First Philippine Holdings Corporation vs. Commissioner of Internal Revenue

DECISION

MINDARO-GRULLA, J.:

Submitted for decision on January 4, 2019, is a

Petition for

Review filed on February 20, 2015 praying that the deficiency tax assessments in the amount of P1,555,240,774.37 for taxable year 2009, be declared null and void. 1 Petitioner First Philippine Holdings Corporation is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with office address at 6 th Floor, Benpres Building, Exchange Road corner Meralco Avenue, Pasig City, Philippines. 2 On the other hand, respondent is the Commissioner of the Bureau of Internal Revenue (BIR), the government agency tasked to, among others, collect all national internal revenue taxes. As 1 Summary of the Case, Pre-Trial Order dated August l8, 2015, Docket - Vol. I, p. 414. 2 Par. 1, Summary of Admitted Facts, Joint Stipulation of Facts & Issues (JSF), Docket - Vol. I, p. 394.

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First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

Commissioner, respondent has the power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto or other matters arising under the Tax Code or other laws or portions thereof administered by the BIR.3 On May 18, 2010, petitioner received a copy of Letter of Authority No. LOA-116-2010-00000053 (LOA) dated May 14, 2010,4 authorizing the conduct of an audit of its taxable records for taxable year (TY) 2009. 5 Subsequently, petitioner executed several Waivers of the Defense of Prescription under the Statute of Limitations of the National Internal Revenue Code (Waivers), with the following details:6

1. On August 17, 2012, Mr. Francis Giles B. Puno executed a Waiver (First Waiver) for the period until December 31, 2012. The First Waiver was accepted by then Officer-in-Charge Assistant Commission for LTS Alfredo V.

Misajon (OIC-ACIR Misajon) on

September 6, 2012.7

2. On November 6, 2012, Ms. Perla R. Catahan executed another Waiver (Second Waiver) for the period until June 30, 2013, OIC-ACIR Misajon accepted the Second Waiver on November 15, 2012.8

3. On May 24, 2013, Ms. Catahan executed a subsequent Waiver (Third Waiver) for the period until December 31, 2013. OIC-ACIR Misajon accepted the Third Waiver on June 13, 2013.9 3 Par. 4, Petition for Review, vis-a-vis Par. I, Answer, pp. 7 and 340, respectively; Par. 2, JSF, Docket- Vol. I, p. 395.

4 Exhibit "P-1 ",Docket- Vol. II, p. 769. 5 Par. 3, Summary of Admitted Facts, JSF, Docket - Vol. I, p. 395. 6 Par. 4, Summary of Admitted Facts, JSF, Docket- Vol. I, p. 395. 7 Par. 4.1, Summary of Admitted Facts, JSF, Docket- Vol. I, p. 395; Exhibit "P-7", Docket- Vol. II, pp. 881 to 882.

8 Par. 4.2, Summary of Admitted Facts, JSF, Docket - Vol. I, p. 395; Exhibit "P-8", Docket- Vol. II, pp. 883 to 884.

9 Par. 4.3, Summary of Admitted Facts, JSF, Docket - Vol. I, p. 395; Exhibit "P-9", Docket- Vol. II, pp. 885 to 886.

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First Philippine Holdings Corporation vs. Commissioner of

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4. On October 3, 2013, Mr. Ramon T. Pagdagdagan executed a final Waiver (Fourth Waiver) for the period until June 30, 2014. OIC-ACIR Misajon accepted the Fourth Waiver on October 29, 2013.10 On June 2, 2014, petitioner received a copy of the Preliminary Assessment Notice (PAN) of even date which assessed petitioner for deficiency income tax, value-added tax (VAT), expanded withholding tax (EWT), withholding tax on compensation (WC), fringe benefit tax (FBT) and documentary stamp tax (DST) for the TY 2009 in the total amount of P1,534,735,393.83. 11 In response to the PAN, petitioner alleges that it filed a Reply dated June 16, 2014.12 However, on June 30, 2014, petitioner received a copy of the Formal Letter of Demand with Rna/ Assessment Notice (FLD-FAN) dated June 27, 2014, finding it liable for deficiency income tax, VAT, EWT, we, FBT, DST and corresponding penalties and interest forTY 2009 in the total amount of P1,555,240,774.37 .13 The alleged deficiency taxes are broken down as follows:

Tax

Basic Tax

Interest

Compromise

Total

Penalty

Income Tax

p 527 107 058.70 p 447 968 793.45 p 50,000.00 p 975 125,852.15

VAT

10 181.362.04 ~ 9.104.648.13 50.000.00 19,336 010.17

EWT

11 634,558.97 10.593.695.74 25,000.00 22 253,254.71 we 19 948,611.70 17,948,285.16 25,000.00 37,921,896.86

FBT

432,644.52 389,261.54 16,000.00 837,906.06

DST

262 302 864.34 237 437 990.08 25 000.00 499,765,854.42

TOTAL TAX DUE

P1,555,240,774.37 10 Par. 4.4, Summary of Admitted Facts, JSF, Docket~ Vol. I, p. 395; Exhibit "P~10", Docket- Vol. II, pp. 897 to 898.

11 Par. 5, Summary of Admitted Facts, JSF, Docket ~ Vol. I, p. 395; Exhibit "P~2", Docket- Vol. II, pp. 770 to 780.

12 Exhibit "P~3", Docket- Vol. II, pp. 781 to 796. 13 Par. 6, Summary of Admitted Facts, JSF, Docket~ Vol. I, pp. 395 to 396; Exhibit "P~ 4", Docket- Vol. II, pp. 797 to 813.

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First Philippine Holdings Corporation vs. Commissioner of

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On July 25, 2014, petitioner filed a Protest to assessment of even date in the form of a request for reconsideration. 14 On December 10, 2014, petitioner filed a Supplemental

Protest 15

Petitioner filed on February 20, 2015 the instant Petition for Review.

On May 19, 2015, respondent filed his Answer, 16 interposing the following special and affirmative defenses: "SPECIAL AND AFFIRMATIVE DEFENSES Respondent hereby reiterates and re-pleads the preceding paragraphs of this answer as part of the Special and Affirmative Defenses.

THE ASSESSMENT WAS MADE

WITHIN THE PRESCRIPTIVE

PERIOD

TO

ASSESS

DEFICIENCY TAXES

5.

Petitioner claims that the waivers executed by its own officers were defective and did not toll the running of the prescriptive period to assess deficiency taxes. Firstly, petitioner argues that its corporate officers, one (1) treasurer and two (2) comptrollers, were not authorized to sign the waivers in its behalf. Secondly, petitioner argues that former OIC Assistant Commissioner Alfredo V. Misajon was equally not authorized to sign the Waivers.

6.

However, respondent submits that the position assumed by petitioner is more of convenience rather than merit. As for its first ground to invalidate the waiver, respondent cannot help but notice that petitioner's fourth officer to sign the waiver was already 14 Par. 7, Summary of Admitted Facts, JSF, Docket - Vol. I, p. 396; Exhibit "P-5", Docket- Vol. II, pp. 814 to 863.

15 Par. 8, Summary of Admitted Facts, JSF, Docket - Vol. I, p. 396; Exhibit "P-6", Docket- Vol. II, pp. 864 to 880.

16 Docket- Vol. I, pp. I 06 to 128.

, ..

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First Philippine Holdings Corporation vs. Commissioner of

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empowered with a Board Resolution. This tends to mislead the Honorable Court that the three (3) corporate officers who signed the previous waivers were not authorized to sign in behalf of petitioner. Moreover, the fourth corporate officer occupies the same position as the two before him as comptroller of petitioner. 7.

The second ground alleged by petitioner to invalidate the

Waiver

likewise deserves scant consideration. Petitioner recognizes RDAO 5-2001 which authorizes an Assistant Commissioner to sign a Waiver in behalf of respondent. The designation of an Officer-in- Charge does not divest ACIR Misajon of his powers, more important his functions, to act as Assistant Commissioner for the Large Taxpayers Service. As stated in RDAO 5- 2001, one of ACIR Misajon's functions is to sign waivers in behalf of the CIR. Also, there was no distinction under RDAO 5-2001 whether the revenue officer who will sign the waiver is an OIC or not.

8.

Given

the foregoing considerations, respondent respectfully submits that the waivers that were executed were validly executed and in accord with existing rules and regulations. Further, the case of "Rizal Commercial Banking Corporation vs. Commissioner of Internal Revenue' likewise tells us that strict adherence to RMO 20-90 is not absolute and a taxpayer may be estopped from questioning the validity of waivers. 9.

Thus, given that it was petitioner who executed the assailed waivers, and that the same was accepted by respondent through ACIR Misajon, it is respectfully submitted that the assessment was made within the prescriptive period to assess deficiency taxes.

PE:TITIONER IS LIABLE FOR THE

ASSESSED DEFICIENCY TAXES FOR

2009 10.

All

presumptions are in favor of the correctness of tax assessments. The good faith of tax assessors and the validity of their actions are presumed. They will be presumed to have taken into consideration all the facts to which their attention was called ( CIR vs. '~ ~ t.

Tax

C.T.A. C..se No. 8991 First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

Page 6 of 65

Construction Resources of Asia, Inc. 145 SCRA 671). It is incumbent upon the taxpayer to prove the contrary (Mindanao Bus Company vs. CIR, 1 SCRA 538; CIR vs. Tuazon, Inc., 173 SCRA 397) and failure to do so shall vest legality on respondent's actions and assessments. 11.

Per investigation report of respondent's examiners, the following tax deficiencies were found:

Basic Tax

Interest

Compromise

Total Increments

Penalty

Total

Income Tax

527,107,058.70 447,968,793.45 50,000.00 448,018,793.45 975,125,852.15

VAT

EWT

Compensation

FBT

DST

Total

10,181,362.04 9,104,648.13 50,000.00 9,154,648.13 19,336,010.17 11,634,558.97 10,593,695.74 25,000.00 10,618,695.74 22,253,254.71 19,948,611.70 17,948,285.16 25,000.00 17,973,285.16 37,921,896.86 432,644.52 389,261.54 16,000.00 405,261.54 837,906.06 262,302,864.34 237,437,990.08 25,000.00 237,462,990.08 499,765,854.42 831,607,100.27 723,442,674.10 191,000.00 723,633,674.10 1,555,240,774.38 The foregoing tax deficiencies were explained as follows: I. INCOME TAX

a. That per Reconciliation of Service income per books as against the data from the third party information (Relief) resulted to a discrepancy/variance amounting .. to P14,601,213.26 hence should be part of income pursuant to Sec. 32 of the NIRC as per schedule on page 491;

b. Reconciliation of purchases per books and the third party information (Relief) have a difference amounting to P9,513,394.16 and should also be included in the computation of income tax as per schedule on page 490. pursuant to Sec. 32 of the NIRC;

c. Verification of payment of Inaec Aviation Corp. (lnaec) for the share in the rental income on helicopter shows that the above named taxpayer did not declare the income amounting to P2,885,262.00. Purchases from lnaec was also undeclared in the computation on Income tax. The said findings resulted to a total of undeclared income of P6,253,986.54 as per summary on page 511 which should be included in the

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First Philippine Holdings Corporation vs. Commissioner of

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computation of income tax pursuant to Sec. 32 of the NIRC;

d. Verification of the payment of goods to top 10,000 corporation against the alpha list of suppliers shows that a discrepancy amounting to P6,548,267.00, hence, should be part of adjustment in income tax computation on page 497, pursuant to Sec. 32 of the NIRC;

e. Verification of Donation on charitable institution amounting to P5,464,500.00 was disallowed since there is no proof or certificate presented which is violation of Sec. 34 (H) of the NIRC; (page 435);

f. Per verification of the representation expenses it shows that the amount of P3,979,609.13 exceed the ceiling as prescribed by law per computation page 508, pursuant to RR-10-2002;

g. Reconciliation of the expenses per financial statement as against the Income tax return (ITR) shows a discrepancy amounting to P1,151,652,963.00. The amount was not declared in the financial statement, hence, claimed as expenses in the ITR as per summary on page 509. Interest expense was not necessary and not related to the taxable income pursuant to Sec. 34 (A)(1). Per Notes to FS #12, Long term debt FRCN 'Nere used to finance acquisition of other company's shares and for debt repayment. These funds were also used to finance your affiliates as stated in Note #20, Related Party disclosures which the Advances to FPH Fund, FGHC International, First Philec Group amounted to P3, 144,000,000.00, P2,410,000,000.00, and P969,000,000.00, respectively, which should be disallowed/added in the computation of income tax;

h. Verification of the salaries and wages per Financial statement /ITR as against the alpha list of employees shows that there is a discrepancy amounting to P65,838,758.38 as computed on page 501, which resulted to an under declaration of income pursuant to Sec. 32 of the NIRC;

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First Philippine Holdings Corporation vs. Commissioner of

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i. Comparison of income payments subject to withholding tax claimed per financial statement/income tax return as against the Alpha list disclosed that were not subjected to withholding tax amounting to P320,905,7283.26 per computation on pages 497 to 500 hence disallowed pursuant to Section 34 (K) of the NIRC, as amended;

j. The said findings resulted to a total deficiency tax on Income Tax amounting to P975, 125,852.15 including increments per summary on page 555.

II. Value Added Tax:

a. That per verification of service income per books against the party information (Relief), it shows that there is a discrepancy on income amounting to P14,601,21326 as summarized in page 491, which should be added in the computation of VAT pursuant to Sec. 106 of the NIRC, as amended;

b. Comparison of purchases per books and the third party information (Relief) shows a discrepancy amounting to P9,513,394.16 as summarized on page 490, which should also be included in the computation of VAT pursuant to Sec. 106 of the NIRC, as amended;

c. Per verification of the service and other income, it shows that some of income were not included in the computation of VAT amounting P44,129,345.07. The said amount should be part in the computation on VAT as stated on page 505 pursuant to Sec. 106 of the NIRC, as amended;

d. Reconciliation of the payment of goods to top lOT corporation against the alpha list of suppliers shows that the taxpayer pays more than the amount claimed in the FS, hence the said discrepancy or unaccounted source of cash amounting to P6,548,267 .00 should be part of adjustment in VAT computation on page 497, pursuant to Sec. 106 of the NIRC, as amended; l

First Philippine Holdings Corporation vs. Commissioner of

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Page 9 or 65

e. The said findings resulted to a total deficiency tax on

VAT

amounting to P19,336,010.17 including increments per computation on pages 554. III. WITHHOLDING TAX:

a.

Withholding Tax-Compensation

' Verification of the salaries and wages per alpha list and FS shows that there's a discrepancy amounting to P65,838,758.30 which resulted to a deficiency tax amounting to P37,921,896.86 including increments, pursuant to Sec. 80 (A) of the NIRC as per summary on page 552.

b.

Expanded Withholding Tax (EWT)

Verification disclosed that some of the income payments were not subjected to

Expanded

Withholding Tax in violation of Section 57 of the NIRC and its implementing regulations particularly Revenue Regulations No. 2-98 as amended by

Revenue

Regulations

No.

6-2001 and further . amended by Revenue Regulations No. 12-2001 and subsequently further amended by Regulations No. 17-2003 and 30-2003. This resulted to deficiency EWT amounting to P22,253,254.71 inclusive of increments (computation on pages 548 to 549). IV. DOCUMENTARY STAMP TAX A DST for the Advances to and from related parties, Short term and long term loans, Lease contact and issuance of stocks with a total amount of P52,516,431,441.83, only P31,465,264.00 was subjected to DST.

The remaining amount of P52,484,966,177.83 is still subject to DST which resulted to a deficiency tax amounting to P499,765,854.42 including increments (computation on page 550 to 551).

12. At this juncture, it must be stressed that when assessments are assailed, the burden of proof is upon the complaining party. It is, incumbent upon the complaining t.

First Philippine Holdings Corporation vs. Commissioner of

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party to show that the assessment was erroneous, in order to relieve himself from it.

13.

Failure to present proof of error in the assessment will justify judicial affirmation of said assessment (Delta Motors Co. vs.

Commissione~ CTA

Case No. 3782/ 21 May 1986/ Commissioner of Internal Revenue vs. Court of Appeal~ eta!./ G.R. Nos. 104151 and 105563, 10 March 1995)."

On June 1, 2015, respondent transmitted the BIR Records for the instant case.17 The pre-trial conference was set, and held on, July 9, 2015.18 Petitioner's Pre-Trial Brief 19 and respondent's Pre-Trial Brief 20 were both filed on July 6, 2015.

However, on even date, petitioner filed an Omnibus Motion/1 praying, in effect, for an early resolution of the issue of prescription, prior to the conduct of a full-blown trial on the merits of the case. During the pre-trial conference, the Court granted petitioner's Omnibus Motion and set the presentation of petitioner's witnesses to testify on the issue of prescription on August 10, 2015.22 The Court also directed the parties to submit their Joint Stipulation of Facts and Issues.

The parties submitted their Joint Stipulation of Facts and Issues (JSF) on August 6, 2015.23 Consequently, the Court issued a Pre- 17 Respondent's Compliance dated May 28,2015, Docket- Vol. I, pp. 350 to 351. 18 Notice of Pre-Trial Conference dated May 22, 2015, Docket- Vol. I, pp. 348 to 349; Minutes of the hearing held on, and Resolution dated, July 9, 2015, Docket- Vol. I, pp. 381 and 384, respectively.

19 Docket - Vol. I, pp. 353 to 364.

20 Docket- Vol. I, pp. 370 to 373.

21 Docket- Vol. I, pp. 374 to 379.

22 Minutes of the Hearing held on July 9, 2015, Docket- Vol. I, p. 381; Resolution dated July 9, 2015, Docket- Vol. I, p. 384. 23 Docket- Vol. I, pp. 394 to 401.

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First Philippine Holdings Corporation vs. Commissioner of

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Trial Order on August 18, 2015,24 approving and adopting the said JSF, and considering the pre-trial as deemed terminated. During the trial on the issue of prescription, petitioner presented documentary and testimonial evidence. As for its testimonial evidence, on September 7, 2015, petitioner offered the testimonies of the following witnesses: Mr. Techserve Allan Golfo/5 Senior Manager for Corporate Accounting, Ms. Gemma Rose C. Roque,26 Head of Comptrollership Group, and Atty. Esmeralda C. Amistad/7 Assistant Corporate Secretary and Assistant Compliance Officer.

Petitioner filed its Formal Offer of Evidence (FOE) on the issue of prescription on October 7, 2015. 28 Respondent filed his Omnibus Motion (to Cancel Hearing Set on July 20, 2015 and Admit Comment) on December 1, 2015.29 In the Resolution dated December 1, 2015,30 the Court admitted petitioner's Exhibits. Respondent likewise presented documentary and testimonial evidence. He offered the testimony of his witness, Ms. Olivia S. Sison/~ Revenue Officer II of the Bureau of Internal Revenue (BIR). There being no other witnesses to present, respondent's counsel made an oral FOE. Considering that petitioner did not interpose any objection, the Court admitted respondent's exhibits and gave the parties thirty (30) days from notice to file their respective memorandum. 32 24 Docket- Vol. I, pp. 414 to 418.

25 Exhibit "P-57'', Docket- Vol. I, pp. 424 to 439; Minutes of the hearing held on, and Resolution dated, September 7, 2015, Docket- Vol. II, pp. 731 to 732, 733. 26 Exhibit "P-58", Docket- Vol. II, pp. 582 to 597; Minutes of the hearing held on, and Resolution dated, September 7, 2015, Docket- Vol. II, pp. 731 to 732, 733. 27 Exhibit "P-59", Docket - Vol. II, pp. 720 to 730; Minutes of the hearing held on, and Resolution dated, September 7, 2015, Docket- Vol. II, pp. 731 to 732, 733. 28 Docket- Vol. II, pp. 751 to 768.

29 Docket- Vol. II, pp. 1012 to 1015. 30 Docket- Vol. II, pp. 1010 to 1011. 31 Exhibit· R-6", Docket- Vol. II, pp. 1027 to 1030; Minutes of the hearing held on May 4, 2016, Docket- Vol. III, pp. 1052 to 1053; Resolution dated May 23, 2016, Docket -Vol. III, pp. 1055 to 1057.

32 Minutes of the hearing held on May 4, 2016, Docket - Vol. III, pp. 1052 to 1053; Resolution dated May 23,2016, Docket- Vol. III, pp. 1055 to 1057.

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First Philippine Holdings Corporation vs. Commissioner of

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Within the extended time granted by the Court, petitioner filed its Memorandum (Re: Issue on Prescription) on June 23, 2016,33 while respondent filed his Memorandum on July 13, 2016.34 On September 27, 2016, the Court issued a Resolution resolving the issue on prescription.35 The Court partially granted petitioner's Omnibus Motion.

The dispositive portion of the said Resolution states:

"WHEREFORE, in view of the foregoing, petitioner's

Omnibus

Motion

is

PARTIALLY

GRANTED.

Accordingly, respondent's right to assess the following:

(1) deficiency VAT for the 1st and 2nd quarters of 2009;

(2) deficiency EWT for the months of January to July 2009; (3) deficiency WT on compensation for the months of January to July 2009; and (4) deficiency FBT for the pt and 2nd quarters of 2009 had already prescribed. Set this case for hearing on November 7, 2016 at 9:00 a.m. for the presentation of evidence for the petitioner to determine its liability for the remaining tax deficiency assessments for the taxable year 2009.

Reconsideration}6

with petitioner's Comment (to Respondent's Motion for Partial Reconsideration) filed on November 3, 2016.37 Likewise, petitioner filed its Motion for Partial Reconsideration (Re: Decision dated September 27, 2016) on October 18, 2016,38 with no comment from the respondent as per Records Verification Report dated November 21, 2016.39 In the Resolution dated March 9, 2017,40 the Court denied both motions for lack of merit.

33 Docket- Vol. III, pp. 1072 to 1115. 34 Docket- Vol. III, pp. I 117 to 1123. 35 Docket- Vol. III, pp. 1126 to 1144. 36 Docket- Vol. III, pp. 1145 to 1152. 37 Docket- Vol. III, pp. 1173 to 1178. 38 Docket- Vol. III, pp. 1154 to 1168. 39 Docket- Vol. III, p. 1179.

40 Docket- Vol. II, pp. 1181 to 1191

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First Philippine Holdings Corporation vs. Commissioner of

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Aggrieved, both parties separately filed their Petitions for Review with the CTA En Bane, by respondent on April 11, 2017 under CTA EB No. 1625, while that of petitioner's on April 17, 2017 under CTA EB No. 1626.

On April 19, 2017, petitioner's Petition was consolidated with that of respondent's, the case bearing the lowest docket number, via CTA En Banes Minute Resolution.41 Pending the resolution of the CTA En Bane, the trial on the merits in the instant case proceeded. On May 29, 2017, petitioner filed a Motion to Commission An Independent Certified Public Accountant42 The Court commissioned Ms. Roselle Y. Caraig on June 14, 2017, as the Independent Certified Public Accountant (ICPA) to render a report on the case.43 When the case was called for the presentation of evidence for the petitioner to determine the liability for the remaining deficiency taxes for the TY 2009, petitioner presented documentary and testimonial evidence. As for its testimonial evidence, petitioner offered the testimonies of the following witnesses: Mr. Techserve Allan Golfo,44 Senior Manager for Corporate Accounting, Ms. Victoria A. Martinez,45 former Assistant Vice President, and Ms. Roselle Y. Caraig,46 the Court-commissioned ICPA. On August 3, 2017, the ICPA submitted her report47 to the Court, which was later amended and submitted on September 7, 2017.48 41 Docket- Vol. III, pp. 1200 to 1201. 42 Docket, Vol. III, pp. 1217 to 1220. 43 Minutes ofthe Hearing held on June 14,2017, Docket- Vol. III, pp. 1362 to 1363. 44 Exhibit "P-5006", Docket- Vol. IV, pp. 1416 to 1435; Minutes of the hearing held on July 31, 2017, Docket- Vol. IV, p. 1787; Order dated August 16, 2017, Docket- Vol. IV, p. 1788.

45 Exhibit "P-5007", Docket- Vol. IV, pp. 1392 to 1397; Minutes of the hearing held on July 31,2017, Docket- Vol. IV,p. 1787; Order dated August 16,2017, Docket- Vol. IV, p. 1788.

46 Exhibit "P-300", Docket- Vol. IV, pp. 1820 to 1843; Minutes of the hearing held on September 13,2017, Docket- Vol. IV, p. 1847; Order dated August 16,2017, Docket -Vol. IV, p. 1788.

47 !CPA Report dated July 31,2017.

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First Philippine Holdings Corporation vs. Commissioner of

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For petitioner's documentary evidence, it filed its Formal Offer of Evidence on October 30, 2017.49 On November 27, 2017, the said Formal Offer of Evidence was resolved by the Court, 50 admitting petitioner's exhibits, except for certain exhibits which were denied for not being found in the records and for failure to submit the duly marked exhibit. Petitioner filed a Motion for Partial Reconsideration (Re: Resolution dated November 27, 2017) on December 12, 2017,51 which was partially granted by the Court in its Resolution dated June 21, 2018,52 admitting the previously denied exhibits except for Exhibit "P-93", for not being found in the records. Petitioner's admitted documentary exhibits are the following:

Exhibit:

Description:

P-4

Formal Letter of Demand with Final Assessment

Notice dated June 27, 2014

P-5

Petitioner's Protest filed on July 25 2014

P-11

Income Tax Return of FPH for the year 2009

P-60

PRC Professional Identification Card

P-61

Bureau of Internal Revenue Accreditation Number 08-

000745-40-2016 issued to Roselle Y. Caraig on June 8, 2016 by the Revenue National Accreditation Board valid until June 8, 2019

P-62

PICPA ID with ID Number 101274

P-63

Tax Management Association of the Philippines

(TMAP) application form for Isla Lipana & Co. indicating Roselle Y. Caraig as the representative

P-64

Curriculum vitae

P-65

Reconciliation of undeclared sales

P-66

Reconciliation of undeclared purchases

P-67

Audited Financial Statement of FPH for Taxable Year

2009

P-68

Itemized summary of the donations of Eugenio Lopez Foundation, Inc., the Philippine Business for Social Proqress and the Lopez Group Foundation, Inc.

P-69

Certificate of Donation No. D033-093-2009 (certified by Benjamin F. Uichico, authorized signatory of the 48 Exhibit "P-51", Amended !CPA Report dated August 31,2017. 49 Docket- Vol. V, pp. 1876 to 1887.

50 Resolution dated November 27, 2017, Docket- Vol. V, pp. 2115 to 2117. 51 Docket- Vol. V, pp. 2124 to 2127.

52 Docket- Vol. V, pp. 2172 to 2178.

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First Philippine Holdings Corporation vs. Commissioner of

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Philippine Business for Social Progress)

P-69-A

Certificate of Donation No. D043-007-2009 (certified by Mariti H. Hernandez actinq comptroller of ELFI)

P-69-B

Certificate of Donation No. D043-014-2009 (certified by Mariti H. Hernande~actinq comptroller of ELFI)

I

P-69-C

Certificate of Donation No. D043-022-2009 (certified by Mariti H. Hernandez, acting comptroller of ELF!)

P-69-D

Certificate of Donation No. D043-028-2009 (certified by Mariti H. Hernandez, acting comptroller of ELF!)

P-69-E

Certificate of Donation No. D043-035-2009 (certified by Mariti H. Hernandez, actinq comptroller of ELF!)

P-69-F

Certificate of Donation No. D043-044-2009 (certified by Mariti H. Hernandez, acting com_ptroller of ELF!)

P-69-G

Certificate of Donation No. D043-047-2009 (certified by Mariti H. Hernandez, acting comptroller of ELF!)

P-69-H

Certificate of Donation No. D043-052-2009 (certified by Mariti H. Hernandez, acting comptroller of ELF!)

P-69-I

Certificate of Donation No. D043-054-2009 (certified by Mariti H. Hernandez, acting comptroller of ELF!) P-69-l Certificate of Donation No. D043-061-2009 (certified by Mariti H. Hernandez, acting comptroller of ELF!)

P-69-K

Certificate of Donation No. D043-040-2009 (certified by Mariti H. Hernandez acting comptroller of ELF!)

P-69-L

Certificate of Donation No. D043-044-2009 (certified I by Mariti H. Hernandez actinq comptroller of ELF!)

P-69-M

Certificate of Donation No. D043-048-2009 (certified by Mariti H. Hernandez, acting comptroller of ELF!)

P-70

Schedule with breakdown of Representation Expense

of Petitioner

P-71

Reconciliation of Interest Expense of Petitioner

P-72

Reconciliation of Professional Fees

P-73

Reconciliation of Rental

P-74to

Reconciliation of ITR/FS and Alpha list

P-74-L

P-75

Judicial

Affidavit

of

Roselle

Y.

Caraig

(Re:

Commissioning as Independent Certified

Public

Accountant)

P-75-A

Signature of Roselle Y. Caraig

P-76

Judicial Affidavit of Jason Jimenez

P-76-A

Signature of Jason Jimenez

P-77

Independent Certified

Public

Accountant

(!CPA) Report dated August 31, 2017

P-78

Certificate

of

Filing

of

Amended

Articles

of Incorporation dated August 6, 2014 with attached

Amended Articles of Incorporation of Petitioner

P-78-1

Amended Articles of Incorporation of Petitioner

P-78-2

Certificate of Filing of Amended By-Laws dated July 9, 2009 with attached Amended By-laws of Petitioner

P-79

BIR Certificate of Registration of Petitioner

P-80

Summary List of Sales for calendar year 2009

P-81

Summary List of Purchases for calendar year 2009

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First Philippine Holdings Corporation vs. Commissioner of

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P-82

Alphalist of Payees

P-83

Relevant working paper of Petitioner's external auditor to prove that there were not transactions with

INAEC Corporation

-·

P-84

Relevant working paper of Petitioner's external auditor to prove that the amount picked up by the BIR included transactions which should not be classified under "salaries and wages" account

P-84-1

Breakdown of the personnel expenses that should not be classified as salaries based on the working paper I of Petitioner's external auditor

P-84-2

Breakdown of retirement benefit expense based on the working paper of Petitioner's external auditor

P-84-3

Breakdown of training and others based on the working paper of Petitioner's external auditor

P-84-4

Breakdown of reconciling items of the disallowed expenses issue

P-84-5

Breakdown of other outside services under disallowed expenses issue

P-84-6

Breakdown of the repairs and maintenance, office supplies expense and communication, light and water under the disallowed expense issue

P-84-7

Schedule of Exhibits

P-85

Audited Financial Statement of Petitioner for the year ending December 31, 2009

P-86

Floating

Rate

Corporate

Notes

(FRCN)

Facility

Agreement

P-87

Fixed

Rate

Corporate

Notes

(FXCN)

Facility

Agreement

P-88

Reconciling

items of the identified discrepancy between the forex loss per AFS vs. forex loss per ITR based on relevant portion of the working paper from Petitioner's external auditor

P-89 to

Official Receipts by the Law Firm of Quiason

P-89-24

Makalintal Barot Torres and Ibarra to Petitioner

P-89-25 to

Official Receipts by SGV & Co. to Petitioner

P-89-40

-

P-89-41 to

Official Receipts by Migallos & Luna Law Office to

P-89-64

Petitioner

P-89-53 to

Official Receipts by Puno and Puno Law Offices to

P-89-65

Petitioner

P-90 to

Official Receipts by Watson Wyatt Worldwide to

P-90-2

Petitioner

P-91

Official Receipts issued by First Philippine Realt

Corporation

P-92 to

Certificate of Creditable Tax Withheld At Source BIR

P-92-74

Form No. 2307 of Petitioner

P-93-1 to

Documentary Stamp Tax Declaration/Return BIR

P-93-54

Form No. 2000 of Petitioner

P-300

Judicial Affidavit of Roselle Y. Carajg

P-300-A

Signature of Roselle Y. Caraig

L

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

P-5001

FPH's Articles of Incorporation

P-5002

FPH's Annual Income Tax Return (BIR Form No. 1702) for taxable year 2009 filed with the BIR on A_pril 14, 2010

P-5003

General Ledger of FPH

P-5004

Floating

Rate

Corporate

Notes

(FRCN)

Facility

Agreement

P-5005

Fixed

Rate

Corporate

Notes

(FXCN)

Facility

Agreement

P-5006

Judicial Affidavit ofTechserve Allan U. Golfo

P-5006-A

Signature of Techserve Allan U. Golfo

P-5007

Judicial Affidavit of Victoria A. Martinez

P-5007-A

Signature of Victoria A. Martinez During the hearing held on July 23, 2018, respondent's counsels manifested that they are adopting all the evidence presented in the preliminary determination of jurisdiction of this case, which was noted by the Court.53 Consequently, on July 31, 2018, respondent filed its Formal Offer of Evidence,S4 with petitioner's Comment/Opposition (To Respondent's Formal Offer of Evidence) filed on August 24, 2018.55 Meanwhile, on September 3, 2018, CTA En Bane issued a Decision,56 denying both petitions for lack of merit. The dispositive portion of the Decision states:

"WHEREFORE, pursuant to Section 2 of Republic Act No. 1125, as amended by Republic Act No. 9503 in relation to Section 3 of Rule 2 of the Revised Rules of the Court of Tax Appeals, the Petitions for Review filed by

First

Philippine

Holdings

Corporation

and the Commissioner of Internal are hereby DENIED for lack of merit. The findings and conclusions reached by the Second Division in the assailed Resolutions dated September 27, 2016 and March 9, 2017 Assailed Resolutions are hereby AFFIRMED.

Internal Revenue

Resolving respondent's Formal Offer of Evidence, the Court issued a Resolution dated October 3, 2018,57 admitting respondent's exhibits and giving the parties a period of thirty (30) days from notice to file their respective memorandum.

Respondent's documentary exhibits are the following:

Exhibit:

Description:

R-8

Letter dated May 14, 2010

R-9

First Notice for the Presentation of Books of Accounts and other Accounting_ Record dated June 7 L 2010 --

R-10

Second and Final Notice for the Presentation of Books of Accounts and other Accounting Record dated August 5, 2010

R-11

Letter dated April 5, 2011

R-12

Preliminary

Assessment

Notice

with

Details

of

Discrepancies

R-13

Formal Letter of Demand, Assessment Notices and ·- -- --- -

Details of Discrepancies

In compliance thereof and within the extended time granted by the Court, petitioner filed its Memorandum on November 26, 2018,58 while respondent failed to file his memorandum as per Records Verification Report dated December 6, 2018.59 On January 4, 2019, the instant case was submitted for decision.60

THE ISSUES

Based on the JSF, both parties are unable to agree on the issues to be resolved by the Court. Hence, the issues to be resolved for petitioner are as follows: 61

1. Whether or not the right of the respondent to assess petitioner for deficiency taxes has already prescribed; 57 Docket- Vol. V, pp. 2269 to 2270.

58 Docket- Vol. V, pp. 2303 to 2374.

59

I

Docket- Vo. V, p. 2377.

60 Resolution dated October 16, 2018, docket, Vol. lll, p. 1779. 61 Pars. I to 10, Issues to be Resolved, JSF, Docket- Vol. I, pp. 396 to 397. " First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

2. Whether or not petitioner was afforded due process in ·the issuance of the formal letter of demand and final assessment notice;

3. Whether or not petitioner's right to speedy disposition of cases was violated;

4. Whether or not the FLD-FAN is invalid for failure to comply with Revenue Memorandum Order No. 1-2000;

5. Whether or not petitioner is liable for deficiency income tax for taxable year 2009;

6. Whether or not petitioner is liable for deficiency VAT for taxable year 2009;

7. Whether or not petitioner is liable for deficiency EWT for taxable year 2009;

8. Whether or not petitioner is liable for deficiency we for taxable year 2009;

9. Whether or not petitioner is liable for deficiency FBT for taxable year 2009; and 10.

Whether or not petitioner is liable for deficiency DST for taxable year 2009.

On the other hand, the sole issue to be resolved on the part of the respondent is as follows: 62 Whether or not petitioner is liable to pay the assessed amount of P1,555,240,774.37, representing its deficiency Income Tax, VAT, EWT, we, FBT, DST and corresponding penalties and interest, for taxable year 2009.

Petitioner's arguments:

Petitioner argues that it is not liable to deficiency taxes for the lY 2009.

62 Par. I, JSF, Docket- Vol. I, p. 397.

L

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

Petitioner avers that on the alleged assessed deficiency income tax, it stresses that it does not have any form of undeclared sales, unaccounted purchases or unrecognized income, nor does it maintain an unaccounted source of cash. It contends that being a listed company, it adopts the policy of transparency and full reporting with regard to its tax records and full compliance with applicable laws and regulations.

As to the assessed deficiency VAT, petitioner argues that Section 106 of the National Internal Revenue Code (NIRC) of 1997, is inapplicable as it is a seller of services, subject to VAT upon collection and not upon consummation of the sale. Further, petitioner maintains that it did not have undeclared purchases as well as unaccounted source of cash.

Petitioner disagrees with respondent when it was assessed of deficiency EWT and we on the basis that the assessment lacks factual or legal basis. As such, the deficiency EWT and WC assessment must be cancelled for being in clear violation of its right to due process and non-compliance with Section 228 of the NIRC of 1997.

On the deficiency FBT, petitioner avers that this item should be cancelled as the expenses on transportation and travel were only used for the conduct of the business and cannot be considered as fringe benefits. Moreover, the item "Other Benefits" should also be cancelled as respondent failed to indicate where he got the figure. Lastly, petitioner asserts that it is not liable for deficiency DST on the basis that the Filinvest Decision,63 imposition of DST on inter- office advances granted to affiliated corporation, is not applicable in this case. It posits that the Filinvest Decision is not applicable to transactions beginning March 20, 2004 upon the effectivity of Republic Act No. 9243, which amended the provisions of the NIRC of 1997, relating to DST.

According to petitioner, the said Decision cannot be applied retroactively.

Respondent's counter-arguments:

63 Referring to Commissioner of Internal Revenue vs.

Filinvest Development

Corporation, G.R. Nos. 163653 and 167689 dated July 19,2011. t

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

Respondent maintains that petitioner is liable for deficiency income tax, VAT, EWT, WC, FBT and DST for the TY 2009.

COURT'S RULING

The Petition for Review must be partially granted. As ruled in the Resolution dated September 27, 2016,64 which was affirmed by the CTA En Bane in its Decision dated September 3, 2018,65 the period to assess the following alleged deficiency taxes for the TY 2009 have already prescribed:

(1) deficiency VAT for the 1st and 2nd quarters of 2009; (2) deficiency EWT for the months of January to July 2009; (3) deficiency WT on compensation for the months of January to July 2009; and (4) deficiency FBT for the 1st and 2nd quarters of 2009. The Court shall now determine whether the petitioner is liable of the remaining alleged deficiency income tax, VAT for the 3'd and 4th quarters, EWT for the months of August to December, WC for the months of August to December, DST and compromise penalty for the TY 2009.

For an orderly discussion, the subject tax assessments shall be addressed in this sequence:

Tax Type

EWT

WTC

IT

FBT

VAT

DST

Total

64 Docket- Vol. III, pp. 1126 to 1144. 65 Docket- Vol. V, pp. 2203 to 2249.

Total

p 22,253,254.71 37,921,896.86 975 125 852.15 837,906.06 19,336,010.17.

499 765,854.42 P1,555,240,774.37 t..

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

I.

DEFICIENCY EWT - P22,253,254.71 Respondent assessed petitioner of deficiency EWT for TY 2009 in the amount of P22,253,254.71, computed as follows:66

Amount

Rate

Tax Dye

Professional Fee (15%)

p 66,922,594.80 15% p 10,038,389.22

Professional Fee (10%)

790,628.20 10% 79,062.82

Rental

19,090,158.00 5% 954,507.90 Payment to supplier of services to Top lOT Corp 1,160,877,170.00 2% 23,217,543.40 Payment of goods to Top lOT

Corp

9,610,152.00 1% 96,101.52

Total

P1,257 ,290, 703.00 p 34,385,604.86

Less: Payment

22,751,045.89

Tax Still Due

p 11,634,558.97 Add: Interest (Computed up to 07 .15.2014) p 10,467,915.52 Interest on late remittance 125,780.22 P10,593,695.74

Compromise Penalty

25,000.00 10,618,695.74

TOTAL DEFICIENCY EWT

P22,253,254.71 The assessment resulted from the respondent's finding that there were income payments made by petitioner in the year 2009 that were not subjected to EWT as required under Section 2.57.2 of Revenue Regulations (RR) No. 02-98, as amended, detailed as follows: 67

Income Payments

Per ITR/FS

Per Alphalist

Discrepancv

Rate

EWTDue

Professional Fee (15%)

p 66 922 594.80 p 53 113 965.12 p 13 808 629.68 0.15 p 2 071 294.'

Professional Fee ( 15%)

790 628.20 790 628.20 -

Rental

19 090 158.00 17 864 647.74 1 225 510.26 0.05 61 275.!

Payment of services by Top lOT Corp

Security Services

p 14 061 410.00 Other Outside services 18 219 959.00

Advertisino

1 425_,625.00

Repairs and

6,614,607.00

Maintenance

-Labor

Insurance

7 452 886.00 Communication, Light 6, 757,086.00

and Water

Interest

1 067 075 436.00

Representation

5 020 086.00

Others-Cost of Services

13 155 000.00

Others-Operating

21,095,075.00

Expenses

1 160 877 170.00 685 777 719.97 475 099 450.03 0.02 9 501989.1

TOTAL

P1 247 680 551.00 P757 546 961.03 P490 133 589.97 Pll 634 558.~ Add: Interest (Computed up to 07.15.2014) p 10 467 915.52 66Exhibit "P-4", Docket- Vol. II, p. 798. 67 Exhibit "P-4", Details of Discrepancies, Schedule 8, Docket- Vol. II, p. 802.

L

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

~

PeriTR/FS

Per.

-Rate I

EWT Due

tonlate1 ·

Pl

?~ nnn nn

TOTAL DEFICIENCY EWT

The Court shall discuss each of the above-enumerated categories of income payments.

a. Professional fees- P13_808/629.68 Section 2.57.2(A)(9) of RR No. 02-98, as amended, imposes 10% or 15% on payments for professional fees as follows: "Sec. 2.57.2.

Income payments subject to creditable withholding tax and rates prescribed thereon. - xxx.

(A)

Professional fee~ talent fee~ etc./ for services rendered by individuals. - On the gross professional, promotional and talent fees or any other form of remuneration for the services of the following individuals - Fifteen percent (15%), if the gross income for the current year exceeds P720,000; and Ten percent (10%), if otherwise;"

_!Ql; 1 R fiQ~ Petitioner contends that the assessed professional fees of P13,808,629.68 pertain to:

(a) income payments to entities exempted from withholding, (b) professional fees subjected to 2% withholding and (c) legal fees which were not considered by respondent in his evaluation/audit.

Details of petitioner's reconciliation are as follows: 68

Per ITRIFS

P67 ,713,223.00

Less:

1. Exempted from EWT-GPPs SGV &Co.

p 6,063,156.70

Migallos & Luna Law Offices

300,000.00

Puno & Puno Law Offices

363,000.00

The Law Firm of QMBTI

2,155,090.84

Villaraza Cruz Marcelo & Angangpaco

8,928,571.42 , 2. Income subjected to 2% EWT 68 Exhibit "P-77", Table 6.15, p. 17.

L

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

Watson Wyatt Philippines

Add:

3. Various legal fees subjected to 15% EWT Professional fees subjected to 15% EWT

Others

600,000.00 1,560,000.00 2,874,705.91 166,483.00

Per Alphalist

PS3,904,592.95 The Court-commissioned ICPA, Ms. Roselle M. Caraig, stated that it was not provided with Schedule 3 of the Annual Information Return of Income Tax Withheld (Expanded)/Income Payments Exempt from Withholding Tax (BIR Form No, 1604-E) to be able to verify the actual amount of income payments to General Professional Partnerships (GPPs) listed above. However, the ICPA was provided with the official receipts (0Rs)69 issued by the said GPPs to support petitioner's payments thereto for CY 2009. With regard to the income payments to Watson Wyatt Philippines, the ICPA noted from the alphalist of payees attached to the BIR Form No. 1604-E that the total income payments amounted to P602,500.00 and not P600,000.00 as claimed by petitioner.70 The ICPA was, likewise, provided with copies of the 0Rs71 issued by Watson Wyatt Philippines aggregating to P662,750.00 to support the claimed expenses.

As to the reconciliation items "various legal fees subjected to 15%" and "professional fees subjected to 15% EWT", the ICPA was not provided with the details of the suppliers/income payments composing the said payments. However, the ICPA verified that the total income payments subjected to 15% withholding tax per alphalist of payees attached to the BIR Form No. 1604-E amounted to P53,111,018.37.

The ICPA was not able to verify the reconciling item "Others" as it was not provided with details and/or documents in support of petitioner's claim.

The Court sustains the assessment.

69 Exhibits "P-89-1" to "P-89-65".

70 Exhibit "P-82".

71 Exhibits "P-90-1" and "P-90-2".

L

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

Section 22(8) of the NIRC of 1997, as amended, defines GPPs as "partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business'. As a corollary, Section 26 of the same NIRC provides that a general professional partnership shall not be subject to income tax. Its partners are the ones liable in their individual capacity for the payment of income tax. Consequently, GPPs are exempt from EWT as provided for under Section 2.57.5 of RR No. 02-98, as amended by RR No. 14-02, to wit:

"Sec. 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:

XXX

XXX

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:

XXX

XXX

XXX

(4) General professional partnerships

XXX

XXX

xxx" However, in the instant case, petitioner failed to provide valid supporting documents, such as the Articles of Partnership of the subject payees to prove that the same are indeed GPPs. The ORs presented by petitioner merely established the amount of professional fees paid for a particular period. As to the professional fees paid to Migallos & Luna Law Offices and Puna & Puna Law Offices, in the respective amounts of P300,000.00 and P363,000.00, there is no indication that the gross income for the year 2009 of the said payees did not exceed P720,000.00. Thus, the same shall be imposed with the 15% EWT rate.

'-'

L

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

On the income payments to Watsons Wyatt Philippines amounting to P662,750.00, the Court cannot determine the taxability of the same because the supporting 0Rs72 do not show the description or the nature of the said income payments. Also, petitioner did not submit the invoices referred to in the ORs. As to the remaining reconciling items, i.e., various legal fees subjected to 15% EWT in the amount of P1,560,000.00, professional fees subjected to 15% EWT in the amount of P2,874,705.91 and others in the amount of P166,483.00, the Court cannot verify the same without the corresponding details and supporting documents. In sum, petitioner is liable for the deficiency 15% EWT assessment of P2,071,294.45 on professional fees of P13,808,629.68.

b. Rentals- P1,225,510.26 Petitioner contends that the difference in rentals amounting to P1,225,510.26 pertains to income payments to First Philippine Realty Corporation for purchases of food items. However, a perusal of the OR73 provided by petitioner shows that the amount indicated therein does not tally with the assessed amount of P1,225,510.26. Moreover, since the nature of the income payment cannot be ascertained from the supporting OR, the Court cannot determine the tax implication of the transaction. Thus, the income payment of P1,225,510.26 shall be considered as rentals subject to 5% EWT, under Section 2.57.2 of RR No. 02-98, as amended by RR No. 14-02, which states: "Sec. 2.57.2. Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in

the Philippines:

XXX

(C) Rentals

72 Exhibits "P-90-1" and "P-90-2".

73 Exhibit "P-91 '".

"

XXX

XXX

L

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

(1) Real properties.- On gross rental for the continued use or possession of real property used in business which the payor or obligor has not taken or is not taking title, or in which he has no equity - Five percent (5%);

(2) Personal properties.- On gross rental or lease in excess of

Ten

Thousand

Pesos

(PlO,OOO.OO) per payment for the continued use or possession of personal property used in business which the payor or obligor has not taken or is not taking title, or in which he has no equity which include, but not limited to the following: land transport equipment, water transport equipment, air transport equipment, industrial equipment, commercial equipment, scientific equipment, agricultural machinery and equipment, construction/civil engineering machinery and equipment, telecommunication equipment, office furniture/machines/equipment, main frame computer and all other computer machines/equipment, materials handling equipment and auxiliary equipment- Five percent (5%); However, the

Ten

Thousand

Pesos

(PlO,OOO.OO) threshold shall not apply when the accumulated gross rental or lease paid by the lessee to the same lessor exceeds or is reasonably expected to exceed PlO,OOO.OO within the year. In which case, the lessee shall withhold the five percent (5%) withholding tax on the entire amount.

c. Purchases of Services by Top 10,000 Corporations- ?475,099,450.03 Petitioner argues that the difference pertains to (a) salaries and wages paid to security guards through security agencies, (b) membership dues and charges paid to non-stock non-government institutions exempt from income (withholding) tax, (c) interest payments to financial institutions exempt from income (withholding) tax by virtue of their certificate of tax exemptions; and (d) payments (

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

to government or its political subdivisions for real property taxes, business permits and other local and national taxes and fees. 74 The Court cannot likewise verify petitioner's claim due to lack of specific details and supporting documents pertaining to the items in the reconciliation submitted by the petitioner. Thus, this assessment item shall remain.

It is noted that while the assessment covering the months of January to July of TY 2009 had already prescribed, petitioner was unable to point out which portion of the assessment pertains thereto, hence, the entire EWT assessment shall be considered as pertaining to the months of August to December 2009. In sum, petitioner is liable for basic deficiency EWT for TY 2009 in the amount of Pl1,634,558.97, computed as follows:

Income Payments

Amount

Rate

EWTDue

Professional Fee (15%)

I'

13,808,629.68 15%

I'

2,071,294.45

Rental

1,225,510.26 5% 61,275.51 Purchases of services by Top lOT Corp 475,099,450.03 2% 9,501,989.00

TOTAL

P490,133,589.97 P11,634,558.97 II.

DEFICIENCY WTC- P37,921,896.86 Finding that petitioner failed to pay the corresponding WTC on unaccounted salaries and wages of P65,838,758.30 pursuant to Section 80(A) of the NIRC of 1997, as amended, respondent assessed petitioner of deficiency

EWT

in the amount of P37,921,896.86, computed as follows:75

Unaccounted Salaries and Wages

Rate

Deficiency Tax

Add: Interest (Computed up to 07.15.2014)

Compromise Penalty

TOTAL DEFICIENCY WTC

74 Exhibit "P-77", Annexes 3, 3-1,3-2 and 3-3. 1'17,948,285.16 25,000.00 75 Exhibit "P-4", Docket- Vol. II, pp. 797 to 813. I' 65,838,758.30 0.30 I' 19,948,611.70 17,973,285.16 P37 ,921,896.86 t

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

Respondent computed the unaccounted salaries and wages as follows: 76

Salaries and Wages

Per ITR

P422,611,345.00

Per Alphalist

356,772,586.70 Unaccounted Salaries ar1d W~ge!_ P65,838, 758.30 Relative thereto, petitioner contends that the difference between the salaries and wages per ITR as against those shown in the alphalist of employees attached to the Annual Information Return of Income Tax Withheld on Compensation and Final Withholding Taxes or BIR Form No. 1604-CF pertains to 13th month pay as well as petitioner's contributions to pension plans, Social Security System (SSS),

Home Development Mutual Fund (HDMF)/Pag-ibig and

PhiiHealth which are allegedly exempt from WTC. Details of petitioner's reconciliation are presented as follows: 77

Salaries and Wages per ITR

P453,174,482.00 Salaries and Wages per Alpha list of Payees 356,772,586.70

Unaccounted Salaries and Wages

p 96,401,895.30 Less: Payments not subjected to withholding tax on compensation Contributions to Pension plans P185,126,164.77 SSS, HDMF, and Philhealth 1,320,045.00

Fringe-Benefits- Others

8,774,250.41 Add: Classified under "Direct Charges-Salaries wages and benefits" 98 818 564.88

Difference

p - However, petitioner failed to present evidence to explain the actual nature of the aforesaid amounts. Thus, in the absence of proof that the amount of P65,838, 758.30 is not subject to WTC, petitioner is liable for the corresponding basic deficiency WTC for TY 2009 in the amount of P19,948,611.70, as computed by respondent. As earlier noted, respondent's right to assess petitioner of deficiency WTC for the months of January to July of TY 2009 had already prescribed. Petitioner was, however, unable to establish that the salaries and wages of P65,838,758.30 or a portion thereof pertained to the months of January to July, 2009. Thus, the Court shall consider the amount of P65,838, 758.30 as pertaining to the months of August to December 2009.

76 Exhibit "P-4, Details of Discrepancies, Schedule 7, Docket- Vol. II, p. 801. 77 Exhibit "P-77'', p. 16, Table 6.14. t

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

III.

DEFICIENCY INCOME TAX- P975,125,852.15 In the respondent's FLD, the deficiency income tax assessment was computed as follows: 78 Taxable income per return Add (Less) adjustment:

Undeclared Sales (SLS vs Relief)

Undeclared Purchases (SLP vs Relief)

Undeclared Income

Unaccounted source of cash

Disallowed Charitable Contribution

Disallowed Representation

Disallowed expenses

Unaccounted Salaries and Wages

Expenses not subjected to EWT Adjusted Net income

Tax Due

Less: Payments

Prior Years Excess Credits

Creditable Withholding Tax (1st to 3rd Quarters) Creditable Withholding Tax (4th Quarter)

Total

Less: MCIT

Total

Less: Amount carry forward for next year

Excess

Unsupported 2307

Tax still due and payable Add: Interest (Computed up to 07.15.2014)

Compromise Penalty

TOTAL DEFICIENCY INCOME TAX

f> 14,601,213.26 9,513,394.16 6,253,986.54 6,548,267.00 5,464,500.00 3,979,609.13 1,151,652,963.00 65,838,758.30 490,133,589.97 f> 78,401,789.00 6,372,031.00 6,802, 745.00 f> 91,576,565.00 f> 91,576,565.00 91,576,565.00 f> f> 447,968,793.45 50,000.00 f> 1,753,986,281.36 P1,753,986,281.36 f> 526,195,884.41 911.174.29 f> 527,107,058.70 448,018,793.45 p 975,125,852.15 As can be seen from the above computation, the assessment arose from the following items:

A.

Undeclared Sales (SLS vs TPI-Relief)

, 14,601,213.26 B.

Undeclared Purchases (SLP vs TPI-Relief)

9,513,394.16 c.

Undeclared Income

6,253,986.54 D. Unaccounted source of cash 6,548,267.00 E.

Disallowed Charitable Contribution

5,464,500.00 F.

Disallowed Re(:lresentation 3,979,609.13 G. Disallowed Expenses 1,151,652,963.00 78 Exhibit "P-4", Docket- Vol. II, p. 797.

L

Arst Pht'lippine Holdings Corporation vs. Commissioner of

Internal Revenue

H.

Unaccounted Salaries and Wages

I.

Expenses not subiected to Ewr J.

Amount carried forward for next year K.

Unsupported Creditable Withholding Taxes

~- A. Undeclared Sales - /#14,601,213.26 65,838,758.30 490,133,589.97 91,576,565.00- 911,174.29 The undeclared sales were derived by the respondent as follows:

As described in the Details of Discrepancies, the undeclared sales of Pl4,601,213.26 is based on the difference between the Service Income per books against that REUEF, hence must be added in the computation of income tax, pursuant to Section 32 of the NIRC of 1997, as amended?9

Registered Name

Amount per

Registered Name

Amount per

Difference

SLS

RELIEF

None

-

First Electro Dynamics

p 600,000.00 p 600,000.01

Corporation

First Philippine Industrial

P18,556,701.03

First Philippine Industrial

24,742,268.04 6,185,567.0

Corooration

Corporation

First Sumiden Circuits Inc

4 59S 099.62

First Sumiden Circuits Inc

4 232 741.35 4 232 741.3~

None

-

Hewlett Packard Philippines

136,564.25 136,564.2~

Corooration

None

-

INAEC Aviation Corooration

721 315.50 721 315.51

None

-

Kimberly Clark Philsinc

51,278.60 51,278.61

Planet Sports

2 867 610.59

Planet Soorts

3 751 215.66 883 605.0'

Stock Transfer Service Inc

424 277.32

Stock Transfer Service Inc

1 060 693.40 636 416.0:

None

-

The Mercantile Insurance

49,205.92 49,205.9:

Company Inc

Trans-Asia Oil and Energy

2,046,258.59

Trans-Asia Oil and Energy

3,150,778.09 1,104,519.51

Development Corporation

Development Corporation

Total

1"14,601,213.21 The resulting discrepancy as found in the above table was computed by deducting the amount reflected per petitioner's Summary List of Sales (SLS) from the amount of Summary List of Purchases (SLP) per Third-Party Information (TPI)/Reconciliation of Listing for Enforcement (RELIEF), or in case the amount per SLS is higher than the amount per RELIEF, by automatically reflecting the lower amount of income between SLS and RELIEF as an undeclared sales.

79 Exhibit "P-2", Details of Discrepancies, Schedule 1, Docket- Vol. II, pp. 778 to 779.

I

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

On the other hand, petitioner asserts that as seller of services, its VAT payments are based on gross receipts. As such, there are significant differences in accounting methods between income tax accounting under accrual basis and VAT accounting under cash basis due to timing differences in recognizing income per income tax and per VAT. Thus, discrepancies between the RELIEF and SLS of the petitioner should not be automatically subjected to income tax. Petitioner accounted for the differences as follows: (a) the amount of P651,278.60 pertains to the rental income from First Electro Dynamics Corporation and Kimberly Clark Philippines Inc. which were accrued in 2009 but were not collected during the year,

(b) the amount of P770,521.42 pertains to unearned and uncollected service income from INAEC Aviation Corporation and The Mercantile Insurance Company, (c) there is no unaccounted sales amounting to P760,165.93 to Stock Transfer Services Inc. and Trans-Asia Oil and Energy Development Corporation, such discrepancy is an excessive declaration of purchases from the said customers, (d) the amount of P136,564.25 pertains to rebates received from Hewlett Packard Philippines Corporation which petitioner treated as a reduction in expense; and (e) the difference in the declarations made by First Philippine Industrial Corporation, Planet Sports Inc., Stock Transfer Services, Inc., Trans-Asia Oil and Development Corporation and First Sumiden Circuits, Inc. in the total amount of P12,282,683.08 refers to income accrued but not yet collected in the year 2009. Furthermore, petitioner noted that for the sales made to First Sumiden Circuits, Inc. amounting to P4,595,099.62, it reported higher sales in its VAT Returns than the amount reported per RELIEF. Petitioner likewise contends that the BIR should have secured certifications from concerned parties to authenticate said declarations and present such certifications to the petitioner in order that it can have a fair chance to validate the same. Thus, the imposition of income tax on any discrepancy is not factual but merely a conclusion. The Court cancels the assessment.

To reiterate, respondent purportedly found petitioner to have undeclared sales/receipts not subjected to income tax derived per matching of the petitioner's SLS vis-a-vis the data from the SIR's RELIEF System.

[

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

Hoi('Jever, records do not show that the information provided by the BIR was verified. The method employed by respondent in securing the data from the RELIEF, which were compared with the figures appearing on petitioner's SLS, violates Revenue Memorandum Order (RMO) No. 04-03, which requires the BIR to verify the allegations stemming from TPI through externally sourced data. Nowhere in the records did it show that the amount per petitioner's SLS received by the BIR was verified with externally sourced data to check its correctness. The respondent did not secure the required certifications or confirmation from the alleged third-party sources to support the integrity of the amounts per RELIEF. Notably, RMO No. 04-03 recognizes the need to verify the amounts reflected in the quarterly report with other externally sourced data in ascertaining the taxpayer's under-declaration of revenues or overstatement of costs and expenses, if any. The pertinent portions of RMO No. 04-03 are quoted hereunder: "The Bureau of Internal Revenue is reengineering its work processes in order to increase revenue collections and to pursue quality audit by making use of available internal and external information resources. In order to strengthen and enhance its assessment functions, the utilization of information technology has been identified as an effective tool· to improve tax administration through the development of the Reconciliation of Listings for Enforcement (RELIEF) System.

The RELIEF System was created to support third- party information program and voluntary assessment program of the Bureau through the cross-referencing of third-party information from the taxpayer's Summary Lists of Sales and Purchases prescribed to be submitted on a quarterly basis pursuant to Revenue Regulations Nos. 7- 95, as amended by RR 13-97, RR 07-99 and RR 08-2002. The RELIEF System shall cover all VAT taxpayers above threshold limits set by RR 8-2002 to submit Summary Lists of Sales and Purchases in magnetic form based on a prescribed electronic format.

The consolidation and matching of information with other externally sourced data will detect under-declaration of

L

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

revenues/ over-declaration of cost and expenses, thus, resulting to greater tax potential."

Without the confirmation from third parties, the finding casts doubts as to the reliability and correctness of the assessment on the alleged undeclared sales.

While it is true that tax assessments have the presumption of correctness and regularity in its favor, it is also equally true that assessments should not be based on mere presumptions no matter how reasonable or logical the presumption might be. This principle was thoroughly discussed by the High Court in the case of Commissioner of Internal Revenue vs. Hantex Trading Co., Inc., 80 the pertinent portions of which are quoted as follows: "We agree with the contention of the petitioner that, as a general rule, tax assessments by tax examiners are presumed correct and made in good faith.

All

presumptions are in favor of the correctness of a tax assessment. It is to be presumed, however, that such assessment was based on sufficient evidence. Upon the introduction of the assessment in evidence, a prima facie case of liability on the part of taxpayer is made. If a taxpayer files a Petition for Review in the CTA and assails the assessment, the prima facie presumption is that the assessment made by the BIR is correct, and that in preparing the same, the BIR personnel regularly performed their duties. This rule for tax initiated suits is premised on several factors other than the normal evidentiary rule imposing proof obligation on the petitioner-taxpayer: the presumption of administrative regularity; the likelihood that the taxpayer will have access to the relevant information; and the desirability of bolstering the record-keeping requirements of the NIRC. However, the prima facie correctness of a tax assessment does not apply upon proof that an assessment is utterly without foundation, meaning it is arbitrary and capricious. Where the BIR has come out with a 'naked assessment,' 1:e., without any foundation character, the determination of the tax due is without rational basis. In such a situation, the U.S. Court of 80 G.R. No. 136975, March 31, 2005 t.

c.T.A. ease No. 8991 First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

Page 35 of 65

Appeals ruled that the determination of the Commissioner contained in a deficiency notice disappears. Hence, the determination by the CTA must rest on all the evidence introduced and its ultimate determination must find support in credible evidence."

Accordingly, the assessment cannot be sustained since it was based merely on unverified amounts extracted from respondent's own database.

B. Undeclared Purchases - 1'9,513,394.16; and D. Unaccounted source of cash - P6,548,267.00;

Respondent's comparison of the purchases reflected in petitioner's SLP against the amounts declared in the SLS per RELIEF, disclosed a difference amounting to P9,513,394.16 which was assessed with deficiency income tax pursuant to Section 32 of the NIRC of 1997, as amended. Below is the detailed breakdown of the alleged undeclared purchases of P9,513,394.16:81

Registered Name

Total

Registered Name

Gross Sales

Undeclared

Purchases

Of Seller

Purchases

TN Ramos Construction And

p 598,942.25

TN Ramos Construction and

P4,314,875.10 P3,715,932.85 DeveiQil_ment Corp

Development Corporation

Rufino Ernesto Jr Baltazar

1 312 310.75

Rufino Ernesto Jr Baltazar

3 662 607.15 2 350 296.40

None

-

BMR Modern Structures Inc

867 300.00 867,300.00

The Law Firm of QMBTI

(847,124.91)

None

- 847,124.91

None

-

Pilipinas Shell Petroleum

287,175.78 287,175.78

Corporation

None

-

Macquarie Capital Securities

216,148.05 216,148.05

Philippjnes Inc

Unison Computer Systems

2,500.00

Unison Computer Systems Inc

203,242.86 200,742.86

Inc

Quartz Business Products

181,116.74

Quartz Business Products

341,755.46 160,638.72

Corporation

Corporation

None

-

Honda Cars Makati Inc

133 428.25 133 428.25

Certification International

25,000.00

Certification International

136,000.00 111,000.00

Philippines Inc

Philippines Inc

Manila Electric Company

68 009.41

Manila Electric Company

175 331.33 107 321.92

E-Pius Stationery Inc

71,407.00

Eplus Stationery Inc

150 462.51 79,055.51

Griffin Sierra Toursinc

15,920.25

Griffin Sierra Travel Inc

94 569.83 78 649.58

Watson Wyatt Philippines Inc

1115 000.00

Watson Wyatt Philippines Inc

1180 000.00

65 000.00

None

-

Integrated Computer Systems

45,535.71 45,535.71

Inc

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

Registered Name

Total

Registered Name

Gross Sales

Undeclared

Purchases

Of Seller

Purchases

None

-

John Clements Consultants

38,886.62 38,886.62

Inc

None

-

INAEC Aviation Corporation

36 305.50 36 305.50

Cats Motors Inc

8,221.83

Cats Asian Cars Inc

40 247.16 32 025.33

Crown Property Apprisal

(31,250.00)

None

- 31,250.00

Corp

Mercury Drug Corporation

30,461.25

Mercury International Security

53,571.42 23,110.17 Printinq Corp.

None

-

0 N Asia Motors Corporation

15 776.32 15,776.32

None

-

Mapfre Insular Insurance

14,906.67 14,906.67

Corporation

Lane Archive Technologies of

2,567.00

Komstaklnc

17,421.02 14,854.02

the Philippines

None

-

Tan Ronnie

14 359.60 14 359.60

None

-

CT Citimotorsinc

8 009.24 8 009.24

Citibind Corporation

2,010.33

Citibind Corporation

9,115.62 7,105.29

Facilities Managers Inc

(6 499.50)

None

- 6 499.50

Ambassador Appliances Inc

22,406.25

Ambassador Appliances Inc

27,361.61 4,955.36

Total

P2,570,998.65 1"12,084,392.81 P9,513,394.16 Likewise, respondent's verification of the expenses claimed per petitioner's Audited Financial Statements (AFS) as against the purchases of goods by top ten thousand corporations as reported in the Alphalist of Suppliers shows a discrepancy amounting to P6,548,267 .00 which respondent treated as unaccounted source of cash and subjected to deficiency income tax pursuant to Section 32 of the NIRC of 1997, as amended, computed as follows: 82 Purchases of Goods by Top 1 OT Corp.

PerFS

p 9,610,152.00

Per Alphalist

16,158,419.00

Difference

(P6,548,267.00) On the other hand, petitioner contends that the assessments on undeclared purchases and unaccounted source of cash amounting to P9,513,394.16 and P6,548,267.00, respectively, lack legal and factual bases because these were merely based on presumptions or conclusion. The FAN-FLD did not provide any details where the discrepancies noted by the respondent came from. In its reply to the PAN, petitioner requested from the respondent, the basis of the assessed amounts but the respondent ignored said request. Moreover, petitioner asserts that even assuming there were unrecorded purchases, the respondent is in error in concluding that unrecorded purchases is equivalent to undeclared income. Without

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

proof that petitioner realized or received income, gain, or profit, there is no factual and legal bases to assess for undeclared income on the ground of unaccounted income payments. The Court cancels the subject income tax assessment items. The three (3) elements on the imposition of income tax are: (1) there must be gain or profit, (2) that the gain or profit is realized or received, actually or constructively, and (3) it is not exempted by law or treaty from income tax.83 Income tax is assessed on income received from any property, activity or service. As such, income tax is imposed only when there is an income, and such income was received by the taxpayer and not when there is an under declaration of purchases.

In this case, the said elements are not present. Respondent's assessment was apparently based on a mere presumption that the alleged undeclared purchases/expenses constitute undeclared income.

For income tax purposes, a taxpayer is free to deduct from its gross income a lesser amount, or not to claim any deduction at all. What is prohibited by the income tax law is to claim a deduction beyond the amount authorized therein.84 Even when taxable income is imputed on the alleged undeclared purchases or expenses in the amounts of P9,513,394.16 and P6,548,267.00, as undeclared purchases or expenses, petitioner is also entitled to claim the corresponding deduction in the same amounts in the nature of direct cost or operating expense. Thus, no gain or profit would result from the transactions which can be subjected to income tax.

C. Undeclared Income - P6,253,986.54 83 Commissioner of Internal Revenue vs. Court of Appeals, et al., G.R. No. 108576, January 20, 1999.

84 The Commissioner of Internal Revenue vs. Phoenix Assurance Co., Ltd., G.R. No. L- 19727, May 20,1965.

?

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

Respondent's reconciliation of petitioner's sales with the SLP of INAEC Aviation Corporation (INAEC) shows that the rental income on petitioner's helicopter was not declared and only a portion of petitioner's purchases from INAEC were declared. In addition, respondent found that petitioner had undeclared other income in the amount of P3,000,000.00 which was assessed pursuant to Section 32 of the NIRC of 1997.85 The details thereof are shown below: Undeclared Sales (INAEC Aviation Corp.) I' 2,885,262.00 Undeclared Income due to undeclared purchases from 1'405,030.04 INAEC Aviation Corp.

Less: Purchases claimed per SLP 36,305.50 368,724.54

Undeclared Other Income

3,000,000.00

Total

P6,253,986.54 Petitioner contends that it does not have any form of undeclared income, and said difference is recorded as follows: (a) undeclared rental income from

INAEC

Aviation

Corporation

amounting to P2,885,262.00 pertains to income earned and reported in 2006. Its summary list of purchases for the year 2009 shows that there are no purchases transactions with INAEC Aviation Corporation,

(b) undeclared other income pertains to the proceeds from the sale of transportation equipment, with P2,549,018.33 and P305,882.20 representing the book value of the equipment and output VAT, respectively, and audit adjustment in the amount of P145,099.47. According to petitioner, since there was no gain from the said sale, the proceeds are not subject to income tax. The !CPA, upon examination of the working papers of petitioner's external auditors, verified that there were no transactions with INAEC Aviation Corporation for TY 2009 in the amount of P2,885,262.00, and that there were no purchase transactions from INAEC Aviation Corporation per SLP. On the other hand, petitioner did not submit any supporting documents pertaining to the Other income amounting to P3,000,000.00.

The Court cancels the foregoing item of assessment. We find that the subject assessment resulted from respondent's comparison of petitioner's sales to purchases from INAEC Aviation Corp. as reflected in its SLS and SLP and that shown per the SIR's RELIEF System.

As we have stated earlier, without third party-

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

certifications, the assessment resulting therefrom is without factual basis.

E. Disallowed Charitable Contribution - P5,464,500.00 Invoking Section 34(H) of the NIRC of 1997, as amended, respondent disallowed petitioner's claimed donations to charitable institutions for failure to present proofs or Certificates of Donation. Petitioner avers that all donations were properly substantiated with Certificates of Donations, in the form prescribed by the BIR. The Certificates of Donations (BIR Forms No. 2322) offered by petitioner are summarized as follows:

Exhibit

Payee

Amount

P-69

Philippine Business For Social Progress

p 1 000,000.00

P-69-A

-'- Eugenio Lopez Foundation Inc.

400,000.00

P-69-B

Eugenio Lopez Foundation Inc.

200 000.00

P-69-C

Eugenio Lopez Foundation Inc.

200,000.00

P-69-D

Eugenio Lopez Foundation, Inc.

200,000.00

P-69-E

Eugenio Lopez Foundation, Inc.

400,000.00

P-69-F

Eugenio Lopez Foundation, Inc.

200,000.00

P-69-G

Eugenio Lopez Foundation Inc.

200 000.00

P-69-H

Eugenio Lopez Foundation, Inc.

200,000.00

P-69-I

Eugenio Lopez Foundation, Inc.

500,000.00

P-69-J

Eugenio Lopez Foundation, Inc.

200,000.00

P-69-K

-'--- Eugenio Lopez Foundation, Inc.

950,000.00

P-69-L

LoQez Group Foundation, Inc.

1,563,000.00

P-69-M

Lopez Group Foundation, Inc.

1,500.00

Total

P6,214,SOO.OO It is here noted that there is a difference of P750,000.00 between the amounts of P5,464,500.00 reflected in the Annual ITR vis-a-vis the amount of P6,214,500.00 indicated in the Certificates of Donations, showing that the amount disallowed is more than the covered donations.

As represented by petitioner, the difference pertains to donations made in 2009 but is to be accounted for in January 2010.

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First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

Pege 40 of 65

Since petitioner was able to present proper documents in support of its claimed deduction for donations amounting to P5,464,500.00, respondent's disallowance thereof must be cancelled. F. Disallowed Representation Expense- 1'3,979,609.13 Respondent found that petitioner's claimed representation expense exceeded the ceiling prescribed by law pursuant to RR No. 10-2002, as shown below:86 Representation expense per ITR p 5,020,086.00

Gross Receipt per ITR

P104,047 ,687.00 Rate as allowable 1%

Ceiling for Representation Expense

1,040,476.87

Disallowed Representation Expense

P3,979,609.13 Petitioner accounted for the breakdown of its representation expense per ITR amounting to P5,020,086.00, as follows: 87

Representation Expense per ITR

PS,020,086.00

Details:

1. Actual Representation Expense !'2,433,949.00 per RR No. 10-2002

2. Corporate Giveaways 1,857,387.00

3. Investors Materials 285,000.00

4. Others 443,750.00 5,020,086.00

Difference

- ..

With regard to corporate giveaways and investor materials, petitioner contends that these were essentially marketing expenses incurred in the ordinary course of business, hence deductible in full pursuant to Section 34(A)(1) of the NIRC of 1997. As correctly pointed out by the ICPA, petitioner did not provide supporting documents for its claimed corporate giveaways and investor materials in order for this Court to verify the actual nature and tax implications of these expenses.

Likewise, no details/documents were provided pertaining to the "Others" account. 86 Exhibit "P-4", Details of Discrepancies, Schedule 5, Docket- Vol. II, p. 801 87 Exhibit "P-77", Table 6. 7, p. 13

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First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

Indeed, Section 5 of RR No. 10-2002 sets the ceiling on entertainment, amusement, and recreation expense, as follows: "SECTION 5.

CEILING

ON

ENTERTAINMENT, AMUSEMENT, AND RECREATION EXPENSE - There shall be allowed a deduction from gross income for entertainment, amusement and recreation expense, as defined in Section 2 of these Regulations, in an amount equivalent to the actual entertainment, amusement and recreation expense paid or incurred within the taxable year by the taxpayer, but in no case shall such deduction exceed 0.50 percent ( 0/o) of net sales (i.e., gross sales less sales returns/allowances and sales discounts) for taxpayers engaged in sale of goods or properties; or 1.00 percent ( 0/o) of net revenue (i.e., gross revenue less discounts) for taxpayers engaged in sale of services, including exercise of profession and use or lease of properties.

However, if the taxpayer is deriving income from both sale of goods/properties and services, the allowable entertainment, amusement and recreation expense shall in all cases be determined based on an apportionment formula taking into consideration the percentage of the net sales/net revenue to the total net sales/net revenue, but which in no case shall exceed the maximum percentage ceiling provided in these Regulations.

Apportionment Formula:

Net sales/net revenue x

Actual Expense

Total Net sales and net revenue Illustration: ERA Corporation is engaged in the sale of goods and services with net sales/net revenue of P200,000 and PlOO,OOO respectively.

The actual entertainment, amusement and recreation expense for the taxable quarter totaled to P3,000. Ent., Amusement 8r.

Allowable Amt to be

Recreation Expense

Max.

claimed as EAR (EAR) based on

Percentage

Expense (whichever Net sales/

Apportionment

Ceiling of EAR

is lower of col. 2 Net revenue

Formula*

Expense**

and 3)

Particulars

(1) (2) (3) (4)

Sale of Goods

p 200 000 p 2 000 p 1000 p 1000

Sale of Services

100 000 1000 1000 1000

Total

P300.000 P3.000 P2.000 P2.000

L

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

*Apportionment Formula

Sale of Goods (P200,000/P300,000) x P3,000 Sale of Services (Pl00,000/P300,000) x P3,000

**Maximum Percentage Ceiling

Sale of Goods (P200,000 x 0.50%) Sale of Services (P100,000 x 1%) In the above illustration, ERA Corporation can only claim a total of P2,000 as entertainment, amusement and recreation expense." Guided by the afore-cited provision, petitioner can only claim a total amount of P1,040,476.87 as representation and entertainment expense, as computed below.

Thus, respondent's disallowance of petitioner's claimed representation expense in the amount of P3,979,609.13 is upheld.

Representation Expense per ITR

Less: 1% of the gross receipts per ITR . Disallowed Representation Expense G. Disallowed Expenses- P1,151,652,963.00 p 5,020,086.00 1,040,476.87 P3,979,609.13 Respondent disallowed the discrepancy between certain expenses per petitioner's AFS as against those shown in its ITR in the amount of P1,151,652,963.00, computed as follows:88

Particulars

PerFS

PeriTR

Difference

Salaries and Wages

p 545,000,000.00 p 583,611,345.00

(P

38,611,345.00) Other outside services 8,000,000.00 18,219,959.00 (10,219,959.00)

Repairs and Maintenance

- 6,614,607.00 (6,614,607.00)

Office Supplies

- 2,610,152.00 (2,610,152.00)

Interest

- 1,067,075,436.00 ( 1,067,075,436.00) Communication, Light and

Water

- 6 757 086.00 (6 757 086.00) Forex losses - 19,764,378.00 (19,764,378.00)

TOTAL

P553,000,000.00 P1,704,652,963.00 (P1,151,652,963.00} In the Details of Discrepancies attached to the FLO, petitioner clearly provided the factual and legal bases of the disallowance of the interest expense of P1,067,075,436.00. As stated therein, the "Interest expense was not necessary and not related to your taxable 88 Exhibit "P-4", Details of Discrepancies, Schedule 6, Docket- Vol. II, p. 801.

I

t.

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

income pursuant to Sec. 34(A)(1). Per your Notes to FS #12, Long- term debt FRCN & FXCN were used to finance acquisition of other company's shares and for debt repayment These funds were also used to finance your affiliates as stated in Note #20, Related Party disclosures which your Advances to FPH Fund, FGHC International,

First

Philec

Group

amounted to P3, 144,000,000.00, P2,410,000,000.00 and P969,000,000.00, respectively." However, as to the remaining disallowed expenses, namely, salaries and wages in the amount P38,611,345.00, other outside services in the amount of P10,219,959.00, repairs and maintenance in the amount of P6,614,607.00, office supplies in the amount of P2,610,152.00, communication, light and water in the amount of P6,757,086.00 and forex losses in the amount of P19,764,378.00 totalling P84,577,527.00, respondent failed to state in the Details of Discrepancies the factual and legal bases of the disallowance of the said expenses. Hence, the assessment on these items is void and must be cancelled and/or withdrawn pursuant to Section 228 of the NIRC of 1997, as amended, which provides that the taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void. With regard to the disallowed interest expense of P1,067,075,436.00, the ICPA found that the same arose from the provisions of the Floating Rate Corporate Notes Facility Agreement

(FRCN

Agreement) and

Fixed

Rate Corporate Notes Facility

Agreement (FXCN Agreement) entered into by petitioner with BDO Capital & Investment Corporation and Banco De Oro - ECPI, Inc. - Trust Banking Group.89 Section 34(B)(1) of the NIRC of 1997 provides that the amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business shall be allowed as deduction from gross income. The term "interest" shall refer to the payment for the use or forbearance or detention of money, regardless of the name it is called or denominated.90 89 Exhibits "P-5004" and "P-5005", Docket- Vol. V, pp. 1985 to 2110 90 BIR Ruling No. 196-03 dated 20 June 2003.

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First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

To implement Section 34(B)(1) of the NIRC of 1997, as amended, Section 3 of RR No. 13-2000, laid down the requisites for an interest to be deductible from gross income, listed as follows:

1. There must be an indebtedness; 2.

There should be an interest expense paid or incurred upon such indebtedness;

3.

The indebtedness must be that of the taxpayer; 4.

The indebtedness must be connected with the taxpayer's trade, business or exercise of profession;

5.

The interest expense must have been paid or incurred during the taxable year;

6.

The interest must have been stipulated in writing; 7.

The interest must be legally due;

8.

The interest payment arrangement must not be between related taxpayers as mandated in Section 34(8)(2), in relation to Section 36(B), both of the NIRC of 1997; 9.

The interest must not be incurred to finance petroleum operations; and

10. In case of interest incurred to acquire property used in trade, business or exercise of profession, the same was not treated as a capital expenditure.

As aptly noted by the ICPA, the interest expense incurred by petitioner met all the requirements provided under RR 13-2000.91 Requisites no. 1 to 3 and 6 to 8 were proven by the submission of the FRCN and FXCN Agreements;92 requisite no. 4 was supported by the submission of the Articles of Incorporation93 of petitioner showing that the indebtedness was incurred in its ordinary course of business; requisites 5, 9 and 10 were supported by Notes No. 12{Long Term Debts), 21 (Financial Risk Management Objectives and Policies) and 22 (Financial Instruments) of petitioner's AFS94, stating that the interest expense was incurred on these loan agreements, and that the proceeds from the loan were used to acquire shares and for purposes of debt repayments. Thus, respondent's disallowance of this item is cancelled.

H. Unaccounted Salaries and Wages - P65,838,758.30 91 Exhibit "P-77", Table 6.13, p. 15. 92 Exhibits "P-5004" and "P-5005", Docket -Vol. V, pp. 1985 to 2110. 93 Exhibit "P-78-1 ".

94 Exhibit "P-67", Docket - Vol. V, pp. 1926 to 1928 and 1936 to 1944

I

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

Respondent found a discrepancy in petitioner's claimed salaries and was as reflected in its FS/ITR and as shown per its alphalist of employees in the amount of P65,838,758.30, as computed below. Respondent stated that such discrepancy resulted to an under declaration of petitioner's income, thus, was assessed pursuant to Section 32 of the NIRC of 1997, as amended.

Salaries and Wages

Per ITR

1'422,611,345.00

Per Alphalist

356,772,586.70

Unaccounted Salaries and Wages

P65,838,758.30 As we have stated under the deficiency WTC assessment, petitioner failed to explain and substantiate the discrepancy of P65,838, 758.30, hence, the assessment thereon is sustained. I. Expenses not subjected to EWT- 1'490,133,589.97 Notably, petitioner was also assessed of the corresponding deficiency EWT for the income payments of P490,133,589.97. Thus, based on the Court's findings under the deficiency EWT assessment (supra), petitioner failed to withhold and remit proper taxes on the subject income payments, as follows:

Income Payments

Amount

Professional Fee (15%)

'" 13,808,629.68

Rental

1,225,510.26 Purchases of services by Top lOT Corp 475,099,450.03

TOTAL

P490,133,589.97 Consequently, the amount of P490,133,589.97 shall be disallowed from petitioner's claimed deductible expenses pursuant to Section :l4(K) of the NIRC of 1997, which states: "(K) Additional Requirements for Deductibility of Certain Payments. - Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this Section, shall be allowed as deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of

L

First Philippine Holdings Corporation vs. Commissioner of Inm/11iJI R-.tR!nue

Internal Revenue in accordance with this Section, Section 58 and 81 of this Code." (Emphases ours) J. Amount carried forward for next year- 1'91,576,565.00;

and K. Unsupported Creditable Withholding Taxes - 1'911,174.29 Following the computation per FLD, respondent disallowed the excess tax credits carried over to the succeeding year in the amount of P91,576,565.00, and "Unsupported 2307" in the amount of P911,174.29 without indicating therein the basis for the disallowance. Thus, pursuant to Section 228 of the NIRC of 1997, as amended, the assessment on these amounts is void and must be cancelled. Based on the foregoing, petitioner is liable for deficiency income tax for TY 2009 in the amount of P76,409,022.22, computed as follows:

Taxable Income per Return

Add (Less) adjustment:

Disallowed Representation Expense

Unaccounted Salaries and Wages

Expenses not subjected to EWT Adjusted Net income

Tax Due

Less: Payments

Prior Years Excess Credits

Creditable Withholding Tax (1st to 3rd Quarters) Creditable Withholding Tax (4th Quarter) Tax still due and payable p 3,979,609.13 65,838,758.30 p 490,133,589.97 559,951,957.40 p 78,401,789.00 6,372,031.00 P559,951,957 .40 p 167,985,587.22 6,802,745.00 91,576,565.00 p 76,409,022.22 IV.

VALUE-ADDED TAX- P19,336,010.17 Respondent computed the deficiency VAT assessment as follows:95

Sales per VAT

p 69,404,812.47 95 Exhibit "P-4", Docket, Vol. II, p. 798.

L

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

Add: Other Income/Adjustment

Undeclared Sales (SLS vs RELIEF)

Undeclared Purchases (SLP vs RELIEF)

Undeclared Service Income

Unaccounted source of cash

Total

Less: Zero-rated Sales

Total Vatable Income per Audit

Rate

Output Tax per Audit

Input Tax carried over from previous quarter Input Tax deferred on capital goods exceeding 1M from previous period Input Tax generated during the year Purchases of Capital goods not exceeding 1M Purchases of Capital goods exceeding 1M Goods other than Capital Goods Services rendered by Non-resident

Domestic Services

Total Domestic Purchases

Total

Less: Input tax carried over to succeeding year

INPUT TAX PER AUDIT

Tax still due and payable Add: Interest (Computed up to 07.15.2014)

Compromise Penalty

TOTAL DEFICIENCY VAT

p 14,601,213.26 9,513,394.16 44,129,345.07 6,548,267.00 p 385,008.72 308,702.02 538,113.14 358,250.08 8,809,989.69 p 9,104,648.13 50LOOO.OO 74,792,219.49 p 144,197,031.96 7,070,366.89 p 137,126,665.07 12% P16,455,199.81 p 13,682,353.12 10,400,063.65 p 24,082,416.77 17,808,579.00 p 6,273,837.77 p 10,181,362.04 9,154,648.13 P19,336,010.17 As can be seen from the above computation, the assessment arose from the following items:

a. Undeclared Sales (SLS vs RELIEF) p 14,601,213.26 b.Undeclared Purchases (SLP vs RELIEF) 9,513,394.16

c. Undeclared Service Income 44,129,345.07

d. Unaccounted source of cash 6,548,267.00

e. Input tax carried over to succeeding year 17,808,579.00

a. Undeclared Sales (SLS vs RELIEF)- P14,601,213.26

b. Undeclared Purchases (SLP vs RELIEF}- P9,513,394.16 Based on the same findings under the deficiency income tax assessment (supra), the deficiency VAT assessment on the alleged undeclared sales of P14,601,213.26 and undeclared purchases of P9,513,394.16 resulted from respondent's comparison of petitioner's data per its SLS and SLP with third-party information per the BIR's RELIEF System.

?.

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

As we have discussed earlier, without third-party certifications as to the amounts reflected per the BIR RELIEF System, the assessment must be cancelled for lack of factual basis. Moreover, as to the undeclared purchases, it must be emphasized that under Section 106 (A) of the NIRC of 1997, as amended, VAT is imposed on the "gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor". Also, under Section 108 of the NIRC of 1997, as amended, VAT is imposed on the "gross receipts derived from the sale or exchange of services". Significantly, the law defines "gross receipts" as: "xxx the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value-added tax." Clearly, VAT can be imposed only when it is shown that the taxpayer received an amount of money or its equivalent from its sale, barter or exchange of goods or properties, or from sale or exchange of services, and not when there are undeclared purchases.

c. Undeclared Service Income - P44,129,34S.07 Respondent found that petitioner had undeclared service income· amounting to P44,129,345.07, as computed below, which was assessed with deficiency VAT pursuant to Section 106 of the NIRC of 1997, as amended, computed as follows: Management fees p 70 077,982.00 Rental income 33 969,705.00 Scrap sales 8,607.00 Sales commission 3 223 877.00

Total

P107,280,171.00 ·

Add: Other Income

Undeclared income from Inaec Aviation Corp. P2,885,262.00 Undeclared Income due to undeclared purchases

L

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

from Inaec Aviation Corp.

368,724.54

Undeclared Other Income

(Proceeds on sale of Transportation Equipment) 3 000.000.00 6,253,986.54

Total

Pl13,534,157.54 Less: Amount subjected to VAT 69 404,812.47 Undeclared service income p 44,129,345.07 Petitioner contends that it does not have any form of undeclared service income and accounts for the noted discrepancies as follows:

a. The alleged undeclared management fees, rental income and sales commission in the amounts of P45,335,714.40, P5,718,354.88, and P3,223,877.00 pertained to income that were accrued in 2009 but was uncollected.

b.

The service income in the amount of P2,885,262.00 from INAEC Aviation Corporation was not subjected to VAT since the service (i.e. lease of aircraft) is VAT-exempt.

c. Petitioner does not have undeclared income due to undeclared purchases from INAEC Aviation Corporation in the amount of P368,724.54.

d. The undeclared income of P3,000,000.00 actually pertains to the proceeds from the sale of transportation equipment, with P2,549,018.33 and P305,882.20 representing the return of capital and output VAT, respectively.

The ICPA verified that the undeclared management fees amounting to P44,800,000.00 pertains to accruals for 2009 which remained uncollected as of the close of the year, recorded as follows:96

Date

Ref

Description

Amount

12/31/2009

GJ09-12-000055

To take up accrual of

FPIP

P44,800,000.00 manaqement fee for CY 2009 96 Exhibit "P-77", Table 6.18, p. 20. c.

First Philippine Holdings Corporl1tton vs. Commissioner of

Internal Revenue

The excess of P535,714.4097 was not explained by the petitioner.

The !CPA's findings show that the sales commission amounting to P3,223,877.00 pertains to accrual for 2009 which were uncollected as of the close of the year, recorded as follows: 98

Date

Ref

Description

Amount

12/31/2009

GJ09-12-000079

To set up receivable from FPIP on sales 1>3,223,877 .06 commission as of December 31 2009 However, the !CPA was not able to verify the remaining items as they were not provided with documents to corroborate the same. The Court partially upholds the assessment. In the old case of Consolidated Mines_ Inc. vs. Court of Tax Appeals,99 the Supreme Court explained the nature of books of account, i.e., general ledgers, as evidence. Thus: "A 'ledger' is a book of accounts in which are collected and arranged, each under its appropriate head, the various transactions scattered throughout the journal or daybook, land is not a 'book of original entries,' within the rule making such books competent evidence. First Nat. Building Co. v. Vanderberg, 119 P 224, 227; 29 Okl. 583.

Code Iowa, No. 3658, providing that 'books of account' are receivable in evidence, etc., means a book containing charges, and showing a continuous dealing with persons generally. A book, to be admissible, must be kept as an account book, and the charges made in the usual course of business.

Security Co. v. Graybeal, 52 NW 497, 85 Iowa 543, 39 Am St Rep 311. Books of account may therefore be admissible under the rule. In tax cases, however, this Court appears not to place too high a probative value on them. 97 (1'45,335,714.40- P44,800,000.00). 98 Exhibit "P-77", Table 6.19, p. 20. 99 G.R. Nos. L-18843 and L-18844, 29 August 1974. ~

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

considering the statement in the case of Collector of Internal Revenue v. Reves that "books of account do not prove per se that they are veracious: in fact they may be more consistent than truthful." Indeed. books of account may be used to carrv out a plan of tax evasion. (Underscoring supplied) In the foregoing case, the Supreme Court provided that in tax cases, books of accounts do not prove per se that they are reliable such that it may be given high probative value. In fact, mere presentation of these books of account without the presentation of its supporting documents may even be used to carry out plans for tax evasion.

Thus, entries in these schedules, general listings and general ledgers may not be given probative value by the Court, unless the supporting documents thereto are presented. Consequently, considering that said pieces of evidence cannot be given any probative value, it follows that petitioner failed to prove that it has no undeclared service income.

Nonetheless, even if the Court consider these schedules and journal entries as evidence tending to prove that petitioner has no undeclared income; still, petitioner failed to discharge the burden of proving the fact of why the said income is not subject to VAT. Here, petitioner likewise failed to present to the Court any official receipts or subsequent journal entries supporting the subject of the assessment to establish the movement of the alleged accrued service income. With no basis for determining the nature and terms of the undeclared management fees, rental income and sales commission and for failure to disprove the existence of undeclared income, the subject assessment shall be upheld except for the amount of P6,253,986.54, which pertains to the following: Undeclared income from Inaec Aviation Corp. P2,885 262.00 Undeclared Income due to undeclared purchases from Inaec Aviation Corp.

368 724.54

Undeclared Other Income

(Proceeds on sale of Transportation Eauioment) 3 000,000.00 P6,253,986.54 t.

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

As stated under the deficiency income tax assessment (supra), the amount of P6,253,986.54 resulted from respondent's comparison of petitioner's sales to and purchases from INAEC Aviation Corp. as reflected in its SLS and SLP and that shown per the BIR's RELIEF System. As we have stated earlier, without third party-certifications, the assessment resulting therefrom is without factual basis.

v. Excess Input Tax Carried Over to

Succeeding

Quarter

P17,808,579.00 In arriving at the deficiency VAT assessment, respondent deducted the input tax carried over to succeeding year in the amount of P17,808,579.00 from the total allowable input VAT without providing the basis for such deduction or disallowance. Hence, pursuant to

Section

228 of the

NIRC

of 1997, such disallowance/assessment is considered void and must be cancelled. Although the assessment for the 1st and 2"d quarters of lY 2009 had already prescribed, petitioner was unable to point out which portion of the assessment pertains thereto, hence, the entire VAT assessment shall be considered as pertaining to the 3'd and 4th quarters of lY 2009.

Thus, petitioner is not liable to pay deficiency VAT since the input VAT per re-computation in the amount of P24,853,057.02 is more than enough to cover the output tax amounting to P12,731,407.93, as shown below:

Sales per VAT

Add: Other If!come/Adjustment

Undeclared Se-rvice Income

Less:

Total

Less: Zero-rated Sales

Total Vatable Income per Audit

Rate

Output Tax

Input Tax carried over from previous quarter Input Tax deferred on capital goods exceeding 1M from previous period Input Tax generated during the year Purchases of Capital goods not exceeding 1M p 69,404,812.47 P44 I 129,345.0 7 ------=-=---c------=-----,-------,--- 6,253,986.54 37,875,358.53 p 385,008.72 p 107,280,171.00 7,070,366.89 p 100,209,804.11 12% P12,025,176.49 p 13,682,353.17 4,620,718.12 '

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

Purchases of Capital goods exceeding 1M Goods other than Capital Goods Services rendered by Non-resident

Domestic Services

Total Domestic Purchases

Total

Less: Input Tax on Capital Goods exceeding 1 million deferred for the succeeding period

Input Tax

TOTAL VAT PAYABLE{OVERPAYMENT)

308,702.02 538,113.14 358,250.08 8,809,989.69 10,400,063.65 p 28,703,134.94 3,850,077.92 p 24,853,057.02 {P12,827,880.53) V.

FRINGE BENEFITS TAX- P837,906.06 Respondent's verification of petitioner's FBT account disclosed a discrepancy in the computation of FBT for the first quarter of 2009. Hence, pursuant to Section 80(A) of the NIRC of 1997, respondent assessed petitioner of deficiency FBT for the first quarter of 2009 in the amount of P837,906.06, computed as follows: 100

Transportation and Travel

Other Benefits

Total

Divisor

Gross. Up Tax rate Tax due Less: Tax paid Amount still due Add: Interest (Computed up to 07.15.2014)

Compromise Penalty

TOTAL DEFICIENCY FBT

!>389,261.54 16!000.00 P6, 186,259.00 696!864.55 p 6,883,123.55 0.68 P10,122,240.51 0.32 p 3,239, 116.96 2,806,472.44 !>432,644.52 405!261.54 P837,906.06 Since the assessment for the first and second quarters of TY 2009 is. declared invalid due to prescription, the deficiency FBT assessment of P837,906.06 covering the first quarter of 2009 is cancelled.

VI.

DOCUMENTARY STAMP TAX- P499,765,854.42 Respondent's verification disclosed that petitioner failed to pay the corresponding DST on advances due to and from affiliates and 100 Exhibit "P-4", Docket- Vol. II, pp. 799 and 803. l

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

Pege 5"1 of 65

subsidiaries and Lease contracts in accordance with Sections 194 and 179 of the NIRC of 1997, as amended, shown as follows: 101

Nature

Amount

Rate

Tax Due

Deposit for future subscription p 5,300,000,000.00 1/200 p 26,500,000.00 Advances to landowners 88,000,000.00 1/200 440,000.00

Short Term Loan

11,205,000.00 1/200 56,025.00 Advances to subsidiaries 6,781,000,000.00 1/200 33,905,000.00 Advances from subsidiaries 27,975,000,000.00 1/200 139,875,000.00 Advances from FGHC 6,262,461.63 1/200 31,312.31

Lease Contract

22,637,467.20 1/1000 22,638.47

Long Term Debts

11,675,000,000.00 1/200 58,375,000.00 Issuance of stocks

Common

594,326,513.00 1/200 2,971,632.57

Preferred

63,000,000.00 1/200 315,000.00

Total

1'52,516,431,441.83 p 262,491,608.34

Less: Payment

188,744.00

Tax Still Due

p 262,302,864.34 Add: Interest (Computed up to 07.15.2014) 1'237,437,990.08

Compromise Penalty

25,000.00 237,462,990.08

TOTAL DEFICIENCY DST

P499,765,854.42 DST is a tax on documents, instruments, loan agreements, and papers evidencing the acceptance, assignment, sale or transfer of an obligation, right or property incident thereto. DST is actually an excise tax because it is imposed on the transaction rather than on the document. 102 DST is also levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or termination of specific legal relationships through the execution of specific instruments. 103

a. Deposit for future subscription - P5,300,000,000.00 In the case of Commissioner of Internal Revenue vs. First Express Pawnshop Company_ Inc., lD"' the Supreme Court ruled that deposits on future subscription of shares of stock are not subject to 101 Exhibit "P-4", Docket- Vol. II, p. 799. 102 Section 173, 1997 Tax Code; De Leon and De Leon, The National Internal Revenue Code Annotated, 8th ed., Volume 2 (2003). See also Michel J Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue, G.R. No. 166786, 3 May 2006, 489 SCRA 147, 152-153.

103 Philippine Home Assurance Corporation v. Court of Appeals, 361 Phil. 368, 372-373 (1999).

104 G.R. Nos. 172045-46, June 16, 2009. 0

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

Pege 55 of 65

DST for the reason that there is yet no subscription that creates rights and obligations between the subscriber and the corporation, to wit:

"In Section 175 of the Tax Code, DST is imposed on the original issue of shares of stock. The DST, as an excise tax, is levied upon the privilege, the opportunity and the facility of issuing shares of stock.

In

Commissioner of Internal Revenue

v.

Construction

Resources of Asia, Inc., 105 this Court explained that the DST attaches upon acceptance of the stockholder's subscription in the corporation's capital stock regardless of actual or constructive delivery of the certificates of stock. Citing Philippine Consolidated Coconut Ind., Inc. v. Collector of Internal Revenue/06 the Court held: The documentary stamp tax under this provision of the law may be levied only once, that is upon the original issue of the certificate. The crucial point therefore, in the case before Us is the proper interpretation of the word 'issue.' In other words, when is the certificate of stock deemed 'issued' for the purpose of imposing the documentary stamp tax? Is it at the time the certificates of stock are printed, at the time they are filled up (in whose name the stocks represented in the certificate appear as certified by the proper officials of the corporation), at the time they are released by the corporation, or at the time they are in the possession (actual or constructive) of the stockholders owning them?

XXX

Ordinarily, when a corporation issues a certificate of stock (representing the ownership of stocks in the corporation to fully paid subscription) the certificate of stock can be utilized for the exercise of the attributes of ownership over the stocks mentioned on its 105 230 Phil. 76, 80-81 (1986).

106 162 Phil. 32 (1976).

t-

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

face. The stocks can be alienated; the dividends or fruits derived therefrom can be enjoyed, and they can be conveyed, pledged or encumbered. The certificate as issued by the corporation, irrespective of whether or not it is in the actual or constructive possession of the stockholder, is considered issued because it is with value and hence the documentary stamp tax must be paid as imposed by

Section 212 of the National Internal Revenue

Code, as amended.

XXX

Revenue Memorandum Order No. 08-98 (RMO 08- 98) provides the guidelines on the corporate stock documentary stamp tax program. RMO 08-98 states that: "1. All existing corporations shall file the Corporation Stock DST Declaration, and the DST Return, if applicable when DST is still due on the subscribed share issued by the corporation, on or before the tenth day of the month following publication of this Order.

XXX

3. All existing corporations with authorization for increased capital stock shall file their Corporate Stock DST Declaration, together with the DST Return, if applicable when DST is due on subscriptions made after the authorization, on or before the tenth day of the month following the date of authorization. (Boldfacing supplied) RMO 08-98, reiterating Revenue Memorandum Circular No. 47-97 (RMC 47-97), also states that what is being taxed is the privilege of issuing shares of stock, and, therefore, the taxes accrue at the time the shares are issued. RMC 47-97 also defines issuance as the point in which the stockholder acquires and may exercise attributes of ownership over the stocks.

L

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

As pointed out by the CTA, Sections 175 and 176 of the Tax Code contemplate a subscription agreement in order for a taxpayer to be liable to pay the DST. A subscription contract is defined as any contract for the acquisition of unissued stocks in an existing corporation or a corporation still to be formed. A stock subscription is a contract by which the subscriber agrees to take a certain number of shares of the capital stock of a corporation, paying for the same or expressly or impliedly promising to pay for the same.

Based on Note 7 of the Audited Financial Statements107, petitioner contributed P5.3 billion or approximately US$110.1 million by way of deposit for future subscription. There was no agreement to subscribe to the unissued shares. Here, the deposit on stock subscription refers to an amount of money received by the corporation as a deposit with the possibility of applying the same as payment for the future issuance of capital stock. In Commissioner of Internal Revenue v. Construction Resources of Asia, Inc. 108, the Supreme Court held:

"We are firmly convinced that the Government stands to lose nothing in imposing the documentary stamp tax only on those stock certificates duly issued, or wherein the stockholders can freely exercise the attributes of ownership and with value at the time they ar~ originally issued. As regards those certificates of stocks temporarily subject to suspensive conditions they shall be liable for said tax only when released from said conditions, for then and only then shall they truly acquire any practical value for their owners." The deposit on stock subscription is merely an amount of money received by a corporation with a view of applying the same as payment for additional issuance of shares in the future, an event which may or may not happen. The person making a deposit on stock subscription does not have the standing of a stockholder and he is not entitled to dividends, voting rights or other prerogatives and attributes of a stockholder. Hence, petitioner is not liable for the payment of DST on its deposit on subscription for the reason that 107 Exhibit 85, p. 21.

108 230 Phil. 76, 80-81 ( 1986).

L

First Philippine Holdings Corpor11tion vs. Commissioner of

Internal Revenue

there is yet no subscription that creates rights and obligations between the subscriber and the corporation. Clearly, petitioner is not liable for the payment of DST on its deposit for future subscription. Thus, respondent's assessment thereon is cancelled.

b. Advances to landowners- PBB,OOO,OOO.OO Per Note 10 of petitioner's AFS109 for TYs 2009 and 2008, the assessed "Advances to landowners" in the amount of P88,000,000.00 actually pertains to transactions entered into by petitioner in 2008. Thus, lt was erroneous on the part of respondent to assess petitioner of deficiency DST thereon for such is beyond the scope of the present assessment.

Accordingly, respondent's deficiency DST assessment on the amount of P88,000,000.00 is cancelled.

c. Lease Contract- f/#22,637,467.20 Petitioner avers that the DST on the Lease Contract shall be for the account of the seller/lessee; hence it shall not be liable. However, petitioner did not submit the related Lease Contract for the Court to verify the same. Neither is there any showing that petitioner has legal basis for claiming that it is not liable to DST. Thus, the assessment on this item is upheld.

d. Short Term Loan - f/#11,205,000.00 Petitioner contends that this pertains to a short term loan obtained by its subsidiary First Philippine Utilities Corporation (FPUC) from Metro Pacific Investments Corporation (MPIC). Per Note 7 of the AFS, 110 under Significant Transactions and Information on Certain Investees, it was also stated that this was 109 Exhibit "P-67", p. 25, Docket- Vol. V, p. 1925. 110 Exhibit "P-67", p.22, Docket- Vol. V, p. 1922. t

First Philippine Holdings Corporation vs. Commissioner of Int..mill Revr!Jntm covered by a Promissory Note and Pledge Agreement between FPUC and MPIC whereby the former unconditionally promises to pay the latter the principal amount of P11,205,000,000.00 on or before June 30, 2010 at an interest rate of 5% per annum. The loan is collateralized by the remaining 30,093,270 shares of MERALCO held by FPUC and 138,357,600 common shares of First Gen Corporation owned by FGHC International, both are subsidiaries of the petitioner. Since the petitioner is not a party to the loan agreement, it is incorrect to assess the petitioner for DST on the said short term loan. Hence, this assessment is cancelled.

e. Advances to subsidiaries - 1'6,781,000,000.00

f. Advances from subsidiaries - 1'27,975,000,000.00 It was disclosed in the Notes to the AFS that these Advances to and from subsidiaries represent non-interest bearing and unsecured peso-denominated loans to meet working capital and investments requirements.111 The petitioner did not submit other information and documents to substantiate the same. Thus, for failure to refute the BIR's findings, these items of assessment are upheld.

g. Advances from FGHC- 1'6,262,461.63 Petitioner maintains that advances from FGHC are not subject to DST since no written paper was signed and delivered by it to give right to debt. However, the Court cannot determine the nature of the transaction since petitioner did not provide any supporting documents for the advances from FGHC amounting to P6,262,461.63. Hence, this assessment remains.

h. Long Term Debts- 1'11,675,000,000.00 111 Exhibit "P-67", Note 20, p. 35, Docket- Vol. V, p. 1935.

L

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

Petitioner avers that these long term debts pertain to Floating Rate Corporate Notes (FRCN) Facility Agreement and Fixed Rate Corporate Notes (FXCN) Facility Agreement issued in the year 2007, hence should not be covered by the current audit period assessment. It also contends that the DST on these agreements was already paid upon its execution.

Petitioner did not present any DST proof of payment on the agreements. However, a perusal of the FRCN and FXCN Facility Agreements112 shows that these were executed on October 25, 2007 and March 28, 2007, respectively. Hence, the assessments on the long-term debts are invalid for being beyond the scope of the present assessment.

i. Issuance of Common stocks - 1'594,326,513.00

j. Issuance of Preferred stocks - 1'63,000,000.00 Petitioner avers that the amounts lifted by the BIR for the Common Stocks Issuance and Preferred Stocks Issuance pertain to previous taxable years wherein the beginning balance of the outstanding common stock as indicated in the 2009 AFS was considered in arriving at the amount for the Common Stocks Issuance. While preferred stocks issued during the years 2007 and 2008 were picked up for the Preferred Stocks Issuance. Petitioner claims that for the issuances occurred during the year 2009, the corresponding DST has already been paid. As a rule, original issuance of shares is subject to DST of Pl.OO on each P200 or a fractional part thereof, of the par value of the shares. In case of shares without par value, the amount of DST is based .on the actual consideration for the issuance of such shares. DST is imposed on the privilege of issuing shares of stock. The shares are considered issued upon the acquisition of the stockholder of the attributes of ownership over the shares. The entire shares of stock subscribed are considered issued for purposes of the DST, even if not fully paid. Likewise, the obligation to pay the DST attaches

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

upon acceptance of the stockholder's subscription in the capital stock of a corporation regardless of the physical issuance and delivery to the stockholder of the certificate of stock. In the case of Commissioner of Internal Revenue vs. Construction Resources of Asia, Inc. and the Court of Tax Appeals, 113 the Supreme Court held that the delivery of the certificates of stock to the stockholders, whether actual or constructive, is not essential for the DST to attach. Moreover, receipt of dividends and sale of shares have their own tax implications.

In this regard, the assessment should include those subscribed during the year 2009 regardless of whether they were issued or not. Upon examination of Notes 13 and 14 of the AFS, the beginning balances of common shares and preferred shares issued prior to the year 2009 were considered in the amount sought to be assessed for DST subscription both for common stocks and preferred stocks. Issuances for common stocks amount to P39,892,180.00114, while there was no subscribed nor issued preferred stocks during the year 2009. Petitioner submitted its DST Declarations/Returns (BIR Form No. 2000) as proof of the remittances of the DST for the shares of common stocks issued of 3,989,218.00.115 Thus, the DST assessment pertaining thereto must be cancelled. Based on the foregoing, the petitioner shall be liable for deficiency DST in the total amount of P173,645,205.78, computed as follows:

Nature

Amount

Rate

Advances to subsidiaries p 6,781,000,000.00 1/200 Advances from subsidiaries 27,975,000,000.00 1/200 Advances from FGHC 6,262,461.63 1/200

Lease Contract

22,637,467.20 1/1000

Total

P34,784,899,928.83 Less: Paym~nt

Tax Still Due

VII.

COMPROMISE PENALTIES- P191,000.00 113 G.R. No. L-68230 dated November 25, 1986. 114 3,989,218 number of shares at 1"10 par value per share. 115Exhibit 'P-93-1" to "P-93-54".

Tax Due

p 33,905,000.00 139,875,000.00 31,312.31 22,637.47 P173,833,949.78 188,744.00 P173,645,205.78 t

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

P~ge 52 of 55 Respondent imposed compromise penalties in the total amount of P191,000.00 against petitioner for its failure to file and/or pay an internal revenue tax at the time or times required by law or regulation pursuant to Section 255 of the NIRC of 1997, as amended, as determined using the schedule of suggested compromise penalties prescribed under Revenue Memorandum Order (RMO) No. 19-2007, broken down as follows: 116

IT

p 50.000.00

VAT

50,000.00

EWf

25,000.00 wrc 25.000.00

FBT

16 000.00

DST

25,000.00

Total

p 191,000.00 It must be stressed that a compromise penalty is imposed to avoid prosecution for violation of the provisions of the NIRC of 1997.117 Under RMO No. 01-90, as amended by RMO No. 19-2007, compromise penalties are only amounts suggested in settlement of criminal liability, and may not be imposed or exacted on a taxpayer in the event that a taxpayer refuses to pay the same. Clearly, the compromise penalty implies a mutual agreement between the parties in respect to the thing or subject matter which is so compromised. The imposition of the same without the conformity of the taxpayer is illegal and unauthorized. 118 Since there is nothing in the records which would show that petitioner consented to the compromise penalties assessed for all the deficiency taxes, the compromise penalties in the total amount of P191,000.00 cannot be sustained.

WHEREFORE, in light of the foregoing considerations, the Petition for Review is PARTIALLY GRANTED. Accordingly, the assessments issued by respondent against petitioner for TY 2009 covering deficiency VAT and FBT are CANCELLED and SET ASIDE. 116 Exhibit "P-4", Docket- Vol. II, pp. 797 to 813 117 The l'hilippines International Fair. Inc. vs. The Collector of Internal Revenue. et. a/., G.R. Nos. L-12928 and L-12932, March 31, 1962 118 Commissioner of Internal Revenue vs. Lianga Bay Logging Co .• Inc., eta/., G.R. No. L-35266, January 21, 1991 t.

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

On the other hand, the deficiency IT, EWT, WTC, and DST assessments for TY 2009 are AFFIRMED but with modifications. Accordingly, petitioner should be ORDERED TO PAY respondent the aggregate amount of P1,214,705,419.96, inclusive of the 25% surcharge, 20% deficiency interest, and 20% delinquency interest imposed under Sections 248(A)(3), 249(B) and (C) of the NIRC of 1997, as amended, computed until December 31, 2017, as follows:

es es | wre ECTS ist | —SCsTcotal Si P76,409,022.22 | P11,634,558.97 | P19,948,611.70 | P173,645,205.78 | _P281,637,398.67 » 250 Add: 25% i 19,102,255.56 | _2,908,639.74| —4,987,152.93| 43,411,301.45 70,409,349.68

Surcharge

Add: 20%

Deficiency

Interest

IT:

from Apr. 16, 2010 to July 15, 2014 (P76,409,022.22 x 20% x 1,552/365 days)

EWT:

from Jan. 12, 2010 to July 15, 2014 (P11,634,558.97 x 20% x 1,646/365 days)

WTC:

from Jan. 12, 2010 to July 15, 2014 (P19,948,611.70 x 64,979,069.85

Pf —

— Pf —

17,992,008.14 17,992,008.14 20% x 1,646/365 days)

DST:

from Jan. 12, 2010 to July 15, 2014 (P173,645,205,78 x 20% x 1,646/365 days)

Total Amount Due

as of July 15, 2014 P160,490,347.63 | P25,036,614.64 | P42,927,772.77 | P373,670,210.63 P602,124,945.67

Add:

20% Deficiency

Interest

From uly 26 ona 195,217,155.79 (P281,637,398.67 x 20% x 1,265/365 days) \- 156,613,703.40 156,613,703.40

Add:

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

IT

EWT

WTC

DST

Total

20% Delinquency

Interest

from July 16, 2014 417,363,318.50 to Dec. 31 2017 (P602,124,945.67 X 20% X 1,265/365 days)

Total Amount Due

P1,214,705,419.96 as of Dec. 31, 2017 In addition, petitioner should be ORDERED TO

PAY

respondent delinquency interest at the rate of twelve percent (12%) on the total unpaid deficiency taxes due of P602,124,945.67 as of July 15, 2014, as determined above, computed from January 1, 2018 until full payment thereof pursuant to Section 249(C) of the NIRC of 1997, as amended by Republic Act No. 10963, also known as Tax Reform for Acceleration and Inclusion (TRAIN), as implemented by RR No. 21-2018.

WE CONCUR:

~ f-J. M.:~- (~ CIELITO N. MINDARO-GRULLA

Associate Justice

~t;:C. G.d--a-...oot,. 2-, JOANITO c. CASTANEDA, JR.

ASiOciate Justice

First Philippine Holdings Corporation vs. Commissioner of

Internal Revenue

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.

O-..~~c. ~ .... ,"d:. $.

cnJANITO c. CASTANEDA, JR.'

Associate Justice

2nd Division Chairperson

CERTIFICATION

Pursuant to Section 13, 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's Division.

Presiding Justice