Euro-Philippines Airline Services, Inc. vs. Commissioner of Internal Revenue

DECISION

Fabon-Victorino, J.:

Petitioner Euro-Philippines Airline Services, Inc. (Euro-Phil) filed this Petition for Review praying for the cancellation of the Formal Assessment Notice (FAN) issued by respondent Commissioner of Internal Revenue (CIR) for deficiency income tax (IT), value-added tax (VAT), withholding tax on compensation (WTC) and documentary stamp tax (DST), inclusive of interest and surcharge, in the aggregate amount of P4,271,228.20, for the taxable year ending March 31, 2007.

STATEMENT OF FACTS

Petitioner is a domestic corporation with office address at 4th Floor, Filipino Building, 135 Dela Rosa Street, Legaspi Village, Makati City. 1 It is an exclusive passenger sales j

agent of British Airways PLC, an off-line international airline in the Philippines to service the latter's passengers in the Philippines. 2 Respondent, on the other hand, is the Commissioner of the Bureau of Internal Revenue (BIR) empowered to issue and cancel assessments of internal revenue taxes.

She

holds office at the BIR National Office Building, Agham Road, Diliman, Quezon City.

On September 14, 2010, petitioner received a FAN dated September 13, 2010 from respondent with Details of Discrepancies together with Assessment No. IT -LA69595- FY07-10-0455 for income tax, Assessment No. VT-LA69595- FY07-10-0455 for VAT, Assessment No. WC-LA69595-FY07- 10-0455 for withholding tax on compensation, and

Assessment

No.

DS-LA69595-FY07-10-04553

for documentary stamp tax, inclusive of surcharge and interest, for taxable year ending March 31, 2007, in the aggregate amount of P4,271,228.20, summarized as follows: 4

PARTICULARS

BASIC TAX

INTEREST

SURCHARGE

TOTAL

Income Tax

p 189 970.49 p 123,558.89 p 313,529.38

VAT

2 179 970.85 1 515,064.95 3 695,035.80

Withholding Tax-

131,568.14 92,494.20 224,062.34

Compensation

DST

17,500.00 8,750.00 12 350.68 38,600.68

TOTAL

P2,519,009.48 P¹,743,468.72 P8,750.00 P4,271,228.20 The

FAN

and the supporting computation sheets showed the following computations: 5

a) Income Tax

Net Income per return Add: Disallowed salaries and wages due to

Non-withholding (Schedule 1)

Net Income per audit 2 Exhibits " H", "I ", and "J". 3 Paragraph 3, Facts Admitted, JSFI, docket, p. 86; Exhibits "A" to "A-5". 4 Paragraph 4, Facts Admitted, JSFI, docket, p. 86. 5 Paragraphs 8 to 11, Facts Admitted, JSFI, docket, pp. 88-89. P6,684 313.77 542,772.84 7 227 086.61 /

Income Tax Due (35%)

Less: Tax Payments/Credits:

Prior Year's Excess Credits

Creditable Withholding Tax per BIR

Form 2307

Tax Paid

Basic Tax Due

Interest (7-16-07 to 10-15-10)

Total Amount Due

p 299,095.93 1,928,654.59 111/759.30 b) Withholding Tax on Compensation

Compensation & Benefits per FS/ITR

Less: Total Compensation per BIR Form

No.1601-C Disallowed salaries and wages for non- withholding Withholding tax ratio Withholding Tax paid per return P1 862 618.89 Gross Compensation per return 7 685 252.16 Withholding Tax on Compensation still due

Interest (4- 11-07 to 04- 12-10)

Total Withholding Tax on Compensation Due

c) Value-added Tax and Interest Taxable Receipts per VAT returns Add: Receipts not subjected to VAT (Schedule 2

Total VATable Receipts per Investigation

Output Tax Due (Schedule 4)

Less : Tax Credits/Payments

Input Tax Carried-Over from Previous Year p 182 654.70

Allowable Input Tax per Audit

143,032.83

VAT Payment

623.42

Basic Tax Due

Add: Interest (4-26-07 to 10- 15- 10)

Total Amount Due

2 529 480.31 2 339 509.82 189 970.49 123 558.89 P313,529.38 P8 228,025.00 7,685,252.16 542,772.84 24.24% 131 568.14 92,494.20 P224,062.34 p 8 746.51 20 876 935 .16 20 885 681.67 2,506 281.80 326 310.95 2,179 970.85 1,515 064.95 P3,695,035.80 d) Documentary Stamp Tax, Surcharge and Interest

Assignment of Certificate of Time Deposit

p 3,500,000.00 (Sec. 198 in relation to Sec. 179 of NIRC)

Tax Rate

1/200

DST Due

17 500.00

50% Surcharge

8 750.00

Interest (04-06-07 to 10- 15-10)

12 350.68

Total Amount Due

p 38,600.68

Respondent disallowed petitioner's salaries and wages expense in the amount of P542, 772.84 for failure of petitioner to withhold the corresponding withholding tax thereon and to remit the same to the BIR. 6 In addition, the commission and miscellaneous income received by the local sales agents from their foreign principals are subject to VAT. 7 On

September

29, 2010, petitioner filed with respondent its protest together with supporting documents, signed by its

President/General

Manager

Violeta

D.

Echevarria and received by respondent through the Regional Director of Revenue Region No. 8-Makati. 8 Petitioner raised the following grounds in its protest:

1. The deficiency income tax, which was brought about by the alleged failure to withhold tax on compensation, had no legal basis because the income from which taxes were supposedly not withheld actually represented employer's contribution to SSS, Philhealth, HDMF, Employees Compensation and other employee benefits, such as medical, dental, HMO premiums and rice subsidy, which are not considered compensation subject to withholding tax. Accordingly, the said "salaries and wages" should not have been disallowed and subjected to income tax;

2. The receipts that are supposedly subject to 12°/o VAT actually pertained to "services rendered to persons engaged exclusively in international air transport" hence, zero-rated; and

3. The assignment of a certificate of time deposit is not subject to documentary stamp tax. 9 Respondent failed to act on petitioner's protest within the required 180-day period within which to resolve the

protest. 10 Hence, this Petition for Review filed on April 20, 2011.

In her Answer posted on June 28, 2011 11, respondent raised the following Special and Affirmative Defenses: 4.

The assessments in question were made and issued in accordance with law, rules and regulations; 5.

Respondent

disallowed petitioner's salaries and wages expense in the amount of P542, 772.84 for failure of the petitioner to withhold the corresponding withholding tax thereon and remit the same to the BIR.

6.

Commission

and miscellaneous income received by the local sales agents from their foreign principals are subject to VAT. Thus, petitioner's receipts in the total amount of P20,876,935.16 from British Airways PLC is subject to 12°/o VAT. 7.

The deficiency withholding tax on compensation in the amount of P131,568.14 arose from petitioner's failure to withhold the corresponding withholding tax on the salaries and wages expense in the amount of P542,772.84.

8.

The assignment of Certificate of Time Deposit is subject to documentary stamp tax (DST) as provided for under Section 198 of the 1997 Tax Code, as amended.

9.

All presumptions are in favor of the correctness of the tax assessment

(Interprovincial Autobus vs. Collector of Internal Revenue, 98 Phil. 290). On September 6, 12 and 7, 13 2011, the parties filed their respective Pre-Trial Briefs. Thereafter, they filed their Joint Stipulation of Facts & Issues, 14 which was approved on October 6, 2011. 15 To prove its case, petitioner presented its Finance Manager,

Marie

B.

Dino;

the

Court

Commissioned

Independent Certified Public Accountant (ICPA), Dominador Homer G. Dumaraos and its Independent Auditor and Tax Consultant, Moises Visperas Jr. Marie B. Dino executed a Judicial Affidavit16 for her direct examination in which she declared that as a Finance Manager she prepares petitioner's tax returns and other required reports, pay the corresponding taxes thereon and remit to the government the required contributions for both employer and employee.

Petitioner is the exclusive passenger sales agent of British Airways PLC authorized by the Civil Aeronautics Board (CAB) 17 to operate in the Philippines to service the latter's passengers in the Philippines. 18 Petitioner received a copy of the FAN dated September 14, 2010, assessing it for deficiency IT, VAT, WTC, and DST in the respective amounts of P313,529.38, P3,695,035.80, P224,062.34, P38,600.68, or in the total amount of P4,271,228.20.

After receipt thereof, she, assisted by petitioner's President/General Manager Violeta D. Echevarria and External Auditor Moises Visperas, Jr., reviewed the assessment and prepared a Protest Letter sent to the BIRon September 29, 2010.

12 Petitioner's Pre-Trial Brief, docket, pp. 62-69. 13 Respondent's Pre-Trial Brief, docket, pp. 70-75.

According to the witness, petitioner is not liable for the deficiency assessments issued by respondent. As to deficiency WTC, petitioner's contributions to SSS, Philhealth, HDMF,

Employees

Compensation

and other employee benefits such as medical, dental, HMO premiums and rice subsidy are not considered as compensation subject to withholding tax.

And since the assessment for alleged deficiency income tax stemmed from the denial of the certain expenses due to alleged failure to withhold taxes on contributions to government agencies, it follows that the assessment for deficiency income tax should also be declared invalid.

About the claimed VAT deficiency, she invoked Republic

Act

(R.A.)

No.

9337, as implemented by

Revenue

Memorandum Circular (RMC) No. 46-2008, which provides that "services rendered to persons engaged exclusively in international air transport operations is zero-rated".

Relevantly, RMC No. 46-2008 does not mention commission income which petitioner received from British Airways PLC as compensation for services it rendered for the latter's passenger requirements, which includes ticketing, booking and refunds.

Anent the DST assessment, there is nothing in Section 198 of the NIRC that states that assignment of a certificate of time deposit is subject to DST. In addition, the witness clarified that she is an employee of petitioner and not of British Airways PLC. She was not privy to the preparation, execution and signing of the three (3) agreements between the two. Witness Dominador Homer G. Dumaraos testified that as Court-commissioned ICPA, he reviewed and verified pertinent records and documents of petitioner in relation to the assessments issued against it by respondent Per his audit, the amount of P542,772.34 included in the compensation and other benefits account for the period / ending March 31, 2007 was fairly stated. 19 ./

The testimony20 of petitioner's Tax Consultant Moises Visperas Jr. is basically in corroboration with that of first witness Marie B. Dino.

He is also of the opinion that respondent erred in considering the difference between petitioner's compensation and benefits account total in its Financial Statement vis-a-vis the amount indicated in the BIR Form 1601-C as petitioner's deficiency WTC. The difference was due to the fact that petitioner adopted the

Philippine Financial Reporting Standards (PFRS) in the

preparation of its Financial Statement for the year 2007. 21 As part of his job, he prepared all the necessary documents pertaining to the accounts involved and assisted in the drafting of petitioner's Protest Letter sent to the BIR on September 29, 2010. 22 He also testified that all compensation and benefits under the PFRS are lumped in one account in the Financial Statement, which includes not only salaries and wages but also employer's share in benefits provided to employees. Since petitioner started adopting the said reporting standard on petitioner's financial statement for the year ending March 31, 2006, it created a discrepancy between the figures reflected in petitioner's financial statement and BIR Form 1601-C given that the employer's share in SSS, Philhealth, HDMF and other employee benefits were not included in BIR Form 1601-C.

Just as Dino, he was not a signatory or a party to the agreements between petitioner and British Airways PLC, nor a custodian of the registration of British Airways PLC issued by the SEC.

In a Resolution dated May 21, 2012, the Court admitted all the documentary exhibits formally offered by petitioner on April 13, 2012. 23 On July 17, 2012, respondent manifested that she will no longer present any witness and submits the case for decision. 24

Only petitioner filed a Memorandum25 on September 20, 2012. Despite the Court's directive, respondent did not. The parties submitted the following issues for the resolution of the Court: 26 1.

Whether

or not the disputed assessment of the respondent against the petitioner for alleged deficiency income tax, value added tax, withholding tax on compensation and documentary stamp tax is legally correct;

2.

Whether

or not respondent's disallowance of petitioner's salaries and wages expense in the amount of P542,772.84 is valid;

3.

Whether or not the commission and miscellaneous income received by petitioner from its foreign principal is subject to VAT;

4.

Whether or not the assignment of Certificate of Time Deposit is subject to documentary stamp tax (DST) under Section 198 of the 1997 Tax Code, as amended.

The foregoing issues may however be summed up to one, to wit:

WHETHER THE

SUBJECT ASSESSMENTS

FOR ALLEGED DEFICIENCY INCOME TAX, VAT,

WITHHOLDING

TAX

ON

COMPENSATION, AND DST, INCLUSIVE OF

INTEREST

AND

SURCHARGE,

IN

THE

AGGREGATE AMOUNT OF P4,271,228.20, 24 Minutes of the Hearing dated July 17,2012.

COVERING TAXABLE YEAR ENDING MARCH

31, 2007 IS INVALID AS TO JUSTIFY ITS

NULLIFICATION

AND

CANCELLATION

PRAYED FOR BY PETITIONER.

Petitioner's Arguments:

Petitioner claims that the assessment for deficiency withholding tax on compensation is not valid since the employer's contribution to SSS, Philhealth, HDMF, Employees Compensation and other employee benefits, particularly, medical, dental, HMO premiums, and rice subsidy are not considered compensation subject to withholding tax as provided under Section 32(B)(7)(f) of the NIRC of 1997, as amended. Moreover, payments for medical, HMO premiums and rice subsidy are ordinary and necessary expenses, hence, considered as de minimis benefits not subject to income and withholding taxes. However, under the PFR5, all compensation and benefits, which include not only salaries and wages but also employer's share in 555, Philhealth, HDMF and other benefits for medical and other benefits to staff, are lumped in one account in the Financial Statements (FS) for presentation purposes.

Petitioner also denies liability to deficiency VAT as the receipts which were supposedly subjected to 12°/o VAT actually pertained to "services rendered to persons engaged exclusively in international air transport", thus zero-rated pursuant to Revenue Memorandum Circular (RMC) No. 46- 2008.

Finally, the assignment of the certificate of time deposit is not subject to DST since upon its issuance and subsequent renewal, the DST is paid by the bank, and subsequently debited from petitioner's account in accordance with Section 179 of the NIRC of 1997, as amended. Also the absence of an express reference to deed of assignment of certificate of time deposit as subject to D5T, the deed of assignment of/ certificate of time deposit is not subject to tax.

Respondent's Arguments:

Respondent counters that she disallowed petitioner's salaries and wages expense of PS42, 772.84 for the latter's failure to withhold the corresponding withholding tax thereon and remit the same to the BIR. This amount was derived by comparing the compensation and benefits account per FS/ITR amounting to P8,228,025.00 against the compensation per BIR Form No. 1601-C amounting to P7,685,252.16.

With respect to her VAT assessment issued against petitioner, the commission and miscellaneous income received by the local sales agents from their foreign principals are subject to VAT. Consequently, petitioner's receipts in the total amount of P20,876,935.16 from British Airways PLC is subject to 12°/o VAT. Respondent's reiterates that pursuant to Section 198, in relation to Section 179 of the NIRC of 1997, as amended, petitioner is liable for deficiency DST in the amount of P38,600.68 on the assignment of certificate of time deposit.

The Ruling of the Court

The petition is partly meritorious. 1)

INCOME

TAX

AND

WITHHOLDING

TAX

ON

COMPENSATION

The compensation amounting to PS42, 772.84 allegedly not subject to withholding tax may be broken down as follows: 27 555, PHIC and HDMF employer's p 186,008.20 contribution

Medical Insurance Premium Expense

167,082.24

Staff Cost

158/591.14

Medical Expenses

39 690.80

Maternity Benefit (Unsupported)

(8,600.04)

TOTAL

P542,772.3428 A. SSS, PHIC, and HDMF employer's contribution Insofar as petitioner's contribution to SSS, Philhealth, HDMF, Employees Compensation, the relevant provision is Section 32(B)(7)(f) of the NIRC of 1997, as amended, as implemented by

Section

2. 78.1(B)(12) of

Revenue

Regulations (RR) No. 2-98, to wit: SEC. 32. Gross Income. -

XXX

XXX

XXX

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

XXX

XXX

XXX

(7) Miscellaneous Items. -

XXX

XXX

XXX

(f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of individuals. (Emphasis supplied)

SECTION

2. 78.1.

Withholding

of Income Tax on Compensation Income. -

XXX

XXX

XXX

28 .50 rounding off difference.

(B) Exemptions from withholding tax on compensation. - The following income payments are exempted from the requirement of withholding tax on compensation:

XXX

XXX

XXX

(12) GSIS, 555,

Medicare and

other contributions.

GSIS, SSS, Medicare and Pag-ibig contributions, and union dues of individual employees.

(Emphasis supplied) In support of its allegation, petitioner submitted machine validated official receipts as proof of payment/remittance to SSS, PHIC and HDMF, as detailed below:

Monthly

Employee

Employer

Period

Exhibit

Remittance

Exhibit

Share

Share

sss

April 2006

M

p 18 272.00

R-4

p 6,433.30 p 11 838.70

May 2006

M-3

18,272.00

R-11

6,433.30 11,838.70

June 2006

M-5

18,272.00

R-48

6,433.30 11,838.70

July 2006

M-7

18,272.00

R-56

6,433.30 11,838.70

August 2006

M-9

16,852.00

R-76

5 933.30 10,918.70

September 2006

M- 11

16 852.00

R-83

5,933.30 10,918.70

October 2006

M-13

16 993.00

R-86

5,983.30 11,009.70

November 2006

M-15

16 993.00

R-102

5,983.30 11,009.70

December 2006

M-17

16,993.00

R-113

5,983.30 11 009.70

January 2007

M- 19

19,008.00

R-13 1

5,983.30 13 024.70

February 2007

M-21

19,008.00

R-139

5,983.30 13 024.70

March 2007

M-24

19 008.00

R-149

5,983.30 13 024.70

JV0960031

(19,008.00) (5 983 .30) (13 024.70) p 195,787.00 p 67,516.30 p 128,270.70 Phil health

April 2006

N

p 7 250.00 p 3 625 .00 p 3,625.00

May 2006

N- 1

7 250.00

N-3

3 625.00 3,625.00

June 2006

N-2

7 250.00 3 625.00 3,625.00

July 2006

N-4

7 250.00

N-7

3 625 .00 3,625.00

August 2006

N- 5

6 650.00 3 325.00 3,325.00

September 2006

N-6

October 2006

N-8

November 2006

N-9

December 2006

N- 10

January 2007

N- 12

February 2007

N-1 3

March 2007

N- 14

HDMF

April 2006

0

May 2006

0 -2

June 2006

0 -4

July 2006

0 -6

August 2006

0 -8

September 2006

0 - 10

October 2006

0 - 12

November 2006

0 - 14

December 2006

0 - 16

January 2007

0 - 18

February 2007

0 - 20

March 2007

0 -22

TOTAL

6 650.00 3 325.00 3 325.00 6 750.00 3 375.00 3 375 .00 6 750.00

N-9

3 375.00 3 375. 00 6 750.00 3 375.00 3 375. 00 7 775.00 3 887.50 3 887.50 7 775.00

N-15

3 887.50 3 887.50 7 775.00 3 887 .50 3 887.50 p 85,875.00 p 42,937.50 p 42,937.50 p 2 600.00 0 - 1 p 1 300.00 p 1 300.00 2 600.00 0 -3 1 300 .00 1 300.00 2 600.00 0 -5 1 300 .00 1 300.00 2 600.00 0 -7 1 300 .00 1 300. 00 2 400.00 0 -9 1 200 .00 1 200 .00 2 400.00 0 - 11 1 200.00 1 200 .00 2 400.00 0 - 13 1 200.00 1 200 .00 2 400.00 0 - 15 1 200.00 1 200 .00 2 400.00 0 - 17 1 200.00 1 200 .00 2 400.00 0 -19 1 200 .00 1 200 .00 2 400.00 0 -21 1 200 .00 1 200.00 2 400.00 0 -23 1 200.00 1 200.00 p 29,600.00 p 14,800.00 p 14,800.00 p 311,262.00 p 125,253.80 p 186,008.20 Petitioner is therefore correct that its share in the SSS, Medicare, and Pag-ibig contributions for the benefit of its employees in the sum of P186,008.20 are exempt from the requirement of withholding tax on compensation. A.

Medical Insurance Premium Expense

As regards the Medical Insurance Premium Expense of petitioner amounting to ¥>167,082.24, Section 34(M) of the NIRC of 1997, as amended, provides:

CHAPTER

DEDUCTIONS

VII

ALLOWABLE

SEC.

34.

Deductions

from

Gross

/ Income. - Except for taxpayers earning compensation income arising from personal services rendered under an employer- employee relationship where no deductions shall be allowed under this Section other than under Subsection

(M)

hereof, in computing taxable income subject to income tax under Sections 24(A); 25(A); 26; 27(A), (B) and (C); and 28(A)(1), there shall be allowed the following deductions from gross income:

XXX

XXX

XXX

(M) Premium Payments on Health and/or Hospitalization Insurance of an

Individual Taxpayer.

- The amount of premiums not to exceed Two thousand four hundred pesos (P2,400) per family or Two hundred pesos (P200) a month paid during the taxable year for health and/or hospitalization insurance taken by the taxpayer for himself, including his family, shall be allowed as a deduction from his gross income: Provided, That said family has a gross income of not more than Two hundred fifty thousand pesos (P250,000) for the taxable year: Provided, finally, That in the case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction.

Evident from the foregoing that premium payment on health and/or hospitalization insurance of an individual taxpayer up to P2,400.00 per family is an allowable deduction from taxable gross income, subject to specific conditions mentioned in Section 34(M) of NIRC of 1997, as amended.

Thus, payments made by an employer for the benefit of its employees will not be considered taxable income, provided that the conditions mentioned in Section 34(M) of NIRC of 1997, as amended, are met; otherwise, the payments will be subject to withholding tax on / compensation.

/

In addition, Revenue Regulation (R.R.) Nos. 2-98 and 3-98, as amended by RR Nos. 8-2000 and 10-2000,29 provides, among others, exemptions from income tax and withholding tax on compensation of de minimis benefits received by individual taxpayers from their employers. In particular, Section 2. 78.1(A)(3) of RR No. 2-98, in relation to Section 32(B) of the NIRC of 1997, as amended, enumerates the income payments exempted from withholding tax on compensation. However, there was no mention of medical insurance premium paid by the employer The pertinent provisions Section 2. 78.1(A)(3) of RR No. 2-98 are quoted below:

SECTION

1.

Section

2. 78.l(A)(3), (6)(b)(ii) and (7) of Revenue Regulations No. 2-98, as last amended by Revenue Regulations No. 8-2000, is hereby further amended to read as follows: Sec. 2. 78.1. Withholding of Income Tax on Compensation Income. -

(A)

XXX

(3)

Facilities

and privileges of relatively small value. -

XXX

XXX

XXX

The following shall be considered as 'de minimis' benefits not subject to INCOME TAX AS WELL AS withholding tax on compensation income of both managerial and rank and file employees:

(a) Monetized unused vacation leave credits of

PRIVATE

employees not / exceeding ten (10) days during the year 29 Revenue Regulation prevailing during the material dates of this case.

AND THE MONETIZED VALUE OF LEAVE

CREDITS

PAID

TO

GOVERNMENT

OFFICIALS AND EMPLOYEES;

(b)

Medical

cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125 per month;

(c) Rice subsidy of Pl,OOO.OO or one (1) sack of SO-kg. rice per month amounting to not more than Pl,OOO.OO;

(d) Uniform and clothing allowance not exceeding P3,000 per annum;

(e) Actual yearly medical benefits not exceeding PlO,OOO per annum;

(f) Laundry allowance not exceeding P300 per month;

(g) Employees achievement awards, e.g., for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding PlO,OOO received by the employee under an established written plan which does not discriminate in favor of highly paid employees;

(h) Gifts given during Christmas and major anniversary celebrations not exceeding PS,OOO per employee per annum;

(i) Flowers, fruits, books, or similar items given to employees under special circumstances, e.g., on account of illness, / marriage, birth of a baby, etc., and ~

(j) Daily meal allowance for overtime work not exceeding twenty five percent (25°/o) of the basic minimum wage.

(Emphasis supplied) Therefore, for the medical insurance premium expenses to be deemed as de minimis benefits exempt from fringe benefit tax, income tax, and withholding tax on compensation, the following conditions must be satisfied:

(1) they must be furnished by the employer to his employees, both managerial and rank and file; (2) they do not exceed P10,000.00 per annum; and (3) they must be actually used or utilized for medical reasons. Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per month of not more than P1,000.00, actual yearly medical benefits not exceeding P10,000 per annum and daily meal allowance for overtime work not exceeding twenty-five percent (25°/o) of the basic minimum wage are likewise considered as de minimis benefits not subject to income tax and withholding tax on compensation of both managerial and rank and file employees. To prove its claim, petitioner submitted its check vouchers and official receipts from its health insurance provider, to wit:

Date

Payee

Particulars

OR#

Amount

Exhibit

Interbroker

1st Semi Annual 6/21/2006 Insurance1 Inc.

Payment

27636 p 83/541.12

"Q- 1"

Interbroker

2st Semi Annual 12/11/2006 Insurance, Inc.

Payment

28066 83 541.12

"Q-5"

TOTAL

P167 1082.24 There is however no clear and complete indication that the amount was exclusively utilized by its employees for their medical needs, as the names of the employees who benefited from such payments were not reflected or / attached therein.

Besides, to determine the actual medical benefits furnished by the employer, the employee must fully substantiate with official receipts in his name the medical insurance premium so granted, on or before the annualization of withholding taxes in any given calendar year, to determine if the medical insurance premium conforms to the ceiling amount prescribed by the regulations.

If the employer pays more than the ceiling prescribed by the Regulations, the excess shall be taxable to the employee receiving the benefits, if such excess is beyond the P30,000.00 ceiling of "Other Benefits" provided under Section 2.78.1(B)(11) of RR No. 2-98, in relation to Section 32(B)(7)(e) of the NIRC of 1997, as amended. Considering that there is no clear showing that the alleged medical insurance premium of P167,082.24 refers to the medical benefits considered as de minimis benefits contemplated under RR No. 2-98, as amended by RR No. 10-2000, and that petitioner met the conditions under Section 34(M) of the NIRC of 1997, as amended, the same shall be considered as compensation subject to income tax and consequently, to withholding tax. B.

Staff Cost and Medical Expenses

With respect to the item medical and staff expenses in the amounts of P158,591.14 and P39,690.80, respectively, record shows that these pertain to medical allowances, rice subsidy and meals for staff which were considered de minimis benefits not subject to income tax and withholding tax on compensation, except for the following in the total amount of P49,036.63:

Employee Name (Claimant)

Particulars

Reference

Amount

Not properly receipted in the name of the employee/company

Leticia Carlos

medicines

P-15

p 203.95

Leticia Carlos

medicines

P-17

897.75

Leticia Carlos

medicines

P-18

94.00

Violeta Echeverria

medicines

P-27

181.25

Violeta Echeverria

medicines

P-28

181.25

Regina Garcia

medicines for office

P-30

299.25

Regina Garcia

Leticia Carlos

Marisa Saavedra

R~gina Garcia

Patricia Marie Pascual

Patricia Marie Pascual

Patricia Marie Pascual

Patricia Marie Pascual

Y. Ranola Y. Ranola Y. Ranola Y. Ranola Y. Ranola Y. Ranola Y. Ranola

Regina Garcia

Patricia Marie Pascual

Patricia Marie Pascual

Patricia Marie Pascual

Marisa Saavedra

Y. Ranola Y. Ranola Y. Ranola Y. Ranola

Patricia Marie Pascual

Patricia Marie Pascual

Y. Ranola

Regina Garcia

Y. Ranola Y. Ranola Y. Ranola Y. Ranola

Patricia Marie Pascual

Anne Lorraine Famatigan

Marisa Saavedra

Regina Garcia

Marie Dino

Marie Dino

Marie Dino

Natalie Puey

Regina Garcia

Manila North Tollways

Manila North Tollways

medicines medicines medicines salon pas medicines medicines medicines medicines medicines for office medicines medicines medicines medicines medicines medicines medicines medicines for office medicines medicines medicines medicines medicines medicines medicines medicines medicines medicines medicines medicines for office medicines medicines medicines medicines medicines medicines medicines medicines medicines medicines medicines supplies for office outing supplies for office outing supplies for office outing visine staff lunch toll fee toll fee

P-38

495.00

P-42

2 190.35

P-45

233.10

P-47

35.75

P-49

215.50

P-52

453.75

P-53

647.50

P-54

556.50

P-56

53.05

P-58

20.40

P-59

204.00

P-60

153.00

P-61

278.50

P-62

105.20

P-63

153.00

P-64

38.00

P-66

563.00

P-69

189.25

P-70

1 107.25

P-71

378.50

P-73

278.50

P-75

575.00

P-76

26.00

P-77

76.00

P-78

286.20

P-83

1 449.00

P-84

1 970.55

P-86

464.00

P-88

431.00

P-94

900.00

P-96

51.00

P-97

441.00

P-98

105.00

P-99

291.25

P-102

1 942.50

P-111

341.50

P-113

1 086.75

P-115

144.25

P-117

692.25

P-118

316.80

R-15

107.50

R-16

548.75

R-17

2 528.50

R-21

66.30

R-25

538.00

R-37

53.00

R-38/39

732.00

Manila North Tollways

Jollibee

Jollibee

Jollibee

Ocean Adventure

Ocean Adventure

SM Supermarket (outing)

Regina Garcia

Reqina Garcia

Regina Garcia

Marie Dina

Marie Dina

Anne Lorraine Famatiqan

Regina Garcia

Patricia Pascual

Regina Garcia

Subtotal

OR with Incomplete Date

Marie Dina

Subtotal

Without valid supporting documents

Leticia Carlos

Marie Dina

Marie Dina

Marie Dina

Marie Dina

Marie Dina

Marie Dina

Tip-Pancake

Lor Go Anq

Reqina Garcia

Reqina Garcia

Regina Garcia

toll fee office outing (breakfast) office outing (breakfast) office outing (breakfast) entrance fee entrance fee supplies for office outing

Coffee Supplies

Coffee Supplies

Coffee Supplies

Supplies

Softdrinks for

Christmas lunch

DLC Foods

ice for Christmas

Lunch

optical expense

Office Supplies

medicines

Coffee Supplies

ultrasound fee medicines

Tip to Porter

(outinq)

Tip-Seafood by the

Bay

Tip-Dencio's

entrance fee to

Ocean Adventure

drinking water Meal for the driver

Tip- Pancake House

(office outing - breakfast) dental staff lunch Crystal cases for ceiiQ_hones Lunch -staff

Lunch- Maggie

Coffee Supplies

Write-off of Input

tax

R-40

53.00

R-41

76.00

R-43

83.00

R-44

1 043.00

R-45

450.00

R-46

450.00

R-51

1 243.10

R-59

525.75

R-60

1 028.00

R-67

280.20

R-107

822.05

R-109

131.25

R-118

500.00

R-119

33.00

R-122

260.00

R-144

269.70

R-159

1 089.70

R-166

833.40 p 35,541.80

P-24

1,390.00 1,390.00

P-14

704.30

R-14

20.00

R-29

72.50

R-29

97.00

R-29

4 950.00

R-29

120.00

R-29

500.00

R-42

86.04

R-68

3 206.00

R-80

1 577.00

R-93

500.00

R-96

72.50

R-104

267.00 413.60 1 468.89

Subtotal

Grand Total

Cancelled Check

(1,950.00) P 121104.83 p 49,036.63 For petitioner's failure to duly substantiate the amount of P49,036.63, the same shall be subject to income tax and consequently to withholding tax on compensation. In fine, petitioner is liable to pay basic deficiency income tax and withholding tax on compensation amounting to P75,641.60 and P52,387.21, respectively, as follows:

Deficiency Income Tax

Medical Insurance Premium Expense

p 167,082.24

Staff Cost and Medical Expense

49,036.63

Total Disallowed Salaries & Wages Expense

P216,118.87 x Income Tax Rate 35%

Basic Deficiency Income Tax Due

P 751641.60

Deficiency Withholding Tax on

Compensation

Total Disallowed Salaries & Wages Expense

p 216,118.87 x Rate of Withholding Tax 24.24%30

Basic Deficiency Withholding Tax Due

p 52,387.21 II.

VALUE-ADDED TAX

Section 108 of the NIRC of 1997, as amended, provides that services rendered by VAT-registered persons to persons engaged in international air transport operations shall be subject to zero percent rate, to wit: SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. -

XXX

XXX

XXX

30 Tax Rate used by the BIR as per FAN, Details of Discrepancy, Exhibit "A-1", docket, p. 532. j

(B) Transactions

Subject

to

Zero

Percent

(Oo/o) Rate. - The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0°/o) rate:

XXX

XXX

XXX

( 4) Services rendered to persons engaged in international shipping or international air transport operations, including leases of property for use thereof; (Emphasis supplied) Revenue Memorandum Circular (RMC) No. 46-200831 issued to clarify certain provisions of the National Internal Revenue Code of 1997, as amended, further provides: II. Definition of Terms

XXX

XXX

XXX

3. International Air Carrier - shall refer to a foreign airline corporation doing business in the Philippines having been granted landing rights in any Philippine port to perform international air transportation services/activities or flight operations from the Philippines to anywhere in the world and vice versa, in the case of on-line carrier, or having maintained business establishment, agent or representative office in the Philippines for the sale of its own tickets/passage documents or tickets/passage documents of other airline companies, which airline companies operate without touching any Philippine port, in the case of off- _____ li_n_e_c_a_r_r_ier.

International air carrier j 31 Subject: Clarification of Issues Concerning Common Carriers by Air and Their Agents Relative to the Revenue and Receipt from Transport of Passengers, Goods/Cargoes and Mail, and from Excess Baggage.

includes both off-line carrier and on- line carrier.

XXX

XXX

XXX

III. Questions and Answers

XXX

XXX

XXX

Q-14:

Which

transactions with international air transport operators are zero-rated?

A-14: Sale of services to persons engaged exclusively in international air transport operations, including leases of property for use thereof, and the sale of goods, supplies, equipment and fuel are zero-rated.

However, sale of goods, supplies, equipment and fuel as well as services rendered to persons engaged in both domestic and international operations shall be zero-rated only with respect to the portion that will be used in their international operations.

(Emphasis

supplied) Evident from the above that services rendered to persons engaged in international air transport operations are zero-rated.

It has been established that British Airways PLC is authorized by the Civil Aeronautics Board (CAB) 32 to operate as an off-line carrier in the Philippines for the period covered by the subject assessment. Under the Agreements between British Airways PLC and petitioner, 33 petitioner is the exclusive passenger sales agent of British Airways PLC in the Philippines.

Also proved is the fact that petitioner renders services as passenger sales agent only to British Airways PLC, which is an off-line international air carrier engaged j exclusively in international air transport. Thus, petitioner

can treat its sale of services to British Airways PLC as VAT zero-rated sales. Significantly, respondent failed to present any evidence to controvert these facts. Accordingly, this Court finds that the deficiency VAT assessment in the amount of P3,695,035.80 should be cancelled for lack of legal basis. III. Deficiency Documentary Stamp Tax Section 179 of the NIRC of 1997, as amended by Republic Act No.

924334, imposed

DST on

all debt instruments including certificate of time deposit, to wit: SEC. 179. Stamp Tax on All Debt Instruments. - On every original issue of debt instruments, there shall be collected a documentary stamp tax on One peso (Pl.OO) on each

Two

hundred pesos (P200), or fractional part thereof, of the issue price of any such debt instruments: Provided, That for such debt instruments with terms of less than one (1) year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ratio of its term in number of days to three hundred sixty-five

(365) days: Provided, further, That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan.

For purposes of this section, the term debt instrument shall mean instruments representing borrowing and lending transactions including but not limited to debentures, certificates of indebtedness, due bills, bonds, loan agreements, including those signed abroad 34 February 17, 2004.

/ wherein the object of contract is located or used in the Philippines, instruments and securities issued by the government of any of its instrumentalities, deposit substitute debt instruments, certificates or other evidences of deposits that are either drawing interest significantly higher than the regular savings deposit taking into consideration the size of the deposit and the risks involved or drawing interest and having a specific maturity date, orders for payment of any sum of money otherwise than at sight or on demand, promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation.

(Emphasis

supplied) Further, Section 198 of the NIRC of 1997, which imposes DST on assignments and renewals of certain instruments, states:

SEC.

198.

Stamp

Tax

on

Assignments and Renewals of Certain

Instruments. - Upon each and every assignment or transfer of any mortgage, lease or policy of insurance, or the renewal or continuance of any agreement, contract, charter, or any evidence of obligation or indebtedness by altering or otherwise, there shall be levied, collected and paid a documentary stamp tax, at the same rate as that imposed on the original instrument.

The Supreme Court, in the case of Philacor Credit Corporation vs. Commissioner of Internal Revenue, 35 had the occasion to interpret Section 198 of the NIRC of 1997, which

I

is a similar provision of the old Tax Code, in this wise: ,J

If we look closely at this provision, we would find that an assignment or transfer becomes taxable only in connection with mortgages, leases and policies of insurance. The list does not include the assignment or transfer of evidences of indebtedness; rather, it is the renewal of these that is taxable. The present case does not involve a renewal, but a mere transfer or assignment of the evidences of indebtedness or promissory notes.

A renewal would involve an increase in the amount of indebtedness or an extension of a period, and not the mere change in person of the payee.

In BIR Ruling No. 139-97 issued on December 29, 1997, then CIR Liwayway Vinzons-Chato pronounced that the assignment of a loan that is not for a renewal or a continuance does not result in a liability for DST.

Revenue Regulations

No.

13-2004, issued on December 23, 2004, states that '[t]he DST on all debt instruments shall be imposed only on every original issue and the tax shall be based on the issue price thereof. Hence, the sale of a debt instrument in the secondary market will not be subject to the DST.' xxx (Emphasis supplied) From the pronouncement of the Final Arbiter, the mere transfer or assignment of evidence of indebtedness is not among those subject to DST; rather it is the renewal of such that is taxable. A renewal would involve an increase in the amount of indebtedness or an extension of a period, and not the mere change in the person of the payee. Revenue Memorandum Circular No. 77-2012 dated November 22, 2012, which interpret, among others, Section 198 of the NIRC of 1997, states that any assignment or re- I assignment of debt instruments shall be subject to DST

"only when the assignment or re-assignment of the debt instrument entails changing the maturity date or remaining period of coverage from that of the original instrument or carries with it a renewal or issuance of new instruments in the name of the transferee to replace the old ones." Otherwise, the assignment or re-assignment without any change in maturity date shall be exempt from DST as provided under Section 199(f) or (g) of the NIRC of 1997, as amended.

In the instant case, respondent assessed petitioner of deficiency DST under Section 179 of the NIRC of 1997, as amended, on the basis of its assignment of Certificate of Time Deposit. However, respondent failed to allege or show that the said certificate was renewed, i.e., there was a change in maturity date. For this reason, the Court agrees with petitioner that the mere assignment of said certificate of time deposit is not subject to DST. Where the law did not specify that such transfer and/or assignment is to be taxed, there would be no basis to recognize an imposition. 36 Well-settled is the rule that tax laws must be construed in favor of the taxpayer and strictly against the government; and that a tax cannot be imposed without clear and express words for that purpose. 37 What is controlling in this case is the well-settled doctrine of strict interpretation in the imposition of taxes, not the similar doctrine as applied to tax exemptions. The rule in the interpretation of tax laws is that a statute will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously. A tax cannot be imposed without clear and express words for that purpose.

Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication. In answering the question of who is subject to tax statutes, it is basic that in case of doubt, such statutes are to be construed most strongly against the / government and in favor of the subjects or citizens because .../

burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import. As burdens, taxes should not be unduly exacted nor assumed beyond the plain meaning of the tax laws. 38

WHEREFORE, the instant Petition for Review is PARTIALLY GRANTED.

The assessments for deficiency value-added tax and documentary stamp tax, as well as the interests and surcharges, for the taxable year ending March 31, 2007 are hereby CANCELLED and WITHDRAWN for lack of legal basis. The assessments for deficiency income tax and withholding tax on compensation for taxable year ending March 31, 2007 are MODIFIED. Petitioner is hereby ORDERED TO PAY respondent the amount of P160,036.01, inclusive of the twenty-five percent (25°/o) surcharge imposed under Section 248(A)(3) of the NIRC of 1997, as amended, computed as follows:

BASIC TAX

25°/o

TAX TYPE

DUE

SURCHARGE

TOTAL

Income Tax

p 75,641.60 p 18,910.40 p 94,552.00

Withholding Tax on Compensation

52,387.21 13,096.80 65,484.01

TOTAL

P128,028.81 P32,007.20 P160,036.01 Petitioner is likewise ORDERED TO PAY respondent the following:

(a) deficiency interest at the rate of twenty percent (20°/o) per annum on the basic deficiency income tax of P75,641.60 and withholding tax on compensation of P52,387.21 computed from July 15, 2007 and April 10, 2007, respectively, until full payment thereof pursuant to Section 249(B) of the NIRC of 1997, as amended; and

(b) delinquency interest at the rate of twenty percent (20°/o) per annum on the total amount of P160,036.01 and 38 Commissioner of Internal Revenue vs. Fortune Tobacco Corporation, G.R. Nos. / 167274-75, July 21, 2008.

J

on the 20°/o deficiency interest which have accrued as afore- stated in (a), computed from October 13, 2010 until full payment thereof pursuant to Section 249(C) of the NIRC of 1997, as amended.

I Concur:

ER~P.UY

Associate Justice

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. ER~P.UY

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.