual Depreciation Expense

Multiplied by 50%

Monetary value

Amount

f'2,065,178.5 7 5 1

Yo

6 413,035.7 50° P206,517.8 Therefore, petitioner correctly determined the FBT du motor vehicle and timely filed and paid the corresponding eon the amount due, as detailed below:248 1st Quarter 2nd Quarter

(Exhibit

(Exhibit

Particulars

"P-109-1")

"P-109-2")

Should be monetarv value 1'206,517.86 1'206,517.86 Divide bv 12 12 Monthlv amortization 17,209.82 17,209.82 Multiolv bv 2 3 Quarterlv amortization 34,419.64 51,629.46

Divisor

68% 68% Tax base/ grossed-up value 50,617.12 75,925.68 Tax rate 32% 32% Total FBT due per quarter 1'16,197.48 1'24,296.22 3rd Quarter

(Exhibit

"P-109-3")

1'206,517.86 12 17,209.82 3 51,629.46 68% 75,925.68 32% 1'24,296.22 4th Quarter

Exhibit

-109-4") 206,517.86 ( "P

I'

12 17,209.82 3 51,629.46 68% 75,925.68 32% 1'24,296.22 Accordingly, the deficiency FBT assessment on motor v ehicle should be cancelled for lack of legal and factual basis. To summarize, petitioner is liable for basic FBT forTY 2016in the amount of 1'1,579,173.06, computed as follows:

Particulars

Travels

Golf Membership

Total

Divisor

Grossed-up monetary value Tax rate

FBT

V.DST

Amount

1'1,167,502.76 2,188,240.00 1'3,355,742.76 68% 4,934,915.82 32% 1'1,579,173.06 Respondent slapped petitioner with deficiency DST forTY 2016, in the amount of P12,241,729.56,249 computed as follows:

Particulars

Legal Basis

Tax Base

Tax Rate

Tax Due

Advances from PDI Sec.179of for future dividends theNIRC 1'15,000,000.00 1/200 1'75,000.00 Receivables from wholly owned Sec. 179 of subsidiary (increase)

the NIRC

2,117,719,511.00 1/200 10,588,597.56 Advances from

Affiliates: Various

net of Dividend received for the year (from CRB and Sec. 194 of

ARB)

the NIRC

314,999,999.91 1/200 1,575,000.00 l'3 first 1'2,000.00; l'1 for

Rent Exrense

3,132,592.00 succeeding 3,132.00

Total DST

1'12,241,729.56

Less: DST Payments

DST Still Due

P12,241,729.56 V.1 Advances from PDI for future dividends- ?15,000,000.00; and Advances from Affiliates- ?314,999,999.91 Petitioner complains that the alleged advances from affiliates are not advances. Instead, these are "dividends receivable" from its various subsidiaries and affiliates; thus, not subject to DST. In support thereof, the relevant pages of its cash receipts bookzso were adduced as evidence.

249 250 The complaint is unfounded.

Schedule 7, Exhibit "P-1," Docket (Vol. 1), p. 70. Exhibit "P-26." Id. at p. 385.

Sifting through the cash receipts book shows that it is simply a breakdown of the petitioner's cash inflows for TY 2016 (i.e., dividend income, other income, management fees, 2015 dividends receivable, 2015 receivables, and miscellaneous items). Yet, this alone is insufficient proof that these transactions do not represent advances from affiliates. For this reason, the DST assessment pertaining to said advances is sustained.

V.2 Receivables from wholly owned subsidiary- ?2,117,719,511.00 Petitioner argues that DMCI Mining Corporation, its wholly owned subsidiary, fully paid the DST on receivables on March 10, 2020. 251 Also, said payment covers the same intercompany transaction, subject of respondent's deficiency DST assessment in the amount of P10,588,597.56, as evidenced by the PAN252 issued to DMCI Mining Corporation. Additionally, the BIR' s Termination Letter253 certified such DST payment,254 Thus, DST thereon should be cancelled.

We agree with petitioner.

Our verification disclosed that in its 2016 AFS, 255 petitioner reported receivables amounting to !'2,117,719,511.00 from its wholly owned subsidiary, DMCI Mining Corporation. On the other hand, DMCI Mining Corporation classified the same transaction as a loan assignment256 in its own 2016 AFS. Petitioner presented the following documents to establish payment of DST thereon, to wit 251 252 253 254 255 256 257 258 259 260

1. PAN257 issued by respondent to DMCI Mining Corporation;

2. Payment Form (BIR Form No. 0605);258 (3)

3. BIR Filing Reference;259

4. PNB BIR eFPS payment confirmation;260 and

5. Termination Letter261 issued by respondent confirming the closure and termination of said DST assessment. Exhibits "P-22" to "P-25." Id. at pp. 380-382 and 384. Exhibit "P-43." Docket (Vol. II), pp. 595 and 597. Exhibit "P-44." I d. at p. 598.

Par. 71, Petition for Review, Docket (Vol.!), p. 32. Note 11, Exhibit "P-35," Docket (Vol. II), p. 547. Note 11, Exhibit "P-121," p. 25, USB (Exhibit "P-124-2"). Exhibit "P-43," Docket (Vol. II), pp 595-597. Exhibits "P-22" and "P-23," Docket (Vol. !), pp. 380-381. Exhibit "P-24," id. at p. 382.

Exhibit "P-25," id. at p. 384.

These documents jointly establish that the DST liability for said intercompany transaction between petitioner and DMCI Mining Corporation was duly paid by the latter. In fact, the BIR's Termination Letter confirmed the closure of this matter. Indeed, Section 173 of the NIRC, as amended, as implemented by Sections 2 and 3 of RR No. 9-2000,262 states that any of the parties shall be liable for the full amount of the DST due and the full amount of the DST may be remitted by any of the party or parties to the taxable transaction.

Simply put, there is no more outstanding DST liability on said transaction against petitioner. On this account, the deficiency DST assessment on receivables from wholly owned subsidiary in the amount of Pl0,588,597.56 should be cancelled. V.3 Rent Expense- ?3,132.00 Petitioner admits its DST liability on rent expense. 263 Thus, respondent's assessment in the amount of P3,132.00, representing petitioner's deficiency DST is upheld. In sum, petitioner 1s liable for basic DST m the amount of P1,653,132.00 forTY 2016, computed as follows:

Particulars

Gr oss Amount

Tax Rate

DSTDue

Advances from PDI 1'15,000,000.00 1'1.00/1'200.00 1'75,000.00 Advances from

Affiliates

314,999,999.91 1'1.00/200.00 1,575,000.00 1'3.00 for the first 1'2,000.00, and 1'1.00 for every 1'1,000.00, or fractional part thereof, in excess of RentEx ense 3,132,592.00 1'2,000.00264 3,132.00265 261 262 263 264 265 Total deficiency DST 1'1,653,132.00 Exhibit "P-44," id. at p. 598.

SUBJECT: Mode of Payment and/ or Remittance of the Documentary Stamp Tax (DST) Under Certain Conditions.

Item H.2.d. of the !CPA Report (Exhibit "P-123"), Binder, p. 52. Section 194 of the NIRC of 1997.

Upon re-computation, the DST due should be 1'3,134.00; With a difference of 1'2.00. However, since the Court cannot go beyond what is stated in the assessment and considering that the power to assess is bestowed to respondent, the Court is constrained to limit its findings only up to the extent of respondent's assessment.

VI. MC (Compromise Penalties) Respondent found petitioner liable for the following compromise penalties covering TY 2016:266

Nature of Violation

Violated Provisions

Compromise

Penalty

Failure to file and pay income tax

Sections 32 & 27 of the

NIRC & RMO 7-2015

1'50,000.00

Penalty for Non-filing of Summary List of

Section 250 of the NIRC

Sales and Purchases

& RMO 7-2015

25,000.00

Sections 24(B)(2) and

Failure to file and pay Final Tax

25(A)(2) of the NIRC &

RMO No. 7-2015 50,000.00 Penalty on late remittance of Final Tax RMO No. 7-2015 25,000.00 Section 57 of the NIRC, Failure to file and pay EWT Section 2.57.2 of RR No.

2-98 & RMO No. 7-2015 25,000.00

Penalty for Non-filing of WE Alphalist

1,000.00

Penalty for Non-filing of WC Alphalist

RMO No. 7-2015 1,000.00 Section 2.33(6), 3(e) and Failure to file and pay FBT

(7) of RR No. 3-98 & RMO No. 7-2015 25,000.00 Sections 179, 176, 194 of Failure to file and pay DST the NIRC, and RMO No.

7-2015 50,000.00

Total Penalties Due

1'252,000.00 Yet, petitioner never gave its imprimatur to the imposition thereof;

hence, must be cancelled for being illegal and unauthorized.267

CONCLUSION

First. Petitioner is liable for basic deficiency internal revenue taxes for TY 2016, in the total sum of P79,133,845.57, computed as follows:

266 267

Amount of Basic

Type of Tax

Deficiency Tax

IT

-

FWT

1'74,969,055.29

EWT

931,222.60

FBT

1,579,173.06

DST

1,653,132.00 Exhibit "P-1," Docket (Vol. I), p. 70. See Commissioner of Internal Revenue v. Lianga Bay Logging Co., Inc, et al., G.R. No. L-35266, january 21, 1991.

1'79,132,582.95 Second. Petitioner is likewise liable for 25% surcharge of the basic internal revenue taxes, pursuant to Section 248(A)(3) of the NIRC, as amended, which provides:

SEC. 248. Civil Penalties.- (A) There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to twenty-five percent (25%) of the amount due, in the following cases:

(3) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment Third. Petitioner, too, is liable for deficiency interest, with the following rates: (1) 20% per annum, counted from date prescribed by law for payment of FWT, EWT, FBT, and DST, until December 31, 2017; and (2) 12% per annum, counted from January 1, 2018 until April 30, 2021; the latter date being the due date under the FAN,26S pursuant to Section 249(B) of the NIRC, as amended by RA No. 10963. Fourth. Petitioner's tax liability forTY 2016, in the total amount of P145,527,776.53, consisting of basic deficiency internal revenue taxes, surcharges, and deficiency interest computed as of April 30, 2021, are broken down as follows:

FWT

EWT

FBT

DST

Basic Tax Due

1'74,969,055.29 1'931,222.60 1'1,579,173.06 1'1,653,132.00

Add: 25% Surcharge

18,742,263.82 232,805.65

Subtotal

1'93,711,319.11 1'1,164,028.25

Add: Deficiency Interest

on

FWT:

20'\\, from Jan. 21, 2017269 to Dec. 31, 2017 14,172,232.37 (1'74,969,055.29 X 20% X 345 days/365) 268 269 Exhibit "P-6." Docket (Vol.!), pp. 134-141. Petitioner is an eFPS filer.

394,793.27 413,283.00 1'1,973,966.33 1'2,066,415.00 12% from Jan. 1, 2018 to Apr. 30, 2021 (P74,969,055.29 x 12% x 29,971,190.94 1,216 days/365)

EWT:

20% from Jan. 21, 201728 to Dec. 31, 2017 176,039.34 (P931,222.60 x 20% x 345 12% from Jan. 1, 2018 to Apr. 30, 2021 (P931,222.60 372,284.94 x 12% x 1,216 days/365)

FBT:

20% from Jan. 17, 2017271 to Dec. 31, 2017 301,989.81 (P1,579,173.06 x 20% x 349 days/365) 12% from Jan. 1, 2018 to Apr. 30, 2021 (P1,579,173,06 x 12% x 1,216 days/365)

DST:

20% from Jan. 6, 2017 to Dec. 31, 2017 (P1,653,132.00 x 20% x 360 days/365) 12% from Jan. 1, 2018 to Apr. 30, 2021 (P1,653,132.00 x 12% x 1,216 days/365) Total Amount Due, April 30, 2021 P1,712,352.53 P2,907,279.24 Fifth. Petitioner is likewise liable for delinquency interest at the rate of 12% per annum, based on the sum of basic deficiency internal revenue taxes, 25% surcharge, and deficiency interest (until April 30, 2021), computed from May 1, 2021 until full payment thereof pursuant to Section 249(C) of the NIRC, as amended.

631,323.10 326,097.27 660,890.47 P137,854,742.02 P3,053,402.74 ACCORDINGLY, the Petition for Review dated February 23, 2022, filed by DMCI Holdings, Inc. is PARTIALLY GRANTED.

Respondent’s deficiency Income Tax assessment and Compromise Penalties for taxable year 2016 are CANCELLED and SET ASIDE. On the other hand, respondent’s deficiency Final 270 Petitioner is an eFPS filer.

271 January 15, 2017 fell on a Sunday.

Withholding Tax, Expanded Withholding Tax, Fringe Benefit Tax, and Documentary Stamp Tax assessments for taxable year 2016 are UPHELD WITH MODIFICATIONS. Thus, petitioner is ORDERED TO PAY respondent the following:

Deficiency

Basic

Surcharge

Interest

Total

FWT

P74,969,055.29 P18,742,263.82 P44,143,422.91 P137,854,742.02

EWT

P931,222.60 232,805.65 548,324.28 1,712,352.53

FBI

1,579,173. 06 394,793.27 933,312.91 2,907,279.24

DST

1,653,132.00 413,283.00 986,987.74 3,053,402.74

Total

P79,132,582.95 P19,783,145.74 P46,612,047.84 P145,527,776.53 In addition, petitioner is ORDERED TO PAY respondent delinquency interest at the rate of twelve percent (12%) per annum on the total amount due of P145,527,776.53 as of April 30, 2021, or equivalent to the amount of P47,844.75272 per day, computed from May 1, 2021 until full payment thereof pursuant to Section 249(C) of the NIRC, as amended by Republic Act No. 10963, as implemented by Revenue Regulations No. 21-2018.

Associate Justice

WE CONCUR:

272 ~· 7-~ .... ~~--- CATHERINE T. MANAHAN

Associate Justice

HENRY i}4NGELES

Associate Justice

1'145,527,776.53 multiplied by 12% divided by 365 days.

ATTESTATION

I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division.

~·/-~ CATHERINE T. MANAHAN

Associate Justice

Chairperson

CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairperson's Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division.

~.~ "''--- MA. BELEN M. RINGPIS-LIBAN

Acting Presiding Justice