Commissioner of Internal Revenue vs. El Paso Philippines Energy Company, Inc.

DECISION

Fabon-Victorino, J.:

On February 23, 2015, the Court in Division rendered a Decision 1 in CTA Case No. 8013, entitled El Paso Philippines Energy Company, Inc.

(EPPECI)

vs.

Commissioner of

Internal Revenue (CIR), the dispositive portion of which reads as follows:

Assailed Decision of February 23, 2015:

WHEREFORE, premises considered, the instant Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the assessments issued by respondent against petitioner for taxable year 2004 covering

deficiency income tax in the amount of P28,134,150.84, deficiency expanded withholding tax in the amount of P186,395. 72, deficiency improperly accumulated earnings tax in the amount of P35,153,053.99 and compromise penalty in the amount of P25,000.00 are hereby CANCELLED and WITHDRAWN. However, respondent's assessments covering deficiency value-added tax and final withholding tax for taxable year 2004 are hereby AFFIRMED, and petitioner is held liable to pay the modified amount of P12,120,947 .06, inclusive of the twenty- five percent (25°/o) surcharge imposed under Section 248 (A) (3) of the NIRC of 1997, computed as follows:

BASIC TAX

SURCHARGE

TOTAL

Value-added Tax

p 3,258,957.25 p 814,739.31 p 4,073,696.56

Final Withholding Tax

6,437,800.40 1,609,450.10 8,047,250.50

Total

p 9,696,757.65 p 2,424,189.41 p 12,120,947.06 In addition, petitioner is held liable to pay:

(a) Deficiency interest at the rate of twenty percent (20°/o) per annum on the basic deficiency VAT in the amount of P3,258,957.25 and basic

FWT

in the amount of P6,437 ,800.40 computed from January 25, 2005 and January 15, 2005, respectively, until full payment thereof, pursuant to Section 249 (B) of the NIRC of 1997, as amended; and (b) Delinquency interest at the rate of 20°/o per annum on the total amount of P12,120,947.06 and on the deficiency interest which have accrued as afore-stated in (a) computed from December 2, 2009 until full payment thereof, pursuant to Section 249 (C) of the NIRC of 1997, as amended.

WHEREFORE, in view thereof, both respondent's and petitioner's Motions for Partial Reconsideration are DENIED for lack of merit.

1. deficiency Income Tax (IT) in the amount of P28,134,150.84;

2. deficiency Expanded Withholding Tax (EWT) in the amount of P186,395. 72;

3. deficiency Improperly Accumulated Earnings Tax (IAET) in the amount of P35, 153,053.99; and 2 En Bane docket, pp. 49-59. 3 En Bane docket, pp. 1-10.

J

4. compromise penalty in the amount of P25,000.00.

THE FACTS AND THE PROCEEDINGS

The established facts are as follows: Petitioner CIR is the Commissioner of the BIR vested with the power, among others, to collect national internal revenue taxes.

He holds office at BIR National Office Building, Agham Road, Quezon City. Respondent EPPECI, on the other hand, is a domestic corporation, with principal place of business at the Ground Floor PFDA Building, Navotas Fish Port Complex, Navotas City.

On August 23, 2005, respondent received from the BIR Revenue District Office (ROO) No. 43-Pasig City Letter of Authority (LOA) No. 00009462 4 dated August 18, 2005 for the examination of its books of accounts and other related accounting records for calendar year 2004. Attached to the said LOA is a formal request for the submission of respondent's books of accounts, financial statements, and other related accounting records and supporting documents. On September 5, 2005, respondent, in compliance with the said request, furnished the CIR with copies of its books of account, financial statements, and other pertinent accounting records and supporting documents with covering letter5 of even date. It was received by petitioner, through BIR RDO No. 43-Pasig City, on the same day. Additional documents were transmitted 6 to BIR ROO No. 43-Pasig City on November 22, 2006, as requested. Sometime in January 2007, BIR RDO No. 43-Pasig City issued a Notice 7 dated January 23, 2007, informing 4 Exhibit A-1, Rollo, pp. 903. 5 Exhibits A and A-2, Rollo, p. 902. 6 Exhibits Band B-1, Rollo, p. 904. 7 Exhibit C, Rollo, p. 905. / respondent of its alleged tax liabilities and requ1nng it to appear before the said office for an informal conference set on February 1, 2007.

Thereafter, respondent received a

Revised

Post

Reporting Notice 8 dated October 30, 2007 from the same

BIR RDO

with attached

Summary of Computation of

Deficiency Taxes and Details of Discrepancy. On November 26, 2007, respondent filed a reply letter9, contesting the alleged deficiency taxes contained in the Revised Post Reporting Notice. On January 8, 2008, respondent received a Preliminary Assessment Notice10 (PAN) dated December 28, 2007 for its alleged deficiency IT, VAT, EWT, FWT, and IAET in the aggregate amount of P76,900,903.32, inclusive of interests, for calendar year 2004.

On January 22, 2008, respondent received a Formal Letter of Demand 11 (FLO) No. 431130 dated January 15, 2008 with attached

Assessment

Notices, demanding payment of the deficiency tax assessments for calendar year 2004, computed as follows:

I. DEFICIENCY INCOME TAX Taxable Income_per return

Add: Disallowances/ Adjustments per

investigation:

Unaccounted income Unaccounted prime contractors Professional fees not subjected to EWT Interest expense not subjected to final tax Disallowed interest expense Taxable income per investigation Income tax due thereon Less: Payments/tax credits Prior years excess tax credits claimed Creditable withholdinq tax claimed

Total

Less: Excess tax credits to be carried forward

Deferred MCIT

Deficiency income tax Add: 20% interest p.a. from 4.16.05 to 2.15.08

TOTAL AMOUNT DUE

8 Exhibit D, Rollo, pp. 908-912. 9 Exhibits E and E-1, Rollo, pp. 913-914. 10 Exhibit F, Rollo, pp. 915-918. 11 Exhibit G, Rollo, pp. 919-929. - P48 641 323.00 1 044 141.23 1 154 982.00 4,973,138.20 288 715.93 PS6 102 300.36 56 102 300.36 17 952 736.11 10 715 585.00 15 517 047.00 26 232 632.00 P22,203,593.00 4 029 039.00 26 232 632.00 - 17 952 736.11 10 181 414.73 P28 134 150.84

II. DEFICIENCY VALUE-ADDED TAX Taxable receipts per return Add: Adjustments/discrepancies per investigation:

Unaccounted income Gross receipts not subjected to VAT Taxable receipts per investigation Value-added tax due thereon Less: Allowable input tax/payments

Payments

Input tax during the year Deficiency_ value-added tax Add: 20% interest p.a. from 1.25.05 to 2.15.08

TOTAL AMOUNT DUE

III. DEFICIENCY EXPANDED WITHHOLDING TAX Expanded withholding tax due thereon Add: 20% interest p.a. from 1.16.05 to 2.15.08

TOTAL AMOUNT DUE

IV. DEFICIENCY FINAL WITHHOLDING TAX ON

INTEREST EXPENSE

Interest expense not subjected to final withholding tax Final withholding tax rate Final withholding tax on interest expense due thereon Add: 20% interest p.a. from 1.16.05 to 2.15.08

TOTAL AMOUNT DUE

V. DEICIENCY IMPROPERLY ACCUMULATED

EARNINGS TAX

Taxable income Add: Interest income subject to final tax Equity in net earnings of subsidiary

Losses

Balance

Less: Income tax payable

Balance

Less: Capital stock Improperly accumulated earninqs Improperly accumulated earnings rate Improperly accumulated earnings tax

Add: 25% Surcharge

20% interest p.a. from 1.11.06 to 2.15.08

TOTAL AMOUNT DUE

72 705 617.83 48 641 323.00 32 584 572.81 81 225 895.81 153 931 513.64 15 393 151.36 6 194 285.89 1 076 276.07 7 270 561.95 8 122 589.40 4 967 019.05 P13 089 608.45 115-'-498.20 71 197.52 P186 695.72 4,973,138.20 20% 994,627.64 613 126.63 P¹ 607 754.27 (435 096 750.00) 607 823.00 171 352 773.00 485 906 173.00 657 866 769.00 222 770 019.00 4 029 039.00 218 740 980.00 8 140 000.00 210 600 980.00 10% 21 060 098.00 5 265 024.50 8,827,931.49 14,092,955.99 P35 153 053.99 Respondent protested 12 the said FLD on January 25, 2008.

In a Letter 13 dated February 15, 2008, petitioner informed respondent that its protest shall be forwarded to BIR RDO No. 43-Pasig City.

On

April

30, 2008,

Verification

Notice 14 dated 12 Exhibits Hand H-1, Rollo, pp. 930-934. 13 Exhibit I, Rollo, p. 935. 14 Exhibit J, Rollo, p. 936. respondent received a

April

1, 2008 stating

Tax

that

Revenue Officer Marjonie Ando had been authorized to verify supporting documents in relation to the "Re-investigation (AIRT)" covering the taxable year 2004. Attached thereto was a letter15 dated April 18, 2008, requesting respondent to submit supporting documents of its protest within ten (10) days from notice.

On May 19, 2009, petitioner issued a Referral Note16 to Revenue Officer (RO) Rodrigo Peralta, directing him to continue the audit of respondent's tax liabilities. On September 11, 2009, RO Peralta made a Report of Investigation 17 to the Revenue District Officer of RDO No. 43A-East,

Pasig

City

recommending the denial of respondent's request for reinvestigation for failure to substantiate its claim for cancellation of assessment. On November 27, 2009, respondent received from BIR Revenue Region No. 7, Quezon City, Regional Task Force a Preliminary Collection Notice 18 dated October 23, 2009, demanding payment of the alleged deficiency tax assessments in the aggregate amount of P78,196,263.26. This prompted respondent to file a Petition for Review with the Court in Division on December 28, 2009 for the cancellation of the questioned assessment issued by petitioner.

In his Answer 19 , petitioner claimed that since the Petition for Review was filed beyond the 30-day prescriptive period provided under Section 228 of the Tax Code, as amended,

the Court in

Division

no longer had the competence to hear and determine the case. Nevertheless, he argued that: (1) the assessments for deficiency IT, VAT, EWT, and IAET were valid and in accordance with law; (2) the said assessments were determined and computed based on respondent's records; and (3) assessments were prima facie presumed correct and made in good faith. 15 Exhibit J-1, Rollo, p.937. 16 Exhibit 11-a, BIR Records, p. 660.L. 17 Exhibit 14, BIR Records, p. 667.L. 1B Exhibit K, Rollo, p. 938. 19 Rollo, pp. 236-239.

/

On May 21, 2010, petitioner moved for a preliminary hearing on the issue of prescription 20 , but the same was denied in the Resolution dated November 2, 2010, ruling that the Petition for Review was seasonably filed. 21 Petitioner's bid for a reconsideration suffered the same fate in the Resolution22 promulgated on February 9, 2011. Trial ensued during which both parties presented evidence in support of their respective positions. On February 23, 2015, the Court in Division rendered the assailed Decision which it affirmed in the similarly assailed Resolution of May 18, 2015. As earlier stated, both petitioner and respondent elevated the matter to the Court En Bane, however, respondent subsequently withdrew its appeal on ground of payment in accordance with the assailed Decision. On April 28, 2016, the instant Petition for Review was submitted for decision. 23

THE ISSUE

Petitioner anchored its appeal on the sole ground to wit:

THE

2nd

DIVISION

OF

THE

HONORABLE

COURT

OF

TAX

APPEALS

ERRED IN CANCELLING THE ASSESSMENT

ON

DEFICIENCY INCOME TAX

IN THE

AMOUNT OF P28, 134,150.84, DEFICIENCY

EXPANDED WITHHOLDING TAX IN THE

AMOUNT

OF

P186,395. 72,

DEFICIENCY

IMPROPERLY

ACCUMULATED

EARNINGS

TAX IN THE AMOUNT OF P35,153,053.99

AND

COMPROMISE

PENALTY

IN

THE

AMOUNT OF P25,000.00

FOR TAXABLE

20 TSN dated May 21, 2010, Rollo, p. 379. 21 Resolution dated November 2, 2010, Rollo, pp. 421-435. 22 Rollo, pp. 458-461.

23 Resolution dated April 28, 2016, En Bane docket, pp. 183-185. /

YEAR 2004 BECAUSE THE ASSESSMENTS

ARE WITH FACTUAL AND LEGAL BASES

AND THEREFORE, VALID.

Petitioner insists that the deficiency assessments for income tax (IT), expanded withholding tax (EWT), improperly accumulated earning tax (IAET) and Compromise Penalty are valid given their factual and legal bases. Allegedly, respondent has deficiency

IT

as it has unaccounted source of income revealed through some discrepancies on its income tax return and creditable withholding tax and alphalist/BIR

Form

No.

1601-E.

Respondent's

receipts as reflected in its financial statements/income tax return (FS/ITR) and as computed based on the creditable income taxes withheld from it, show a discrepancy of P48,641,323.00. This amount represents unaccounted income subject to income tax per Section 32 of the Tax Code. The same is true with the discrepancy on respondent's income payments to its prime contractors per FS/ITR and per alphalist amounting to P1,044, 141.23. On the other hand, the discrepancy on respondent's professional fee per FS/ITR and per alphalist amounting to P1,154,982.00, represents professional fees not subjected to EWT, hence, disallowed as deduction from its gross income pursuant to Section 34(K) of the Tax Code.

Part of

respondent's interest expense was also disallowed due to its failure to subject the same to FWT. Moreover, the disallowance of respondent's interest expense in the amount of P288,715.93 was due to its failure to apply the limitation of deductibility of interest expense as provided under the Tax Code.

Further, respondent failed to withhold and remit the EWTon professional fees paid amounting to P1,154,982.00, rendering liable to pay the deficiency

EWT

thereof amounting to P186,385. 72, pursuant to

Revenue

Regulations (RR) No. 2-98, as amended.

Respondent

as well has improperly accumulated earnings for taxable year 2004 amounting to P210,600,980.00, precisely it was assessed of deficiency / IAET of P35,153,053.99, by virtue of RR No. 02-99, as v/ amended.

The failure of respondent to file/pay its IAET warrants the imposition of P25,000.00 compromise penalty mandated under Revenue Memorandum Order (RMO) No. 1- 90.

In rejecting petitioner's claim, respondent echoes the Court in Division's findings and submits that the Court in

Division

correctly cancelled the deficiency

IT

of P28, 134,150.84, the deficiency EWT of P186,395. 72, the IAET of P35,153,053.99, and the compromise penalty of P25,000.00. 24

RULING OF THE COURT EN BANC

Petitioner's position in the present appeal could not be any different from his previous stance before the Court in Division. In fact, the ground relied upon by petitioner in this

Petition for Review

was practically truncated, if not reproduced verbatim, from his

Motion

for

Partial

Reconsideration filed on March 5, 2015. On this account and at the risk of being repetitive, the Court En Bane quotes with approval the discussion of the Court in Division in the assailed Decision pertaining to each and every item in the assessment to press the point, thus: I. DEFICIENCY

INCOME

TAX

P28,134,150.84 Respondent (herein petitioner) computed the deficiency income tax assessment for taxable year 2004 in the amount of P28,134,150.84 as follows:

Taxable income per return p Add: Disallowances/ Adjustments per investigation: Unaccounted income P48,641 323.00 Unaccounted prime contractors 1,044 141.23 Professional fees not subjected to EWT 1,154 982.00 Interest expense not subjected to final tax 4,973 138.20 - Disallowed interest expense 288 715.93 56 102,300.36 Taxable income per investigation p 56 102,300.36

Income tax due thereon p 17 952 736.11 Less: Payments/tax credits Prior years excess tax credits claimed P10 715,585.00 Creditable withholding tax claimed 15 517,047.00

Total

P26 232 632.00 Less: Excess tax credits to be carried forward P22 203,593.00

Deferred MCIT

4 029,039.00 26 232 632.00 -

Deficiency Income Tax

p 17 952,736.11 Add: 20% Interest p.a. from 04.16.05 to 2.15.08 10 181 414.73

TOTAL AMOUNT DUE

P28, 134,150.84 Petitioner (herein respondent) contends that the assessed deficiency income tax in the amount of P28,134,150.84 is baseless since it is based on the application of the "net worth" method.

On the other hand, respondent insists that due to some discrepancies on petitioner's income tax return and creditable withholding tax and alphalist/1601-E, petitioner has unaccounted source of income. The Court will now determine the validity of the said assessment by looking into the propriety of the income imputed, as well as the expense deductions and tax credits disallowed by respondent, namely:

Unaccounted income p 48,641,323.00 Unaccounted prime contractors 1,044,141.23 Professional fees not subjected to EWT 1,154,982.00 Interest expense not subjected to final tax 4,973,138.20 Disallowed interest expense 288,715.93 Excess tax credits to be carried forward 22,203,593.00

Deferred MCIT

4,029,039.00

a. Unaccounted income - P48,641,323.00

Invoking Section 32 of the National Internal

Revenue Code (NIRC) of 1997, as amended, respondent assessed petitioner of deficiency income tax on the alleged unaccounted income of P48,641,323.00, representing the discrepancy between petitioner's receipts as reflected in its financial statements/income tax return (FS/ITR) and as computed by respondent based on the creditable income taxes withheld from petitioner:

Receipts per investigation: Creditable withholding tax P15,517,047.00 Divided by the rate 10% p 155,170,470.00

Receipts per FS/ITR

106,529,147.00

Difference

p 48,641,323.00

EXHIBIT

M

N

ppp 0

EXHIBIT

NNN-7

NNN-8

Petitioner asserted that respondent erred in using ten percent (10°/o) as the withholding tax rate in computing its gross receipts since the withholding tax rates applicable to its management fees vary from 10°/o to fifteen percent (15°/o).

In support of its claim, petitioner presented the

Certificates

of Creditable Tax Withheld at Source (BIR Form No. 2307) issued by its clients for taxable year 2004 that reflected the following income payments and creditable taxes withheld therefrom:

TAX

PAYOR

INCOME PAYMENT

RATE

Duracom Mobile Power Corp.

p 9 184 999.70 10% p East Asia Utilities Corp.

50 735 294.10 10% Cebu Private Power Corp.

35,294 117.67 15% East Asia Power Resources Corp. 28 221 498.76 15%

CWT

918,499.97 5 073 529.41 5,294 117.65 4 233 224.81

TOTAL

P123 435,910.23 P15,519 371.84 For management fees from East Asia Utilities Corporation, the Court-commissioned Independent CPA found that the tax withheld was 15°/o (not 10°/o) per sales invoices examined and that income payments received amounted to P33,823,529.41 (not P50,735,294.10):

INVOICE

TAX

INVOICE NO.

DATE

RATE

AMOUNT

EWT

N530N531-001

8/18/2004 15% p 16 176 470.59 p 2,426 470.59

N530N531-002

8/18/2004 15% 17 647 058.82 2,647 058.82

TOTAL

P33,823,529.41 p 5,073,529.41 The Independent CPA likewise observed that the net amount of P28,750,000.00 (P33,823,529.41 less P5,073,529.41) received by petitioner from East Asia Utilities Corporation is supported by a corporate check dated September 22, 2004.

As a result, petitioner's adjusted total gross receipts for taxable year 2004 amounted to P106,524,145.54, detailed as follows:

EXHIBIT

PAYOR

INCOME PAYMENT

M

Duracom Mobile Power Corp.

p 9 184,999.70

NNN-7 and NNN-8

East Asia Utilities Corp.

33 823,529.41

PPP

Cebu Private Power Corp.

35 294,117.67 0 East Asia Power Resources Corp. 28 221,498.76

TOTAL

p 106,524,145.54 However, when the adjusted total gross receipts per withholding tax certificates and invoices are compared with that reported in petitioner's financial statements and income tax return, there remains a discrepancy of PS,001.46, computed as follows: Gross receipts per FS/ITR p 106 529,147.00 Adjusted gross receipts per withholding tax certificates 106 524,145.54

Difference

p 5,001.46 In its

Reconciliation

Income, petitioner noted difference, in this wise:

of

Unaccounted

of the foregoing "Note:

The management fees billed to DMPC and EAPRC were in United States Dollars. As such, there are differences in foreign exchange rates used by the companies and upon payment/collection." On the other hand, the Independent CPA did not verify further the source of the difference because of the minimal amount involved.

In sum, petitioner has sufficiently explained the alleged unaccounted income found by respondent, except for the amount of P5,001.46. Consequently, petitioner shall be liable to pay deficiency income tax on the unaccounted difference of P5,001.46 in line with the rule that tax assessments by tax examiners are presumed correct and made in good faith, with the taxpayer having the burden of proving otherwise. Failure to present proof of error in

J

the assessment will justify the judicial affirmance of said assessment.

b. Unaccounted payments to prime contractors - P1,044,141.23

Respondent's

examiner compared petitioner's income payments to prime contractors as reported in its FS/ITR with those reflected in petitioner's alphalist/BIR Form No. 1601-E, and construed the difference as unaccounted source of income amounting to P1,044,141.23, broken down as follows: Payments to prime contractors:

Per FS/ITR

p 18,697.37 Per alphalist/BIR Forms No. 1601-E 1,062,838.60

Difference

p 1,044,141.23 Petitioner explained that the difference pertains to travel expenses by company officers and several payments made by petitioner on behalf of El Paso Bangladesh, its affiliated company. Those payments were purportedly made to a travel agency and were recorded as either Travel and Transportation Expenses or

Accounts Receivable and

were reported in petitioner's financial statements as such. The Court finds for petitioner. A scrutiny of petitioner's Alphalist of

Payees Subject to Expanded Withholding Tax as

of December 31, 2004 shows the following:

INCOME

PAYEE

ATC

PAYMENT

RATE

Travel Counsellors Inc.

WC120

p 1 044 141.53 2% p

DHL Worldwide Express

WC120

10 551.07 2% Santiago, Jay Daniel R.

WI010

55 000.00 10%

Adfa Graph Enterprises

WC120

8 146.00 2%

EWT

20,882.83 211.02 5,500.00 162.92

TOTAL

P1,117,838.60 p 26,756.77 Based on the listing of Alphanumeric Tax

Codes

(ATC)

under Revenue

Memorandum

Order (RMO) No. 29-98, all of the foregoing with ATC WC120 represent payments to prime contractors/sub-contractors subject to 2°/o creditable withholding tax; while the payment to Santiago,

Jay

Daniel

R.

with ATC

WIOlO

represents professional fees paid to an individual, such as lawyer, CPA, engineer, etc., subject to 10°/o creditable withholding tax. The latter was not included in the computation; thus, respondent's examiner arrived at the amount of P1,062,838.60 income payments per alphalist, as shown below:

PAYEE

INCOME PAYMENT

EWT

Travel Counsellors Inc.

p 1 044 141.53 p 20 882.83

DHL Worldwide Express

10,551.07 211.02

Adfa Graph Enterprises

8,146.00 162.92

TOTAL

P1,062,838.60 p 21,256.77 As regards petitioner's income payments

to DHL Worldwide Express and Adfa Graph

Enterprises

in the respective amounts of P10,551.07 and P8,146.00, totalling P18,697.07, respondent's examiner correctly found that these were reported in petitioner's FS/ITR for taxable year 2004.

Petitioner's general ledger for taxable year 2004 disclosed that the amount of P10,551.07, representing courier charges paid to

DHL

Worldwide

Express, and the amount of P8,146.00, representing cost of printing invoices and official receipts paid to

Adfa

Graph

Enterprises, were recorded under the "Communications" and "Miscellaneous" expense accounts, respectively. However, in its FS and ITR for taxable year 2004, both amounts were reported under "Others" and "Miscellaneous" expense accounts, respectively. With reference to the income payments to Travel Counsellors, Inc. totaling P1,044,141.23, the same were reported in petitioner's FS/ITR for taxable year 2004 contrary to respondent's allegation.

As aptly found by the Independent CPA, the income payments of P1,044,141.23 were recorded as either "Transportation and Travel" expense or "Accounts Receivable-EPEIC" in petitioner's general ledger for taxable year 2004.

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NAME OF

PAYEE

Travel

Counsellors, Inc.

Travel

Counsellors, Inc.

Travel

Counsellors, Inc.

Travel

Counsellors, Inc.

Travel

Counsellors, Inc.

OR

No.

38675 38858 39057 39409 39579

Petitioner's

Notes

to its Audited

Financial

Statements as of December 31, 2004 and 2003, indicate that EPEIC stands for El Paso Energy

International Company -

foreign affiliate of petitioner. Below is the breakdown of the amount of P1,044,141.23:

DEBITED TO

ACCOUNT

TILE AS

OR DATE

AMOUNT

EWT

REFERENCE

FOLLOWS

EXH.

"P", "P-

Transportation

1" to

25-Aug-04

p 147 440.00 p 2 948.80

JV#080407

and Travel

"P-4"

"Q",

"Q-1"

Transportation to "Q-

17-Seo-04

187 841.82 3 756.84

JV#090405

and Travel

6"

Accounts

"R", "R-

Receivable-

1" to 13-0ct-04 394 462.73 7 889.25

JV#100411

EPEIC

"R-6"

Accounts

"5", "5-

Receivable-

1" to

26-Nov-04

210 739.09 4 214.78 JV#l10410

EPEIC

"5-5"

Accounts

"T", "T-

Receivable-

22-Dec-04

103 658.18 2 073.16

JV#120410

EPEIC

P1,044,141.82 P20 882.84 The above income payments of P147 ,440.00 and P187 ,841.82 formed part of petitioner's claimed deduction for "Transportation and Travel" in the amount of P845,528.00 in its ITR for the year 2004. In its Statement of Income for the year ended December 31, 2004, petitioner reflected as part of its

Expenses

the amount of P969,722.00 representing "Others", which composed of the P8,403.00 Representation and Entertainment, P845,528.00 Transportation and Travel, and P115,790.00

Miscellaneous

expenses.

On the other hand, the income payments in the amounts of P394,462. 73, P210,739.09, and P103,658.18 formed part of the Accounts

Receivable-EPEIC

ending balance as of

December

31, 2004 in the amount of P1,261,700.02. The latter amount was included in the Receivable of P30,273,203.00, reflected in petitioner's Balance Sheet as of December 31, 2004.

As indicated in Note 3 of petitioner's Notes to Financial Statements, the Receivables in the 2" to

"T-6"

BIR

RECORDS

(EXHIBIT

1)

Page 229

Paqe 229

Paqe 239

Paqe 239

Paqe 239

J

amount of P30,273,203.00 is composed of the following:

Related Parties

p 8,038,169.00 Creditable withholding tax and others 22,235,034.00 P30,273,203.00 The Receivables from Related Parties of P8,038,169.00 consisted of the balances of the following Accounts Receivables as of December 31, 2004:

Accounts Receivable - EPEAC

p 6,776,468.99

Accounts Receivable - EPEIC

1,261,700.02 p 8,038,169.01 Based on the foregoing, petitioner duly reported the income payments of P1,044,141.82 in its FS/ITR for taxable year 2004.

Respondent's allegation that petitioner had undeclared income arising from the alleged unreported income payments of P1,044,141.82 is without factual basis.

By comparing petitioner's income payments to prime contractors/subcontractors per alphalist with those allegedly shown in petitioner's FS/ITR, respondent concluded that the difference pertains to petitioner's undeclared income. By doing so, respondent merely relied on assumptions without obtaining any evidence corroborating such findings. This is contrary to the doctrine laid down by the Supreme Court in Collector of Internal Revenue v. Benipayo, wherein it was held that:

XXX

XXX

XXX

Even if these alleged unaccounted income payments are to be treated as income, the same shall be offset by reporting the equivalent payments as expenses.

Hence, no taxable income will result from the said transactions. For lack of factual basis, the deficiency income tax assessment pertaining to the alleged undeclared income from unaccounted income payments of P1,044,141.23 should be cancelled.

c. Professional fees not subjected to EWT - P1,154,982.00

EXHIBIT

Pursuant to Section 34 (K) of the NIRC of 1997, as amended, respondent disallowed petitioner's claimed deduction for professional fees in the amount of P1,154,982.00, as computed below, for its alleged failure to subject the same to EWT:

Professional fees:

Per FS/ITR

p 1,209,982.00 Per alphalist 55,000.00

Difference

p 1,154,982.00

Petitioner

argued that the difference represents payments made to general professional partnerships, which are exempt from withholding tax pursuant to Section 2.57.5 (B) ( 4) of Revenue Regulations (RR) No. 2-98, as amended by

RR

No.

14-02.

Petitioner

submitted various documents to support its position, to wit:

PAYEE

AMOUNT

X-2 andY SGV & Co.

p 74 122.00

Z and Z-2

SGV & Co.

72,770.00

AA and AA-3

SGV & Co.

621000.00

BB BB-2 to BB-11

Puno & Puno Law Offices

221,938.17

DD and DD-3

Puno & Puno Law Offices

438,549.26

EE to EE-4

Puno & Puno Law Offices

40.36

FF-3 and FF-4

Siguion Reyna Montecillo & Ongsiako Law Offices

400.00

GG and GG-4

Puno & Puno Law Offices

732.93

HH-4

SGV & Co.

65,000.00 II, 11-9 and 11-10 Atty. Editha P. Talaboc 80.00

JJ-3

SyCip Salazar Law Offices

206,420.00

KK-3

SyCip Salaazar Law Offices

12,929.62

TOTAL

P1,154,982.34 The

Court

agrees with petitioner.

Payments amounting to P1,154,982.34 were made to general professional partnerships, such as law offices and accounting/auditing firms. Section 22 (B) of the NIRC of 1997, as amended, defines general professional partnerships as partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. Corollary thereto, Section 26 of the same Code provides that a general professional partnership shall not be subject to income tax. Its partners are the ones liable in their individual capacity for the payment of income tax.

The Supreme Court, in the case of Rufino R. Tan v. Ramon R. Del Rosario, Jr., et a/., had the occasion to rule that the income tax is imposed not on the professional partnership, which is tax-exempt, but on the partners themselves in their individual capacity computed on their distributive shares of partnership profits. Considering that general professional partnerships are exempt from income tax, payments made to these partnerships are not subject to withholding tax pursuant to Section 2.57 .5 of RR No. 2-98, as amended by RR No. 14-02, which states:

XXX

XXX

XXX

This means that respondent's disallowance of petitioner's claimed deduction for professional fees in the amount of P1,154,982.00 has no legal or factual basis.

Consequently, the deficiency income tax assessment arising from the disallowed professional fees should be cancelled.

d. Interest expense not subjected to final withholding tax (FWT) - P4,973,138.20 Finding that part of petitioner's interest expense in the amount of P4,973,138.20 was not subjected to final withholding tax, respondent disallowed the same as deduction from petitioner's gross income, pursuant to Section 34 (K) of the NIRC of 1997, as amended. Below is the computation of the disallowed interest expense of P4,973,138.20: Interest expense:

PerFS

I

P 133,047,207.00

J

Per alphalist 128,074,068.80

Difference

p 4,973,138.20 Petitioner disagreed stating that all of its income payments amounting to P133,047,207 .00 were subjected to the corresponding final tax and were remitted to the BIR as evidenced by its BIR Form Nos. 1601-F and 1604-CF.

Further, respondent's computation is erroneous because it failed to consider petitioner's payments of interest expense in the succeeding taxable year 2005 for interest incurred in 2004; thus, explaining why the interest expense was reported in 2004 but not subjected to FWT in the same year. To account for the difference of P4,973,138.20 found by respondent, petitioner submitted a Reconciliation of Interest Expense Per books and Per BIR Form No. 1701-F 67 and the related documents.

Examination of the foregoing shows that out of the P14,188,231.91 FWT remitted by petitioner to the BIR for the year 2004, only the FWT of P9,880,327.69 pertains to its interest expense for the said year, as computed below: FWT per Annual Information Return of income

Taxes Withheld on Compensation and Final

Withholding Taxes (BIR Form No. 1604-CF) P14,188 231.91 1) FWT on Interest Expense for taxable

Less:

year 2003

Paid in January 2004

P2,881 783.85

Paid in March 2004

33 483.84 2) Forex loss pertaining to FWT on Interest Expense for taxable year 2003 (see computation below) 11,811.55

3) FWT on Management Fee Expense for

2004 1,380 824.98 4,307 904.22 FWT per BIR Form No. 1604-CF pertaining to Interest Expense for taxable year 2004 p 9,880,327.69 Forex gain(loss) per schedule [Exhs. "ZZ" and "ZZ-1"]

January

P(17 131.47)

March

75.10

April

23 234.34

June

(2 857.43)

October

2 983.54 p 6 304.08 Less: Forex loss pertaining to 2003 interest expense

Included in the month of Jan. 2004 per schedule [Exhibit "ZZ"l Accrued Interest thru Dec. 31, 2003 (US$52.4M Loan) [Exhibit "KKK-l.b"] Interest for Jan. 1 - 23 2004 Interest paid on Jan. 23 2004 FWT rate used FWT due FWT remittance [Exhibit "ZZ"l Forex qain (loss) Forex gain (loss) pertaining to Accrued Interest thru Dec. 31 2003 Included in the month of March 2004 per schedule [Exhibit "ZZ"l Accrued Interest, Dec. 10, 2003 - Feb. 29, 2004 (US$2M Loan) [Exhibit "KKK-5.a"l

Accrued Interest March 1-10 2004

Interest Paid on March 10 2004

FWT rate used FWT due FWT remittance [Exhibit "ZZ"] Forex qain (loss) [Exhibit "ZZ"l Accounted for as follows:

Jan. 1-31 2004 [Exhibit "KKK-2.a] Feb. 1-29 [Exhibit "KKK-3.a] March 1-10 2004 [Exhibit "KKK-5.a] Dec. 10-31 2003 [Exhibit "KKK-2.al

US$ Amount

519 240.33 173 080.11 692 320.44 10% 69 232.04 69 232.04 51,924.03 23 270.63 2 872.92 26 143.55 10% 2 614.36 2 614.36 890.13 842.56 287.29 594.37 2 614.35 Forex loss pertaining to FWT on interest expense for 2003 Forex gain pertaining to FWT on interest expense for 2004

FX Rate

Php Amount

55.50 28 817 838.32 55.43 9 593 172.79 38 411 011.11 10% 3 841 101.11 55.72900 3 858 232.58 (17 131.47) (0.229) (11 890.60) 56.3350 1 310 950.66 55.3861 159 119.56 1 470 070.22 10% 147 007.02 56.2020 146 931.92 75.10 0.1330 118.39 0.1330 112.06 (0.8159) (234.40) 0.1330 79.05 75.10 Documents submitted by petitioner further show that petitioner's interest expense for taxable year 2004 amounting to P133,047 ,207.00 pertains to the remaining balance of drawdowns made on a loan facility from a foreign bank, Hollandsche Bank-Unie N.V. of Netherlands, totaling US$54.4 million as of December 31, 2003. The first drawdown was made on January 28, 1999 and petitioner made partial payments to the foreign bank upon availability of funds. The US$2 million loan was paid on June 20, 2004, while the US$52.4 million loan was prepaid in full on June 30, 2004 by petitioner's parent company,

EPEC

Netherland Holdings B.V. of Netherlands. In effect, the latter was subrogated to the rights of the foreign bank under the loan facility agreement.

By virtue of subrogation, the US$52.4 million loan originally owed by petitioner to Hollandsche Bank-Unie N.V. of (11 890.60) 79.05 (11,811.55) p 18,115.63 EXH.

KKK-1

KKK-2

KKK-2

Netherland became payable to EPEC Netherland Holdings B.V. of Netherlands. Considering that the US$54.4 million loan was obtained by petitioner from a non-resident foreign bank (Hollandsche Bank-Unie N.V.), and that US$52.4 million thereof was subrogated to a non-resident foreign corporation

(EPEC

Netherland Holdings B.V.), the imposable tax on the interest derived from said loan is 20°/o pursuant to Section 28 (B) (5) (a) of the NIRC of 1997, as amended, which states:

XXX

XXX

XXX

However, paragraphs 2(a)(ii) and 2(b) of

Article 11 of the Philippines-Netherlands Tax

Treaty provide for the following preferential tax rates on interest:

XXX

XXX

XXX

It is clear from the foregoing, prior to the subrogation of the US$52.4 million loan to EPEC Netherland Holdings B.V., the applicable rate on the subject interest payments is the lower rate of ten percent (10°/o), pursuant to paragraph 2 (a) (ii)

of Article

11 of the

Philippines-

Netherlands Tax Treaty.

On the other hand, upon subrogation of the US$52.4 million loan to EPEC Netherland Holdings B.V. on June 30, 2004, the applicable rate on the subject interest payments is fifteen percent (15°/o), pursuant to paragraph 2 (b) of

Article 11 of the Philippines-Netherlands Tax

Treaty.

Therefore, the

FWT

due on the P133,047,207 .00 interest expense claimed by petitioner for taxable year 2004 amounted to P16,318,128.04, as computed below:

FINAL WITHHOLDING TAX

JV NO.

DATE

PARTICULARS

2004

RATE

AMOUNT DUE

010411 1/23/2004 Jan1-23 $52.4M loan p 10 552 489.87 10% p 1 055 248.99 010413 1/31/2004 Jan1-31 $2M loan 551 601.72 10% 55 160.17 010413 1/31/2004 Jan24-31 $52.4M loan 3 671 252.99 10% 367 125.30

KKK-3 52,212.17 KKK-3 1,341,596.87 KKK-4 17,503.15 KKK-5 1,420,761.96 KKK-5 36,815.68 KKK-6 1,054,742.33 KKK-7 52,482.34 KKK-7 324,814.64 KKK-8 53,472.57 KKK-8 1,428,558.77 KKK-9 17,411.19 PE 22,779,061.24| es ee ee KKK-10 P_2,138,173.61 KKK-11 1,079,600.04 KKK-12 1,028 469.26 KKK-13 849,284.20 KKK-14 213,733.94 100417 10/20/2004 interest for Juli-Sep25 1,986,302.16 15% 297,945.32 1 177,800.57 1, 131,381.14 868,633.97 255,199.86 P 9,040,221.91 |»133,047,207.33| | _»16,318,128.04 After comparing the FWT~ due of P16,318,128.04 against the FWT remittances of P9,880,327.64, the Court finds petitioner liable for deficiency FWT of P?6,437,800.40 on its interest expense of P45,003,324.53, computed as follows:

DISALLOWED

INTEREST

(FWT STILLS!

DUE DIVIDED

FWT STILL BY APPLICABLE

EXHIBIT DATE FWT DUE FWT REMITTED DUE RA

10411 | 1/23/2004 | P__1,055,248.99 P 959,317.26 | P 95,931.73

Total

KKK-8 | 050404 | 5/31/2004 1,428,558.77 1,298,689.79 129,868.98] KKK-9 | 060402 | 6/10/2004 17,411.19 15,828.35 iss284| | | » 7,277,906.13 | _®6,616,278.31 | P 661,627.82 | P 6,616,278.20 KKK-10 | 060405 | 6/30/2004 | P 2,138,173.61 | P 1,295,862.79 | P 842,310.82 P|

KKK-11

KKK-12

KKK-13

kkk-14 | o90418 | 9/30/2004 | 213,733.94] | 2,733.94] | 100417 | 10/20/2004 | __297,945.32| 14,733.16] 8321216] | 100421 | 10/31/2004 | 1,177,800.57| | aa77go0.s7| }i1o4is | 11/30/2004 | tt3izer.ia| Tat zezaa| | 120414 | 12/31/2004 | _g68633.97| | wese33.97| so{ | 38,387,046.33 po 120414 | 12/31/2004 255,199.86] | 255,199.86 ‘Subtotal ==—s—ss—s—<—s—sSsd 9,040, 221.91 | 3,282,164.96 | 5,758,056.95 | 38,387,046.33 P .

P16,318,128.04 9,898,443.27 | P6,419,684.77 | P45,003,324.53 on interest expense for 2004 [Net Amount _—s—_—_s| ©16,318,128.04| P9,880,327.64* | P6,437,800.40 | P45,003,324.53 * The P.05 difference between the P9,880,327.69 FWT computed earlier and as computed above is due to rounding-off.

For failure to withhold and remit the corresponding FWT of P6,437,800.40, petitioner cannot claim the’ interest expense of P45,003,324.53 as deduction from its gross income for taxable year 2004, pursuant to Section 34 (K) of the NIRC of 1997, as amended, which states that:

XXX XXX XXX

© Disallowed interest expense _ P288,715.93 Petitioner’s ITR for taxable year 2004 showed interest income subjected to final tax in the amount of P607,823.00. Pursuant to Section 34 (B) of the NIRC of 1997, as amended, respondent applied the limitation of deductibility of interest expense and disallowed the amount of P288,715.93, computed as follows:

Interest income subjected to final tax P 607,823.00 Disallowed interest expense (P607,823.00/80% x 38% P288,715.93 It can be inferred from the foregoing that wa respondent assumed that the final tax rate on petitioner’s interest income is 20%. Petitioner argued that the foregoing computation is erroneous because the applicable final tax rates on its interest income for the year 2004 are 7.5°/o (for US dollar accounts) and 20°/o (for Philippine peso accounts). Petitioner alleged that it had computed the interest expense limitation based on the amounts of interest income earned from its peso and US dollar accounts.

The Court agrees with petitioner. Section 34 of the NIRC of 1997, as amended, prior to its amendment under Republic Act No. 9337, provides that the amount of interest that a taxpayer can deduct from his taxable gross income should be reduced by an amount equal to 38°/o of his interest income subjected to final tax, thus:

XXX

XXX

XXX

For taxable year 2004, petitioner earned interest income in the amount of P607,823.34 (net of withholding tax) on its US dollar and Philippine peso savings accounts as evidenced by the various journal vouchers, entries in petitioner's Security Bank US dollar and peso savings accounts passbooks, Security Bank's

Confirmations

of Purchase, as well as

Confirmations of Sale Without Recourse of Fixed

Rate Treasury Notes (FXTN), and petitioner's Temporary Investment Advice and letters to Security Bank Corporation.

Under Section 27 (D) (1) of the NIRC of 1997, as amended, the interest income derived by a domestic corporation from a depositary bank under the expanded foreign currency deposit system is subject to a final tax at the rate of either seven and a half percent (7.5°/o) for US dollar accounts and twenty percent (20°/o) for Philippine peso accounts. Consequently, petitioner's non-deductible interest expense for taxable year 2004 amounted to P274,557 .00, as correctly computed by petitioner, detailed as follows:

NON-

DEDUCTIBLE

INTEREST

DATE

EXHIBIT EARNED

LIMITATION

. AMOUNT OF

INTEREST

OF FWT

[onus DollarAccouns | 3 1,045.38 3,997.76 8,570.29 2,027.23 27,791.38 27,562.23 12/20/2004 38,498.40 15,815.56 LUL-13 and LUL-13.c 3,806.65 PO | _220579.61| | || _—90,616.49 pO |

NET

Fr

m

Fad

v m 2 7) m 6/30/2004 3,655.72 7/9/2004 18,366.67 7/19/2004 7,713.02 8/19/2004 27,796.25 9/30/2004 3,589.96 10/8/2004 79,632.35 37,825.37 LLL-11.a 11/10/2004 159,442.23 80% 38% 75,735.06 LLL-13 to LLL-13.b 12/29/2004 9,100.23 4,322.61 po | 387,243.73| | | 83,940.77 Pp 607,823.34] | Examination of petitioner’s ITR for taxable year 2004 shows that petitioner's claimed deduction for interest expense amounted to P132,772,650.00, an amount’ lower’ by P274,557.00 when compared with the interest expense of P133,047,207.00 reflected in its audited FS for the same year. Clearly, petitioner did not claim all of its reported interest expense by applying the limitation, as provided by the NIRC of 1997, as amended. As a result, the disallowance of petitioner’s interest expense in the amount of ?288,715.93 should be cancelled.

Total

f. Excess Tax Carried Over to Succeeding Year — P22,203,593.00 Respondent disallowed petitioner’s excess tax credits for taxable year 2004, but gave no WA explanation in the Details of Assessment/ Discrepancies. The Court could only surmise that the excess tax credits carried over to the succeeding year was disallowed in order to recapture the tax benefit realized by petitioner in carrying the said amount to the succeeding year.

However, it was improper for respondent to disallow the said excess tax credits because any tax benefit derived by petitioner from the carry-over of the said amount redounds to the succeeding year 2005. Since the tax benefit will be in the succeeding year, at most, petitioner may only be assessed in the said succeeding year.

g. Minimum Corporate Income Tax (MCIT) P4,029,039.00 Respondent likewise disallowed petitioner's MCIT payment in the amount of P4,029,039.00 without further explanation. Considering that the MCIT will be credited against the normal income tax for the three (3) immediately succeeding taxable years, pursuant to Section 27(E)(2) of the NIRC of 1997, as amended, its benefit will redound on the succeeding years. Thus, it is inappropriate to disallow the same for such is beyond the scope of the present assessment.

In fine, notwithstanding the P45,008,325. 99 adjustments on petitioner's taxable income, representing the sum of petitioner's unaccounted income in the amount of P5,001.46 and disallowed interest expense in the amount of P45,003,324.53, petitioner still incurred a net loss in the amount of P390,088,424.04. Thus, petitioner's income tax liability was at the MCIT rate of two percent (2°/o) based on its gross income for taxable year 2004. However, petitioner's MCIT liability of P4,029,039.00 per its 2004 ITR shall be adjusted to P4,029,139.21 to reflect the unaccounted income of P5,001.46.

Since

petitioner's income tax credits were more than sufficient to cover its

MCIT

liability of P4,029,139.21, petitioner is not liable to pay any deficiency MCIT for taxable year 2004, as shown below:

Sales/Revenues/Receipts/Fees

p 106 529 147.00

Less:

Cost of Sales/Services

9 205 500.00 Gross Income from Operation p 97 323 647.00

Add:

Non-operating_ and Other Income

104 128 312.00

Total Gross Income

p 201 451 959.00

Add:

Unaccounted income 5 001.46

Adjusted Total Gross Income

p 201 456 960.46

Less:

Deductions

P636 548 709.00

Less: Disallowed Interest Expense

45 003 324.53 591 545 384.47

Adjusted Net Loss

P(390 088 424.01)

Minimum Corporate Income Tax Due

p 4 029 139.21

Less:

Tax Credits

Prior Year's Excess Credits

p 10 715,585.00

Creditable Tax Withheld for the First Three

Quarters

11 286 147.00

Creditable Tax Withheld for the Fourth Quarter

4 230 900.00 26 232 632.00

Excess Tax Credits

P{22,203,492.79)

XXX

XXX

XXX

III. DEFICIENCY EWT - P186,395.72

Upon

investigation, it was found by respondent that petitioner failed to withhold and remit the EWT on professional fees paid. Thus, pursuant to Revenue Regulations No. 2-98, respondent assessed petitioner for deficiency EWT in the amount of P186,695. 72, inclusive of interest, computed as follows: Professional fees per FS/ITR p 1,209 982.00 Professional fees per AL/1601-E 55 000.00 Professional fees not subjected to EWT p 1 154 982.00 EWT rate 10% EWT due thereon p 115 498.20 Add: 20% interestp.a. from 01.16.05 to 2.15.08 71 197.52

TOTAL AMOUNT DUE

p 186,695.72 As discussed and determined earlier [see discussion under deficiency income tax assessment, item I(c)], the subject income payments amounting to P1,154,982.00 were made to general professional partnerships, which are exempt from income tax, pursuant to Section 26 in relation to Section 22(8) of the

NIRC of 1997, as amended, and consequently, to withholding tax, as provided for under Section 2.57 .5 of RR No. 2-98, as amended by

RR

No.

14-02.

Therefore, respondent's deficiency EWT assessment on the said income payments shall be cancelled.

XXX

XXX

XXX

V. DEFICIENCY IMPROPERLY ACCUMULATED EARNINGS TAX - P35,153,053.99 xxx. Petitioner was assessed of improperly accumulated earnings tax in the total amount of P21,060,098.00, computed thus: Taxable income p (435 096 750.00) Add: Interest income subject to final tax p 607 823.00 Equity in net earnings of subsidiary 171,352 773.00

Losses

485,906 173.00 657,866 769.00

Balance

p 222,770 019.00 Less: Income tax payable 4,029 039.00

Balance

p 218,740 980.00 Less: Capital stock 8,140 000.00 Improperly accumulated earninqs p 210,600 980.00 Improperly accumulated earnings rate 10% Improperly accumulated earnings tax p 21,060,098.00 As correctly pointed out by petitioner, it cannot possibly have any improperly accumulated earnings, because it has a deficit of P3,707,998,535.00; thus, no earnings to speak of, much more accumulation thereof.

Petitioner's

Statements

of

Changes

in Stockholders' Equity (Capital Deficiency) show that it has sustained a capital deficiency from the year 2002 until 2004.

Therefore, respondent's assessment against petitioner for deficiency improperly accumulated earnings tax of P35,153,053.99 is devoid of factual basis and should be cancelled.

VI. COMPROMISE PENAL TV - P25,000.00 For alleged non/late/filing/payment of improperly accumulated earnings tax, respondent imposed compromise penalty against petitioner for taxable year 2004 in the amount of P25,000.00.

Pursuant to RMO No. 01-90, as amended by RMO No. 19-07, compromise penalties are only suggested in settlement of criminal liability, and may not be imposed or exacted on the taxpayer in the event that a taxpayer refuses to pay the same.

Thus, compromise penalty implies mutual agreement between the taxpayer, on one hand, and the BIR, on the other.

Absent any showing that petitioner consented to the compromise penalties, the same should not be imposed. Accordingly, respondent's imposition of compromise penalties, without the consent of petitioner, cannot be sustained. (Citations omitted)

WHEREFORE, the Petition for Review filed by the Commissioner of Internal Revenue on June 5, 2015, is hereby DENIED, for lack of merit. Accordingly, the assailed Decision and Resolution dated February 23, 2015 and May 18, 2015, respectively, are AFFIRMED.

We Concur:

ROMAN G. DE[ ROSARIO

Presiding Justice

Q,~~c.~~,9...

JffANITO C. CASTANEDf<, JR.

Associate Justice

LOVELL (.BAUTISTA

Associate Justice

(with Concurri~

issenting Opinion) ER~mnfP. UY

Associate Justice

~ W.M~~~b~ CIELITO N. MINDARO-GRULLA

Associate Justice

CAES~ASANOVA

Associate Justice

Q'!4, ~ ~ . .(_I MA. BELEN M. RINGPIS-LIBAN

Associate Justice

(1~7~~ CATHERINE T. MANAHAN

Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court. ROMAN G. DE ROSARIO

Presiding Justice

REPUBLIC OF THE PHILIPPINES

COURT OF TAX APPEALS

QUEZON CITY

ENBANC

*********

COMMISSIONER OF INTERNAL

REVENUE,

Petitioner, -versus-

Present:

DEL ROSARIO, P.J., CASTANEDA, JR., BAUTISTA, UY, CASANOVA, FASON-VICTORINO, MINDARO-GRULLA, RINGPIS-LIBAN, and MANAHAN, JJ.

EL PASO PHILIPPINES

Promulgated:

ENERGY COMPANY, INC., Respondent.

MAR 0 6 2017 ~~

~ · X - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ~

X

CONCURRING AND DISSENTING OPINION

UY, J.:

With all due respect to the learned ponente and my other colleagues, while I concur on the affirmation of the ruling of the Second Division of this Court that El Paso Philippines Energy Company, Inc. is only liable for value-added tax (VAT) and final withholding tax (FWT), plus the corresponding 25% surcharges imposed thereon, for calendar year 2004, I dissent on the imposition of the deficiency interest thereon on the basis of Section 249(8) of the National Internal Revenue Code (NIRC) of 1997, and the inclusion of said deficiency interest in the computation of delinquency interest under Section 249(C) of the same Code. Section 249 of the NIRC of 1997 reads: "SEC. 249. Interest. -

CONCURRING AND DISSENTING OPINION

(A)

In General. - There shall be assessed and collected on any unpaid amount of tax, interest at the rate of twenty percent (20%) per annum, or such higher rate as may be prescribed by the rules and regulations, from the date prescribed for its payment until the amount is fully paid.

(B)

Deficiency Interest. - Any deficiency in the tax due, as the term is defined in this Code, shall be subject to the interest prescribed in Subsection (A) hereof, which interest shall be assessed and collected from the date prescribed for its payment until the full payment thereof.

(C)

Delinquency Interest. - In case of failure to pay:

XXX

XXX

XXX

(3) A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the Commissioner, there shall be assessed and collected on the unpaid amount, interest at the rate prescribed in Subsection (A) hereof until the amount is fully paid, which interest shall form part of the tax." (Emphases supplied) Based on the foregoing Section 249(B), the "Deficiency Interest" shall be imposed on '1a]ny deficiency in the tax due, as the term is defined in this Code", i.e., as the term "deficiency" is defined in the NIRC of 1997. Relative thereto, an examination of the said Code discloses that there are only three (3) instances where it defines the term "deficiency", and this relates only and respectively to three (3) types of internal revenue taxes, namely, income tax, estate tax, and donor's tax, pursuant to Sections 56(B), 93 and 104 of the NIRC of 1997, viz:

"SEC. 56. Payment and Assessment of Income Tax for Individuals and Corporations.-

XXX

XXX

XXX

(B) Assessment and Payment of Deficiency Tax.- After the return is filed, the Commissioner shall examine its and assess the correct amount of the tax. The tax or deficiency income tax so discovered shall be paid upon

CONCURRING AND DISSENTING OPINION

notice and demand from the Commissioner. As used in this Chapter1, in respect of a tax imposed by this Title2, the term 'deficiency' means:

(1) The amount by which the tax imposed by this Title exceeds the amount shown as the tax by the taxpayer upon his return; but the amount so shown on the return shall be increased by the amounts previously assessed (or collected without assessment) as a deficiency, and decreased by the amount previously abated, credited, returned or otherwise repaid in respect of such tax; or (2) If no amount is shown as the tax by the taxpayer upon his return, or if no return is made by the taxpayer, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency;

but such amounts previously assessed or collected without assessment shall first be decreased by the amounts previously abated, credited, returned or otherwise repaid in respect of such tax." (Emphasis supplied) "SEC. 93. Definition of Deficiency. -As used in this Chapter-3, the term 'deficiency' means:

(a) The amount by which the tax imposed by this Chapter exceeds the amount shown as the tax by the executor, administrator or any of the heirs upon his return; but the amount so shown on the return shall first be increased by the amounts previously assessed (or collected without assessment) as a deficiency and decreased by the amounts previously abated, refunded or otherwise repaid in respect of such tax; or (b) If no amount is shown as the tax by the executor, administrator or any of the heirs upon his return, or if no return is made by the executor, administrator, or any heir, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency;

but such amounts previously assessed or collected without assessment 1 Chapter IX- RETURNS AND PAYMENT OF TAX. 2 Title II- TAX ON INCOME.

3 CHAPTER I- ESTATE TAX (under TITLE III- ESTATE AND DONOR'S TAXES).

CONCURRING AND DISSENTING OPINION

shall first be decreased by the amounts previously abated, credited, returned or otherwise repaid in respect of such tax." (Emphasis supplied) "SEC. 104. Definitions. - xxx The term 'deficiency' means: (a) the amount by which the tax imposed by this Chapter-4 exceeds the amount shown as the tax by the donor upon his return; but the amount so shown on the return shall first be increased by the amounts previously assessed (or collected without assessment) as a deficiency, and decreased by the amounts previously abated, refunded or otherwise repaid in respect of such tax, or (b) if no amount is shown as the tax by the donor upon his return, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency, but such amounts previously assessed or collected without assessment shall first be decreased by the amounts previously abated, credited, returned or otherwise repaid in respect of such tax."

(Emphasis

supplied) Such being the case, the deficiency interest under Section 249(8) should be applied only whenever there is a deficiency income tax, a deficiency estate tax, and a deficiency donor's tax. For this reason, in this case, no deficiency interest under Section 249(8) should be imposed on the deficiency VAT and deficiency FWT against El Paso Philippines Energy Company, Inc. Correspondingly, the computation of the delinquency interest imposed under Section 249(C) should not as well include the said deficiency interest. Correspondingly, I vote for the DELETION of: (1) the imposition of deficiency interests on El Paso Philippines Energy Company, Inc.'s basic deficiency VAT in the amount of P2,958,405.41 and basic deficiency FWT in the amount of P6,437,800.40, both at the rate of 20% per annum; and (2) the inclusion of said deficiency interests in the computation of the delinquency interest to be imposed on the same basic deficiency VAT and basic deficiency FWT. ER~P.UY Assoc1ate Justice

4 CHAPTER II -

DONOR'S TAX (under TITLE III -

ESTATE AND DONOR'S

TAXES).