Filipinas Synthetic Fiber Corporation, et al. vs. C.7.A. Case No. 3421 Commissioner of Internal Revenue, et al.

DECISION —

C.T.A. CASE NO. 3421 ee i

First Quarter ~ 1976

April E5, 1976 LHhterest Mcerued oesaeissiwme cent gees B 4,483, 332.69 15% Tax dite thereon weunnseeeennunenvee 672, 499.90 14% int. fr. 4/26/76 to 10.26. 76...0.. 23, 537. 50 Compromise ~- late payment .. cnn nennan 30. OO seen seems wonte Quan went meus emte mane Aare nate anete came aaune te Amount due On LO/ES/7G wavcancnncens FP 696,087.40 Less: Balance of Payment made on LO/ES/76 cee en eee wee eee eae ¢ 997, 283. 39) Balance of Fayment to be Applied to Second Quarter, 1976 ween cnn ners annennnennae (B 301,195.99) Sot CHS ON St es Ss Sy See es a ee a ee ee

Second Quarter - 1976

July @5, 1976 Interest Accrued wancenuccnnnennonune Fo4, 082, 379.99 seas sa otet sotem cates cnet sense came conen memar ganas ees finds gates 15% Tax due thereon saewseeenncanneee | B 612, 357. 00 14% int. fr. 4/26/76 to 10.26. 76..... 21,432. 50 ° Compromise —- late payment wean eaanneae SO. 00 Amount due on LO/ES/76 cevscwennnene FB 633, 839.50 Less: Balance of Fayment made ON 1O/PER/S7G wean awlbenunncsunceae§ ( 301,195.99) Balance of TAX senueewercceceneuewene p 332,643.51 14% int. fr. 10/25/76 to 1/25/77 woes 11,642, 52 Amaunt due aon L/ES/S77 2. e denen nn nean Ee ° 344,286.03 Less: Payment made on 1/25/77:

OR # SO26398 .... F 40, 498. 00 # 5026399 .... - 40, 824,00 # SOZ6400 1... BOS, 390. 00 # SOZ@6401 .... 301, 312.00 ;

# SOZG402 .... 44,339.00 (PF 1,232, 363.00) tie coum secon meen aoeey ans Sam Sutah SOnet enue mame Kenan mee seecva Conc Grrro eoree one CED even ein eae Grim Oem eta EHD pane HR ' Balance of Fayment to be Applied to Third t _ Quarter, 1976 senevnnuwnstnenenvunoune (6 888, 076. 98) SSSR IS cS cS Soe Se ee ee 4uc 7 f

DECISION —

C.T.A. CASE NO. 3421 -4- Third Quarter - 1976 ;

October 25h, 1976 Interest Accrued wane ne nnn en nv nnn nuns B 3,192, 735.65 15% Tax due thereon wn ence n een e nen nee B 478,910. 35 14% int. fr. 10/24/76 to 1/85/77 «2+. 16, 761.86 Compromise - late payment w«nnaenennee 39.00 Amount due on L/ES/S77 acne nen unnveess =) 495, 722.21 Less: Balance of Payment made On L/ES/77 6 is eww tela ee ee ew ( 888,076. 98) Balance of Payment to be Applied to Fourth Quarters. 1976 <ituewe te we tea eee ee (fF 392, 354.77) bt +} ---$--$--- Ff -- 4 ff} $$}

Fourth Quarter ~- 1976

January &5, 1977 Interest Accrued enews eensencnenneae | FB 3,749,549. 46 15% Tax due thereon w..aeennnnerenveean = S62, 432. 42 Less: Balance of Fayment made on 1/25/77 ea eanmpeneananaaeeaeseetsen#aneeeneee#ese® ¢ 392, 354.77) Balance of Tan «scenes eSeasscwvtivsue B 170,077.65 14% int. fr. 10/24/76 to 1/25/77 ..-. 71,432.61 Compromise — late payment cescnesaune 50.00 AMOUNT STILL DUE AND COLLECTIBLE .... Bp 241,560. 26 \ eeedheeeribeeete ed cerdimeniteerdi-evieesectreriencdaaiaetectl

SSS SS SSS SSS

DECISION —

C.T.A. CASE NO. 3421 - 23>

(Royalty)

