Court of Tax Appeals · First Division

Philippine Securities Settlement Corp. vs. Commissioner of Internal Revenue

CTA Case No. 9058 August 15, 2018 UY

REPUBLIC OF THE PHILIPPINES

COURT OF TAX APPEALS

QUEZON CITY

FIRST DIVISION

*********

PHILIPPINE SECURITIES

CTA Case No. 9058

SETTLEMENT CORP.,

Petitioner,

Members:

-versus-

DEL ROSARIO, PJ. , Chairperson,

UY, and

COMMISSIONER OF INTERNAL

REVENUE,

Respondent.

MINDARO-GRULLA, JJ.

Promulgated:

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

DECISION

UY, J.:

~ Before Us is a Petition for Review1 filed on May 28, 201 5 by Philippine Securities Settlement Corp. against the Commissioner of Internal Revenue, praying for the cancellation and withdrawal of the latter's Final Decision on Disputed Assessment (FDDA) assessing the former for alleged deficiency income tax (IT), expanded withholding tax (EWT), withholding tax on compensation (WTC), final withholding tax (FWT), and final withholding value-added tax (FWVAT) for taxable year 2010 in the total amount of P7,601 ,925.55, inclusive of interest, penalties, and surcharges.

THE FACTS

Petitioner Philippine Securities Settlement Corp. is a domestic corporation duly organized and existing under Philippine law with registered principal address at the 37F Tower 1, The Enterprise Center, 1 Docket - Vol. I, pp. 10 to 36.

Ayala Avenue, Makati City. 2 Respondent is the duly appointed Commissioner of Internal Revenue vested under appropriate laws with the authority to carry out the functions, duties, and responsibilities of his Office, including inter alia, the power to decide disputed assessments, cancel and abate tax liabilities pursuant to the provisions of the National Internal Revenue Code (NIRC) of 1997 and other laws, rules and regulations. He may be served summons, pleadings, and other processes at his office at the BIR National Office Building, BIR Road, Diliman, Quezon City. 3 On April 13, 2012, petitioner received a letter-request from the Bureau of Internal Revenue (BIR) requesting petitioner to submit its books of accounts and tax returns for Taxable Year 2010, attaching thereto Letter of Authority (LOA) No. 047-2012-00000083 dated 30 March 2012 for the examination of petitioner's books of accounts and other accounting records of all internal revenue taxes forTY 2010.4 On November 6, 2013, petitioner received respondent's Preliminary Assessment Notice (PAN) assessing petitioner for deficiency IT, EWT, WTC, FWT and FWVAT for TY 2010 in the total amount of P7,458, 186.07, inclusive of penalties and surcharge. Petitioner filed its protest to the PAN on November 21, 2013.5 On April 21, 2014, petitioner received a copy of respondent's Final Assessment Notice (FAN), assessing petitioner for alleged deficiency IT, EWT, WTC, FWT, and FWVAT forTY 2010 in the total amount of P6, 797,415.03, inclusive of penalties and surcharge. Petitioner filed its Protest to the FAN with a request for reinvestigation on May 21, 2014.6 On April 28, 2015, petitioner received respondent's FDDA, assessing petitioner for deficiency IT, EWT, WTC, FWT, and FWVAT forTY 2010 in the total amount of P7,601 ,925.55, inclusive of interest, penalty, and surcharge, 7 with the following findings/conclusions, inter alia, to wit:

1) Petitioner is liable for deficiency IT in the total amount 2 Par. 1, Admitted Facts, Joint Stipulation of Facts and Issues (JSFI), Docket- Vol. I, p. 420.

3 Par. 2, Admitted Facts, JSFI, Docket- Vol. I, p. 420. 4 Par. 3, Admitted Facts, JSFI, Docket- Vol. I, p. 420. 5 Par. 4, Admitted Facts, JSFI, Docket- Vol. I, pp. 420 to 421. 6 Par. 5, Admitted Facts, JSFI, Docket- Vol. I, p. 421. 7 Par. 6, Admitted Facts, JSFI, Docket- Vol. I, p. 421. f of P4,989,902.97. 8 2) The discrepancy in accounts receivable (AR) from receipts per petitioner's VAT Returns to assess petitioner for the deficiency IT is for alleged unreported income in the total amount of P475,609.65. 9 3) Petitioner is liable for the deficiency IT for alleged non- withholding of EWT and FWT in the total amount of P6, 170,231.59.10 4) In assessing petitioner for deficiency EWT, respondent claims that petitioner is liable for EWT at a rate of two percent (2o/o) on its payments to "Contractors" pursuant to Section 2.57.2(E) of RR No. 2-98, as amended. 11 5) Petitioner is liable for the deficiency IT due to the disallowance of its salaries and wages for alleged non- withholding in the total amount of P1 ,928,255.53. 12 6) Petitioner is liable for deficiency IT due to alleged unsupported expenses in the total amount of P447, 132.93.13 7) The disallowance of petitioner's expenses resulting from the fees paid to Range Computer Services (RANGE) in the total amount of P251, 755.10 for being substantiated by alleged invalid official receipts (ORs) due to the fact that the aforementioned ORs do not contain RANGE's authority-to-print-number (ATP). 14 8) The disallowance of petitioner's expenses resulting from foreign travel expenses in the total amount of P195,377.83 paid to Marsman Drysdale Travel, Inc. due to alleged inconsistencies in the name/s appearing in the ORs with the Cost-Sharing Agreement. It is respondent's position that, following the Cost-Sharing Agreement, it is inconsistent with such agreement for petitioner to claim the entire amount of travel expenses resulting from the official business travels of common 8 Par. 7, Admitted Facts JSFI, Docket- Vol. I, p. 421. 9 Par. 8, Admitted Facts, JSFI, Docket- Vol. I, p. 421. 10 Par. 9, Admitted Facts, "JSFI, Docket- Vol. I, p. 421. 11 Par. 10, Admitted Facts, JSFI, Docket- Vol. I, p. 421. 12 Par. 11, Admitted Facts, JSFI, Docket- Vol. I, pp. 421 to 422. 13 Par. 12, Admitted Facts, JSFI, Docket- Vol. I, p. 422. 14 Par. 13, Admitted Facts, JSFI, Docket- Vol. I, p. 422. f officers of the PDS Group. 15 9) Petitioner is liable for the deficiency IT due to disallowed prior period expenses in the total amount of P116,411.53 for being accrued prior to TY 2010. 16 1 0) Petitioner is liable for interest, penalty, and surcharge in the total amount of P3,405,404.15 resulting from the alleged deficiency IT, EWT, WTC, FWT, and FWVAT for TY 2010. 17 On May 28, 2015, the instant Petition for Review18 was filed by petitioner.

Respondent then filed his Answer on July 30, 2015, 19 raising the following Special and Affirmative Defenses, to wit: "1. Respondent reiterates and repleads the preceding paragraphs of the answer as part of his Special and Affirmative Defenses;

2. Petitioner failed to submit the pertinent documents to refute the validity of the findings against them.

3. Section 228 of the Tax Code provides that the taxpayer shall submit the required documents in support of his protest within sixty (60) days from date of filing of the letter protest, otherwise the assessment shall become final. The phrase 'submit the required documents' includes submission or presentation of the pertinent documents for scrutiny and evaluation by the Revenue Officer conducting the audit and the said Revenue Officer shall state this fact in his report of investigation.

4. Assessments are prima facie presumed correct and made in good faith.

The taxpayer has the duty of proving otherwise.

In the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. (Aban, Law of Basic Taxation in the Philippines, 1st Edition, p. 1 09); 15 Par. 14, Admitted Facts, JSFI, Docket- Vol. I, p. 422. 16 Par. 15, Admitted Facts, JSFI, Docket- Vol. I, p. 422. 17 Par. 16, Admitted Facts, JSFI, Docket- Vol. I, p. 422. 18 Docket- Vol. I, pp. 10 to 36.

19 Docket- Vol. I, pp. 172 to 174.

5. Finally, Petitioner should be reminded that taxes are important because it is the lifeblood of the government and so should be calculated without unnecessary hindrance (Commissioner vs. A/gue, Inc., L-28896, 17 February 1988).

Taxes are enforced proportional contribution from persons and property levied by the state, thus, no one is considered entitled to recover that which he must give up to another- Non videtur quisquam id capere quod ei necesse est alii restitutere." Thereafter, petitioner filed its Motion to Admit Rep/y2° with attached Reply21 on August 13, 2015, where petitioner argued that: it complied with Section 228 of the Tax Code by submitting documents in support of its Formal Protest; respondent failed to identify what documents petitioner allegedly failed to submit; and respondent failed to consider the additional supporting documents/evidence petitioner submitted.

In the Resolution dated August 26, 2015, 22 the Court granted Motion to Admit Reply of petitioner and thus, its Reply was admitted. Both parties filed their respective Pre-Trial Briefs, 23 as well as a Joint Stipulation of Facts and /ssues, 24 which was approved by this Court in the Resolution dated January 6, 2016. 25 On December 14, 2015, petitioner filed a Motion to Commission Independent Certified Public Accountant, 26 which was granted by this Court on January 14, 2016. Accordingly, Atty. Adan T. Delamide was directed to submit his report within thirty (30) days.27 The filing of the I CPA Report28 on February 26, 2016, was noted by this Court on March 8, 2016.29 On February 29, 2016, this Court issued a Pre-Trial Order. 30 20 Docket- Vol. I, pp. 178 to 180.

21 Docket- Vol. I, pp. 181 to 186.

22 Docket- Vol. I, p. 188.

23 Docket- Vol. I, pp. 189 to 193, and 274 to 303. 24 Docket- Vol. I, pp. 420 to 446.

25 Docket- Vol. I, p. 466.

26 Docket- Vol. I, pp. 44 7 to 451. 27 Docket - Vol. I, pp. 4 72 to 4 73. 28 Docket- Vol. II, pp. 1025 to 1172. 29 Docket- Vol. II, p. 1028.

30 Docket- Vol. I, pp. 735 to 747.

In support of its Petition for Review, petitioner presented documentary evidence, as well as the testimony of three (3) witnesses, namely: 1) Rosemarie V. Marchadesch; 2) Stephanie Marie A. Zulueta; and 3) Atty. Adan T. Delamide.

Thereafter, petitioner submitted its Formal Offer of Evidence (with Manifestation) on June 2, 2016, 31 to which respondent filed his Comment on June 23, 2016. 32 In a Resolution dated August 12, 2016,33 this Court resolved to admit Exhibits "P-1" to "P-13" "P-15" to "P-716" "P-718" to "P-1065"

I

"P-1067" to "P-1187" "P-1191" to "P-1187" "P-1191" to "P-4618" "P- ,

I

4620" to "P-6075," subject to this Court's final evaluation and/or appreciation of their purposes, materiality, relevancy, and probative value to the issues involved in this case. On September 6, 2016, petitioner filed a Motion for Partial Reconsideration, 34 praying that its Exhibit "P-14" be admitted into evidence. As per Records Verification dated October 20, 2016 of the Judicial Records Division of this Court, 35 respondent failed to file his comment, despite due notice.

In the Resolution dated January 9, 2017, 36 petitioner's Motion for Partial Reconsideration was denied, due to petitioner's failure to satisfy the requirements for the admission of secondary evidence.

For his part, respondent presented documentary evidence, as well as the testimony of two (2) witnesses, namely: 1) Revenue Officer Gerardo C. Nuestro; and 2) Revenue Officer Marc Vermon Vileo L. DelaCruz.

Respondent filed his Formal Offer of Evidence on March 28, 2017, 37 to which petitioner filed its Comment (Re: Respondent's Formal Offer of Evidence dated 27 March 2017) on April 7, 2017. 38 In the Resolution dated May 26, 2017,39 this Court admitted into evidence Exhibits "R-1" to "R-8-a," subject to this Court's final evaluation and/or appreciation of their purposes, materiality, relevancy, 31 Docket- Vol. III, pp. 1219 to 1262. 32 Docket- Vol. III, pp. 1530 to 1531. 33 Docket- Vol. III, pp. 1536 to 1539. 34 Docket- Vol. III, pp. 1550 to 1556. 35 Docket- Vol. III, p. 1560.

36 Docket- Vol. III, pp. 1565 to 1567. 37 Docket- Vol. III, pp. 1581 to 1610. 38 Docket - Vol. III, pp. 1611 to 1613. 39 Docket- Vol. III, pp. 1619 to 1620. ~ and probative value to the issues involved in this case. With the filing of petitioner's Memorandum40 and respondent's Memorandum41 on July 28, 2017, the instant case was submitted for decision on August 16, 2017.42 Hence, this Decision.

THE ISSUES

As stipulated by the parties, the following issue is submitted for the resolution of this Court,43 to wit: "Whether or not Petitioner is liable to pay deficiency Income Tax, Expanded Withholding Tax, Withholding Tax on Compensation, Final Withholding Tax, and Final Withholding of Value-Added Tax for taxable year 2010 in the total amount of Seven Million Six Hundred One

Thousand Nine Hundred Twenty Five Pesos and 55/100

(PhP7,601 ,925.55)."

Petitioner's arguments:

Petitioner contends that it submitted its supporting documents within the period prescribed by law. It also avers that the assessment is void for lack of legal and/or factual basis.

Anent the assessment for deficiency income tax, petitioner asserts that the discrepancy in accounts receivable from receipts per VAT returns as sales, do not involve any income or revenue on its part. Rather, these accounts receivable pertain to reimbursements at cost by its clients for Rivest, Shamir, and Adlemen Tokens (RSA Tokens), the costs of which were initially shouldered by the petitioner. As explained in the ICPA Report, the purchase of the RSA Tokens were initially recorded as an asset and were subsequently written off after the costs were transferred to its customers. There was neither gain 40 Docket- Vol. III, pp. 1632 to 1680. 41 Docket- Vol. III, pp. 1682 to 1686. 42 Docket- Vol. III, p. 1689.

43 Issue, JSFI, Docket- Vol. I, pp. 422 to 423. r nor profit actually or constructively realized by petitioner, as the amount was a mere return of capital.

With regard to the disallowed expenses due to non-withholding, petitioner argues that payments may to Cyberzone Properties, Inc., a PEZA-registered entity, are not subject to EWT pursuant to Section 24 of R.A. No. 7916, otherwise known as the Special Economic Zone Act, Section 2. 75.5(8)(2) of RR No. 2-98, as amended, and Revenue Memorandum Circular No. 72-04.

Petitioner also stated that its payment to Philippine Depository & Trust Corp. (PDTC), was made pursuant to a Cost-Sharing Agreement (CSA), which provides for a reimbursement mechanism between and among affiliated companies. As for the other rental expenses in the amount of P3,815,634.00, the same were all properly subjected to EWT. Anent the disallowed professional fees expense, for failure to withhold on its income payments at the rate of fifteen percent (15%), petitioner submits that these pertain to payments made to professional recruitment agencies, and not professional fees made to those engaged in the practice of a profession. As such, such recruitment agencies are properly classified as "labor only" contractors subject to a withholding tax rate of two percent (2°/o ), the amounts of which were properly withheld by petitioner, pursuant to Section 2.57.2(K) of RR No. 2-98.

As for the portion of P240,873.00 captioned as "Outside Other Services," the same represents petitioner's operating expenses made for the following third party services: (a) security services; (b) janitorial services; (c) messengerial services; and (d) other contractual services wherein the total amount of P172,592.47 were withheld at the appropriate amounts.

The remaining portion of P68,280.53 represents payments for the following accounts, which are not subject to EWT: (a) non-agency fee portion on its payments to security agencies; (b) reimbursements of parking fees for messengerial and janitorial supplies; and (c) estimates not subject to EWT.

On the other hand, the portion of P1 ,483, 816.00 captioned as "Outside Services" represents petitioner's payments for the following accounts: (a) hiring fees; (b) security services; (c) messengerial services; (d) janitorial services; (e) other contractual services; (f) various legal fees; and (g) management and professional fees wherein the total amount of P27,554.02 were withheld at the appropriate amounts.

Among the foregoing payments, the following were not subject to EWT: (a) legal fees- retainer, regular, and notarial fees; (b) audit fees - external; (c) non-agency fees of payment to security agency; (d) reimbursement of parking fees; (e) amortization of previous years' payments; (f) estimates not subject to EWT; and (g) estimates not claimed as deductible expenses.

The legal and audit fees represent income payments to general professional partnerships and therefore, are not subject to EWT. Non- agency fees, on the other hand, do not fall within the scope of payments to "Contractors" as contemplated under Section 2.57.2(E) of RR No. 2-98, and are likewise not subject to EWT under Section 2.57.2(M) of RR No. 2-98 since petitioner is not classified as a Top 20,000 Taxpayer. Payment for parking fees consist of payments made at cost and without profit.

With regard to the amortization of previous years' expenses part of the Outside Services, these refer to payments incurred in prior years, the withholding of which was already made in full at the time it was made in accordance with Section 2.57.4 of RR No. 2-98. As such, petitioner is no longer obligated to withhold on its subsequent payments.

The amount of P76,380.00 represents petitioner's income payments made for advertising, out of which the amounts of P32,555.97 and P306.20 were subject to the applicable rates of 2% and 5°/o, respectively under RR No. 2-98. The remaining portion of P43,478.83 represents payments for the following accounts: (a) payment for awards night validation; (b) payments to supplier of goods; (c) various reimbursements; (d) estimates not subject to EWT; and (e) estimates not claimed as deductible expense in the total amount of P20,000.00. With regard to its payments for awards night validation, petitioner submits that these represent payments made to a general professional partnership and are not subject to EWT. As for its payments to its supplier of goods, petitioner submits that these constitute payments to entities that are not within the scope of Section 2.57.2 of RR No. 2-98, which expressly mentions specific payees who are subject to withholding tax. Anent its reimbursement payments, petitioner submits that such ~ payments are not subject to EWT since these merely constitute reimbursements at cost.

Petitioner also submits that the amount of P88,698.00 represents petitioner's income payments made to its various insurance providers out of which the amount of P20, 191.49 was subject to the applicable EWT under RR No. 2-98. The remaining portion of P68,506.51 represents payments for the following accounts: (a) amortization of previous years' payments;

(b) share in payment of affiliate under the CSA; (c) reimbursements;

(d) taxes; and (e) estimates not subject to EWT. With regard to the amortization of previous years' payments, petitioner submits that these refer to payments incurred in prior years, the withholding of which was already made in full at the time that it was made. As such, petitioner is no longer obligated to withhold on its subsequent payments, as previously discussed. As for its share in payment of affiliate under the CSA, reimbursements, and taxes, petitioner submits that such payments are not subject to EWT since these merely constitute reimbursement at cost.

The amount of P470,996.00 represents petitioner's payments for reimbursements for taxi fares, gas and oil, and toll fees related to the conduct of its business and its share in the cost of its affiliates under the CSA. Therefore, such payments are not subject to EWT since these merely constitute reimbursement at cost. Petitioner likewise submits that the amount of P332,625.00 represents payments for its utilities expense, made to The Enterprise Center Condominium Corporation (Enterprise) and Cyberzone. With respect to its payment to Enterprise, petitioner posits that its payments are not subject to EWT due to the fact that such fees do not constitute payment to "Contractors" as contemplated under Section 2.57.2(E) of RR No. 2-98. Notwithstanding that its payments to Enterprise are not subject to EWT, petitioner nevertheless withheld two percent (2°/o) on its payments to the same, while its payment to Enterprise for its condominium/association dues are not subject to EWT.

As for its payment to Cyberzone, petitioner submits that it is not f subject to EWT pursuant to Section 2. 75.5(8)(2) of RR No. 2-98, which expressly provides that payments made to PEZA-registered enterprises, such as Cyberzone, are not subject to EWT. The findings of the ICPA shows that petitioner incurred Miscellaneous Expenses in the total amount of Php48,953. 70 consisting of the following: (a) courier services; (b) printing and reproduction expense; (c) training expense; (d) realized foreign exchange loss; and (e) miscellaneous expense wherein the total amount of P20,864.23 was withheld at the appropriate amounts. The remaining portion of P36,402. 76 represents its various expenses consisting of the following: (a) accruals of courier fees; (b) income payments which were not subject to EWT; (c) realized foreign exchange loss; (d) training expenses; (e) amortization of previous year's payments; (f) estimates not subject to WT; and (g) miscellaneous expenses.

With regard to its foreign exchange loss, petitioner submits that this expense does not represent income payments. Rather, it represents actual losses occurred in the ordinary course of its trade and business from its regular dealings involving foreign currencies, which may be claimed as a deduction for income tax purposes. As for its training expenses, these pertain to payments made to general professional partnerships, such as SGV & Co. and Isla Lipan a & Co., which are not subject to EWT; as well as payments made to non-stock non-profit organizations, which are not subject to income tax pursuant to Section 30 of the Tax Code, and are likewise not subject to EWT.

Anent the amortization of previous year's payments, these refer to payments incurred in prior years, the withholding of which was already made in full at the time it was made. As such, petitioner is no longer obligated to withhold on its subsequent payments, as previously discussed.

With regard to its miscellaneous expenses, these refer to payments made, which are not subject to EWT due to the fact that such payment were made to entities who do not fall within the scope of payments to "Contractors" as contemplated under Section 2.57.2(E) of RR No. 2-98. These expenses are likewise not subject to EWT under Section 2.57.2(M) of RR No. 2-98 since petitioner is not classified as a Top 20,000 Taxpayer. r

The amount of P5,51 0,104.00 represents petitioner's payments for various expenses consisting of the following: a) payments subjected to 2°/o EWT; b) payments subjected to 5% EWT; c) payments subjected to 15% EWT; d) payments for taxes, which are not subject to further taxes; e) payments to general professional partnerships, which are not subject to EWT; f) payments to non-stock non-profit institutions not subject to EWT; g) payment to travel agencies not subject to EWT; h) payments for purchase of goods not subject to EWT since PSSC is not classified as a Top 20,000 Taxpayer; i) reimbursements at cost to employees; j) amortization of prepaid expenses, the withholding of which was already made in full at the time the expense was made; k) reimbursements at cost to affiliates pursuant to the CSA; and I) accruals. As for the disallowed salaries and wages for non-withholding, PSSC submits that the discrepancy between the amount reported in petitioner's books of account and audited Financial Statements against its BIR Form No. 1604CF for TY2010 amounts to P3,324,848.50.

With regard to petitioner's allocation of salaries and benefits to/and from affiliates, it is submitted that petitioner and its affiliates entered into a CSA wherein each entity shares in the expense or cost for salaries and wages of common staff and personnel, among others. As such, its payments booked as allocation of salaries and benefits to affiliates constitute reimbursements made at cost to the entity which initially shouldered the amount payable. As such, it is not subject to WTC. Furthermore, the proper WTC on the salaries and wages was initially shouldered by petitioner's affiliates and the expense is claimed by the entity receiving the allocation based on the policy approved by the PDS Group.

In addition, petitioner submits that its accrued vacation leaves, retirement benefit expenses, and accruals of bonuses were not claimed as a deduction in its income tax return forTY 2010. As such, respondent has no factual and/or legal basis to deny these alleged expenses for failure to withhold for the reason that they were never claimed as an expense in the first place. Anent the assessment for deficiency IT for alleged unsupported expenses, petitioner submits that it represents PSSC's expenses for its payments to Range Computer Services, and Marsman Drysdale Travel, Inc.

With regard to its payments to Range, petitioner asserts that the f said payments were duly supported by the required official receipts and respondent has no legal basis to deny the same on the ground that the official receipts issued by Range does not bear the authority- to-print (ATP) number, as Section 238 of the Tax Code does not require the ATP to be indicated on a taxpayer's official receipts/invoices. Likewise, Section 113 of the Tax Code does not require the ATP among the information required to be contained on an official VAT receipt/invoice. Finally, RMO No. 28-2002 enumerates the information required to be contained on an official receipt and/or sales invoice. Notably, the ATP is absent from the said provision. With regard to its payments to Marsman, petitioner submits that they consist of the following expenses: a) foreign travel expenses incurred for the sole benefit of PSSC; and b) foreign travel expenses incurred for the benefit of the PDS Group. Such distinction must be made due to the fact that under the CSA, only expenses that are incurred for the benefit of all entities within the PDS Group are allocated among its affiliates. However, expenses incurred for the sole benefit of one entity shall not be subject to allocation, rather, it shall be claimed in full by the benefitting entity. As for the assessment for deficiency IT for alleged prior period expenses, the same represents payments made to Enterprise and City Service Corporation for services rendered in TY 2009. It should be noted that petitioner utilizes the accrual method of accounting wherein it makes an estimate of costs it may incur in a particular period. Considering that such payments are merely estimates, the actual expense incurred may be greater or lesser than the initial estimates.

In this case, the final billing of the foregoing expenses were only received by the petitioner in TY 2010 and yielded a greater expense than initially estimated, which prompted petitioner to make the necessary adjustment in its books of account in TY 2010 pertaining to the difference between the initial estimate and actual billing. With regard to petitioner's alleged liability for deficiency expanded withholding tax, petitioner submits that its income payments for CY 2010 were subject to EWT at the proper rates. In addition, petitioner's income payments which were not subject to EWT were in accordance with the applicable rules and regulations promulgated by respondent.

Anent the alleged deficiency withholding tax on compensation, petitioner submits that its salaries and wages expense were subject t to WTC at the proper amounts. In addition, it is respectfully submitted that any remaining portion of petitioner's salaries and wages not subject to WTC represent reimbursements made at cost to the entity which initially shouldered the salaries payable to common staff and personnel in accordance with the CSA and expenses which were not claimed as deductions such as leave benefits, retirement and bonus. As for the alleged deficiency final withholding tax, it is respectfully submitted that TATA was engaged to provide maintenance services for PDS Group's eCS Software. However, the service agreement was entered into between TATA and PDTC only. As such, petitioner's expenses for TATA's services represent reimbursements made by petitioner in favor of PDTC pursuant to the CSA, with no direct payments being made by petitioner in favor of TATA. Since these payments merely constitute reimbursements at cost, such payments are not subject to FWT. In addition, petitioner cannot be deemed the proper withholding agent on its income payments to TATA by virtue of the fact that it is not the payor of the income. Section 2.57(A) of RR No. 2-98 expressly provides that the liability to withhold and remit the tax due is an obligation that is entrusted to the payor of the income as withholding agent. Also, it is submitted that the payments made by PDTC to TATA were properly subject to FWT.

Anent the alleged deficiency final withholding VAT, petitioner submits that it does not make direct payments to TATA. Rather, it is PDTC who makes direct payments and petitioner merely reimburses PDTC for its share in the same. Considering that these payments merely constitute reimbursements at cost, such payments are not subject to FWVAT.

Finally, the proper FWVAT on PDTC's direct payments to TATA were properly subject to FWVAT. With regard to the assessment for interest, penalty, and surcharge resulting from the alleged deficiency IT, EWT, WTC, FWT, and FWVAT for TY 2010, petitioner submits that it lacks the legal and/or factual basis to impose the alleged deficiency taxes, as well as the associated interest penalties and surcharge on the same. Petitioner also asserts that it is not liable for Compromise Penalties for alleged deficiency FWT and FWVAT on its payments to TATA.

Respondent failed to identify what documents it allegedly failed to submit.

Finally, respondent failed to consider the additional supporting documents/evidence petitioner submitted. Respondent's counter-arguments:

For his part, respondent counters that the assessment against petitioner for taxable year 2010 has become final and executory due to petitioner's failure to submit relevant documents in support of its protest.

THE COURT'S RULING

The instant Petition for Review is partially granted. Petitioner was able to submit "all relevant supporting documents".

Respondent is of the view that petitioner failed to submit the relevant documents to support its protest against the FAN, since the evidence petitioner presented are mostly narrative in character and did not focus and has no relation to the factual issues involved in the assessment; and that petitioner failed to observe the 60-day period under Section 228 of the NIRC of 1997, in submitting relevant supporting documents; thus, the deficiency taxes issued against petitioner for taxable year 2010 had become final and executory. We disagree.

Section 228 of the NIRC of 1997 provides as follows: "SEC. 228. Protesting of Assessment. -When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: xxx

XXX

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

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

(Emphasis and

underscoring supplied) Based on the foregoing provision, within sixty (60) days from the filing of a protest to the tax assessment, the taxpayer must submit all relevant supporting documents; otherwise, the said tax assessment shall become final.

In this case, petitioner's protest was filed on May 21, 2014.44 Thus, counting from such date, the said sixty-day period ends July 20, 2014. However, record shows that petitioner submitted its supporting documents only on July 21, 2014. 45 Nevertheless, the same is of no moment, pursuant to Section 1, Rule 22 of the Rules of Court, to wit: "Section 1. How to compute time. In computing any period of time prescribed or allowed by these Rules, or by order of the court, or by any applicable statute, the day of the act or event from which the designated period of time begins to run is to be excluded and the date of performance included. If the last day of the period, as thus computed, falls on a Saturday, a Sunday, or a legal holiday in the place where the court sits, the time shall not run until the next working day."

(Emphasis and underscoring supplied) Thus, since July 20, 2014 fell on a Sunday, and the next working day is July 21, 2014, the submission of petitioner's relevant supporting documents on such later date was timely made.

Anent the

issue whether petitioner submitted "relevant supporting documents", in Commissioner of Internal Revenue vs. First Express Pawnshop Company, lnc., 46 the Supreme Court said: "Since respondent has not allegedly submitted any 44 Par. 5, Admitted Facts, JSFI, Docket- Vol. I, p. 421; Exhibit "P-5", Docket- Vol. III, pp. 1314 to 1340.

45 Exhibit "P-6", Docket- Vol. III, pp. 1349 to 1350. 46 G.R. No. 172045-46, June 16,2009. ~ relevant supporting documents, petitioner now claims that the assessment has become final, executory and demandable, hence, unappealable.

We reject petitioner's view that the assessment has become final and unappealable.

It cannot be said that respondent failed to submit relevant supporting documents that would render the assessment final because when respondent submitted its protest, respondent attached the GIS and Balance Sheet. Further, petitioner cannot insist on the submission of proof of DST payment because such document does not exist as respondent claims that it is not liable to pay, and has not paid, the DST on the deposit on subscription.

The term 'relevant supporting documents' should be understood as those documents necessary to support the legal basis in disputing a tax assessment as determined by the taxpayer. The BIR cannot demand what type of supporting documents should be submitted. Otherwise, a taxpayer will be at the mercy of the BIR, which may require the production of documents that a taxpayer cannot submit." (Emphasis and underscoring supplied)

Based

on these jurisprudential pronouncements, the determination of which documents would be necessary to support the legal basis in disputing tax assessments is dependent on the taxpayer, not on the BIR. Thus, any document submitted by the said taxpayer is considered as "relevant supporting documents" for purposes of the aforequoted Section 228 of the NIRC of 1997. Correspondingly, even when the BIR is of the opinion that the submitted documents do not address or refute their findings, as in this case, the same does not have the effect of making the subject tax assessments final. Hence, contrary to the position of respondent, the said tax assessments did not become final. We shall then determine the propriety of the subject tax assessments.

In the FDDA, respondent assessed petitioner for deficiency income tax, EWT, WTC, FWT, and FWVAT in the amount of P7,601,925.55, broken down as follows: I. Income Tax p 4,989,902.97] f

II. EWT Ill. WTC IV. FWT V. FWVAT VI. Compromise Penalties

Total

238,909.27 951,242.77 992,764.66 397,105.88 32,000.00 p 7,601 ,925.55 Before resolving the propriety of the assessment for deficiency income tax, the Court finds it proper to first determine the propriety of the assessments for deficiency EWT, WTC, FWT, and FWVAT as the Court's findings thereon would affect the computation of the deficiency income tax assessment.

DEFICIENCY EWT- P238,909.27 Respondent assessed petitioner of deficiency EWT forTY 2010 in the amount of P238,909.27, computed as follows47:

Basic Tax Due (Schedule 2)

p 127,787.05 Add: Interest (01.16.11 to 5.22.15) 111 '122.22

TOTAL AMOUNT DUE

P238,909.27 -- -------- The assessment resulted from respondent's findings that there were income payments made by petitioner in the year 2010 comprising of rental in the amount ofP736,472.05, professional fees in the amount of P80,948.61, director's fees in the amount of P23,000.00 and payments to prime contractors/sub-contractors in the amount of P3,768,557.55 that were not subjected to EWT as required under Revenue Regulations (RR) No. 02-98, as amended, detailed as follows: 48

Expense/Income

EWT

Payments

Per FS/ITR

Per1601E

Discrepancy

Rate

EWT Due

Rental

p 3,815,634.00 p 3,079,161.95 p 736,472.05 5% p 36,823.60

Professional Fees

308,262.00 227,313.39 80,948.61 15% 12,142.29 Director's fee 220,500.00 197,500.00 23,000.00 15% 3,450.00

Payment

to contractors/subcontractors

Other Outside Services

240,873.00

Advertising

76,380.00

Insurance

88,698.00

Transportation

and

Travel

470,996.00

Communication

Light and Water

332,625.00

Miscellaneous

48,880.00

Outside Services

1,483,816.00

Others

5,51 0,104.00 8,252,372.00 4,483,814.45 3, 768,557.55 2% 75,371.15 P20,849, 140.00 P7,987,789.79 P4,608,978.21 P127,787.05 47 Exhibit "P-7", Docket, Vol. III, p. 1386. 48 Exhibit "P-7", Annex A, Details of Discrepancies, Schedule 2, Docket, Vol. III, p. 1388. ~

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

Rental - ~736, 4 72. 05 Section 2.57.2(C)(1) and (2) of RR No. 02-98, as amended by RR No. 14-02, prescribes the withholding of 5°/o tax on rentals of real properties used in business and rentals of personal properties in excess of P1 0,000.00 annually, to wit:

"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

( 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°/o );

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

Ten

Thousand

Pesos

(P1 0,000.00) 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°/o);

However, the

Ten

Thousand

Pesos

(P1 0,000.00) threshold shall not apply when the accumulated gross rental or lease paid by the lessee r to the same lessor exceeds or is reasonably expected to exceed P10,000.00 within the year. In which case, the lessee shall withhold the five percent (5°/o) withholding tax on the entire amount. The Court-commissioned Independent CPA (ICPA) provided a breakdown of the rental expense as reflected in the Financial Statements/Income Tax Return (FS/ITR) and in the Annual Information Return of Creditable Income Taxes Withheld (Expanded)/lncome Payments Exempt from Withholding Tax (BIR Form No. 1601 E) of petitioner and noted a discrepancy in the amount of P737,228.06, detailed as follows: 49

Supporting

Particulars

Per FS/ITR

Per1601E

Difference

Schedule

Rent - Office Space -Enterprise

p 1,678,524.70 p 2,111,627.20 P(433, 102.50)

Annex "D"

Rent - Office Space - Northgate

398,001.51 - 398,001.51

Annex "E"

Rent - Parking Space

67,454.73 35,342.93 32,111.80

Annex "F"

Rent- Computer Equipment

808,254.44 250,415.82 557,838.62

Annex "G"

Rent - Others

5,956.36 5,955.75 0.61

Annex "H"

Car Lease

448,296.64 11,496.55 436,800.09

Annex "I"

Rent- Transportation Equipment

409,144.84 356,135.50 53,009.34

Annex "J"

Printing and Reproduction

46,791.46 ( 46,791.46}_

Annex "K"

Telecommunications

Annex "L"

DID/Leased Lines Periodic

- 5,155.48 ( 5, 155.48)

Telecommunications- Telephone

- 255,484.47 (255,484.47)

Annex "L"

TOTAL

P3,815,633.2250 P3,078,405.16 P737,228.06 The above amount of P737,228.06 is higher by P756.01 when compared to that assessed by respondent in the amount of P736,472.05 because respondent deducted in his computation a higher amount of P3,079, 161.95 income payments already subjected to EWT per BIR Form No. 1601 E, as shown below:

Per FS/ITR

Per1601E

Difference

Rental Expense Per SIR's Assessment

p 3,815,634.00 p 3,079,161.95 p 736,472.05 Rental Expense Per !CPA's Findings 3,815,633.22 3,078,405.16 737,228.06 p 0.78 p 756.79 p 49 Exhibit "P-45", Annex C, Docket, Vol. II, p. 1050. 50 With a minimal difference of P.78 when compared with the actual amount of P3,815,634.00 reported per FS/ITR (Exhibit "P-51'~ lines 52 and 84 and Exhibit "P-52'~ Statement of Comprehensive Income for the year ended December 31, 2010 and Note 13 of the Notes to

Financial Statements):

Rental claimed under:

Cost of Services

p 3,032,191.00

Operating Expenses/Deductions

783,443.00

Total

P3,815,634.00 (756.01) ~

Further, it is to be noted that the ICPA's reconciliation schedule shows that there were payments for "Printing and Reproduction" in the amount of P46,791.46, "Telecommunications-DID/Leased Lines Periodic" in the amount of P5, 155.48 and "Telecommunications - Telephone" in the amount of P255,484.47, for which a 5% EWT on rentals was withheld and remitted per BIR Form No. 1601 E but the said income payments did not form part of petitioner's claimed rental expense.

By deducting these amounts, respondent erroneously reduced petitioner's EWT liability on rentals. However, since the power to assess is lodged in the respondent and is not within the province of this Court, the Court is constrained to limit its findings based on respondent's assessment.

a. Rent- Office Space- Enterprise The I CPA verified that the difference of P433, 102.50 in the rental expense of office space in "The Enterprise" building pertains to Philippine Accounting Standards (PAS) No. 17 adjustment. Actual rental payments on the said office space amounted to P2, 111 ,626.84 from which petitioner withheld P1 05,581.34 in taxes51 . However, the rental expense following accounting standards required petitioner to report only the amount of P1 ,678,524. 70 in its audited FS, thus: 52 Rent - Office S~ace -Enter~rise

PerFS/ ITR

f> 1,678,524.70

Per1604E

2,111,627.20

Difference

p (433, 1 02.50) Difference due to recognition of PAS 17 (433,102.14)

Unaccounted Difference

~( 0.36) PAS 17 provides that the lease payment should be recognized as an expense (for lessee) or revenue (for lessor) in the income statement over the lease term on a straight line basis, unless another systematic basis is more representative of the time pattern of the user's benefit. In other words, under PAS 17, the sum of the expected rental for the lease term is computed and divided equally over the total number of months covered by the lease. On the other hand, RR No. 02-98 requires the withholding of the 5% tax on the lease payment at the time it is paid or payable, accrued as an expense or asset, whichever is applicable, in the payor's books, whichever comes first.

51 Exhibit "P-45", Annex D, Docket, Vol. II, p. 1051. 52 Exhibit "P-45", Docket, Vol. II, p. 1033. ~

Thus, there may be a timing difference between the recognition of the rental expense/income for financial statement purposes and the withholding of the corresponding 5°/o tax. However, petitioner failed to present the lease contracts relative to its lease payments for office space at The Enterprise building in order for this Court to ascertain that the aforesaid discrepancy of P433, 102.50 was due to the recognition of rental expense under PAS 17.

Be that as it may, since the amount of P2,111,627.20 rental payments subjected to EWT per BIR Form No. 1601 E is more than the amount of P1 ,678,524. 70 rental payments reported as expense, petitioner is not liable of any deficiency EWT on the said lease payments.

b. Rent - Office Space - Northgate Rent - Office S~ace - Northgate

PerFS/ ITR

p 398,001.51

Per 1604E

Difference

p 398,001.51 Per the ICPA's report, petitioner did not withhold taxes on its rental payments to Cyberzone Properties, Inc. (Cyberzone) since the latter is a Philippine Economic Zone Authority (PEZA)-registered enterprise enjoying exemption from income tax and consequently from withholding taxes.

The Court partially agrees with the findings of the I CPA. PEZA-registered enterprises are exempt from paying all local and national taxes and, in lieu thereof, are only subject to the 5% special tax on gross income, to be distributed in accordance with Section 24 of Republic Act (RA) No. 7916 otherwise known as The Special Economic Zone Act of 1995, to wit: "SEC. 24.

Exemption from National and Local Taxes. - Except for real property taxes on land owned by developers, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu thereof, five percent (5°/o) of the gross income earned by all business enterprises within the ECOZONE shall be paid and remitted as follows: (a)

Three

percent (3°/o) to the

National

Government;

(b) Two percent (2%) which shall be directly ~ remitted by the business establishments to the treasurer's office of the municipality or city where the enterprise is located."

Relative to the above-provision, Section 2.57.5(B)(2) of RR No. 02-98, as amended, states:

"SECTION 2.57.5.Exemption from Withholding. - The withholding of creditable withholding tax prescribed in these Regulations shall not apply to income payments made to the following:

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

(2) Corporations registered with the Board of Investments, Philippine Export Processing Zones and Subic Bay Metropolitan Authority enjoying exemption from the income tax pursuant to EO 226, as amended, Republic Act No. 7916 and the Omnibus Investments Code of 1987 and RA 7227, as amended, respectively;" Clearly, from the foregoing, the EWT does not apply to income payments to persons enjoying exemption from the income tax provided by RA No. 7916.

Based on the Certification53 issued by the PEZA, Cyberzone, located at the Northgate Cyberzone - SEZ, is a PEZA-registered Ecozone Facilities Enterprise with Registration Certificate No. 00-05-F dated 06 June 2000. Accordingly, income payments to Cyberzone effective June 6, 2000 shall not be subject to the EWT prescribed under RR No. 02-98, as amended.

However, out of the subject rental expense of P398,001.51, the amount of P166, 700.46 pertaining to rental paid by petitioner to Cyberzone on January 20, 2010 and April 5, 2010, or prior to the latter's PEZA registration on June 6, 2000, is subject to 5% EWT. Hence, respondent's deficiency assessment thereon is upheld. Below 53 Exhibit P-6048.

r is the breakdown of the rental amount of P166, 700.46: 54 Exhibit No.

Invoice

VAT

Amount

OR

OR Date

Amount

Paid

No.

P-1707to P-1710

83,350.23 P10,002.03 P93,352.26 436V

20-Jan-10

P-1690 to P-1694

83,350.23 10,002.03 93,352.26 457V

05-Apr-1 0

P166,700.46 P20,004.06 P186,704.52 886V

05-Jul-1 0

c. Rent - Parking Space Based on the ICPA report, the amount of P32,111.80 Rent - Parking Space not subjected to 5°/o EWT can be accounted for follows: 55 Rent- Parking S~ace

PerFS/ ITR

p 67,454.73

Per 1604E

35,342.93

Difference

p 32,111.80 Accounted for as follows:

Rent- Parking Space (Exempt from EWT) p 5,450.40 Rent- Parking Space (Reimbursements to employees) 1,749.26

Rent- Parking Space (Accrual)

12,164.84

Rent- Parking Space (Amortization of Prepaid Expense)

12,293.10

Overstatement of Parking Space

454.20 P32,111.80 The amount of P5,450.40 referred to as "Rent-Parking Space (Exempt from EWT)", pertains to petitioner's payments to Cyberzone for parking space rental, detailed as follows:

Invoice

Amount

Exhibit No.

Amount

VAT

Paid

OR No.

OR Date

P-1707 to P-1711

p 1,362.60 P163.51 1,526.11 436 v

20-Jan-10

P-1712 to P-1716

1,362.60 163.51 1,526.11

457V

05-Apr-10

P-1717 to P-1721

1,362.60 163.51 1,526.11

886V

05-Jul-10

P-1722 to P-1726

1,362.60 163.51 1,526.11 1372 v 05-0ct-10 p 5,450.40 654.05 6,104.45 As stated earlier, Cyberzone is exempt from EWT starting only on June 6, 2000, the date of its PEZA registration. Thus, respondent's deficiency 5°/o EWT assessment on the amount of P2,725.20 (the sum 54 Exhibit P-45, Annex E, Docket, Vol. II, p. 1052. 55 Exhibit P-45, Annex F, Docket, Vol. II, p. 1053. ~ of P1 ,362.60 and P1 ,362.60) representing parking space rentals paid by petitioner prior to Cyberzone's PEZA registration is sustained. With reference to the reimbursement to employees in the amount of P1, 7 49.26, the Court found that the amount of P264.26 was paid to Tempo Services, Inc. for messengerial services, detailed as follows:

Exhibit

Date

Supplier/Payee

Nature of Payment

Amount Paid

TEMPO

SERVICES, Services rendered by 4

P-2719 to P-2724

06-Jul-10

INC.

messengers p

TEMPO

SERVICES,

Services

rendered by

P-2725 to P-2730

06-Jul-10

INC.

additional messengers

Total

p The aforesaid amount of P264.26 is not subject to 5°/o EWT on rentals as assessed by respondent but on the 2°/o EWT on payments to certain contractors under Section 2.57.2(E)(g) of RR No. 02-98, as amended, to wit:

"SECTION 2.57.2.

Income Payment Subject to

Creditable

Withholding

Tax and Rates Prescribed

Thereon. - 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

(E)

Income payments to certain contractors- On gross payments to the following contractors, whether individual or corporate- One percent (2% ).

XXX

(g) Messengerial, janitorial, private detective and/or security agencies, credit and/or collection agencies and other business agencies;"

The remaining amount of P1 ,485.00 (P1 ,749.26 less P264.26) represent parking tickets paid by petitioner's employees to various entities on several occasions, such as meetings and conferences, that were subsequently reimbursed by petitioner. Since the use of the parking space was not continuous and lasted only for a specific meeting/conference, the amount of P1 ,485.00 is not subject to the 5°/o EWT imposed on the "continued use or possession of real property used in business under which the payor or obligor has not taken or is 116.14 148.12 264.26 f not taking title, or in which he has no equity" as provided under Section 2.57.2(C)(1) of RR No. 02-98, as amended. With reference to the "Rent - Parking Space (Accrual)" in the amount of P12, 164.84 and "Rent Parking Space (Amortization of Prepaid Expense)" in the amount of P12,293.1 0, respondent's deficiency 5% EWT assessment thereon is sustained. The ICPA noted that petitioner withheld taxes in the amount of P1, 767.16 on its rental payments to SPI Parking Services, Inc. amounting to P35,342.93. Records showed that parking rental payments are made on quarterly bases and subjected to withholding taxes upon payment. Accruals of parking expenses (when no billing is received) and subsequent amortization of the pre-payments of rental are no longer subjected to withholding tax. 56 Thus, it can be gleaned that these accrual and amortization of Rent-Parking Space pertain to the petitioner's continued use of parking space owned by SPI Parking Services, Inc., hence subject to 5% EWT. Pursuant to Section 2.57.4 of RR No. 02-98, as amended by RR No. 12-01, the obligation to withhold arises at the time an income payment is paid or payable, or the income payment is accrued or recorded as an expense or asset, whichever is applicable, in the payor's books, whichever comes first. Since it had accrued and claimed the amount of P12, 164.84 as rental expense deduction in its ITR, petitioner was already obligated to withhold and remit the 5% EWT at the time of accrual thereof. Hence, for failure to do so, petitioner is liable to pay deficiency 5% EWT on P12, 164.84.

Likewise, the amortization of prepaid Rent -

Parking Space

amounting to P12,293.1 0 shall be subjected to deficiency 5°/o EWT for petitioner's failure to prove that the 5% EWTon such prepaid rent had already been previously paid.

d. Rent- Computer Equipment The amount of P557,838.62 pertaining to Rent-Computer Equipment that was not subjected to EWT is composed of the following: 57 56 Exhibit "P-45", Docket, Vol. II, p. 1033. 57 Exhibit "P-45", Annex G, Docket, Vol. II, p. 1054. r

Allocation from affiliates Overstatement in the books due to accounting error

Total

p 552,322.99 5,515.65 P557 ,838.64 With regard to the allocation from affiliates in the amount of P552,322.99, it is important to note that petitioner is a wholly owned subsidiary of Philippine Dealing System Holdings Corp. (PDSHC).58 The other subsidiaries of PDSHC are: (i) Philippine Dealing and Exchange Corp. (PDEX); (ii) Philippine Depository & Trust Corp. (PDTC); (iii) PCD Nominee Corporation; and (iv) PDS Academy for Market Development Corp. PDSHC (parent company) and its subsidiaries (including petitioner) are collectively referred to as the "PDS Group". 59 By virtue of a Cost-Sharing Agreement (CSA) between and among the members of the PDS Group, certain expenses or costs are allocated and shared among the member companies. 60 To implement the CSA, there are certain instances when each company pays its share of the allocable expense or cost directly to the vendor. In other instances, a company will initially shoulder a certain expense or cost and the other companies will reimburse the former for their respective allocated share of the expense or cost based on the percentages set out in the internal Memorandum61 dated October 24, 2008.62 The BIR recognizes interrelated group of companies sharing costs/expenses in Revenue Audit Memorandum Order (RAMO) No. 1-

98. However, petitioner must prove that such shared costs/expenses only involve reimbursement of costs/expenses, without any mark-up or additional charges.

In support of the allocated rent expense from affiliates in the amount of P552,322.99, petitioner presented PDTC's Accounts Payable Vouchers, Certificates of Creditable Tax Withheld at Source issued by PDTC to IBM Philippines, Inc., PDTC's SIR Form No. 1604E with attached Alphalist, Official Receipts and Invoices issued by IBM Philippines, Inc. to PDTC, and petitioner's Check Vouchers63. While these documents show that petitioner's affiliate, PDTC, made payments for computer rentals to IBM Philippines, Inc. and that it 58 Exhibit "P-52", Note 1 of petitioner's Audited Financial Statements forTY 2010, Exhibit "P-52". 59 Exhibit "P-42'~ Answer to Q5, Docket, Vol. I, p. 490. 60 Exhibit "P-43", Answer to Q24 and Q25, Docket, Vol. I, p. 232. 61 Exhibit "P-11", Docket, Vol. III, pp. 1402-1408. 62 Exhibit "P-43", Answer to Q26, Docket, Vol. I, p. 232. 63 Exhibits P-1727 to P-1806.

~ withheld and remitted the corresponding 5o/o EWT, however, petitioner's actual reimbursement to PDTC for its shared computer rental expense was not established. The Check Vouchers, which were presented by petitioner, merely create a paper trail for its payment of the check. The same do not prove the fact of payment to PDTC. As held in the case of Towne & City Development Corporation vs. Court of Appea/s64 , the vouchers remain a piece of paper having no evidentiary weight, to wit:

"x x x [A]s correctly pointed out by the trial court which the appellate court upheld, vouchers are not receipts. It should be noted that a voucher is not necessarily an evidence of payment. It is merely a way or method of recording or keeping track of payments made. A procedure adopted by companies for the orderly and proper accounting of funds disbursed. Unless it is supported by an actual payment x x x, a voucher remains a piece of paper having no evidentiary weight. A receipt is a written and signed acknowledgment that money has been or goods have been delivered, while a voucher is documentary record of a business transaction. The references to alleged check payments in the vouchers presented by the petitioner do not vest them with the character of receipts. x x x" (Citations omitted) Thus, respondent's deficiency 5% EWT on the assessed rental of P552,322.99 shall remain. The same holds true with the alleged overstatement of computer rental from IBM Phils., Inc. in the amount of P5,515.65.

e. Rent - Others Petitioner's claimed Rent-Others refers to income payments made to KSA Realty Corporation for rental of chairs in the amount of P3,372.29, and to Diamond 1GB, Inc for lease of vehicle amounting to P2,584.07 totaling P5,956.36 65 which were subjected to 5% EWT, as shown below: 66

Rent - Others

PerFS/ ITR

Per 1604E

Difference

64 G.R. No. 135043, July 14, 2004.

65 Exhibit "P-45", Annex H, Docket, Vol. II, 1055. 66 Exhibit P-85.

., 5,956.36 5,955.75 p 0.61 r f. Car Lease and Rent- Transportation Equipment For petitioner's failure to refute respondent's findings, the deficiency 5°/o EWTon the car lease expense of~436,800.09 and rent- transportation equipment of ~53,009.34 is sustained. Based on the foregoing, petitioner is liable for deficiency EWTon rental payments in the amount of ~60,853.69, computed as follows:

Particulars

Amount

Rent - Office Space -Enterprise

p (433, 1 02.50)

Rent - Office Space - Northgate

166,700.46

Rent - Parking Space

2,725.20

Rent - Computer Equipment

557,838.64

Car Lease

436,800.09

Rent- Transportation Equipment

53,009.34

Printing and Reproduction

( 46,791.46)

Telecommunications- DID/Leased Lines Periodic

( 5, 155.48)

Telecommunications -Telephone

(255,484.47)

TOTAL

p 476,539.82 Withholding tax rate 5%

Deficiency EWT

p 23,826.99 II.

Professional Fees- pi)80,948.61 Relative to the withholding of EWTon professional fees, Section 2.57.2(E)(4) of RR No. 2-98, as amended by RR No. 30-03, provides as follows:

Sec.

2.57.2.

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

A)

Professional fees, talent fees, 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 (1 0%), if otherwise;

XXX

(9) Fees of directors who are not employees of the company paying such fees, whose duties are confined to attendance at and participation in the meetings of the board of directors.

XXX

(B)

Professional fees, talent fees, etc., for services of taxable juridical persons. - On the gross professional, promotional and talent fees, or any other form of remuneration enumerated in the preceding subparagraph for the services of taxable juridical persons -Fifteen percent (15%), if the gross income for the current year exceeds P720,000; and Ten percent (1 0%), if otherwise; f

Furthermore, in order to determine the applicable tax rate (1 0% or 15%) to be applied/withheld by the withholding agent, every individual professional/talent/corporate directors herein enumerated, shall periodically disclose his gross income for the current year to the Bureau of Internal Revenue (BIR) by submitting a notarized sworn declaration attached as Annex "A" hereof in three (3) copies (two (2) copies for the BIR and one (1) copy for the taxpayer), copy furnished all the current payors of the declaration duly stamped received by the BIR (Collection Division of the Regional Office having jurisdiction over the place where the income earner is registered/Large Taxpayers Collection Division for large taxpayers in

Metro

Manila/LTDO for large taxpayers outside Metro-Manila). Sworn declaration may likewise be filed by the income payor on behalf of the professionals/talents/directors whose services were being rendered exclusively to the aforesaid payor. The disclosure should be filed on June 30 of each year or within fifteen (15) days after the end of the month the professional/talent/director's income reaches P720,000, whichever comes earlier. In case his total gross income is less than P720,000 as of June 30, he/she shall submit a second disclosure within fifteen (15) days after the end of the month that his/her gross income for the current year to date reaches P720,000. The payee - professional/talent/director shall furnish each payor a copy of the BIR duly stamped received sworn declaration not later than five (5) days from the date of receipt by the BIR. In case of failure to submit the June 30 annual declaration/disclosure to the BIR, and to furnish the payor/s a copy thereof, the payor shall withhold the tax at the rate of 15%. (Emphasis supplied) As verified by the ICPA, the amount of professional fees per books amounted to P828,586.03. Of this amount, P308,867.13 was charged to operating expenses. PerFS, this amount was P308,262.00, or a discrepancy of P605.13. Petitioner claimed in its ITR the lower amount per FS. Below is the distribution of the professional fees of P828,586.03:67

Summary of Professional

Direct Costs

Indirect Costs

Total

Fees

63.60% 36.40% 100%

Tax Withheld

Legal Fees- Retainer

p 302,732.82 p 173,262.18 p 475,995.00

Legal Fees- Regular

2,322.11 1,329.00 3,651.11

Legal Fees - Notarial Fees

512.89 293.54 806.43

Audit Fees- External

100,107.92 57,294.47 157,402.39 - - - -

Hiring Fees (60/40)

121,030.19 80,686.79 201,716.98 p 4,918.01

Management

and

Professional Fees- Others

(6,987.02) {3,998.86) (1 0,985.88) 4,184.82

Total

p 519,718.90 p 308,867.13 p 828,586.03 p 9,102.83

Per BIR Assessment

308,262.00

Unaccounted Difference

p 605.13 Legal Fees -Retainer and Legal Fees- Regular refer to income payments made by petitioner to "Puno and Puno Law Offices" and 67 Exhibit "P-45", Docket, Vol. II, p. 1036. t

"Romulo Mabanta Buenaventura Sayee & Delos Angeles". On the other hand, Audit fees - External pertain to payments made to "Sycip Gorres Vela yo & Company". Petitioner maintain that these payees are general professional partnerships (GPPs) duly registered with the SEC, thus the alleged income payments thereto in the total amount of P637,048.50 are exempt from EWT under RR No. 02-98, as amended. This was allegedly confirmed by the I CPA, in paragraph 19 of his report dated February 24, 2016.

Section 22(8) of the National Internal Revenue Code (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. Corollary thereto, 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

(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:

(4) General professional partnerships 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. Also, there is nothing from the records that would show that the gross income for the year 2010 of the said payees did not exceed P720,000.00. Consequently, the professional fees paid thereto in the amount of P637,048.50 is subject to 15°/o EWT pursuant to Section 2.57.2(E)(4) of RR No. 2-98, as amended by RR No. 30-03.

With regard to the Legal Fees - Notarial Fees in the amount of P806.4368, the same are subject to EWT on professional fees as provided for under Section 2.57.2(E)(4) of RR No. 2-98, as amended by RR No. 30-03. In the absence of proof that the gross income for the year 2010 of the recipients of the said notarial fees did not exceed 68 Exhibits P-2248 to P-2268.

P720,000.00, the amount of P806.43 shall be imposed of 15% deficiency EWT.

As regards the Hiring Fees amounting to P201, 716.98, the same pertain to the following items:

Invoice

Exhibit No.

Supplier

Nature of Payment

Amount

P-2269 to P-227 4

Jobstreet.Com Philippines

Payment

for

Job

p 3,435.75 Inc.

Postings

P-2275 to P-2280

QUAERITO

QUALITAS

Payment for search and 19,240.20 INC.

selection services.

P-2281 to P-2286

JOBSTREET

SELECT, Payment for search and 17,316.18 INC.

selection services.

P-2287 to P-2292

QUAERITO

QUALITAS

Payment for search and 22,680.00 INC.

selection services.

P-2293 to P-2298

George Garrett Guilford &

Payment for professional 108,000.00

Associates

fee for hiring.

P-2299 to P-2305

Jobs DB Philippines, Inc.

Payment

for

Job

780.00

Postings

P-2306 to P-2311

QUAERITO

QUALITAS

Payment for search and 7,311.28 INC.

selection services.

P-2312 to P-2317

Jobstreet.Com Philippines

Payment

for

Job

936.00 Inc.

Postings

P-2318 to P-2323

JOBSTREET

SELECT, Payment for search and 8,747.39 INC.

selection services.

P-2324 to P-2329

JOBSTREET

SELECT, Payment for search and 4,200.00 INC.

selection services.

P-2330 to P-2337

Prepaid Amortization

9,070.18 p 201,716.98 ---- ..

A comparison of the alphalist attached to the petitioner's BIR Form No. 1604E for the year 201069 and the schedule of professional fees70 shows that petitioner properly withheld and remitted 2% EWTon the income payments listed above, except for the prepaid amortization of P9,070.18, pursuant to Section 2.57.2(E)(3)(k) of RR No. 02-98, as amended by RR No. 17-03, which provides as follows: Sec. 2.57.2. Income payments subject to creditable withholding tax and rates prescribed thereon. - 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

(E)

Income payments to certain contractors - On gross payments to the following contractors, whether individual or corporate -Two percent (2%)

XXX

(3) Other contractors

XXX

69 Exhibit P-85.

70 Exhibit "P-45", Annex N, Docket, Vol. II, pp. 1068 to 1070. t

(k) Labor recruiting agencies and/or "labor-only" contractors. For this purpose, any person who undertakes to supply workers to an employer shall be deemed to be engaged in "labor-only" contracting where such person does not have substantial capital or investment in the form of tools, equipment, machineries, work premises and other materials and the workers recruited and placed by such person are performing activities which are directly related to the principal business or operations of the employer which the workers are habitually employed;

With reference to the Management and Professional Fee - Others in the amount of P(1 0,985.88), since the said amount did not form part of the claimed professional fees of P828,586.03, the same shall be disregarded.

In sum, petitioner failed to withhold and remit 15°/o EWT in the amount of P34,736.11 on professional fees of P231 ,574.06, computed as follows:

Direct Costs

Indirect Costs

Total

p p p

Legal Fees - Retainer

302,732.82 173,262.18 475,995.00

Legal Fees - Regular

2,322.11 1,329.00 3,651.11

Legal Fees -

Notarial

Fees

512.89 293.54 806.43

Audit Fees- External

100,107.92 57,294.47 157,402.39

Unaccounted Difference

(605.13)

Total Professional Fees

p 405,675.74 P231,574.06 p 637,854.93

Total 15% EWT

p 34,736.11 However, the Court is constrained to limit its findings based on respondent's assessment. Accordingly, petitioner is liable only to the extent of that EWT assessed by respondent in the amount of P12, 142.29.

Ill.

Director's fee- fi>23,000.00 Petitioner was amiss of its duty to contradict the findings of respondent on the difference of P23,000 pertaining to payment for Director's Fees not subjected to Withholding tax. Hence, this part of the assessment is upheld.

It bears stressing that tax assessments by tax examiners are presumed correct and made in good faith, with the taxpayer having the burden of proving otherwise. Failure to present proof of error in the assessment will justify the judicial affirmance of said assessment. 71 71 Marcos II vs. Court of Appeals, et at., G.R. No. 120880, June 5, 1997. f

IV.

Payment to contractors/subcontractors - f€>3, 768,557.55

a. Outside Services and Other Outside Services The ICPA provided the following details pertaining to Other Outside Services, to wit:

Particulars

Invoice

Direct Cost

Indirect Cost

Tax

Amount

Withheld

Security services:

Agency Fee

30,447.29 24,357.83 6,089.46 608.95 Non-Agency fee 202,981.95 162,385.56 40,596.39 0.00 233,429.24 186,743.39 46,685.85 608.95 Janitorial services:

Labor Cost

123,134.94 98,507.95 24,626.99 2,462.70

Supplies Materials

11,571.51 9,257.21 2,314.30 0.00 134,706.45 107,765.16 26,941.29 2,462.70 Messengerial services

Labor Cost

355,118.49 284,094.79 71024.00 7,102.36

Supplies Materials

7,595.95 6,076.76 1,519.19 0.00 362,714.44 290,171.55 72,543.19 7,102.36 Other contractual services Expense subj. to 2% 354436.24 283,548.99 70,887.25 7,088.72

Reimbursement

6,575.53 5,260.42 1,315.11 0.00 361,011.77 288,809.42 72,202.35 7,088.72 Hiring fees Hiring fees subject to EWT 192,646.80 116,166.02 3,852.94

Prepayment

9,070.18 5,469.32 201,716.98 121,635.34 0.00 3,852.94

Notarial

806.43 512.89 0.00 Management and other professional fees - others Expense subjected to 2% EWT 74,125.89 47,144.07 1,951.58 Expense subjected to 15% EWT 14,888.25 9,468.93 2,233.24 89,014.14 56,612.99 0.00 4,184.82

Outsource Accrual

112,677.07 90,141.66 22,535.41 2,253.54

GPPAccrual

Legal Fee

117,532.50 74,750.67 0.00

Audit Fee

92,271.92 58,684.94 0.00 209,804.42 133,435.61 0.00 0.00 GPP Professional fees

Legal Fee

362,113.61 230,304.26 0.00

Audit Fee

67,086.75 42,667.17 0.00 429,200.36 272,971.43 0.00 0.00

Sub-Total

2,135,081.30 1,548,799.44 240,908.10 27,554.02

Non-deductible Expense

(63,600.00) 0.00 0.00 - ~

Grand Total as Per Audit

Per FS/ITR in FAN

Discrepancy

1 ,485,199.44 240,908.10 27,554.02 1,483,816.00 240,873.00 1,383.44 35.10 However, the Court finds that petitioner failed to withhold taxes from its accrual of outside services amounting to P112,677.07, listed as follows:

Exhibit No.

Supplier

Nature of Payment

Invoice Amount

P-3383 to P-3384

Bulldog Security Agency Inc

Accrual for security services.

p 21,271.62

SUBTOTAL

21,271.62

P-3385 to P-3386

One V-cion Technology &

Accrual for service rendered of 4 10,022.52 Gen. Services, Inc.

l.t> support for the pd 9/1-15/10

P-3387 to P-3388

One V-cion Technology &

Accrual for service rendered of 4 10,022.52 Gen. Services, Inc.

l.t> support for the pd 10/16- 30/10

P-3389 to P-3390

One V-cion Technology &

Accrual for service rendered of 4 10,022.52 Gen. Services, Inc.

l.t> support for the pd 11/16- 30/10

P-3391 to P-3392

One V-cion Technology &

Accrual for service rendered of 4 10,022.52 Gen. Services, Inc.

l.t> support for the pd 12/16- 30/10

P-3393 to P-3394

Jones

Lang

Lasalle

To accrue Jones lang Iasaiie for 10,797.14 (Philippines) Inc.

Feb 2010

P-3395 to P-3396

Jones

Lang

Lasalle

To record Jones Management fee 10,510.54 (Philippines) Inc.

accrual for June

SUBTOTAL

61,397.76

P-3397 to P-3398

Tempo Services, Inc.

Accrual for Additional Messenger

15,887.45

P-3399 to P-3400

Tempo Services, Inc.

Accrual

for messengerial 11,750.88 services for the pd 11/16-30/1 0

P-3401

Tempo Services, Inc.

To record accrual for additional 1,908.70

Messengers for November

SUBTOTAL

29,547.03

P-3402 to P-3403

City Service Corporation

Accrual for janitorial services for 460.66 the month of 11/2010.

SUBTOTAL

460.66

TOTAL

P112,677.07 Likewise, a comparison of petitioner's alphalist against the amounts purported to be subjected to withholding resulted to the following amounts not subjected to withholding tax:

Particulars

Amount

Tempo Services, Inc.

p 6,657.97 One V-cion Technology & Gen. Services, Inc. 1,032.81 Jones Lang Lasalle (Philippines) Inc. 6,575.53

Total

P14,266.31 -- Thus, petitioner failed to withhold on its income payments pertaining to other outside services in the total amount of P25,388.68 representing 20°/o of the amount of P126,943.38 (the sum of f

P112,677.07 and P14,266.31); and on its income payments pertaining to other outside services in the total amount P1 01,554.70 or 80% of the same amount of P126,943.38.

b. Advertising The I CPA verified that total advertising expense paid by petitioner amounted to P380,701.76. Of this amount, P76, 140.35 was charged to operating expense representing 20°/o of the total costs. Per FS, the amount is P76,380.00 or a difference of P239.65. Below is the breakdown of the advertising expense of P380,701.76: 72 80% 20% 100%

Tax Withheld

(P)

Advertising Sublect to 2%

129,423.88 32,355.97 161,779.85 3,235.38

Advertising Subject to 5%

1,224.80 306.20 1,531.00 76.55

Advertising

not subject to 43,686.11 10,921.53 54,607.64

EWT

Advertising (Accrual)

50,226.62 12,556.65 62,783.27

Advertising

considered 80,000.00 20,000.00 100,000.00 nondeductible _!otal Adverti~ing Exp~nses ,_ 304,561.41 76,140.35 380,701.76 3,311.93 Per ICPA report, advertising expense amounting toP 54,607.64 was not subjected to EWT either because it was paid to GPPs or represents reimbursements.

Exhibit No.

Supplier

Nature of Payment

Invoice Amount

P-367 4 to P-3679

Isla Lipana &Co.

P-3713 to P-3714

Reimbursement

& 15,000.00

Liquidations

P-3715 to P-3719

Paramint Enterprises

Payment for Other Advertising

1,200.00

Expenses

72 Exhibit "P-45", Docket, Vol., p. 1037. ~

P-3720 to P-3721

Paramint Enterprises

In addition, accrual of advertising of P62, 783.27 was not subjected to EWT. Total advertising expense not subjected to EWT and not claimed as deduction amounted to P20,000.00. This represents reversal of IT-related advertising unsupported provisions73. Exhibit No.

Nature of Payment