THE EXCLUSIVE PHILIPPINE FRANCHISEE OF THE GLOBAL BRAND
“DUNKIN’ DONUTS”
2007 DEFICIENCY TAX ASSESSMENT
(Final, Executory and Demandable)
PHP 1.56 BILLION
INCLUDING SURCHARGES AND INTERESTS
TAX AUDIT REPORT
SUBMITTED and DOCUMENTED BY
Othello E. Dalanon
in his official capacity as former BIR tax examiner
INTRODUCTION
GOLDEN DONUTS, INC. (GDI), a domestic corporation, is the exclusive
Philippine Franchisee of DUNKIN’ DONUTS OF AMERICA, INC. (DDA).
It is the largest and leading coffee and donut shop chain in the country
which sells various doughnuts, along with coffee, hot chocolates, shakes,
and the likes.
It belongs to the TOP 10,000 PRIVATE CORPORATIONS as determined by the BIR
and adopts a Computer Assisted Accounting System (CAAS) with duly-registered
hardbound computer-generated books of accounts.
It has 45 stockholders. Its Chairman of the Board was LEOPOLDO L. PRIETO
(deceased) and the Officers are:
Walter C. Spakowski
Marixi R. Prieto
Miguel H. Prieto
Pedro E. Paraiso
Ernesto S. Co
Jocelyn V. Santos
President
Secretary
Treasurer
Chief Financial Officer
VP & General Manager
VP Finance & Administration
CASE BACKGROUND
In 2008, I conducted tax audit of the 2007 financial records of
GDI where I discovered the following irregularities, to wit:
 GDI has two (2) sets of books of accounts.
 It declared false information in the tax return.
 It substantially under-declared revenues in the tax return.
 It substantially under-remitted VAT.
 It failed to dutifully comply with the withholding tax laws.
The above-enumerated irregularities resulted to
DEFICIENCY TAX ASSESSMENT
amounting to
P1.56 BILLION
including surcharges and interests
computed up to date of assessment.
I personally reported these irregularities to BIR Commissioner Henares
and recommended to her the criminal prosecution for tax evasion under
the RATE (Run After Tax Evaders) program of the Bureau.
Despite documentary evidence to prove such irregularities, CIR Henares
did not pursue tax evasion case against GDI, because Ms. MARIXI
PRIETO, GDI’s secretary and also the Chairperson of Philippine Daily
Inquirer (PDI), talked to her and BIR Regional Director Nestor Valeroso,
who both extended LENIENCY to the taxpayer in view of Ms. Prieto’s
closeness to PRESIDENT AQUINO according to DCIR Estela Sales.
And despite finality of the said assessment and the Bureau’s
constant goal of raising revenues for the state, CIR Henares
intentionally failed to collect it.
Instead she focuses on strictly enforcing tax laws against low
income earners such as the Marginal Income Earners like: sarisari store, fishermen, tricycle drivers, etc., rather than enforcing
collection of deficiency taxes of big and large taxpayers who are
better able to pay like GDI.
The CIR, in a telecast interview by GMA 7 on Feb. 28, 2014, and subsequent media
releases, claimed that my assessment was flawed.
If my assessment was faulty, what is the correct assessment for the commissioner?
How much was collected for the government’s coffer?
Less than P4M?
Why did commissioner Henares not give my assessment a
chance to stand in a judicial scrutiny before publicly declaring it
as inaccurate?
Is she not LAWYERING for GDI who might be the real tax evader?
While she “actively runs” after other alleged tax cheats, she
coddles GDI…a tax evader?
CIR Kim Henares also claimed that she ordered “two
reinvestigations” of the case.
Is there a law that authorizes her to order a re-audit of a due
and demandable tax assessment?
IS THIS NOT A SELECTIVE “RE-AUDIT” POLICY?
In the case of Congressman Manny Pacquiao’s tax liabilities, why
did Henares not order “two reinvestigations”? Who knows her
new team of examiners might find it justifiable to reduce CMP’s
tax deficit by concluding that the previous examiner’s audit
findings were flawed?
DETAILS OF THE IRREGULARITIES and ASSESSMENT
 GDI HAS TWO (2) SETS OF BOOKS OF ACCOUNTS.
1. The duly-registered hardbound computer-generated books of accounts which
are the bases of my audit findings; and
2. The “manually-posted from original books of accounts” which GDI claimed as
the bases of its Trial Balance for Financial Statements and Income Tax Returns
purposes.
• Is it not that keeping two (2) sets of books of accounts a fraudulent act or
criminal tax violation?
