Herbalife International Philippines, Inc. v. Commissioner of Internal Revenue

THIRD DIVISION [C.T.A. CASE NO. 8478. November 3, 2016.] HERBALIFE INTERNATIONAL PHILIPPINES, INC. , petitioner , vs. COMMISSIONER OF INTERNAL REVENUE , respondent . DECISION BAUTISTA , J p : The Case Before the Court is a Petition for Review 1 filed by petitioner on April 26, 2012, pursuant to Section 7 (a) (2) 2 of Republic Act ("RA") No. 1125 , 3 as amended by RA No. 9282 4 and RA No. 9503 , 5 in relation to Rule 4 6 of the Revised Rules of the Court of Tax Appeals ("RRCTA") , 7 which seeks for the Court to render judgment cancelling and withdrawing the Formal Assessment Notice ("FAN") dated August 26, 2011 for being invalid and without legal basis, 8 covering alleged deficiency Income Tax, Value-Added Tax ("VAT"),Expanded Withholding Tax ("EWT"),Withholding Tax on Compensation ("WTC"),Final Withholding Tax ("FWT") of VAT, and Documentary Stamp Tax ("DST") for the calendar year ("CY") 2007, including increments for late payment of WTC and Compromise Penalties. 9 The Parties Petitioner Herbalife International Philippines, Inc. ("Herbalife") a wholly-owned subsidiary of Herbalife International, Inc.,USA, 10 is engaged in the business of marketing and distributing nutrition, weight management, and personal care products, mainly through direct selling 11 via its authorized Distributors. 12 Its business address is at G/F Goodland Bldg.,377 Gil Puyat Extension, Makati City. 13 Respondent is the Commissioner of Internal Revenue ("CIR"),with office address at the Bureau of Internal Revenue ("BIR") National Office, Agham Road, Diliman, Quezon City. The Facts On April 14, 2008, 14 petitioner filed its Annual Income Tax Return 15 (BIR Form No. 1702) for CY ended 2007. On February 27, 2008, petitioner filed its Annual Information Return of Creditable Income Taxes Withheld (Expanded)/Income Payments Exempt from Withholding Tax 16 (BIR Form No. 1604-E). CAIHTE On June 4, 2008, respondent issued a Letter of Authority ("LOA") No. 2001 00069261 17 received by petitioner on June 5, 2008, covering all internal revenue taxes from January 1, 2007. 18 On January 4, 2010, petitioner received a Revalidation Notice dated December 22, 2010, revalidating the LOA to replace the previously-assigned Revenue Officer. 19 On September 28, 2010, petitioner received a Notice of Informal Conference ("NIC") dated September 27, 2010. 20 On December 23, 2010, respondent issued a Preliminary Assessment Notice ("PAN"), 21 which was received 22 by petitioner on December 28, 2010. 23 After asking for an extension, 24 petitioner filed its reply to the PAN on January 31, 2011 25 and June 10, 2011 asking for a reinvestigation of the assessment. 26 On September 1, 2011, petitioner received the FAN 27 dated August 26, 2011, 28 with the following details: I. INCOME TAX ("IT") Taxable Income per ITR [Php]9,377,113.00 Add: Adjustments/disallowance per investigation Disallowed Expenses due to Non-withholding [Php]83,987,344.32 (Schedule 1) Unaccounted Expenses (Schedule 2) 3,769,289.73 Unsupported Expenses (Schedule 3) 10,105,563.00 [Php]97,862,197.05 Adjusted Taxable Income per investigation [Php]107,239,310.05 Basic Income Tax Due [Php]37,533,758.52 Less: Allowable tax credits/payments Prior Years' Minimum Corporate Income Tax [Php]3,281,989.55 Creditable Tax Withheld at Source claimed per return 630,442.00 Total [Php]3,912,431.55 Less: Excess Credits Carried Over to Succeeding Year 630,442.00 [Php]3,281,989.55 Deficiency Income Tax [Php]34,251,768.97 Add: Interest (04.16.08 to 09.30.11) 23,685,332.85 TOTAL AMOUNT DUE [Php]57,937,101.82 =================== II. VALUE ADDED TAX ("VAT") Taxable Sales per VAT returns [Php]316,188,408.80 Add: Undeclared Income from Unaccounted Expense (Schedule 2) 3,769,289.73 Taxable Sales per Investigation [Php]319,957,698.53 Output Tax Due 38,394,923.83 Less: Claimed Input Tax 19,491,171.20 VAT Due [Php]18,903,752.63 Less: Payments per BIR Records (Integrated Tax System) 16,643,909.76 Deficiency Value-Added Tax [Php]2,259,842.87 Add: Interest (01.26.08 to 09.30.11) 1,662,996.70 TOTAL AMOUNT DUE [Php]3,922,839.57 =================== III. EXPANDED WITHHOLDING TAX 29 ("EWT") Basic Deficiency Withholding Tax (Schedule 4) [Php]441,019.08 Add: Interest (01.16.08 to 09.30.11) 326,958.26 TOTAL AMOUNT DUE [Php]767,977.34 =================== IV. WITHHOLDING TAX ON COMPENSATION ("WTC") Basic Deficiency Withholding Tax (Schedule 5) [Php]177,582.49 Add: Interest (01.16.08 to 09.30.11) 131,654.31 TOTAL AMOUNT DUE [Php]309,236.80 =================== V. FINAL WITHHOLDING TAX ("FWT") Basic Deficiency Withholding Tax (Schedule 1a) [Php]18,255,820.35 Add: 50% Surcharge [Php]9,127,910.18 Interest (01.16.08 to 09.30.11) 13,534,315.04 [Php]22,662,225.22 TOTAL AMOUNT DUE [Php]40,918,045.57 =================== VI. FINAL WITHHOLDING OF VAT ("FW-VAT") Basic Deficiency Withholding Tax (Schedule 6) [Php]3,822,424.68 Add: 50% Surcharge [Php]1,911,212.34 Interest (01.11.08 to 09.30.11) 2,844,302.86 [Php]4,755,515.20 TOTAL AMOUNT DUE [Php]8,577,939.88 =================== VII. DOCUMENTARY STAMP TAX ("DST") Basic Deficiency Tax (Schedule 7) [Php]36,814.00 Add: 50% Surcharge [Php]18,407.00 Interest (01.06.08 to 09.30.11) 27,494.52 [Php]45,901.52 TOTAL AMOUNT DUE [Php]82,715.52 =================== On September 29, 2011, respondent received petitioner's Protest Letter to the FAN 30 dated September 28, 2011, refuting the findings of respondent. 31 On March 8, 2012, petitioner filed its Documentary Stamp Tax Declaration/Return (BIR Form No. 2000) covering a lease transaction dated February 8, 2007 with Goodland Company, Inc. as lessor. 32 Due to the inaction of respondent on petitioner's protest, the latter filed the instant Petition for Review with Motion for Suspension of Collection of Tax 33 on April 26, 2012, 34 which was initially raffled to the First Division of the Court of Tax Appeals ("CTA"). On May 9, 2012, the Court issued Summons 35 to respondent, ordering her to file her Answer to the Petition for Review within fifteen (15) days from receipt thereof. On the same date, the Court issued a Notice of Hearing 36 for the Motion for Suspension of Collection of Tax, setting the hearing on May 15, 2012. DETACa On the scheduled hearing, only counsel for petitioner appeared. 37 The Court denied the Motion for Suspension of Collection of Tax for failure of petitioner to substantiate the same with legal or factual bases. 38 This was confirmed through a Resolution 39 dated May 29, 2012. On May 23, 2012, respondent filed by registered mail her Motion for Extension of Time to File Answer 40 praying for an additional period of twenty (20) days within which to file an Answer; which was later on granted by the Court in its June 5, 2012 Order. 41 On June 13, 2012, respondent filed, by registered mail, her Answer. 42 Respondent claims that petitioner failed to submit the required documents in support of its protest against the FAN and Letter of Demand dated August 26, 2011 within the sixty (60)-day period from filing of its protest; that because of this, the assessed deficiency IT, VAT, EWT, WTC, FWT, FWT-VAT, DST and Compromise Penalty for CY 2007 has already become final, executory and demandable, thus depriving the Court of Jurisdiction to act on the instant petition. 43 Respondent also argues that assuming that the Court has jurisdiction to act on the instant petition, petitioner failed to substantiate or controvert by substantial evidence the BIR factual findings, as shown under the Details of Discrepancies attached to the FAN and Letter of Demand dated August 26, 2011, as well as the BIR Letter dated August 26, 2011, bearing the assessed Compromise Penalty for CY 2007. 44 Lastly, respondent asserts that she has fully complied with the due process requirement mandated under Section 228 of the 1997 National Internal Revenue Code, as amended ("1997 NIRC") ,as implemented by Revenue Regulations ("RR") No. 12-99 ,when the disputed PAN dated December 23, 2010 and FAN and Letter of Demand dated August 26, 2011 were issued; that records clearly show that petitioner was duly afforded an opportunity to controvert the factual findings of respondent on its deficiency taxes for CY 2007 through the issuance of a Notice for Informal Conference and PAN dated August 26, 2011; it was also duly appraised of the factual and legal bases of the deficiencies; and that all presumptions are in favor of the correctness of tax assessments issued by respondent to herein petitioner for CY 2007. 45 On June 25, 2012, petitioner filed a Reply. 46 Thereafter, the Court issued a Notice of Pre-trial Conference 47 setting the Pre-Trial Conference on July 20, 2012, which was rescheduled 48 to August 3, 2012. Consequently, the parties filed their respective Pre-Trial Briefs on July 31, 2012 49 and August 2, 2012. 50 On the scheduled Pre-trial Conference, 51 counsels for both parties appeared, counsel for petitioner presented the Secretary Certificate 52 authorizing them to sign a Compromise Agreement of a Pre-trial Order that may be issued, while counsel for respondent filed his Special Power of Attorney 53 on August 10, 2012. The parties likewise agreed to submit their Joint Stipulation of Facts and Issues ("JSFI") within fifteen (15) days therefrom. 54 After asking for an extension of fifteen (15) days, 55 on September 5, 2012, the parties, through their respective counsels, filed their JSFI, 56 which the Court approved in its Resolution 57 dated September 11, 2012. On October 2, 2012, a Pre-trial Order 58 was issued by the Court terminating pre-trial and setting the date/s for the presentation of evidence by the parties. On October 15, 2012, petitioner filed a Motion to Amend Pre-Trial Order, 59 which was granted in open Court during the October 18, 2012 hearing without any objection from respondent, in order to reflect the replacement of petitioner's witness; its reservation of the right to avail modes of discovery; and the changes in the trial dates. 60 This was later confirmed in a Resolution 61 dated November 13, 2012. In view of CTA Administrative Circular No. 01-2013 ,the case was transferred to the Third Division, through an Order 62 dated April 4, 2013. During trial, petitioner presented the following witnesses: (1) Ms. Margie B. Alabastro ("Ms. Alabastro"), 63 Finance Manager and the authorized representative of petitioner; (2) Ms. Mary Ann Capuchino ("Ms. Capuchino"), 64 the court-commissioned 65 Independent Certified Public Accountant ("ICPA");and (3) Ms. Lina E. Jacob ("Ms. Jacob"), 66 petitioner's General Manager. On May 30, 2013, petitioner filed a Motion for Leave to Take Deposition 67 of its witnesses who are based in Herbalife London, namely, Mr. Mani Manivannan ("Mr. Manivannan") and Ms. Victoria Palmer ("Ms. Palmer"),which was granted by the Court in its Resolution 68 dated July 1, 2013. During the July 11, 2013 69 hearing, counsel for petitioner manifested that they have no more witnesses to present other than the witnesses subject of deposition. The Court granted respondent fifteen (15) days or until July 26, 2013, to file a motion for reconsideration of its Resolution dated July 1, 2013, while counsel for petitioner was granted ten (10) days from receipt thereof to file its comment. 70 This was confirmed in Resolution 71 dated July 17, 2013. On July 18, 2013, respondent filed her Motion for Reconsideration, 72 with petitioner filing a Comment/Opposition with Urgent Ex Parte Motion to Resolve (To Respondent's Motion for Reconsideration Dated 19 July 2013) 73 on July 31, 2013. On July 24, 2013, petitioner filed a Compliance (To Order Made in Open Court on 11 July 2013), 74 submitting a copy of questions addressed to Mr. Manivannan and Ms. Palmer, which was noted 75 by the Court. In response thereto, respondent filed a Comment/Opposition (With Motion to Strike-Off the Record the alleged Compliance filed by petitioner) 76 on August 1, 2013. aDSIHc On August 13, 2013, petitioner, through Ms. Alabastro, received the Final Decision on Disputed Assessment ("FDDA"), 77 which denied petitioner's protest to the FAN due to its failure to present books and other records, in violation of Section 3.1.5 of Revenue Regulations ("RR") No. 12-1999. On August 16, 2013, petitioner filed an Omnibus Motion to Resolve and Urgent Ex-Parte Motion for the Issuance of an Amended 1 July 2013 Resolution Granting Leave to Take Deposition ("Omnibus Motion"), 78 which was granted in a Resolution 79 dated August 23, 2013. During the August 29, 2013 hearing, counsel for respondent manifested that he would file the appropriate pleading relative to the Resolution of the Court dated August 23, 2013, insofar as the filing of respondent's cross written interrogatories, which the Court noted. 80 As regards petitioner's Omnibus Motion, the same was granted insofar as the prayer therein to amend the July 1, 2013 Resolution to specifically indicate that the petitioner was granted leave to take the testimony of Mr. Manivannan and Ms. Palmer by Oral Deposition on September 3 and 4, 2013, at the Philippine Embassy in London, United Kingdom. 81 These were confirmed in the Court's Resolution 82 dated September 3, 2013. On September 10, 2013, petitioner's General Manager Ms. Jacob, filed a letter to the BIR Revenue Region No. 8 Makati, informing it that it already commenced judicial action. 83 This was reiterated by petitioner's counsel, through a letter 84 dated September 12, 2013, informing respondent that petitioner already instituted an appeal before the Court. On September 13, 2013, the Court issued a Resolution 85 amending the July 1, 2013 Resolution to specifically indicate that petitioner was granted leave to take the testimony of its witnesses, with the required additional details. During the hearing on November 25, 2013, counsel for petitioner manifested that they were able to depose their last two (2) witnesses on September 3, 2013. 86 However, they have not yet received the consularized copy of the transcript from the Department of Foreign Affairs ("DFA"). 87 On March 10, 2014, the DFA-Office of Legal Affairs filed with the Court its Endorsement, 88 with attached transcripts 89 of the depositions of Mr. Manivannan and Ms. Palmer taken on September 3 and 4, 2013, together with the requisite Certifications 90 executed by Consul Voltaire O.C. Mauricio of the Embassy of the Philippines in London. During the hearing on March 13, 2014, counsel for petitioner moved for the admission of the Depositions of Mr. Manivannan and Ms. Palmer that were transmitted by the DFA to the Court. 91 Counsel for respondent was granted fifteen (15) days to file her Comment, while counsel for petitioner was granted ten (10) days from receipt thereof to file a reply. 92 Thereafter, the incident shall be deemed submitted for resolution. 93 Petitioner was also granted thirty (30) days from receipt of the Resolution on the admission of the subject Depositions to file its Formal Offer of Evidence ("FOE"),while counsel for respondent was granted fifteen (15) days from receipt thereof to file a comment. 94 This was later confirmed in a Resolution 95 dated March 20, 2014. On March 28, 2014, respondent filed by registered mail her Comment/Opposition 96 to the admission of the depositions of Mr. Manivannan and Ms. Palmer; while petitioner filed its Reply (To Respondent's Comment/Opposition Dated 28 March 2014) 97 on April 7, 2014. The Court resolved to admit the Depositions of Mr. Manivannan and Ms. Palmer in its Resolution 98 dated April 16, 2014. After being granted an extension, 99 on June 6, 2014, petitioner filed its FOE, 100 offering Exhibits "A," "B," "B-1," "C," "D," "E," "F," "G," "H," "I," "J," "J-1," "K" to "K-11," "K-11-1," "L," "L-1," "M," "N" to "N-1," and "O" to "XXX." This was resolved by the Court in its Resolution 101 dated July 14, 2014, admitting all except for Exhibits "C," "E," and "G," for failure to present the originals for comparison with the machine copies. On August 1, 2014, petitioner filed a Motion for Reconsideration (To: Resolution dated 14 July 2014), 102 praying for the Court to admit Exhibits "C," "E," and "G" for having complied with the requirements for the presentation of secondary evidence. The Court, in its Resolution 103 dated October 22, 2014, denied petitioner's Motion for Reconsideration. On August 11, 2014, respondent filed an Urgent Omnibus Motion a. To Reset Trial Hearing [("Motion to Reset")];b. To Conduct a Hearing before a Commissioner [("Motion to Conduct Commissioner's Hearing")];and c. To Issue a Subpoena Ad Testificandum to Respondent's Witness [("Motion to Issue Subpoena ")]. 104 The Motion to Reset was considered moot, while the Motion to Conduct Commissioner's Hearing was granted by the Court in its Resolution 105 dated August 18, 2014. The Motion to Issue Subpoena was granted in Resolution 106 dated December 5, 2014, thereafter, a Subpoena Ad Testificandum 107 was issued for Revenue Officer ("RO") Ms. Fatima B. Pre ("Ms. Pre"). Presentation of evidence for respondent ensued, wherein the following witnesses were presented: (1) RO Ms. Pre, 108 the RO who handled the continuance of investigation and immediate report of the internal revenue tax case of petitioner; and (2) RO Mr. Emilio O. Romero ("Mr. Romero"), 109 the RO who conducted a re-investigation relative to the Letter Protest to the FAN. During the hearing on July 7, 2015, 110 counsel for respondent manifested that they have no witnesses to present, thus, he was granted fifteen (15) days to file an FOE, and petitioner was granted the same period to file its comment. Thereafter, the incident shall be deemed submitted for resolution of the Court. 111 The Court also granted both parties thirty (30) days within which they shall simultaneously file their respective memoranda. 112 These were confirmed by the Court in its Resolution 113 dated July 20, 2015. ETHIDa After being granted an extension, 114 on August 5, 2015, respondent filed, by registered mail, her FOE 115 offering Exhibits "R-1," "R-2," "R-2-a," "R-3," "R-3-a," "R-3-b," "R-3-c," "R-4," "R-4-a," "R-5," "R-5-a," "R-5-b," "R-6," "R-6-a," "R-6-b," "R-7," "R-7-a," "R-7-b," "R-7-c," "R-8," "R-8-a," "R-8-b," "R-8-c," "R-9," "R-9-a," "R-9-b," "R-10," "R-10-a," "R-11," "R-11-a," "R-11-b," "R-12," "R-12-a," R-13," "R-13-a," "R-14," "R-14-a," "R-14-b," "R-14-c," "R-15," "R-15-a," "R-16," and "R-16-a." The Court resolved to admit all Exhibits that were formally offered by respondent through its Resolution 116 dated September 4, 2015. On October 7, 2015, petitioner filed a Motion for Extension to File Petitioner's Memorandum, 117 which was granted by the Court in its Resolution 118 on October 19, 2015. On November 10, 2015, petitioner filed by registered mail a Memorandum for the Petitioner Ad Cautelam ; 119 while respondent failed to file her memorandum per Records Verification Reports issued by the Court's Judicial Records Division dated October 20, 2015, 120 November 23, 2015, 121 and December 2, 2015. 122 Thereafter, the Court resolved to submit the case for decision through its Resolution 123 dated December 4, 2015; hence, this Decision. The Issues 124 The parties submit to the Court the following issues: 1. WHETHER THE COURT HAS JURISDICTION OVER THE INSTANT CASE; AND 2. WHETHER THE ASSESSMENTS FOR PETITIONER'S ALLEGED DEFICIENCY TAXES AMOUNTING TO ONE HUNDRED TWELVE MILLION FIVE HUNDRED SIXTY-EIGHT THOUSAND EIGHT HUNDRED FIFTY-SIX AND 50/100 PESOS (PHP112,568,856.50) WERE ISSUED IN ACCORDANCE WITH LAW AND REGULATIONS. Petitioner's Arguments Petitioner claims that respondent erred in disallowing expenses due to non-withholding of taxes; that the discrepancy in the amount stated under the heading of "professional and management fees" represents payment made to a recruitment agency that was already subjected to EWT per the Alphalist and the professional and management fees paid to general professional partnerships ("GPP"),which is not subject to withholding tax. It further maintains that respondent failed to discharge the burden of proving the taxability of the unaccounted expenses; that under-declaration of an expense is not prohibited by law, what the law prohibits is to claim a deduction beyond the amount authorized therein; that respondent erred in computing its unsupported expenses; that it was able to adduce sufficient proof to substantiate the deductions claimed through the various official receipts ("OR"),journal/cash vouchers, and petty cash vouchers; that pursuant to BIR Ruling DA 238-03 ,the absence of original receipts or records does not prevent a taxpayer from proving, by other evidence, that the claimed deduction was really paid or incurred; that respondent erred in subjecting royalties and production bonuses paid to non-resident distributors and interest expense to VAT; that pursuant to Section 4.114 of RR No. 2-98 ,as amended by Section 7 of RR No. 14-02 ,only payments to non-residents for services rendered in the Philippines are subject to Final Withholding of VAT; and that it kept and preserved its records as required by law and regulations, thus negating the Php50,000.00 penalty assessed against it. Respondent's Counter-Arguments In her Answer, respondent argues that the Court has no jurisdiction over the instant Petition for Review because it has become final, executory and demandable for failure of petitioner to submit the required documents in support of its protest, within the sixty (60)-day period from filing of its protest; that even assuming that the Court has jurisdiction, petitioner failed to substantiate or controvert by substantial evidence the BIR factual findings, as shown under the Details of Discrepancies attached to the FAN and Letter of Demand dated August 26, 2011; that she has fully complied with the due process requirement mandated under Section 228 of the 1997 NIRC ,as amended and RR No. 12-99 ;that the assessments issued against petitioner for deficiency IT, VAT, EWT, WTC, FWT, FWT-VAT, DST and Compromise Penalty for CY 2007 were made in accordance with law and regulations; and that all presumptions are in favor of the correctness of tax assessments. The Ruling of the Court At the outset, the Court finds the need to determine whether it has jurisdiction over the instant Petition for Review. The Court has jurisdiction over the Petition for Review. Respondent claims that the Court has no jurisdiction over the Petition for Review because the assessment has become final, executory, and demandable for failure of petitioner to submit the required documents within sixty (60) days after the filing of its protest. The Court does not agree. Section 228 of the 1997 NIRC is instructive, to wit: Sec. 228. Protesting of Assessment. When the Commissioner or his[/her] duly authorized representative finds that proper taxes should be assessed, he[/she] shall first notify the taxpayer of his[/her] findings: Provided, however ,That a pre-assessment notice shall not be required in the following cases: cSEDTC xxx xxx xxx The taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void. Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his[/her] duly authorized representative shall issue an assessment based on his findings. Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final. If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of said decision, or from the lapse of the one hundred eighty (180)-day period ;otherwise, the decision shall become final, executory and demandable. 125 Records disclose that petitioner received the FAN dated August 26, 2011 on September 1, 2011. 126 On September 29, 2011, the Assessment Division of BIR Revenue Region No. 8 received petitioner's letter protest, 127 together with the documentary evidence attached to it. However, on account of respondent's inaction, petitioner filed the instant Petition for Review on April 26, 2012. 128 Respondent argues that petitioner failed to submit documentary evidence in support of its protest, petitioner on the other hand, insists that it already filed the documents in support of its protest together with its letter protest. In CIR v. First Express Pawnshop Company, Inc. , 129 the term "relevant supporting documents" should be understood as those documents necessary to support the legal basis in disputing a tax assessment, as determined by the taxpayer. The BIR can only request the taxpayer to submit additional documents but cannot demand what type of supporting documents should be submitted. Otherwise, a taxpayer will be at the mercy of the BIR, which may require the production of documents that a taxpayer cannot submit. Applying this to the instant case, petitioner already submitted the documents it deems sufficient to support its claim when it filed its protest to the FAN. Hence, the tax assessment cannot be considered as final, executory and demandable. Furthermore, under Section 228 of the 1997 NIRC ,if the protest is not acted upon within one hundred eighty (180) days from submission of supporting documents, the taxpayer adversely affected by the inaction may appeal to the CTA within thirty (30) days from the lapse of the one hundred eighty (180)-day period. Petitioner filed its administrative protest on September 29, 2011, 130 together with the documentary evidence attached to it, thus, respondent had until March 27, 2012 to act on petitioner's administrative protest but it failed to do so. Thus, due to the inaction of respondent, petitioner had thirty (30) days from March 27, 2012 or until April 26, 2012 to file its judicial protest. Consequently, the Court holds that the instant Petition for Review filed on April 26, 2012 was timely filed. The assessments relating to petitioner's alleged deficiency taxes were issued in accordance with law and regulations. The Court finds the need to emphasize that tax assessments by tax examiners are presumed correct and made in good faith, and all presumptions are in favor of the correctness of a tax assessment, unless proven otherwise. 131 In the case at bar, respondent assessed petitioner for alleged deficiency taxes for CY 2007 in the total amount of Php112,586,856.50, broken down as follows: TAX TYPE AMOUNT IT Php57,937,101.82 VAT 3,922,839.57 EWT 767,977.34 WTC 309,236.80 FWT 40,918,045.57 FWT-VAT 8,577,939.88 DST 82,715.52 Compromise Penalty 53,000.00 TOTAL PHP112,568,856.50 =============== As shown in the table above, petitioner has alleged deficiencies in IT, VAT, EWT, WTC, FWT, FWT-VAT, DST and Compromise Penalty. The Court will now proceed to discuss in detail the merits of the assessment for each type of tax. I. DEFICIENCY INCOME TAX Php57,937,101.82 In the FAN 132 dated August 26, 2011, petitioner was assessed deficiency IT for taxable year 2007 in the total amount of Php57,937,101.82, inclusive of increments, computed as follows: DETAILS AMOUNT Taxable Income per ITR [Php]9,377,113.00 Add: Adjustments/disallowance per investigation Disallowed Expenses due to Non-withholding (Schedule 1) [Php]83,987,344.32 Unaccounted Expenses (Schedule 2) 3,769,289.73 Unsupported Expenses (Schedule 3) 10,105,563.00 [Php]97,862,197.05 Adjusted Taxable Income per Investigation [Php]107,239,310.05 Basic Income Tax Due [Php]37,533,758.52 Less: Allowable tax credits/payments Prior Years' Minimum Corporate Income Tax [Php]3,281,989.55 Creditable Tax Withheld at Source claimed per return 630,442.00 Total [Php]3,912,431.55 Less: Excess Credits Carried Over to Succeeding Year 630,442.00 [Php]3,281,989.55 Deficiency Income Tax [Php]34,251,768.97 Add: Interest (04.16.08 to 09.30.11) 23,685,332.85 TOTAL AMOUNT DUE [Php]57,937,101.82 ================= Section 34 of the 1997 NIRC allows taxpayers to deduct business expenses from their gross income. Section 34 provides as follows: SDAaTC Sec. 34. Deductions from Gross Income. Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under subsection (M) hereof, in computing taxable income subject to income tax under Sections 24(A);25(A);26; 27(A),(B) and (C);and 28(A)(1),there shall be allowed the following deductions from gross income: (A) Expenses. (1) Ordinary and Necessary Trade, Business or Professional Expenses. (a) In General. There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession, including: (i) A reasonable allowance for salaries, wages, and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of fringe benefit furnished or granted by the employer to the employee: Provided, That the final tax imposed under Section 33 hereof has been paid; (ii) A reasonable allowance for travel expenses, here and abroad, while away from home in the pursuit of trade, business or profession; (iii) A reasonable allowance for rentals and/or other payments which are required as a condition for the continued use or possession, for purposes of the trade, business or profession, of property to which the taxpayer has not taken or is not taking title or in which he has no equity other than that of a lessee, user or possessor; (iv) A reasonable allowance for entertainment, amusement and recreation expenses during the taxable year, that are directly connected to the development, management and operation of the trade, business or profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his or its trade, business or exercise of a profession not to exceed such ceilings as the Secretary of Finance may, by rules and regulations prescribe, upon recommendation of the Commissioner, taking into account the needs as well as the special circumstances, nature and character of the industry, trade, business, or profession of the taxpayer: Provided, That any expense incurred for entertainment, amusement or recreation that is contrary to law, morals public policy or public order shall in no case be allowed as a deduction. (b) Substantiation Requirements. No deduction from gross income shall be allowed under Subsection (A) hereof unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (i) the amount of the expense being deducted, and (ii) the direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer. Respondent disallowed certain expenses due to the following: (1) non-withholding; (2) unaccounted expenses; and (3) unsupported expenses. The Court will now delve into the reasons why these expenses were disallowed. A. Disallowed Expenses Due to Non-Withholding Php83,987,344.32 Respondent disallowed 133 the first type of expenses amounting to Php83,987,344.32, for the following reasons: DETAILS AMOUNT 1.) Expanded Withholding Tax (WE) 1.a) Professional and Management Fees [Php]1,464,269.00 1.b) Payment to Contractors by Top 10K-Services 6,185,661.27 1.c) Payment by Top 10K-Goods 17,087,895.00 Sub-total [Php]24,737,825.27 Less: Acquisition of Prop. & Eqpt. 17,087,895.00 Total [Php]7,649,930.27 2.) Withholding Tax on Compensation (WTC) 2.a) Salaries and Wages [Php]727,797.05 3.) Final Withholding Tax (FWT) [Php]75,609,617.00 TOTAL [PHP]83,987,344.32 =============== 1.a) Professional and Management Fees ("PMF") Php1,464,269.00 PMF represents fees paid to the search firm fees, audit fees, legal fees, and discrepancy, which were allegedly not subjected to withholding tax and are not supported with documents, hence, disallowed by the respondent. The PMF is broken down as follows: acEHCD DETAILS AMOUNT Search Firm Fee Php1,100,000.00 Audit Fees 239,268.00 Legal Fees 125,000.00 Difference 1.00 TOTAL PHP1,464,269.00 ============== Petitioner alleges that payments made to the recruitment agency, Kapient Philippines, Inc. ("KPI"),is the fee made for the placement of Mr. Enrico Garcia ("Mr. Garcia") as its general manager. Petitioner presented billing invoices, check vouchers ("CVs") and official receipts 134 ("ORs") to support this claim. It also alleges that payments made to Manabat Sanagustin & Co. ("Manabat") and Britanico Sarmiento Franco & Associates ("Britanico"),which are both general professional partnerships ("GPP"),are not subject to EWT pursuant to Section 2.57.5 of RR No. 2-98 ,as amended. A perusal of the documentary evidence submitted to the Court shows that payment to KPI was properly subjected to 2% withholding tax as evidenced by BIR Form No. 1604-E, 135 Alphalist of Payees Subject to EWT, 136 CVs 137 and ORs. 138 Hence, respondent cannot enforce the said assessment against petitioner. On the other hand, payments made to Manabat and Britanico, are exempt from withholding tax pursuant to Section 26 139 of the 1997 NIRC in relation to Section 2.57.5 140 of RR No. 2-98 , 141 as amended. However, after a review of the documentary evidence submitted to the Court, it was discovered that out of the amounts in question, only Php168,000.00 and Php124,234.00 for Manabat and Britanico, respectively, are supported by valid documents. 142 Thus the Court upholds the assessment on PMF but in the reduced amounts of Php71,268.00 143 for Manabat and Php766.00 144 for Britanico. 1.b) Payment to Contractors by Top 10K (Services) Php6,185,661.27 Based on the evaluation conducted by the ICPA of petitioner's reconciliation schedule 145 and the voluminous CVs, journal vouchers ("JVs") and ORs, it appears that respondent's assessment of petitioner's income payments to contractors by the top 10,000 corporations for purchases of services can be accounted for as follows: 146 DETAILS AMOUNT A. Advertising 1. Giveaways Php2,299,318.08 2. Reimbursement to Employees 87,889.15 Sub-total Php2,387,207.23 B. Transportation and Travel 1. Intercompany Billings Php151,931.09 2. Reimbursement to Employees 457,802.33 Sub-total Php609,733.42 C. Communication, Light and Water 1. Intercompany Billings Php212,161.04 2. Reimbursement to Employees 8,403.46 Sub-total Php220,564.50 D. Miscellaneous Expenses 1. Reimbursement to Employees Php8,641.00 2. Local Taxes and Other Fees 67,820.00 Sub-total Php76,461.00 E. Warehousing Fees Lodged under Rentals Php913,590.76 F. Rentals Lodged under Miscellaneous Expenses Php(231,715.51) G. Payments to Various Insurance Companies 1. Maxicare Healthcare Php447,546.74 2. United Coconut Planters Life Assurance, Inc. 60,139.41 3. AON Philippines, Inc. 31,190.32 4. Erroneous Booking-Over 1,086.63 Sub-total Php539,963.10 H. Employee Training Cost Php102,935.71 I. Staff Functions Php1,566,921.05 TOTAL PHP6,185,661.26 147 ============== 1.b.A.1) Advertising-Giveaways Php2,299,318.08 Petitioner alleged that the giveaways were not purchased from any local supplier but were instead inventory products of the company given to its distributors. 148 To support its claim, petitioner submitted its General Journal ("GJ") Standard Journal Entry, Inventory Adjustments Schedule, Reclassification Schedule 149 and P & E Request Form. 150 SDHTEC The Court holds that the above are insufficient to refute the assessment. Journal entries and schedules cannot stand alone to invalidate the assessment. Likewise, P & E Request Form is not, in any way, a relevant document to corroborate the schedules and journal entries. Thus, the Court upholds the assessment for advertising giveaways amounting to Php2,299,318.08. 1.b.A.2) Advertising-Reimbursement to Employees Php87,889.15 Petitioner maintains that this payment pertains to reimbursements to employees for production, photographic, advertising, promotion and sample costs which were traceable to specific employees; that being reimbursements, it is not in the nature of income payments; and thus it is not subject to EWT. 151 Records show that out of Php87,889.15, 152 only Php52,994.15 is supported by valid documents, while Php34,895.00 should be disallowed for the following reasons, to wit: DATE DESCRIPTION AMOUNT EXHIBIT REASON 11/29/2006 Toll Fees Php167.00 W-03 Outside the period of Claim 12/1/2006 Toll Fees 167.00 W-03 Outside the period of Claim Gasoline 1,100.00 W-04 Without Supporting Invoice/OR 11/30/2006 Gasoline 85.00 W-05 Outside the period of Claim 11/29/2006 Meals 312.00 W-06 Outside the period of Claim 11/29/2006 Meals 234.00 W-07 Outside the period of Claim Meals 566.40 W-06 Tape Receipt not readable 2/22/2007 Production 5,000.00 W-10 Supported by Liquidation Form only 4/30/2007 Photographic 1,500.00 W-11 Supported by Journal Voucher only 7/31/2007 Production 4,095.00 W-33 Supported by Journal Voucher only 5/31/2007 Production 2,197.00 W-24 Supported by Journal Voucher only 6/30/2007 Awards/Recognition 7,063.00 W-30 Supported by Journal Voucher only 11/30/2007 Promotion 5,400.00 W-37 Supported by Journal Voucher only 11/30/2007 Samples 5,429.80 W-40 Supported by Journal Voucher only 9/30/2007 Samples 688.80 W-44 Supported by Journal Voucher only 8/31/2007 Production 890.00 W-42 Supported by Journal Voucher only TOTAL PHP34,895.00 ============ 1.b.B.1) Transportation and Travel-Intercompany Billings Php151,931.09 This item pertains to payments to affiliates on airfare, meals and meeting expenses incurred particularly by the following: NAME OF AFFILIATE AMOUNT EXHIBIT Herbalife Australia PTY. Ltd. Php65,356.44 "UUU",Annex D Herbalife Taiwan 41,928.98 "UUU",Annex D Herbalife International Singapore, Inc. 35,413.48 "UUU",Annex D Herbalife International Communications, Inc. 9,232.19 "UUU",Annex D TOTAL PHP151,931.09 ============ Scrutiny of the evidence shows that the amount of Php67,921.86 should be disallowed because it was only supported by billing statements, to wit: DATE AFFILIATE AMOUNT EXHIBIT REASON 8/31/2007 Herbalife International Singapore, Inc. Php35,413.48 X-11 Supported by Billing Statement Only 9/30/2007 Herbalife Australia Pty. Ltd. 27,666.88 X-15 Supported by Billing Statement Only 7/31/2007 Herbalife Australia Pty. Ltd. 4,841.50 X-18 Supported by Billing Statement Only TOTAL PHP67,921.86 ============= 1.b.B.2) Transportation and Travel-Reimbursement to Employees Php457,802.33 The Court agrees with the findings of the ICPA that out of the Php457,802.33, 153 only Php258,180.97 154 is substantiated; while the remaining amount of Php199,621.36 155 is backed up by cash vouchers and/or petty cash vouchers ("PCV") only. Thus, the amount Php199,621.36 should be disallowed for not being properly supported. 1.b.C.1) Communication, Light and Water-Intercompany Billings Php212,161.04 Based on the ICPA report, the amount Php212,161.04 156 pertains to reimbursement payments to Herbalife Australia PTY Ltd.,on telecommunication expenses. 157 Petitioner submitted JVs and billing statements, which are insufficient to support petitioner's claim. The Court requires substantial evidence such as ORs and/or invoices, hence, the assessment amounting to Php212,161.04 is upheld. 1.b.C.2) Communication, Light and Water-Reimbursements to Employees Php8,403.46 This amount pertains to employee reimbursements for telephone expenses. 158 Out of the said amount, Php1,426.68 is supported by JVs and CVs without ORs and/or invoices. 159 However, upon scrutiny of the invoices and ORs 160 supporting the amount Php6,976.78, 161 they do not contain relevant information such as the year when the transactions took place, and/or they were not in the name of the petitioner. Moreover, the submitted OR/invoices do not pertain to telephone expenses but to food items, grocery items, transportation, etc. Therefore, these documents do not support petitioner's allegations. Thus, the Court upholds in toto the assessment on this category in the amount of Php8,403.43. AScHCD 1.b.D.1) Miscellaneous Expenses-Reimbursement to Employees Php8,641.00 Miscellaneous expenses refer to donations, notarial, and postage fees, 162 broken down as follows: DETAILS AMOUNT Donations Php4,000.00 Notarial Fees 1,725.00 Postage Fees 2,916.00 TOTAL PHP8,641.00 =========== As noted by the ICPA, the donations and notarial fees amounting to Php4,000.00 and Php1,725.00, respectively, were supported by JVs and/or CVs only, 163 and should be disallowed. The remaining Php2,916.00 pertaining to postage fees was supported by acknowledgement receipts, 164 which is not a significant document, thus, should also be denied. Thus, the Court upholds the assessment amounting to Php8,641.00. 1.b.D.2) Miscellaneous Expenses-Local Taxes and Other Fees Php67,820.00 This pertains to payments to the Bureau of Food and Drugs ("BFAD"),City of Makati and City of Lucena for the renewal fees of the company's products, community tax certificate ("CTC") and filing fees. 165 The ICPA notes that only Php62,120.00 is supported with ORs while Php5,700.00 is supported only with CVs and/or PCVs. 166 However, upon further examination by the Court of the documents presented, out of the Php62,120.00, only Php26,145.00 is actually supported by valid documents, to wit: PAYEE PARTICULARS AMOUNT EXHIBIT City of Makati Community Tax Certificate Php10,500.00 BB-35 City of Makati Certificate Fee 45.00 BB-38 City of Makati Filing Fee 100.00 BB-39 BFAD Renewal 8,000.00 BB-45 BFAD Renewal 6,000.00 BB-45 BFAD Transfer of Location 1,000.00 BB-47 Brgy. San Lorenzo Clearance 500.00 BB-50 TOTAL PHP26,145.00 =========== As a result, the assessment on local taxes and other fees amounting to Php41,675.00 167 is sustained. 1.b.E) Warehousing Fees Lodged under Rentals Php913,590.76 Payments for warehousing fees lodged under rentals amounting to Php913,590.76 pertain to payments to Lambert Williams Logistics, Inc. ("LWLI") for warehousing freight and freight charges which were lodged under "other rent-warehousing." 168 HESIcT An examination of the documents presented shows that petitioner paid LWLI for warehousing services in the amount of Php2,048,610.23, 169 while the amount subjected to 2% EWT for LWLI based from the alphalist is Php2,908,922.50. 170 Consequently, the Court concludes that warehousing fees were all subjected to 2% EWT, hence, this assessment is cancelled. 1.b.F) Rentals Lodged under Miscellaneous Expenses (Php231,715.51) The ICPA was unable to determine the nature of the rentals (with credit balance) lodged under miscellaneous expense amounting to (Php231,715.51),which was considered by the BIR as a deduction from the amount of non-deductible rental expense. 171 Similarly, BIR did not provide any basis for this finding. Therefore, this item is cancelled. 1.b.G) Payments to Various Insurance Companies Php539,963.10 Payments to various insurance companies such as Maxicare Healthcare (Php447,546.74),United Coconut Planters Life Assurance, Inc. (Php60,139.41) and AON Philippines, Inc. (Php31,190.32) represent group personal accident and life insurance policies for its employees. The ICPA noted that petitioner erroneously over-booked the said account in the amount of Php1,086.63. Careful examination of the documents presented shows that petitioner was able to provide substantial and corroborating evidence to refute respondent's assessment with regard to payment to insurance companies, in the amount of Php538,876.47. 172 1.b.H) Employee Training Cost Php102,935.71 The ICPA noted that petitioner made an accrual in the amount of Php220,000.00 for employee trainings and made a reversal at year-end in the amount of Php117,064.29. 173 In effect, actual expense for employee trainings amounted to Php102,935.71. 174 However, upon examination of the evidence submitted, petitioner presented only JVs 175 as supporting documents for the actual expenses for employee training costs. Thus, the assessment in the amount of Php102,935.71 is sustained. 