BIR Ruling [UN-251-95]

July 7, 1995 BIR RULING [UN-251-95] SGV & Co. 6760 Ayala Avenue Makati, Metro Manila Attention: Atty . J . A . Osana Tax Division Gentlemen : This refers to your letter dated November 1992 protesting the internal revenue tax case of your client, Philippine Overseas Drilling and Oil Development Corporation (Philodrill), Quad Alpha Centrum, Pioneer Street, Mandaluyong, Metro Manila, involving the amounts of P517,876.56 and P2,297,886.40 representing expanded withholding tax and documentary stamp tax for fiscal year ended June 30, 1988; P7,660,271.01, P417,671.99 and P1,414,152.06 representing income tax, withholding tax and documentary stamp tax for fiscal year ended June 30, 1989 on the ground that the same has no legal and factual bases. Records of this case disclosed that Philodrill is a domestic corporation engaged in the exploration of all kinds of petroleum and petroleum products; that investigation disclosed that almost all revenues realized for the period under audit were either non-taxable income or income subjected to final income tax; that gain on sale of marketable securities which is the primary source of its income and interest on bank deposits were subjected to final tax; and that income tax payments were made by the Department of Energy pertaining to crude oil extracted from Cadlao and Tara Oilfields. Re: Income Tax (1989) P7,660,271.01 The assessment arose from the disallowance of the interest expense on loans incurred to finance allegedly its petroleum operation which is not deductible under Section 29(b) (2) (iii) of the Tax Code. Thus, an adjustments thereon were made disallowing the amount of P35,043,259.00 for 1989 resulting in an income tax liability of P7,660,271.01 for the year 1989 under Assessment Notice No. FAS-1-89-92-004133 dated October 15, 1992. In a letter dated November 19, 1992, you alleged that the examiners presumed that since Philodrill is engaged in petroleum exploration activities, all of its indebtedness were incurred to finance said activities; that an examination of its financial statements attached to its 1989 income tax return shows that a substantial portion of its income, such as gain on sale of marketable securities, interest, dividend and other tax paid or exempt income, were derived from its activity as a holding company; that Philodrill, incurs indebtedness to fund the payment of various obligations arising from its investment activities, such as acquisition of shares of stock and subscription payments to companies in which it holds equity; that only a portion of Philodrill's interest expenses in the year 1989 at most P12,682,457.74 corresponding to indebtedness incurred to finance its petroleum explorations as shown by Philodrill's schedule of loans payable for the period July 1988 ending June 30, 1989; that even with the disallowance of the interest expense of P12,682,457.74 Philodrill is still in a loss position for the year 1989 as shown in the following computation: Income per return (P24,135,729.00) Add: disallowed 12,682,457.74 interest expenses Adjusted Net Income (P11,453,271.26) Such being the case, the disallowance of the interest expense of Philodrill in the amount of P35,043,259.00 for the year 1989 resulting in an income tax liability of P7,660,271.01 has no legal and factual bases . Re: Expanded Withholding Tax (1988) P517,876.56 The Examiners reported that Philodrill failed to withhold the expanded withholding tax on certain income payments made by it under Revenue Regulations No. 6-85, as amended; that for the year 1988 the expanded withholding tax liability of Philodrill per return is P270,809.20. However, upon investigation, its expanded withholding tax liability is P499,879.86 resulting in a deficiency expanded withholding tax of P517,876.56 for the year 1988. In a letter dated November 19, 1992, counsel for Philodrill alleged that income payments made by Philodrill to certain payees were not subjected to the expanded withholding tax because the expanded withholding tax does not apply to income payments to persons not enumerated in Revenue Regulations No. 6-85 as amended otherwise known as the Expanded Withholding Tax Regulations. Pursuant to Revenue Regulations No. 6-85, as amended, otherwise known as the Expanded Withholding Tax Regulations, only income payments to persons enumerated thereon are subject to withholding tax. Accordingly, and since the following persons/payees: (1) Stockbroker (commissions); (2) Fidelity Stock and Transfer, Inc. (stock and transfer agent); (3) Labtest Phils. Inc., McPhar Geoservices (Phils. Inc.), Ostrea Mineral Lab. Inc. (conduct chemical analysis of metallurgical samples); (4) Trinay Surveys (conduct hydrographic surveys on sea beds); (5) Dalaya Surveying Co. (surveying); (6) Messrs. Crisostomo, Bobby & VCV Photography (photographic services); (7) IFS Holding Phils. Inc. (stockbrokers) are not among those enumerated in said regulations, income payments made by Philodrill to them are not subject to the expanded withholding tax. Such being the case, the assessment made by this Office against Philodrill involving the amount of P517,876.56 representing expanded withholding tax for the year 1988 has no legal and factual bases . Re: Expanded Withholding Tax (1989) P417,671.99 The Examiner alleged that Philodrill did not withhold the expanded withholding tax on income payment made to certain payees in 1989 which resulted in an expanded withholding tax liability of P417,671.99 under Assessment Notice no. FAS-1-89-92-004134 dated October 15, 1992. Pursuant to Revenue Regulations No. 6-85 as amended, otherwise known as the Expanded Withholding Tax Regulations, only income payments to persons enumerated therein are subject to withholding tax. Such being the case and since payments to the following persons/payees: (1) Stockholders (commissions); (2) Shoreline Mineral Resources; (3) Ostrea Mineral Laboratories; (4) Dalaya Surveying Co.; (5) Crisostomo Bobby and VCV Photography; and (6) IFS Holding Phils. Inc. are not among the enumerated in said regulations, income payments made by Philodrill to them are not subject to the expanded withholding tax. Such being the case, the assessment issued by this Office against Philodrill involving the amount of P417,671.99 representing expanded withholding tax for the year 1989 has no legal and factual bases . Re: Documentary Stamp Tax (1988) P2,297,886.40 (1989) P1,414,152.06 The Examiner reported that Philodrill failed to pay the documentary stamp tax on its original issue of certificate of stocks in 1989. Moreover, it also failed to pay documentary stamp tax on various promissory notes it issued in 1988. Thus, an assessment notice was issued to Philodrill involving the amount of P2,297,886.40 and P1,414,152.06 representing documentary stamp tax for the year 1988 and 1989 respectively under Assessment Notice Nos. FAS-5-88-92-00-4132 and FAS-5-89-92-00-4135 both dated October 15, 1992. Counsel for Philodrill alleged that Philodrill has already paid the aforementioned documentary stamp tax liabilities of Philodrill for 1988 and 1989. However, it has not presented proof of such payment. Such being the case, Philodrill is liable to the payment of the documentary stamp tax for 1988 and 1989 in the respective amounts of P2,297,886.40 and P1,414,512.06. In view thereof, you are requested to urge your client, Philodrill to pay the amounts of P2,297,886.40 and P1,414,152.06 representing documentary stamp tax for the year 1988 and 1989 within fifteen (15) days from receipt hereof; otherwise, this Office will enforce collection thereof through the summary remedies prescribed by law. cdt This constitutes the final decision of this Office on the matter. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue