BIR Ruling

February 21, 1997 MEMORANDUM FOR: The Commissioner This refers to the protested tax case of NEWSWEEK, INC. with principal place of business at 2/F CTC Building, Roxas Blvd., Pasay City, involving the respective amounts of P224,439.51 and P399,658.32 as alleged deficiency income tax and deficiency expanded withholding tax for the year 1992, both covered by Assessment Notice No. 000376-92-210 dated January 4, 1996, detailed as follows: cdpr Deficiency Income Tax Disallowed Interest P309,171.44 Tax Due P108,210.00 Add: Surcharge 27,052.50 Interest 73,177.01 Compromise 16,000.00 Total P224,439.51 ========= Deficiency EWT Tax Due P191,829.16 Add: Surcharge 47,957.29 Interest 143,871.87 Compromise 16,000.00 Total P399,658.32 ========= STATEMENT OF FACTS It is represented that NEWSWEEK, INC., a local branch of NEWSWEEK, U.S.A., derived income from the sale of NEWSWEEK Magazines at newsstand, through subscriptions and from advertisements; that for taxable year 1992, NEWSWEEK, INC. underwent a tax probe, focused on its income and business tax liabilities pursuant to Letter of Authority No. 30166 dated June 20, 1994 (see p. 134); that said investigation resulted in deficiency tax assessments arising from unpaid expanded withholding tax and the disallowance of the interest portion in the General Expense account (see p. 141); that taxpayer, thru counsel, admitted its tax liability as regards the unpaid EWT and proceeded to settle this assessment in the amount of P399,658.32 per ATAP No. 2496075 dated January 25, 1996 and remitted on February 5, 1996, duly validated by the bank (see p. 160) but protested the deficiency income tax assessment which was based on the disallowance of the interest portion amounting to P309,171.44 (see p. 149); that taxpayer, thru counsel, maintained that the interest portion of NEWSWEEK's deficiency EWT assessments for taxable years 1986-1987 should be allowed as a deduction on the ground that all the requisites for interest deduction as provided under Section 29 (b) of the Tax Code had been complied with, citing in the process, the cases of CIR vs. Palanca, Jr. 18 SCRA 496 and CIR vs. Prieto, G.R. No. L-13912, September 30, 1960 which the taxpayer claimed to be the applicable jurisprudence, pertinent to the issue at hand. prcd DISCUSSION Re: Deficiency EWT Since the deficiency EWT assessment has already been extinguished by payment as stated above, let us now concentrate our discussion on the protested deficiency income tax assessment. Re: Deficiency Income Tax It can be gleaned from the records that this particular assessment arose when the interest portion paid on the EWT assessment for taxable years 1986-1987 and included in the General Expense as part thereof was disallowed as a deduction from income, our examiner deemed the interest paid on deficient taxes as a non-deductible expense since said interest was incurred not on an indebtedness but on deficient payment of taxes. To shed light on the matter further, it might be well to note the requisites provided under Section 29 (b) of the Tax Code before the claimed deduction concerned may be allowed to be deducted from gross income, viz: 1) There must be an indebtedness; 2) The indebtedness must be related to the taxpayer's trade or business; 3) The interest thereon must have been paid or accrued during the taxable year; 4) Interest should be legally due on the indebtedness; and before this Office can resolve if, indeed, NEWSWEEK properly complied with the foregoing requisites; perforce, we must determine with certainty if a tax can be considered an indebtedness in legal parlance, under certain circumstances. The lone issue to be resolved therefore, is whether or not the phrase "interest on indebtedness" encompasses interest on deficient taxes. The examiner concerned as can be inferred from her memo-report of investigation postulates a narrow coverage and admits no other interpretation. On the other hand, NEWSWEEK, INC., thru counsel, is of the contrary opinion, that is, interest on deficient taxes can be equated with interest on indebtedness. cdll An indebtedness or a debt or an ordinary obligation which is based upon a juridical tie, created by law, contracts, quasi-contracts, delicts or quasi-delicts, between parties for their private interest or resulting from their own acts or omissions (Art. 1156, Civil Code), as a rule, cannot be considered as a tax. But for certain purposes, taxes may be considered debts, in the generic sense, such as in the matter of deductible items from gross income. Thus, although taxes are not considered debts, interest paid for tax deficiency is deductible. It is well-settled that taxes constitute indebtedness for purposes of deduction from gross income of the amount of interest paid on indebtedness. In so holding, the Supreme Court in Palanca vs. Commissioner (18 SCRA 496) said: "In Commissioner of Internal Revenue vs. Prieto, L-13912, 30 September 1960, it was held that, while the distinction between taxes and debt was recognized in this jurisdiction, the variance in their legal concept does not extend to the interest paid on them , at least insofar as Section 30 (1)(b) of the Tax Code is concerned. The rule in the Prieto case, that the interest on the donor's tax is deductible, is applicable to interest paid on the inheritance and estate taxes. The rationale of this Court's previous determination, that interests on taxes should be considered as interests on indebtedness within the meaning of Section 30 (now 29) (b)(1) of the Tax Code, applies to said taxes, . . . Although taxes already due are not the same as debts, they are, however, obligations that may be considered as such ." (emphasis supplied) In Sambrano vs. Court of Tax Appeals, G.R. No. L-8652, March 30, 1957, the Supreme Court was more eloquent "the rule is settled that although taxes already due have not, strictly speaking, the same concept as debts, they are, however obligations that may be considered as such." Moreover, pertinent portion of the Palanca case (supra) is enlightening which reads: "We do not see any element in this case which can justify a departure from or abandonment of the doctrine in the Prieto as above. In both this and the said case, the taxpayer sought the allowance as deductible items from the gross income of the amounts paid by them as interests on delinquent tax liabilities. Of course, what was involved in the cited case was the donor's tax while the present suit pertains to interest paid on the estate and inheritance tax. This difference, however, submits no appreciable consequence to the rationale of this Court's previous determination that interests on taxes should be considered as interests on indebtedness within the meaning of Section 30 (b)(1) of the Tax Code. The interpretation we have placed upon the said section was predicated on the congressional intent, not on the nature of the tax for which the interest was paid ." (emphasis supplied) Thus, after careful consideration of the foregoing and close perusal of NEWSWEEK's compliance with the requisites for deductibility of interest on indebtedness from gross income as provided under Section 29 (b) of the Tax Code, and as the claimed deduction was properly treated, accounting-wise, this Office is convinced of the impropriety of the assessment and hereby accedes to the request of the taxpayer. llcd CONCLUSION/RECOMMENDATION In view of all the foregoing, it is respectfully recommended that the deficiency income tax assessment in the amount of P224,439.51 be withdrawn and cancelled and this case considered closed and terminated. Respectfully submitted: (SGD.) RODULFO L. SALAZAR Chief, Appellate Division I CONCUR: (SGD.) ALICIA L. TOMACRUZ Head Revenue Exec. Assistant Legal Service Recommendation-APPROVED (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue