CE Philippines Ltd. vs. Commissioner of Internal Revenue

DECISION

MINDARO -GRULLA, J.:

This is a Petition for Review filed on October 17, 2007 by CE PHILIPPINES LTD., as petitioner, against the Commissioner of Internal Revenue (CIR) as respondent, for the Court in Division, pursuant to Rule 4, Section 3 (a) (2), in relation to Rule 8, Section 4(a), of the Revised Rules of the Court of Tax Appeals (RRCTA).

1166 / :20 pn..

r_ v-:

CE PHILIPPINES LTD. v. CIR

Page 2 o f 24 The said Petition is on appeal from respondent CIR's inaction over petitioner's administrative claim for a tax refund or tax credit 1 in the aggregate amount of P29,700,584.82, representing alleged excess capital gains tax (CGT) paid on the gains realized from the redemption by CE Philippines II, Inc. (CEP II) of its Series A preferred shores owned by petitioner on September 15, 2005 and October 17, 2005. Petitioner CE Philippines Ltd. is a non-resident foreign corporation duly organized and existing under and by virtue of the lows o f Bermuda with principal place of business at Clarendon House. Church St.. Hamilton, Bermuda.2 Respondent is the duly appointed Commissioner of the Bureau of Internal Revenue (BIR), empowered to perform the duties of said office including, among others, the duty to act upon and approve claims for refunds or tax credits as provided by law. Respondent holds office at the 5th Floor, BIR Notional O ffice Building, Aghom Rood, Diliman, Quezon City.

On October 22, 1999, C EP II was incorporated and registered

with the Securities and Exchange Commission

(SEC ) primarily to acquire, hold, own and use for investment or otherwise. and to sell or dispose o f, any and all properties of every kind and description and 'Exhibits "F" and "I", Docket, pp. 326-333 ancj 338-3Jj5 2 Exhibits "A", "A-1" and "B", Docket. pp. 298-3 11 116 7 ( . .

C E PHILIPPINES LTD. v. C IR Page 3 o f 24 C TA CASE NO . 7688

DECISIO N

wherever situated, to the extent permitted by law.3 CEP II had an authorized capital stock of P80,000.00, divided into 40,000 common shares and 40,000 Series A preferred shares, both with a par value of P 1.00 each.

CEP

II had an issued outstanding capital stock of P20,000.00, divided into 20,000 common shares, 100% of which were legally and beneficially owned by petitioner. 4 On April 23, 2001, the SEC approved the increase of CEP ll's capital stock from P80,000.00 to P11 ,647,948.00, divided into 2,840,000 common shares and 8,807,948 Series A preferred shares, both with a par value of P1 .00 per share.s The entire amount of increase in the capital stock of CEP II (P1 ,567,948.00, divided into 2,800,000 common shares and 8,767,948 Series A preferred shares, both with a par value of P 1 .00 per share) was subscribed by petitioner and paid for by way of assignment of 1 00,000 common shares and 313,141 Series A preferred shares of CE Cebu Geothermal Power Company, Inc. (CE Cebu), which were valued at allegedly US$65,21 0,000.00, in favor of CEP II. In view of petitioner's subscription to 2,800,000 c ommon shares and 8,7 67,948 Series A preferred shares of CEP II on April 23, 2001 , and its ownership of 20,000 3 Exhibits "M" a nd "M-1 ", Doc ke t, pp. 380-393; Par. 11(3). Joint Stipula tion o f Fac ts and Issues (JSFI). Docke t. p . 94 4 Exhibits "M" a nd "M-1 ", Docke t, pp. 380-393; Exhibit " N-1 ", Docke t, pp. 396-li02; Exhibits " W" a nd "W- 1", Docke t, pp. 455-456 s Exhibit "N". Docke t. p . 391i C...

1168 C E PHILIPPINES LTD. v. CIR

Page 4 o f 24 common shares prior to the increase in CEP ll's capital stock, petitioner became the beneficial and absolute owner of l 00% of CEP ll's capital stock (i.e ., P1l ,587,948.00, divided into 2,820,000 common shares and 8,767,948 Series A preferred shares).6 On March 25, 2004, CEP II obtained approval from the SEC to use the US d ollar as its fun c tional currency in presenting its financial statements pursuant to SEC Memorandum Circular No. 14, Series of 2003.7 Consequently, the financial statements o f CEP II were presented in US dollars beginning the taxable year 2003.8 On September 15, 2005, CEP ll's management. with the approval of the Board o f Directors, effected the redemption of 1, 113,260 Series A preferred shares at a redemption price of US$8.59, or a total redemption amount of US$9,562,903.40.9 The cost per share of the Series A preferred shares is US$5.63. 10 Thus, computing the capital gains based on the functional currency 6 Exhibit " N-1. Docket. pp. 396-402; Exhibits "W" and "W- 1", Docke t. pp. 455-456; and Exhibit "DO", Sworn Statemen t of Ms. Trini ty Galuz doled June 25, 2008, pp. 4-5 7 Guidelines on Preparation of Functional Currency Financial Statement; Exhibits "C", "C- 1 ", and "C-2". Docket. pp. 312-315; Exhibit "DO", Sworn Statement o f Ms. Trinity Gatuz dated June 25, 2008. pp. 3-4 s Exhibits " U", "U-1 ", "U-2". Docket. pp. 426-441 ; Exhibit "DO", Sworn Statem ent of Ms. Trinity Galuz dated June 25. 2008 9 Exhibit "D". Docket. pp. 322-323; Exhibi t "L", Sworn Statement of Ms. Trinity Gatuz dated May 23, 2008, pp. 4-5 JO The cos t per share is compu ted by dividing CEP ll 's paid- up capital as of December 31. 2004 in the amount of US$65,210,000 wi th the issued and ou tstanding shares as of redemption dale of 11 ,587,948 shares; Exhibit "L", Sworn Statemen t of Ms. Trinity Gafuz doted May 23. 2008, pp. 3-4 1169 L.

C E PHILIPPINES LTD. v. C IR

(by deducting the U.S. dollar cost from the U.S. dollar redemption price of the Series A preferred shores), petitioner realized a capital gain upon redemption of US$2.96 per shore, or a total of US$3,295,249.60, computed as follows:

Capital Gain on the Redemption- in U.S. dollars Redemption value per share

US$

8.59 Cost per share 5.63 Capital gain per share- in U.S. dollars

US$

2.96 No. of shares redeemed 1 ' 113,260.00 Capital gain- in U.S. dollars

US$

3,295,249.60 However, for purposes of computing the capital gain and paying the CGT due, petitioner used the peso equivalent of the redemption price (based on the Philippine Dealing System' closing rate on the redemption date) and the peso equivalent of the cost per shore (which was translated based on historical rate), resulting in a capital gain of P370,729,950.66, computed as follows: Redemption Value per share in Philippine Pesos: Redemption price per share in US $

US$

8.59 x PDS closing rate- Sept. 15, 2005 p 55.925 p 480.39 Less: Cost per share in Philippine Pesos Paid-up Capital per Phil. Peso Books p 1 ,707,864,702.00 + No. of shares outstanding 11,587,948 147.38 Capital Gain per share p 333.01 No. of shares redeemed 1,113,260

Capital Gain

P370,729, 950.66 1170

L

CE PHILIPPINES LTD. v. CIR

Page 6 o f 24 Based on the above computation, petitioner filed its Capitol Goins Tax Return (BIR Form No. 1707) 11 on October 17, 2005, and paid CGT in the amount o f P37,067,995.07, computed as follows:

Peso Equivalent of US

Dollar Capital Gain

Rate

Capital Gains Tax

p 100,000.00 at 5% p 5,000.00 370,629,950.66 at 10% 37,062,992.07 p 370,729,950.66 p 37,067,995.07 On Oc tober 17, 2005, CEP ll 's management, with the approval of its Boord of Directors, effected the redemption of 662,290 Series A preferred shores at a redemption price of US$8.59, or a total redemption amount of US$5,689,071.1 0.12 The cost per shore of the Series A preferred shores is US$5.63.13 Thus, computing the capitol gains by deducting from the redemption price in US dollars the original cost which is also in US dollars, petitioner realized a capitol gain upon redemption of $2.96 per shore or a total of $1 ,960,378.40, computed as follows:

Capital Gain on the Redemption - in US dollars: 11 Exhibit "E" . Docket. pp. 324-325; Por.11(6), JSFL Dockel, p. 95 12 Exhibit "G", Docket. pp. 334-335; Par. 11(9) , JSFI, Docket, p. 95; Exhibit " L", Sworn Statement of Ms. Trinity Galuz doled May 23, 2008, p. 5 13 The c os t per shore is compu ted by dividing the paid-up capital as of December 31, 2004 in the amount of $65,210,000.00 with the issued and outstanding shores as of said date of II ,587,948 shores; Exhibit "L", Sworn Statement of Ms. Trinity Galuz doled May 23, 2008, pp. 3- 4 ~ 117 1 CE PHILIPPINES LTD. v. CIR

Redemption value per share Cost per share Capital gain per share - in US dollars No. of shares redeemed Capital gain- in US dollars Page 7 o f 24

US$

8.59 5.63

US$

2.96 662,290

US$

1,960,378.40 However, for purposes of computing the capital gain and paying the CGT due, petitioner again used the peso equivalent of the redemption price (based on the Philippine Dealing System' closing rate on the redemption date) and the peso equivalent of the cost per share (whic h was translated based on historical rate). resulting in a capital gain of P220,0 1 0,657 .50, computed as follows: Redemption Value per share in Philippine Pesos: Redemption price per share in US $

US$

8.59 x PDS closing rate - Oc t. 17, 2005 p 55.83 p Less: Cost per share in Philippine Pesos Paid-up Capital per Phil. Peso Books p 1.707,864.702.00 -:- No. of shares outstanding 11,587,948 Capital Gain per share p No. of shares redeemed 479.58 147.38 332.20 662,290

Capital Gain

p 220,010,657.50 . · - ---··· -- ---- ----- Based on the above computation. petitioner filed its Capital Gains Tax Return (BIR Form No. 1707) 14 on November 16, 2005, and paid the CGT in the amount of P21 ,996,065.75, computed as follows:

Peso Equivalent of US

Dollar Capital Gain

Rate

Capital Gains Tax

p 100,000.00 at 5% p 5,000.00 219,910,657.50 at 10% 21,991,065.75 p 220,010,657.50 p 21,996,065.75 - - -- - · - · - - --- - -- 14 Exhibit "H ", Docke t. p p. 336-337; Par. II( 10) , JS FI, Docke t. p. 95. J.

117 2 CE PHILIPPINES LTD. v. CIR

On October 5, 2007, petitioner filed an administrative claim for refund with the BIR Large Taxpayers District Office No. 122, requesting for a refund of the amount of P 18,644,311.68 and P 11 ,056,273.14, representing the alleged excess CGT paid on the gain realized from the redemption by CEP II of its Series A preferred shares owned by petitioner on September 15, 2005 and October 17, 2005, respectively. 1s The above administrative claim for refund by petitioner was computed based on the following:

A. September 15, 2005 capital gain on redemption: Redemption value per shore - in US dollars Cost per shore- in US dollars Capital gain per shore No. of shores redeemed Capital gain- in US dollars PDS closing rate Sep tember 15, 2005 Capital gain - in Philippine peso CGT due Capital gain p 100,000.00 184, 186,833.88 18,4 18,683.39 Excess C GT paid Capital Gains Tax paid Capital Gains Tax due

Rate

at5% at 10%

Excess Capital Gains Tax Paid

p 37,067,995.07 18,423,683.39 p 18.644,31 1 .68 8.59 5.63 2.96 1,113,260 $ 3,295,249.60 55.925 p 184,286,833.88

CGT

p 5,000.00 184,286,833.88 p 18,423,683.39 15 Exhibits " F", Docke t, pp. 326-333 and Exhibit "I", Docket, pp. 338-345; Pars. 11( 7) and II( 11 ), JSFI. Docke t. p. 95 111 3 f..

CE PHILIPPINES LTD. v. CIR

B. October 17, 2005 capital gain on redemption: Redemption value per share - in US dollars Cost per share- in US dollars Capital gain per share No. of shares redeemed Capital gain- in US dollars PDS closing rate September 15, 2005 Capital gain- in Philippine peso CGT due Capital gain p 100,000.00 109,347,926.07 109,447,926.07 Excess CGT paid Capital Gains Tax paid Capital Gains Tax due

Role

at 5% of 10%

Excess Capital Gains Tax Paid

p 21,996,065.75 10,939,792.61 p 11 ,056,273.14 Page 9 o f 24 8.59 5.63 2.96 662,290 $ 1 ,960,378.40 55.83 p 109,447,926.07

CGT

p 5,000.00 10,934,792.61 p 10,939,792.61 Respondent interposed the following Special and Affirmative Defenses in the Answer 16 to the Petition for Review: "6.

Assuming but without admitting that Petitioner filed a claim for refund, the same is still subject to investigation by the Bureau of Internal Revenue;

7.

Petitioner failed to demonstrate that the tax, which is the subject of this case, was erroneously or illegally collected; 8.

Petitioner has no legal capacity to sue;

9.

Taxes paid and collected are presumed to be made in accordance with the lows and regulations, hence, not creditable or refundable;

16 Docket, pp. 65-66 117 4 c..

CE PHILIPPINES LTD. v. CIR

1 0.

It is incumbent upon the Petitioner to show that it has complied with the provision of Section(s) 204(C) in relation to Section 229 of the 1997 Tax Code. as amended;

11 .

In on action for tax credit or refund. the burden is upon the taxpayer to prove that it is entitled thereto, and failure to discharge the said burden is fatal to the claim (Emmanuel & Zenaida Aguilar v. Commissioner, CA-GR No. Sp. 16432, Marc h 30, 1990 cited in Abon, Low of Basic Taxatio n in the Phippines, /51 Edition, p. 206); 12.

Claims for refund ore construed strictly against the claimant, the some partake the nature of exemption from taxa tion (Commissio ner of Internal Revenue vs. Ledesma, 31 SCRA 95) and as such, they ore looked upon with disfavor.

(Western

Mino lco Corp.

vs.

Commissioner o f Internal Revenue, 124 SCRA 121 )." On March 17, 2008, respondent filed a Motion to Dismiss17 on the ground that petitioner lacks the legal capacity to sue, which this Court denied in its Resolutio n18 dated May 14, 2008. During trial, petitioner presented its sole witness, Ms. Trinity Gatuz, CEP ll's Vice President, who executed and identified her Judicial Affidavits dated May 23, 2008,1 9 June 25, 2008, 20 August 1, 2008,21 November 19, 200822 and February 18, 200923. Thereafter, petitioner formally offered on April 30, 2009 Exhibits "A" to "QQ", inclusive of sub-markings, to support its claims. This Court 17 Docket. pp. 100-106 18 Docke t. pp. 13 1- 135 19 Exhibits "L" and "L- 1", Docket, pp. 370-379 2o Exhibits "DD" and "DD- 1 ",Docke t, pp. 498-505 21 Exhibits "EE" and "EE-l", Dockel. pp. 508-520 22 Exhibits "MM", and "MM- 1", Docket , pp. 569-579 23 Exhibits "QQ" and "QQ- 1", Docket. pp. 592-595 117 5 .t..

., ,.;

CE PHILIPPINES LTD. v. CIR resolved to admit all of said exhibits in its Resolution dated June 22, 2009.

On September 11, 2009, respondent filed a Manifestation24 stating that there is no report of investigation on petitioner's claim for refund and respondent is submitting this case for resolution based on available records.

On January 13, 201 02s, the case was submitted for decision taking into consideration petitioner's

Memorandum26

filed on December 16, 2009, sans respondent's Memorandum. As agreed upon by the parties, the main issue is whether petitioner is entitled to the refund or issuance of a tax credit certificate amounting to P29,700,584.82, representing the excess CGT paid on the gains realized from the redemption by CEP II of its Series A preferred shares owned by petitioner on September 15, 2005 and October 17, 2005.

The sub- issues, are as follows:

"1 .

Whether or not petitioner has legal capacity to sue in the Philippines;

2.

Whether or not petitioner has erroneously over-remitted

CGT

in the amounts of P18,644,311.68 and P 11 ,056,273.14 in relation to the gains realized from the redemption on September 15, 2005 and October 17, 2005, respectively, by CEP II of its Series A preferred shores owned by petitioner;

24 Docket. pp. 604-605 2s Doc ket, p. 64 3 26 Docket, pp. 617-64 2 1176 ' C E PHILIPPINES LTD. v. CIR

3.

Whether or not petitioner remitted and paid to the BIR capitol gains tax in the amount of P37,067,995.07 and P21 ,996,065.75 in relation to the gains realized from the redemption on September 15, 2005 and October 17, 2005, respectively, by CEP II of its Series A preferred shores owned by petitioner; and 4.

Whether or not petitioner filed its administrative and judicial claims for refund or issuance of TCC for the amounts of P 18,644,311 .68 and P 11 ,056,273.14, representing the excess CGT paid on the gains realized from the redemption by CEP II of its Series A preferred shores owned by petitioner on September 15, 2005 and October 17, 2005, respectively, within the two-year prescriptive period provided under Sections 204(C) and 229, Tax Code."27 Suffice it to soy that anent the timeliness of petitioner's administrative and judicial claims for refund, records reveal that petitioner filed its Capitol Goins Tax Return (BIR Form 1707)28 and paid the capitol gains tax in the amount of P37,067,995.07 on October 17, 2005, representing gains realized from the redemption on September 15, 2005 by CEP II of its Series A preferred shores owned by petitioner. Petitioner also filed its Capitol Goins Tax Return (BIR Form No. 1707) 29 on November 16, 2005 and paid the CGT in the amount of P21 ,996,065.75, representing gains realized from the redemption on October 17, 2005 by CEP II of its Series A preferred shores owned by petitioner. 21 Docket, pp. 96-97.

2s Exhibit "E", Docke t, pp. 324-325 29 Exhibit " H", Docke t, p p. 336-337 117 7 ' CE PHILIPPINES LTD. v. CIR

On October 5, 2007, petitioner filed an administrative claim for refund in the amount of P 18,644,311 .68 and P 11 ,056,273.14 with the BIR Large Taxpayers District Office No. 122.

On October 17, 2007, petitioner filed with this Court the instant Petition for Review, due to respondent's inaction on petitioner's administrative claims for refund, praying for a refund or issuance of a tax credit certificate for its alleged excess capital gains tax paid on the gain realized from the redemption by CEP II of its Series A preferred shares on September 15, 2005 and October 17, 2005 in the amount of P29,700,584.82. Petitioner filed the instant Petition for Review within the two-year prescriptive period to file claim for a refund/issuance of tax credit under Section 229 of National Internal Revenue Code (NIRC) of 1997.

As to the main issue, Sections 24(C) and 25(B) of the NIRC of 1997, provide as follows:

"SEC. 24. Income Tax Rates .

XXX

XXX

XXX

(C) Capital Gains from Sale of Shares of Stock not Traded in the

Stock

Exchange .

The prov1s1ons of

Section

39(B)

notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shores sold, or disposed of through the stock exchange. 1178 c..

CE PHILIPPINES LTD. v. C/R

Not over P 100,000 ....... ....... .

On any amount in excess of P 1 00,000 ...... SEC. 25. Tax on Nonresident Alien Individual.

XXX

XXX

XXX

Page 14 of 24

5% 10% (B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines . -There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income. Capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation and real property shall be subject to the income tax prescribed under

Subsections

(C)

and

(D)

of

Section

24." (Emphasis supplied) Likewise, Section 42(E) of the NIRC of 1997 reads: "SEC. 42. Income from Sources Within the Philippines.-

XXX

XXX

XXX

(E) Income From Sources Partly Within and Partly Without the Philippines.-

XXX

XXX

XXX

Gains, profits and income derived from the purchase of personal property within and its sale without the Philippines, or from the purchase of personal property without and its sale within the Philippines shall be treated as derived entirely from sources within the country in which sold: Provided, however, That gain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely from sources within the Philippines regardless of where the said shares are sold . The transfer by a nonresident alien or a foreign corporation to anyone of any share of stock issued by a domeslic corporation shall not be effected or made in its book 117 9 ( CE PHILIPPINES LTD. v. CIR unless: ( l) the transferor has filed with the Commissioner a bond conditioned upon the future payment by him of any income tax that may be due on the gains derived from such transfer, or (2) the Commissioner has certified that the taxes, if any, imposed in this Title and due on the gain realized from such sale or transfer have been paid. It shall be the duty of the transferor and the corporation the shares, of which are sold or transferred. to advise the transferee of this requirement." (Emphasis supplied ) Based on the foregoing, capital gains realized by a non-resident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation shall be subject to the income tax prescribed under Section 24(C), with tax rates of five percent (5%), for the amount not over P100,000.00, and ten percent ( 1 0%), in excess thereo f.

The gain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely from sources within the Philippines regardless of where the said shares are sold. In the instant case, it is undisputed that CEP II is a domestic corporation, while petitioner is a non-resident alien individual not engaged in trade or business within the Philippines; which is made liable by the foregoing provisions for net capital gains tax, representing the gains realized fro m the redemption by CEP II of its Series A preferred shares owned by petitioner on September 15, 2005 and October 17, 2005.

11 80 c.

CE PHILIPPINES LTD. v. CIR

Records show that petitioner filed the Capitol Goins Tax Return (BIR Form No. 1707) 30 and paid the capitol gains tax in the amount of P37,067,995.07 on October 17, 2005 representing gains realized from the redemptio n on September 15, 2005 by CEP II of its Series A preferred shores owned by petitioner. Petitioner a lso filed its Capitol Goins Tax Return (BIR Form 1707)31 on November 16, 2005 and paid the CGT in the amount of P21 ,996,065.75 representing gains realized from the redemption on October 17, 2005 by CEP II of its Series A preferred shores owned by petitioner.

On March 16, 2006, the Bureau of Internal Revenue issued Revenue Regulations No. 06-06, regulating the use of func tional currency other than the Philippine Peso in Financial Statements that will be submitted and in the Books of Accounts that will be maintained for Internal Revenue Tax purposes.

Revenue Regulations No. 06-06 defines "Functional Currency" ds the currency of the primary economic environment in which the reporting entity operates; that is the currency o f the environment in w hich on entity primarily generates and expends cosh. The foregoing regulation likew ise provides that:

"SECTION 8.

Currency to be Used in the Filing of Tax Returns Other than Income Tax.- All tax returns other than the ITR shall 30 Exhibit "E". Docke t. p. 324-325; Par. 11(6) . JSFI. Docke t p. 95 31 Exhibits "H" and " H-1", Docke t. p . 336-337; Por.ll(lO) . JSFI. Docket p. 95 1181 ( CE PHILIPPINES LTD. v. CIR likewise be filed in Philippine peso currency using historical peso amount or actual conversion/ prevailing PDS rate on transaction day, whichever is applicable.

XXX

XXX

XXX

SECTION 12. Treatment of Gain or Loss on Sale of Investment Under Functional Currency. - An investor which invests in func tional currency (other than Philippine peso) securities can compute its gain or loss from the sale of said investment using the functional currency.

For example, if Company A invests in a US dollar bond at US$1 00,000 when the US$:P rate was US$1 :40 and sells the same investment at US$1 02,000 when the US$:P rate was US$1 :50, the computation o f the capital gain shall be as follows: Selling price

Cost

Taxable Gain

USD

102,000 100,000 2,000

Pesos

5,100,000 4,000,000 In the above illustration, the taxable gain that should be reported is only $2,000. Thus, in reporting for tax purposes of the $2,000 gain in equivalent or converted Philippine peso denomination, the equivalent peso denomination is the peso equivalent of 2,000 U.S. dollars using the conversion rote on the date of the consumma tion of the transaction. The above rule sha ll also apply to non-resident stockholders of on investee company where such investee company in the Philippines uses a functional currency other than the Philippine peso for its financial statements.

However, if an investor makes an investment in Philippine peso, then it shall compute the gain or loss from sale of said investment using the Philippine peso cost and Philippine peso selling price." (Emphasis supplied) On March 25, 2004, CEP II obtained approval from the SEC to use the US dollar as its functional currency in presenting its financial statements pursuant to SEC Memorandum Circular No. 14, Series of 118 2

L

CE PHILIPPINES LTD. v. CIR

2003.32 Consequently, the financial statements of CEP II were presented in U.S. dollars beginning the taxable year 2003.33 Thus, CEP II effected the redemption of 1,113,260 Series A preferred shares at a redemption price of US$8.59, or a total redemption amount of US$9,562,903.4034 and the subsequent redemption of 662,290 Series A Preferred Shares at a redemption price of US$8.59, or a total redemption amount of US$5,689,071 .1 035 instead of using the Philippine currency.

However, prior to March 25, 2004, when CEP II was incorporated and registered with the Securities and Exchange Commission and when petitioner subscribed and paid its subscription, the par value of CEP ll's common and Series A preferred shares were denominated in Philippine currency. The facts clearly indicate that the entire amount of increase in the capital stock of CEP II (i.e., P11 ,567,948.00, divided into 2,800,000 common shares and 8.7 67,948 Series A preferred shares, both with a par value of P1.00 per share) had been subscribed by petitioner and paid for by way of assignment of 1 00,000 common shares and 313,141 Series A preferred shares of CE Cebu Geothermal 32 Guidelines on Preporalion o f Func tional Currency Financial Slalemenl; Exhibits "C", "C-1 ", and "C-2"; Exhibit "DD", Sworn Statement of Ms. Trinity Gotuz doled June 25, 2008, Docket, pp. 498-505 33 Exhibits "U", "U-1", "U-2"; Exhibit "DD" Sworn Sta tement of Ms. Trinity Gotuz doled June 25, 2008, Docke t, pp. 498-505 3• Exhibit "D"; Exhibit "L" Sworn Slolemenl of Ms. Trinity Goluz doled May 23, 2008, Docket. pp. 370-379 35 Exhibit "G"; Par. tl(9), JSFt; Exhibit "L", Sworn Sta tement of Ms. Trinity Gatuz doled May 23, C. 2008,Dockel. pp. 370-379 118 3 CE PHILIPPINES LTD. v. C/R

Page 19 o f 24 Power Company, Inc., which were valued at US$65,210,000.00. In view of petitioner's subscription to 2,800,000 common shares and 8,767,948 Series A preferred shares of CEP II on April 23, 2001, and its ownership of 20,000 common shares prior to the increase in CEP II 's capital stock, petitioner became the beneficial and absolute owner of 100% of CEP ll 's capital stock (i.e., P11 ,587,948.00, divided into 2,820,000 common shares and 8,767,948 Series A preferred shares).36 As the abso~ute owner of 100% of CEP II, a domestic corporation whose c apital stock is denominated in Philippine Peso, petitioner's investment clearly translates to Philippine Peso, even though the source of such investment may be in other foreign currency denominated unit (FCDU) . Petitioner effectively makes an investment in Philippine Peso, and ac cording to Revenue Regulations No. 06-06, it shall compute the gain or loss from sale of said investment using the Philippine Peso cost a nd Philippine Peso selling price.

Petitioner computed its claim for refund by finding the difference of the redemption value per share in US dollars against the cost per share, also in US dollars, and such difference is multiplied by the number of shares redeemed by CEP II, resulting in its computed capital gains tax due in US dollars. Thereafter, the capital gains tax in 36 Exhibits "N-1 ", "W", and "W-1 "; Exhibit " DO", Sworn Statement of Ms. Trinity Gotuz doted June 25, 2008, Docket. pp . 498-505 1184 c.

CE PHILIPPINES LTD. v. CIR

Page 20 o f 24 US dollar is then multiplied by the Philippine Dealing System peso equivalent to one US dollar as of closing date of redemption. This computation lacks legal basis.

It is evident from the provision of Section 24(C) of the NIRC that the capital gains considered in the computation thereof should be in Philippine Peso considering that the applicable rate of 5% is based on the amount not over P 100.000.00, and the rate of 10% is based on the amount in excess of P1 00,000.00, which is in Philippine Peso. The low. in fact. did not provide for an FCDU or foreign exchange equivalent of the capital gains to be converted to Philippine Peso as of the date of transaction subject to said tax. Thus, it can be safely concluded that in computing the capital gains in this case, the redemption value per shore, the cost per shore, and the capital gains subject to tax, should all be in Philippine Peso. Revenue Regulations No. 06-06 reinforced suc h w ay of c omputing the c apital gains by providing that "it shall compute the gain or loss from sale of said investment using the Philippine Peso cost and Philippine Peso selling" . Here, petitioner computed its capital gains and CGT in the following manner: 11 85 ( CE PHILIPPINES LTD. v. CIR

September 15, 2005 redemption:

Redemption price per share in US $ x PDS closing rate- Sept. 15, 2005 Less: Cost per share in the Philippine Pesos Paid-up Capital per Phil. Peso Books .;. No. of shares outstanding Capital Gain per share No. of shares redeemed

Capital Gain

Peso Equivalent of US Dollar

Capital Gain

p 100,000.00 370,629,950.66 p 370,729,950.66 October 15, 2005 redemption:

Redemption price per share in US $ x PDS closing rate - Oct. 17, 2005 Less: Cost per share in the Philippine Pesos Paid-up Capital per Phil. Peso Books .;. No. of shares outstanding Capital Gain per share No. of shares redeemed

Capital Gain

Peso Equivalent of US

Dollar Capital Gain

p 100,000.00 219,910,657.50 p 220,010,657.50 Page 21 o f 24

US$

8.59 p 55.925 p 480.39 p 1,707,864,702.00 11,587,948 147.38 p 333.01 1,113,260 p 370,729,950.66

Rate

Capital Gains Tax

at 5% p 5,000.00 at 10% 37,062.992.07 p 37,067,995.07

US$

8.59 p 55.83 p 479.58 p 1 ,707,864,702.00 11,587,948 147.38 p 332.20 662,290 p 220,010,657.50

Rate

Caeital Gains Tax

at 5% p 5,000.00 at 10% 21,991,065.75 p 21,996,065.75 As discussed, CEP II is a domestic corporation with an authorized capital stock denominated in Philippine Peso. The basis of purchasing L.

1186 CE PHILIPPINES LTD. v. C/R

Page 22 o f 24 such shores of stock is necessarily in Philippine Peso, the some having been necessarily reflected in the books/records of CEP 11 .37 Moreover, this Court hod ruled in a similar case entitled CE Philippines Ltd. vs. Commissioner of Internal Revenue3B, which involved the some parties and similar claim for refund o f excess capitol gains tax paid on the gain realized from redemption mode by CEP II of its preferred shores owned by CE Philippines, Ltd. In the said case, this Court denied petitioner's claim for a refund or issuance of a tax credit certificate by ruling that despite the fact that at the time CEP II redeemed its shores from petitioner it was already using the US dollar as its functional currency, it remains undisputed that when petitioner mode its investment in CEP II, it did so by using the Philippine Peso. This Court held in this wise:

"Based on the above discussion, therefore, it is evident that the investment of petitioner to CEP II was mode in Philippine peso, since as indicated in the Deed of Assignment as well as in the Treasurer's Affidavit, petitioner has mode its investment to CEP II, in Philippine peso, by assigning to CEP II, petitioner's shores in CE Cebu Geothermal Power Company, Inc., consisting of 100,000 common shores of stock with par value of P28.00 and 313, 1 41 Series A preferred shores of stock with par value of P28.00, and amounting to P11 ,567.9.48.00 worth of shores. Even assuming that CEP II obtained approval from the Securities and Exchange Commission to use the U.S. Dollar as its func tional currency, such approval was only obtained on March 24, 2005.

Hence, when the Boord of

Directors of CEP

II

issued a resolution authorizing the redemption of its shores from petitioner, consisting of 187,348 Series A Preferred Shores, it computed the redemption price 37 Exhibits "M", "M-1". " N-1". and "N-2". Docket. pp. 380-403 38 CTA Case No. 7 64 1, September 23. 2010 1187 ( CE PHILIPPINES lTD. v. CIR using its U.S. Dollar functional currency. However, despite of the fact that at the time CEP II redeemed its shores from petitioner, it was already using the U. S. Dollar as its functional currency, it remains undisputed that when petitioner mode its investment to CEP II, it did so by using the Philippine Peso." It is well settled that petitioner, as taxpayer claimant, has the burden of proof that it is entitled to a refund of the amount claimed as refundable because taxes are presumed to have been collected in accordance with laws and regulations . The burden of proof rests upon the taxpayer to establish by sufficient and competent evidence its entitlement to a refund.39 Basic is the rule that tax refunds are in the nature of tax exemptions and are to be construed strictissimi juris against the entity claiming the same. 4o Moreover, statutes in derogation of sovereignty, such as those containing exemption from taxation, should be strictly construed in favor of the state.41 In fine, for failure of petitioner to establish the factual basis of its claim for refund, this Court is constrained to deny its claim. 39 Commissioner of Internal Revenue vs. Tokyo Shipping Co., Ltd .. 244 SCRA 336 •o Philippine Geothermal, Inc. vs. Commissioner of Internal Revenue, G .R . No. 154028, July 29, 2005 • 1 PLOT vs. Ci ty of Da vao, G.R. No. 143867. Marc h 25, 2003 1188 c..

CE PHILIPPINES LTD. v. CIR

WHEREFORE, the instant Petition for Review is hereby DENIED.

WE CONCUR:

Q. ~rc .~~ 1 <1.

f'liANITCJC. CASTANEDA,ca'R.

Associate Justice

~N . M~ ~G~ CIELITO N. MINDARO-GRULLA

Associate Justice

__&2_ CAESAR A. CASANOVA

Associate Justice

CERTIFICATION

Pursuant to Artic le VIII. Section 13 of the Constitution, and the Division Chairperson's Attestation, it is hereby c ertified that the conclusions in the above Decisio n were reached in consultation before the c ase was assigned to the writer of the opinion of the Court's Division.

0~----~C

.~

CL

atJ'ANilo c. CASTANEDAVJR."

Acting Presiding Justice

1189