Fourth Quarter ~- 1975

January 5, 1976 Reyalty ficeraed «eccsas cee bee ak eg eed BP 1,485,058. 15 35% Tax due thereon weacceunneennvrvnun @ 519, 770. 35 14% int. fr. 1/25/76 to 4/25/76 «2s 18,191.97 Compromise - late payment wnaaannnaee 30.00 Amount due on 4/26/76 weve e rn nnenene A 938, O18. Ge Lesss Amount credited (TDC #O030-4-26~-76) waa nnnennene 511,276.00 Ba LANGE Ak wees se oleae aw ws eve ew we oi aie ee = 26, 726. 42 Add: 14% int. fr. 4/26/76 to LO/SS/ 7G. Vacca Gud oe hoe OS Fw See ee & 1,871.54 Amount due on 10.25.76 we nen n en nunene — 28,607. 86 Lesss Amount paid on 10/25/76 under Balance of Fayment to be applied to First Quartery W976 wawis sa ween ee dew ee ee (F 480,161.14) Peer eer bereRereReerdercberrdkeecd-ceReerYetcdeeier tee?

_ First Quarter —- 1976

April 25, 1976 Royalty Acerued wsennevensunwennannae = 407, 668. 05 os8 eats tsi aser Gate stone meat mopee fente Gusen tenth Sabeb Somer mess came 35% Tax due thereon wsevinssacevesces B 142, 683. 82 14% int. fr. 1/25/76 to 4/25/76 «aes 9,987.87 Compromise —- late payment does & ws di DR eros 30.00 TOLEL Pitrage ge wei stele cs 668 & wee Wij wee, © ev SE Ew p 152, 721.69 Less: Balance of Fayment uhder OR # 2997115 dated 10/25/76 ... ( 480,161.14) | ‘sev ean soe wees teva sana spent sete wana Se SHON HAAN emia Soe estan Balance of Payment to be applied to First Buarter, 1976 sassenveeteveecennennen (B 327, 439. 45) See se ree ore sere eres at ee cet ee ee et ree oes mre eee >

4UG

DECISION -

C.T.A. CASE NO. 3421 -6-

Second Quarter ~ 1976

July @5, 1976 Reayalty Arerued ww cnceunnannnnnwnnen P 1,064,130. 89 ‘rae snes se0en tose gu tans nm vp fate muney Sante Mame ney Bana Pend 35% Tax due thereon w.acnnuennenennnenn B 376,655. 81 14% int. fr. 7/25/76 to 10/25/76 .... 13,042.95 sore ane sane Orme Mme anaes wenn emene Mines Ime Seehe apih ite aided Amount due on LO/ES/7G aw ce nnn nnanae & 385,698. 76 Less: Balance of Fayment made on 10/25/76 under OR # 2997115 ... ( 327,439. 45) Balance OF tax seeuwendaent ve ae oman B 58,259. 31 Add: 14% int. fr. 1/25/76 to 4/25/76 2grn»eeerneernrenseeneanseemeeanaenereemesaseA 3,733.63, Compromise ~ late payment «ceeseccnae 50.00 Total Amount due on 4/11/77 wawenanese B 62,942. 94 Less: Amount paid under OR # O666256 QILVASI TH? wea we ch SETH ESET Sw we { 447, 506.00) cm care coewe cave retne Stwas soem satan eotet Marte Meme teste mont comm aimee, Balance. of Payment to be applied to Third Quarter, 1976 sscesmtwmcetendunwtecews (Ff 385, 463. 06) SS Soe TS Se SE ee Soe STS See es Se ee ee er ee

Third Quarter ~ 1976

OQetober &5, 1976 » Royalty Accrued pigan ssn wAhddswe navn x Fi 671, 856. 76 ¢ ‘ (sean piece veep Sete eae safry Senay renee Saveh tated tutes orden Meene SROHD wtf BS% Tax due thereon vevseseeeeeegeres PB 235,149.87 14% int. fr. 10/25/76 to 4/11/77..44.- 15,069.91 Compromise ~- late payment ceaanneneee 30, a0 Total amount due on 4/11/77. ee ewes BP 250,269.78 Less: Balance of Fayment made on 4/11/77 under OR # 0666256, 4/11/77 ... ( 385, 463. 06) Balance of Payment to be applied to Fourth Quarter, 1976 aeaenmnnwneeenenweeeaeareseeeaeer®#eneneeaess (B 135, 193.28) Soe Se ee See as Ses See oe ae ee ee a

DECISION —

c.T.A. CASE NO. 3421 = 74 =

Fourth Quarter ~ 1976

January 25, 1977 Royalty Acerued wenn een enn nen nn nn wnae =) 597, 642. 32 35% Tax due thereon. .ssnccevennnneune B 209, 244. 81 14% Int. Fr. 1/25/77 to 4/11/77... .04- 6, 166.49 Amount due on 4ASLAS7T7. ween nn nennnune Fi 215,411.30 Less: Balance of Payment made on 4/11/77 - under OR No. O66G6E856.. 000 n ewan ( 135, 193. 28) Balanteé GF Teds rR Gis oO O58 so SA ee = 8O, 218. 02 | Add: 14% int. fr. 4/11/77 to 1/25/80. 31,314.69 Compromise - late payment. cwunnenauen 50.00 (oees tte ey cntan snsae cane Senge Senet sores muius beeen nmin snee sete AMOUNT STILL DUE AND COLLECTIBLE..... 5 111,582. 71 SRS SES es Se Sees eee eee

(Dividend)

First Quarter ~- 1976

April £5, 1976

Dividend Accrued

Teijin Ltd. (Tokyo, Japan) ..ceenneneveee FB 1,478, 377.50 Madelein Vlachos (N/R , Foreigner. «canner nnane 6, S62. 50 Toyo Menka Kaishu, Ltd.

(Resident). ..waunaan 211,199.00 P 1,696,139.00 Withholding tax at source due thereon: 35% on Fi, 478,377.50., B 317,520.13 30% on F 6, 562. 50, . 1,968.75 19% on FB #211,199.00.. 25, 119.90 e 540, 520. 78 Add: 14% int. fr. 4/25/76 to 7/25/76... 19,125.24 Compromise ~ late payment.) ssn roe nnune : 5Oo, 00 Aerbunt. due ar 77Z577b.asevedseviveetees FP 559,696.02 Less: Payment made on 7/25/76 under OR Now 78ESS4. .. ence ee 340, S20. 78 Boa TAN GC @uvsenettscte vite vet rvnsanes 19,175.24 Add: 14% int. fr. 7/25/76 to 4/25/793.. 7, 382. 47 ee ee et soe tt este mg em en es fs td re eed AMOUNT STILL DUE AND COLLECTIBLE ...... FP 26, 557. 71" . SS Se Se a SS Se SE ee

DECISION -

C.T.A. CASE NO. 3421 - 8 - The ass essm ent was based on the firdings invcsti~l<".tion conducted by t h e But' e au o f I nt et'na 1 Reven ue <BIR> which s ho~ed, among others, that:

"() s t' e ~FH'd s t o ( sic) the wit; tl h o 1 d i Tl ~~ t a>< at source liability of Filsyn, it was gathered th at for the year under review, Filsyn <si c) method of payment nf withholding tax at source is based on act ua l remittance o·r' p ay ment of r·'oyalty , inte·,-es t and divide,nds .::l bl ' 0,1 cl and not on accr-ual basi s put'suant to B. I.R.

Ruling No. 7-003, dated February 26, 1'371.

Following

the said t'uling, a recomputation of the taxpayer's withholding ta>< at source liability on intere st paid and accrued to several foreign bank s and lending institutions and royalty paid and accrued to Teijin, Tokyo, Japan was made a nd it

Wi:\S

gath ered that Filsyn is still further liable to pay the following deficiency interest for failure to pay on time the corresponding withholding tax at source based on accrual thet·'e of, wh ich is as follows.: Deficiency interest on withholding tax on interest to foreign loans ••••.••••••• ~ 166,653.61 Deficiency interest on withhol~ing ta x , o t1 t' o y a 1 t y. . • • . • • • • • . 53, 76E:. 2'+ I=! i:-=:30 , '+15. 85 _,. _______ .,. __ ,. __ _ --·--..

~ ·---- ..... -·~ ---- ·--

><X><

t , XXX >< ){)( "(-:>c:_, . , ., t' e ~FH ' cl ~; t o < -:-, i C' ) t h e w i t h h o l. d i n g t a >< o n c a !5 h d i v i d e n d s , i t I·H1 !5 f •.n' ·t-h e ·r' g at h e t' e d that

Filsyn

failed to pay on time the corresponding withhol~ing tax of 1='540,520.78 due on ~1~6 96, 139.00 cash dividends as computed in the attached working papers mat .. ·l-<ed Anne>< C-1.

