Court of Tax Appeals · Third Division

Herbalife International Philippines, Inc. vs. Commissioner of Internal Revenue

CTA Case No. 8478 November 3, 2016 BAUTISTA

REPUBLIC OF THE PHILIPPINES

Court of Tax Appeals

QUEZON CITY

Third Division

HERBALIFE INTERNATIONAL CTA CASE NO. 8478

PHILIPPINES, INC.,

Petitioner, Members:

Bautista, Chairperson

versus -

Fa bon-Victorino, and

Ringpis-Liban, Jl.

COMMISSIONER

OF Promulgated:

INTERNAL REVENUE,

Respondent.

;t~r&e; .......

X-----------------------------------------------------------------------------------------X

DECISION

BAUTISTA, J:

The Case

Before the Court is a Petition for Reviewl filed by petitioner on April 26, 2012, pursuant to Section 7(a)(2)2 of Republic Act ("RA") No. 11253, as amended by RA No. 92824 and RA No. 95035, in relation to Rule

46 of the Revised Rules of the Court of Tax Appeals ('RRCTA")7, which seeks for the Court to render judgment cancelling and withdrawing the Formal Assessment Notice ("FAN") dated August 26, 2011 for being invalid and without legal basis,8 covering alleged deficiency Income Tax, Value-Added Tax ("VAT"), Expanded Withholding Tax ("EWT"), Withholding Tax on Compensation CWTC"), Final Withholding Tax CFWT") of VAT, and Documentary Stamp Tax ("DST") for the calendar year ("CY") 2007, including increments for late payment of WTC and Compromise Penalties.9

The Parties

Petitioner Herbalife International Philippines, Inc. ("Herbalife") a wholly-owned subsidiary of Herbalife International, Inc., USA,10 is engaged in the business. of marketing and distributing nutrition, weight management, and personal care products, mainly through direct sellingn via its authorized Distributors.12 Its business address is at G/F Goodland Bldg., 377 Gil Puyat Extension, Makati City.13 Respondent is the Commissioner of Internal Revenue ("CIR"), with office address at the Bureau of Internal Revenue ("BIR") National Office, Agham Road, Diliman, Quezon City.

The Facts

On April 14, 200814, petitioner filed its Annual Income Tax 6 "Rule 4. Jurisdiction of the Court xxx Sec. 3. Cases within the jurisdiction of the Court in Division. - The Court in Division shall exercise: (a) Exclusive original over or appellate jurisdiction to review by appeal the following: (¹) xxx; (²) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other applicable law provides a specific period for action: xxx" 7 A.M. No. 05-11-07-CTA, November 22,2005. s Records, Vol. 1, Petition for Review, Prayer, p. 38. 9 I d., Pre-Trial Order, Statement of the Case, p. 466. 10 Records Box 1, Exhibit "I," Petitioner's Formal Offer of Evidence ("FOE"). 11 Id., Exhibit "K-1," Judicial Affidavit of Margie B. Alabastro, Q&A 8, p. 2; Records, Vol. 2, Exhibit "WWW," Judicial Affidavit of Lina E.Jacob, Q&A 6, p. 599. 12 Records, Vol. 2, Exhibit "WWW," Judicial Affidavit ofLina E. Jacob, Q&A 7, p. 599. 13 Records Box 1, Exhibit "B," Petitioner's FOE. 14 While the ITR has a stamp dated" APR 14 2007," this appears to be a mistake in the receipt of the BIR and should instead read "APR 14 2008." Considering that the ITR for the year ending December 31, 2007 is due to be filed on April15, 2008 and that the issue date of the Community Tax Certificate ("CTC") in the 2007 ITR is on January 23, 2008, it is impossible for the ITR to be filed on April14, 2007 with a postdated CTC. Moreover, it cannot be claimed that the 2007 ITR is the

Retum1s (BIR Form No. 1702) for CY ended 2007. On February 27, 2008, petitioner filed its Annual Information Return of Creditable Income Taxes Withheld (Expanded)/Income Payments Exempt from Withholding Tax16 (BIR Form No. 1604-E). On June 4, 2008, respondent issued a Letter of Authority ("LOA") No. 2001 0006926117 received by petitioner on June 5, 2008, covering all internal revenue taxes from January 1, 2007.18 On January 4, 2010, petitioner received a Revalidation Notice dated December 22, 2010, revalidating the LOA to replace the previously-assigned Revenue Officer.19 On September 28,2010, petitioner received a Notice of Informal Conference ("NIC") dated September 27, 2010.20 On December 23, 2010, respondent issued a Preliminary Assessment Notice, ("PAN"),21 which was received22 by petitioner on December 28,2010.23 After asking for an extension,24 petitioner filed its reply to the PAN on January 31,201125 and June 10, 2011 asking for a reinvestigation of the assessment.26 On September 1, 2011, petitioner received the FAN27 dated August 26, 2011,28 with the following details: 2006 ITR since petitioner already filed its 2006 ITR, that the 2007 ITR does not provide that it is an amended one. Moreover, the 2007 ITR expressly provides that it is for the year ending December 2007, and a comparison of the 2006 and 2007 ITRs shows that the latter is preceded by the former by referring to the amounts of NOLCO and Beginning/Ending Inventories. On top of this, a 2007 ITR was uncovered from the BIR Records showing a receiving stamp with "APR 15 2008" on the 2007 ITR, see BIR Records, pp. 1-33, with annex. 15 Records Box 1, Petitioner's FOE, Exhibit "I." 16 Id., Exhibits "!"and "J-1."

17 BIR Records, p. 44.

18 Records, Vol. 1, Joint Stipulation of Facts and Issues ("JSFI"), p. 284. 19 BIR Records, p. 35.

20 BIR Records, Exhibits "R-3," "R-3-a," "R-3-b," and "R-3-c," pp. 265-267. 21 Id., Exhibits "R-6," "R-6-a," and "R-6-b," pp. 358-363. 22 I d. at 370.

23 Records, Vol. 1, JSFI, p. 284.

24 BIR Records, p. 371.

2s I d. at 935-952.

26 Records, Vol. 1, JSFI, p. 284.

27 Records Box 1, Petitioner's FOE, Exhibit "A;" BIR Records, Exhibit "R-1." 28 Records, Vol. 1, JSFI, p. 284.

(

I. INCOME TAX (“IT”)

Taxable Income per ITR

Add: Adjustments / disallowance per investigation Disallowed Expenses due to Non-withholding

(Schedule 1)

Unaccounted Expenses (Schedule 2)

Unsupported Expenses (Schedule 3)

Adjusted Taxable Income per investigation

Basic Income Tax Due

Less: Allowable tax credits / payments

Prior Years’ Minimum Corporate Income Tax

Creditable Tax Withheld at Source claimed per return

Total

Less: Excess Credits Carried Over to Succeeding Year

Deficiency Income Tax

Add: Interest (04.16.08 to 09.30.11)

TOTAL AMOUNT DUE

Il. VALUE ADDED TAX (“VAT”) [Php] _9,377,113.00 83,987,344.32 3,769,289.73 10,105,563.00 [Php] _ 97,862,197.05 [Php] _107,239,310.05

[Php]

[Php] 37,533,758.52 [Php] 3,281,989.55 630,442.00 [Php] 3,912,431.55 630,442.00 [Php] _ 3,281,989.55 [Php] 34,251,768.97 23,685,332.85 [Php] _57,937,101.82 Taxable Sales per VAT returns [Php] 316,188,408.80 Add: Undeclared Income from Unaccounted Expense (Schedule 2) 3,769,289.73 Taxable Sales per investigation [Php] 319,957,698.53 Output Tax Due 38,394,923.83 Less: Claimed Input Tax 19,491,171.20 VAT Due [Php] 18,903,752.63 Less: Payments per BIR records (Integrated Tax System) 16,643,909.76 Deficiency Value-added Tax [Php] 2,259,842.87 Add: Interest (01.26.08 to 09.30.11) 1,662,996.70 TOTAL AMOUNT DUE [Php] 3,922,839.57 Ill. EXPANDED WITHHOLDING TAX?) (“EWT”) Basic Deficiency Withholding Tax (Schedule 4) _—_ [Php] 441,019.08 Add: Interest (01.16.08 to 09.30.11) 326,958.26 TOTAL AMOUNT DUE [Php] 767,977.34 IV. WITHHOLDING TAX ON COMPENSATION (“WTC”) Basic Deficiency Withholding Tax (Schedule 5) — [Php] 177,582.49 Add: Interest (01.16.08 to 09.30.11) 131,654.31 TOTAL AMOUNT DUE [Php] 309,236.80 V. FINAL WITHHOLDING TAX (“FWT”) Basic Deficiency Withholding Tax (Schedule 1a) [Php] 18,255,820.35 Add: 50% Surcharge [Php] 9,127,910.18 Interest (01.16.08 to 09.30.11) 13,534,315.04 [Php] 22,662,225.22 TOTAL AMOUNT DUE [Php] 40,918,045.57 VI. FINAL WITHHOLDING OF VAT (“FW-VAT”) Basic Deficiency Withholding Tax (Schedule 6) [Php] 3,822,424.68 Add: 50% Surcharge [Php] 1,911,212.34 Interest (01.11.08 to 09.30.11) 2,844,302.86 [Php] 4,755,915.20 TOTAL AMOUNT DUE [Php] 8,577,939.88 VII. DOCUMENTARY STAMP TAX (“DST”)

29 BIR Records, p. 1303.

Basic Deficiency Tax (Schedule 7)

Add: 50% Surcharge

[Php]

Interest (01.06.08 to 09.30.11)

TOTAL AMOUNT DUE

[Php]

18,407.00 27,494.52

[Php]

36,814.00 45,901.52 82,715.52 On September 29, 2011, respondent received petitioner's Protest Letter to the FAN30 dated September 28,2011, refuting the findings of respondent. 31 On March 8, 2012, petitioner filed its Documentary Stamp Tax Declaration/Return (BIR Form No. 2000) covering a lease transaction dated February 8, 2007 with Goodland Company, Inc. as lessor.32 Due to the inaction of respondent on petitioner's protest, the latter filed the instant Petition for Review with Motion for Suspension of Collection of Tax33 on April26, 2012,34 which was initially raffled to the First Division of the Court of Tax Appeals (" CTA"). On May 9, 2012, the Court issued Summons35 to respondent, ordering her to file her Answer to the Petition for Review within fifteen

(15) days from receipt thereof. On the same date, the Court issued a Notice of Hearing36 for the Motion for Suspension of Collection of Tax, setting the hearing on May 15, 2012.

On the scheduled hearing, only counsel for petitioner appeared.37 The Court denied the Motion for Suspension of Collection of Tax for failure of petitioner to substantiate .the same with legal or factual bases.38 This was confirmed through a Resolution39 dated May 29,2012.

On May 23, 2012, respondent filed by registered mail her Motion for Extension of Time to File Answer4° praying for an additional period 30 Records Box 1, Petitioner's FOE, Exhibits "B" and "B-1." 31 Records, Vol. 1, JSFI, p. 284.

32 Records Box 1, Petitioner's FOE, Exhibit "F," BIR Form No. 2000. 33 Records, Vol. 1, Petition for Review, pp. 10-220, with annexes. 34 Id., JSFI, p. 284.

35 Records, Vol. 1, Summons, p. 221.

36 Id. at 222-223.

37 Records, Vol. 1, Minutes of Hearing dated May 15, 2012, p. 224. 38 Id.

39 I d. at 226.

40 Records, Vol. 1, pp. 228-229.

I

of twenty (20) days within which to file an Answer; which was later on granted by the Court in its June 5, 2012 Order41. On June 13, 2012, respondent filed, by registered mail, her Answer42. Respondent claims that petitioner failed to submit the required documents in support of its protest against the FAN and Letter of Demand dated August 26, 2011 within the sixty (60) day period from filing of its protest; that because of this, the assessed deficiency IT, VAT, EWT, WTC, FWT, FWT - VAT, DST and Compromise Penalty for CY 2007 has already become final, executory and demandable, thus depriving the Court of jurisdiction to act on the instant petition.43 Respondent also argues that assuming that the Court has jurisdiction to act on the instant petition, petitioner failed to substantiate or controvert by substantial evidence the BIR factual findings, as shown under the Details of Discrepancies attached to the FAN and Letter of Demand dated August 26, 2011, as well as the BIR Letter dated August 26, 2011, bearing the assessed Compromise Penalty for CY 2007.44 Lastly, respondent asserts that she has fully complied with the due process requirement mandated under Section 228 of the 1997 National Internal Revenue Code, as amended (u1997 NIRC"), as implemented by Revenue Regulations ("RR") No. 12-99, when the disputed PAN dated December 23, 2010 and FAN and Letter of Demand dated August 26,2011 were issued; that records clearly show that petitioner was duly afforded an opportunity to controvert the factual findings of respondent on its deficiency taxes for CY 2007 through the issuance of a Notice for Informal Conference and PAN dated August 26, 2011; it was also duly appraised of the factual and legal bases of the deficiencies; and that all presumptions are in favor of the correctness of tax assessments issued by respondent to herein petitioner for CY 2007.45 41 Id. at 231.

42 Records, Vol. 1, Answer, pp. 232-238. 43 Id. at 233-235.

44 Id. at 235-236.

45 I d. at 236-237.

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On June 25, 2012, petitioner filed a Reply46. Thereafter, the Court issued a Notice of Pre-trial Conference47 setting the Pre-Trial Conference on July 20, 2012, which was rescheduled48 to August 3, 2012. Consequently, the parties filed their respective Pre-Trial Briefs on July 31,201249 and August 2, 2012so. On the scheduled Pre-trial Conferencesl, counsels for both parties appeared, counsel for petitioner presented the Secretary Certificate52 authorizing them to sign a Compromise Agreement of a Pre-trial Order that may be issued, while counsel for respondent filed his Special Power of Attorneys³ on August 10, 2012. The parties likewise agreed to submit their Joint Stipulation of Facts and Issues ("JSFI") within fifteen (15)· days therefrom. 54 After asking for an extension of fifteen (15) days,ss on September 5, 2012, the parties, through their respective counsels, filed their JSFJ56, which the Court approved in its Resolutions7 dated September 11, 2012.

On October 2, 2012, a Pre-trial Orderss was issued by the Court terminating pre-trial and setting the date/ s for the presentation of evidence by the parties.

On October 15, 2012, petitioner filed a Motion to Amend Pre- Trial Order,s9 which was granted in open Court during the October 18, 2012 hearing without any objection from respondent, in order to reflect the replacement of petitioner's witness; its reservation of the right to avail modes of discovery; and the changes in the trial dates.6o This was later confirmed in a Resolution61 dated November 13,2012. 46 Records, Vol. 1, Reply, pp. 240-247. 47 I d. at 248.

48 Id., at 249.

49 Records, Vol. 1, Petitioner's Pre-Trial Brief, pp. 250-260. 50 Id., Respondent's Pre-Trial Brief, pp. 261-263. 51 I d., Minutes of Hearing dated August 3, 2012, p. 264. 52 Id. at 265-266.

53 Id. at 267.

54 I d., Minutes of Hearing dated August 3, 2012, p. 264; see pp. 269-270. 55 Records, Vol. 1, pp. 271-276, with annex. 56 Id, JSFI, pp. 284-291.

57 Id. at 293-294.

ss Id., Pre-Trial Order ("PTO"), pp. 466-471. 59 I d. at 482-487.

60 Id., Minutes of Hearing dated October 18, 2012, pp. 488-489. 61 Records, Vol. 1, pp. 493-494.

I

In view of CTA Administrative Circular No. 01-2013, the case was transferred to the Third Division, through an Order62 dated April 4, 2013.

During trial, petitioner presented the following witnesses: (1) Ms. Margie B. Alabastro ("Ms. Alabastro")63, Finance Manager and the authorized representative of petitioner; (2) Ms. Mary Ann Capuchino ("Ms. Capuchino")64, the court-commissioned65 Independent Certified Public Accountant ("ICPA"); and (3) Ms. Lina E. Jacob ("Ms. Jacob)66, petitioner's General Manager.

On May 30, 2013, petitioner filed a Motion for Leave to Take Deposition67 of its witnesses who are based in Herbalife London, namely, Mr. Mani Manivannan ("Mr. Manivannan") and Ms. Victoria Palmer ("Ms. Palmer"), which was granted by the Court in its Resolution68 dated July 1, 2013.

During the July 11, 201369 hearing, counsel for petitioner manifested that they have no more witnesses to present other than the witnesses subject of deposition. The Court granted respondent fifteen

(15) days or until July 26, 2013, to file a motion for reconsideration of its Resolution dated July 1, 2013, while counsel for petitioner was granted ten (10) days from receipt thereof to file its comment.70 This was confirmed in Resolution71 dated July 17, 2013. On July 18, 2013, respondent filed her Motion for Reconsiderationn, with petitioner filing a Comment/ Opposition with Urgent Ex Parte Motion to Resolve (To Respondent's Motion for Reconsideration Dated 19 July 2013)73 on July 31, 2013. 62 Records, Vol. 2, p. 707.

63 Records, Vol. 1, Judicial Affidavit ("JA") of Margie B. Alabastro, pp. 301-463, with annexes; Records, Vol. 1, Minutes of Hearing dated September 25, 2012, p. 464. 64 Records, Vol. 2, JA of Ms. ManJ Ann C. Capuchino, pp. 503-597, with annexes; Records, Vol.1, Minutes of Hearing dated October 18,2012, p. 488; Records, Vol. 2, Minutes of Hearing dated January 22,2013, pp. 684-686.

65 Records, Vol. 1, JA of Ms. ManJ Ann C. Capuchino, pp. 477-480, with annex; Records, Minutes of Hearing dated October 18, 2012, pp. 488-489; see Records, Vol. 1, Oath of Commission dated October 18, 2012, p. 490.

66 Records, Vol. 2, Exhibits "WWW" and "WWW-1," JA of Ms. Lina E. Jacob, pp. 598-683, with annexes; Minutes of Hearing dated January 22, 2013, pp. 684-686; Minutes of Hearing dated May 15, 2013, p. 796. 67 Id. at 797-803.

68 I d. at 806.

69 I d., Minutes of Hearing dated July 11, 2013, p. 807. 7o Id.

71 Id. at 816.

72 Records, Vol. 2, pp. 808-814.

73 Records, Vol. 2, pp. 833-844.

On July 24, 2013, petitioner filed a Compliance (To Order Made in Open Court on 11 July 2013)74, submitting a copy of questions addressed to Mr. Manivannan and Ms. Palmer, which was noted75 by the Court.

In response thereto, respondent filed a Comment/ Opposition (With Motion to Strike-Off the Record the alleged Compliance filed by petitioner)76 on August 1, 2013. On August 13, 2013, petitioner, through Ms. Alabastro, received the Final Decision on Disputed Assessment ("FDDA")77, which denied petitioner's protest to the FAN due to its failure to present books and other records, in violation of Section 3.1.5 of Revenue Regulations ('RR") No. 12-1999.

On August 16, 2013, petitioner filed an Omnibus Motion to Resolve and Urgent Ex-Parte Motion for the Issuance of an Amended 1 July 2013 Resolution Granting Leave to Take Deposition ("Omnibus Motion")78, which was granted in a Resolution79 dated August 23, 2013.

During the August 29, 2013 hearing, counsel for respondent manifested that he would file the appropriate pleading relative to the Resolution of the Court dated August 23, 2013, insofar as the filing of respondent's cross written interrogatories, which the Court noted. so As regards petitioner's Omnibus Motion, the same was granted insofar as the prayer therein to amend the July 1, 2013 Resolution to specifically indicate that the petitioner was granted leave to take the testimony of Mr. Manivannan and Ms. Palmer by Oral Deposition on September 3 and 4, 2013, at the Philippine Embassy in London, United Kingdom.Bl These were confirmed in the Court's Resolution82 dated September 3, 2013.

On September 10,2013, petitioner's General Manager Ms. Jacob, filed a letter to the BIR Revenue Region No. 8 Makati, informing it that it already commenced judicial action.s3 This was reiterated by 74 Id. at 820-827.

75 I d. at 832.

76 Id. at 845-850.

77 BIR Records, Exhibit "R-14-c," pp. 1393-1398. 78 Records, Vol. 2, pp. 851-857.

79 I d. at 859-863.

8° I d., Minutes of Hearing dated August 29, 2013, p. 864. 81 Id.

82 I d. at 866-867.

83 BIR Records, Exhibit "R-1," pp. 1417-1418. ( petitioner's counsel, through a letter84 dated September 12, 2013, informing respondent that petitioner already instituted an appeal before the Court.

On September 13, 2013, the Court issued a Resolutionss amending the July 1, 2013 Resolution to specifically indicate that petitioner was granted leave to take the testimony of its witnesses, with the required additional details.

During the hearing on November 25, 2013, counsel for petitioner manifested that they were able to depose their last two (2) witnesses on September 3, 2013.86 However, they have not yet received the consularized copy of the transcript from the Department of Foreign Affairs ("DFA").s7 On March 10, 2014, the DFA- Office of Legal Affairs filed with the Court its Endorsement88, with attached transcripts89 of the depositions of Mr. Manivannan and Ms. Palmer taken on September 3 and 4, 2013, together with the requisite Certifications9o executed by Consul Voltaire O.C. Mauricio of the Embassy of the Philippines in London.

During the hearing on March 13, 2014, counsel for petitioner moved for the admission of the Depositions of Mr. Manivannan and Ms. Palmer that were transmitted by the DFA to the Court.91 Counsel for respondent was granted fifteen (15) days to file her Comment, while counsel for petitioner was granted ten (10) days from receipt thereof to file a reply.92 Thereafter, the incident shall be deemed submitted for resolution.93 Petitioner was also granted thirty (30) days from receipt of the Resolution on the admission of the subject Depositions to file its Formal Offer of Evidence ("FOE"), while counsel for respondent was granted fifteen (15) days from receipt thereof to file 84 Id. at 1457-1460.

85 Records, Vol. 2, pp. 869-870 86 I d., Minutes of Hearing dated November 25, 2013, p. 873. s7 Id.

88 I d. at 886.

89 I d. at 888-936 and 938-944.

90 Id., at 887 and 937.

91 Records, Vol. 2, Minutes of Hearing dated March 13, 2014, p. 947. 92 Id.

93 Id.

I

Page 11 o£55 a comment.94 This was later confirmed in a Resolution95 dated March 20, 2014.

On March 28, 2014, respondent filed by registered mail her Comment/Opposition96 to the admission of the depositions of Mr. Manivannan and Ms. Palmer; while petitioner filed its Reply (To Respondent's Comment/Opposition Dated 28 March 2014)97 on April 7, 2014. The Court resolved to admit the Depositions of Mr. Manivannan and Ms. Palmer in its Resolution98 dated April16, 2014. After being granted an extension,99 on June 6, 2014, petitioner filed its FOE1oo, offering Exhibits "A," "B," "B-1," "C," "D," "E," "F," "G," "H," "I," "J," "J-1," "K" to "K-11," "K-11-1," "L," "L-1," "M," "N" to "N-1," and "0" to "XXX." This was resolved by the Court in its Resolution101 dated July 14, 2014, admitting all except for Exhibits "C," "E," and "G," for failure to present the originals for comparison with the machine copies.

On August 1, 2014, petitioner filed a Motion for Reconsideration (To: Resolution dated 14 July 2014)102, praying for the Court to admit Exhibits "C," "E," and "G" for having complied with the requirements for the presentation of secondary evidence. The Court, in its Resolution103 dated October 22, 2014, denied petitioner's Motion for Reconsideration.

· On August 11, 2014, respondent filed an Urgent Omnibus Motion [a. To Reset Trial Hearing [("Motion to Reset")]; b. To Conduct a

Hearing

before a

Commissioner

[("Motion

Conduct

Commissioner's Hearing")]; and c. To Issue a Subpoena Ad

Testificandum

Respondent's

Witness

[("Motion

Issue

Subpoena")].1°4 The Motion to Reset was considered moot, while the Motion to Conduct Commissioner's Hearing was granted by the Court in its Resolutionlos dated August 18, 2014. The Motion to Issue 94 Records, Vol. 2, Minutes of Hearing dated March 13, 2014, p. 947. 95 Id. at 952-953.

96 Id. at 962-967.

97 Id. at 955-961.

98 I d. at 970-973.

99 See Records, Vol. 2, pp. 974-978 and 980. 1oo Records, Vol. 2, Petitioner's FOE, pp. 981-1005. 101 Id. at 1008-1009.

102 Records, Vol. 3, pp. 1010-1022.

1o3 Id. at 1069-1076.

104 Id. at 1025-1026.

105 Records, Vol. 3, pp. 1031-1032.

(

Subpoena was granted in Resolutionl06 dated December 5, 2014, thereafter, a Subpoena Ad Testificandum107 was issued for Revenue Officer ("RO") Ms. Fatima B. Pre ("Ms. Pre"). Presentation of evidence for respondent ensued, wherein the following witnesses were presented: (1) RO Ms. Pre,tos the RO who handled the continuance of investigation and immediate report of the internal revenue tax case of petitioner; and (2) RO Mr. Emilio 0. Romero ("Mr. Romero")109, the RO who conducted a re-investigation relative to the Letter Protest to the FAN. During the hearing on July 7, 2015,110 counsel for respondent manifested that they have no witnesses to present, thus, he was granted fifteen (15) days to file an FOE, and petitioner was granted the same period to file its comment. Thereafter, the incident shall be deemed submitted for resolution of the Court.111 The Court also granted both parties thirty (30) days within which they shall simultaneously file their respective memoranda.112 These were confirmed by the Court in its Resolution113 dated July 20, 2015. After being granted an extension,114 on August 5, 2015, respondent filed, by registered mail, her FOE115 offering Exhibits "R-1," "R-2 " "R-2-a " "R-3 " "R-3-a " "R-3-b " "R-3-c " "R-4 " "R-4-a " "R-5 "

I

"R-5-a," "R-5-b," "R-6," "R-6-a," "R-6-b," "R-7," "R-7-a," "R-7-b," "R- 7-c," "R-8," "R-8-a," "R-8-b," "R-8-c," "R-9," "R-9-a," "R-9-b," "R-10," "R-10-a," "R-11," "R-11-a," "R-11-b," "R-12," "R-12-a," R-13," "R-13- a," "R-14," "R-14-a," "R-14-b," "R-14-c," "R-15," "R-15-a," "R-16," and "R-16-a." The Court resolved to admit all Exhibits that were formally offered by respondent through its Resolution116 dated September 4, 2015.

106 Id. at 1080.

107 Id.

1os Id., Exhibit "R-15" and "R-15-a," JA of Revenue Officer ("RO") Fatima B. Pre, pp. 1198-1207; Minutes of Hearing dated April13, 2015, p. 1148. 109 Id., Exhibits "R-16" and "R-16-a," JA afRO Emilio 0. Romero, pp. 1210-1215. 11o Id., Minutes of Hearing dated July 7, 2015, p. 1175. 111 Records, Vol. 3, Minutes of Hearing dated July 7, 2015, p. 1175. 112 I d.

113 Id. at 1177-1178.

114 See Records, Vol. 3, pp. 1180-1184. 115 Records, Vol. 3, Respondents' FOE, pp. 1186-1196. 116 Id. at 1234-1235.

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On October 7, 2015, petitioner filed a Motion for Extension to File Petitioner's Memorandum,117 which was granted by the Court in its Resolution11s on October 19, 2015.

On November 10, 2015, petitioner filed by registered mail a Memorandum for the Petitioner Ad Cautelam119; while respondent failed to file her memorandum per Records Verification Reports issued by the Court's Judicial Records Division dated October 20, 2015120, November 23, 2015121, and December 2, 2015122. Thereafter, the Court resolved to submit the case for decision through its Resolution123 dated December 4, 2015; hence, this Decision.

The Issues124

The parties submit to the Court the following issues: 1.

WHETHER THE COURT HAS JURISDICTION OVER

THE INSTANT CASE; AND 2.

WHETHER THE ASSESSMENTS FOR PETITIONER'S

ALLEGED DEFICIENCY TAXES AMOUNTING TO ONE HUNDRED

TWELVE MILLION FIVE HUNDRED SIXTY-EIGHT THOUSAND

EIGHT

HUNDRED

FIFTY-SIX

AND

50/100

PESOS

(PHP112,568,856.50) WERE ISSUED IN ACCORDANCE WITH LAW AND REGULATIONS.

Petitioner's Arguments

Petitioner claims that respondent erred in disallowing expenses due to non-withholding of taxes; that the discrepancy in the amount stated under the heading of "professional and management fees" represents payment made to a recruitment agency that was already subjected to EWT per the Alphalist and the professional and 117 Records, Vol. 3, pp. 1236-1250, with annexes. 118 I d. at 1252.

119 Id., Memorandum for the Petitioner Ad Cautelam, pp. 1255-1296. 12o Id. at 1253.

121 Id. at 1254.

122 I d. at 1298.

123 Records, Vol. 3, p. 1300.

124 Records, Vol. 1, PTO, pp. 467-468. r management fees paid to general professional partnerships ("GPP"), which is not subject to withholding tax. It further maintains that respondent failed to discharge the burden of proving the taxability of the unaccounted expenses; that under-declaration of an expense is not prohibited by law, what the law prohibits is to claim a deduction beyond the amount authorized therein; that respondent erred in computing its unsupported expenses; that it was able to adduce sufficient proof to substantiate the deductions claimed through the various official receipts ("OR"), journal/ cash vouchers, and petty cash vouchers; that pursuant to BIR Ruling DA 238-03, the absence of original receipts or records does not prevent a taxpayer from proving, by other evidence, that the claimed deduction was really paid or incurred; that respondent erred in subjecting royalties and production bonuses paid to non-resident distributors and interest expense to VAT; that pursuant to Section 4.114 ofRR No. 2-98, as amended by Section 7 ofRR No. 14-02, only payments to non-residents for services rendered in the Philippines are subject to Final Withholding of VAT; and that it kept and preserved its records as required by law and regulations, thus negating the Php50,000.00 penalty assessed against it.

Respondent's Counter-Arguments

In her Answer, respondent argues that the Court has no jurisdiction over the instant Petition for Review because it has become final, executory and demandable for failure of petitioner to submit the required documents in support of its protest, within the sixty (60) day period from filing of its protest; that even assuming that the Court has jurisdiction, petitioner failed to substantiate or controvert by substantial evidence the BIR factual findings, as shown under the Details of Discrepancies attached to the FAN and Letter of Demand dated August 26, 2011; that she has fully complied with the due process requirement mandated under Section 228 of the 1997 NIRC, as amended and RR No. 12-99; that the assessments issued against petitioner for deficiency IT, VAT, EWT, WTC, FWT, FWT - VAT, DST and Compromise Penalty .for CY 2007 were made in accordance with law and regulations; and that all presumptions are in favor of the correctness of tax assessments.

(

The Ruling of the Court

At the outset, the Court finds the need to determine whether it has jurisdiction over the instant Petition for Review. The Court has jurisdiction over the Petition for Review.

Respondent claims that the Court has no jurisdiction over the Petition for Review because the assessment has become final, executory, and demandable for failure of petitioner to submit the required documents within sixty (60) days after the filing of its protest. The Court does not agree.

Section 228 of the 1997 NIRC is instructive, to wit: Sec.

228.

Protesting of Assessment.

When the

Commissioner or his[/her] duly authorized representative finds that proper taxes should be assessed, he[/ she] shall first notify the taxpayer of his[/her] findings: Provided, however, That a pre-assessment notice shall not be required in the following cases:

XXX

The taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void.

Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his[/her] duly authorized representative shall issue an assessment based on his findings.

Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final. (

If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by th~ decision or inaction may appeal to the Court of Tax Appeals within thirty

(30) days from receipt of said decision, or from the lapse of the one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable.125 Records disclose that petitioner received the FAN dated August 26, 2011 on September 1, 2011,126 On September 29, 2011, the Assessment Division of BIR Revenue Region No. 8 received petitioner's letter protest,127 together with the documentary evidence attached to it. However, on account of respondent's inaction, petitioner filed the instant Petition for Review on April26, 2012,128 Respondent argues that petitioner failed to submit documentary evidence in support of its protest, petitioner on the other hand, insists that it already filed the documents in support of its protest together with its letter protest.

In CIR v. First Express Pawnshop Company, Inc.,129 the term "relevant supporting documents" should be understood as those documents necessary to support the legal basis in disputing a tax assessment, as determined by the taxpayer. The BIR can only request the taxpayer to submit additional documents but cannot demand what type of supporting documents should be submitted. Otherwise, a taxpayer will be at the mercy of the BIR, which may require the production of documents that a taxpayer cannot submit. Applying this to the instant case, petitioner already submitted the documents it deems sufficient to support its claim when it filed its protest to the FAN. Hence, the tax assessment cannot be considered as final, executory and demandable.

Furthermore, under Section 228 of the 1997 NIRC, if the protest is not acted upon within one hundred eighty (180) days from submission of supporting documents, the taxpayer adversely affected by the inaction may appeal to the CTA within thirty (30) days from the lapse 125 Underscoring ours.

126 Records Box 1, Petitioner's FOE, Exhibit "A;" BIR Records, Exhibit "R-1;" Records, Vol. 1, JSFI, p. 284. 127 Records Box 1, Petitioner's FOE, Exhibits "B" and "B-1;" Records, Vol. 1, JSFI, p. 284. 128 Records, Vol. 1, JSFI, p. 284.

129 G.R. Nos. 172045-46, June 16, 2009, 589 SCRA 253. \..

( of the one hundred eighty (180)-day period. Petitioner filed its administrative protest on September 29, 2011130, together with the documentary evidence attached to it, thus, respondent had until March 27, 2012 to act on petitioner's administrative protest but it failed to do so. Thus, due to the inaction of respondent, petitioner had thirty

(30) days from March 27,2012 or until April26, 2012 to file its judicial protest. Consequently, the Court holds that the instant Petition for Review filed on April 26, 2012 was timely filed. The assessments relating to petitioner's alleged deficiency taxes were issued in accordance with law and regulations.

The Court finds the need to emphasize that tax assessments by tax examiners are presumed correct and made in good faith, and all presumptions are in favor of the correctness of a tax assessment, unless proven otherwise.131 In the case at bar, respondent assessed petitioner for alleged deficiency taxes for CY 2007 in the total amount of Phpll2,586,856.50, broken down as follows:

TAX TYPE

IT

VAT

EWT

WTC

FWT

FWT-VAT

DST

Compromise Penalty

TOTAL

AMOUNT

Php

57,937,101.82 3,922,839.57 767,977.34 309,236.80 40,918,045.57 8,577,939.88 82,715.52 53,000.00

PHP

112,568,856.50 As shown in the table above, petitioner has alleged deficiencies in IT, VAT, EWT, WTC, FWT, FWT-VAT, DST and Compromise Penalty. The Court will now proceed to discuss in detail the merits of the assessment for each type of tax.

130 Records Box 1, Petitioner's FOE, Exhibit "B-1." 131 Commissioner of Internal Revenue v. Hon. Raul M. Gonzalez, Secretary of Justice, et. al., G.R. No. 177279, October 13,2010,633 SCRA 139, citing Rizal Commercial Banking Corporation v. Commissioner of Internal Revenue, G.R. No. 168498, April 24, 2007, 522 SCRA 144, citing Commissioner of Internal Revenue v. Hantex Trading Co., Inc., G.R. No. 136975, March 31, 2005, 454 SCRA 301. (

DEFICIENCY INCOME TAX- Php57,937,101.82 In the FAN132 dated August 26, 2011, petitioner was assessed deficiency IT for taxable year 2007 in the total amount of Php57,937,101.82, inclusive of increments, computed as follows:

DETAILS

AMOUNT

Taxable Income per ITR

[Php]

9,377,113.00 Add: Adjustments/ disallowance per investigation Disallowed Expenses due to Non-withholding (Schedule 1)

Unaccounted Expenses (Schedule 2)

[Php]

83,987,344.32 3,769,289.73

Unsupported Expenses (Schedule 3)

10,105,563.00

[Ph£]

97,862,197.05 Adjusted Taxable Income per investigation

Basic Income Tax Due

[Phr]

107,239,310.05

[Php]

37,533,758.52 Less: Allowable tax credits/payments

Prior Years' Minimum Corporate Income Tax

Creditable Tax Withheld at Source claimed per return

Total

[Php]

3,281,989.55 630,442.00 3,912,431.55

Less: Excess Credits Carried Over to Succeeding Year

Deficiency Income Tax

630,442.00

[Ph£]

3,281,989.55

[Php]

34,251,768.97 Add: Interest (04.16.08 to 09.30.11)

TOTAL AMOUNT DUE

23,685,332.85 [Ph_pJ 57,937,101.82 Section 34 of the 1997 NIRC allows taxpayers to deduct business expenses from their gross income. Section 34 provides as follows: 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)(l), there shall be allowed the following deductions from gross income;

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

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

(i) A reasonable allowance for salaries, wages, and other forms of compensation for personal services actually rendered, including the 132 Records Box 1, Petitioner's FOE, Exhibit "A;" BIR Records, Exhibit "R-1." ( grossed-up monetary value of fringe benefit furnished or granted by the employer to the employee: Provided, That the final tax imposed under Section 33 hereof has been paid; (ii) A reasonable allowance for travel expenses, here and abroad, while away from home in the pursuit of trade, business or profession; (iii) A reasonable allowance for rentals and/ or other payments which are required as a condition for the continued use or possession, for purposes of the trade, business or profession, of property to which the taxpayer has not taken or is not taking title or in which he has no equity other than that of a lessee, user or possessor; (iv)

A

reasonable allowance for entertainment, amusement and recreation expenses during the taxable year, that are directly connected to the development, management and operation of the trade, business or profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his or its trade, business or exercise of a profession not to exceed such ceilings as the Secretary of Finance may, by rules and regulations prescribe, upon recommendation of the Commissioner, taking into account the needs as well as the special circumstances, nature and character of the industry, trade, business, or profession of the taxpayer: Provided, That any expense incurred for entertainment, amusement or recreation that is contrary to law, morals public policy or public order shall in no case be allowed as a deduction.

(b) Substantiation Requirements.- No deduction from gross income shall be allowed under Subsection (A} hereof unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (i) the amount of the expense being deducted, and (ii) the direct connection or relation of the expense being deducted to the development, management, operation and/ or conduct of the trade, business or profession of the taxpayer. Respondent disallowed certain expenses due to the following:

(1) non-withholding; (2) unaccounted expenses; and (3) unsupported ( expenses. The Court will now delve into the reasons why these expenses were disallowed.

A. Disallowed Expenses Due to Non-Withholding- Php83,987,344.32 Respondent disallowed133 the first type of expenses amounting to Php83,987,344.32, for the following reasons:

DETAILS

1.) Expanded Withholding Tax (WE) 1.a) Professional and Management Fees 1.b) Payment to Contractors by Top 10K- Services 1.c) Payment by Top 10K- Goods

Sub-total

Less: Acquisition of Prop. & Eqpt.

Total

2.) Withholding Tax on Compensation (WTC) 2.a) Salaries and Wages 3.) Final Withholding Tax (FWT)

TOTAL

AMOUNT

[Php]

[Ph£]

[PHP]

1,464,269.00 6,185,661.27 17,087,895.00 24,737,825.27 17,087,895.00 7,649,930.27 727,797.05 75,609,617.00 83,987,344.32 l.a) Professional and Management Fees (PMF")- Php1,464,269.00 PMF represents fees paid to the search firm fees, audit fees, legal fees, and discrepancy, which were allegedly not subjected to withholding tax and are not supported with documents, hence, disallowed by the respondent. The PMF is broken down as follows:

DETAILS

Search Firm Fee

Audit Fees

Legal Fees

Difference

TOTAL

AMOUNT

Php

1,100,000.00 239,268.00 125,000.00 1.00 PHP 1,464,269.00 Petitioner alleges that payments made to the recruitment agency, Kapient Philippines, Inc. ("KPI"), is the fee made for the placement of Mr. Enrico Garcia ("Mr. Garcia") as its general manager. Petitioner 133 Records Box 1, Petitioner's FOE, Exhibit "A;" BIR Records, Exhibit "R-1." r

Page 21 o£55 presented billing invoices, check vouchers (" CV s") and official receipts134 ("ORs") to support this claim. It also alleges that payments made to Manabat Sanagustin & Co. ("Manabat") and Britanico Sarmiento Franco & Associates ("Britanico"), which are both general professional partnerships ("GPP"), are not subject to EWT pursuant to Section 2.57.5 of RR No. 2-98, as amended. A perusal of the documentary evidence submitted to the Court shows that payment to KPI was properly subjected t<? 2% withholding tax as evidenced by BIR Form No. 1604-£135, Alphalist of Payees Subject to EWT136, CVs137 and 0Rs138. Hence, respondent cannot enforce the said assessment against petitioner. On the other hand, payments made to Manabat and Britanico, are exempt from withholding tax pursuant to Section 26139 of the 1997 NIRC in relation to Section 2.57.5140 of RR No. 2-98141, as amended. However, after a review of the documentary evidence submitted to the Court, it was discovered that out of the amounts in question, only Php168,000.00 and Php124,234.00 for Manabat and Britanico, respectively, are supported by valid documents142. 134 Records, Vol. 3, Memorandum For the Petitioner Ad Cautelam, item no. 24, p. 1260. 135 Records Box 1, Petitioner's FOE, Exhibit "f." 136 I d., Exhibit "J-1," p. 38 of 39.

mId., Exhibit "S-78."

138 Id., Exhibit "S-79."

139 "SEC. 26. Tax Liabilih; of Members of General Professional Partnerships. - A general professional partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities. For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership." 140 "SECTION 2.57.5. Exemption from Withholding. - The withholding of creditable withholding tax prescribed in these Regulations shall not apply to income payments made to the following:

(A) XXX

(B) Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special, such as but not limited to the following:

(1) XXX

(⁴) General Professional Partnerships; xxx" 141 Implementing Republic Act No. 8424, An Act Amending the National Internal Revenue Code, as Amended" Relative to the Withholding on Income Subject to the Expanded Withholding Tax and Final Withholding Tax, Withholding of Income Tax on Compensation, Withholding of Creditable Value-Added Tax and Other Percentage Taxes, effective January 1,1998. 142 Manabat Sanagustin & Co.

OR NO.

OR AMOUNT

OR# 9670

Php

16,800.00

OR# 9344

16,800.00

OR# 9343

16,800.00

OR# 9232

16,800.00

OR DATE

11/19/2007 10/4/2007 10/4/2007 8/21/2007

EXHIBIT

S-70

S-67

S-64

S-61

(

Thus the Court upholds the assessment on PMF but in the reduced amounts of Php71,268.00143 for Manabat and Php766.00144 for Britanico.

l.b) Payment to Contractors by Top 10K (Services)- Php6,185,661.27 Based on the evaluation conducted by the ICPA of petitioner's reconciliation schedule145 and the voluminous CVs, journal vouchers ("JVs") and ORs, it appears that respondent's assessment of petitioner's income payments to contractors by the top 10,000 corporations for purchases of services can be accounted for as follows:146

DETAILS

A. Advertising

1. Giveaways

2. Reimbursement to Employees

Sub-total

B. Transportation and Travel

1. Intercompany Billings

2. Reimbursement to Employees

Sub-total

C. Communication Light and Water

1. Intercompany Billings

2. Reimbursement to Employees

Sub-total

D. Miscellaneous Expenses

1. Reimbursement to Employees

2. Local Taxes and Other Fees

Sub-total

E. Warehousing Fees Lodged under Rentals F. Rentals Lodged under Miscellaneous Expenses G. Payments to Various Insurance Companies

OR#9116

16,800.00

OR#9115

16,800.00

OR# 9001

16,800.00

OR# 8674

16,800.00

OR# 8651

16,800.00

OR# 8508

16,800.00

TOTAL

PHP

168,000.00

Britanico Sanniento Franco & Assodates

OR NO.

OR AMOUNT

OR# 0508

Php

8,848.00

OR # 0402

21,840.00

OR # 0273

93,546.00

TOTAL

PHP

124,234.00 143 Php239,268.00 less Php168,000.00.

144 Php125,000.00 less Php124,234.00.

145 Records Box 1, Exhibit "U."

146 Records Box 4, Exhibit "UUU," ICPA Report p. 33 7/5/2007 7/5/2007 5/31/2007 3/30/2007 3/8/2007 1/26/2007

OR DATE

10/19/2007 3/30/2007 1/22/2007

AMOUNT

Php

Ph£

Php

Ph£

Php

Ph£

Php

PhE

S-58

S-55

S-52

S-50

S-47

S-44

EXHIBIT

S-39

S-37

S-18

2,299,318.08 87,889.15 2,387,207.23 151,931.09 457,802.33 609,733.42 212,161.04 8,403.46 220,564.50 8,641.00 67,820.00 76,461.00 913,590.76 (231,715.51} (

1. Maxicare Healthcare

2. United Coconut Planters Life Assurance, Inc.

3. AON Philippines, Inc.

4. Erroneous Booking - Over

Sub-total

H. Employee Training Cost I. Staff Functions

Php

Ph£

447,546.74 60,139.41 31,190.32 1,086.63 539,963.10 102,935.71 1,566,921.05

TOTAL

PHP

6,185,661.26147 l.b.A.l) Advertising- Giveaways- Php2,299,318.08 Petitioner alleged that the giveaways were not purchased from any local supplier but were instead inventory products of the company given to its distributors.148 To support its claim, petitioner submitted its General Journal ("GJ") Standard Journal Entry, Inventory Adjustments Schedule, Reclassification Schedule149 and P & E Request Form150.

The Court holds that the above are insufficient to refute the assessment. Journal entries and schedules cannot stand alone to invalidate the assessment. Likewise, P & E Request Form is not, in any way, a relevant document to corroborate the schedules and journal entries. Thus, the Court upholds the assessment for advertising giveaways amounting to Php2,299,318.08. l.b.A.2) Advertising- Reimbursement to Employees- Php87,889.15

Petitioner

maintains that this payment pertains to reimbursements to employees for production, photographic, advertising, promotion and sample costs which were traceable to specific employees; that being reimbursements, it is not in the nature of income payments; and thus it is not subject to EWT.151 Records show that out of Php87,889.15152, only Php52,994.15 is supported by valid documents, while Php34,895.00 should be disallowed for the following reasons, to wit: 147 Rounding off difference of .01 148 Records, Vol. 3, Memorandum For the Petitioner Ad Cautelam, item no. 27, p. 1261. 149 Records Box 1, Exhibits "V-001" to "V-032." 1so Id., Exhibits "V-033" to "V-148."

151 Records, Vol. 3, Memorandum For the Petitioner Ad Cautelam, item no. 27, p. 1261. 152 Records Box 1, Petitioner's FOE, Exhibit "U-01." (

DATE

DESCRIPTION

AMOUNT

EXHIBIT

REASON

11/29/2006

Toll Fees

Php

167.00

W-03

Outside the period of Claim 12/1/2006

Toll Fees

167.00

W-03

Outside the period of Claim

Gasoline

1,100.00

W-04

Without Supporting Invoice/OR

11/30/2006

Gasoline

85.00

W-05

Outside the period of Claim 11/29/2006

Meals

312.00

W-06

Outside the period of Claim 11/29/2006

Meals

234.00

W-07

Outside the period of Claim

Meals

566.40

W-06

Tape Receipt not readable 2/22/2007

Production

5,000.00

W-10

Supported by Liquidation Form only 4/30/2007

Photographic

1,500.00

W-11

Supported by Journal Voucher only 7/31/2007

Production

4,095.00

W-33

Supported by Journal Voucher only 5/31/2007

Production

2,197.00

W-24

Supported by Journal Voucher only 6/30/2007

Awards/ Recognition

7,063.00

W-30

Supported by Journal Voucher only 11/30/2007

Promotion

5,400.00

W-37

Supported by Journal Voucher only 11/30/2007

Samples

5,429.80

W-40

Supported by Journal Voucher only 9/30/2007

Samples

688.80

W-44

Supported by Journal Voucher only 8/31/2007

Production

890.00

W-42

Supported by Journal Voucher only

TOTAL

PHP

34,895.00 l.b.B.l) Transportation and Travel- Intercompany Billings- Php151,931.09 This item pertains to payments to affiliates on airfare, meals and meeting expenses incurred particularly by the following:

NAME OF AFFILIATE

Herbalife Australia PTY. Ltd.

Herbalife Taiwan

Herbalife International Singapore, Inc. Herbalife International Communications, Inc.

TOTAL

AMOUNT

EXHIBIT

Php

65,356.44 "UUU," Annex D 41,928.98 "UUU," Annex D 35,413.48 "UUU," Annex D 9,232.19 "UUU," Annex D -==-=-c''-=--:-::-::- PHP 151,931.09 Scrutiny of the evidence shows that the amount of Php67,921.86 should be disallowed because it was only supported by billing statements, to wit:

DATE

AFFILIATE

REASON

8/31/2007 Herbalife International Singapore, Inc. 9/30/2007 Herbalife Australia Pty. Ltd.

7/31/2007 Herbalife Australia Pty. Ltd.

AMOUNT

Php

35,413.48 27,666.88 4,841.50

EXHIBIT

X-11

X-15

X-18

Supported by Billing Statement Only

TOTAL

PHP

67,921.86 l.b.B.2) Transportation and Travel - Reimbursement to Employees - Php457,802.33 The Court agrees with the findings of the ICPA that out of the Php457,802.33153, only Php258,180.97154 is substantiated; while the remaining amount of Php199,621.36155 is backed up by cash vouchers 153 Records Box 1, Petitioner's FOE, Exhibits "U-10" to "U-18." 154 Id., Exhibits "Y-001" to "Y-306."

155 Id.

( and/ or petty cash vouchers ("PCV") only. Thus, the amount Php199,621.36 should be disallowed for not being properly supported. l.b.C.l) Communication, Light and Water - Intercompany Billings - Php212,161.04 Based on the ICPA report, the amount Php212,161.04156 pertains to reimbursement payments to Herbalife Australia PlY Ltd., on telecommunication expenses.157 Petitioner submitted JVs and billing statements, which are insufficient to support petitioner's claim. The Court requires substantial evidence such as ORs and/ or invoices, hence, the assessment amounting to Php212,161.04 is upheld. l.b.C.2) Communication, Light and Water- Reimbursements to Employees- Php8,403.46 This amount pertains to employee reimbursements for telephone expenses.158 Out of the said amount, Php1,426.68 is supported by JVs and CVs without ORs and/ or invoices,159 However, upon scrutiny of the invoices and 0Rst6o supporting the amount Php6,976.7816t, they do not contain relevant information such as the year when the transactions took place, and/ or they were not in the name of the petitioner. Moreover, the submitted OR/invoices do not pertain to telephone expenses but to food items, grocery items, transportation, etc. Therefore, these documents do not support petitioner's allegations. Thus, the Court upholds in toto the assessment on this category in the amount of Php8,403.43.

l.b.D.l) Miscellaneous Expenses -

Reimbursement to Employees -

Php8,641.00 Miscellaneous expenses refer to donations, notarial, and postage fees,162 broken down as follows:

156 I d., Exhibit "U-20" 157 Records Box 4, ICPA Report, Exhibit "UUU." 158 Id.

159 I d. at 36.

160 Records Box 1, Petitioner's FOE, Exhibits "AA-01" to "AA-28." 161 Php8,403.46 less Php1,426.68.

162 Records Box 4, Petitioner's FOE, Exhibit "UUU." (

DETAILS

AMOUNT

Donations

Php

4,000.00

Notarial Fees

1,725.00

Postage Fees

2,916.00

TOTAL

PHP

8,641.00 As noted by the ICP A, the donations and notarial fees amounting to Php4,000.00 and Php1,725.00, respectively, were supported by JVs and/ or CVs only163, and should be disallowed. The remaining Php2,916.00 pertaining to postage fees was supported by acknowledgement receipts164, which is not a significant document, thus, should also be denied. Thus, the Court upholds the assessment amounting to Php8,641.00.

l.b.D.2) Miscellaneous Expenses -

Local Taxes and Other Fees -

Php67,820.00 This pertains to payments to the Bureau of Food and Drugs ("BFAD"), City of Makati and City of Lucena for the renewal fees of the company's products, community tax certificate (" CTC") and filing fees.165 The ICP A notes that only Php62,120.00 is supported with ORs while Php⁵,700.00 is supported only with CVs and/ or PCVs,166 However, upon further examination by the Court of the documents presented, out of the Php62,120.00, only Php26,145.00 is actually supported by valid documents, to wit:

PAYEE

PARTICULARS

AMOUNT

City of Makati

Community Tax Certificate

Php

10,500.00

City of Makati

Certificate Fee

45.00

City of Makati

Filing Fee

100.00

BFAD

Renewal

8,000.00

BFAD

Renewal

6,000.00

BFAD

Transfer of location 1,000.00 Brgy. San Lorenzo Clearance 500.00

TOTAL

PHP

26,145.00 163 Id. at 37.

164 Records Box 1, Petitioner's FOE, Exhibits "BB-31," "BB-43," and "BB-53." 165 Records Box 4, Petitioner's FOE, Exhibit "UUU," p. 37. 166 Id.

EXHIBIT

BB-35

BB-38

BB-39

BB-45

BB-47

BB-50

Page 27 o£55 As a result, the assessment on local taxes and other fees amounting to Php41,675.00167 is sustained. l.b.E) Warehousing Fees Lodged Under Rentals- Php913,590.76 Payments for warehousing fees lodged under rentals amounting to Php913,590.76 pertain to payments to Lambert Williams Logistics, Inc. ("L WLI") for warehousing freight and freight charges which were lodged under "other rent- warehousing."168 An examination of the documents presented shows that petitioner paid LWLI for warehousing services in the amount of Php2,048,610.23169, while the amount subjected to 2% EWT for LWLI based from the alphalist is Php2,908,922.50170. Consequently, the Court concludes that warehousing fees were all subjected to 2% EWT, hence, this assessment is cancelled.

l.b.F) Rentals Lodged Under Miscellaneous Expenses- (Php231,715.51) The ICP A was unable to determine the nature of the rentals (with credit balance) lodged under miscellaneous expense amounting to (Php231,715.51), which was considered by the BIR as a deduction from the amount of non-deductible rental expense.171 Similarly, BIR did not provide any basis for this finding. Therefore, this item is cancelled. l.b.G) Payments to Various Insurance Companies- Php539,963.10 167 Php5,700 plus (Php62,120.00 less Php26,145.00) 16s Jd.

169

CUSTOMER

Lambert Williams Logistics, Inc.

Total Amount Per OR

OR NUMBER

7587 7856 7938 8107 8171 8348 8542 8714 8858 9085

AMOUNT PER OR

EXHIBIT

Php

180,335.64

CC-02

172,196.10

CC-07

175,454.02

CC-11

207,896.04

CC-18

1%,614.34

CC-24

236,813.89

CC-29

205,726.52

CC-34

239,822.56

CC-39

218,961.85

CC-47

214,789.27

CC-53

Php

2,048,610.23 Total Amount Subjected to EWT per BIR Form 1604-E 2,908,922.50

DIFFERENCE

PHP

(860,312.27) 170 Records Box 1, Petitioner's FOE, Exhibit "J-1," p. 38 of 39. 171 Records Box 4, Petitioner's FOE, Exhibit "UUU," p. 38. cJ

Payments to various insurance companies such as Maxicare Healthcare (Php447,546.74), United Coconut Planters Life Assurance, Inc. (Php60,139.41) and AON Philippines, Inc. (Php31,190.32) represent group personal accident and life insurance policies for its employees. The ICPA noted that petitioner erroneously over-booked the said account in the amount of Php1,086.63. Careful examination of the documents presented shows that petitioner was able to provide substantial and corroborating evidence to refute respondent's assessment with regard to payment to insurance companies, in the amount of Php538,876.47172. l.b.H) Employee Training Cost- Php102,935.71 The ICP A noted that petitioner made an accrual in the amount of Php220,000.00 for employee trainings and made a reversal at year- end in the amount of Php117,064.29.173 In effect, actual expense for employee trainings amounted to Php102,935.71174. However, upon examination of the evidence submitted, petitioner presented only JVs17S as supporting documents for the actual expenses for employee training costs. Thus, the assessment in the amount of Php102,935.71 is sustained. l.b.I) Staff Functions- Php1,566,921.05 As noted by the ICPA176, the staff functions amounting to Php1,566,921.05 represents other employee cost, as enumerated in the table below:

172

NAME OF ISSUER

ORNO.

AMOUNT

Maxicare Healthcare

022179v

Php

Maxicare Healthcare

022180v

Maxicare Healthcare

024797v

Maxicare Healthcare

023957v

Cocolife

63661

AON Philippines

15429

AON Philippines

16674

Total

Php

Over-booked expense

TOTAL

PHP

173 Records Box 4, Petitioner's FOE, Exhibit "UUU," p. 38. 174 Php220,000.00 less Php117,064.29.

175 Records Box 1, Exhibits "EE-01" to "EE-24." 176 Records Box 4, Petitioner's FOE, Exhibit "UUU," p. 38. 389,436.00 27,527.74 6,811.52 23,771.48 60,139.41 20,682.92 10,507.40 538,876.47 1,086.63 539,963.10

EXHIBIT

DD-02

DD-11

DD-15

DD-18

DD-23

DD-29

(

ACCOUNT DESCRIPTION

1. Optical and Dental/Medical Allowance

2. Birthday and Meal Allowance

3. Uniform Allowance

4. Service Award

5. Marriage Benefits

6. Other Employee Reimbursements

7. Contribution to Retirement Fund

8. Accrued Employment Cost

Less: Adjustments

TOTAL

AMOUNT

Php

200,198.24 44,261.45 98,796.18 44,238.15 9,000.00 132,813.71 440,418.00 605,687.50

Php

1,575,413.23 8,492.18

PHP

1,566,921.05 l.b.I.l) Optical and Dental/Medical Allowance- Php200,198.24 Findings of the ICPA reveal that out of Php200,198.24, only Php199,116.09 is properly supported by JV, CVs and 0Rs.l77 The difference of Php1,082.15 is supported by CVs and PCVs only. Upon further examination of the documents presented, the Court finds that optical, dental and medical allowance amounting to Php23,249.83 should likewise be denied for the following reasons:

CUSTOMER

DATE

AMOUNT

EXHIBIT

REASON

Mercury Drug Corp.

Php

65.20

FF-004

Undated Tape Receipt

Mercury Drug Corp.

- 84.25

FF-005

Undated Tape Receipt

Mercury Drug Corp.

- 464.40

FF-005

Undated Tape Receipt

Mercury Drug Corp.

- 101.50

FF-005

Undated Tape Receipt

Mercury Drug Corp.

- 293.25

FF-005

Undated Tape Receipt

Mercury Drug Corp.

- 133.93

FF-005

Undated Tape Receipt

Mercury Drug Corp.

- 160.00

FF-005

Undated Tape Receipt

Mercury Drug Corp.

- 112.10

FF-006

Undated Tape Receipt

Farmacia Lily & Gen. Mdse.

2/12/2007 90.00

FF-006

Without Name of Payee

Farmacio San Lazaro

2/16/2007 65.37

FF-010

Without Name of Payee

Farmacia Lily & Gen. Mdse.

3/30/2007 80.25

FF-031

Without Name of Payee

Mercury Drug Corp.

- 610.00

FF-035

Undated Tape Receipt

Padova Pharmacy

2/23/2007 105.00

FF-052

Without Name of Payee

Padova Pharmacy

3/11/2007 200.00

FF-056

Without Name of Payee

Sandy Cualing

3/26/2007 207.00

FF-055

Supported by PCV only

Sandy Cualing

3/12/2007 232.00

FF-059

Supported by PCV only

Sandy Cualing

3/26/2007 109.95

FF-062

Supported by PCV only

Cyrial Pharmacy

5/8/2007 170.00

FF-074

Without Name of Payee

Sandy Cualing

5/29/2007 1,082.00

FF-077

Supported by PCV only

Padova Pharmacy

7/1/2007 87.00

FF-081

Without Name of Payee

Padova Pharmacy

8/10/2007 69.00

FF-086

Without Name of Payee

Sandy Cualing

10/1/2007 578.00

FF-089

Supported by PCV only

Sandy Cualing

10/9/2007 716.00

FF-092

Supported by PCV only

Sandy Cualing

10/18/2007 454.00

FF-095

Supported by PCV only R. Legaspi 3/12/2007 1,005.23

FF-111

Supported by PCV only

Winnie Pinpin

1/22/2007 324.00

FF-144

Supported by CV only 177 Records Box 4, Exhibit "UUU," p. 39.

I

Winnie Pinpin

2/2/2007 7,792.70

FF-145

Supported by CV only L. V allijera 9/13/2007 286.50

FF-192

Supported by PCV only L. V allijera 9/24/2007 649.75

FF-195

Supported by PCV only L. V allijera 10/1/2007 655.95

FF-198

Supported by PCV only M. Santiago 1/18/2007 4,344.00

FF-234

Supported by CV only M. Santiago 3/12/2007 511.00

FF-239

Supported by PCV only A. V allejera 3/14/2007 116.00

FF-252

Supported by PCV only A. V allejera 3/28/2007 994.00

FF-257

Supported by CV only A. Zapanta 2/28/2007 300.50

FF-277

Supported by PCV only

TOTAL

PHP

23,249.83 1.b.I.2) Birthday and Meal Allowance- Php44,261.45 ICPA notes that out of the Php44,261.45lodged under birthday and meal allowance, only Php38,295.95 is properly substantiated by CVs, PCVs and 0Rs178 while Php5,965.50179 is backed up by CVs and PCVs only. Therefore, the amount of Php5,965.50 should be denied for not being supported by proper documents. 1.b.I.3) Uniform Allowance- Php98,796.18 As noted by the ICP A 1so, uniform allowance can be broken down (as supported by proper documents, loan receipts and CVs/PCVs) to Php89,165.68, Php2,483.62 and Php7,146.88, respectively.1B1 The Court holds that loan receipts, CV s and PCV s are not proper documents, thus, the amounts of Php2,483.62 and Php7,146.88 should be denied. Upon further examination by the Court, it found that an additional Php22,693.00 should be denied for the following reasons:

CUSTOMER

DATE

AMOUNT

Ferdinand Flores

1/17/2007

Php

15,000.00

Rizhell Rivera

2/28/2007 2,666.75

Karen Rivera

5/15/2007 622.75

Maricar Santiago

1/29/2007 2,000.00

Winnie Pinpin

4/2/2007 1,214.00

Winnie Pinpin

6/13/2007 1,189.50

TOTAL

PHP

22,693.00 1.b.I.4) Service Award- Php44,238.15 178 Records Box 1, Exhibits "GG-01" to "GG-61." 179 Records Box 4, Exhibit "UUU," p. 40. 180 I d. at 41.

1s1 Id.

EXHIBIT

REASON

HH-03

Supported by CV only

HH-07

Supported by CVonly

HH-21

Supported by PCV only

HH-37

Supported by CV only

HH-43

Supported by CVonly

HH-46

Supported by PCV only (

Service awards pertain to trip expenses (gasoline, hotel, meal allowances) granted to employees for the length of service rendered in the company _182 The Court agrees with the findings of the ICP A that expenses amounting to Php149.60 are only supported by CVs and PVCs, while the amount of Php44,088.55 is properly substantiated.JB3 l.b.I.S) Marriage Benefits- Php9,000.00 This pertains to fixed financial incentives given to a newly-wed employees amounting to Php3,000.00 per employee.184 This was awarded to three (3) employees, namely: Veronica Abuel, Karen Rivera and Winnie Pinpin, as supported by Certificates of Marriage and CV slss. Therefore, this assessment is cancelled. 1.b.I.6) Other Employee Reimbursements- Php132,813.71 This pertains to various expenses such as Christmas raffle prizes, anniversary expenses, flowers for burial, etc.JB6 As noted by the ICP A, only Php131,316.75 was supported by proper documents, while Php1,496.96 was supported by CVs and PCVs only.J87 Further inspection of the evidence reveals that an additional amount of Php10,105.71 should be denied for not being supported by proper documents, broken down as follows:

CUSTOMER

Johann Cainglet

Pizzeria

TOTAL

DATE

AMOUNT

EXHIBIT

REASON FOR DISALLOWANCE

12/7/2007

Php

7,625.71 "KK-05 11

Supported by Statement of Account

9/17/2007 2,480.00 "KK-17 11

Supported by Delivery Receipt

PHP

10,105.71 1.b.I.7) Contribution to Retirement Fund- Php440,418.00 This assessment is cancelled since substantial evidence, such as CV, OR, and accrual schedulelss, was provided in order to refute the assessment.

182 Records Box 4, Exhibit "UUU, 11 p. 41.

183 Records Box 1, Exhibits "II-01 II to "II-34. II 184 Records Box 4, Exhibit "UUU, II p. 41. 185 Records Box 1, Exhibits "/J-1 11 to "JJ-6.

11 186 Records Box 4, Exhibit "UUU, II p. 41. 187 Id.

188 Records Box 1, Exhibits "LL-1 II to "LL-3. 11 { l.b.I.B) Accrued Employment Cost- Php605,687.50 This pertains to various accruals for possible employee costs such as travel, gasoline and uniform,189 The Court agrees with the finding of the ICP A that the said accrual may be disallowed as deductions for income tax purposes due to non-withholding. Thus, respondent's assessment on staff functions is sustained but in the reduced amount of Php671,568.57, computed as follows:

ACCOUNT DESCRIPTION

Optical and Dental/ Medical Allowance

Birthday and Meal Allowance

Uniform Allowance

Service Award

Marriage Benefits

Other Employee Reimbursements

Contribution to Retirement Fund

Accrued Employment Cost

Less: Adjustments

TOTAL

AMOUNT

Php

24,331.98 5,965.50 32,323.50 149.60 0.00 11,602.67 0.00 605,687.50

Php

680,060.75 8,492.18

PHP

671,568.57 Based from the foregoing discussion, payments for services to contractors by top lOk corporation amounting to Php3,650,227.71 is disallowed, computed as follows:

DETAILS

A. Advertising

1. Giveaways

2. Reimbursement to Employees

Sub-total

B. Transportation and Travel

1. Intercompany Billings

2. Reimbursement to Employees

Sub-total

C. Communication Light and Water

1. Intercompany Billings

2. Reimbursement to Employees

Sub-total

D. Miscellaneous Expenses

1. Reimbursement to Employees

2. Local Taxes and Other Fees

Sub-total

G. Payments to Various Insurance Companies

4. Erroneous Booking - Over 189 Records Box 4, Exhibit "UUU," p. 42.

AMOUNT

Php

2,299,318.08 34,895.00

Php

2,334,213.08

Php

67,921.86 199,621.36

Php

267,543.22

Php

212,161.04 8,403.46

Php

220,564.50

Php

8,641.00 41,675.00

Php

50,316.00

Ph£

1,086.63 (

Sub-total

H. Employee Training Cost I. Staff Functions

TOTAL

Php

1,086.63

Php

102,935.71

Php

671,568.57

PHP

3,648,227.71 l.c) Payment by Top 10K- Goods- Php17,087,895.00 Respondent computed the above assessment as follows:

DETAILS

AMOUNT

Per ITR/FS

Php

141,469,518.00

Per 1601 E/C/F Alphalist

Discrepancy Per PAN

Adjustment Per Re-investigation

12,564,640.00

Php

128,904,878.00 111,816,983.00

AMOUNT NOT SUBJECTED TO WITHHOLDING

PHP

17,087,895.00

Upon

re-investigation conducted by respondent, importations/shipments from Herbalife Luxemburg in the amount of Phplll,816,983.00 were re-considered in the computation of deficiency taxes since the same was reflected in the VAT returns.190 The Court notes that the assessed amount of Phpl7,087,895.00 was already included by respondent in the computation of disallowed expenses due to non-withholding. Hence, the assessment for this category is cancelled.

2.a) Salaries and Wages- Php727,797.05 The discrepancies found by the respondent are as follows:

DETAILS

AMOUNT

1. Temporary Pay Php 141,313.95191

2. Insurance Retirement Fund 440,418.24192

3. Reconciling Item for Retirement Cost 146,065.00

TOTAL

PHP 727,797.19193 2.a.1) Temporary Pay- Php141,313.95 190 Records Box 1, Formal Assessment Notice, Exhibit "A," Annex "A," par. d. 191 Records Box 4, Exhibit "UUU," Annex S. 192 Id., Annex T.

193 Rounding off difference of .14 (

Temporary pay represents payments to Aljems Andrade, A. Estacio, Louie Aguas, and Rex Tolentino, who are usually hired to do clerical jobs and to fill-in regular workforce.J94 The ICP A noted that payments to Mr. Aljems Andrade ("Mr. Andrade") amounting to Php103,074.40195 for contract labor have exceeded the statutory minimum wage per year of Php60,000.00, and should be subjected to withholding tax on compensation pursuant to Section 2.79 (A) of RR No.2-98, as amended.J96 On the other hand, petitioner maintains197 that the applicable wage order is Wage Order ('WO") No. NCR-12 from January 1 to August 27, 2007 and WO No. NCR -13 from August 28 to December 31, 2007. The minimum wage rate per the afore-cited WOs are Php350.00/ day and Php362.00/ day, respectively; that based on the prevailing minimum wage rates, Mr. Andrade could have earned a total minimum wage for the year 2007 in the amount of Php110,448.00198; and that the actual compensation of Mr. Andrade amounting to Php103,074.40 falls below the minimum statutory wage, thus, not subject to tax.

The Court agrees with petitioner that for the year 2007, the applicable wage orders are WO Nos. NCR-12 and 13. However, the Court disagrees with the petitioner's computation of statutory minimum wage. Records disclose that Mr. Andrade did not work for 26 days a month for 12 months for the year 2007. Based on the evidence on record, Mr. Andrade worked for 220 days only for the entire 2007 and could have earned a statutory minimum wage of Php77,948.00, computed below:

NAME OF

NO. OF

PERIOD

EMPLOYEE

AMOUNT

DAYS

WORKED

Jan.1 to Aug. 27,2007

Aljems Andrade

Php

1,300.00 4 Jan.1 to Aug. 27, 2007

Aljems Andrade

1,894.10 5 Jan.1 to Aug. 27, 2007

Aljems Andrade

2,188.70 4 Jan.1 to Aug. 27, 2007

Aljems Andrade

2,259.80 5 194 Records Box 4, Exhibit "UUU," p. 48. 195 Id., Annex S 196 Id. at49 197 Records, Vol. 3, Memorandum for Petitioner, p. 1267. 198

DETAILS

AMOUNT

Statutory Minimum Wage Gan to Aug 2007)

Php350/day * 26 days/month • 8 months

Php

72,800.00

Statutory Minimum Wage (Aug to Dec 2007)

Php362/ day • 26 days/ month • 4 months

Php

37,648.00

TOTAL

PHP

110,448.00

EXHIBIT

"PP-01" to "PP- 04"

"PP-05" to "PP- 08"

"PP-09" to "PP- 12"

"PP-13" to "PP-15"

(

Jan.1 to Aug. 27, 2007 Jan.1 to Aug. 27, 2007 Jan.1 to Aug. 27, 2007 Jan.1 to Aug. 27, 2007 Jan.1 to Aug. 27, 2007 Jan.1 to Aug. 27, 2007 Jan.1 to Aug. 27, 2007 Jan.1 to Aug. 27, 2007 Jan.1 to Aug. 27, 2007 Jan.1 to Aug. 27, 2007 Jan.1 to Aug. 27, 2007 Jan.1 to Aug. 27, 2007 Jan.1 to Aug. 27, 2007 Jan.1 to Aug. 27, 2007 Jan.1 to Aug. 27, 2007 Jan.1 to Aug. 27, 2007 Jan.1 to Aug. 27, 2007 Jan.1 to Aug. 27, 2007

TOTAL

Aljems Andrade

Minimum Wage @Php350.00 per Day for 141 Days (Per Wage Order No. NCR-12) Aug. 28 to Dec. 31, 2007 Aug. 28 to Dec. 31, 2007 Aug. 28 to Dec. 31, 2007 Aug. 28 to Dec. 31, 2007 Aug. 28 to Dec. 31, 2007 Aug. 28 to Dec. 31, 2007 Aug. 28 to Dec. 31, 2007 Aug. 28 to Dec. 31, 2007 Aug. 28 to Dec. 31, 2007 Aug. 28 to Dec. 31, 2007 Aug. 28 to Dec. 31, 2007 Aug. 28 to Dec. 31, 2007 Aug. 28 to Dec. 31, 2007 Aug. 28 to Dec. 31, 2007 Aug. 28 to Dec. 31, 2007 Aug. 28 to Dec. 31, 2007

TOTAL

Aljems Andrade

PHP

Php

PHP

2,913.70 3,539.40 2,031.30 2,468.00 1,625.00 2,743.70 1,668.70 2,470.50 4,278.30 1,878.90 1,778.90 2,102.30 1,706.30 1,980.50 2,235.90 2,236.90 1,651.40 1,978.90 2,082.00 2,103.40 4,037.10 1,388.90 2,788.90 2,913.70 2,112.50 65,557.70 49,350.00 2,087.10 2,672.60 2,742.20 1,904.30 2,513.70 2,533.00 1,782.40 1,917.00 2,935.20 2,297.90 2,412.10 2,335.90 1,807.80 2,691.40 2,493.40 2,386.70 37,512.70 Minimum Wage @Php362.00 per Day for 79 Days (Per Wage Order No. NCR-13) Total Compensation received by A. Andrade SHOULD BE MINIMUM WAGE OF A. ANDRADE TO BE EXEMPT FROM WTC -_

BLAAE STATE UTUAAHEAVMUBRYARYUUN®H

aaaraanaInt4tgUhraaaa»net

NJ

Ne)

Php

PHP

“PP-16” to “PP- 21”

“PP-22” to “PP- 27”

“PP-28” to “PP- 31”

“PP-32” to “PP- 34”

“PP-35” to “PP- 39”

“PP-40” to “PP- 43”

“PP-44” to “PP- 48”

“PP-49% to “PP- 52”

“PP-53” to “PP- 57”

“PP-58” to “PP- 61”

“PP-62” to “PP- 66”

“PP-67” to “PP- 68”

“PP-69” to “PP- 71”

“PP-72” to “PP- 73”

“PP-74” to “PP- 78”

“PP-79” to “PP- 83”

“PP-84” to “PP- 87”

“PP-88” to “PP- 91”

“PP-92” to “PP- 93”

“PP-94” to “PP- 98”

“PP-99” to “PP- 105”

“PP-106” to “PP- 109”

“PP-110” to “PP- 113”

“PP-114” to “PP- 118”

“PP-119" to “PP- 123”

“PP-124” to “PP- 128”

“PP-129” to “PP- 133”

“PP-134” to “PP- 138”

“PP-139” to “PP- 143”

“PP-144” to “PP- 148”

“PP-149" to “PP- 153”

“PP-154” to “PP- 158”

“PP-159” to “PP- 163”

“PP-164” to “PP- 170”

“PP-171” to “PP- 175”

“PP-174” to “PP- 179”

“PP-180" to “PP- 182”

“PP-183” to “PP- 185”

“PP-184” to “PP- 189”

“PP-190" to “PP- 194”

“PP-195” to “PP- 197”

28,598.00 Php 103,070.40 77,948.00 From the foregoing, the actual compensation of Mr. Andrade in the amount of Php103,070.40 exceeded the minimum wage of Php77,948.00. Thus, the Court upholds the assessment on temporary pay in the reduced amount of Php103,070.40.

2.a.2) Insurance Retirement Fund - Php440,418.24 Insurance retirement fund pertains to petitioner’s provision for the contribution to its funded and non-contributory, defined benefit pension plan.!% The Court agrees with the ICPA that it is the same item lodged under the “Other Employment Cost” account, which pertains

199 Records Box 4, Exhibit “UUU,” p. 49.

to actual contribution to retirement fund supported by ORs and vouchers which was claimed as deduction for income tax purposes.2oo Therefore, this item is cancelled.

2.a.3) Reconciling Item for Retirement Cost- Php146,065.00 This pertains to the additional deductible expense arising from the difference between the retirement cost booked per accounting as against the amount of deductible expense for tax purposes.201 However, no evidence was presented to disprove respondent's allegation, hence, said assessment is sustained. In sum, the assessment on salaries and wages in the amount of Php249,135.40 remains, computed as follows:

DETAILS

Temporary Pay

Reconciling Item for Retirement Cost

TOTAL

·AMOUNT

Php

103,070.40 146,065.00

PHP

249,135.40 3.) Final Withholding Tax ('fFWT")- Php75,609,617.00 Based on the ICP A report202, payments made to non-resident and resident individuals and ~orporations alleged by respondent as not subjected to FWT amounting to Php75,609,617.00203 is comprised of the following items:

DETAILS

a. Royalties - Resident Corporation

b. Royalties- Non-Resident Corporation

c. Production Bonus

d. Interest Expense

e. Management Fees

TOTAL

AMOUNT

Php

41,292,473.00 15,272,477.00 12,116,340.00 4,464,722.00 2,463,605.00 PHP 75,609,617.00 Petitioner alleges that the above amounts are income payments made to resident and. non-resident foreign individuals and corporations per 2007 audited financial statements (" AFS") / income 2oo Jd.

2o1 Id. at 50.

2o2 Id. at 53.

203 Exhibit "A," FAN- Schedule la.

( tax return ("ITR"); and that these are commission expenses and interest payments which have been subjected to withholding tax. Records show that the above accounts were reflected In petitioner's 2007 AFS and annual ITR, as follows:

DETAILS

AMOUNT

EXHIBIT

Royalties

Php

68,681,290.00 0-20

Production Bonus

32,719,766.00 0-20

Interest Expense

4,464,722.00 0-21

Management Fees

2,463,605.00 "I," Line 110

TOTAL

PHP

108,329,383.00 Based on the examination conducted by the Court, the amounts of royalties and production bonus reflected in the AFS in the amount of Php68,681,290.00 and Php32,719,766.00, respectively, are higher than the amount being assessed by the BIR; while the interest expense and management fees are the same amount as indicated in the CY 2007 AFS/ITR against the assessed figures. It appears therefore, that the assessed amounts were already included in the AFS of petitioner. As far as taxable income is concerned, the assessed amount of Php75,609,617.00 was properly recorded in the books of the petitioner, thus, already subjected to the income tax due. In sum, petitioner has disallowed expenses due to non- withholding in the amount of Php3,971,397.11, broken down as follows:

DETAILS

1.a) Professional and Management Fees 1.b) Payment to Contractors by Top 10K- Services 2.a) Salaries and Wages

TOTAL

Unaccounted Expenses- Php3,769,289.73

AMOUNT

Php

72,034.00 3,648,227.71 249,135.40

PHP

3,969,397.11 After re-investigation of the PAN, respondent computed the unaccounted commission expenses as follows: (

DETAILS

Commission Expenses per BIR Forms 1601E

Commission Expenses per ITR/ FS

Unaccounted Commission Expenses

Less: Adjustments per Re-investigation

AMOUNT

Php

124,804,929.73204 15,897,829.00205 108,907,100.73

Production Bonus

Royalties

Php 32,719,766.00 68,681,290.00

Direct Charges - Others

UNACCOUNTED COMMISSION

EXPENSES PER RE-INVESTIGATION

3,736,755.00

Php

105,137,811.00206

PHP

3,769,289.73 As found by the ICP A,207 the unaccounted expenses pertain to the following adjustments made in the company's books:

DESCRIPTION

a. Reversal of over accrued royalties

b. Reversal of aged royalty checks

c. Reversal of over accrued other bonus expense

d. Additional accrual of other bonus expense

e. Brokerage Fees

TOTAL COMMISSIONS ACCOUNTED FOR

AMOUNT

Php

1,235,230.72 121,405.54 1,709,836.00 (169,245.00) 887,021.00

PHP

3,784,248.26 A review of the documentary evidence submitted to the Court reveals that petitioner was able to properly account for the commission expenses lodged under reversal of over accrued royalties amounting to Php1,235,230.722os, reversal of aged royalty checks amounting to Php121,405.54209 and reversal of over accrued other bonus expense of Php1,709,836.002Io.

However, documents submitted to support the additional accrual of other bonus expense amounting to Php169,245.00211 pertains to 2006 expenses, and is therefore outside the period of claim. Petitioner likewise failed to submit supporting documents for brokerage fees amounting to Php887,021.00, thus, it will be considered unaccounted and should be included in the computation of deficiency income tax.

204 Records Box 1, Exhibits "P-01" to "P-53," total per BIR Form 1601E is Php124,804,929.65, with rounding off difference of 0.08.

2os Id., Exhibit "0-20."

206 Id., Exhibit "A," Schedule 2.

207 Records Box 4, Exhibit "UUU," p. 66. 2os I d., Annex W, Exhibits "CCC-01" to "CCC-42." 2°9 Id., Exhibit "UUU," Annex X, Exhibits "DDD-1" to "DDD-5." 210 ld., Exhibit "UUU," Annex Y, Exhibits "EEE-1" to "EEE-4." 211 I d., Exhibit" UUU," Annex Z.

(

Based from the foregoing, commission expenses not subjected Php702,817.47, computed as follows:

petitioner has unaccounted to income tax amounting to

DETAILS

Unaccounted Commission Expenses per Re-investigation

Less: Properly accounted commission expenses Reversal of over accrued royalties

Php

Reversal of aged royalty checks Reversal of other bonus expense

UNACCOUNTED COMMISSION EXPENSES

Unsupported Expenses- Php 10,105,563.00

AMOUNT

Php

1,235,230.72 121,405.54 1,709,836.00

Ph£

PHP

3,769,289.73 3,066,472.26 702,817.47 Based on the ICP A Report2t2, respondent's assessment on unsupported expenses amounting to Phpl0,105,563.00 is comprised of the following transactions:

NATURE OF PAYMENTS

AMOUNT

a. Credit Card Fee

Php

b. Payments to Affiliates

1. Herbalife Singapore Pte. Ltd.

Php

2,463,604.82

2. Herbalife Europe Ltd. 33,479.67

Ph£

c. Accrued Other Miscellaneous Expense

d. Payment for Local Taxes and Other Fees

1. City of Makati

Php

1,559,382.95

2. City of Lucena 200.00

3. Barangay San Lazaro 800.00

4. Bureau of Internal Revenue 100.00

5. Bureau of Food and Drugs 56,075.00

Ph£

e. Bank Charges

f. Employee Reimbursements

g. Donation and Contribution

h. Others

i. Cash Over/ (Under)

j. Unaccounted Difference

TOTAL MISCELLANEOUS EXPENSE PER FSjiTR

PHP

Credit Card Fee- Php3,974,175.96

REFERENCE

3,974,175.% Exhibit "UUU," part 2, Annex AA 2,497,084.49 1,801,642.53 1,616,557.95 115,721.92 8,641.00 6,500.00 23,310.00 (965.50) 62,894.65 10,105,563.00 Exhibit "UUU," part 2, Annex BB Exhibit "UUU," part 2, Annex CC Exhibit "UUU," part 2, Annex DD Exhibit "UUU," part 2, Annex EE Exhibit "UUU," part 2, Annex FF Exhibit "UUU," part 2, Annex GG Exhibit "UUU," part 2, Annex HH

Exhibit "GGG"

Credit card fee pertains to the service fee charged by credit card companies for sales on account.2t3 The ICPA noted that only Php700,287.97 was properly supported, while the remaining amount, Php3,273,887.99 was backed only by JVs2t4. However, the Court found that the documents identified by the ICPA as proper supports for credit card service fees GVs and payment 212 Records Box 4, Exhibit "UUU," pp. 68-69. 213 Id. at 69.

214 Records Box 3, Exhibits "HHH-0001" to "HHH-0034." ( advices215) are insufficient to refute the assessment. Thus, the Court upholds the assessment for credit card fee amounting to Php3,974,175.96.

Payments to Affiliates- Php2,497,084.49 Petitioner claims that it entered into agreements with Herbalife Europe Limited and Herbalife Singapore. The former through a Non- Resident Distributor Payment Agreement216 executed between petitioner and Herbalife Europe Limited. Under the said agreement, Herbalife Europe remains as an independent contractor as a settlement agent for petitioner.217 Thus, with respect to payments made to Herbalife Europe Ltd., for management services rendered, the Court finds that petitioner was able to provide sufficient proof to rebut the assessment. Petitioner submitted JVs218, intercompany billings219 and invoices22o, to support its claim, thus, the assessment in this regard is cancelled. On the other hand, with respect to payments for management services allegedly rendered by Herbalife Singapore Pte. Ltd., the Court finds that petitioner failed to establish the direct correlation between the expense being deducted and the development, management, operation and/ or conduct of its business. The unsigned Service Agreement that it submitted was denied admission by the Court for being a mere photocopy. Further, the debit note22l and the bank validated deposit slip as a proof of electronic fund transfer222 are insufficient to support its claim and to refute respondent's findings. Thus, the assessment by respondent in the amount of Php2,463,604.82 is sustained.

Accrued Other Miscellaneous Expense- Php1,801,642.53 21s Records Box 3, Exhibits "HHH-0035" to "HHH-0432." 216 Records Box 1, Exhibit "D."

217 Id. at 2.

21B Records Box4, Exhibits "III-02," "III-04," "III-06," "III-08," "III-10," "III-12," "III-14," "III-16," "III- 18," "III-19," "III-21," "III-23," and "III-25. 11 219 Id., Exhibits "III-01, 11 "III-03, 11 "III-05," "III-07," "III-09, 11 "III-11, 11 "III-13," "III-15, 11 11lll-17,

11 "III-

20, II "III-22, II "III-24," and "III-26. II 220 Id., Exhibits "III-28, 11 "III-30, 11 "III-32, 11 "III-34," "III-36, 11 "III-38, 11 "III-40, 11 "III-42, 11 "III-44," "III- 46, II "III-48," and "III-50. II 221 Id., Exhibit "AAA-1."

222 Id., Exhibit "AAA-3."

(

This account was supported by JVs223 only, the Court finds these documents insufficient to cancel the assessment. Thus, the assessment is upheld amounting to Phpl,801,642.53. 4.

Payments for Local Taxes and Other Fees- Php1,616,557.95 The Court agrees with the findings of the ICPA that petitioner was able to provide sufficient proof such as ORs, CVs and PVCs224 up to the amount of Phpl,610,857.95. As for the remaining Php5,700.00, the Court finds that the same is supported only by CVs and PCVs225, hence, only the assessment relating to the latter amount is sustained. 5.

Bank Charges- Php115,721.92 These pertain to charges from various banks226. The Court finds that the evidence presented, such as JVs and Metrobank application for fund transfer form227, do not prove nor support petitioner's allegation that these are indeed bank charges; and that the JVs are internally generated documents. In order to support petitioner's claim that these are bank charges, the supporting documents for which the JVs were based should have been presented. Thus, the Court upholds the assessment amounting to Phpll5,721.92. 6.

Employee Reimbursements - Php8,641.00 This amount represents payments for notarial fees, postage stamps, service fees and donations.22s However, upon examination of the documents submitted to the Court, only the OR229 amounting to Php22.00 is valid, while the remaining amount of Php8,619.00 is supported by CVs23o, PCVs231, acknowledgment receipt232 and ORs 223 Records Box 4, Exhibits "JJJ-1" to "JJJ-7. 11 224 Id., Exhibits "KKK-01 11 to "KKK-49.

11 225 Id., Exhibits "KKK-46 11 and "KKK-47.

11 226 Id., Exhibit "UUU, 11 p. 70.

227 I d., Exhibits "LLL-01" to "LLL-69. II 228 Id.

229 Records Box 4, Exhibit "MMM-33. II 230 Id., Exhibits "MMM-01, 11 "MMM-03, 11 "MMM-06," "MMM-09, 11 "MMM-12, 11 "MMM-15, 11 "MMM-18, 11 "MMM-21, 11 "MMM-24, 11 and IIMMM-28.

11 231 Id., Exhibits "MMM-02, 11 "MMM-04, 11 "MMM-07, 11 "MMM-10, 11 "MMM-13, 11 "MMM-16, 11 "MMM-22," "MMM-25," "MMM-26, 11 "MMM-29, 11 "MMM-30, 11 and "MMM-32.

11 232 Id., Exhibit "MMM-31.

11 ( without petitioner's name and/or without ATP233. Thus, the assessment amounting to Php8,619.00 is sustained. 7.

Donation and Contribution- Php6,500.00 The Court agrees with the ICPA that only the amount of Php2,500.00 was properly supported by 0Rs234, thus, the amount Php4,000.00 remains unsubstantiated with proper documents. 8.

Others- Php23,310.00 This amount represents payments for destruction charge lodged under other miscellaneous expense, was properly supported by an QR235, and is therefore cancelled.

Cash Overj(Under) - (Php965.50) Cash Over/ (Under) amounting to (Php965.50) is cancelled for being properly supported236.

10. Unaccounted Difference- Php62,894.65 The assessment for unaccounted difference is sustained for petitioner's failure to account for the same. In sum, out of the Phpl0,105,563.00 assessed by respondent as unsupported miscellaneous expenses, petitioner was able to provide documentary evidence up to Phpl,669,204.12 only. The remaining Php8,436,358.88 is unsupported, hence, sustained for reasons previously discussed and computed as follows:

NATURE OF PAYMENTS

a. Credit Card Fee

b. Payment to Affiliates - Herbalife Singapore

c. Accrued Other Miscellaneous Expense

d. Payment for Local Taxes and Other Fees

AMOUNT

Php

3,974,175.96 2,463,604.82 1,801,642.53 5,700.00 233 Records Box 4, Exhibits "MMM-05," "MMM-08," "MMM-11," "MMM-14," "MMM-17," "MMM- 20," "MMM-23," and "MMM-27."

234 Id., Exhibit "NNN-2."

235 I d., Exhibit "000-2."

236 Records Box 3, Exhibit "GGG-1."

( e. Bank Charges 115,721.92 £. Employee Reimbursements 8,619.00

g. Donation and Contribution 4,000.00

j. Unaccounted Difference 62,894.65

TOTAL UNSUPPORTED MISCELLANEOUS EXPENSE

PHP

8,436,358.88 D.

Excess Credits Carried Over to Succeeding Year- Php630,442.00 Excess tax credit amounting to Php630,442.00 was disallowed by respondent as a deduction from income tax due for the reason that it was allegedly forwarded to the succeeding taxable year (2008), as verified in the Integrated Tax System ("ITS"). However, upon examination of the BIR records, there was no document proving respondent's contention, hence this assessment is cancelled.

As discussed, petitioner has basic deficiency income tax due in the amount of Php3,957,558.71, computed as follows:

DETAILS

AMOUNT

Taxable Income per ITR

Php

9,377,113.00

Add:

Disallowed Expenses due to non-withholding

Php

3,969,397.11

Unaccounted Expenses

702,817.47

Unsupported Expenses

8,436,358.88

Phe

13,108,573.46

Adjusted Taxable Income

Phe

22,485,686.46

Income Tax Due (35%)

Php

7,869,990.26

Less:

Prior Year's MCIT

Php

3,281,989.55

Creditable Tax Withheld

630,442.00

Phe

3,912,431.55

BASIC DEFICIENCY INCOME TAX

PHP

3,957,558.71 II. DEFICIENCY VALUE ADDED TAX- Php3,922,839.57 Respondent computed the alleged deficiency VAT amounting to Php3,922,839.57237, as follows:

DETAILS

AMOUNT

Taxable Sales per VAT returns

[Php]

316,188,408.80238 Add: Undeclared Income from Unaccounted Expense (Schedule 2) 3,769,289.73 Taxable Sales per investigation

[Php]

319,957,698.53 237 Records Box 1, FAN, Exhibit "A."

238 Records Box 4, Exhibits "PPP-01," line 15B + "PPP-09," line 15B + "PPP-19," line 15B + "PPP-28," line 15B.

(

Output Tax Due

Less: Claimed Input Tax

VAT Due

38,394,923.83 19,491,171.20239

[Php]

18,903,752.63 Less: Payments per BIR records (Integrated Tax System)

Deficiency Value-added Tax

16,643,909.76

[Php]

2,259,842.87 Add: Interest (01.26.08 to 09.30.11)

TOTAL AMOUNT DUE

1,662,996.70

[PHP]

3,922,839.57 The Court agrees with the findings of the ICPA that petitioner's VAT payments amounted to Php18,451,437.85 based on its Quarterly VAT Return (BIR Form No. 2550Q), summarized as follows:

QUARTER

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

TOTAL

AMOUNT

EXHIBIT

Php

3,183,986.07 "PPP-01," line 25 3,062,929.37 "PPP-09," line 25 6,850,724.70 "PPP-19," line 25 5,353,797.71 "PPP-28," line 25 PHP 18,451,437.85 Based on the FAN, the deficiency VAT pertains to undeclared income from unaccounted expenses amounting to Php3,769,289.73. As previously discussed, petitioner was able to account the said expenses but only to the extent of Php3,066,472.26, while the amount Php702,817.47 remains unaccounted, to wit:

DETAILS

Unaccounted Commission Expenses per Re-investigation

Less: Properly accounted commission expenses

AMOUNT

Php

3,769,289.73 Reversal of over accrued royalties

Php

Reversal of aged royalty checks Reversal of other bonus expense 1,235,230.72 121,405.54 1,709,836.00 Ph£ 3,066,472.26

UNACCOUNTED COMMISSION EXPENSES

PHP

702,817.47 From the foregoing, petitioner has a basic deficiency VAT arising from unaccounted expenses of Php84,338.10, computed as follows:

DETAILS

Taxable Sales per VAT Returns

Add: Undeclared Income from Unaccounted Expenses

Taxable Sales per Investigation

Output Tax Due

Less: Claimed Input Tax

VAT Due

AMOUNT

Php 316,188,408.80 702,817.47 Php 316,891,226.27

Php

38,026,947.15 19,491,171.20

Php

18,535,775.95 239 Records Box 4, Exhibits "PPP-01," line 22 + "PPP-09," line 22 + "PPP-19," line 22 + "PPP-28," line 22.

(

18,451,437.85 Less: Payments per BIR Form No. 2550Q

BASIC DEFICIENCY VALUE ADDED TAX

PHP

84,338.10 III. DEFICIENCY Php767977.34

EXPANDED

WITHHOLDING

TAX

Respondent assessed240 petitioner for failure to withhold and remit the withholding tax on the following income payments in the amount of Php767,977.34, to wit:

NATURE OF INCOME PAYMENT

a.) Professional and Management fees b.) Payment to Contractors by Top 10K Corp. -Services c.) Payment by Top 10K- Goods

Deficiency Expanded Withholding Tax

Add: 20% Interest p.a. (04.16.08 to 09.30.11)

TOTAL AMOUNT DUE

AMOUNT

TAXRATE

Php

1,464,269.00 10% 6,185,661.27 2% 17,087,895.00 1% a.) Professional and Management Fees- Php146,426.90

EWTDUE

Php

146,426.90 123,713.23 170,878.95

Php

441,019.08 326,958.26

PHP

767,977.34 Professional and management fees was already discussed241. To reiterate, the Php1,100,000.00 pertains to payment to the recruitment agency KPI, as fee for the placement of Mr. Enrico Garcia as its general manager. Examination of the documents show that payment to KPI was properly subjected to 2% withholding tax as evidenced by BIR Form No. 1604-E242, Alphalist of Payees Subject to EWT243, CVs244 and 0Rs245, hence, respondent cannot enforce the said assessment against petitioner.

In addition, this account also includes expenses pertaining to audit fees of Php239,268.00 and legal fees of Php125,000.00, payable to Manabat Sanagustin & Co. and Britanico Sarmiento Franco & Associates, respectively, which are general professional partnerships not subject to EWT pursuant to Section 2.57.5 of RR No. 2-98, as amended. However, out of the amounts in question, only the amounts of Php168,000.00 and Php124,234.00 for Manabat and Britanico, 240 Records Box 1, FAN, Exhibit 11 A.

11 241 Please see discussions under section l.a. 242 Records Box 1, Exhibit "J."

243 I d., Exhibit "J-1," p. 38 of 39.

244 I d., Exhibit "S-78."

245 Id., Exhibit 115-79."

( respectively, were supported by valid documents, broken down as follows:

Manabat Sanagustin & Co.

OR NO.

OR AMOUNT

OR # 9670

Php

16,800.00

OR # 9344

16,800.00

OR # 9343

16,800.00

OR # 9232

16,800.00

OR # 9116

16,800.00

OR # 9115

16,800.00

OR # 9001

16,800.00

OR # 8674

16,800.00

OR # 8651

16,800.00

OR # 8508

16,800.00

TOTAL

PHP 168,000.00

OR DATE

11/19/2007 10/4/2007 10/4/2007 8/21/2007 7/5/2007 7/5/2007 5/31/2007 3/30/2007 3/8/2007 1/26/2007

Britanico Sanniento Franco & Associates

ORNO.

ORAMOUNT

ORDATE

OR# 0508

Php

8,848.00 10/19/2007

OR# 0402

21,840.00 3/30/2007

OR# 0273

93,546.00 1/22/2007

TOTAL

PHP 124,234.00

EXHIBIT

S-70

S-67

S-64

S-61

S-58

S-55

S-52

S-50

S-47

S-44

EXHIBIT

S-39

S-37

S-18

As a result, only the amount Php72,034.00 was not subjected to EWT. Thus, petitioner has deficiency EWT of Php7,203.40, computed as follows:

GPP

Manabat Sanagustin & Co.

TAXBASE

TAXRATE

EWTDUE

Britanico Sarmiento Franco & Associates

TOTAL

Php 71,268.00 10% 766.00 10% ------ PHP 72,034.00

Php

7,126.80 76.60

PHP

7,203.40 b.) Payment to Contractor by Top 10k Corp.- Services- Php123,713.23 The Court agrees with the findings of the ICP A246 that payments of services to contractors by top lOk corporations amounting to Php1,251,069.94 were not subjected to EWT, thus, petitioner is liable for deficiency EWT of Php25,021.40, broken down as follows:

DETAILS

TAX BASE

Nature of Payments by Top 10k for purchases of services: Payments to various insurance companies

Employee Training Cost

Php

539,963.11

Employee Uniforms-Payments to Third Parties

Accrued Employment Cost

246 Records Box No.4, Exhibit "UUU," pp. 75-77. 102,935.71 2,483.62 605,687.50

RATE

2% 2% 2% 2%

TAX DUE

EXHIBIT

Php

10,799.26 "UUU," Annex J 2,058.71 "UUU," Annex K 49.67 "UUU," Annex N 12,113.75 "UUU," Annex R r

TOTAL

PHP

1,251,069.94

PHP

25,021.40 c.) Payments to Suppliers by Top 10k Corporations for purchases of Goods - Php170,878.95 Similarly, the Court agrees with the findings of the ICPA that purchases of goods (Additions to Plant, Property and Equipment) amounting to Phpl,538,115.00 were not subjected to EWT, thus petitioner is liable for deficiency EWT in the amount of Phpl5,381.15, computed as follows:

DETAILS

AMOUNT

EXHIBIT

Amount of Payments by Top 10K Corp. for

Purchase of Goods per Company's Schedule of

Additions to Property, Plant and Equipment

Php

17,087,895.52

"QQQ-1 to2"

Less: Payments Subjected to EWT per Alphalist

Leasehold Improvements Subjected to 15% EWT

Php

380,000.00 "J-1," page 39

Leasehold Improvements Subjected to 10% EWT

410,500.00 "J-1," page 39

Leasehold Improvements Subjected to 2% EWT

10,667,439.68 "J-1," page3 8

Leasehold Improvements Subjected to 1% EWT

1,291,162.67 "J-1," pages 37 and 38

Furniture and Fixtures Subjected to 2% EWT

6,250.00 "J-1," page38

Furniture and Fixtures Subjected to 1% EWT

1,562,534.16 "J-1," pages 37 and 38

Office Equipment Subjected to 1% EWT

1,101,447.58 "J-1," pages 37 and 38

Computer Equipment Subjected to 2% EWT

56,607.14 "J-1," page 38

Computer Equipment Subjected to 1% EWT

73,839.29

PhE

15,549,780.52 "J-1," page 37 Payments not Subjected to EWT

Php

1,538,115.00

EWTRate

DEFICIENCY EWT

PHP

15,381.15 From the foregoing discussion, petitioner is liable for deficiency EWT in the amount of Php47,605.95, computed as follows:

AMOUNT

TAXRATE

EWTDUE

NATURE OF INCOME PAYMENT

a.)

Professional and Management fees

Php

72,034.00 10%

Php

7,203.40 b.)

Payment to Contractors by Top 10K Corp.- Services c.)

Payment by Top 10K- Goods

1,251,069.94 2% 1,538,115.00 1% 25,021.40 15,381.15

DEFICIENCY EXPANDED WITHHOLDING TAX

PHP

47,605.95 IV. DEFICIENCY WITHHOLDING TAX ON COMPENSATION- Php309,236.80 As previously discussed, respondent's assessment on salaries and wages amounting to Php249,135.40 is upheld for petitioner's failure to subject it to WTC, thus, it is proper for the petitioner to be held liable for deficiency WTC in the amount of Php60,789.04, computed as follows:

DETAILS

Amount Not Subjected to Withholding

AMOUNTS

Php

249,135.40 (

Average Withholding Tax Rate:

Tax Due & Withheld

Php

2,055,153.64 24 40% 247

Taxable Compensation

8,423,657.79 = · 0

BASIC DEFICIENCY WITHHOLDING TAX ON COMPENSATION

PHP

60,789.04 V. DEFICIENCY FINAL WITHHOLDING TAX- Php40,918,045.57 Respondent assessed petitioner for alleged deficiency FWT in the amount of Php40,918,045.57248, computed as follows:

DETAILS

INCOME

SHOULD BE

TAX

DEFICIENCY

DISCREPANCY PER

PAYMENT

TAX RATE

IMPOSED

TAX RATE

RE-INVESTIGATION

Royalties - Res. Corp.

Royalties- Non-Res. Corp.

Production Bonus

Php

41,292,473.00 35% 10% 25%

Php

10,323,118.25

Interest Expense

Management Fees

15,272,477.00 12,116,340.00 4,464,722.00 2,463,605.00 35% 35% 20% 35% 10% 25% 3,818,119.25 10% 25% 3,029,085.00 15% 5% 223,236.10 0% 35% 862,261.75

Total

Php

75,609,617.00

Php

18,255,820.35

Add:

50% Surcharge

9,127,910.18 13,534,315.04 Interest (01.16.08 to 09.30.11)

TOTAL AMOUNT DUE

PHP

40,918,045.57 In the details of discrepancies, respondent stated that these amounts were royalties and income payments made to non-resident foreign corporations which the petitioner failed to subject to FWT (with correct tax rate), in violation of Section 28(B)(1)249 and Section 28(B)(S)(a)2so of the 1997 NIRC.2s1 Petitioner claims that the royalty overrides and production bonuses paid to its resident and non-resident distributors are not to be 247 Records, Box 1, Exhibit "A," Schedule 5. us Id., Schedule 1a.

249 "Sec. 28. Rates of Income Tax on Foreign Corporations. - xxx

XXX

(B) Tax on Non-resident Foreign Corporation. - 1) In General.- Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5 ( c ): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30% )." 250 "Sec. 28. Rates of Income Tax on Foreign Corporations. - xxx

XXX

(B) Tax on Non-resident Foreign Corporation. (1) xxx

XXX

(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. -(a) Interest on Foreign Loans. -A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1986; (b) xxx" 251 Records Box 1, Exhibit "A," Details of Discrepancies par. (j). ( understood as the "royalties" under Section 42(A)(4)252 of the 1997 NIRC.

Ms. Jacob testified that royalty overrides and production bonuses form part of the benefits given to distributors. Royalty overrides is a payment to qualified Supervisors ranging from 5 to 15% on the monthly volume of their three (3) levels of active downline distributors. A production bonus is how petitioner denominates a commission, which is a bonus of 2% to 7% on downline distributors' collective volume earned by eligible distributors.253 The Court agrees with petitioner that income payments to resident distributors are not royalties subject to FWT but in the nature of commissions.

An examination of documents shows that royalty and production bonuses paid to resident and non-resident corporations with valid supporting documents are Php40,581,983.80 and Php25,732,329.23, respectively, as shown below: 252 "Sec. 42. Income from Sources Within the Philippines.- (A) xxx (1) xxx; 4) Rentals and Royalties. Rentals and royalties from property located in the Philippines or from any interest in such property, including rentals and royalties for- a) The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; b) The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment;

c) The supply of scientific, technical, industrial or commercial knowledge or information;

d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c);

e) The supply of services by a non-resident person or his employee in connection with the use of property rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person;

f) Technical advice, assistance or services rendered in connection with technical management or administration od any scientific, industrial or commercial undertaking, venture, project or scheme; and g) The use of or the right to use: (i) motion picture films; (ii) films or video tapes for use in connection with television; and (iii) tapes for use in connection with radio broadcasting."

253 Records, Vol. 2, JA of Lina E. Jacob, offered as testimony of Ms. Jacob during the May 15, 2013 hearing.

(

DETAILS

AMOUNT PER

WITH SUPPORTING

DIFFERENCE

ASSESSMENT

DOCUMENTS

Royalties/Commissions to Resident

Distributors Subjected to 10% EWT

Php

41,292,473.00

Php

40,581,983.80254

Php

710,489.20

Royalties/Commissions to Non-Resident

Distributors Subjected to 25% & 35%

27,388,817.00 25,732,329.23255 1,656,487.77

TOTAL

PHP

68,681,290.00

PHP

66,314,313.03 PHP 2,366,976.97 The Court likewise agrees with the findings of the ICP A that the amount of Php710,489.20 should be subjected to 10% EWT for not being properly supported with documents. Hence, the Court finds petitioner liable for deficiency EWT amounting to Php71,048.92256. Similarly, the income payment to non-resident distributors are not royalties that should be subjected to FWT but it is a commission subject to withholding tax, hence, the commission amounting to Php1,656,487.77 without supporting documents should be subjected to 25% withholding tax or a deficiency of Php414,121.94. On the other hand, the Court finds merit in respondent's assessment that interest expense amounting to Php4,464,722.00 is subject to 20% FWT. Records show that it was already subjected to a 15% FWT, thus, petitioner is accountable for a deficiency 5% FWT in the amount of Php223,236.10.

Anent the assessment for management fee, as previously discussed, petitioner failed to prove that the services were rendered outside the Philippines. The Confirmation Letter of Ms. Ng Woei Bin257, without any supporting documents, is at most self-serving and should not be given any weight. It follows, therefore, that respondent's assessment on management fees is sustained. Thus, based on the foregoing discussion, petitioner is liable for deficiency FWT /EWT in the amount of Php1,570,668.71, computed as follows:

DETAILS

Royalties/Commission Resident Distributors

Royalties/ Commission Non-Resident Distributors

Interest Expense

Management Fee

TOTAL

AMOUNT

Php

710,489.20 1,656,487.77 4,464,722.00 2,463,605.00

PHP

9,295,303.97

TAX RATE

10% 25% 5% 35%

TAX DUE

Php

71,048.92 414,121.94 223,236.10 862,261.75 PHP 1,570,668.71 254 Records Box 4, Exhibit "UUU," Annex U, computed as Php93,646,823.00 divided by Php92,035,511.03 multiplied by Php41,292,473.00. 25s Id., Exhibit "UUU," Annex V.

256 Php710,489.20 X 10%.

257 Records Box 4, Exhibit "BBB-5."

VI. DEFICIENCY FINAL WITHHOLDING- VAT- Php8,577,939.88 Respondent assessed the petitioner for alleged deficiency withholding VAT of Php3,822,424.68, computed as follows:

Production Bonus

Royalties

Interest Expense

Total

VAT Rate

DETAILS

Basic Deficiency Withholding VAT

Add: 50% Surcharge

Interest (01.11.08 to 09.30.11)

TOTAL DEFICIENCY WITHHOLDING VAT

AMOUNT

Php

12,116,340.00 15,272,477.00 4,464,722.00

Php

31,853,539.00 12%

Php

3,822,424.68 1,911,212.34 2,844,302.86

PHP

8,577,939.88 The production bonus and royalties pertain to commissions paid to Anthony Wing and Louisa Higgins, non-resident distributors, as evidenced by their respective affidavits2ss. However, the originals of the affidavits were not presented, to prove that the income they received were derived from outside the Philippines. Without such proof, respondent's assessment in the amount of Php3,286,658.04 is upheld, computed as follows:

DETAILS

Production Bonus

Royalties

Total

VAT Rate

DEFICIENCY WITHHOLDING VAT

AMOUNT

Php

12,116,340.00 15,272,477.00

Php

27,388,817.00 12%

PHP

3,286,658.04 On the other hand, assessment on interest expense for deficiency withholding VAT in the amount of Php535,766.04259 is cancelled for not being subject to withholding VAT under the 1997 NIRC. VII. DEFICIENCY DOCUMENTARY STAMP TAX- Php82,715.52 Petitioner is allegedly liable for deficiency DST in the amount of Php36,814.00, computed as follows:

258 Records Box 4, Exhibits "TTT-3" to "TTT-4." 259 Php4,464,722.00 X 12%.

(

CfA CASE NO. 8478

DETAILS

A. Increase in Due from Related Parties per FS Documentary Stamp Tax (Php1.00 for every Php200.00) B. Monthly Rent per BIR Form 1601E Term (60 months)

Escalation Rate

Total Rental Fee/Tax Base

Year1

Year2

Year3

Year4

YearS

Documentary Stamp Tax (Php3.00 plus Php1.00 for every Php1,000.00 in excess of Php2,000.00)

Basic Deficiency DST

Add: 50% Surcharge

Interest (01.06.08 to 09.30.11)

TOTAL DEFICIENCY DST

AMOUNT

Php

2,042,244.00

Php

10,212.00 410,500.00 60.00 10%

Php

4,926,000.00 5,418,600.00 5,418,600.00 5,418,600.00 5,418,600.00 Phe 26,600,400.00 26,602.00 36,814.00

Php

18,407.00 27,494.52 Ph£ 45,901.52

PHP

82,715.52 An examination of petitioner's Statement of Cash Flows260 indicates a cash flow from a financing activity, showing an increase in due to related parties amounting to Php2,042,244.00. Related party transactions261 is defined as petitioner's transactions with its parent company and other related parties, which are, under the existing policies, subject to interest at a fixed rate of 0.5% of outstanding payables exceeding ninety (90) days. These transactions consist mainly of cash advances from related parties used for working capital requirements and purchase of inventories.262 Petitioner failed to provide evidence to disprove the assessment. Section 179263 of tlte 1997 NIRC states that a DST shall be collected on every original issue of debt instruments of one peso (Phpl.OO) on each two hundred pesos (Php200.00), or a fractional part thereof, of the issue price of any such debt instrument. Thus, the Court upholds respondent's assessment of deficiency DST liability amounting to Php10,212.00.

260 Records Box 1, Exhibit "0-7."

261 !d., Exhibit "0-21," Note to FS No. 15. 262 !d.

263 "Sec. 179. Stamp Tax on All Debt Instruments. -On every original issue of debt instruments, there shall be collected a documentary stamp tax of one peso (Php1.00) on each Two Hundred pesos (Php200.00), 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."

(

On the other hand, assessment on the DST on Rent in the amount Php26,602.00 is cancelled since it was already paid, as evidenced by BIR Form No. 2000264.

VIII. PENALTIES- Php53,000.00 Respondent's imposition of compromise penalty amounting to PhpSO,OOO.OO cannot be sustained.

Under Revenue Memorandum Order ('RMO") No. 01-90265, as amended by RMO No. 19-07266, compromise penalties are only amounts suggested in settlement of criminal liability, and may not be imposed or exacted on the taxpayer in the event that the taxpayer refuses to pay the same.267 RMO No. 19-07 further provides that compromise penalties should not form part of the assessment notice that reflects deficiency basic tax, surcharge and interest; and that it should appear in a separate assessment notice/ demand letter as the amount suggested to the taxpayer in lieu of criminal prosecution. Thus, absent any clear showing that petitioner consented to the compromise penalty, its imposition should be cancelled. On the other hand, the Court upholds the Php3,000.00 penalty imposed by the respondent for petitioner's failure to file Quarterly Remittance Return of Final Income Taxes Withheld (BIR Form No. 1603) for the 2nd, 3rd and 4th quarters of 2007, pursuant to Section 250268 of the 1997 NIRC.

WHEREFORE, premises considered, the instant Petition for Review is hereby PARTIALLY GRANTED. The assessment issued by respondent for CY 2007 covering deficiency IT, VAT, EWT, WTC, FWT, FWT-VAT, DST and penalties is hereby UPHELD WITH MODIFICATIONS.

264 Records Box 1, Exhibit "F."

265 Amendments to the Provisions of a "Revised Schedule of Compromise Penalties" for Internal Revenue Violations as Prescribed in RMO 26-86, November 28, 1989. 266 The Consolidated Revised Schedule of Compromise Penalties for Violations of the National Internal Revenue Code, August 8, 2007. 267 RMO No. 19-07, par. 6.

268 "Sec. 250. Failure to File Certain Information Returns. - In the case of each failure to file an information return, statement or list, or keep any record, or supply any information required by this Code or by the Commissioner on the date prescribed therefor, unless it is shown that such failure is due to reasonable cause and not to willful neglect, there shall, upon notice and demand by the Commissioner, be paid by the person failing to file, keep or supply the same, One thousand pesos (Php1,000.00) for each such failure: xxx" (

Accordingly, petitioner is hereby ORDERED TO PAY the total amount of Eleven Million Two Hundred Seventy Five Thousand Two Hundred Eighty-Eight and 19/100 Pesos (Php11,275,288.19), inclusive of the 25% surcharge imposed under Section 248(A)(3) of the 1997 NIRC, as amended, broken down as follows:

TAX TYPE

BASIC TAX

25% SURCHARGE

TOTAL

Income Tax

Php

3,957,558.71

Php

989,389.68

Php

4,946,948.39

Value Added Tax

84,338.10 21,084.53 105,422.63

Expanded Withholding Tax

47,605.95 11,901.49 59,507.44

Withholding Tax on Compensation

60,789.04 15,197.26 75,986.30

Final Withholding Tax

1,570,668.71 392,667.18 1,963,335.89

Final Withholding of VAT

3,286,658.04 821,664.51 4,108,322.55

Documentary Stamp Tax

10,212.00 2,553.00 12,765.00

Total

Php

9,017,830.56

Php

2,254,457.64

Php

11,272,288.19

Penalty

3,000.00

GRAND TOTAL

PHP

11,275,288.19 In addition, petitioner is also ORDERED TO PAY: 1.

Deficiency interest at the rate of twenty percent (20%) per annum on the basic deficiency IT, VAT, EWT, WTC, FWT, FWT-VAT, DST, computed from dates indicated below until full payment thereof pursuant to Section 249(B)269 of the 1997 NIRC, as amended:

TAX TYPE

Income Tax

Php

Value Added Tax

Expanded Withholding Tax

Withholding Tax on Compensation

Final Withholding Tax

Final Withholding of VAT

Documentary Stamp Tax

BASIC TAX

3,957,558.71 84,338.10 47,605.95 60,789.04 1,570,668.71 3,286,658.04 10,212.00

DEFICIENCY INTEREST

COMPUTED FROM

April16, 2008 January 26, 2008 January 16, 2008 January 16, 2008 January 16, 2008 January 11, 2008 January 06, 2008 2.

Delinquency interest at the rate of twenty percent (20%) per annum on the amount of Php11,272,288.19, representing the basic deficiency IT, VAT, EWT, WTC, FWT, FWT-VAT, DST, and the corresponding twenty five percent (25%) surcharge; and the twenty percent (20%) deficiency interest which have accrued as aforestated in Item (1), computed from August 27, 2011 until full payment thereof pursuant to Section 249(C)270 of the 1997 NIRC, as amended. 269 "SEC. 249. Interest. -(A) xxx (B) Deficiency Interest. - Any deficiency in the tax due, as the term is defined in this Code, shall be subject to the interest prescribed in Subsection (A) hereof, which interest shall be assessed and collected from the date prescribed for its payment until the full payment thereof. xxx" 270 "SEC. 249. Interest. - (A) XXX (B) XXX (C) Delinquency Interest. - In case of failure to pay:

(1) The amount of the tax due on any return to be filed, or (2) The amount of the tax due for which no return is required, or (3) A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the Commissioner, there shall be (

SO ORDERED.

WE CONCUR:

LOVELL (BAUTISTA

Associate Justice

ON-VICTORINO

MA. BELER~PIS-LIBAN

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.

LOVELL(. BAUTISTA

Associate Justice

Chairperson

CERTIFICATION

Pursuant to Section 13 of Article VIII 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.

Presiding Justice

assessed and collected on the unpaid amount, interest at the rate prescribed in Subsection (A) hereof until the amount is fully paid, which interest shall form part of the tax. xxx"

Footnotes

1
Records, CTA Case No. 8478, Vol. 1, Petition for Review, pp. 10-220, with annexes.
2
"Sec. 7. Jurisdiction.- The Court of Tax Appeals shall exercise: (a) Exclusive appellate jurisdiction to review by appeal, as herein provided: (1) xxx; (2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National Internal Revenue Code or other applicable law provides a specific period for action: Provided, that in case of disputed assessments, the inaction of the Commissioner of Internal Revenue within the one hundred eighty day-period under Section 228 of the National Internal Revenue Code shall be deemed a denial; xxx"
3
An Act Creating the Court of Tax Appeals, as amended.
4
An Act Expanding the Jurisdiction of the Court of Tax Appeals (CTA), Elevating its Rank to the Level of a Collegiate Court with Special Jurisdiction and Enlarging its Membership, Amending for the Purpose Certain Sections of Republic Act No. 1125, as amended, Otherwise Known as the Law Creating the Court of Tax Appeals, and for Other Purposes.
5
An Act Enlarging the Organizational Structure of the Court of Tax Appeals, Amending for the Purpose Certain Sections of the Law Creating the Court of Tax Appeals, and for Other Purposes.