BIR Ruling [DA-128-04]

March 24, 2004 BIR RULING [DA-128-04] Secs. 248; 249; 017-97; 036-02 Tax Counseling Integrated Unit 2204-C, PSE Tower Center I Exchange Road, Ortigas Center Pasig City Attention: Reynoso B. Floreza Tax Counsel Gentlemen : This has reference to your letter dated January 12, 2004 requesting, on behalf of your client Bechtel Overseas Corporation (BOC for brevity), a ruling on the legality of the demand for the collection of increments i . e . surcharge, interest and compromise penalty on the fringe benefit tax (FBT) for the four (4) quarters of 2000. It is represented that in the early part of November 1999, BOC filed a claim for cash refund of excess VAT payments in the amount of P52.5 Million. The request was changed to the issuance of tax credit certificate (TCC) upon the advice of the Chief, Revenue Accounting Division that there was no sufficient cash for the said refund. On January 5, 2000, the BIR approved the request and simultaneously issued the TCC bearing the amount claimed. Consequently, BOC tendered the TCC as payment for its fringe benefit tax for the first quarter of taxable year 2000 in the amount of P541,000.00. The Head Revenue Executive Assistant, Collection Service, refused to accept the TCC as payment alleging that said tax that BOC is required. to pay is a withholding tax in which case a TCC is not acceptable. BOC, through counsel then went to the Chief, Revenue Accounting Division and requested that the TCC be converted to cash so that BOC could utilize the same as payment of its FBT liability. BOC was however informed that the BIR has no available cash and that it would take months or even years before the Department of Budget and Management (DBM) could provide for the necessary allocation to cover the cash refund. Knowing fully well that it could not have its TCC converted to cash expeditiously, BOC filed a protest with the Appellate Division; this Bureau, contending that the controversial tax is not a withholding tax but a fringe benefit tax that is a direct liability of the employer i . e . BOC. Therefore, the TCC should be accepted as payment for the same. Notwithstanding the pendency of the protest, BOC also tendered the TCC as payment of the FBT liabilities for the second, third and fourth quarters but these payments were all rejected for the same reason as in the first quarter tender of payment. Exasperated with the pressure exercised by the Collection Unit, Large Taxpayers Service for the collection of the FBT, BOC paid in cash on April 12, 2002 the demanded FBT for the 4 quarters of 2000, without increments. However, on October 9, 2002 the Bureau issued BIR Ruling No. 036-02 at the instance of BOC. The said ruling states in part that: "From the foregoing discussion, it is quite clear that FBT is a withholding tax on the employee although payment thereof is made directly by the employer. It is a direct internal revenue tax liability of the employee, and not the employer. Such being the case, Bechtel cannot use its TCC to pay the FBT because of the prohibition under Section 204(C) of the 1997 Tax Code." Based on this pronouncement of the Bureau that FBT is a withholding tax, the Large Taxpayers Service demanded BOC to pay the increments (surcharge, interest and compromise). It is now your position that BOC is not liable for the alleged increments of P1,121,249.28 because it has voluntarily paid the FBT due before the issuance of the adverse ruling. In addition, the liability arises only if BOC has been delinquent in the payment thereof after the issuance of the said ruling. In reply thereto, please be informed that under Sections 248 (a)(3) and 249, both of the Tax Code, as amended, the imposition of the surcharge and interest on delinquency is mandatory. Strong reasons of policy support a strict observance of the rule regarding the payment of tax. The laws imposing penalties for delinquencies are clearly intended to hasten tax payments or punish evasions or neglect of duty in respect thereof. If delays in tax payments are to be condoned for light reasons, the law imposing penalties for delinquencies would be rendered nugatory and the maintenance of the government and its multifarious activities would be as precarious as taxpayers are willing or unwilling to pay their obligations to the state on time. ( Jamora vs. Meer , 74 Phil. 22) (BIR Ruling No. 017-97 dated 02-05-97) Yet, the aforesaid provisions of the Tax Code upon which the Collection Section of the Large Taxpayers Service based the imposition of increments speaks of a situation where the tax that is supposed to be paid is already delinquent. This boils down to the issue of whether or not BOC, under the antecedent facts presented, became delinquent in the payment of its FBT.. For a conclusive start, this Office is of the opinion that BOC has not been delinquent in the payment of the FBT. As such, it should not be required to pay the increments. In the case of Cagayan Electric Power & Light Co., Inc. vs. Commissioner of Internal Revenue (138 SCRA 629), the Supreme Court said that "where imposition of a tax statute was controversial, taxpayer may not be held-liable for the surcharge and interest." Records show that BOC filed a protest after the Large Taxpayers Service rejected the TCC as payment for the FBT. The protest involved more of a legal issue rather than a factual one. Considerably, the determination as to the nature of the FBT has been elevated for resolution. As such, in the absence of any ruling that clarifies the issue of whether or not FBT is a withholding tax, BOC could not have been considered delinquent in the payment of FBT that would justify the imposition of interest, surcharge and compromise penalties. BOC may, therefore, be considered delinquent only from the issuance of the ruling by the Commissioner of Internal Revenue in which case the appropriate assessment and demand could be issued on the basis of said ruling. Thus, if BOC still fails to pay the tax despite the issuance of such ruling, then it would be considered delinquent and any demand now to be made upon BOC for the payment of the tax should include the statutory penalties incident to delinquency. On the other hand, it may be said that the act of BOC in tendering the TCC as payment for the FBT may have been prompted based on the opinion of the Appellate and Law Divisions of the Legal Service that FBT is not a withholding tax but a direct liability of the employer. In which case, TCC may be used as payment for the same. Thus, the ruling that clarifies the issue, at the instance of BOC, could not be given retroactive application but shall only be applied from the day that the Bureau opined finally that FBT is a withholding tax that is on October 9, 2002. Since the FBT of the four quarters of taxable year 2000 were already paid on April 12, 2002 and the adverse ruling was issued only on October 9, 2002, it is the opinion of this Office that BOC had not been delinquent in paying the FBT. Therefore, no interest, surcharge and compromise penalties can be validly demanded from BOC. Finally, the act of BOC in accepting the TCC in lieu of cash refund can be a laudable contribution for its part as a concerned, taxpayer in helping augment the country's financial burden. Apropos , the imposition of increments even without a clear basis as what happened in this case cannot be used as an opportunity by the government to boost collection for it would slowly result to killing the hen that lays the golden egg. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different then this ruling shall be considered null and void. TIHCcA Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group