BIR Ruling [DA-320-06]

May 17, 2006 BIR RULING [DA-320-06] Rodrigo Berenguer & Guno 4/F, Philippine First Building 6764 Ayala Avenue Makati City Attention: Atty. Mariano T. Villafranca II Gentlemen : This refers to your letter dated April 24, 2006 on behalf of your client, LG Electronics Philippines Inc . ("LG" or the "Company") requesting, in effect, for a ruling on whether or not your client's 1994 deficiency income tax liability may still be a subject of compromise settlement under Revenue Regulation (RR) No. 30-2002 and Revenue Memorandum Order (RMO) No. 22-2001. As represented, LG appealed to the Supreme Court the decision of the Court of Tax Appeals in favor of BIR on the deficiency income tax liability assessment for taxable year 1994 where it is pending to date. Upon review of the Company's Audited Financial Statement for the year ending December 31, 2005, the Company still enjoys positive networth although not as significant as before. However, for several years until 2005, the Company has been suffering from surplus or earnings deficit that grew by the year. The surplus or earnings deficit resulted in capital impairment by more than 50% as follows: Fiscal Year Capital Earnings Percentage Deficit of Capital Impairment 2000 739,036,000 419,076,082 57.00% 2001 739,036,000 432,606,561 59.00% 2002 739,036,000 432,935,559 59.00% 2003 739,036,000 439,042,311 59.00% 2004 739,036,000 501,109,298 68.00% 2005 739,036,000 564,344,800 76.00% In its letter to the Technical Working Group dated April 10, 2006, LG proposed to settle the 1994 assessment based on financial incapacity due to earnings deficit resulting in capital impairment by at least 50%. cTACIa In reply, please be informed that Section 204 of the 1997 Tax Code states: "SEC. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. The Commissioner may (A) Compromise the payment of any internal revenue tax, when: IAETDc (1) A reasonable doubt as to the validity of the claim against the taxpayer exists; or (2) The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax. xxx xxx xxx" Pursuant to Section 3(2) of RR 30-2002, the offer to compromise based on financial incapacity may be accepted upon showing that: "(a) . . . (b) The taxpayer, as reflected in its latest Balance Sheet supposed to be filed with the Bureau of Internal Revenue, is suffering from surplus or earnings deficit resulting to impairment in the original capital by at least 50%, provided that amounts payable or due to stockholders other than business-related transactions which are properly includible in the regular "accounts payable" are by fiction of law considered as part of capital and not liability, and provided further that the taxpayer has no sufficient liquid asset to satisfy the tax liability; or (c) The taxpayer is suffering from a networth deficit (total liabilities exceed total assets) computed by deducting total liabilities (net of deferred credits and amounts payable to stockholders/owners reflected as liabilities, except business related transactions) from total assets (net of prepaid expenses, deferred charges, pre-operating expenses, as well as appraisal increases in fixed assets), taken from the latest audited financial statements, provided that in the case of an individual taxpayer, he has no other leviable properties under the law other than his family home; or xxx xxx xxx" In relation to the above provision, Section 3 of RMO 22-2001 provides "SEC. 3. Basis for Acceptance of Compromise Officer. . . . 3.2. Financial Incapacity. The offer to compromise based on financial incapacity may be accepted upon showing that: 3.2.1 . . . 3.2.2 The taxpayer is suffering from surplus or earnings deficit resulting to impairment of the original capital by at least fifty percent (50%) as reflected in the latest audited Financial Statements (FS)/Account Information Form (AIF) filed not later than July 31, 2001; or 3.2.3 The taxpayer is suffering from a networth deficit, computed by deducting total liabilities (net of deferred credits) from total assets (net of prepaid expenses, deferred charges, pre-operating expenses, as well as appraisal increases in fixed assets), as reflected in the latest audited FS/AIF filed not later than July 31, 2001; or 3.2.4 . . ." Moreover, under Section 2(3) of RR No. 30-2002 civil tax cases being disputed before the courts may be compromised. Section 2.1.3 of RMO No. 22-2001 provides that civil tax cases being disputed before the courts, e.g. MTC, RTC, CTA, CA and SC may be the subject of compromise settlement upon compliance with the basis and conditions set forth in Section 204 of the Tax Code of 1997. In view of the foregoing, this Office is of the opinion and so holds that your client's 1994 deficiency income tax may still be subject of compromise settlement pursuant to RR 30-2002, specifically Sections 2(3) and 3(2)(b) and (c), respectively on the grounds of being a "civil tax case being disputed before the court" and "financial incapacity." 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 as null and void. EHTCAa Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service