BIR Ruling

February 20, 1997 MEMORANDUM FOR: The Commissioner This refers to the protest filed by B. J. SERVICE INTERNATIONAL, INC. (BJSII), thru counsel, requesting for the cancellation of the Assessment Notices issued against it for the taxable year 1981 due to its availment of the tax amnesty granted under Executive Order (EO) No. 41 as expanded by EO 64. STATEMENT OF FACTS Records show that BJSII is a branch office of an American corporation. It is duly registered with the Securities and Exchange Commission (SEC) as a service contractor in the Philippines. Investigation conducted by Revenue Examiner M. Rempola on the books of accounts of BJSII resulted in the issuance of deficiency tax assessments for the year 1981. Corresponding Final Assessment Notices were issued on January 1, 1987 for the following: KIND OF TAX AMOUNT Deficiency Income P9,057,694.40 Deficiency Expanded Withholding 29,905.07 Deficiency Branch Profit Remittance 290,232.00 Deficiency Contractor's Tax 1,789,298.29 On November 3, 1986, or prior to the issuance of the above-referred Final Assessment, BJSII applied for tax amnesty of its unpaid taxes for taxable year 1981 to 1985 pursuant to EO 41 as amended by EO 64. By reason of its availment of said tax amnesty, BJSII is now seeking immunity against our assessment. Hence, this request for cancellation. DEFICIENCY INCOME : BRANCH PROFIT REMITTANCE ; & CONTRACTOR'S TAXES Executive Order No. 41 only covers unpaid income taxes for the year 1981-1985. With the amendment introduced under EO 64, the scope and coverage of EO 41 was expanded to include not only income taxes under Title III of the Tax Code, but also to the tax on business under Chapter II, Title V, of the same Code. It is clear that with the expansion of the amnesty granted, the branch profit remittance and contractor's taxes are included in its coverage. cdti Section 6 of EO 41, as amended, enumerates the immunities and privileges available to taxpayers who avail of the tax amnesty therein granted. Accordingly, a taxpayer shall be relieved of any income tax liability on any untaxed income and business from January 1, 1981 to December 31, 1985, including increments thereto and penalties on account of the non-payment of the said taxes (par. a ). Considering the application of the amnesty as well as the provisions aforecited, BJSII is no longer liable for income and business taxes particularly for the taxable year 1981 to 1985, pursuant to E.O. 41. The Tax Amnesty Implementation Officer has issued a certification that BJSII filed a tax amnesty return under File No. 32A-F-001129-41-B. DEFICIENCY EXPANDED WITHHOLDING TAX This deficiency represents the disallowed rental expense of BJSII paid to Philippine National Oil Company (PNOC), which in effect is an income of the latter. Paragraph a.) of Section 4 of Revenue Memorandum Circular 51-79, dated June 25, 1979, provides that the withholding of tax shall not apply to income payments to National Government its instrumentalities including provincial, city and municipal governments, as well as government-owned and controlled corporations. PNOC is one of those government-owned or controlled corporation which is exempt from income tax. The enabling law of PNOC as amended provide exemptions from all taxes, duties, fees imposts, and other charges imposed directly or indirectly by the Republic of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities (Sec. 2, P.D. 572). Since the rental income from which the corresponding tax shall be withheld by the BJSII (according to the examiner) belongs to PNOC which is exempt from taxes, the withholding of said taxes is clearly erroneous as the withheld tax is not a tax on BJSII which is only the collecting arm of the BIR but a tax directly on the income of PNOC. BJSII therefore, acted within the bounds of law when it desisted from withholding any tax on rental payments it made in favor of PNOC. CONCLUSION/RECOMMENDATION In view of the foregoing, it is respectfully recommended that the following: ASSESSMENT No. KIND OF TAX AMOUNT FAS-1-81-87-000215 Deficiency Income Tax P9,057,694.40 FAS-1-81-87-000216 Def. Exp. Withholding Tax 29,905.07 FAS-1-81-87-000217 Def. Br. Profit Remittance Tax 290,232.00 FAS-1-81-87-000218 Def. Contractor's Tax 1,789,298.29 be withdrawn and cancelled and this case be considered closed and terminated. Respectfully submitted: (SGD.) RODULFO L. SALAZAR Chief, Appellate Division I CONCUR: (SGD.) ALICIA L. TOMACRUZ Head, Revenue Executive Assistant (Legal Service) Recommendation-APPROVED (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue