Philippine Institute of Certified Public Accountants (PICPA)
SEMINAR ON TAX UPDATES
Wednesday, February 28, 2007
Grand Ballroom, Hotel Intercontinental, Makati City
LATEST TAX DECISIONS INVOLVING
THE COURT OF TAX APPEALS (CTA)
JUANITO C. CASTAÑEDA, JR.
Associate Justice, Court of Tax Appeals
In Commissioner of Internal Revenue (CIR) vs. Michel J. Lhuiller,
G.R. No. 150947, July 15, 2003, the Supreme Court reiterated its previous
declarations that it has the final say in legal disputes:
x x x The Supreme Court by tradition and in our system
of judicial administration, has the last word on what the law is;
it is the final arbiter of any justifiable controversy. There is
only one Supreme Court from whose decisions all other courts
should take their bearings.
“Determining whether this tax exemption is wise or advantageous is
outside the realm of judicial power. This matter is addressed to the sound
discretion of the lawmaking department of government.” CIR v. Philippine
Airlines, Inc., G.R. 160528, Oct. 9, 2006, 1st Div.
A.
PRINCIPLE OF STARE DECISIS
Holding that it is not bound by an earlier decision of the Court of
Appeals (CA), which became final for failure of the Commissioner of
Internal Revenue to appeal the same, the Supreme Court reversed the
decision of the CA, which relied on the earlier final CA decision and which
also affirmed the decision of the Court of Tax Appeals (CTA) and BIR
Ruling No. UN 140-94, April 19, 1994 to the effect that PLDT is exempt
from all taxes, including VAT on its importations of equipment, machineries
and spare parts necessary in the conduct of its business under its franchise
considering that it was only liable for the “3% franchise tax on gross
receipts which shall be in lieu of all taxes on its franchise or earnings
thereof” under Section 12 of RA 7082 (PLDT Franchise). The clause “in
lieu of all taxes” in Sec. 12 of R.A. 7082 is immediately followed by the
limiting or qualifying clause “on this franchise or earnings thereof”,
suggesting that the exemption is limited to taxes imposed directly on PLDT
since taxes pertaining to PLDT’s franchise or earnings are its direct liability.
Accordingly, indirect taxes, not being taxes on PLDT’s franchise or
earnings, are outside the purview of the “in lieu” provision. PLDT is subject
to VAT & previously to advance sales tax or compensating tax on its
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importations. Under the principle of stare decisis or rule of binding
precedent, the general rule is that decisions of the Supreme Court have the
force and effect of law and are binding upon the courts. However, this is not
a hard and fast rule. There should be no blind adherence to precedent. What
is important is that the court decision must be right. CIR vs. PLDT, G.R.
No. 140230, Dec. 15, 2005, 3rd Div.
Reversing DBP vs. CA and the Com. of Customs, G.R. No. 86625,
Dec. 22, 1989, 180 SCRA 612, the Supreme Court ruled that RA 1125, the
CTA Charter, is a special law vis-à-vis P.D. 242, which is now embodied in
the Revised Administrative Code. P.D. 242 provides that in disputes
between government agencies and government-owned or controlled
corporations, the OSG, in cases where it acts as counsel, and the DOJ, in all
other cases, shall serve as arbiter. However, in tax cases covered under
Section 7 of RA 1125, jurisdiction pertains to the CTA.
PNOC vs. CA,
CIR, & Tirso Savellano, G.R. No. 109976 & PNB vs. CA, CTA, Tirso B.
Savellano and CIR, G.R. No. 112800, April 26, 2005, En Banc.
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B.
COMPROMISE
The CIR may cancel compromise agreements entered into by his
predecessor if the same is contrary to law. Also, the CTA has the power of
judicial review over compromise agreements entered into by the
Commissioner. The government is never estopped by mistakes of its agents.
PNOC vs. CA, CIR, & Tirso Savellano, supra.
C.
TRO ISSUED ON RA 9337 (EXPANDED VAT
ACT OF 2005); EFFECTIVITY OF LAW
No appeal taken to the CTA from the decision of the
Commissioner of Internal Revenue or the Commissioner of
Customs or the Regional Trial Court, provincial, city or
municipal treasurer or the Secretary of Finance, the Secretary of
Trade and Industry or the Secretary of Agriculture, as the case
may be, shall suspend the payment, levy, distraint, and/or sale
of any property of the taxpayer for the satisfaction of his tax
liability as provided by existing law: Provided, however, That
when in the opinion of the Court the collection by the
aforementioned government agencies may jeopardize the
interest of the Government and/or the taxpayer the Court at any
stage of the proceeding may suspend the said collection and
require the taxpayer either to deposit the amount claimed or to
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file a surety bond for not more than double the amount with the
Court. (Sec. 11, RA 1125, amended by Sec. 9, RA 9282)
On July 1, 2005, the Supreme Court granted a TRO (temporary
restraining order) from enforcing and implementing Republic Act No. 9337,
the “Expanded Value-Added Tax of 2005,” which was supposed to take
effect on said date.
On Sept. 1, 2005, it issued its En Banc decision
upholding the laws constitutionality and lifting the TRO upon finality of its
decision. Hence, the new VAT took effect on November 1, 2005. The effect
of the TRO issued by the Supreme Court is to postpone the effectivity of the
law up to the time of finality of its decision on the merits of the case.
Association of Pilipinas Shell Dealers, et al. vs. Cesar V. Purisima, et al. &
Francis Joseph G. Escudero, et al. vs. Cesar V. Purisima, et al., G.R. Nos.
168461 & 168463, Res. July 1, 2005, issuing TRO and consolidating cases
with ABAKADA Guro Party List [Formerly AASJS] Officers Samson S.
Alcantara, et al. vs. Hon. Executive Sec. Eduardo R. Ermita, et al., G.R.
No. 168056 & Aquilino Q. Pimentel, et al. vs. Exec. Secretary Eduardo R.
Ermita, et al., G.R. No. 168207, Sept. 1, 2005, En Banc.
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D.
PROTEST MUST BE MADE 30 DAYS FROM
RECEIPT OF FINAL ASSESSMENT
The CTA and the CA declared as final and unappealable the
assessment against PNB, dated 16 January 1991 for failure to protest within
the 30-day prescribed period. However, the Supreme Court found that the
significant BIR letter was the one issued against PNB on 08 October 1986,
wherein the BIR assessed PNB for its withholding tax liability on the interest
earnings and /or yields from PNOC’s money placements with the bank. It had
30 days from receipt to protest the BIR’s assessment. PNB did not take any
action as to the said assessment so that upon the lapse of the period to protest,
the withholding tax assessment became final and unappealable, and could no
longer be disputed. PNOC vs. CA, CIR, & Tirso Savellano, supra.
April 30, 2004 Preliminary Assessment Notice (PAN) for 2001
deficiency DST & GRT was protested. Formal Letter of Demand with
Assessment Notices was received on Aug. 30, 2004 & appealed to CTA on
Sept. 29, 2004. CTA 1st Div. dismissed petition for lack of jurisdiction as
there was failure to protest final assessment. Allied Banking Corp. vs. CIR,
CTA EB 167, August 23, 2006.
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E.
APPEALABLE DECISION; APPEAL PERIOD
1.
Authorized Official; 30-Day Period to Appeal from Decision -
A January 24, 1991 final demand letter for tax deficiency assessments issued
and signed by the Chief of the Accounts Receivable and Billing Division of
the BIR, acting in behalf of CIR, is final and executory and subject to appeal
to CTA. Warrants of distraint, levy, garnishment, issued on Oct. 10 & 17,
1991 were appealed to CTA on Nov. 8, 1991. Under Sec. 7 NIRC, as
amended by RA 8424. the CIR may delegate any power vested upon him by
law to Division Chiefs or to officials of higher rank other than 4 powers
exclusively granted to him. CTA correctly dismissed petition for lack of
jurisdiction as 30-day period already lapsed. Oceanic Wireless Network,
Inc. vs. CIR, CTA & CA, G.R. No. 148380, December 9, 2005.
2.
30-Day Period to Appeal Counted From Inaction - On July 5,
2001, petitioner received a BIR assessment dated May 25, 2001 for 1997
Gross Onshore Tax and DST for Special Savings Placements. It protested
the same on July 20, 2001. As the protest was not acted upon, it filed on
April 30, 2002 a petition for review. In a September 10, 2003 Resolution, the
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CTA Division dismissed petition as it was filed beyond the 30-day period
following the lapse of 180 days from petitioner’s submission of documents
in support of its protest under Section 228 of the Tax Code. Due to failure to
file a motion for reconsideration, the Resolution became final and executory
on October 1, 2003 and Entry of Judgment was made on December 1, 2003.
On February 20, 2004, petitioner filed a Petition for Relief of Judgment on
the ground of excusable negligence of its counsel’s secretary who allegedly
misfiled and lost the September 10, 2003 Resolution. The CTA denied the
petition in a Resolution dated May 3, 2004. Petitioner’s motion for
reconsideration was denied in its November 5, 2004 Resolution. On appeal,
the CTA En Banc affirmed the assailed Resolutions of the CTA in a
Decision dated June 7, 2005. On appeal, the Supreme Court held that relief
cannot be granted on the flimsy excuse that failure to appeal was due to the
neglect of counsel, who is responsible for acts of his employee. Even
assuming that counsel’s neglect is excusable, petitioner’s action for the
cancellation had already prescribed. From July 20, 2001, the date of filing of
its protest, it had until September 18, 2001 to submit relevant documents and
from September 18, 2001, the Commissioner had until March 17, 2002 to
issue his decision. Due to Commissioner’s inaction, petitioner had until
April 16, 2002 within which to appeal to the CTA. Petition for Review filed
8
on April 30, 2002 was filed outside the jurisdictional 30-day period to
appeal. The 30-day period to appeal is jurisdictional. RCBC vs. CIR, G.R.
No. 168498, June 16, 2006, 1st Div.
3.
Optional or Mandatory 30-Day Period of Appeal from Lapse
of 180-Day Period - The CTA held that under Section 228 of the NIRC, the
taxpayer has the option to appeal to the CTA the inaction of the
Commissioner of Internal Revenue on its protest against an assessment
within 30 days from the expiry of 180 days from the submission of evidence
contesting the assessment. This was reversed by the Court of Appeals, which
held that appeal is mandatory, not optional. However, it should be noted that
under Section 3(a)(2), Rule 4 of the Revised Rules of the Court of Tax
Appeals, which was approved by the Supreme Court and effective December
15, 2005, the appeal is optional. Section 3(a)(2), Rule 4, RRCTA; Lascona
vs. CIR, CTA Case No. 5777, Jan. 4, 2000, reversed by the Court of
Appeals in CA-G.R. SP No. 58061, October 25, 2005.
9
F.
PRESCRIPTION OF RIGHT TO COLLECT
Mere filing of protest letters without request for reinvestigation does
not to suspend the running of the 3-year (now 5-year) prescriptive period to
collect taxes from assessment. CIR vs. Philippine Global Communications,
Inc., G.R. No. 167146, October 31, 2006, 1st Div.
Mere filing of protest requesting for reconsideration, without a valid
waiver of the statute of limitations, does not suspend running of prescriptive
period (then 3-years under Sec. 203, 1977 NIRC, now 5 years under Sec.
222 (c), 1997 NIRC) to collect.
Protest alleges prescription, which is
liberally construed in favor of the taxpayer. Only request for reinvestigation
that is granted can suspend. Request for reconsideration does not. Protest
here did not specifically request for either a reconsideration or
reinvestigation but letter did not raise any question of fact; neither did it
offer to present any new evidence. BIR September 10, 1992 letter to BPI
refers to request for reconsideration. Moreover, there is no evidence that
request was granted assuming arguendo that BPI requested for
reinvestigation. Hence, assessment has prescribed. BPI vs. CIR, G.R. No.
139736, October 17, 2005, 2nd Div.
10
However, where there was referral to the examiner for verification,
there was considered to be a request for reinvestigation deemed granted.
Hence, period to collect is suspended. BPI (formerly FEBTC) vs. CIR,
CTA EB 70, Aug. 15, 2006.
G.
