BIR Ruling

November 18, 1997 MEMORANDUM FOR: The Commissioner This refers to the protested internal revenue tax case of Mr. DIOCELDO S. SY of 1157 Masangkay Street, Binondo, Manila, involving the amounts of P34,890.36 and P78,722.61 (or a total of P113,612.97) as deficiency expanded withholding and income taxes, respectively, for the year 1993, covered by Assessment Notice No. 000289-93, dated January 22, 1997. cdta The records of the case show that Mr. Dioceldo S. Sy is a self-employed individual, who owns and operates a general merchandising enterprise, under the name of D.S.S. Trading. For the year 1993, Mr. Sy reflected in his Income Tax Return, a net income of P388,407.47 from his business and an income tax due of P64,722.00 (p. 132, Docket). On August 8, 1994, Letter of Authority No. 15382 was issued by the Revenue District Officer, Revenue District Office No. 30, Binondo, Manila, directing Revenue Officers Bernardo C. Andaya and Erlinda G. Viardo to examine the books of accounts and other accounting records of Mr. Dioceldo S. Sy, for the period January to December 1993 (p. 111). On September 15, 1994, Revenue Officer Andaya submitted his report finding taxpayer liable for deficiency income tax of P52,825.92. The tax liability resulted due to the disallowance of the amount of P109,107.90, representing social security contribution which is not deductible pursuant to Section 29, in relation to Section 21 (f) of the Tax Code (p. 127). The computation of the aforesaid deficiency is as follows: Net Income per Return P388,407.47 Add: Total Discrepancy 109,107.90 Net Income per Investigation P497,515.37 Less: Exemptions 28,000.00 Taxable Net Income P469,515.37 Tax Due P97,455.00 Less: Tax Due per Return 64,722.00 Deficiency Tax P32,733.00 Add: Surcharge 25% 8,183.25 Interest from 4-15-94 to 9-15-94 & Penalty 11,909.67 Deficiency Income Tax P52,825.92 Apparently, the foregoing finding was communicated to the taxpayer, who dutifully paid the assessed deficiency tax of P52,825.92 on September 13, 1994, as shown by Authority to Accept Payment No. 1660256 (pp. 125, 186). LLjur The entire docket of subject-taxpayer's case was then forwarded and subjected to routine review by the Assessment Division, Revenue Region No. 6, Manila, which on October 30, 1996, sent a memorandum addressed to the Revenue District Officer, RDO No. 30, Binondo, Manila, pertinent portion of which is quoted here, as follows (p. 142): "1. Submit the following: a) . . . b) . . . c) . . . d) . . . e) . . . e) (f) BIR Form W-3 with amended Alpha List of employees for 1991 and TCC or BIR Form W-3 with Alpha List of Employees for 1992 in order to verify the correctness of Tax Credit claimed on BIR Form 1743-W filed for the months of January to April. 2. Disallow and collect deficiency income tax on Brokerage and Freight and Arrastre Charges (on importation) due to non-withholding of EWT. 3. Assess and collect deficiency EWT on Brokerage and Freight and Arrastre Charges mentioned in No. 2 above pursuant to RMO 38-83." Soon thereafter, Assessment Notice No. 000289-93, dated January 22, 1997, was issued against the taxpayer, the details of which are shown below: Deficiency Expanded Withholding Tax Brokerage (P60,756.00 x 5%) P3,037.80 Arrastre (P10,925.29 x 1%) 109.26 Freight (P48,703.79 x 1 %) 487.04 Tax Credits (January to April) 11,811.08 Total P15,445.18 Add: Surcharge 3,861.30 Interest (1-25-97) 11,583.88 Compromise 4,000.00 EXPANDED WITHHOLDING TAX DUE P34,890.36 Deficiency Income Tax Net Income disclosed by the returns as audited P497,515.37 Add: Discrepancies Brokerage no EWT P60,756.58 Freight no EWT 48,703.79 Arrastre no EWT 10,925.29 Total Adjustments 120,385.66 Net Income per investigation P617,901.03 Less: Personal & additional exemption 28,000.00 Amount subject to tax P589,901.03 Income Tax due thereon P133,570.00 Less: Amount already assessed 97,455.00 Balance P36,115.00 Add: 25% Surcharge 9,028.75 20% Interest (up to 1-24-97) 25,078.86 Compromise 8,500.00 INCOME TAX DUE P78,722.61 Taxpayer, in his protest letter dated February 10, 1997, expressed willingness to pay the deficiency expanded withholding taxes on Brokerage, Arrastre and Freight, including its increments, as follows, to wit: LLphil Deficiency Expanded Withholding Tax on Brokerage P3,037.80 Deficiency Expanded Withholding Tax on Arrastre 109.26 Deficiency Expanded Withholding Tax on Freight 487.04 Total P3,634.10 25% Surcharge 908.52 Compromise 300.00 Proposed EWT To Be Paid P4,842.62 ======== Taxpayer, however, contends that the item Tax Credits in the amount of P11,811.08 should be excluded from the computation of the total deficiency expanded withholding taxes inasmuch as it represents advance payment by the withholding agent on the tax refund of each employee as a result of the year-end adjustment in the alphabetical list of withholding tax on compensation income for the year ended December 31, 1992. This amount (P11,811.08) should have been refunded by the BIR but for procedural expediency, the Bureau authorized the withholding agent to credit said advances against future remittances of withholding taxes. This is clearly indicated in BIR Forms No. 1743 for December, 1992 and January, 1993, filed on January 11, 1993 and February 9, 1993 respectively. With regard to the deficiency income tax assessment, taxpayer claims that there is no question as to the deductibility of expenses like brokerage, freight and arrastre from gross income. The inadvertence in not subjecting them to the expanded withholding tax cannot constitute as a justifiable reason for adding them back as part of the gross income particularly when the taxpayer is amenable to paying the required tax and its increments. Taxpayer contends that he should not twice be placed in jeopardy, otherwise, his willingness to pay the tax (EWT) with all its increments will result in a mockery of whatever benevolent intentions he nurtures and renders naught the time honored principles of uniformity, equality and due process in taxation. DISCUSSION I. Deficiency Expanded Withholding Tax Sections 249 and 251 of the Tax Code, as amended, provides: "SEC. 249. Interest (a) In general. There shall be assessed and collected on any unpaid amount of tax, interest at the rate of twenty percent (20%) per annum, or such higher rate as may be prescribed by regulations, from the date prescribed for payment until the amount is fully paid. SEC. 251. Failure of withholding agent to collect and remit tax . Any person required to collect, account for, and remit any tax imposed by this Code or who willfully fails to collect such tax, or account for and remit such tax, or willfully assists in any manner to evade any such tax or the payment thereof, shall, in addition to other penalties provided for under this Chapter, be liable to a penalty equal to the total amount of the tax not collected, or not accounted for and remitted." The aforequoted provisions clearly provides that the withholding agent, shall, in addition to the tax required to be deducted and withheld, pay 20% interest and a penalty equal to the total amount of the tax collected, or not accounted for and remitted. Hence, based on the foregoing, this Office finds the taxpayer's proposal to pay only the amount of P4,842.62, as deficiency expanded withholding tax, inadequate and unacceptable. On the item Tax Credits in the amount of P11,811.08, this Office agrees with the taxpayer that the same should be excluded from the computation of the total deficiency expanded withholding taxes due. Its inclusion in the assessment is erroneous simply on the reason that the same does not constitute as an expense subject to the expanded withholding tax as provided for under the Expanded Withholding Tax Regulation. As correctly pointed out by the taxpayer, this amount actually represents over withheld taxes, i.e. creditable withholding taxes, on the compensation income of his employees which were advanced as a result of the year-end adjustment in the alphabetical list of withholding tax on compensation income for the year ended December 31, 1992. Attached as evidence proving this fact is the alphabetical list of employees from whom taxes were withheld for the year 1992, duly stamped "received" by the BIR on January 25, 1993, wherein the total of overwithheld taxes under the employees column is P16,477.38, while the total for the column of amount withheld and paid for December 1992 is P4,666.30 or a difference of P11,811.08, the amount advanced by the taxpayer, as withholding agent. Our computation of the taxpayer's deficiency expanded withholding tax is as follows: Brokerage P60,756.00 x 5% = P3,037.80 Arrastre P10,925.29 x 1% = 109.26 Freight P48,703.79 x 1% = 487.04 EWT Due P3,634.10 Add: 25% Surcharge P 908.53 20% Interest from 4-16-94 to 8-15-97 3,028.42 Penalty Sec. 251 3,634.10 7,571.05 Deficiency Expanded Withholding Tax P11,205.15 II. Deficiency Income Tax Section 29 (j) of the Tax Code, as amended, provides: "(j) Additional requirement for deductibility of certain payments . Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this section, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in accordance with this section, Sections 51 to 74 of this Code." Corollary to the above provision is Section 9 of R.R. 6-85, as amended, which states: "Sec. 9. Requirement for deductibility . Any income payment, which is otherwise deductible under Sections 30 and 57 of the Tax Code, as amended, shall be allowed as a deduction from the payor's gross income only if it is shown that the tax required to be withheld has been paid to the Bureau of Internal Revenue in accordance with Sections 53, 54, 91 and 93 also of the Tax Code." The law, as well as its implementing regulation, disallows as deductible expenses, income payments which were not subjected to the expanded withholding tax. Therefore, the disallowance of the expenses on brokerage, arrastre and freight from the subject taxpayer's gross income was only proper and correct. We, however, disagree with the computation of the deficiency income tax because it failed to consider and credit the earlier payment made by the taxpayer in the amount of P52,825.92, which was previously assessed as his deficiency income tax. Based on our computation, taxpayer is liable only to the following: Net Income as audited P497,515.37 Add: Disallowed expenses for non-withholding Brokerage P60,756.58 Freight 48,703.79 Arrastre 10,925.29 120,385.66 Net Income P617,901.03 Less: Personal & additional exemption 28,000.00 Taxable Income P589,901.03 Income Tax Due 133,570.00 Less: Taxes Paid Per return P64,722.00 After initial audit 52,825.92 117,547.92 Balance P16,022.38 Add: 25% Surcharge P4,005.59 20% Interest from 4-16-94 to 8-15-95 P13,351.98 17,357.57 Deficiency Income Tax P33,379.95 RECOMMENDATION : In view of the foregoing, it is recommended that the assessments for deficiency expanded withholding tax and deficiency income tax, in the amounts of P34,890.36 and P78,722.61, issued against DIOCELDO S. SY, be modified or reduced to P11,205.15 and P33,379.95, respectively, and after payment thereof, this case be considered closed and terminated. cdti Respectfully submitted: (SGD.) RODULFO L. SALAZAR Chief, Appellate Division I CONCUR: (SGD.) SIXTO S. ESQUIVIAS IV Assistant Commissioner Legal Service Recommendation-APPROVED: (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue