3m Philippines, Inc. vs. Commissioner of Internal Revenue

DECISION

CASTANEDA, JR., J.:

THE CASE

The Petition for Review filed by 3M Philippines, Inc. prays for the cancellation and setting aside of the assessments for basic deficiency income tax, value-added tax (VAT), expanded withholding tax (EWT), withholding tax on compensation (WTC), final withholding tax (FWT) and deficiency interest; and further asks for the refund of the amount of P5,795,915.59, allegedly representing petitioner's payment under protest on November 28, 2015. 1 ?v

THE FACTS

Petitioner 3M Philippines, Inc. is a domestic corporation duly organized and registered under Philippine laws, with principal office at 9th Floor Three World Square Building, 22 Upper McKinley Road, McKinley Hill, Fort Bonifacio, Taguig City.2 It is incorporated primarily to manufacture, fabricate, compound, mould, produce, purchase, sell, own, use, develop, experiment with, license and generally deal in with materials commonly known as plastics, glass, glass cloth, glassine, rubber and rubber products, cellulose acetate, cellulose nitrate and products produced out of said substances, glue wax, abrasive and adhesives, and any and all kinds of goods, wares, merchandise, manufactures, commodities, furniture, machinery, tools, supplies and products, and generally to engage in and conduct any form of manufacturing or mercantile enterprise, including the establishment and maintenance of 3M Customer Technical Center as the marketing and product development facility of the Company.3 It is likewise a registered taxpayer under

Certificate

of

Registration

No.

OCN8RC0000018856 dated January 1, 1996.4 On the other hand, respondent is the duly appointed Commissioner of the Bureau of Internal Revenue (BIR) who 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 National Internal Revenue Code (NIRC) or other laws or portions thereof administered by the BIR. He holds office at the BIR National Office Building, BIR Road, Diliman, Quezon City.

On April 2, 2013, respondent issued a Letter of Authority (LOA) No. 116-2013-00000006,5 authorizing revenue officers to examine petitioner's books of accounts and other accounting records for all internal revenue taxes covering January 1, 2011 to December 31, 2011. As such, respondent gave a List of Audit Requirements6 to petitioner on April 8, 2013.

Afterwards, respondent issued a Preliminary Assessment Notice (PAN) on December 22, 2014, which was received by petitioner on fo.-

December 23, 2014, assessing the latter for deficiency income tax - P936,492,033.97, deficiency VAT- P891,046,448.06, deficiency EWT- P18,922,192.29, deficiency WTC - P38,283,205.98, deficiency FWT - P5,115,122.62, deficiency final withholding

VAT

(FWVAT)

- P¹,816,108.20, deficiency documentary stamp tax

(DST)

P385,323.28, and administrative penalty - P50,000.00.7

Petitioner

replied to the PAN through a Letter dated January 6, 2015.8 Respondent then issued a Formal Letter of Demand9 (FLD) assessing petitioner for deficiency income tax - P556,410,512.84, deficiency VAT- P686,372,548.41, deficiency EWT- P19,123,433.43, deficiency WTC - P38,690,627.62, deficiency FWT - P5,144,062.41, deficiency FWVAT- P1,844,558.49, deficiency DST- P388,718.35, and administrative penalty - P50,000.00. On November 5, 2015, petitioner received the undated Final Decision on Disputed Assessment10 (FDDA) with attached Details of Discrepancies and Assessment Notices that reduced the amount of the deficiency taxes and cancelled the deficiency FWVAT assessment. Petitioner was issued an assessment for deficiency income tax - P1,589,183.30, deficiency VAT - P34,851,900.69, deficiency EWT - P²,670,656.75, deficiency WTC - P4,675,924.46, deficiency FWT - P620,167.17, and deficiency DST- P400,974.08 or in the aggregated amount of P44,808,806.46. Afterwards, petitioner paid under protest some of the deficiency taxes on November 28, 201511 and informed respondent on December 3, 201512 of such payment. Petitioner filed the instant Petition for Review before this Court on December 4, 2015.

Respondent interposed the following special and affirmative defenses in the Answer13 filed through registered mail on February 19, 2016 and received by the Court on February 24, 2016: ;t-

"4.

Respondent

reiterates and re-pleads the preceding paragraphs of this Answer as part of her Special and Affirmative Defense.

Petitioner is liable for deficiency Income Tax.

A. Sales Discrepancy.

5. Petitioner posits that respondent failed to provide the basis of the assessment since it allegedly failed to provide identify each sales transaction and identify the vendees of its Additional Sales.

6. Petitioner is clearly mistaken.

7. Section 228 of the National Internal Revenue Code (Tax Code) provides:

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-

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

-XXX-

(Emphasis supplied).

8. This Honorable Court has explained in the case of CIR v. Liquigas that Section 228 does not require a full 7-t- explanation of every legal and factual basis as posited by petitioner, specifically:

Liquigaz Philippines' witness, Juliet A. Abano, cannot feign ignorance of the factual and legal bases of the BIR's assessments. Nor can her observation that 'there was no explanation whatsoever on every item of the assessment' be given decisive weight, for all that Section 228 of the NIRC requires is that 'the taxpayer shall be informed in writing of the law and the fact on which the assessment is made.' It is sufficient to identify the law and recite the facts: Section 228, which is applicable to assessments, does not demand a full explanation of every legal and factual basis.

Nor is a full explanation required by Section 3.1.6 of RR No. 12-99; it is sufficient for the FDDA, as the decision of the CIR or his duly authorized representative, to state the facts, applicable laws, rules and regulations, or jurisprudence on which such decision is based.

(Emphasis supplied).

9. In the instant case, the Formal Letter of Demand has sufficiently complied with the requirements of the law.

10. Moreover, petitioner was able to intelligently protest the same which in fact resulted to the reduction of the assessment.

11. Hence, it cannot feign ignorance now and assert that it did not understand fully the assessment just because it was not satisfied with the decision which did not result to a full elimination of the assessment. ?a-

B. Disallowed Expenses.

12. Petitioner argues that the expenses that were disallowed during the audit were allegedly supported by documents which were submitted to respondent.

13. Respondent disagrees.

14. All the documents submitted by petitioner were considered by respondent. The Final Decision on Disputed Assessment states:

Verification of the following expense/cost accounts revealed these are either overclaimed or unsupported, hence disallowed pursuant to Section 34 (A) (1) (b) of the NIRC, as amended.

a. Accounts pertaining to 2010 Charges - P776,721.62 Verification of your protest revealed that there is still an unreconciled discrepancy of Accounts pertaining to 2010 as per table below:

Discrepancy per FLD

Expenses already accrued or recorded

Net Adjustment

4,853,561.69 4,076,840.07 776£721.62

b. Reimbursement of Employee expenses with Vendor Names- P795,153.13 Verification of your protest revealed that there is still an unreconciled discrepancy of Accounts pertaining to 2010 as per table below:

Discrepancy per FLD

Protested and Reconsidered

11,810,288.94 11,015,135.80 Jc-

Net Adjustment

C. Interest on Additional Taxable Income. 795,753.14

15. Petitioner further posits that it is not liable for interest since there was no taxable income in the first place.

16. Respondent disagrees.

17. It is noteworthy that the imposition of interest arose from petitioner's filing of an amended return. Hence, its original return was incorrect and contained deficiency Income Tax until it was corrected by the amended return.

18. Thus, the imposition of interest, as sanctioned by Section 249 of the Tax Code, was proper.

Petitioner

is liable for deficiency Value Added Tax.

A. Vatable Sales.

19. Petitioner contends that it is not liable for deficiency Value Added Tax (VAT).

20. Petitioner's contention is bereft of merit.

21. Assessments made by the Bureau of Internal Revenue are presumed correct and made in good faith and taxpayers have the duty to prove otherwise.

22. In the case at hand, petitioner failed to provide proof positive that it has declared, for VAT purposes the proceeds it earned for its sale of its property, plant and equipment and that Miscellaneous Income were indeed already subjected to VAT. ~

CfA Case Nos. 9213 and 9214

23. Thus, for petitioner's failure, despite all the opportunity given to it, the assessment for deficiency VAT must stand.

B. Input Tax Disallowance.

24. Petitioner again claims that the assessment pertaining to the disallowance of input tax were void for failure to state the law and facts on which it is based.

25. To emphasize, the assessment has clearly stated the facts and law upon which it is based in full compliance with Section 228 of the Tax Code and implementing rules and regulations.

26. The Formal Letter of Demand states:

INPUT TAX DISALLOWANCE

The following input taxes are disallowed pursuant to Section 110 in relation to Section 113 of the NIRC, as amended:

1. Input Tax on Unsupported Importation - P183,607,845.00 Verification disclosed that Input Tax on importation claimed per

VAT

Returns

amounted to P183,607,845.00.

However, subject taxpayer failed to submit documentation particularly import entry declarations, hence, the disallowance of said Input Tax.

2. Input Tax on Over-claimed Purchases - P10,514,292.73.

Verification of 3M's SLP revealed excess discrepancies when matched against SLS of third parties shown per worksheet attached pt.- herewith as ANNEX A-6.

Such is deemed unsupported. The input tax thereon is also deemed unsupported. The input tax thereon is also deemed unsupported.

3. Input Tax in violation of Invoicing Requirements- P16,903,292.73 Verification of supplier's invoices disclosed that some invoices failed to comply with the invoicing requirements as prescribed under Section 110 of the Tax Code in relation with Section 4.113-1 (B) (³) and 4.113-4 (A) (2) both of Revenue Regulation No. 16-2005, as amended.

Input Tax disallowed on such improper invoicing amounted to P16,903,230.64, please see Annex A-13. 4.

Input Tax on

Reimbursements of

Employee Expenses with no Vendor Names - P1,417,234.67- Annex A-8 Please see item B.1.c on Expense/Cost Accounts- Disallowances under I. Income Tax

5. Input Tax- Others- P505,602.77 Verification of VAT Returns disclosed the amount of P505,602.77 was claimed as Input Others.

However, 3M failed to substantiate said input tax, hence disallowed.

6. Various Input tax disallowances per verification with ITS- P13,041,877.87 Verification made at our ITS revealed that some supplier's TINs were either invalid, wrong tin or non-vat registered. (pis. see Annex A-14)

7. Excess Input Tax on Capital Goods exceeding 1 Million - P987,763.99 p-

Verification disclosed that claimed input tax on capital goods exceeding 1 million amounted to P2,337,763.99. However, per Note 26 (a) (ii) of Audited Financial Statements, page 42, the amount is only P1,350,000.00, hence the discrepancy of P987,763.99 is disallowed.

Additional Input Tax Disallowance

1. Discrepancy of beginning and ending balances of

Deferred

Input

Tax

P2,694,853. 74 as show per table next page. -xxx-

27. A simple reading of the assessment would clearly inform petitioner as to why the assessment came about.

28. In fact, petitioner itself was able to protest the same which, again, resulted to a decreased assessment. The FDDA states:

1. Input Tax in Violation of Invoicing Requirements - P16,903,230.64 Verification of supplier's invoices disclosed that some invoices failed to comply with the invoicing requirements as prescribed under Section 110 of the Tax Code in Relation with Section 4.113-1 (B) (3) and 4.113-4 (A) (2) both of Revenue Regulation No. 16-2005, as amended. Input Tax disallowed on such improper invoicing amounted to P16,903,230.64, please see Annex A-1. 2.

Discrepancy of beginning and ending balances of Deferred Input Tax - P2,694,853.74 as show per table next page.

-XXX-

~

29. Again, it must be stressed that an unfavorable decision from respondent cannot and should not be used by petitioner to assail the assessment just because the assessment for deficiency was not fully eliminated.

Petitioner

is liable for deficiency Withholding Taxes.

30. Petitioner claims that it is not liable for deficiency Expanded Withholding Tax (EWT) since: (a) depreciation expense is no subject to EWT; (b) the purchases were not made to regular supplier of goods; and (c) it has reconciled its EWT deficiency for its purchase of services.

31. Petitioner further avers that the discrepancy noted by respondent as regards its compensation which resulted to deficiency Withholding Tax on Compensation (WTC) pertains to 555 employer contributions share, employee food, meals and other expenses, payments for employee medical and dental coverage, Philhealth and Pag-ibig employer contributions share, as well as de minimis benefits.

32. Petitioner's bare contentions without proof are bereft of merit.

33. The Honorable Supreme Court has thoroughly explained in the case of CIR v. Hantex the presumption in favor of the correctness of tax assessments, specifically: 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 of liability on the part of the 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 Jt- 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.

(Emphasis supplied).

34. In the case at hand, the revenue officers have painstakingly examined all records of petitioner made available to them as regards petitioner's sales and purchases.

35. Moreover, audit procedures adopted include analysis of petitioner's accounting system, reconciliation of petitioner's books of accounts against the returns it filed, third party matching of data, sampling and verification of revenue as to whether the income it reported truly reflects the actual results of petitioner's business operation.

36. Petitioner was given all the opportunity to present its side.

However, it failed to present credible evidence to refute the assessment.

37. Thus, the assessment for deficiency Ewr and wrc must stand.

Petitioner is liable for deficiency Final Tax.

38. Petitioner asserts that it is not liable for deficiency Final Tax. yv-

39. However, it was not able to refute the findings in the Formal Letter of Demand as regards the Royalty Expenses which states:

FINAL TAX

Royalty Expense not subjected to Final Tax - P3,536,890.89 Verification disclosed that royalty expense per FSS duly subjected to Final Vat Withholding at 12°/o amounted to P78,384,76.45 but the amount subjected to Final Tax at 10°/o was only P74,847,835.56. Hence, the difference of 3,536,890.89 is assessed pursuant to Section 28 (B) (1) of the NIRC, as amended.

40. Thus, for failure to provide proof as basis for its assertion, the assessment for deficiency Final Tax must be upheld.

41. It is noteworthy that petitioner has failed to contest the imposition on deficiency Documentary Stamp Tax in the amount of P400,974.08.

42. Notably, petitioner, in the instant Petition for Review, failed to refute respondent's assessment for deficiency Documentary Stamp.

43. All told, it is very clear that petitioner is indeed liable for deficiency taxes in aggregate amount of P44 ,808,806.46.

44. Thus, petitioner's claim for refund for allegedly erroneously paid or illegally collected taxes has no leg to stand on." 'It- . '

Thereafter, petitioner filed its Pre-Trial Brief14 on April 25, 2016, while Respondent's Pre-Trial Brief15 was filed on April 27, 2016. The Court received the parties' Joint Stipulation of Facts and Issues16 on June 2, 2016. Consequently, the Court issued the Pre-Trial Order17 on June 22, 2016, and terminated the pre-trial. Upon motion of petitioner,18 the Court commissioned Mr. George V. Villaruz as Independent Certified Public Accountant (!CPA) on July 7, 2016.19 During trial, petitioner presented Ms. Darlene Clarin-San Manuel, Mr. Anthony A. Chan, and Mr. George V. Villaruz as its witnesses. Petitioner then formally offered its testimonial and documentary evidence, which the Court admitted, except for Exhibits "P-9", "P-10", "P-32" "P-33" "P-37" "P-38" "P-42" "P-43" "P-47" "P-48" "P-100"

I

I

I

I

I

I

I

I

I

"P-101", "P-102", "P-104", "P-108", "P-108-a", "P-108-a", "P-108-c", "P-108-d" "P-108-h" "P-108-i" "P-108-J'" "P-108-J., "P-108-o" "P- '

I

I

I

I

I

108-p", "P-108-q", "P-108-v", "P-108-w", "P-108-x", "P-108-bb", "P- 108-ee", "P-108-ff", "P-108-kk", "P-4.36-!CPA", "P-4.37-!CPA", "P- 4.182-ICPA", and "P-5.⁴-!CPA". 20 On the other hand, respondent presented Revenue Officer Tito Monforte as his sole witness. Afterwards, respondent formally offered his testimonial and documentary evidence and the Court admitted the same.21 The Court declared the case submitted for decision on January 30, 2018/2 in view of the filing of petitioner's Memorandum23 on January 16, 2018 and the Verification Report issued by the Court's Judicial Records Division dated January 23, 2018, stating that respondent failed to file a memorandum. f.,

THE ISSUES

The parties presented the following issues24 for the Court's determination:

1. Whether or not petitioner is liable for the deficiency internal revenue taxes and related interest and penalties for taxable year ended December 31, 2011 assessed under the undated FDDA in the aggregate amount of P45,023,806.45; and

2. Whether or not petitioner is entitled to the refund of the P⁵,795,915.59 it paid under protest for the assessments on deficiency income tax, withholding tax- expanded, withholding tax-compensation under the FDDA, inclusive of interest computed until November 30, 2015.

THE COURT'S RULING

The Court shall first determine the timeliness of the filing of the present Petition for Review in accordance with Section 228 of the NIRC of 1997, as amended, which provides: "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: Provided, however, That a preassessment notice shall not be required in the following cases:

XXX

XXX

XXX

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

Within a period to be prescribed by implementing rules and regula.tions, the taxpayer shall be required to 'j<-

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.

If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of the one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable."

Based on the foregoing, petitioner has thirty days from receipt of respondent's final decision within which to appeal the said decision. Since petitioner received the FDDA on November 5, 2015, it had thirty days therefrom or until December 5, 2015 within which to appeal the said FDDA. Thus, the instant Petition for Review filed on December 4, 2015 was timely filed.

The Court shall now determine whether petitioner is liable for the assessed deficiency taxes.

Respondent assessed petitioner for deficiency internal revenue taxes for taxable year (TY) 2011 in the aggregate amount of P1,892,110,434.40, broken down below: 25

KIND OF TAX

AMOUNT

Income Tax

p 936,492,033.97

VAT

891,04§/448.06~ /&-

EWT

WTC

FWT

FWVAT

DST

Administrative Penalty

TOTAL

- ---------------- 18 922,192.29 38,283,205.98 5,115,122.62 1_L816,108.20 385,323.28 50/000.00 L_ -~1,892,110,434.40 Respondent subsequently issued the FLD after taking into consideration the protest letter of petitioner, still assessing petitioner of deficiency internal revenue taxes forTY 2011 in a reduced amount of P1,308,024,461.55, as shown below:26

KIND OF TAX

AMOUNT

Income Tax

p 556,410,512.84

VAT

686,372,548.41

EWT

19,123,433.43

WTC

38,690,627.62

FWT

5,144,062.41

FWVAT

1 844,558.49

DST

388,718.35

Administrative Penalty_

50,000.00

Total

P1,308,024,461.55 In the FDDA, respondent still found petitioner liable to pay deficiency income tax, VAT, EWT, WTC, FWT, and DST, inclusive of surcharge and interests, and administrative penalties forTY 2011, in the aggregate amount of P45,023,806.45, as computed below:

Basic

Surcharge

Interest

Pen a tty

Total

Income Tax

p 684 788.25 p 904 395.05 p 1,589 183.30

VAT

19,970 084.38 14 881 816.31 34,851,900.69

EWT

1 523 108.93

1147 547.82

2 670 656.75

WTC

2 666 738.17 2 009 186.29 4,675 924.46

FWT

353,689.09 266 478.08 620 167.17

DST

199 871.00 p 49 967.75 151135.33 400 974.08

Administrative

Penalties

p 215,000.00 215 000.00

Total

P25,398,279.82 P49,967.75 P19,360,558.88 P215,000.00 P45,023,806.45 On November 28, 2015, petitioner paid the following deficiency taxes in the total amount of P⁶,416,818.00: j2e-

Tax Type

IT (inclusive of interest 'til 11/30/2015)

EWT

wrc DST (inclusive of surcharge and interest 'til 11/20/2015)

Administrative Penalties

Total

Exhibit Nos.

BIR Form No. 0605 eFPS payment /Filing Ref. No.27 confirmation28 Taxes paid

"P-17" to "P-18"

Annex B (''P-23'1

P 1 606L068.49

"P-15" to "P-16"

Annex D (''P-23")

1 523,108.93

"P-21" to "P-22"

Annex F (''P-23")

2 666 738.17

"P-13" to "P-14"

Annex H (''P-23")

405,902.41

"P-19" to "P-20"

Annex J (''P-23")

215,000.00 1'6,416,818.00 On December 3, 2015, petitioner informed respondent through a Letter29 that the former paid the deficiency DST and administrative penalties without qualification, but paid the deficiency income tax, EWT, and WTC under protest.

Based on the foregoing, only the assessments for deficiency income tax, VAT, EWT, WTC, and FWT in the aggregate amount of P44,407,832.3730 remain as subject of the present Petitions for Review.

Petitioner avers that the right of respondent to assess petitioner has already lapsed for deficiency VAT covering the first to third quarters of TY 2011 and deficiency EWT, WTC, and FWT for January to November 2011.

Section 203 of the NIRC of 1997, as amended, mandates that internal revenue taxes must be assessed within three (3) years reckoned from the period fixed by law for the filing of the tax return or the actual date of filing, whichever comes later, to wit: "SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)- ~ 27 Docket, val. II, pp. 707 and 714 to 722. 28 Docket, val. II, pp. 729, 732, 735, 738, and 741. 29 Exhibit "P-23", docket, val. II, pp. 723 to 726. 30 Total of P1,589,183.30 (income tax), P34,851,900.69 (VAT), P2,670,656.75 (EWT), P4,675,924.46 (WTC), and P620,167.17 (FWT).

year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day." In relation thereto, Sections 77 and 114 of the NIRC of 1997, as amended, provide for the time of filing of the income tax and VAT returns, which are all quoted hereunder for easy reference: "SEC. 77. Place and Time of Filing and Payment of Quarterly Corporate Income Tax. -

XXX

XXX

XXX

(B) Time of Filing the Income Tax Return. -The corporate quarterly declaration shall be filed within sixty

(60) days following the close of each of the first three (3) quarters of the taxable year. The final adjustment return shall be filed on or before the fifteenth (15th) day of April, or on or before the fifteenth (15th) day of the fourth (4th) month following the close of the fiscal year, as the case may be." (Emphasis supplied) "SEC. 114. Return and Payment of Value-Added Tax- (A) In General. - Every person liable to pay the value- added tax imposed under this Title shall file a quarterly return of the amount of his gross sales or receipts within twenty-five (25) days following the close of each taxable quarter prescribed for each taxpayer: Provided, however, That VAT-registered persons shall pay the value- added tax on a monthly basis." (Emphasis supplied) Further, pursuant to Revenue Regulations (RR) No. 26-200231, taxpayers classified under group B, such as herein petitioner, are required to file the Monthly Withholding Tax Returns within fourteen

(14) days following the end of the month. ~ 31 SUBJECT: Amending Further Revenue Regulations No. 9-2001, as amended by Revenue Regulations No. 2-2002 and Revenue Regulations No. 9-2002, Providing for the Staggered Filing of Returns of Taxpayers Enrolled in the Electronic Filing and Payment System (EFPS) Based on Industry Classification.

Applying the afore-quoted provisions of law and regulations, the following are the dates pertinent to the subject deficiency tax assessments:

Date of

Last Day to

Last day to

Receipt of

Exhibit

Period

Date filed

File Return

Assess

FLD/FANs32

Annual Income Tax Return 33

P-27

CY 2011

Apr. 16, 2012 Apr. 16, 2012 Apr. 16, 2015 Jan. 12, 2015

Quarterly VAT Returns14

P-31

1st Qtr of 2011 Apr. 25, 2011 Apr. 25 2011 Apr. 25 2014

P-36

2nd Qtr of 2011 Jul. 25 2011 Jul. 25 2011 Jul. 25 2014 Jan. 12, 2015

P-41

3rd Qtr of 2011 Oct. 24 2011 Oct. 25, 2011 Oct. 25 2014

P-46

4th Qtr of 2011 Jan. 25, 2012 Jan. 251 2012 Jan. 25_L_ 2015

EWT Returns15

P-49

January 2011

Feb. 14 2011 Feb. 14 2011 Feb. 14, 2014

P-50

February 2011

Mar. 14 2011 Mar. 14 2011 Mar. 14, 2014

P-51

March 2011

Apr. 1~2011 Apr. 14 2011 Apr. 14 2014

P-52

April 2011

May 14, 2011

May 16 2011

May 16 2014

P-53

May 2011

Jun. 14, 2011 Jun. 14 2011 Jun. 14 2014

P-54

June 2011

Jul. 14 2011 Jul. 14 2011 Jul. 14 2014 Jan. 12, 2015

P-55

July 2011

Aug. 14 2011 Aug. 15 2011 Aug. 15 2014

P-56

August 2011

Sept. 14 2011 Sept. 14 2011 Sept. 14, 2014

P-57

September 2011

Oct. 14, 2011 Oct. 14 2011 Oct. 14 2014

P-58

October 2011

Nov. 14 2011 Nov. 14 2011 Nov. 14 2014

P-59

November 2011

Dec. 15, 2011 Dec. 14 2011 Dec. 15 2014

P-60

December 2011

Jan. 16 2012 Jan. 16 2012 Jan. 16 2015

WTC Returns16

P-61

January 2011

Feb. 14 2011 Feb. 14, 2011 Feb. 14 2014

P-62

February 2011

Mar. 14, 2011 Mar. 14 2011 Mar. 14 2014

P-63

March 2011

Apr. 13 2011 Apr. 14 2011 Apr. 14, 2014

P-64

April2011

May. 13 2011

May 16 2011

May 16 2014

P-65

May 2011

Jun. 14 2011 Jun. 14, 2011 Jun. 14 2014

P-66

June 2011

Jul. 13, 2011 Jul. 14 2011 Jul. 14 2014 Jan. 12, 2015

P-67

July 2011

Aug. 12 2011 Aug. lS_L 2011 Aug. 15, 2014

P-68

August 2011

Sept. 14 2011 Sept. 14, 2011 Sept. 14 2014

P-69

September 2011

Oct. 14 2011 Oct. 14, 2011 Oct. 14, 2014

P-70

October 2011

Nov. 14 2011 Nov. 14r_2011 Nov. 14 2014

P-71

November 2011

Dec. 14 2011 Dec. 14, 2011 Dec. 14, 2014

P-72

December 2011

Jan. 13, 2012 Jan. 16, 2012 Jan. 16, 2015 32 Exhibit "R-5", BIR records, p. 1086. 33 Exhibit "P-27", docket, vol. II, pp. 772 to 773. 34 Exhibits "P-31", "P-36", "P-41", and "P-46", docket vol. III, pp. 1312 to 1313, 1322 to 1323, 1333 to 1335, and 1342 to 1344, respectively. 35 Exhibits "P-49", "P-50", "P-51", "P-52", "P-53", "P-54", "P-55", "P-56", "P-57", "P-58", "P-59", and "P-60", docket, vol. III, pp. 1345 to 1377 . 36 Exhibits "P-61", "P-62", "P-63", "P-64", "P-65", "P-66", "P-67", "P-68", "P-69", "P-70", "P-71", "P-72", docket, vol. III, pp. 1378 to 1401.

I

~

FWT Return$17

P-73

January 2011

P-74

February 2011

P-75

March 2011

Feb. 14 2011 Feb. 14, 2011 Feb. 14 2014 Mar. 14 2011 Mar. 14 2011 Mar. 14 2014 Apr. 13 2011 Apr. 14 2011 Apr. 14 2014

P-76

April2011

May 13 2011

May 16 2011

May 16 2014

Jan. 12, 2015

P-77

May 2011

Jun. 14 2011 Jun. 14 2011 Jun. 14, 2014

P-78

June 2011

Jul. 13, 2011 Jul. 14, 2011 Jul. 14 2014

P-79

July 2011

Aug. 13 2011 Aug. 15 2011 Aug. 15, 2014

P-80

August 2011

Sept. 14, 2011 Sept. 14, 2011 Sept. 14 2014

P-81

September 2011

Oct. 14 2011 Oct. 14 2011 Oct. 14, 2014

P-82

October 2011

Nov. 14 2011 Nov. 14 2011 Nov. 14, 2014

P-83

November 2011

Dec. 14 2011 Dec. 14 2011 Dec. 14 2014

P-84

December 2011

Jan. 13 2012 Jan. 16 2012 Jan. 16 2015 Based on the above table, the right of respondent to assess petitioner for deficiency VAT covering the first to third quarters of TY 2011 and deficiency EWT, WTC, and FWT for January to November 2011 has already prescribed in accordance with Section 203 of the NIRC of 1997, as amended. Thus, this Court shall decide these cases involving only the assessments for deficiency income tax forTY 2011, deficiency VAT covering the fourth quarter of TY 2011, and deficiency EWT, WTC, and FWT for the month of December 2011. The Court shall now proceed to determine the merits of the subject assessments.

I. Deficiency Income Tax- P2,171,774.37 In the FDDA, respondent assessed petitioner for deficiency income tax forTY 2011 in the amount of P1,589,183.30, computed as follows: 38

Taxable Income per Original ITR

P363,487,919.93

Add: Adjustment per Audit

Sales Discrepancy per Audit

p 710 752.80

Disallowed Cost and Deductions

Payments of Accounts pertaining to 2010

Charges per Purchase Journal Book-AP

776,721.62

Reimbursements of Employee Expenses with

no Vendor Names per Purchase Journal Book 795,153.14 2 282,627.56

Taxable Income per Audit

P365,770,547.49

Income Tax Due at 30%

P109 731,164.25

Less: Creditable Withholding Tax per Original Returns

16,555,536.65 37 Exhibits "P-73", "P-74", "P-75", "P-76", "P-77", "P-78", "P-79", "P-80", "P-81", "P-82", "P-83", "P-84", docket, vol. III, pp. 1402 to 1413. 38 Exhibit"P-11", docket, vol. I, p. 61; Exhibits "R-7", BIR records, pp. 1127 to 1131.

I~

Income Tax Due per Audit

Less: Income Tax paid per Return Quarterly Income Tax Pa_yments

Original ITR

Basic Deficiency Income Tax

Add: Interest (until Oct. 16, 2015)

Interest on Additional Taxable Income per

Amended Returns

Total_ Income "("ax Deficiency ---- p 93,175 627.60 P71,049,265.00 21 441,574.35 92,490,839.35 p 684,788.25 p 479,914.61 424,480.44 904,395.05 P1,589,183.30 The deficiency income tax assessment arose from the following items, which shall be discussed one by one:

a. Sales discrepancy per audit P710,752.80

b. Disallowed Cost and Deductions: b.1 Payments of accounts pertaining to 2010 charges 776,721.62 b.2 Reimbursements of employee expenses with no vendor names 795 153.14

c. Interest on additional taxable income per amended returns P424,480.44

a. Sales discrepancy per audit Based on the Details of Discrepancy39, attached to the FDDA, after respondent's verification of petitioner's protest, there was still an unreconciled discrepancy on petitioner's sales in the amount of P710,752.80, as shown below. Hence, pursuant to Section 32 of the NIRC of 1997, as amended, respondent assessed petitioner of the corresponding deficiency income tax. Discre~an~y per FLD P33,650,562.36

July Sales per FLD

P279,267,155.70 July Sales per protest 246,327,346.14 32,939,809.56

Net Adjustment to Income per FDDA

p 710,752.80 Petitioner argues that respondent failed to provide the details/basis of the 2011 Sales Register that it used to arrive at this assessment item, hence, must be declared void pursuant to Section 228 of the NIRC of 1997, as amended. A breakdown of the gross figures used by respondent is allegedly necessary to allow petitioner to compare the same with its financial records and books of accounts on a transaction-by-transaction basis, so that petitioner can determine whether these transactions are in fact its sales. The absence of this essential information allegedly violates petitioner's right to due process ,._

in being informed of the factual and legal bases of the deficiency tax assessment.

Contrary to its assertion, petitioner was informed of the subject assessment as the Details of Discrepancies attached to the PAN40 and FLD41 show how respondent arrived at the alleged discrepancy. In fact, petitioner was able to refute the said finding and explain its side thereon. As can be gleaned from its protest to the PAN42, petitioner even mentioned that "The Sales Register which was relied upon by the BIR only reflects the original invoice amounts" and particularly disputed the sales amount only for July. Having been able to intelligently protest the assessment, petitioner had substantial understanding of the factual and legal bases of the same. In the case of Commissioner of Internal Revenue vs. Asalus Corporation,43 the Supreme Court ruled that substantial compliance with the requirement as laid down under Section 228 of the NIRC suffices, for what is important is that the taxpayer has been sufficiently informed of the factual and legal bases of the assessment so that it may file an effective protest against the assessment. Petitioner alleges that it submitted to the BIR positive proof on the actual 2011 Sales Register figures showing the correct sales figures. However, the Sales Register44 presented by petitioner pertains only to the month of July, which was already considered and excluded by respondent in arriving at the remaining amount of discrepancy per FDDA. No other document was presented to controvert the assessed remaining discrepancy per FDDA.

For petitioner's failure to adduce evidence to reconcile or justify the alleged sales discrepancy of P710, 752.80, the deficiency income tax assessment thereon is upheld.

b. Disallowed Cost and Deductions

Respondent's

verification disclosed that the following expense/cost accounts were either over-claimed or unsupportedV'-

hence, disallowed pursuant to Section 34(A)(1)(b) of the NIRC of 1997, as amended:

b.l Payments of accounts pertaining to 2010 charges P776,721.62 b.2 Reimbursements of employee expenses with no vendor names P795,153.14 With regard to the disallowance of P776,721.62, petitioner argues that this pertains to payments of accounts payable where the corresponding expenses were already accrued or recorded in taxable year 2010 and that the accrual was reversed in 2011 upon payment of the same.

In other words, these payments were not claimed as expenses in 2011.

However, bare and unsubstantiated allegations do not constitute substantial evidence and have no probative value.45 As such, petitioner's bare allegations, unsubstantiated by sufficient documentary evidence, cannot be given credence by the Court. Tax assessments by tax examiners are presumed correct and made in good faith, and all presumptions are in favor of the correctness of a tax assessment unless proven otherwise.46 The burden of proof is upon the complaining party to show clearly that the assessment is erroneous. Failure to present proof of error in the assessment will justify the judicial affirmance of said assessment.47 Apparently, the disallowance in the amount of P776,721.62 shall remain.

c. Disallowed reimbursements of employee expenses with no vendor names In the FLD, respondent disallowed petitioner's reimbursements of employee expenses with no vendor names per Purchase Journal Book in the amount of P11,810,288.94. After verification of petitioner's protest, respondent reconsidered the amount of P11,015,135.80 but still disallowed the amount of P795,153.14 in the FDDA.48 Petitioner avers that this item of assessment was (a) void for failure of the BIR to provide the factual basis, and (b) should also be fe-

set aside for being based on grossly over-stated figures. Petitioner alleges expresses that respondent did not provide the details of the alleged reimbursements to allow the former to refute properly the discrepancy. Petitioner is allegedly at loss as to how the BIR arrived at the amount of Pll,015,135.80 for a single transaction under employee reimbursement, which clearly indicated the erroneous nature of the schedules used by the BIR in generating the said assessment.

The Court does not agree.

In the Details of Discrepancies attached to the FLD, respondent clearly states the factual and legal bases of the assessment in the amount of P11,810,288.94, to wit:

"B. EXPENSE/COST ACCOUNTS- DISALLOWANCES

1. Verification of the following expense/cost accounts revealed these are either overclaimed or unsupported, hence disallowed pursuant to Section 34 (A)(l)(b) of the NIRC, as amended.

XXX

XXX

XXX

c. Reimbursement of Employee expenses with no Vendor Names- P11,810,288.94

Verification of Purchase Journal Book -

EP

revealed payment of charges but with no Vendor names as per worksheet attached herewith as ANNEX A-8."

The worksheet referred to by respondent as Annex A-849 contains the details of the original disallowed amount of P11,810,288.94. Clearly, petitioner was properly informed about the assessment. In fact, in its protest letter to the FLD/FANs, petitioner noted "that out of the total amount being disallowed, one line item amounted to Pll,016,135.80". This shows that petitioner was ?c-

furnished a copy of Annex A-8 wherein the details/breakdown of the total disallowed amount of P11,810,288.94 is shown. Evidently, petitioner was able to effectively contest the subject disallowance. However, as found by respondent, there remained an unsupported or unreconciled amount of P795,153.14 out of the total disallowance of P11,810,288.94.

Further, petitioner's argument that the disallowed amount of P795,153.14 was based on grossly over-stated figures is not supported by evidence. Basic is the rule that he who alleges a fact has the burden of proving it and a mere allegation is not evidence. 50 Considering that petitioner failed to refute the disallowance of P795,153.14, the same must be sustained.

d. Interest on additional taxable income per Amended Return Since the basis of respondent's audit was the Annual Income Tax Return (AITR), the adjustment made by petitioner in its Amended AITR was considered by respondent as part of the adjustments to taxable income based on the FLD,51 hence, respondent assessed petitioner for the additional taxable income in the amount of P7,017,000.00. In the FDDA, respondent excluded the amount of P7,017,000.00 as adjustment to taxable income, but imposed deficiency interest on the related income tax due of P2,105,100.00 from April 15, 2012 up to the filing of the Amended AITR on April 18, 2013 in the amount of P424,480.44, computed as follows:

Additional Taxable Income per Amended Annual ITR

P7,017,000.00

Multiply by

0.30

Income Tax Due

P2,105 100.00 Interest rate from April 15, 2012 to date of Amended Annual ITR on April 18, 2013 0.20

Amount of Interest

P424,480.44 - Pursuant to Section 77(8) and (C) of the NIRC of 1997, as amended, the last day for the filing of petitioner's Annual ITR for CY 2011 and payment of the corresponding income tax was on April 16, ?t,.;

2012 (April 15, 2012, being a Sunday). While petitioner timely filed its Original Annual ITR on April 16, 201252, however, it filed an Amended Annual ITR on April 18, 201353, reporting an additional taxable income of P7,017,000.0054• Thus, petitioner's belated payment of the P2,105,100.00 income tax due on the additional taxable income of P7,017,000.00 must be subjected to twenty percent (20°/o) deficiency interest pursuant to Section 249(A) of the NIRC of 1997, as amended, which provides as follows:

"SEC. 249. Interest- (A) In General. - There shall be assessed and collected on any unpaid amount of tax, interest at the rate of twenty percent (20°/o) per annum, or such higher rate as may be prescribed by rules and regulations, from the date prescribed for payment until the amount is fully paid." Hence, respondent's assessment for deficiency interest is upheld but in the adjusted amount of P423,326.96, computed as follows:

Additional Taxable Income per Amended Annual ITR

P7,017,000.00

Multiply by Income Tax Rate

x30%

Income Tax Due

P2, 105,100.00 Multiply by 20% Deficiency Interest/annum (20% x 367/365 days) 20.109589%

Amount of Deficiency Interest

P4~3,326.96 In sum, petitioner is liable to pay basic deficiency income tax for TY 2011 in the amount of P684,788.25 as assessed by respondent and deficiency interest of P423,326.96, as computed above, on belated payment of P2,105,100.00 income tax due. II. Deficiency VAT- P34,851,900.69 Petitioner was assessed of deficiency VAT for TY 2011 in the amount of P34,851,900.69, computed as follows: 55

I Vatable Sales per Vat Returns

P3,057,966,501.75 1/c_

erA Case Nos. 9213 and 9214

Add: Adjustment per Audit

Additional Taxable Income per Amended ITR

Vatable Sales per Audit

Output Tax Due per Audit

Less: Allowable Input Tax per Audit

Input Tax per Vat Returns:

Input Tax on Capital Goods exceeding 1M deferred fr previous period

Current Transactions

Total Available Input Tax per Vat Returns

Less: Input Tax on Capital Goods exceeding 1M deferred to succeeding period

Net Available Input Tax per Vat Return

Less: Disallowances per Audit

Due to Invoicing Requirements Violation

Discrepancy on beginning and ending balances

of Deferred Input Tax per 2550Q vs FS

Vat Payable per Audit

Vat Paid per Returns

Vat Deficiency

Add: Interest (until Oct. 16, 2015)

Total Vat Deficiency

31 1001000 o 00 P31061~066,501.75 p 367,327,980.21 p 1,829,563.69 261 2941512.18 P263, 124,075.87 3,322,814.04 P259 8011261.83 16,903,230.64 2,694,853.74 240,2031177.45 p 12711241802.76 107,154,718.38 p 19,970,084.38 141881 816.31 p 34,851,900.69 The following components of the deficiency VAT assessment shall be discussed in seriatim:

a. Additional taxable income per Amended ITR p 3 1001000.00

b. Disallowed input tax due to invoicin_g_ requirements violation 16,903,230.64

c. Disallowed discrepancy on beginning and ending balances of deferred input tax per 2550Q vs. ~

a. Additional taxable income per amendediTR p 2,694,853.74 Respondent's verification revealed that there was still an unreconciled discrepancy of additional VATable income per Amended ITR, in the amount of P3,100,000.00, as shown below, hence, assessed pursuant to Section 106(A) of the NIRC of 1997, as amended:

Discrepancy per FLD

p 51200 000.00

Restatement of Available for Sale Financial

Assets not subject to VAT 2,100,000.00

Net Additional Vatable Income for FDDA

P3,100,000.00 ik-

The Court-commissioned ICPA provided a breakdown of the assessed amount of P3,100,000.00 as follows: 56 Proceeds from retirement of Property and equipment p 240,000.00 Others: Miscellaneous income, net 2,860,000.00

Net Additional Vatable Income for FDDA

P3,100,000.00 Petitioner argues that the transactions pertaining to the amount of P3,100,000.00 are not subject to VAT. However, as correctly noted by the ICPA, petitioner did not provide documents in support of the assessed amount of P3,100,000.00. Hence, the Court cannot verify the nature of the same and ascertain the proper tax implication. Consequently, the Court is constrained to uphold the deficiency VAT assessment on this item.

b. Disallowed input tax due to invoicing requirements violation Respondent disallowed petitioner's claimed input taxes in the total amount of P16,903,230.64, broken down below, for failure to meet the invoicing requirements prescribed under Sections 4.113- 1{8)(3) and 4.113-4(A)(2) of Revenue Regulations (RR) No. 16-05, as amended: 57

Registered Name

TIN

Input Tax

Reason for disallowance 3M's TIN not indicated; Uses BILL document instead of Philscan Travel and Tours Inc.

p 60 178.85 invoice/official receipt 3M's TIN not indicated; Uses

STATEMENT

OF

ACCOUNT

Angara Abello Concepcion

document instead of R~al 434145 24 942.64 invoice/official receipt Showcase Display Concepts Inc.

6926590 839,381.22 3M's TIN not indicated 3M's TIN not indicated; VAT not separately billed, Official

Receipt

should be used

Pacubas General Services

18,129.60 instead of invoice

Jodan General Merchandise

250002063 178,300.64 3M's TIN not indicated

Graphics Library Incorporated

5024326 322,514.15 3M's TIN not indicated

Desmond A Malic Trucking

3M's TIN not indicated in both

Service

1,588,536.29 Official Receipt & invoice 3M's TIN not indicated in both

Official

Receipt;

VAT

not IDS Marketing Phils Inc.

232434950 2,210,512.90 separately billed 56 Exhibit "P-36", p. 9.

57 Exhibit "P-11", Annex A-1, docket, vol. I, p. 70. ,L

3M's TIN not indicated in both

Official

Receipt;

VAT

not

Megaworld Corporation

2,774,044.91 separately billed 3M's TIN not indicated in both

Official

Receipt;

VAT

not 3Giovision Inc.

207359381 6,932 942.72 separately billed 3M's TIN not indicated in both

Official

Receipt;

VAT

Excellence Freight Inc.

190527014 1,953 746.72 separately billed

Total

P16,903,230.64 Petitioner contends that the assessment is void since it was not informed of the factual basis thereof. The PAN and the FAN referred to a disallowed input VAT of P16,903,230.64 under an "Annex A-13" but, allegedly, petitioner was not furnished a copy of said Annex. The details of the disallowed input VAT only came out in Annex A-1 of the FDDA but only contained gross figures per identified supplier, without identifying the specific purchases in relation thereto. Petitioner further asserts that the assessment is without factual basis as it was based merely on a sampling of invoices/ORs. After examining a single non-compliant invoice/OR from a vendor, the BIR automatically assumed that all of the invoices/DRs from the same vendor are non-compliant, and disallowed all of the input VAT for that vendor. According to petitioner, the invoices/DRs actually examined by the BIR per records pertain to only P2,158,858.62 out of the total disallowed input VAT of P16,903,230.64. Hence, the assessment, if any, must be limited to the input VAT represented by the invoices/ORs actually examined by the BIR and not on the amount of P16,903,230.64, which is based on mere assumptions. Moreover, petitioner avers that the VAT invoicing requirements, as implemented by RR No. 16-05, as amended, is less strictly enforced in deficiency VAT assessments as compared to VAT refunds citing the case of Commissioner of Internal Revenue vs. Euro-Philippines Airline

C'

'

T

58 ~erv1ce~ .~.nc. .

The Court partially upholds the disallowance. not In Commissioner of Internal Revenue vs. United Salvage and Towage (Phils.), Inc., 59 the Supreme Court considered a Detailed Notice of Discrepancy or a justification on how the deficiency taxes;z_ sa CTA EB No. 1106, July 14, 2015.

CfA Case Nos. 9213 and 9214 were arrived at as sufficient to prove the factual and legal bases in a BIR assessment, to wit:

"In the present case, a mere perusal of the FAN for the deficiency EWT for taxable year 1994 will show that other than a tabulation of the alleged deficiency taxes due, no further detail regarding the assessment was provided by petitioner. Only the resulting interest, surcharge and penalty were anchored with legal basis. Petitioner should have at least attached a detailed notice of discrepancy or stated an explanation why the amount of P48,461.76 is collectible against respondent and how the same was arrived at. xxx" (Emphasis supplied) Records show that respondent's FLD/FAN was accompanied by Details of Discrepancies, which states that: 60 "3. Input tax in violation of Invoicing Requirements - P16,903,230.64 Verification of supplier's invoices disclosed that some invoices failed to comply with the invoicing requirements as prescribed under Section 110 of the 1997 Tax Code in relation with Section 4.113-1 (B) (3) and 4.113-4 (A) (2) both of Revenue Regulation No. 16-2005 as amended. Input tax disallowed on such improper invoicing amounted to P16,903,230.65, please ANNEX A-13." Petitioner's enumeration of the details of the P16,903,230.65 disallowed input taxes in its protest letter61 to the FLD/FAN belies its claim that it was not given a copy of Annex A-13. Having laid down the legal and factual bases for the disallowed input tax of P16,903,230.65, respondent observed the due process requirement on assessment under Section 228 of the NIRC of 1997, as amended. Verily, the input VAT disallowances made by respondent were based on the documents presented by petitioner during respondent's investigation. While the invoices/DRs found in the BIR records only ,$L

erA Case Nos. 9213 and 9214 pertain to P2,158,858.62 input VAT as alleged by petitioner, it does not necessarily mean that these were the only documents actually examined by respondent.

Nonetheless, Sections 110(A) and 113(A) and (B) of the NIRC of 1997, as amended, and as implemented by Sections 4.110-1, 4.110-8 and 4.113-1(A) and (B) of RR No. 16-05, explicitly state that any input tax may be creditable against the output tax provided that the same is supported by VAT invoice (for purchase of goods or properties) or VAT official receipt (for purchase of services) containing the required information, to wit:

"SEC. 110. Tax Credits.-

(A)

Creditable Input Tax. - (1) Any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 113 hereof on the following transactions shall be creditable against the output tax: xxx" (Emphasis supplied) "SEC. 113. Invoicing and Accounting Requirements for VAT-Registered Persons. -

(A)

Invoicing Requirements. -

A VAT-registered

person shall issue:

(1) A VAT invoice for every sale, barter or exchange of goods or properties; and (2) A VAT official receipt for every lease of goods or properties, and for every sale, barter or exchange of services.

(B)

Information Contained in the VAT Invoice or

VAT Official Receipt - The following information shall be indicated in the VAT invoice or VAT official receipt: Jv erA Case Nos. 9213 and 9214

XXX

XXX

XXX

(2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value-added tax: Providect That: (a) The amount of the tax shall be shown as a separate item in the invoice or receipt;

XXX

XXX

XXX

(3) The date of transaction, quantity, unit cost and description of the goods or properties or nature of the service; and ( 4) In the case of sales in the amount of One thousand pesos {Pl,OOO) or more where the sale or transfer is made to a VAT-registered person, the name, business style, if any, address and Taxpayer Identification Number {TIN) of the purchaser, customer or client." To support the input VAT of P16,903,230.64, petitioner submitted various documents which were examined by the ICPA. The results of the I CPA's examination are summarized hereunder:62

Amount of

Annex

Input VAT

Duly Substantiated Input Tax

82 p 109,314.02

With Exceptions Noted:

Official Receipts/ Invoices with alterations and appended information with countersignature 81.1 p 11,408 607.91 Certified true copy of Official Receipts/ Invoices with alterations and appended information with countersignature 81.2 1,862 393.27 Official Receipts/ Invoices already out-of-period 81.3 1 841 058.33 Official Receipts/ Invoices with appended information 81.4 355 949.17 Official Receipts/ Invoices with alterations and appended information 81.5 310 735.29 ·· " 0fiftcial~R.$ceipts/Invoices not part ofSL.P declared ..... . ..••.••. Sf.6· .c:

l42l93.2~98 Official Receipts/Invoices with alterations 81.7 53 458.25 Official ReceiQ_ts/Invoices with invalid support 81.8 11396.22 Official Receipts/Invoices with incomplete details 81.9 36,173.73

erA Case Nos. 9213 and 9214

Total Exceptions Noted

Bl

P16,022,405.15 No supporting documents _p_rovided for examination p 771,511.48

Total

*P16,903,230.65 *the difference of 0.01 may be due to rounding off. At the outset, the input VAT of P771,511.48 shall be disallowed for being unsupported and shall be considered as pertaining to the unprescribed fourth quarter of TY 2011. Further, note that the input VAT of P142,632.98 classified as "official receipts/invoices not part of SLP declared" shall be disregarded as this was not reported in petitioner's SLP (Summary List of Purchases). However, in effect, there is an input VAT of the same amount which remained unaccounted, hence, shall still be included in the disallowance and considered as belonging to the fourth quarter of TY 2011.

Out of the P15,989,086.19 (P16,903,230.65 less P771,511.48 less P142,632.98) remaining input VAT accounted by the ICPA, only the amount of P5,295,538.87 pertains to the unprescribed fourth quarter of TY 2011, to wit:

Month filed per

Input VAT

I

SLP

Name of Supplier

Amount

Duly Substantiated Input Tax (From Annex 82 of

ICPA Report)

I

10/31/2011 3GLOVISION, INC.

p 337.92 10/31/2011 3GLOVISION, INC.

3,283.20 12/31/2011 3GLOVISION, INC.

462.72 12/31/2011 3GLOVISION, INC.

1,350.00 12/31/2011 3GLOVISION, INC.

3,286.80 10/31/2011 SHOWCASE DISPLAY CONCEPTS INC.

3,600.00 10/31/2011 SHOWCASE DISPLAY CONCEPTS INC.

6,480.00 10/31/2011 SHOWCASE DISPLAY CONCEPTS INC.

3,024.00 10/31/2011 SHOWCASE DISPLAY CONCEPTS INC.

11,664.00 10/31/2011 SHOWCASE DISPLAY CONCEPTS INC.

2,590.16 10/31/2011 SHOWCASE DISPLAY CONCEPTS INC.

792.00 10/31/2011 SHOWCASE DISPLAY CONCEPTS INC.

19_L620.00 10/31/2011 SHOWCASE DISPLAY CONCEPTS INC.

3,924.00 10/31/2011 SHOWCASE DISPLAY CONCEPTS INC.

1_L372.80 subtotal ~ 61,787.60

With Exceptions Noted:

Official Receipts/ Invoices with alterations and appended information with countersignature (from Annex 81.1 of !CPA Report) ~

10/31/2011 IDS MARKETING PHILS INC P

10/31/2011 IDS MARKETING PHILS INC 51,354.81 11/30/2011 IDS MARKETING PHILS INC 774,463.46

11/30/2011 | IDS MARKETING PHILS INC

12/31/2011 __| IDS MARKETING PHILS INC

| 10/31/2011 83,674.53 525,939.90 524,724.07 65,292.59 10,560.00 4,320.00 3GLOVISION, INC.

10/31/2011 3GLOVISION, INC.

GRAPHICS LIBRARY INCORPORATE

GRAPHICS LIBRARY INCORPORATE

agaron DESMOND A. MALIC TRUCKING 10/31/2011 SERVICES INC.

DESMOND A. MALIC TRUCKING #N/A SERVICES INC.

JOSE DANILO M. ZUNIGA, JR.

JOSE DANILO M. ZUNIGA, JR.

JOSE DANILO M. ZUNIGA, JR.

JOSE DANILO M. ZUNIGA, JR.

JOSE DANILO M. ZUNIGA, JR.

JOSE DANILO M. ZUNIGA, JR.

JOSE DANILO M. ZUNIGA, JR.

JOSE DANILO M. ZUNIGA, JR.

JOSE DANILO M. ZUNIGA, JR.

JOSE DANILO M. ZUNIGA, JR.

JOSE DANILO M. ZUNIGA, JR.

JOSE DANILO M. ZUNIGA, JR.

JOSE DANILO M. ZUNIGA, JR.

JOSE DANILO M. ZUNIGA, JR.

JOSE DANILO M. ZUNIGA, JR.

JOSE DANILO M. ZUNIGA, JR.

JOSE DANILO M. ZUNIGA, JR.

MEGAWORLD CORPORATION

MEGAWORLD CORPORATION

MEGAWORLD CORPORATION

MEGAWORLD CORPORATION

MEGAWORLD CORPORATION

again PHILSCAN TRAVEL & TRAVEL TOURS, 10/31/2011 INC.

| agystzou | PHILSCAN TRAVEL & TRAVEL TOURS, 10/31/2011 INC.

Certified true copy of Official Recejpts/ Invoices with alterations and appended information with countersignature (from Annex B1.2 of ICPA Report) 143,628.00 26,184.00 8,926.80 3,080.93 583.20 6,397.06 361.15 877.92 3,792.00 3,888.00 2,158.20 2,313.12 1,266.72 3,128.63 2,099.52 10,090.80 3,888.00 5,184.00 4,090.14 109,385.01 109,385.01 |

O10

— —_ (o>) uw co

Oo

WA

Ww

109,385.01 109,385.01 1,772.78 2,979.89 Official Receipts/ Invoices already out-of-period (from P Annex 81.3 of ICPA Report,

GRAPHICS LIBRARY INCORPORATED

erA Case Nos. 9213 and 9214

12/31/2011

GRAPHICS LIBRARY INCORPORATED

11/30/2011

MEGAWORLD CORPORATION

11/30/2011

MEGAWORLD CORPORATION

11/30/2011 SHOWCASE DISPLAY CONCEPTS INC.

11/30/2011 SHOWCASE DISPLAY CONCEPTS INC.

11/30/2011 SHOWCASE DISPLAY CONCEPTS INC.

11/30/2011 SHOWCASE DISPLAY CONCEPTS INC.

PHILSCAN TRAVEL & TRAVEL TOURS, 11/30/2011 INC.

PHILSCAN TRAVEL & TRAVEL TOURS, 11/30/2011 INC.

11/30/2011 3GLOVISION, INC.

11/30/2011 3GLOVISION, INC.

12/31/2011 3GLOVISION, INC.

12/31/2011 3GLOVISION, INC.

Official Receipts/ Invoices with appended information (from Annex 81.4 of !CPA Report) DESMOND A. MALIC TRUCKING 10/31/2011 SERVICES INC.

10/31/2011 SHOWCASE DISPLAY CONCEPTS INC.

10/31/2011 SHOWCASE DISPLAY CONCEPTS INC.

10/31/2011 SHOWCASE DISPLAY CONCEPTS INC.

10/31/2011 SHOWCASE DISPLAY CONCEPTS INC.

10/31/2011 SHOWCASE DISPLAY CONCEPTS INC.

10/31/2011 SHOWCASE DISPLAY CONCEPTS INC.

ANGARA ABELLO CONCEPCION

10/31/2011

REGALA & CRUZ LAW OFFICES

ANGARA ABELLO CONCEPCION

11/30/2011

REGALA & CRUZ LAW OFFICES

Official Receipts/Invoices with incomplete details (from Annex 81.9 of !CPA Report) 10/31/2011 PACUBAS GENERAL SERVICES, INC.

subtotal

Total

11,689.78 109,385.01 109,385.01 232 265.09 37,920.00 63,682.92 67,909.40 512.68 1,225.76 186 029.71 248,676.67 441147.10 259,021.77 37,932.00 177.94 283.14 6,000.00 2,370.00 1,296.00 3,960.00 600.00 1,200.00 3 399.82 /#~233,751.27 P5,295,538.87 Since the VAT assessment covering the first to third quarters of TY 2011 had already prescribed, the input VAT disallowance of P10,693,547.31, as computed below, pertaining to the first to third quarters of TY 2011 shall be cancelled: Input VAT disallowance per FDDA p 16,903,230.64 Less: Unsupported input VAT 771 511.48 Unaccounted input VAT 142 632.98 Input VAT pertaining to 4th Qtr of CY 2011 5,295,538.87 Input VAT disallowance pertaining to 1st to 3n1 Qtrs of

CY 2011

P10,693,547 .31 ~

Meanwhile, the Court agrees with the exceptions noted by the ICPA save for the input VAT in the amount of P1,710,121.23 (from Annex 81.1 of the ICPA Report), broken down below, which were supported by DRs/invoices with alterations and/or appended information and the countersignature is the same with that of the signatory appearing on said documents:

Input VAT

Exhibit

Name of Supplier

Amount

P-4.114-ICPA

IDS MARKETING PHILS INC

p 116,580.53 P-4.115-ICPA

IDS MARKETING PHILS INC

51,354.81 P-4.116-ICPA

IDS MARKETING PHILS INC

774,463.46 P-4.117-ICPA

IDS MARKETING PHILS INC

83,674.53 P-4.118-ICPA

IDS MARKETING PHILS INC

525,539.90

GRAPHICS LIBRARY

P-4.100-ICPA

INCORPORATED

10,560.00

GRAPHICS LIBRARY

P-4.101-ICPA

INCORPORATED

4,320.00 DESMOND A. MALIC TRUCKING P-4.63-ICPA SERVICES INC.

143,628.00

Total

P1,710,121.23 Hence, the ICPA's input VAT exceptions in the amount of P3,523,630.04 (P5,233,751.27 less P1,710,121.23) are proper disallowances for failure to meet the substantiation requirements as required under Sections 110(A) and 113(A) and (B) of the NIRC of 1997, as amended, in relation to Sections 4.110-1, 4.110-8 and 4.113- 1 of Revenue Regulations (RR) No. 16-05. Moreover, the input VAT of P61,787.60 found by the ICPA to be valid should be reduced by P40,030.16 for the following reasons:

Exhibit

Invoice/

Input VAT

Reason for

No.

Name of Supplier

OR No.

Amount

disallowance VAT OR with notation "NOT

SHOWCASE DISPLAY

VALID SOURCE OF INPUT

P-4.225 CONCEPTS INC.

1190 p 3,600.00 TAX" VAT OR with notation "NOT

SHOWCASE DISPLAY

VALID SOURCE OF INPUT

P-4.225 CONCEPTS INC.

1190 6,480.00 TAX" VAT OR with notation "NOT

SHOWCASE DISPLAY

VALID SOURCE OF INPUT

P-4.225 CONCEPTS INC.

1190 3,024.00 TAX" VAT OR with notation "NOT

SHOWCASE DISPLAY

VALID SOURCE OF INPUT

_p-4.225 CONCEPTS INC.

1190 2,590.16 TAX" Jr-.

SHOWCASE DISPLAY

P-4.225 CONCEPTS INC.

SHOWCASE DISPLAY

P-4.225 CONCEPTS INC.

SHOWCASE DISPLAY

P-4.225 CONCEPTS INC.

Total

1190 1190 1190 VAT OR with notation "NOT

VALID SOURCE OF INPUT

792.00 TAX" VAT OR with notation "NOT

VALID SOURCE OF INPUT

19,620.00 TAX" VAT OR with notation "NOT

VALID SOURCE OF INPUT

3,924.00 TAX" P40,030.16 Consequently, only the input VAT of P21,757.44 (P61,787.60 less P40,030.16) was duly substantiated. Thus, out of the assessed input

VAT

disallowance of P16,903,230.64, only the amount of P4,477,804.66, as computed below, shall remain:

Disallowance per FDDA

p 16,903_L230.64 Less: Input VAT pertaininq to 1st to 3rd Qtr of CY 2011 10,693,547.31 Allowed input from ICPA exceptions Duly substantiated input per Court's further verification

Total Disallowed Input VAT

d. Disallowed discrepancy on beginning and ending balances of deferred input tax per 2550Qvs. FS 1,710,121.23 21_~757.44 P4,477,804.66 Per the FDDA, respondent disallowed the discrepancy on beginning and ending balances of Deferred Input Tax, in the amount of P2,694,853. 74, computed as follows: 63

Details

Discrepancy

4th Qtr 2011 (Deduction from Available Input Tax) Deferred Input VAT on Purchases of capital

Goods >1M

P3 322 814.04 Ending Balance Deferred input VAT per Note 7 of Audited FS page 441 4,174 000.00 p 851185.96 1st Qtr 2011 Input VAT on Purchases of Capital Goods >1M carried deferred from 2010 P1 829 563.69 4th Qtr 2010 (Deduction from Available Input

Tax) Deferred Input VAT on Purchases of Capital

Goods >1M (page 855)

1843 667.78

Value taken for comparison as per approved PAN P1 843,667.78 Beginning Balance Deferred input VAT per Note 7 of Audited FS page 441 - 1,843,667.78

Discrepancy (Excessive Deferred Input Tax)

P2,694,853.74 63 Exhibit"P-11", docket, vol. I, p. 67.

Jk-

erA Case Nos. 9213 and 9214

Upon comparison of the amounts of input VAT on purchases of capital goods exceeding P1M deferred for the succeeding period reflected in the 4th Quarterly VAT Returns for CY 2010 and 2011 vis-a- vis the beginning and ending balances of deferred input VAT per 2011 Audited Financial Statements (FS), respondent found discrepancies in the amounts of P1,843,667.78 and P851,185.96, respectively, and considered both as excessive deferred input tax. Apparently, petitioner reported the amount of P1,843,667.78 as input VAT on purchases of capital goods exceeding P1M deferred for the succeeding period in the 4th quarter of 2010 but carried over only the amount of P1,829,563.69 in the 1st quarter and for the month of January of CY 201164• Since petitioner reported a lesser amount of deferred input VAT as carry-over in its 2011 VAT Returns, the disallowance, if any, should be based only on the amount of P1,829,563.69.

However, even if respondent used the amount of P1,829,563.69, the disallowance of the same cannot be sustained. Pursuant to Section 110(A) of the NIRC of 1997, as amended, as implemented by Section 4.110-3 of RR No. 16-2005, the input VAT on purchases of capital goods exceeding P1M should be spread over 60 months or the estimated useful life of the capital goods, whichever is shorter. This means that a portion of the P1,829,563.69 deferred input taxes on purchases of capital goods carried over from previous period was amortized during the taxable year 2011 based on the useful life of the said capital goods, while a portion of the same may still be part of the P3,322,814.04 deferred to the succeeding taxable quarters. Hence, respondent cannot disallow the entire amount of P1,829,563.69 since a portion thereof did not form part of the allowable input tax claimed by petitioner during 2011. Likewise, the disallowance of P851,185.96 cannot prosper. Albeit no explanation was provided by respondent, in attempting to disallow input taxes based on the value of discrepancy on the ending balance of deferred input VAT, respondent may have wanted to show that by deducting a lower amount of input VAT deferred to succeeding period in petitioner's 4th Quarterly VAT Return for 2011, petitioner benefitted from the input taxes, equivalent to the amount of the discrepancy, which should still be deferred. If so, the discrepancy does pc..

not refer to excessive deferred input tax. Moreover, even if there is indeed an excessive deferred input tax, disallowing the same results in double deduction from allowable input tax since the deduction of a higher amount of deferred input tax per return already reduced the amount of amortized input tax claimed during the period. If at all, to warrant the disallowance of input tax credits, respondent should have focused his investigation on the input VAT actually amortized during the taxable year 2011 as the same accounts for a portion of the allowable input tax claimed and credited against the output tax for the same period. Nonetheless, a perusal of the 2011 Quarterly VAT Returns65 reveals that, among others, petitioner claimed input VAT-others of P505,602.77 and input VAT amortization of P844,513.60 or a total of P1,350,116.37 input VAT related to capital goods exceeding P1M during the period, as shown below: 1st Qtr 2"d Qtr 3n1 Qtr 4th Qtr (Exh. P-31) (Exh. P-36) (Exh. P-41) (Exh. P-46)

Total

Others (Line 20E)

p 129 972.12 p 129 972.12 p 129 972.12 p 115 686.41 p 505,602.77 Input Tax deferred on capital goods exceeding P1M from previous quarter (Line 208) 1 829 563.69 3 656 453.33 3 759 016.27 3,540 915.15 12 785,948.44 Add: Input Tax on purchases of capital goods exceeding P1M (Line 210) 2 027 443.95 310 320.00 - - 2 337 763.95

Total

P3 857 007.64 P3 966 773.33 P3 759 016.27 P3,540 915.15 p 15 123,712.39 Less: Input Tax on purchases of capital goods exceeding P1M deferred for the succeeding period (Line 23A) 3 656 453.33 3 759 016.27 3 540,915.15 3,322 814.04 14 279,198.79 Amortization of input tax on purchases of capital goods exceeding P1M P200 554.31 P207 757.06 P218,101.12 P218,101.11 p 844,513.60

Total

P330,526.43 P337,729.18 P348,073.24 P333,787.52 P1,350,116.37 Meanwhile, based on Note 26(a)(ii) of the Audited FS66, petitioner's input VAT on purchases/payments for 2011 amounted to P259,801,000.00, which includes the input VAT related to the capital goods exceeding P1M of P1,350,000.00 (rounded off). jh-

From the foregoing, petitioner's claimed amortized input VAT on capital goods exceeding P1M in its Quarterly VAT Returns forTY 2011 is the same as that reflected per its Audited FS for the same year. Thus, the assessed input tax disallowance of P2,694,853.74 should be cancelled for lack of factual and legal bases. In sum, petitioner is still liable to pay basic deficiency VAT for the 4th quarter of TY 2011 in the amount of P4,849,804.66, computed as follows:

VA Table Sales/Receipts per VAT Return67

P748,741,042.35

Add: Adjustment per Audit

Additional Taxable Income per Audit

3,100 000.00

Vatable Sales/Receipts per Audit

P751,841,042.35

Output Tax Due per Audit

p 90,220 925.08

Less: Allowable Input Tax per Audit

Input Tax per VAT Return

Input Tax Deferred on Capital Goods

exceeding P1Million from Previous Quarter p 3,540,915.15

Others

115,686.41

Current Transactions

65,032 570.18

Total Available Input Tax per VAT Return

P68,689,171.74

Less: Input Tax on Capital Goods

exceeding P1Million deferred to the succeeding period 3,322,814.04

Net Available Input Tax per VAT Return

P65,366,357.70

Less: Disallowances per Audit

Due to invoicing requirements violation 4,477,804.66 60 888,553.04

Net VAT Payable

p 29 332 372.04 Less: Monthly VAT Payments- previous two months 18 048,787.95

Tax Paid per Quarterly VAT Return

6,433,779.43

Basic Deficiency VAT

P4,849,804.66 III. Deficiency EWT- P2,670,656.75 Finding that petitioner's purchases amounting to P93, 166,554.21 were not subjected to Ewr, respondent assessed petitioner of deficiency Ewr thereon in the amount of P2,670,656.75, as computed below, pursuant to Section 57 of the NIRC of 1997, as amended, and RR No. 12-01:68 ?v

Amount without EWT at 1% Amount without EWT at 2%

Total

EWT Deficiency at 1%

EWT Deficiency at 2%

Total

Interest (until Oct. 16, 2015)

Total EWT Deficiency

p 34 022,215.08 59,144,339.13 P93,166,554.21 p 340,222.15 1,182,886. 78 p 1,523,108.93 1147,547.82 p 2,670,656.75 As discussed earlier, the assessment covering the months of January to November of CY 2011 had already prescribed. However, since petitioner was unable to point out which portion of the assessment pertains to the months of January to November of CY 2011, the entire EWT assessment shall be considered as pertaining to the month of December 2011.

Based on Annex A-269 which was attached to the FDDA, the assessed amounts of P34,022,215.08 and P59,144,339.13 allegedly not subjected to 1 °/o and 2°/o EWT, respectively, were computed by respondent as follows:

EWTbaseat 1%:

Cost of Sales-Purchases

p 215,970 164.00

Add: Office SUQQiies-Cost of Sales

p 2,028,109.83

Office Supplies-Selling and Administrative

9,518,518.67 Additions to PPE during the year 10,622 000.00 22 168 628.50 Total adjusted amount subject to withholding tax per audit p 238,138 792.50 Less: Amount subjected to withholding tax per returns 116 637 812.42 Amounts not subjected to withholding tax per FLD p 121,500,980.08 Less: Adjustments per protest 87,478,765.00 Net amounts not subjected to withholding tax

for FDDA

p 34-,022,215.08 EWT base at 2%:

Adjustments to 15%

p 62,704 971.37

Less: Paid to General Professional PartnershiQ_

3,560_1632.24 Subject to 2°/o EWT P59,144,339.13 Anent the purchases allegedly not subjected to 1 °/o EWT, petitioner posits that these purchases were not made to regular suppliers of goods, hence, not subject to the 1 °/o EWT. However, ,ac-

petitioner failed to provide documentary evidence to support its position.

With regard to the amount purportedly subject to 2°/o EWT, petitioner maintains that Annex A-2 of the BIR's schedule shows that it had no income payments on which it failed to withhold the required 2°/o EWT on regular suppliers of services. While the "amount not subjected to withholding tax per FLD"' under the 2°/o column of Annex A-2 reflected a zero amount, it is clear that the EWT assessment did not arose therefrom as the same schedule shows that the said assessment was derived from the amount of Outside Services initially assessed as subject to 15°/o EWT in the FLD, which were then reconsidered by respondent as subject to 2°/o EWT in the FDDA.

Aside from its Monthly Remittance Returns of Creditable Income Taxes Withheld (Expanded) [BIR Forms No. 1601-E] 70 and Annual

Information

Return

of

Creditable

Income

Taxes

Withheld

(Expanded)/Income Payments Exempt from Withholding Tax [BIR Form No. 1604-EY1, no other document was provided by petitioner in relation to the EWT deficiency. Neither did the latter provide other justification to overturn the said assessment. Thus, the Court upholds the basic deficiency 1 °/o and 2°/o EWT assessments of P340,222.15 and P1,182,886.78, respectively, totaling P1,523,108.93.

IV. Deficiency WTC- P4,675,924.46 Pursuant to Sections 24, 79 and 80 of the NIRC of 1997, as amended, and RR No. 2-98, respondent assessed petitioner of deficiency WTC in the total amount of P4,675,924.46 due to the non- withholding of WTC on compensation amounting to P8,333,557.02. Below is the detailed computation of the amount of P4,675,924.46:

Cost of Sales:

Salaries and Allowances

Selling and Administrative:

Salaries and Allowances

70 Exhibits "P-49" to "P-60", docket, vol. III, pp. 1345 to 1377. 71 Exhibit "P-98", docket, vol. III, p. 1440. p 29,201,645.08 284,121,228.00 ~ erA Case Nos. 9213 and 9214

Share-based compensation Total Compensation Amount subject to Withholding Tax

per Audit

Less: Amounts subjected to Withholding tax per Returns Amount not subjected to Withholding Tax per FAN

Less: Adjustments per Protest

Subjected to FBT

SSS Contribution

Employees Benefits-Others

Meal and Beverages

Medical Exp.

Medicare Premium

Pag-ibig Fund

State Insurance Premium

Share-based Compensation

Retirement Expense

Net Amount Not subjected to Withholding Tax per

FDDA

Multi~ by Rate of Withholding_

Basic Deficiency Withholding Tax on

Com~nsation 72 Add: Interest (until Oct. 16, 2015)

Total Compensation Withholding Tax Deficiency73

11 856,000.00 p 325_Ll78_L_873.08 250,224,791.66 P74,954,081.42 p 6,991 550.86 2 752,785.02 1,916 848.02 1,312,875.00 13,261 272.13 931166.35 260,800.00 76,280.00 11,856 000.00 27 260,947.02 66,620,524.40 p 8,333,557.02 32% p 2,666,738.25 2,009,186.29 p 4,675,924.54 Petitioner avers that the charges to salaries and allowances account under the 2011 Audited F5 figures used by respondent in generating this item of assessment include the aggregate amount of P20,512,026.70 pertaining to 555 employer contributions share, employees' food, meals and other expenses, payments for employees medical and dental coverage, PhiiHealth and Pag-ibig employer contributions share, as well as de minimis benefits, which are not subject to wrc.

As can be seen from respondent's computation, the amount of P20,512,026.70 consisting of the items highlighted above, was already excluded in the P8,333,557.02 net amount not subjected to wrc per FDDA.

Considering that petitioner neither presented any supporting documents, nor provided any other explanation to overturn the assessed amount of P8,333,557 .02, the same shall be sustained. And since petitioner was unable to point out which portion of the assessment pertains to the prescribed months of January to November /'1- 72 With 0.08 difference due to mathematical error per FDDA. 73 With 0.08 difference due to mathematical error on Basic Deficiency WTC.

of CY 2011, the entire assessment shall be considered as pertaining to the month of December 2011.

Meanwhile, the assessed amount of P8,333,557.02 should be subject to WTC based on the graduated rates of 5°/o to 32°/o. However, in the above computation, respondent used the highest rate of 32°/o in computing the deficiency WTC. Since the employees to whom the compensation pertained to were not individually identified, the appropriate tax rate to be used should be the effective rate computed based on the total WTC paid divided by the total amount of taxable gross compensation reported during CY 2011, as shown below: Total WTC paid per 1604-CF74 p 62,682,650.16 Total Taxable Income (see details below) + 249,432,775.65

Effective Tax Rate

25.13007760/o

Exhibit

No.

Month

Tax Base

Taxes Withheld

P-61

January

13,305,820.32 3,216,058.97

P-62

February

18,432,278.69 4,801,969.63

P-63

March

27,866,722.87 7,748,330.18

P-64

April

28,257,609.79 5,999,288.82

P-65

May

19,654,898.99 5,061,473.73

P-66

June

18,469,386.16 4,620,874.56

P-67

July

16 107 672.25 3 743,650.63

P-68

Au_gust 19,804,416.67 5 110,490.90

P-69

September

17,555,763.42 4,318,392.76

P-70

October

16,710,999.59 3,872,839.69

P-71

November

33,447,087.04 9 083,479.14

P-72

December

19,820,119.86 5,105,801.15

Total

249,432,775.65 62,682,650.16 Thus, petitioner is liable to pay basic deficiency WTC for CY 2011 in the amount of P2,094,229.35 (P8,333,557.02 x 25.1300776°/o). V. Deficiency FWT- P620,167.17 Respondent's verification disclosed that petitioner's royalty expense per FS duly subjected to Final Withholding VAT at 12°/o ?c--

amounted to P78,384,726.45 but the amount subjected to FWT at 10°/o was only P74,847,835.56. Hence, pursuant to Section 28(8)(1) of the NIRC of 1997, as amended, respondent assessed petitioner of the corresponding deficiency FWT in the amount of P620,167.17, computed as follows: 75

Basic Deficiency Final Tax on Royalty

Expense (P3,536,890.89 x 10%) p 353,689.09 Add: Interest (until October 16, 2015) 266,478.08

Total Final Withholding Tax Deficiency

P620,167.17 Petitioner asserts that respondent's right to assess deficiency FWT on this transaction has already prescribed as the alleged discrepancy of P3,536,890.89 pertains to the taxable period of October 2011.

Petitioner's assertion deserves consideration. Based on its Monthly Remittance Returns of Final Income Taxes Withheld (BIR Forms No. 1601-F), petitioner subjected to FWT expenses in the total amount of P425,520,191.50 and withheld the corresponding taxes worth P42,552,019.15, broken down below:

Month

Exhibit No.

Tax Base

Taxes Withheld

January_

P-73

p 5,842,766.00 p 584,276.60

February

P-74

50,970,539.50 5,097,053.95

March

P-75

7,941 341.10 794,134.11

April

P-76

5 113 594.10 511,359.41

May

P-77

7,318_1661.30 731,866.13

June

P-78

50 609,425.90 5,060,942.59

July

P-79

6,453,160.80 645,316.08

August

P-80

49 209,196.30 4,920,919.63

September

P-81

7 568 353.70 756,835.37

October

P-82

2 126,524.40 212 652.44

November

P-83

7 490,809.10 749 080.91

December

P-84

224 875,819.30 22,487,581.93

Total

P425,520,191.50 P42,552,019.15 Records76 show that out of the P425,520,191.50 expenses subjected to FWT, P74,847,835.56 actually refers to royalties, with the corresponding withholding taxes of P7,484,783.56.

Presented ?c---

hereunder is a comparison of the amounts of royalties subjected to FWVAT per BIR Forms No. 1600 as against the amounts subjected to FWT per BIR Forms No. 1601-F, which reveals a net difference of P3,536,891.01:

Per BIR Form No. 1600

Tax Base per

BIR Form No.

Month

Exhibit No.

Tax Base

1601-F77

Difference

P-85

p 5,842,766.03 p 5,842,766.03 -

February

P-86

6,720,866.25 6,720,866.25 -

March

P-87

7 941,341.08 7,941,341.08 -

April

P-88

5,113,594.05 5,113,594.05 -

May

P-89

7,318 661.31 7,318,661.31 -

June

P-90

6,832,297.29 6 832,297.29 -

July

P-91

6,453,160.83 6,453,160.83 -

August

P-92

6 563 642.30 6 563,642.20 p 0.10

September

P-93

7 568 353.72 7 568,353.72 -

October

P-94

5,664 413.35 2 126,524.42 3{537,888.93

November

P-95

7 490,809.08 7,490,809.08 -

December

P-96

4 874,821.28 4 875,819.30 (998.02)

Total

P78,384l726.57 P74,847,8:35.56 P3,536,891.01 From the table above, it can be deduced that the assessed amount of P3,536,890.89 arose from petitioner's expense for the month of October 2011.

As previously discussed, only the FWT assessment covering the month of December 2011 is considered valid. Hence, the assessed amount pertaining to the month of October is already outside respondent's three-year prescriptive period to assess as mandated in Section 203 of the NIRC of 1997, as amended. Accordingly, the assessed basic deficiency FWT in the amount of P353,689.09 must be deleted.

Deficiency Interest

Petitioner contends that the imposition of 20°/o per annum deficiency interest on the assessed deficiency VAT, EWT and WTC for 2011 are without legal basis, hence, invalid as the 20°/o deficiency interest imposed under Section 249(8) of the NIRC of 1997, as/&--

amended, is limited only to assessments for income tax, estate tax, and donor's tax.

Petitioner's contention is untenable. The ruling of the Court in the case of Takenaka Corporation Philippine Branch vs. Commissioner of Internal Revenue/8 as regards the imposition of deficiency interest, is instructive: "The issue is no longer novel as the same was sufficiently discussed by the Supreme Court in Paper Industries Corporation Philippines {PICOP) v. Court of Tax Appeals, et a/.79 The Supreme Court held that Section 247(a) of the NIRC of 1997, as amended [now Section 247(a) of the NIRC of 1997, as amended] 'very clearly embraces failure to pay all taxes imposed in the Tax Code, without any regard to the Title of the Code where provisions imposing particular taxes are textually located.'

XXX

XXX

XXX

XXX

Thus, xxx the imposition of deficiency interest under Section 249(8) of the NIRC of 1997, as amended, clearly applies to all internal revenue taxes imposed by the present Tax Code xxx" Therefore, the deficiency interest is correctly imposed not only on the deficiency income tax but also on the deficiency VAT, EWT, and WTC.

Claim for refund of the payments made under protest Believing that there are no valid deficiency tax assessments against which the payments under protest of P5,795,915.59 may be applied against, petitioner seeks to refund the same under Section 229 of the NIRC of 1997, as amended. t9z-

Pursuant to Section 204(C)80 and 22981 of the NIRC of 1997, as amended, to be entitled to a refund of erroneously or illegally collected tax, the following requisites must be present: (1) the tax has been erroneously or illegally collected, or the penalty has been collected without authority, and/or any sum has been excessively or in any manner wrongfully collected; and (2) the claim for refund or credit has been filed within two years from the date of payment of tax, or penalty, regardless of any supervening cause that may arise after payment. Records show that petitioner's administrative claim82 for refund filed on December 1, 2015 and its judicial claim filed before this Court on December 4, 2015 are well within the two-year prescriptive period in compliance with Sections 204(C) and 229 of the NIRC of 1997, as amended.

As to whether or not there were excess/erroneous tax payments, it can be recalled that petitioner paid under protest the following deficiency tax assessments totaling P5,795,915.59: Exhibit Nos.

Taxes paid BIR Form No.

0605 /Filing

EFPS payment

Taxl'ype

Ref. No.83 confirmation84

Basic

Interest

Total

Income Tax

P-17 to P-18

Annex B (P-23)

p 684,788.25 p 921 280.24 p 1 606,068.49

EWT

P-15 to P-16

Annex D (P-23)

1,523 108.93 1 523 108.93

WTC

P-21 to P-22

Annex F (P-23)

2,666,738.17 2,666,738.17 80 SEC. 204. Authority of the Commissioner to Compromise, Abate, and Refund or Credit Taxes. - The Commissioner may -

XXX

(C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty: Provided, however, That a return filed showing an overpayment shall be considered as a written claim for credit or refund.

81 SEC. 229. Recovery of Tax Erroneously or Illegally Collected - No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid. 82 Exhibit "P-23", docket, vol. II, pp. 723 to 726. 83 Docket, vol. II, pp. 707, and 714 to 722. 84 Docket, vol. II, pp. 729, 732, 735, 738, and 741.

3C-

P4,874,635.35 I P921,280.24 I PS,795,915.59 I To determine whether petitioner is entitled to refund of any amount from the payments made under protest, such payments shall first be offset against the remaining deficiency tax liabilities of petitioner forTY 2011 as found by the Court. In recapitulation, petitioner is liable to pay internal revenue taxes for CY 2011, particularly, deficiency income tax, VAT, EWT, and WTC, in the aggregate amount of P19,122,577.05, inclusive of the 25°/o surcharge imposed under Section 248(A)(3)of the NIRC of 1997, as amended, and deficiency and delinquency interests imposed under Sections 249(8) and (C) of the same Code, computed until November 28, 2015, the date when petitioner made the payments85 under protest for deficiency income tax, EWT and WTC. After applying the said payments to the total amount due, the net amount still due for deficiency income tax, VAT, EWT and WTC as of November 28, 2015 amounted to P191,178.83, P9,913,244.63, P1,597,808.21 and P1,624,429.81, respectively, or in the aggregate amount of P13,326,661.48.

The detailed computations thereof are tabulated below:

Income Tax

(IT)

VAT

EWT

WTC

Total

Basic Tax

p 684 788.25 p 4 849 804.66 p 1 523 108.93 p 2 094 229.35 p 9 151 931.19

Add: 25% Surcharge

171197.06 1 212 451.17 380 777.23 523 557.34 2 287 982.80

20% Deficiencv Interest

IT: From Apr. 16,2012 to Nov. 5, 2015 [P684,788.25 X 20% X 1298/365 days!

487 043.91 487 043.91 Deficiency Interest on belated payment of P2,105,100.00 income tax due 423 326.96 423 326.96 VAT: From Jan. 26, 2012 to Nov. 5, 2015 {P4,849,804.66 X 20% X 1380/365 days/ 3 667 249.55 3 667 249.55 EWT: From Jan. 17, 2012 to Nov. 5, 2015 {P1,523,108.93 X 20% X 1389/365 daYs]

1159 231.95

1159 231.95

WTC: From Jan. 17, 2012 to Nov. 5, 2015 {P2,094,229.35 X 20% X 1389/365 days!

1 593 909.35 1 593 909.35 Total Amount Due, Nov. 5, 2015 P1,766,356.18 P9,729,505.38 P3,063,118.11 P4,211,696.04 P18,770,675.71 85 Exhibits "P-15" to "P-18", "P-21" to "P-22", "P-23", docket, vol. II, pp. 715 to 718, 721 to 722, 729, 732, and 734.

?t--

Add: 20% Deficiency Interest from Nov. 6 2015 to Nov. 28 2015 IT: {P684,788.25 X 20% X 23/365 dais!

p 8 630.21 VAT :[P 4,849,804.66 X 20% x 23/365 days] EWf: {P1,523,108.93 X 20% X 23/365 days} WfC: {P2,094,229.35 X 20% X 23/365 days] 20% Delinquency interest from Nov. 6 2015 to Nov. 28 2015 IT: {P1,766,356.18 X 20% X 23/365 days] 22 260.93 VAT: [P9,729,505.38x 20% x 23/365 days} EWf: {P3,063,118.11 X 20% X 23/365 daysl wrc: [1'4,211,696.04 x 20% x 23/365 days} Total Amount Due Nov. 28, 2015 1'1 797,247.32 Less: Payments made under protest 1 606 068.49 Amount Still Due, Nov. 28, 2015 I' 191,178.83 p 8 630.21 p 61120.83 61120.83 p 19 195.35 19 195.35 p 26 393.03 26 393.03 22 260.93 122 618.42 122 618.42 38 603.68 38 603.68 53 078.91 53 078.91 1'9 913,244.63 1'3 120,917.14 1'4 291,167.98 1'19 122,577.07 1 523 108.93 2 666 738.17 5 795 915.59 1'9,913,244.63 1'1,597,808.21 1'1,624,429.81 1'13,326,661.48 Considering that the payments made by petitioner under protest were lower than the amounts computed by the Court for deficiency income tax, EWT and WTC, there is no erroneously paid tax that may be refunded to petitioner.

WHEREFORE, premises considered, the instant Petitions for Review are PARTIALLY GRANTED. The assessment issued by respondent against petitioner covering deficiency FWT forTY 2011 in the amount of P620,167.17 is CANCELLED AND WITHDRAWN. However, petitioner's claim for refund in the amount of P5,795,915.59 is DENIED and the assessments for deficiency income tax, VAT, EWT, and WTC forTY 2011 are UPHELD IN PART. Accordingly, petitioner is ORDERED TO PAY respondent the aggregate amount of TWENTY

MILLION SEVEN HUNDRED EIGHTY-EIGHT THOUSAND FIVE

HUNDRED SIXTY-ONE PESOS AND FORTY-SEVEN CENTAVOS

(P20,788,561.47), inclusive of the 25°/o surcharge, 20°/o deficiency interest and 20°/o delinquency interest imposed under Sections 248(A)(3), 249(8) and (C) of the NIRC of 1997, as amended, respectively, computed until December 31, 2017, as follows:~

Income Tax

(IT)

Basic Tax

p 684 788.25

Add: 25% Surcharge

171197.06

20% Deficiency

Interest

IT: From Apr. 16,2012 to Nov. 5, 2015 [P684,788.25 X 20% X 1298/365 days] 487 043.91

Deficiency Interest on

belated payment of P2,105,100.00 income tax due 423 326.96 VAT: From Jan. 26, 2012 to Nov. 5, 2015 {P4,849,804.66 X 20% x 1380/365 days] EWT: From Jan. 17, 2012 to Nov. 5, 2015 {P1,523,108.93 X 20% x 1389/365 days] WTC: From Jan. 17, 2012 to Nov. 5, 2015 {1'2,094,229.35 X 20% x 1389/365 days] Total Amount Due, Nov. 5, 2015 P1 766,356.18

Add: 20% Deficiency Interest

from Nov. 6, 2015 to Nov. 28 2015 IT: {P684,788.25 X 20% x 23/365 days] p 8 630.21 VAT:[P4,849,804.66 x 20% x 23/365 days] EWT: [P1,523,108.93 X 20% X 23/365 days} WTC: [P2,094,229.35 x 20% x 23/365 days]

20% Delinquency

interest from Nov. 6, 2015 to Nov. 28 2015 IT: {1'1,766,356.18 X 20% x 23/365 days] 22 260.93 VAT;

[P9,729,505.38x 20% x 23/365 days] EWT; [P3,063,118.11

X 20% X 23/365

days] WTC: [1'4,211,696.04

X 20% X 23/365

days] Total Amount Due, Nov.

28 2015 1'1,797,247.32 Less: Payments made under protest 1 606 068.49 Amount Still Due, Nov. 28, 2015 .. 191,178.83

Add:

20% Deficiency

interest from Nov. 29, 2015 to Dec. 31, 2017 {P4,849,804.66 X 20% x 764/365 days]

VAT

EWT

WTC

Total

p 4 849 804.66 p 1 523 108.93 p 2 094 229.35 p 9 151 931.19 !

1 212 451.17 380 777.23 523 557.34 2 287 982.80 487 043.91 423 326.96 3 667 249.55 3 667 249.55

1159 231.95

1159 231.95

1 593 909.35 1 593 909.35 .. 9 729,505.38 P3,063 118.11 P4 211 696.04 1'18,770,675.71 p 8 630.21 p 61120.83 61120.83 p 19 195.35 19 195.35 p 26 393.03 26 393.03 22 260.93 122 618.42 122 618.42 38 603.68 38 603.68 53 078.91 53 078.91 .. 9 913,244.63 P3,120 917.14 P4 291 167.98 P19 122,577.07 1 523 108.93 2 666 738.17 5 795 915.59 .. 9 913,244.63 P1,597 808.21 P1 624 429.81 P13,326 661.48 p 2,030,274.39 p 2,030,274.39 ~

20% Delinquency

interest from Nov. 29, 2015 to Dec. 31, 2017 TT: [(P1,766,356.18- P1,606,068.49) x 20% X 764/365, P 67,101.26

VAT:

[P9,729, 505.38 x 20% X 764/365 days, 4,073,064.17 67,101.26 _ 644,694.25 xX 764/365 days, oo P_ 646,765.92 646,765.92 of Dec. 31, 2017 P 258,280.09 | P16,016,583.19 | P2,242,502.46 P20,788,561.47 In addition, petitioner is ORDERED TO PAY respondent delinquency interest at the rate of twelve percent (12%) on the total unpaid amount of P12,974,760.12°° representing basic deficiency income tax, VAT, EWT and WIC plus the corresponding 25% surcharge and deficiency interest for deficiency VAT, EWT and WTC as of November 5, 2015, 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.

Wwic:

[(P4,211,696.04- P2,666,738.17) x 20%

EWT:

[(P3,063,118.11- P1,523,108.93) x 20% X 764/365 da P 644,694.25

9 C Cflnzole 9

UANITO C. CASTANEDA, JR.

Associate Justice

IT CONCUR:

CATHERINE T. MANAHAN

Associate Justice

86 Total amount due as of November 5, 2015 of P18,770,675.71 less Payments of P5,795,915.59.

CfA Case Nos. 9213 and 9214

ATTESTATION

I attest that the conclusions in the above Decision were reached in consultation before the cases were assigned to the writer of the opinion of the Court's Division.

~r,t., c. C,;I--.J2~ 2:

JijANITO c. CASTANEDA, JR.

CERTIFICATION

Associate Justice

Chairperson

Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairperson's Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the cases were assigned to the writer of the opinion of the Court.

Presiding Justice