IRREVOCABLE CARRY-OVER OF EXCESS
INCOME TAX
Under Section 76 NIRC, a taxable corporation with excess quarterly
income tax payments may apply for either a tax refund or a tax credit, but
not both. Failure to indicate a choice, however, will not bar a valid request
for a refund, should this option be chosen by the taxpayer later on. The fact
that it filled out the portion “Prior Year’s Excess Credits” in its 1999 Final
Adjustment Return (FAR) means that it categorically availed itself of the
carry-over option. Section 76 remains clear and unequivocal.
Once the carry-over option is taken, actually or constructively, it
becomes irrevocable. Petitioner has chosen that option for its 1998
creditable withholding taxes. Thus, it is no longer entitled to a tax refund of
P459,756.07, which corresponds to its 1998 excess tax credit. Nonetheless,
the amount will not be forfeited in the government’s favor, because it may
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be claimed by petitioner as tax credits in the succeeding taxable years.
Philam Asset Management, Inc. vs. CIR, G.R No. 156637 & G.R. No.
162004 (consolidated), Dec. 14, 2005, 3rd Div.
If the taxpayer fails to signify his option by marking an “x” on the
appropriate box provided in line 31 of BIR Form No. 1702, it is provided in
page 4 thereof that “the excess payments shall be automatically be carriedover to the next taxable period”. ITR amendment will not cure. SC & C
Cosmetech Co., Inc. vs. CIR, CTA EB 126, July 31, 2006.
H.
BEST EVIDENCE; ASSESSMENT MUST BE
BASED ON FACTS
The Supreme Court held that certifications of the Chief Collector of
the Manila International Container Port and the Chief Collector of the Port
of Manila which merely enumerated entry numbers and dates of release and
payments without identification of consumption entries do not comply with
the best evidence rule. Photocopies of consumption entries are worthless as
evidence. Assessments must be based on facts and cannot be made to rest on
another presumption. The Supreme Court remanded the case back to the
CTA to enable the Commissioner of Internal Revenue to submit either
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certified true copies or duplicate original copies of the consumption entries
for the questioned 1987 importations. CIR vs. Hantex Trading Co., Inc.,
G.R. No. 136975, March 31, 2005 (454 SCRA 301). In the remanded case
entitled Hantex Trading Co., Inc vs. CIR, CTA Case No. 5126, February 7,
2007, 1st Div., the CTA cancelled the assessments due to failure to submit
the originals or certified true copies of the consumption entries.
Certifications/letters from various government agencies, i.e., National
Statistics Office, Tariff Commission, BIR, ICTSI that no records could be
found were presented.
Petitioner
was
assessed
for
deficiency
withholding
tax
on
compensation for specified months of the years 1988 to 1991 on the ground
that that payment orders (POs) and confirmation receipts (CRs) reflected in
petitioner’s annual return were fake, not being issued by the BIR. It alleged
that the withholding tax was paid by its confidential payroll agent, who
remitted the withholding taxes through 25 MBTC manager’s checks. The
BIR countered that in addition to the POs and CRs being spurious, the
checks were actually used for the purchase of loose documentary stamps by
various taxpayers other than petitioner. The Supreme Court affirmed the
ruling of both the CTA and the CA that there were no valid remittances of
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the withholding taxes. Both the CTA and the CA found that, although the
POs and CRs were genuine, the best evidence of payment were the checks
remitted through its payroll agent. The dorsal side of these checks contained
handwritten notes that they were used by different individuals and entities to
purchase documentary stamps. These notes were supported by the reports by
the BIR’s Special Project Team.
Benguet Corp. vs. CIR, G.R. No. 141212,
June 22, 2006.
I.
SUBSTANTIATION REQUIREMENT
Refund claim must be substantiated by invoices/receipts. CPA report
is not sufficient. CIR vs. Manila Mining Corp., G.R. No. 153204, August
31, 2005, 3rd Div. Failure to present VAT ORs evidencing zero-rated sales
to AMEX-HK Branch resulted in claim disallowance notwithstanding CPA
report. American Express International, Inc. – Philippine Branch vs. CIR,
CTA EB No. 103, March 3, 2006. See Rule 12, Section 5, and Rule 13,
Revised Rules of the Court of Tax Appeals.
Affirming the CTA decision denying the claim for refund by the
trustee bank of the withholding tax on money market placements, bank
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deposits, deposit substitutes and government securities it made allegedly on
behalf of various tax exempt employee trusts, the Supreme Court held that
mere testimony of witnesses is insufficient to establish that tax exempt
employee trusts invested in such placements subjected to withholding tax.
Documentary proof of such transactions, such as confirmation receipts and
purchase orders, constitute the best evidence on the participation of the
funds from these employee trusts. Far East Bank and Trust Company vs.
CIR & CA, G.R No. 138919, May 2, 2006, 3rd Div.
Official receipts and payment orders by themselves are not sufficient
proof that withholding tax was paid on the sale of acquired properties.
Schedule prepared to show that the taxes the withholding agent withheld did,
indeed, pertain to the taxes accruing on the sale of the acquired assets was
found to be “self-serving and unverifiable” and therefore “barren of
evidentiary weight.” Far East Bank and Trust Company vs. Court of
Appeals, CTA & CIR, G.R No. 129130, Dec. 9, 2005, 1st Div.
To claim loss on auction sale, mere entries made in “subasta” book
are not sufficient. Neither is certification nor vouchers sufficient to prove
other expenses. Official receipts must support expenses. Sworn declaration
15
of loss with the Revenue District Officer pursuant to RR 12-77 is necessary
to prove fire loss. H. Tambunting Pawnshop, Inc. vs. CIR, CTA EB No.
68, April 26, 2006 & June 29, 2006 Resolution.
J.
DESTINATION PRINCIPLE; EXCEPTION;
NON-RETROACTIVE RULINGS
A foreign consortium entered into a contract with NAPOCOR for the
operation and maintenance of its two power barges. This was subcontracted
to the taxpayer, which obtained BIR Ruling No. 023-95 dated February 14,
1995 declaring that if it registers as a VAT taxpayer and the consideration
for its services is paid for in an acceptable foreign currency and accounted
for in accordance with BSP rules and regulations, the services shall be
subject to zero-rate VAT. The taxpayer subsequently registered as a VAT
taxpayer. Allegedly misinterpreting Revenue Regulations No. 5-96 dated
February 20, 1996 and effective April 1996 to be applicable, it nonetheless
paid 10% VAT for sale of services from April to December 1996. On
January 7, 1999, it secured VAT Ruling No. 003-99 dated January 7, 1999,
which reconfirmed BIR Ruling No. 023-95 to the effect that its sales to the
Consortium are zero-rated. On the strength of the said rulings, it filed a
claim for refund with the BIR and subsequently a petition for review with
16
the CTA to toll the running of the two-year prescriptive period under the Tax
Code. The CTA granted the refund and on appeal, the CA affirmed the CTA
decision. Hence, the BIR appealed the case to the Supreme Court.
The high tribunal denied the petition on the ground of nonretroactivity of revocation of rulings prejudicial to the taxpayer under
Section 246 of the Tax Code. However, it held that both the CA and the
CTA erred in holding that services rendered in favor of a resident foreign
corporation and paid for in acceptable foreign currency is subject to zerorate pursuant to then Section 102(b) [now 108(b)] of the Tax Code. The
Consortium is doing business in the Philippines pursuant to its 15-year
NAPOCOR contract. Zero-rating is only allowed if the payor for services is
a nonresident foreign corporation. It held:
x x x Another essential condition for qualification to
zero-rating under Section 102(b) is that the recipient of such
services is doing business outside the Philippines. While this
requirement is not expressly stated in the second paragraph of
Section 102(b), this is clearly provided in the first paragraph of
Section 102(b), but also pertains to the general term “services”
appearing in the second paragraph of Section 102(b). In short,
services other than processing, manufacturing, or repacking of
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goods must likewise be performed for persons doing business
outside the Philippines.
This can only be the logical interpretation of Section
102(b). If the provider and recipient of the “other services” are
both doing business in the Philippines, the payment of foreign
currency is irrelevant. Otherwise, those subject to the regular
VAT under Section 102(a) can avoid paying the VAT by
simply stipulating payment in foreign currency inwardly
remitted by the recipient of services. x x x A tax is a mandatory
exaction, not a voluntary contribution.
When Section 102(b) stipulates payment in “acceptable
foreign currency” under BSP rules, the law clearly envisions
the payer-recipient of services to be doing business outside the
Philippines. Only those not doing business in the Philippines
can be required under BSP rules to pay in acceptable foreign
currency for their purchase for goods or services from the
Philippines. In a domestic transaction, where the provider and
recipient of services from the Philippines, the BSP cannot
require any party to make payment in foreign currency.
xxx
Further, when the provider and recipient of services are
both doing business in the Philippines, their transaction falls
squarely under Section 102(a) governing domestic sale or
exchange of services. Indeed, this is a purely local sale or
18
exchange of services subject to the regular VAT, unless of
course the transaction falls under the other provisions of
Section 102(b).
The Court further held that the BIR’s filing of its Answer dated March
2, 2000 before the CTA contesting the claim for refund revokes the previous
rulings with prospective effect only considering Section 246 of the Tax Code
which prescribes the non-retroactivity of rulings where the revocation is
prejudicial to the taxpayer. CIR v. Burmeister and Wain Scandinavian
Contractor Mindanao, Inc., G.R. 153205, Jan. 22, 2007, 2nd Div.
Payment made by a nonresident foreign corporation to a servicing unit
facilitating collections of Amex-HK receivables from card members is
subject to zero-rate VAT, having complied with the zero-rating requirements
under the law. VAT Ruling 048-98 is void. Even assuming that it revoked
the prior VAT Ruling 080-89, such ruling cannot be given retroactive effect
under Section 246 of the Tax Code. Moreover, the general rule is that rulings
can only have retroactive effect when it so explicitly states applies. In the
final analysis, the interpretation of the Commissioner of Internal Revenue
may render an interpretation of statute only if it is in congruence with the
law. No amount of interpretation can ever revoke, repeal or modify what the
19
law says. CIR vs. American Express International, Inc., G.R. No. 15609,
June 29, 2005, 3rd Div.
K.
INCENTIVES ONLY TO SUBIC ENTERPRISES
Tax incentives granted to non-Subic military bases enterprises
extended under Proclamation 420 was considered outside the ambit of RA
7727, the Bases Conversion and Development Act of 1992, and deemed
unconstitutional. Clearly in RA 7727, only Subic SPEZ was granted tax
exemption. Under Article VI, Section 28(3) of the Constitution, only
Congress by a majority of all its members may grant tax exemption together
with the Constitution and local governments on local tax exemption. John
Hay People’s Alternative Coalition vs. Victor Lim, President, Bases
Conversion Dev. Authority, G.R. No. 119775, October 24, 2003 (414 SCRA
356) & En Banc [Unanimous] Res. March 29, 2005. See also Coconut Oil
Refiners Association vs. Hon. Ruben Torres, G.R. No. 132527, July 29,
2005 (465 SCRA 47), En Banc.
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L.
MEANING OF “GROSS”
The 20% final withholding tax on interest/yield from bank deposits
cannot be deducted for purposes of computing the gross receipts tax. The
express inclusion of interest income in taxable gross receipts creates a
presumption that the entire amount of the interest income, without
deduction, is subject to the gross receipts tax. There is constructive receipt
by virtue of the extinguishment of its 20% final tax liability. CIR vs. Bank
of the Philippine Islands, G.R. No. 147374, June 26, 2006, 3rd Div., citing
CIR vs. Bank of Commerce, G.R. No. 149636, June 8, 2005, 459 SCRA
638; CIR vs. Solidbank Corp., G.R. No. 148191, November 25, 2005, 416
SCRA 436. The word “gross” must be used in its plain and ordinary
meaning. It is defined as “whole, entire, total, without deduction”. A
common definition is “without deduction”. “Gross” is defined as “taking in
the whole; having no deduction or abatement; whole, total as opposed to a
sum consisting of separate and specified parts”. Gross is the antithesis of net.
x x x CIR vs. Bank of Commerce, G.R. No. 149636, June 8, 2005, 459
SCRA 638, 2nd Div.
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M.
PAWN TICKET SUBJECT TO DST
The subject of a documentary stamp tax (DST) is not limited to the
document. DST is an excise tax on the right or privilege to transfer
obligations, rights or incidents subject thereto. Pledge is among the
privileges, the exercise of which is subject to DST. For purposes of taxation,
the pawn ticket is proof of an exercise of a taxable privilege of concluding a
contract of pledge. At any rate, it is not said ticket that creates the
pawnshop’s obligation to pay DST but the exercise of the privilege to enter
into a contract of pledge. There is no basis in petitioner’s assertion that a
DST is literally a tax on a document and that no tax may be imposed on a
pawn ticket. Michel J. Lhuillier Pawnshop, Inc. vs. CIR, G.R. No. 166786,
May 3, 2006, 1st Div.
N.
DST & CGT ON ASSIGNMENT OF DEPOSIT
ON SUBSCRIPTIONS
Assignment of deposit on stock subscriptions is subject to
documentary stamp tax and capital gains tax under Section 176 of the Tax
22
Code. Campagnie Financiere Sucres et Denrees vs. CIR, G.R. No. 133834,
August 28, 2006, 2nd Div.
O.
INVALID PAYMENT
No valid payment of excise taxes by TCC where both transferor and
transferee are held “jointly and severally liable for any fraudulent act or
violation of the pertinent laws, rules and regulations relating to the transfer
of” the subject TCCs and there was determination that TCCs were
fraudulently obtained by transferor. Government is not estopped by mistakes
of its agents in issuance of TDMs. CIR vs. Pilipinas Shell Petroleum Corp.,
CTA EB No. 64, April 28, 2006 (4-2); Petron Corp. v. CIR, CTA Case No.
6136, Aug. 23, 2006, 2nd Div.
In Proton Pilipinas Corp. v. RP as represented by the Bureau of
Customs, G.R. 165027, Oct. 12, 2006, 1st Div., the Supreme Court sustained
the right of the government to collect unpaid customs duties and taxes
considering that TCCs originally used as payment were cancelled, having
been found to be fake and spurious notwithstanding validation by the
Department of Finance. It held:
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Attention must be given to the fact that taxes are the
lifeblood of the nation through which the government agencies
continue to operate and with which the State effects its
functions for the welfare of its constituents. It is also settled
that taxes are the lifeblood of the government and their prompt
and certain availability is an imperious need.
So then, the
determination of the validity or invalidity of the TCCs cannot
be regarded as a prejudicial issue that must first be resolved
with finality in the Criminal Cases filed before the
Sandiganbayan.
The Government should not and must not
await the result of the criminal proceedings in the
Sandiganbayan before it can collect the outstanding customs
duties and taxes of the petitioner for such will unduly restrain
the Government in doing its functions. The machineries of the
Government will not be able to function well if the collection of
taxes will be delayed so much so if its collection will depend on
the outcome of any criminal proceedings on the guise that the
issue of collection of taxes is a prejudicial issue that need to be
first resolved before enforcing its collection.
Therefore, it is the obligation of the petitioner to make
good its obligation by paying the customs duties and taxes,
which remain unpaid by reason of the cancellation of the
subject TCCs for having been found as fake and spurious. It
should not make the Government suffer for its own misfortune.
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P.
DONATION – YEAR DEDUCTIBLE
Donation delivered in 1996 per Deed dated December 29, 1995
should be recognized in 1996 and may not be recognized as deduction in
1995 pursuant to Section 29(h) NIRC, which refers to deduction of
contributions or gifts actually paid or made within the taxable year.
Donation must be perfected and consummated before it can be claimed as
deduction. Philippine Stock Exchange, Inc. v. CIR, CA-G.R. SP No. 76884,
Sept. 21, 2006, 9th Div.
Q.
ALL EVENTS TEST
In CIR vs. Isabela Cultural Corporation, G.R. No. 172231, February
12, 2007, 3rd Div., reversing the decision of the CA affirming the CTA on
this point, the high court disallowed the deduction of legal and auditing
expenses billed in the year 1986 for work rendered by a law firm in 1984
and 1985 and for auditing services rendered by an auditing firm in the year
1985 pursuant to the “all events test” used for purposes of determining
recognition of income and deductibility of expense.
The Supreme Court
held:
25
For
a
taxpayer
using
the
accrual
method,
the
determinative question is, when do the facts present themselves
in such a manner that the taxpayer must recognize income or
expense? The accrual of income and expense is permitted when
the all-events test has been met. This test requires: (1) fixing of
a right to income or liability to pay; and (2) the availability of
the reasonable accurate determination of such income or
liability.
The all-events test requires the right to income or liability
be fixed, and the amount of such income or liability be
determined with reasonable accuracy. However, the test does
not demand that the amount of income or liability be known
absolutely, only that a taxpayer has at his disposal the
information necessary to compute the amount with reasonable
accuracy. The all-events test is satisfied where computation
remains uncertain, if its basis is unchangeable; the test is
satisfied where a computation may be unknown, but is not as
much as unknowable, within the taxable year. The amount of
liability does not have to be determined exactly; it must be
determined with “reasonable accuracy.” Accordingly, the
term “reasonable accuracy” implies something less than an
exact or completely accurate amount.
The propriety of an accrual must be judged by the
facts that a taxpayer knew, or could reasonably be expected
26
to have known, at the closing of its books for the taxable
year.
Accrual method of accounting presents largely a
question of fact; such that the taxpayer bears the burden of
proof of establishing the accrual of an item of income or
deduction.
Corollarily, it is a governing principle in taxation that tax
exemptions must be construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority; and one
who claims an exemption must be able to justify the same by
the clearest grant of organic or statute law. An exemption from
the common burden cannot be permitted to exist upon vague
implications. And since a deduction for income tax purposes
partakes of the nature of a tax exemption, then it must also be
strictly construed.
In the instant case, the expenses for professional fees
consist of expenses for legal and auditing services.
The
expenses for legal services pertain to the 1984 and 1985 legal
and retainer fees of the law firm Bengzon Zarraga Narciso
Cudala Pecson Azcuna & Bengson, and for reimbursement of
the expenses of said firm in connection with ICC’s tax
problems for the year 1984. As testified by the Treasurer of
ICC, the firm has been its counsel since the 1960’s. From the
nature of the claimed deductions and the span of time during
which the firm was retained, ICC can be expected to have
reasonably known the retainer fees charged by the firm as well
27
as the compensation for its legal services.
The failure to
determine the exact amount of the expense during the taxable
year when they could have been claimed as deductions cannot
thus be attributed solely to the delayed billing of these liabilities
by the firm. For one, ICC, in the exercise of due diligence
could have inquired into the amount of their obligation to the
firm, especially so that it is using the accrual method of
accounting. For another, it could have reasonably determined
the amount of legal and retainer fees owing to its familiarity
with the rates charged by their long time legal consultant.
As previously stated, the accrual method presents largely
a question of fact and that the taxpayer bears the burden of
establishing the accrual of an expense or income. However,
ICC failed to discharge this burden. As to when the firm’s
performance of its services in connection with the 1984 tax
problems were completed, or whether ICC exercised reasonable
diligence to inquire about the amount of its liability, or whether
it does or does not possess the information necessary to
compute the amount of said liability with reasonable accuracy,
are questions of fact which ICC never established. It simply
relied on the defense of delayed billing by the firm and the
company, which under the circumstances, is not sufficient to
exempt it from being charged with knowledge of the reasonable
amount of the expenses for legal and auditing services.
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In the same vein, the professional fees of SGV & Co. for
auditing the financial statements of ICC for the year 1985
cannot be validly claimed as expense deductions in 1986. This
is so because ICC failed to present evidence showing that even
with only “reasonable accuracy,” as the standard to ascertain its
liability to SGV & Co. in the year 1985, it cannot determine the
professional fees which said company would charge for its
services.
ICC thus failed to discharge the burden of proving that
the claimed expense deductions for the professional services
were allowable deductions for the taxable year 1986. Hence,
per Revenue Audit Memorandum Order No. 1-2000, they
cannot be validly deducted from its gross income for the said
year and were therefore properly disallowed by the BIR.
29