 GDI DECLARED FALSE INFORMATION IN THE TAX RETURN.
GDI’s CD and duly-registered hardbound computer-generated books of accounts
reflected a NET TAXABLE INCOME amounting to P135.2 million while its Annual
Income Tax Return (AITR) reflected a NET LOSS amounting to P44.9 million.
Is it not that declaring false information in the tax return a fraudulent act or
criminal tax violation?
 GDI UNDER-DECLARED SALES IN THE TAX RETURN.
 Undeclared sales amounting to P897 million.
Sales per CD & duly-registered hardbound books
Less: Sales reflected in the AITR
UNDECLARED SALES
P 1,928,770,398.68
1,031,528,917.00
P 897,241,481.68
Is it not that substantial under-declaration of sales in the AITR a fraudulent act or
criminal tax violation?
According to SUPREME COURT, the books of accounts prevail over the return when
they reflect higher sales, because they are kept and prepared under control and
supervision by the taxpayer, and thus, are admissions against interest. (PICOP vs.
C.A., et al., 250 SCRA 434).
The representations made by GDI in the CD and duly-registered books (hardbound
computer-generated) submitted and presented by it to the Bureau for audit and
examination amounted to admissions against interest which it cannot disown and
change at its convenience of pleasure.
 GDI’s CONTENTIONS
It claimed that the CD and duly-registered hardbound computer-generated books
of accounts which it submitted and presented to the Bureau for audit, contained
more than 2,500 errors in 84 accounts “double take-ups”, and should not be the
bases of the audit findings.
It alleged that its sales was only P1.031 billion as per its “manually-posted from
original books of accounts” which it claimed as the bases of its Trial Balance for
Financial Statements and ITR purposes, as follows:
SHOP: Central Warehouse (trading sales)
SHOP: Owned Outlets (donuts sales)
TOTAL SALES
P
746,312,672.00
285,216,244.74
P 1,031,528,916.74
 MY ARGUMENTS
• GDI’s CD and duly-registered hardbound computer-generated books of accounts
already contained GDI’s external auditors’ adjustments. It means that said
financial records were already audited by GDI’s external auditors.
• The discrepancies or differences of sales accounts between the CD and dulyregistered books on one hand and the AITR on the other were not reflected by
GDI’s external auditors as adjusting or correcting entries in the said financial
records.
• With the more than 2,500 errors posted in 84 accounts, as claimed by GDI, to
contain in the said financial records, it is believed to be unfeasible and amazing
that GDI which belongs to the high profile business in the Philippine industries,
and with its highly competent accounting and auditing employees, supervisors,
and tax managers, the external auditors, and the reputable public auditors that
GDI hired to conduct quarterly reviews of its financial records would not notice
such remarkable and significant errors.
• The SUPREME COURT ruled in the case of Paper Industries Corporation of the
Philippines versus Court of Appeals, et al., 250 SCRA 434 that “where the books
of accounts reflected a Sales or Receipts higher than that reflected in the return,
the books of accounts should prevail. This is so, because the books of accounts
are kept by the taxpayer and are prepared under its control and supervision. And
they reflected what may be deemed to be admissions against interest.”
oIs it not that BIR should even take legal action against GDI’s external auditors for
certifying false financial statements?
• The 84 accounts which GDI claimed to contain errors were all nominal accounts
(income and expense accounts). GDI did not claim that the real accounts (balance
sheet accounts) reflected in the said financial records contained errors. So, let us
determine Sales using a real account reflected in the same financial records
which is associated with Sales account.
• VAT Payable account is a real account or balance sheet account. Under the VAT
principle, this account is concomitant to Sales or Revenue account. Thus, Sales
can be determined using this account, as follows:
VAT Payable credit total per CD & duly-registered books
P
Divide by VAT rate
227,263,254.33
12%
Sales with VAT components
1,892,860,452.75
Add: Sales per General Journal without VAT components
34,511,326.02
Total sales based on VAT payable account
1,928,371,778.77
Less: Sales per CD & duly-registered books
1,928,770,398.68
Discrepancy (not material)
(P
398,619.91)
It may be noted that even if Sales account is computed back based on VAT payable
account reflected in GDI’s financial records, it would point out that Sales per CD
and duly-registered books was P1.928 billion.
This is just one of the several mathematical computations that would prove that
GDI’s CD and the duly-registered books of accounts speak the truth, contrary to
GDI’s claim that the same contained errors.
Note. This explains also presentation in slides nos. 37 and 38.
 Unrecorded and undeclared sales amounting to P438 million.
GDI is the exclusive Philippine Franchisee of DDA. The Franchise Agreement
between said parties states, among others, that the former shall remit to the latter
a Franchise Fee equivalent to 1% of ALL SALES OF EACH SHOP, whether operated
directly by GDI or sublicensed to others. GDI shall be responsible for the
remittance of all fees due DDA.
For year 2007, the Franchisee Fee incurred and recorded per CD and dulyregistered books and claimed by GDI as expense, being included in the Cost of
Sales account, was P23,668,908.00.
On the basis of these information, I computed the unrecorded and undeclared
sales, as follows:
Franchise Fee per CD, duly-registered books, and FS
P
Divide by franchise fee rate per GDI and DDA agreement
23,668,908.00
1%
GDI’s grossed-up sales (or should be sales)
2,366,890,800.00
Less: Sales recorded per CD and duly-registered books
1,928,770,398.68
UNRECORDED and UNDECLARED SALES
P
438,120,401.32
• Is it not that substantial non recording of sales in the registered books
and consequent non declaration of the same in AITR constitute
fraudulent acts or criminal tax violations?
 GDI’s CONTENTIONS
• The Franchise Fee amounting to P23.668 million is equivalent to 1% of its
“system-wide sales” which allegedly refers to sales generated by its companyowned sales outlets and those of the sub-franchisees, excluding central
warehouse’s sales.
• That its central warehouse’s sales of products to the sub-franchisees are not
subject to the 1% Franchise Fee.
BEFORE I PRESENT MY ARGUMENTS, LET US
FIRST DETERMINE THE SHOPS WHICH GDI
DIRECTLY AND INDIRECTLY OPERATES.
DIRECTLY OWNED SHOPS
INDIRECTLY OWNED SHOPS
GDI
SHOP: CENTRAL WHSE
SUB-FRANCHISEES’ SHOPS
SHOP: OWNED OUTLETS
1. GDI maintains a Shop-Central Warehouse (Commissary) wherefrom all its
Sub-Franchisees purchase on COD basis all products, ingredients, supplies,
commodity, merchandise, etc.;
2. GDI has its owned shops-sales outlets; and
3. The Sub-Franchisees’ shops under GDI’s supervision.
GDI’s VERSION
GDI’S VERSION
DIRECTLY OWNED SHOPS
INDIRECTLY OWNED SHOPS
GDI SAID CW’s SALES TO SF ARE NOT
COVERED BY 1% FRANCHISE FEE
GDI
SHOP: CENTRAL WHSE
SUB-FRANCHISEES’ SHOPS
SHOP: OWNED OUTLETS
CUSTOMERS
CUSTOMERS
GDI SAID FRANCHISE FEE OF P23.668M = 1% OF “SYSTEM-WIDE SALES”
Following GDI’s version, let us reconcile Sales account. However, considering that
the financial statements of the sub-franchisees were not available to determine
with certainty the amount of sales of the sub-franchisees, the following
information were utilized to determine the sub-franchisees’ net sales for year
2007, as follows:
a. The sub-franchise agreements between GDI and its sub-franchisees state,
among others, that GDI shall receive a continuing royalty equivalent to 6.6% of
the sub-franchisees’ net sales of the preceding month.
b. The royalty received by GDI for year 2007 per CD, duly-registered books, and
schedule of royalty submitted by GDI to the Bureau for audit was
P133,190,903.90. This amount was properly reflected in the ITR.
On the basis of these information, GDI’s sub-franchisees’ net sales for year 2007
can be approximately determined as follows:
Thus, we may now reconcile GDI’s facts and contentions, as follows:
Let us further reconcile GDI’s contentions
on a monthly basis.
The following data were taken from GDI’s CD
and duly-registered books of accounts, to wit:
•
DATE
•
Franchise Fee
•
Royalty Income
•
SALES – ALL PRODUCTS
•
Central Warehouse
•
Owned Outlets
•
2007
•
Col. 1
•
Col. 2
•
Col. 3
•
Col. 4
•
January
•
1,724,667.96
•
7,421,176.65
•
57,248,319.95
•
22,583,523.83
•
February
•
1,686,532.69
•
7,286,726.73
•
52,501,006.84
•
21,767,600.01
•
March
•
1,848,303.45
•
7,976,470.11
•
55,277,706.99
•
23,968,236.66
•
April
•
1,
It may be noted that there are abrupt increases that occurred in the month of
December, 2007 under columns 3 and 4 (highlighted in green ink). These are the
two (2) items of the 84 accounts which GDI claimed to contain errors (“double
take-ups”) which allegedly occurred in the month of December, 2007, but I did not
subscribe to it because it can be proven that these entries were correct as
discussed earlier. (slides 23, 24 and 25).
Assuming arguendo that there were “double take-ups” in the said period, let us
just reconcile the data or entries for the period from January to September alone
(or for the first three (3) quarters of 2007) based on GDI’s contentions that the 1%
Franchise Fee applies to its “system-wide sales” which allegedly pertains to the
sales of the company-owned outlets and those of the sub-franchisees’, excluding
central warehouse’s sales.
If GDI’s facts and contentions were true,
the reconciliations presented above would not result
to any discrepancies at all.
GDI cannot even reconcile its own facts
and contentions.
MY VERSION
MY VERSION
DIRECTLY OWNED SHOPS
INDIRECTLY OWNED SHOPS
GDI
SHOP: CENTRAL WHSE
SUB-FRANCHISEES’ SHOPS
SHOP: OWNED OUTLETS
CUSTOMERS
CUSTOMERS
MY version - FRANCHISE FEE OF P23.668M = 1% OF GDI’s SALES ALONE
Other arguments to disprove GDI’s contentions
• No specific condition in the License Agreement between GDI and DDA that
Central Warehouse’s sales to sub-franchisees are not subject to 1% Franchise Fee;
• Is it not that GDI’s central warehouse (commissary) a shop which it also operates?
• Is it not the purchases of GDI’s sub-franchisees from central warehouse, sales of
GDI?
• GDI is only responsible for the remittance of the franchise fee supposed to be
remitted by the sub-franchisees to DDA. That instead of the sub-franchisees
remitting directly to DDA, the amount shall be coursed thru GDI which amount
would not form part of GDI’s expense.
• The amount of P23.668 million representing franchise fee is actually incurred and
claimed by GDI as its own expense because it was included in the Cost of Sales
account. The fact that GDI claimed said amount as its expense indicates that the
same pertains to its sales alone.
• Why did GDI claim the whole amount of P2,840,123.69 representing 12% VAT on
franchise fee as tax credit against its Output Tax? The fact that GDI claimed said
amount as tax credit against its Output Tax indicates that the franchise fee
amounting to P23.668 million pertains to 1% of GDI’s sales alone.
Thus, I expressed my firm stance and so hold that GDI’s sales topped P2.366 billion
and of which P438 million was not recorded in its duly-registered books of
accounts and consequently not declared in the AITR for year 2007.
All the abovementioned issues and other significant
discrepancies enumerated in my memorandum and audit
reports culminated to the deficiency tax assessment amounting
to P1.56 billion, including increments, already covered by Formal
Letter of Demand (FLD) and Final Assessment Notices (FANs) all
bearing Demand No. 41-B072-07 and all dated October 29,2010,
which became final, executory and demandable but BIR
Commissioner Henares intentionally failed to either collect it or
sue GDI for tax evasion for under-declaring its revenues in the
tax return. Instead, she publicly announced that the same was
flawed and that she ordered “two reinvestigations”.
MEDIA PUBLICATIONS/OTHERS
 The Manila Times series by Columnist Emeterio Sd. Perez (also an ex-sem);
 GMA 7 by Ms. Susan Enriquez;
 ABS-CBN thru Mr. David Oro;
 Interaksyon by Likha Cuevas-Miel;
 The Philippine Star by Camille Diola;
 Manila Standard Today by Jojo Robles;
 The Daily Tribune by Gerry Baldo (mentioned in privilege speech of Congressman Magtanggol Gunigundo of Valenzuela City);
 Other newsprints and broadcast media;
 Small rally composed of former priests, nuns, seminarians and laymen held on April 15, 2014 at BIR-National Office, Agham Road,
Quezon City, published in Interaksyon by Likha Cuevas-Miel;
 Filed formal complaint before the Office of the Ombudsman vs. Kim Henares and Estela Sales; (Omb. already in action);
 Sent letter to the President stamped received (with bar code) on March 17, 2014 but no action yet from OP;
 On-going meetings with NGOs.
I reverently appeal to the FILIPINO people to help request
President BENIGNO SIMEON C. AQUINO III
to direct BIR Commissioner Kim Henares
collect the deficiency tax of GOLDEN DONUTS, INC.
amounting to P1,564,426,808.08
as the same already belong to the FILIPINO people.
THANK YOU
GOD BLESS THE PHILIPPINES