Ft~om the t'ecot'ds , it was found out that Filsyn declared cash dividends p.'"'\yable on

Mat'ch

26, 1976, hence the withholding tax is due on April 26, 1975, which is after 25 days from the end of the first calendar quarter of 1'376, as provided for under

Section

54 of the

Tax

Code.

However, the withholding tax at so~rce due on 4u, . I

DECISION —-

C.T.A. CASE NO. 3421 the aforesaid amount of cash dividends was only paid on July 6, 1376, hence the corresponding deficiency interest for late payment amounting ta Pp 18,918.22 is recommended herein for collection." (BIR Records, pp. 243-244; Exh. "S-1i") On May 18, 1981, petitioner protested the assessment on the ground, among others, that ‘the BIR erred in holding that its obligation to remit the withholding taxes arose from the moment said payments were accrued in petitioner’s books, regardless of when actual remittance of the payments was made (Exh. "“B"), In the assailed decision, dated September 10, 1981, respondent ‘denied ‘petitioner’s protest and - advised the latter that its decision was already final (Exh. "Co". Thus, this petition filed with Us on February 4, 1982.

The lone issue to be resolved by Us is whether petitioner is required to withhold taxes at source on its foreign loan, royalty aves dividend payments to non resident corporations which have been accrued as liabilities in its books, but have not yet become due and demandable nor been actually paid. | We find no reason to disturb the assailed decision.

We have had occasions in the past to rule on the i issue of when taxes must be withheld in case the ‘payor (withholding agent under the Tax Code) uses the accrual method of accounting. In the cases of Bayer 406

DECISION -

C.T.A. CASE NO. 3421 Fharmacentical Co., Ine. vs. Commissioner of Internal Revenue (CTA fase No. 2846, March 16, 1979), Construction Resources fF Asi

Be

VSe Commissioner of

Internal Revene (CTA Case No. 3307, November 25, 1983), and Western Palawan Timber Corp. vs. Commissioner of Internal Revenue (CTA Case No. 3544, June 5, 1987), we held that: as a general rule, the withholding of taxes at source from income dre non-resident foreign corporations must se. Hache at the time of the accrual, and not of the actual payment; and that the only exception to this rule -- that is, the only time that withholding of taxes must be done upon the actual payment, and not the accrual in the books of the payor “~~ is when there is a government restriction which prevents the actual remittance of the income due the non-resident corporate payee existing at the time the by corual of said income was made on the payor’s books.

| Clearly, in the case’at bar, since no government restriction existed at the time the subject accrual was made, toa Sraeomnit actual remittance of the subject incomes s then, : the Seuarai rule applies. That is, petitioner was obliged under the law to withhold = and remit taxes at source on such incomes acerued in its books. ; ' t This holding is further bolstered by the ruling of the Supreme Court in the recent case of Commissioner of te

DECISION —

C.T.A. CASE NO. 3421 ee PC ternal Revenue vs. Wyeth Suaco laboratories, Ine. and * stenaee ms seereseesenine-teceeumnseeavene — Seremmasenedseseutven tame eqesenirn ot nant sean ee nase emo iheeecnrascoeetasecementnes — guenearnmuay Movepesenabenene: svaceaatnt Seen rimeecanennim — eneomaentnatnnont the Court o ax Appeals (208 SCRA 125 £19911), which reads:

"Wyeth Suaca questions the legality of the regulation imposed by the Bureau of Internal Revenue of requiring a withholding agent or taxpayer to remit the taxes deducted and withheld at source on incomes which have not yet been paid. It maintains the stand that withholding tax at source should only be remitted to the Bureau of Internal Revenue once the incomes subject to withholding tax ak source have actually been paid. Thus, private respendent avers that it was not liable to remit the taxes withheld at source on royalties and dividends «unless these incomes have been actually paid to its foreign licensors and stockholders.

"xX eH xxx "Moreover, the records show that Wyeth Suaco adopted the acerual method of accounting wherein the effect of transactions and ather events on assets and liabilities are recognized and reported in the time periods to which they relate rather than only when cash is received or paid. The "Report of Investigation" submitted by the tax examiner indicated that accrual was the basis of the taxpayer’s return. Thus, private respondent recorded accrued royalties and dividends payable as well as the ‘withholding tax at source fpayable on these incomes. Having deducted and withheld the tax at source and having recorded the withholding tax at source payable in its books of aCcoaunts, private respondent was obligated to reamib the same to the Bureau of Internal Revenue."

Fetitioner makes much of the fact that the subject acerued incomes have not yet become due and demandable at the time the accrual was made. According to : t petitioner, Since such accrued incomes have not yet

DECISION -

C.T.A. CASE NO. 3421 bemome due and demandable, there is as yet, as far as the non-resident corporations-recipients of sich payments are concerned, no taxable income from which petitioner must withhold taxes. Fetitioner goes on to contend thats "The rationale of the Bayer decision xxx was that although the non-resident foreign corporation had the theoretical right to collect the royalties, it was forbidden the right to receive them or dispose of them. Withont the power to command payment to itself nor the power to dispose of the “income,? no ecenamic advantage accrued to the non-resident foreign corporation. The ‘income’ was therefore unrealized and highly artificial without the element of control over the amounts. Accordingly, no gain, profit or income was thereby created. There being no income subject to withholding of tax-at-source, no duty to withhold and pay the tax arose at that time. xxx "Although the case at bar does not invelye any ‘blocking proclamation’ against the remittance of funds, the non-resident foreign corporations involved in this case, at the time the amounts were accrued in Filsyn’s books likewise did not have the right to receive them or dispose of them and neither did they have the power to command payment to themselves or otHers, until these amounts become due and demandable under the relevant contract. No economic gain accrued to the non-resident foreign corporation prior to that time. As in the Bayer and LL.D. Caulk cases, the non-resident foreign corporations did not yet have ‘gains, profits, and income,’ at the time of accrual by the debtor corporation. "

We cannot agree with petitioner. The question, of : ot i whether or not the subject accrued incomes have become due and demandable at the time of such accrual, is not ve pivotal in this case.

4ia

DECISION —

C.T.A. CASE NO. 3421 In the first place, as stated by petitioner in its memorandum, Statement No. 5, par. 7(e) of the Accounting Standards Council defines the term "accrued liabilities" as constituting “liabilities for expenses incurred on or before the balance sheet date but Payable ata later date, usually to specific persons, and determinable with reasonable accuracy. " (Underscoring supplied). Clearly, liabilities -- such as the subject incomes -- may only be acerued if they are payable later than the balance sheet date. In other words, the subject incomes were accrued in the books of petitioner precisely because they were not yet due and demandable.

In the second place, the present case must be differentiated from that of Bayer. “In the earlier case, the withholding agent, Bayer Pharmaceuticals, could not, even if it wanted to, remit the royalty payments to their non-resident, foreign corporation- recipient. The Central Bank prohibition, which was beyond the control of both Bayer and the non-resident Foreign corporation, removed all possibility of such remittance being made.

On the other hand, in the present case, there is no such circumstance or force effectively blocking ‘the non-resident foreign edrporatiets from receiving the incomes already accrued in petitioner’s ‘books. Ih 4ic

DECISION —

C.T.A. CASE NO. 3421 other words, there is nothing beyond the control of petitioner which would prevent or stop it from remitting the said incomes even before they. become due and demandable under the pertinent contracts.

Finally, to countenance the position of the petitioner would be tantamount to saying that, ‘in case the payor actually remits foreign loan payments, royalties, and/or dividends ta a non-resident foreign corporation before they become due and demandable, then such payor does not have an obligation to withhold the taxes at source on said actual payments until the maturity date of the obligations. This is) clearly untenable.

WHEREFORE premises considered, the instant petition for review is DISMISSED. The assailed decision of respondent Commissioner, dated September 10, 1981, is hereby AFFIRMED. FPetitioner is ardered to remit to respondent the amount “of P379, 700.68, as deficiency withholding tax at source for the year 1976, as well as all interests and a accruing on it.

a Ds '

RAMON O. DE V A

Associate JuWge

Alo,

DECISION -

C.T.A. CASE NO. 3421

WE CONCUR:

ct~~· ~ ERNESTO D. ACOSTA P1··' e ~; :i. di n

M

L K. GRUBA n ,, s o c i a-t e \r..uc1 g e - 15 -

CERTIFICATION

I

hereby certify that this decisio n was reached aftor due con sul tation among the members of the

Court

of Tax Appeals in accordance with Section 13

Article

VIII of the Constitution .

41 ~ . I ' I <;,~ ~' Q~ ERNESTO D. ACOSTA P~~er.; id.i. ng Judge