BIR Ruling

July 16, 1996 Fernandez, Santos & Lopez Certified Public Accountants 7th Flr., Rico Gen Bldg. 112 Aguirre St., Legaspi Vill. 1229 City of Makati Gentlemen : This refers to your protest filed on behalf of your client, MAERSK-TABACALERA SHIPPING AGENCY (FILIPINAS) INC ., against the assessments involving the amounts of P1,426,684.64 and P7,663.87 representing deficiency income tax and fixed taxes respectively, both for the year 1987, covered by Assessment Notice Nos. FAS 1-87-91-000994 and FAS 4-87-91-000995. Re: Deficiency Income Tax This assessment arose from the disallowance of the following claimed expenses: 1. Prior year adjustment P6,600.00 2. Miscellaneous expenses (personal) 418,011.15 3. Unsupported expenses 38,475.00 4. Unallowable donations & gifts 23,487.66 5. Allocated EDP cost by principal 1,568,680.50 6. Undeclared income 38,765.64 1. Prior Year Adjustment Our findings show that this expense representing 13th month pay amounting to P6,600.00 was actually incurred in 1985. In the absence of proof to the contrary, the allegation that this amount was given only in 1987 is without any merit. 2. Miscellaneous Expenses P418,011.15 Likewise, in the absence of proof to the contrary, we stand firm in our findings that these expenses are personal expenses incurred for the purchase of personal effects and food stuffs for its expats and top management officials as well as hotel bills of expats wife, hence, not properly deductible for income tax purposes. 3. Unsupported Expenses P38,475 These miscellaneous expenses covered by vouchers Nos. 67613600 and 76388800 were allegedly gratuity payments of the two employees of your client in recognition of their year/length of service. Again, these vouchers are not sufficient to prove that these claimed miscellaneous expenses were really incurred. 4. Unallowable Donations and Gifts P23,487.66 These gifts ranging from wristwatch, and flowers to suiting materials were given to recipients not allowed by the Tax Code. Hence, the disallowance of the same is therefore reiterated. 5. Allocated EDP Cost of the Principal P1,568,680.50 This expense was originally disallowed by the investigating examiner for failure to properly substantiate the same. However, after a careful review and evaluation of the following documentary evidences submitted, to wit: 1. Debit memos of Maersk Tabacalera; 2. Agency agreement between Maersk-Tabacalera and A.P. Moller; 3. Certification issued by KPMG G. Jenpersen, Auditors of A.P. Moller of Copenhagen, Denmark showing that the allocated EDP cost to your client amounts to U.S.$76,521.00. we are inclined to agree with your position that these EDP expenses were really incurred and hence properly deductible following the doctrine enunciated by the Supreme Court in the case of CIR vs. CTA and Smith Kline and French Overseas Co. (Phil. Branch) 127 SCRA 9, which ruled that "a certification issued by the auditors of a parent company with respect to the share of its branch in the overhead expense is ample evidence to show that the expense was really incurred." 6. Undeclared Income P38,765.64 In the absence of proof that the discrepancy was due to an error in the conversion of commission income from dollars to pesos as alleged, we stand pat in our findings that the difference represents undeclared income hence properly taxable. Re: Fixed Tax P7,663.87 These represents fixed taxes of your client's branches in Cebu, Legaspi and Iloilo which you are however amenable to pay. Based on the foregoing, you are requested to advise your client to pay the revised income tax assessment of P367,649.64 and the fixed tax assessment of P7,663.87 to the Revenue District Officer, Revenue District Office No. 43 Paco, Pandacan, Sta. Ana, Manila within thirty (30) days from receipt hereof, otherwise, the collection thereof will be enforced by means of the summary remedies prescribed by law. 1987 Taxable income per ITR P6,723,598.00 Add: Unallowable deductions: 1. Prior year adjustment P6,600.00 2. Miscellaneous expense 418,011.15 3. Unsupported expenses 38,475.00 4. Unallowable donations & gifts 23,487.66 5. Undeclared income 38,765.64 Taxable Income per Investigation P7,248,937.45 Tax Due Thereon P2,537,128.10 Less: Tax already paid 2,353,259.00 Deficiency Income Tax P183,869.10 Surcharge 45,967.27 Interest (from 4-16-88 to 3-15-91) 121,813.27 Compromise penalty 16,000.00 TOTAL P367,649.64 ========= This constitutes our final decision on the matter. cdta Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue