CTA Case No. 3951

DECISION -

tax assessment, however, consisted of interest and compromise penalties for alleged late payment of withholding taxes due on interest on loans, royalties and guarantee fees paid by the petitioner to non-resident corporations.

The assessment was seasonably protested by the petitioner through its auditor, SGV and Co., which was denied by the respondent on the ground that "For Philippine internal revenue tax purposes, the liability to withhold and pay income tax withheld at source from certain payments due to ai foreign corporation is at the time of acerual and not at the time of actual payment or remittance thereof. " (See respondent's letter denying petitioner's protest, pp. 295-236, BIR records.) In support of his decision, the respondent relied upon BIR Ruling No. 71-003 and BIR Ruling No. 284-71-003-154-84 dated September 12, 1984 as well as the Court's decision in Construction Resources of Asia, Inc. v.- Comm. af Int. Rev. (CTA Case No. 3307) holding "that the liability of the taxpayer to withhold and pay the income tax withheld at source from certain payments due to a non-resident foreign corporation attaches at the time of accrual of the afereiesd payments and not at the time of actual payment or remittance thereof" and » "the withholding 490 agent/corporation is obliged to remit the tax to the government since it already and properly belongs ta the government. Sinee the taxpayer in this case failed to pay the withholding tax oan interest, royalties and guarantee fee at the time of their accrual in the books of the corporation the aforesaid assessment is therefore legal and proper." (See respondent's letter of denial to petitioner’s protest, ibid.)

Hence, this petition for review.

The issue at bar is whether the liability to withhold tax at source on income payments to non- resident foreign corporations arises upon remittance of the amounts due to the foreign creditors or upon accrual thereof. Petitioner likewise raised the issue on whether or not the assessments for the fourth quarter of 1975 should be included in this case or in C.T.A. Case No. 3481, also entitled "FILSYN v. CIR."

| In protesting the assessments, the petitioner maintains that "the withholding tax on the said interest income and royalties were paid to the government when the said interest and royalties were actually remitted abroad ....In other words, meee amount has been acerued in the books,. the withholding tax due thereon is ultimately paid to

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-4- the government upon actual remittance abroad of the said amount acerued. " (pp. 244-245, BIR records; Underscoring supplied, ) In support of its position, the petitioner averred that "this procedure ws... i8 in accordance with the decision of the Court of Tax. Appeals in the case of Bayer Pharmaceuticals, Inc. v. Commissioner of Internal Revenue (CTA Case No. EB4E, Maren 16, 1979.)" (ibid.)

In this petition for review, the petitioner is consistent in its line of argument emphasizing that "the petitioner's duty to withhold the tax due is on interest, royalties and guarantee fees prescribed under Section 53 of the Tax Code which provides that the duty to withhold arises only upon actual remittance or payment of the amounts due to ssid recipients, while ts liability to pay to the government the tax so withheld is on or before the 25th of the month following the end of the quarter when such tax had been withheld oan any actual remittance or payment of the aforesaid items of income during the quarter" (Petition for Review, p. 43; Underscoring supplied.) Hence, "there being no legal and factual basis for the deficiency withholding tax, the imposition of interest and !

compromise penalties in connection therewith are”, 430

- 5 - l ~?g a l a nd f c:\c·t u c.'\ 1 l1a s i s 11 • ( i bid. p .

5 ) W e d i s a g t' e e • On the contrary, it appears that the 1 ine of defense adopted by the petitioner is that which is wanting in legal and factual basis. The provisions of law pet'tinent to this case are Sections 53 and 54 of the Na tional Intet'nal Revenue Code in force in 1974- 1975. The t' elevant portions of said sections provide, thus: "SEC. 53. Withholding tax at SOIJrce.-

X

X

X

"(b) Non-resident aliens and fot'eign corporations. - (1) Nonresident alien s .-

Every

individual, corporation, partnership, or association, in what evet' capacity acting, includ i ng a le s see ot' mortgagor of real or personal pt'opet'ty, t ~U i t e acting in any t r ust c~p c ity, e xe c ut or, administrator, reQ i ver, e e nsHw vato~" , f i~ tu,t' a y 9 emple ytH" ~ e nd ev e~ y office r or am ~ loye e o f the Govern ment of th ~ ep r.t bl ic of t he Philippines having the contr'ol, t"eceipt, c•Jstody, disposal, or payment of interest, dividends, rents, t"oyalties, salaries , wages, premiums, annuities, compensation, remuneration s , emoluments, or other fixed or determinable annua l, per i 0 d i c a 1 ' 0 r cas u a 1 g a i n s ' p t' 0 f it s , and income, and capita l gains, of any nonresident alien not engaged in trade or business within the Philippines, shall <except in the case provided in sub- section (a)

(1) of this Section ) deduct and 1-lithhold from the annual, pet'iodica l, or casual gains, profit s , and income, and capital gains, a tax equal to 30 per cent thereof.

.J

-~- 6 - x RK © {2) Nonresident foreign corporations. — In the case of foreign corporations subject to tax under this title, not engaged in trade or business within the Fhilippines, there shall be deducted and withheld at the source in the same manner and upon the same items as is provided in subsection (b) (1) of this section, as well as on remunerations for technical services or otherwise, a tax equal to thirty-five (35) per cent thereof. This tax shall be returned and paid in and subjeot to the same conditions as provided in Section 54. x v4 x" x RX XX "GEC. 34. Returns and payment of tanes withheld at SsOurce.— (a) Quarterly return and payment of taxes withheld. ~- Taxes deducted and withheld under GSeetion 83 shall be covered by a return and paid to the Commissioner of Internal Revenue or to his collection agent in the province, city, or municipality where the withholding agent has his legal residence or withhelding agent is a corporation, where the principal office is located. The taxes deducted and withheld by the withholding agent shall be held a8 a special fund in trust for the Government until paid to the collecting officers. The Commissioner of Internal Revenue” may, with the approval of the Secretary of Finance, require these withholding agents to pay or deposit the taxes deducted and withheld at more frequent intervals when necessary to protect the interest of the Government. The return shall be filed and the payment made within &5 days from the close of each calendar quarter. »% x x" .

It should be noted that nothing in the above-quoted provisions of law can one find that the tax would

- 7 -- be "withheld on a ny actual remittahc e ot~ payment of the aforesaid items of income dl..n~i ng the quat~tet'" as alleged by the petitioner in its Petition fat~ Review.

The l aw is clear as to "who" at'e t' equh'ed to deduct and withhold taxes due on "what" items of income, but it is admitted that the law is not conclusive as to "when" the duty to withhold the taxes arises.

The issue however as to "when" the duty to withhold the taxes ari s es has clearly been defined already by this Court. In other words, the issue is not of first impression.

In at least three analogous cases this Com~t had l..tnmistakably defined that the duty "to withhold and pay the income tax withheld at source from interest due to a non-resident foreign corporation attaches at the time of the accrual of said interest and not at the time of actual payment · ot~ t~ e mitt ance t h et'eof.

Because of its controlling effects on the pt~ esent case, we will quote the pertinent pot~tion of the decision:

"Payment of the withholding ta>< at s6urce due from a foreign lender attaches upon accrual of the intet~est to be remitted abroad.

The interest accrues at the time it is earned.

At such time, the tax on the intere st attaches and the contractor is obliged to remit the tax to the government since it alt~ eady and properly belongs to the govet~nment.

Indeed, there is no reason · why the overseas contractor, petitioner in this

~ 8 - case, who is based in the Philippines, should wait until it remits the interest due the foreign lender before paying the withholding tax-at-source. Otherwise, the government will be at the mercy of the taxpayer who may take time in remitting the interest to the foreign lender. " (Western Palawan Timber Corporation v. Commissioner of Internal Revenue, CTA Case No. 3544, June S, 1987, quoting Construction Resources of Asia, Inc. v. Commissioner of Internal Revenue, CTA Case No. 3307, Nov. 25, -1983.)

We do not intend to depart from the rulings these precedent cases, In fact, We have to preserve the sagacity of the judewent.

Petitioner, has taken refluge in the much earlier case of Bayer Pharmaceuticals, Inc. v. Commissioner of Internal Revenue, CTA Case No. 2846, Mareh 16, 1979, which ruled, thus:

"We, accordingly, rule that since the royalties in question could not be paid or remitted in 1972 by petitioner Bayer Pharmaceuticals, Inc. to non- resident foreign corporation Bayer Aktiengesellschalft, lerverkusen Bayermerk due to Central Bank restrictions, petitioner was under no obligation to withhold and pay income tax-at-source on said royalties..."

(Underscoring supplied) In that case, the royalties could not be remitted to the non-resident foreign corporation due to Central Bank restrictions, and so the Court ruled that the time of payment of the royalties is the maturation point of the withholding duty. It bears emphasis, therefore, that if the income

- 9 - payable to a non-resident cot"pOt"ation can be paid or remitted because there are no restrictions again st its payment or remittance thereof, the liability to withhold and pay the ta~ thereon attaches at the time of accrual, not at the time of actual remittance.

In this case , there are no such restrictions , hence, the li ability of petitioner to withhold and pay the income ta~ withheld at source from interest due it foreign c reditor attaches at the time of the accrual of s id int er st and not at the time of etual p~yment or remitt ance thereof.

It

is interesting to n ote, whethet" by co incidence or by design th t th p tition et", in the admin i s t rat ive 1 v 1 or even in its pleadings in this Court , nev Qr 111ent ioned about t he liability "to withhold arose only when the paym nts become with thi s duty as well as th e mand a te of Secti on 54 that the withholding t a x b p a id within 2 5 days from the end of th e c a lendar quarter when the wi t hh t1 1 ding was mi:lde.

an "acct"ltal" vet"S lts "due~ma11dable a nd payable" situation."

( p.

18, Und erscoring s upplied) :

petit i onet"' s memot"andum;

The intt"oduction of the -~ 10 - misplaced because it creates a new version from the originally categorical position taken by the petitioner in the administrative. level and even in the pleadings filed in this Court that “the withholding tax on the said interest income = and royalties were paid to the government when the said interest and royalties were actually remitted abroad...whatever amount has heen accrued in the books, the withholding tax due thereon is ultimately paid to the government upon actual remittance abroad of the said amount accrued." (Underscoring supplied; Protest letter, pp. 244- 245, BIR records. ) We could only surmise that the Western Falawan decision probably influenced such re-alignment -of arguments. But just the same, the insertion of the phrase "due, sieabie ancl demandable” is of no moment and will not in any way alter the stand this Court has consistently taken. Tt shonld be remembered that the petitioner is using the acerual system of accounting. Under that system, an item that is definitely ascertained as to amount and acknowledged to be due has "acerued", receipt of income is not essential to constitute "income". (Revenue Act 1918, ie, 40 Sta. 1064, Lichtenberger Ferguson Co. v. Welch C.C.A., Cal.

54), F. @nd S70, S7ed. Thus a "corporation which ves co.

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- 11 - made its income tax t~ettwn on acct~tlal ba s is, by deducting from gross inco me all losses and expenses acct~uing dt_n~ing that yeat~, whethr!t ~ payable ot~ not, was t~ e q u i t~ e d t o d e d u c t a 1 1 t~ e s e t~ v e s on i t s b o o k s , including t~eset~ve fot~ income taxes •. • ;

tax having " acc t~ued" in economic and bool<keeping se n se" <U.s.

v.

An de t~son, '+55 Ct.

131, 13L•, ;:;::E,g U.S.

422 70 L .

Ed.

3'+7 >.

In the same vein, the wit hh o l di n g tax s ho uld be paid to t h e govern ment upon accr u a l The seco n d issue raised by the petitioner involves a question as the assessment made for the fourth <4th> quarter (1975) should have bee n included in the CTA Case No. 3421. In fact, it has alt~eady been t~esolved in that cas e and that herein petitioner was ordered to pay such deficiency withholding tax.

To assess again herein Petitioner would be tantamount to double assessment on the same taxab l e year which is grossly unfa i r to the petitionet~ .

ihe Court recognizes that the burden of proof is on the taxpayer contest i ng the validity or correctness of an as s essment to prove not only that the respondent is wrong but that he <taxpayet") is right.

All

pre s umpti on s are in favor of the

I

correctness of the tax a sse s sment.

<Inter-

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I

- 12 - provincial Autobus Co., Inc. v. Collector of Internal Revenue, 98 Phil. 290, Jan. 31, 1956.) And if the taxpayer fails to present evidence or proof in support of his allegations, this Court will sustain the assessment anainst the taxpayer {Caresosa ve. Bureau of Internal Revenue, CTA Case No. 3713, January 25, 1985.)

IN VIEW OF THE FOREGOING, judgment is hereby -rendered ordering petitioner to pay respondent the amount of F306,163.35 as deficiency withholding tax at source for the fourth quarter of 1974 to the third quarter of 41975 plus 10% surcharge and 14% anntiial interest from November 29, 1979 to July 31, 1980, plus 820% interest from August 1, 1980 until Fully paid but not to exceed that which corresponds to a period of three (3) years omursuant to FLD. No. 1705, | 80 QRDERED.

Quezon City, Metro Manila, May 14, 1993.

Assoel Judge

ves .

’ ae)

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WE CONCUR =

Qunws & GLeke

ERWESTO D. ACOSTA yresiding Judge

: A

AAwa V2

RAMON O. DE VEY

Associate Judgt

L CeERTIF TCATri or

I hereby certify that this decision was reached after due consultation among the members of the Court of Tax Appeals in accordance with Section 13, Article VITI of the Constitution.

Crnr We 2: GlivaPa

ERNESTO D. ACOSTA

Presiding Jucge

Court of Tax Appeals

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