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

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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.

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 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.

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 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 carried-

over 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

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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

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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 non-

retroactivity 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 zero-

rate 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

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 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

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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

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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:

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 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

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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

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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.

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