1.b.I) Staff Functions Php1,566,921.05 As noted by the ICPA, 176 the staff functions amounting to Php1,566,921.05 represents other employee cost, as enumerated in the table below: ACCOUNT DESCRIPTION AMOUNT 1. Optical and Dental/Medical Allowance Php200,198.24 2. Birthday and Meal Allowance 44,261.45 3. Uniform Allowance 98,796.18 4. Service Award 44,238.15 5. Marriage Benefits 9,000.00 6. Other Employee Reimbursements 132,813.71 7. Contribution to Retirement Fund 440,418.00 8. Accrued Employment Cost 605,687.50 Php1,575,413.23 Less: Adjustments 8,492.18 TOTAL PHP1,566,921.05 ============== 1.b.I.1) Optical and Dental/Medical Allowance Php200,198.24 Findings of the ICPA reveal that out of Php200,198.24, only Php199,116.09 is properly supported by JV, CVs and ORs. 177 The difference of Php1,082.15 is supported by CVs and PCVs only. Upon further examination of the documents presented, the Court finds that optical, dental and medical allowance amounting to Php23,249.83 should likewise be denied for the following reasons: CUSTOMER DATE AMOUNT EXHIBIT REASON Mercury Drug Corp. - Php65.20 FF-004 Undated Tape Receipt Mercury Drug Corp. - 84.25 FF-005 Undated Tape Receipt Mercury Drug Corp. - 464.40 FF-005 Undated Tape Receipt Mercury Drug Corp. - 101.50 FF-005 Undated Tape Receipt Mercury Drug Corp. - 293.25 FF-005 Undated Tape Receipt Mercury Drug Corp. - 133.93 FF-005 Undated Tape Receipt Mercury Drug Corp. - 160.00 FF-005 Undated Tape Receipt Mercury Drug Corp. - 112.10 FF-006 Undated Tape Receipt Farmacia Lily & Gen. Mdse. 2/12/2007 90.00 FF-006 Without Name of Payee Farmacio San Lazaro 2/16/2007 65.37 FF-010 Without Name of Payee Farmacia Lily & Gen. Mdse. 3/30/2007 80.25 FF-031 Without Name of Payee Mercury Drug Corp. - 610.00 FF-035 Undated Tape Receipt Padova Pharmacy 2/23/2007 105.00 FF-052 Without Name of Payee Padova Pharmacy 3/11/2007 200.00 FF-056 Without Name of Payee Sandy Cualing 3/26/2007 207.00 FF-055 Supported by PCV only Sandy Cualing 3/12/2007 232.00 FF-059 Supported by PCV only Sandy Cualing 3/26/2007 109.95 FF-062 Supported by PCV only Cyrial Pharmacy 5/8/2007 170.00 FF-074 Without Name of Payee Sandy Cualing 5/29/2007 1,082.00 FF-077 Supported by PCV only Padova Pharmacy 7/1/2007 87.00 FF-081 Without Name of Payee Padova Pharmacy 8/10/2007 69.00 FF-086 Without Name of Payee Sandy Cualing 10/1/2007 578.00 FF-089 Supported by PCV only Sandy Cualing 10/9/2007 716.00 FF-092 Supported by PCV only Sandy Cualing 10/18/2007 454.00 FF-095 Supported by PCV only R. Legaspi 3/12/2007 1,005.23 FF-111 Supported by PCV only Winnie Pinpin 1/22/2007 324.00 FF-144 Supported by CV only Winnie Pinpin 2/2/2007 7,792.70 FF-145 Supported by CV only L. Vallijera 9/13/2007 286.50 FF-192 Supported by PCV only L. Vallijera 9/24/2007 649.75 FF-195 Supported by PCV only L. Vallijera 10/1/2007 655.95 FF-198 Supported by PCV only M. Santiago 1/18/2007 4,344.00 FF-234 Supported by CV only M. Santiago 3/12/2007 511.00 FF-239 Supported by PCV only A. Vallejera 3/14/2007 116.00 FF-252 Supported by PCV only A. Vallejera 3/28/2007 994.00 FF-257 Supported by CV only A. Zapanta 2/28/2007 300.50 FF-277 Supported by PCV only TOTAL PHP23,249.83 ============ 1.b.I.2) Birthday and Meal Allowance Php44,261.45 ICPA notes that out of the Php44,261.45 lodged under birthday and meal allowance, only Php38,295.95 is properly substantiated by CVs, PCVs and ORs 178 while Php5,965.50 179 is backed up by CVs and PCVs only. Therefore, the amount of Php5,965.50 should be denied for not being supported by proper documents. caITAC 1.b.I.3) Uniform Allowance Php98,796.18 As noted by the ICPA, 180 uniform allowance can be broken down (as supported by proper documents, loan receipts and CVs/PCVs) to Php89,165.68, Php2,483.62 and Php7,146.88, respectively. 181 The Court holds that loan receipts, CVs and PCVs are not proper documents, thus, the amounts of Php2,483.62 and Php7,146.88 should be denied. Upon further examination by the Court, it found that an additional Php22,693.00 should be denied for the following reasons: CUSTOMER DATE AMOUNT EXHIBIT REASON Ferdinand Flores 1/17/2007 Php15,000.00 HH-03 Supported by CV only Rizhell Rivera 2/28/2007 2,666.75 HH-07 Supported by CV only Karen Rivera 5/15/2007 622.75 HH-21 Supported by PCV only Maricar Santiago 1/29/2007 2,000.00 HH-37 Supported by CV only Winnie Pinpin 4/2/2007 1,214.00 HH-43 Supported by CV only Winnie Pinpin 6/13/2007 1,189.50 HH-46 Supported by PCV only TOTAL PHP22,693.00 =========== 1.b.I.4) Service Award Php44,238.15 Service awards pertain to trip expenses (gasoline, hotel, meal allowances) granted to employees for the length of service rendered in the company. 182 The Court agrees with the findings of the ICPA that expenses amounting to Php149.60 are only supported by CVs and PVCs, while the amount of Php44,088.55 is properly substantiated. 183 1.b.I.5) Marriage Benefits Php9,000.00 This pertains to fixed financial incentives given to a newly-wed employees amounting to Php3,000.00 per employee. 184 This was awarded to three (3) employees, namely: Veronica Abuel, Karen Rivera and Winnie Pinpin, as supported by Certificates of Marriage and CVs. 185 Therefore, this assessment is cancelled. 1.b.I.6) Other Employee Reimbursements Php132,813.71 This pertains to various expenses such as Christmas raffle prizes, anniversary expenses, flowers for burial, etc. 186 As noted by the ICPA, only Php131,316.75 was supported by proper documents, while Php1,496.96 was supported by CVs and PCVs only. 187 Further inspection of the evidence reveals that an additional amount of Php10,105.71 should be denied for not being supported by proper documents, broken down as follows: CUSTOMER DATE AMOUNT EXHIBIT REASON FOR DISALLOWANCE Johann Cainglet 12/7/2007 Php7,625.71 KK-05 Supported by Statement of Account Pizzeria 9/17/2007 2,480.00 KK-17 Supported by Delivery Receipt TOTAL PHP10,105.71 =========== 1.b.I.7) Contribution to Retirement Fund Php440,418.00 This assessment is cancelled since substantial evidence, such as CV, OR, and accrual schedule, 188 was provided in order to refute the assessment. 1.b.I.8) Accrued Employment Cost Php605,687.50 This pertains to various accruals for possible employee costs such as travel, gasoline and uniform. 189 The Court agrees with the finding of the ICPA that the said accrual may be disallowed as deductions for income tax purposes due to non-withholding. Thus, respondent's assessment on staff functions is sustained but in the reduced amount of Php671,568.57, computed as follows: ACCOUNT DESCRIPTION AMOUNT 1. Optical and Dental/Medical Allowance Php24,331.98 2. Birthday and Meal Allowance 5,965.50 3. Uniform Allowance 32,323.50 4. Service Award 149.60 5. Marriage Benefits 0.00 6. Other Employee Reimbursements 11,602.67 7. Contribution to Retirement Fund 0.00 8. Accrued Employment Cost 605,687.50 Php680,060.75 Less: Adjustments 8,492.18 TOTAL PHP671,568.57 ============= Based from the foregoing discussion, payments for services to contractors by top 10k corporation amounting to Php3,650,227.71 is disallowed, computed as follows: ICHDca DETAILS AMOUNT A. Advertising 1. Giveaways Php2,299,318.08 2. Reimbursement to Employees 34,895.00 Sub-total Php2,334,213.08 B. Transportation and Travel 1. Intercompany Billings Php67,921.86 2. Reimbursement to Employees 199,621.36 Sub-total Php267,543.22 C. Communication, Light and Water 1. Intercompany Billings Php212,161.04 2. Reimbursement to Employees 8,403.46 Sub-total Php220,564.50 D. Miscellaneous Expenses 1. Reimbursement to Employees Php8,641.00 2. Local Taxes and Other Fees 41,675.00 Sub-total Php50,316.00 G. Payments to Various Insurance Companies 1. Erroneous Booking-Over Php1,086.63 Sub-total Php1,086.63 H. Employee Training Cost Php102,935.71 I. Staff Functions Php671,568.57 TOTAL PHP3,648,227.71 ============== 1.c) Payment by Top 10K-Goods Php17,087,895.00 Respondent computed the above assessment as follows: DETAILS AMOUNT Per ITR/FS Php141,469,518.00 Per 1601 E/C/F Alphalist 12,564,640.00 Discrepancy Per PAN Php128,904,878.00 Adjustment Per Re-investigation 111,816,983.00 AMOUNT NOT SUBJECTED TO WITHHOLDING PHP17,087,895.00 ============== Upon re-investigation conducted by respondent, importations/shipments from Herbalife Luxemburg in the amount of Php111,816,983.00 were re-considered in the computation of deficiency taxes since the same was reflected in the VAT returns. 190 The Court notes that the assessed amount of Php17,087,895.00 was already included by respondent in the computation of disallowed expenses due to non-withholding. Hence, the assessment for this category is cancelled. 2.a) Salaries and Wages Php727,797.05 The discrepancies found by the respondent are as follows: DETAILS AMOUNT 1. Temporary Pay Php141,313.95 191 2. Insurance Retirement Fund 440,418.24 192 3. Reconciling Item for Retirement Cost 146,065.00 TOTAL PHP727,797.19 193 ============= 2.a.1) Temporary Pay Php141,313.95 Temporary pay represents payments to Aljems Andrade, A. Estacio, Louie Aguas, and Rex Tolentino, who are usually hired to do clerical jobs and to fill-in regular workforce. 194 The ICPA noted that payments to Mr. Aljems Andrade ("Mr. Andrade") amounting to Php103,074.40 195 for contract labor have exceeded the statutory minimum wage per year of Php60,000.00, and should be subjected to withholding tax on compensation pursuant to Section 2.79 (A) of RR No. 2-98 ,as amended. 196 On the other hand, petitioner maintains 197 that the applicable wage order is Wage Order ("WO") No. NCR-12 from January 1 to August 27, 2007 and WO No. NCR-13 from August 28 to December 31, 2007. The minimum wage rate per the afore-cited WOs are Php350.00/day and Php362.00/day, respectively; that based on the prevailing minimum wage rates, Mr. Andrade could have earned a total minimum wage for the year 2007 in the amount of Php110,448.00; 198 and that the actual compensation of Mr. Andrade amounting to Php103,074.40 falls below the minimum statutory wage, thus, not subject to tax. The Court agrees with petitioner that for the year 2007, the applicable wage orders are WO Nos. NCR-12 and 13. However, the Court disagrees with the petitioner's computation of statutory minimum wage. Records disclose that Mr. Andrade did not work for 26 days a month for 12 months for the year 2007. Based on the evidence on record, Mr. Andrade worked for 220 days only for the entire 2007 and could have earned a statutory minimum wage of Php77,948.00, computed below: NAME OF NO. OF PERIOD EMPLOYEE AMOUNT DAYS EXHIBIT WORKED Jan. 1 to Aug. 27, 2007 Aljems Andrade Php1,300.00 4 "PP-01" to "PP-04" Jan. 1 to Aug. 27, 2007 Aljems Andrade 1,894.10 5 "PP-05" to "PP-08" Jan. 1 to Aug. 27, 2007 Aljems Andrade 2,188.70 4 "PP-09" to "PP-12" Jan. 1 to Aug. 27, 2007 Aljems Andrade 2,259.80 5 "PP-13" to "PP-15" Jan. 1 to Aug. 27, 2007 Aljems Andrade 2,513.70 5 "PP-16" to "PP-21" Jan. 1 to Aug. 27, 2007 Aljems Andrade 3,539.40 8 "PP-22" to "PP-27" Jan. 1 to Aug. 27, 2007 Aljems Andrade 2,031.30 5 "PP-28" to "PP-31" Jan. 1 to Aug. 27, 2007 Aljems Andrade 2,468.00 5 "PP-32" to "PP-34" Jan. 1 to Aug. 27, 2007 Aljems Andrade 1,625.00 3 "PP-35" to "PP-39" Jan. 1 to Aug. 27, 2007 Aljems Andrade 2,743.70 6 "PP-40" to "PP-43" Jan. 1 to Aug. 27, 2007 Aljems Andrade 1,668.70 3 "PP-44" to "PP-48" Jan. 1 to Aug. 27, 2007 Aljems Andrade 2,470.50 4 "PP-49" to "PP-52" Jan. 1 to Aug. 27, 2007 Aljems Andrade 4,278.30 5 "PP-53" to "PP-57" Jan. 1 to Aug. 27, 2007 Aljems Andrade 1,878.90 5 "PP-58" to "PP-61" Jan. 1 to Aug. 27, 2007 Aljems Andrade 1,778.90 3 "PP-62" to "PP-66" Jan. 1 to Aug. 27, 2007 Aljems Andrade 2,102.30 6 "PP-67" to "PP-68" Jan. 1 to Aug. 27, 2007 Aljems Andrade 1,706.30 4 "PP-69" to "PP-71" Jan. 1 to Aug. 27, 2007 Aljems Andrade 1,980.50 5 "PP-72" to "PP-73" Jan. 1 to Aug. 27, 2007 Aljems Andrade 2,235.90 5 "PP-74" to "PP-78" Jan. 1 to Aug. 27, 2007 Aljems Andrade 2,236.90 5 "PP-79" to "PP-83" Jan. 1 to Aug. 27, 2007 Aljems Andrade 1,651.40 4 "PP-84" to "PP-87" Jan. 1 to Aug. 27, 2007 Aljems Andrade 1,978.90 5 "PP-88" to "PP-91" Jan. 1 to Aug. 27, 2007 Aljems Andrade 2,082.00 5 "PP-92" to "PP-93" Jan. 1 to Aug. 27, 2007 Aljems Andrade 2,103.40 5 "PP-94" to "PP-98" Jan. 1 to Aug. 27, 2007 Aljems Andrade 4,037.10 10 "PP-99" to "PP-105" Jan. 1 to Aug. 27, 2007 Aljems Andrade 1,388.90 1 "PP-106" to "PP-109" Jan. 1 to Aug. 27, 2007 Aljems Andrade 2,788.90 6 "PP-110" to "PP-113" Jan. 1 to Aug. 27, 2007 Aljems Andrade 2,513.70 6 "PP-114" to "PP-118" Jan. 1 to Aug. 27, 2007 Aljems Andrade 2,112.50 4 "PP-119" to "PP-123" TOTAL PHP65,557.70 141 ============== ==== Minimum Wage @Php350.00 per Day for Php49,350.00 141 Days (Per Wage Order No. NCR-12) Aug. 28 to Dec. 31, 2007 Aljems Andrade Php2,087.10 4 PP-124 to "PP-128" Aug. 28 to Dec. 31, 2007 Aljems Andrade 2,672.60 5 PP-129 to "PP-133" Aug. 28 to Dec. 31, 2007 Aljems Andrade 2,742.20 5 PP-134 to "PP-138" Aug. 28 to Dec. 31, 2007 Aljems Andrade 1,904.30 5 PP-139 to "PP-143" Aug. 28 to Dec. 31, 2007 Aljems Andrade 2,513.70 5 PP-144 to "PP-148" Aug. 28 to Dec. 31, 2007 Aljems Andrade 2,533.00 5 PP-149 to "PP-153" Aug. 28 to Dec. 31, 2007 Aljems Andrade 1,782.40 4 PP-154 to "PP-158" Aug. 28 to Dec. 31, 2007 Aljems Andrade 1,917.00 5 PP-159 to "PP-163" Aug. 28 to Dec. 31, 2007 Aljems Andrade 2,935.20 7 PP-164 to "PP-170" Aug. 28 to Dec. 31, 2007 Aljems Andrade 2,297.90 5 PP-171 to "PP-175" Aug. 28 to Dec. 31, 2007 Aljems Andrade 2,412.10 5 PP-174 to "PP-179" Aug. 28 to Dec. 31, 2007 Aljems Andrade 2,335.90 5 PP-180 to "PP-182" Aug. 28 to Dec. 31, 2007 Aljems Andrade 1,807.80 4 PP-183 to "PP-185" Aug. 28 to Dec. 31, 2007 Aljems Andrade 2,691.40 5 PP-184 to "PP-189" Aug. 28 to Dec. 31, 2007 Aljems Andrade 2,493.40 5 PP-190 to "PP-194" Aug. 28 to Dec. 31, 2007 Aljems Andrade 2,386.70 5 PP-195 to "PP-197" TOTAL PHP37,512.70 79 ============== ==== Minimum Wage @Php362.00 per Day for 79 Days (Per Wage Order No. NCR-13) Php28,598.00 Total Compensation received by A. Andrade Php103,070.40 SHOULD BE MINIMUM WAGE OF A. ANDRADE TO BE EXEMPT FROM WTC PHP77,948.00 =========== From the foregoing, the actual compensation of Mr. Andrade in the amount of Php103,070.40 exceeded the minimum wage of Php77,948.00. Thus, the Court upholds the assessment on temporary pay in the reduced amount of Php103,070.40. TCAScE 2.a.2) Insurance Retirement Fund Php440,418.24 Insurance retirement fund pertains to petitioner's provision for the contribution to its funded and non-contributory, defined benefit pension plan. 199 The Court agrees with the ICPA that it is the same item lodged under the "Other Employment Cost" account, which pertains to actual contribution to retirement fund supported by ORs and vouchers which was claimed as deduction for income tax purposes. 200 Therefore, this item is cancelled. 2.a.3) Reconciling Item for Retirement Cost Php146,065.00 This pertains to the additional deductible expense arising from the difference between the retirement cost booked per accounting as against the amount of deductible expense for tax purposes. 201 However, no evidence was presented to disprove respondent's allegation, hence, said assessment is sustained. In sum, the assessment on salaries and wages in the amount of Php249,135.40 remains, computed as follows: DETAILS AMOUNT Temporary Pay Php103,070.40 Reconciling Item for Retirement Cost 146,065.00 TOTAL PHP249,135.40 ============= 3.) Final Withholding Tax ("FWT") Php75,609,617.00 Based on the ICPA report, 202 payments made to non-resident and resident individuals and corporations alleged by respondent as not subjected to FWT amounting to Php75,609,617.00 203 is comprised of the following items: DETAILS AMOUNT a. Royalties Resident Corporation Php41,292,473.00 b. Royalties Non-Resident Corporation 15,272,477.00 c. Production Bonus 12,116,340.00 d. Interest Expense 4,464,722.00 e. Management Fees 2,463,605.00 TOTAL PHP75,609,617.00 =============== Petitioner alleges that the above amounts are income payments made to resident and non-resident foreign individuals and corporations per 2007 audited financial statements ("AFS")/income tax return ("ITR");and that these are commission expenses and interest payments which have been subjected to withholding tax. Records show that the above accounts were reflected in petitioner's 2007 AFS and annual ITR, as follows: DETAILS AMOUNT EXHIBIT Royalties Php68,681,290.00 O-20 Production Bonus 32,719,766.00 O-20 Interest Expense 4,464,722.00 O-21 Management Fees 2,463,605.00 I, Line 110 TOTAL PHP108,329,383.00 =============== Based on the examination conducted by the Court, the amounts of royalties and production bonus reflected in the AFS in the amount of Php68,681,290.00 and Php32,719,766.00, respectively, are higher than the amount being assessed by the BIR; while the interest expense and management fees are the same amount as indicated in the CY 2007 AFS/ITR against the assessed figures. It appears therefore, that the assessed amounts were already included in the AFS of petitioner. As far as taxable income is concerned, the assessed amount of Php75,609,617.00 was properly recorded in the books of the petitioner, thus, already subjected to the income tax due. In sum, petitioner has disallowed expenses due to non-withholding in the amount of Php3,971,397.11, broken down as follows: DETAILS AMOUNT 1.a) Professional and Management Fees Php72,034.00 1.b) Payment to Contractors by Top 10K-Services 3,648,227.71 2.a) Salaries and Wages 249,135.40 TOTAL PHP3,969,397.11 ============== B. Unaccounted Expenses Php3,769,289.73 After re-investigation of the PAN, respondent computed the unaccounted commission expenses as follows: DETAILS AMOUNT Commission Expenses per BIR Forms 1601E Php124,804,929.73 204 Commission Expenses per ITR/FS 15,897,829.00 205 Unaccounted Commission Expenses Php108,907,100.73 Less: Adjustments per Re-investigation Production Bonus Php32,719,766.00 Royalties 68,681,290.00 Direct Charges-Others 3,736,755.00 Php105,137,811.00 206 UNACCOUNTED COMMISSION EXPENSES PER RE-INVESTIGATION PHP3,769,289.73 ============== As found by the ICPA, 207 the unaccounted expenses pertain to the following adjustments made in the company's books: cTDaEH DESCRIPTION AMOUNT a. Reversal of over accrued royalties Php1,235,230.72 b. Reversal of aged royalty checks 121,405.54 c. Reversal of over accrued other bonus expense 1,709,836.00 d. Additional accrual of other bonus expense (169,245.00) e. Brokerage Fees 887,021.00 TOTAL COMMISSIONS ACCOUNTED FOR PHP3,784,248.26 ============== A review of the documentary evidence submitted to the Court reveals that petitioner was able to properly account for the commission expenses lodged under reversal of over accrued royalties amounting to Php1,235,230.72, 208 reversal of aged royalty checks amounting to Php121,405.54 209 and reversal of over accrued other bonus expense of Php1,709,836.00. 210 However, documents submitted to support the additional accrual of other bonus expense amounting to Php169,245.00 211 pertains to 2006 expenses, and is therefore outside the period of claim. Petitioner likewise failed to submit supporting documents for brokerage fees amounting to Php887,021.00, thus, it will be considered unaccounted and should be included in the computation of deficiency income tax. Based from the foregoing, petitioner has unaccounted commission expenses not subjected to income tax amounting to Php702,817.47, computed as follows: DETAILS AMOUNT Unaccounted Commission Expenses per Re-investigation Php3,769,289.73 Less: Properly accounted commission expenses Reversal of over accrued royalties Php1,235,230.72 Reversal of aged royalty checks 121,405.54 Reversal of other bonus expense 1,709,836.00 Php3,066,472.26 UNACCOUNTED COMMISSION EXPENSES PHP702,817.47 ============ C. Unsupported Expenses Php10,105,563.00 Based on the ICPA Report, 212 respondent's assessment on unsupported expenses amounting to Php10,105,563.00 is comprised of the following transactions: NATURE OF PAYMENTS AMOUNT REFERENCE a. Credit Card Fee Php3,974,175.96 Exhibit "UUU," part 2, Annex AA b. Payments to Affiliates 1. Herbalife Singapore Pte. Ltd. Php2,463,604.82 2. Herbalife Europe Ltd. 33,479.67 Php2,497,084.49 Exhibit "UUU," part 2, Annex BB c. Accrued Other Miscellaneous Expense 1,801,642.53 Exhibit "UUU," part 2, Annex CC d. Payment for Local Taxes and Other Fees 1. City of Makati Php1,559,382.95 2. City of Lucena 200.00 3. Barangay San Lazaro 800.00 4. Bureau of Internal Revenue 100.00 5. Bureau of Food and Drugs 56,075.00 Php1,616,557.95 Exhibit "UUU," part 2, Annex DD e. Bank Charges 115,721.92 Exhibit "UUU," part 2, Annex EE f. Employee Reimbursements 8,641.00 Exhibit "UUU," part 2, Annex FF g. Donation and Contribution 6,500.00 Exhibit "UUU," part 2, Annex GG h. Others 23,310.00 Exhibit "UUU," part 2, Annex HH i. Cash Over/(Under) (965.50) Exhibit "GGG" j. Unaccounted Difference 62,894.65 Exhibit "GGG" TOTAL MISCELLANEOUS EXPENSE PER FS/ITR PHP10,105,563.00 =============== 1. Credit Card Fee Php3,974,175.96 Credit card fee pertains to the service fee charged by credit card companies for sales on account. 213 The ICPA noted that only Php700,287.97 was properly supported, while the remaining amount, Php3,273,887.99 was backed only by JVs. 214 However, the Court found that the documents identified by the ICPA as proper supports for credit card service fees (JVs and payment advices) 215 are insufficient to refute the assessment. Thus, the Court upholds the assessment for credit card fee amounting to Php3,974,175.96. 2. Payments to Affiliates Php2,497,084.49 Petitioner claims that it entered into agreements with Herbalife Europe Limited and Herbalife Singapore. The former through a Non-Resident Distributor Payment Agreement 216 executed between petitioner and Herbalife Europe Limited. Under the said agreement, Herbalife Europe remains as an independent contractor as a settlement agent for petitioner. 217 Thus, with respect to payments made to Herbalife Europe Ltd.,for management services rendered, the Court finds that petitioner was able to provide sufficient proof to rebut the assessment. Petitioner submitted JVs, 218 intercompany billings 219 and invoices, 220 to support its claim, thus, the assessment in this regard is cancelled. On the other hand, with respect to payments for management services allegedly rendered by Herbalife Singapore Pte. Ltd.,the Court finds that petitioner failed to establish the direct correlation between the expense being deducted and the development, management, operation and/or conduct of its business. The unsigned Service Agreement that it submitted was denied admission by the Court for being a mere photocopy. Further, the debit note 221 and the bank validated deposit slip as a proof of electronic fund transfer 222 are insufficient to support its claim and to refute respondent's findings. Thus, the assessment by respondent in the amount of Php2,463,604.82 is sustained. cSaATC 3. Accrued Other Miscellaneous Expense Php1,801,642.53 This account was supported by JVs 223 only, the Court finds these documents insufficient to cancel the assessment. Thus, the assessment is upheld amounting to Php1,801,642.53. 4. Payments for Local Taxes and Other Fees Php1,616,557.95 The Court agrees with the findings of the ICPA that petitioner was able to provide sufficient proof such as ORs, CVs and PVCs 224 up to the amount of Php1,610,857.95. As for the remaining Php5,700.00, the Court finds that the same is supported only by CVs and PCVs, 225 hence, only the assessment relating to the latter amount is sustained. 5. Bank Charges Php115,721.92 These pertain to charges from various banks. 226 The Court finds that the evidence presented, such as JVs and Metrobank application for fund transfer form, 227 do not prove nor support petitioner's allegation that these are indeed bank charges; and that the JVs are internally generated documents. In order to support petitioner's claim that these are bank charges, the supporting documents for which the JVs were based should have been presented. Thus, the Court upholds the assessment amounting to Php115,721.92. 6. Employee Reimbursements Php8,641.00 This amount represents payments for notarial fees, postage stamps, service fees and donations. 228 However, upon examination of the documents submitted to the Court, only the OR 229 amounting to Php22.00 is valid, while the remaining amount of Php8,619.00 is supported by CVs, 230 PCVs, 231 acknowledgment receipt 232 and ORs without petitioner's name and/or without ATP. 233 Thus, the assessment amounting to Php8,619.00 is sustained. 7. Donation and Contribution Php6,500.00 The Court agrees with the ICPA that only the amount of Php2,500.00 was properly supported by ORs, 234 thus, the amount Php4,000.00 remains unsubstantiated with proper documents. 8. Others Php23,310.00 This amount represents payments for destruction charge lodged under other miscellaneous expense, was properly supported by an OR, 235 and is therefore cancelled. 9. Cash Over/(Under) (Php965.50) Cash Over/(Under) amounting to (Php965.50) is cancelled for being properly supported. 236 10. Unaccounted Difference Php62,894.65 The assessment for unaccounted difference is sustained for petitioner's failure to account for the same. In sum, out of the Php10,105,563.00 assessed by respondent as unsupported miscellaneous expenses, petitioner was able to provide documentary evidence up to Php1,669,204.12 only. The remaining Php8,436,358.88 is unsupported, hence, sustained for reasons previously discussed and computed as follows: NATURE OF PAYMENTS AMOUNT a. Credit Card Fee Php3,974,175.96 b. Payment to Affiliates-Herbalife Singapore 2,463,604.82 c. Accrued Other Miscellaneous Expense 1,801,642.53 d. Payment for Local Taxes and Other Fees 5,700.00 e. Bank Charges 115,721.92 f. Employee Reimbursements 8,619.00 g. Donation and Contribution 4,000.00 j. Unaccounted Difference 62,894.65 TOTAL UNSUPPORTED MISCELLANEOUS EXPENSE PHP8,436,358.88 ============== D. Excess Credits Carried Over to Succeeding Year Php630,442.00 Excess tax credit amounting to Php630,442.00 was disallowed by respondent as a deduction from income tax due for the reason that it was allegedly forwarded to the succeeding taxable year (2008),as verified in the Integrated Tax System ("ITS"). However, upon examination of the BIR records, there was no document proving respondent's contention, hence this assessment is cancelled. As discussed, petitioner has basic deficiency income tax due in the amount of Php3,957,558.71, computed as follows: DETAILS AMOUNT Taxable Income per ITR Php9,377,113.00 Add: Disallowed Expenses due to non-withholding Php3,969,397.11 Unaccounted Expenses 702,817.47 Unsupported Expenses 8,436,358.88 Php13,108,573.46 Adjusted Taxable Income Php22,485,686.46 Income Tax Due (35%) Php7,869,990.26 Less: Prior Year's MCIT Php3,281,989.55 Creditable Tax Withheld 630,442.00 Php3,912,431.55 BASIC DEFICIENCY INCOME TAX PHP3,957,558.71 ============= II. DEFICIENCY VALUE ADDED TAX Php3,922,839.57 Respondent computed the alleged deficiency VAT amounting to Php3,922,839.57, 237 as follows: DETAILS AMOUNT Taxable Sales per VAT returns [Php]316,188,408.80 238 Add: Undeclared Income from Unaccounted 3,769,289.73 Expense (Schedule 2) Taxable Sales per investigation [Php]319,957,698.53 Output Tax Due 38,394,923.83 Less: Claimed Input Tax 19,491,171.20 239 VAT Due [Php]18,903,752.63 Less: Payments per BIR records (Integrated Tax System) 16,643,909.76 Deficiency Value-Added Tax [Php]2,259,842.87 Add: Interest (01.26.08 to 09.30.11) 1,662,996.70 TOTAL AMOUNT DUE [PHP]3,922,839.57 =============== The Court agrees with the findings of the ICPA that petitioner's VAT payments amounted to Php18,451,437.85 based on its Quarterly VAT Return (BIR Form No. 2550Q),summarized as follows: QUARTER AMOUNT EXHIBIT 1st Quarter Php3,183,986.07 "PPP-01," line 25 2nd Quarter 3,062,929.37 "PPP-09," line 25 3rd Quarter 6,850,724.70 "PPP-19," line 25 4th Quarter 5,353,797.71 "PPP-28," line 25 TOTAL PHP18,451,437.85 =============== Based on the FAN, the deficiency VAT pertains to undeclared income from unaccounted expenses amounting to Php3,769,289.73. As previously discussed, petitioner was able to account the said expenses but only to the extent of Php3,066,472.26, while the amount Php702,817.47 remains unaccounted, to wit: DETAILS AMOUNT Unaccounted Commission Expenses per Re-investigation Php3,769,289.73 Less: Properly accounted commission expenses Reversal of over accrued royalties Php1,235,230.72 Reversal of aged royalty checks 121,405.54 Reversal of other bonus expense 1,709,836.00 Php3,066,472.26 UNACCOUNTED COMMISSION EXPENSES PHP702,817.47 ============= From the foregoing, petitioner has a basic deficiency VAT arising from unaccounted expenses of Php84,338.10, computed as follows: EATCcI DETAILS AMOUNT Taxable Sales per VAT Returns Php316,188,408.80 Add: Undeclared Income from Unaccounted Expenses 702,817.47 Taxable Sales per Investigation Php316,891,226.27 Output Tax Due Php38,026,947.15 Less: Claimed Input Tax 19,491,171.20 VAT Due Php18,535,775.95 Less: Payments per BIR Form No. 2550Q 18,451,437.85 BASIC DEFICIENCY VALUE ADDED TAX PHP84,338.10 ============== III. DEFICIENCY EXPANDED WITHHOLDING TAX Php767,977.34 Respondent assessed 240 petitioner for failure to withhold and remit the withholding tax on the following income payments in the amount of Php767,977.34, to wit: NATURE OF INCOME PAYMENT AMOUNT TAX RATE EWT DUE a.) Professional and Management fees Php1,464,269.00 10% Php146,426.90 b.) Payment to Contractors by Top 10K Corp.-Services 6,185,661.27 2% 123,713.23 c.) Payment by Top 10K-Goods 17,087,895.00 1% 170,878.95 Deficiency Expanded Withholding Tax Php441,019.08 Add: 20% Interest p.a. (04.16.08 to 09.30.11) 326,958.26 TOTAL AMOUNT DUE PHP767,977.34 ============ a.) Professional and Management Fees Php146,426.90 Professional and management fees was already discussed. 241 To reiterate, the Php1,100,000.00 pertains to payment to the recruitment agency KPI, as fee for the placement of Mr. Enrico Garcia as its general manager. Examination of the documents show that payment to KPI was properly subjected to 2% withholding tax as evidenced by BIR Form No. 1604-E, 242 Alphalist of Payees Subject to EWT, 243 CVs 244 and ORs, 245 hence, respondent cannot enforce the said assessment against petitioner. In addition, this account also includes expenses pertaining to audit fees of Php239,268.00 and legal fees of Php125,000.00, payable to Manabat Sanagustin & Co. and Britanico Sarmiento Franco & Associates, respectively, which are general professional partnerships not subject to EWT pursuant to Section 2.57.5 of RR No. 2-98 ,as amended. However, out of the amounts in question, only the amounts of Php168,000.00 and Php124,234.00 for Manabat and Britanico, respectively, were supported by valid documents, broken down as follows: Manabat Sanagustin & Co. OR NO. OR AMOUNT OR DATE EXHIBIT OR # 9670 Php16,800.00 11/19/2007 S-70 OR # 9344 16,800.00 10/4/2007 S-67 OR # 9343 16,800.00 10/4/2007 S-64 OR # 9232 16,800.00 8/21/2007 S-61 OR # 9116 16,800.00 7/5/2007 S-58 OR # 9115 16,800.00 7/5/2007 S-55 OR # 9001 16,800.00 5/31/2007 S-52 OR # 8674 16,800.00 3/30/2007 S-50 OR # 8651 16,800.00 3/8/2007 S-47 OR # 8508 16,800.00 1/26/2007 S-44 TOTAL PHP168,000.00 ============ Britanico Sarmiento Franco & Associates OR NO. OR AMOUNT OR DATE EXHIBIT OR # 0508 Php8,848.00 10/19/2007 S-39 OR # 0402 21,840.00 3/30/2007 S-37 OR # 0273 93,546.00 1/22/2007 S-18 TOTAL PHP124,234.00 ============ As a result, only the amount Php72,034.00 was not subjected to EWT. Thus, petitioner has deficiency EWT of Php7,203.40, computed as follows: GPP TAX BASE TAX RATE EWT DUE Manabat Sanagustin & Co. Php71,268.00 10% Php7,126.80 Britanico Sarmiento Franco & Associates 766.00 10% 76.60 TOTAL PHP72,034.00 PHP7,203.40 ============ ============ b.) Payment to Contractor by Top 10k Corp.-Services Php123,713.23 The Court agrees with the findings of the ICPA 246 that payments of services to contractors by top 10k corporations amounting to Php1,251,069.94 were not subjected to EWT, thus, petitioner is liable for deficiency EWT of Php25,021.40, broken down as follows: DETAILS TAX BASE RATE TAX DUE EXHIBIT Nature of Payments by Top 10k for purchases of services: Payments to various insurance companies Php539,963.11 2% Php10,799.26 UUU, Annex J Employee Training Cost 102,935.71 2% 2,058.71 UUU, Annex K Employee Uniforms-Payments to Third Parties 2,483.62 2% 44.67 UUU, Annex N Accrued Employment Cost 605,687.50 2% 12,113.75 UUU, Annex R TOTAL PHP1,251,069.94 PHP25,021.40 ============== ============== c.) Payments to Suppliers by Top 10k Corporations for purchases of Goods Php170,878.95 Similarly, the Court agrees with the findings of the ICPA that purchases of goods (Additions to Plant, Property and Equipment) amounting to Php1,538,115.00 were not subjected to EWT, thus petitioner is liable for deficiency EWT in the amount of Php15,381.15, computed as follows: DETAILS AMOUNT EXHIBIT Amount of Payments by Top 10K Corp. for Purchase of Goods per Company's Schedule of Additions to Property, Plant and Equipment Php17,087,895.52 "QQQ-1 to 2" Less: Payments Subjected to EWT per Alphalist Leasehold Improvements Subjected to 15% EWT Php380,000.00 "J-1," page 39 Leasehold Improvements Subjected to 10% EWT 410,500.00 "J-1," page 39 Leasehold Improvements Subjected to 2% EWT 10,667,439.68 "J-1," page 38 Leasehold Improvements Subjected to 1% EWT 1,291,162.67 "J-1," pages 37 and 38 Furniture and Fixtures Subjected to 2% EWT 6,250.00 "J-1," page 38 Furniture and Fixtures Subjected to 1% EWT 1,562,534.16 "J-1," pages 37 and 38 Office Equipment Subjected to 1% EWT 1,101,447.58 "J-1," pages 37 and 38 Computer Equipment Subjected to 2% EWT 56,607.14 "J-1," page 38 Computer Equipment Subjected to 1% EWT 73,839.29 Php15,549,780.52 "J-1," page 37 Payments not Subjected to EWT Php1,538,115.00 EWT Rate 1% DEFICIENCY EWT PHP15,381.15 =============== From the foregoing discussion, petitioner is liable for deficiency EWT in the amount of Php47,605.95, computed as follows: DHITCc NATURE OF INCOME PAYMENT AMOUNT TAX RATE EWT DUE a.) Professional and Management fees Php72,034.00 10% Php7,203.40 b.) Payment to Contractors by Top 10K Corp.-Services 1,251,069.94 2% 25,021.40 c.) Payment by Top 10K-Goods 1,538,115.00 1% 15,381.15 DEFICIENCY EXPANDED WITHHOLDING TAX PHP47,605.95 =========== IV. DEFICIENCY WITHHOLDING TAX ON COMPENSATION Php309,236.80 As previously discussed, respondent's assessment on salaries and wages amounting to Php249,135.40 is upheld for petitioner's failure to subject it to WTC, thus, it is proper for the petitioner to be held liable for deficiency WTC in the amount of Php60,789.04, computed as follows: DETAILS AMOUNTS Amount Not Subjected to Withholding Php249,135.40 Average Withholding Tax Rate: Tax Due & Withheld Php2,055,153.64 ------------------------------ = 24.40% 247 Taxable Compensation 8,423,657.79 BASIC DEFICIENCY WITHHOLDING TAX ON COMPENSATION PHP60,789.04 ============ V. DEFICIENCY FINAL WITHHOLDING TAX Php40,918,045.57 Respondent assessed petitioner for alleged deficiency FWT in the amount of Php40,918,045.57, 248 computed as follows: DETAILS INCOME SHOULD BE TAX DEFICIENCY DISCREPANCY PER PAYMENT TAX RATE IMPOSED TAX RATE RE-INVESTIGATION Royalties-Res. Corp. Php41,292,473.00 35% 10% 25% Php10,323,118.25 Royalties-Non-Res. Corp. 15,272,477.00 35% 10% 25% 3,818,119.25 Production Bonus 12,116,340.00 35% 10% 25% 3,029,085.00 Interest Expense 4,464,722.00 20% 15% 5% 223,236.10 Management Fees 2,463,605.00 35% 0% 35% 862,261.75 Total Php75,609,617.00 Php18,255,820.35 Add: 50% Surcharge 9,127,910.18 Interest (01.16.08 to 09.30.11) 13,534,315.04 TOTAL AMOUNT DUE PHP40,918,045.57 ================ In the details of discrepancies, respondent stated that these amounts were royalties and income payments made to non-resident foreign corporations which the petitioner failed to subject to FWT (with correct tax rate),in violation of Section 28 (B) (1) 249 and Section 28 (B) (5) (a) 250 of the 1997 NIRC. 251 Petitioner claims that the royalty overrides and production bonuses paid to its resident and non-resident distributors are not to be understood as the "royalties" under Section 42 (A) (4) 252 of the 1997 NIRC. Ms. Jacob testified that royalty overrides and production bonuses form part of the benefits given to distributors. Royalty overrides is a payment to qualified Supervisors ranging from 5 to 15% on the monthly volume of their three (3) levels of active downline distributors. A production bonus is how petitioner denominates a commission, which is a bonus of 2% to 7% on downline distributors' collective volume earned by eligible distributors. 253 The Court agrees with petitioner that income payments to resident distributors are not royalties subject to FWT but in the nature of commissions. An examination of documents shows that royalty and production bonuses paid to resident and non-resident corporations with valid supporting documents are Php40,581,983.80 and Php25,732,329.23, respectively, as shown below: DETAILS AMOUNT PER WITH SUPPORTING DIFFERENCE ASSESSMENT DOCUMENTS Royalties/Commissions to Resident Distributors Subjected to 10% EWT Php41,292,473.00 Php40,581,983.80 254 Php710,489.20 Royalties/Commissions to Non-Resident Distributors Subjected to 25% & 35% 27,388,817.00 25,732,329.23 255 1,656,487.77 TOTAL PHP68,681,290.00 PHP66,314,313.03 PHP2,366,976.97 =============== =============== =============== The Court likewise agrees with the findings of the ICPA that the amount of Php710,489.20 should be subjected to 10% EWT for not being properly supported with documents. Hence, the Court finds petitioner liable for deficiency EWT amounting to Php71,048.92. 256 Similarly, the income payment to non-resident distributors are not royalties that should be subjected to FWT but it is a commission subject to withholding tax, hence, the commission amounting to Php1,656,487.77 without supporting documents should be subjected to 25% withholding tax or a deficiency of Php414,121.94. On the other hand, the Court finds merit in respondent's assessment that interest expense amounting to Php4,464,722.00 is subject to 20% FWT. Records show that it was already subjected to a 15% FWT, thus, petitioner is accountable for a deficiency 5% FWT in the amount of Php223,236.10. Anent the assessment for management fee, as previously discussed, petitioner failed to prove that the services were rendered outside the Philippines. The Confirmation Letter of Ms. Ng Woei Bin, 257 without any supporting documents, is at most self-serving and should not be given any weight. It follows, therefore, that respondent's assessment on management fees is sustained. cEaSHC Thus, based on the foregoing discussion, petitioner is liable for deficiency FWT/EWT in the amount of Php1,570,668.71, computed as follows: DETAILS AMOUNT TAX RATE TAX DUE Royalties/Commission Resident Distributors Php710,489.20 10% Php71,048.92 Royalties/Commission Non-Resident Distributors 1,656,487.77 25% 414,121.94 Interest Expense 4,464,722.00 5% 223,236.10 Management Fee 2,463,605.00 35% 862,261.75 TOTAL PHP9,295,303.97 PHP1,570,668.71 ============== ============== VI. DEFICIENCY FINAL WITHHOLDING-VAT Php8,577,939.88 Respondent assessed the petitioner for alleged deficiency withholding VAT of Php3,822,424.68, computed as follows: DETAILS AMOUNT Production Bonus Php12,116,340.00 Royalties 15,272,477.00 Interest Expense 4,464,722.00 Total Php31,853,539.00 VAT Rate 12% Basic Deficiency Withholding VAT Php3,822,424.68 Add: 50% Surcharge 1,911,212.34 Interest (01.11.08 to 09.30.11) 2,844,302.86 TOTAL DEFICIENCY WITHHOLDING VAT PHP8,577,939.88 ============== The production bonus and royalties pertain to commissions paid to Anthony Wing and Louisa Higgins, non-resident distributors, as evidenced by their respective affidavits. 258 However, the originals of the affidavits were not presented, to prove that the income they received were derived from outside the Philippines. Without such proof, respondent's assessment in the amount of Php3,286,658.04 is upheld, computed as follows: DETAILS AMOUNT Production Bonus Php12,116,340.00 Royalties 15,272,477.00 Total Php27,388,817.00 VAT Rate 12% DEFICIENCY WITHHOLDING VAT PHP3,286,658.04 ============== On the other hand, assessment on interest expense for deficiency withholding VAT in the amount of Php535,766.04 259 is cancelled for not being subject to withholding VAT under the 1997 NIRC. IAETDc VII. DEFICIENCY DOCUMENTARY STAMP TAX Php82,715.52 Petitioner is allegedly liable for deficiency DST in the amount of Php36,814.00, computed as follows: DETAILS AMOUNT A. Increase in Due from Related Parties per FS Php2,042,244.00 Documentary Stamp Tax (Php1.00 for every Php10,212.00 Php200.00) B. Monthly Rent per BIR Form 1601E 410,500.00 Term (60 months) 60.00 Escalation Rate 10% Total Rental Fee/Tax Base Year 1 Php4,926,000.00 Year 2 5,418,600.00 Year 3 5,418,600.00 Year 4 5,418,600.00 Year 5 5,418,600.00 Php26,600,400.00 Documentary Stamp Tax (Php3.00 plus Php1.00 for every Php1,000.00 in excess of Php2,000.00) 26,602.00 Basic Deficiency DST 36,814.00 Add: 50% Surcharge Php18,407.00 Interest (01.06.08 to 09.30.11) 27,494.52 Php45,901.52 TOTAL DEFICIENCY DST PHP82,715.52 ============ An examination of petitioner's Statement of Cash Flows 260 indicates a cash flow from a financing activity, showing an increase in due to related parties amounting to Php2,042,244.00. Related party transactions 261 is defined as petitioner's transactions with its parent company and other related parties, which are, under the existing policies, subject to interest at a fixed rate of 0.5% of outstanding payables exceeding ninety (90) days. These transactions consist mainly of cash advances from related parties used for working capital requirements and purchase of inventories. 262 Petitioner failed to provide evidence to disprove the assessment. Section 179 263 of the 1997 NIRC states that a DST shall be collected on every original issue of debt instruments of one peso (Php1.00) on each two hundred pesos (Php200.00),or a fractional part thereof, of the issue price of any such debt instrument. Thus, the Court upholds respondent's assessment of deficiency DST liability amounting to Php10,212.00. On the other hand, assessment on the DST on Rent in the amount Php26,602.00 is cancelled since it was already paid, as evidenced by BIR Form No. 2000. 264 VIII. PENALTIES Php53,000.00 Respondent's imposition of compromise penalty amounting to Php50,000.00 cannot be sustained. Under Revenue Memorandum Order ("RMO") No. 01-90 , 265 as amended by RMO No. 19-07 , 266 compromise penalties are only amounts suggested in settlement of criminal liability, and may not be imposed or exacted on the taxpayer in the event that the taxpayer refuses to pay the same. 267 RMO No. 19-07 further provides that compromise penalties should not form part of the assessment notice that reflects deficiency basic tax, surcharge and interest; and that it should appear in a separate assessment notice/demand letter as the amount suggested to the taxpayer in lieu of criminal prosecution. Thus, absent any clear showing that petitioner consented to the compromise penalty, its imposition should be cancelled. On the other hand, the Court upholds the Php3,000.00 penalty imposed by the respondent for petitioner's failure to file Quarterly Remittance Return of Final Income Taxes Withheld (BIR Form No. 1603) for the 2nd, 3rd and 4th quarters of 2007, pursuant to Section 250 268 of the 1997 NIRC. WHEREFORE ,premises considered, the instant Petition for Review is hereby PARTIALLY GRANTED .The assessment issued by respondent for CY 2007 covering deficiency IT, VAT, EWT, WTC, FWT, FWT-VAT, DST and penalties is hereby UPHELD WITH MODIFICATIONS . Accordingly, petitioner is hereby ORDERED TO PAY the total amount of Eleven Million Two Hundred Seventy Five Thousand Two Hundred Eighty-Eight and 19/100 Pesos (Php11,275,288.19) ,inclusive of the 25% surcharge imposed under Section 248 (A) (3) of the 1997 NIRC ,as amended, broken down as follows: TAX TYPE BASIC TAX 25% SURCHARGE TOTAL Income Tax Php3,957,558.71 Php989,389.68 Php4,946,948.39 Value Added Tax 84,338.10 21,084.53 105,422.63 Expanded Withholding Tax 47,605.95 11,901.49 59,507.44 Withholding Tax on Compensation 60,789.04 15,197.26 75,986.30 Final Withholding Tax 1,570,668.71 392,667.18 1,963,335.89 Final Withholding of VAT 3,286,658.04 821,664.51 4,108,322.55 Documentary Stamp Tax 10,212.00 2,553.00 12,765.00 Total Php9,017,830.56 Php2,254,457.64 Php11,272,288.19 Penalty 3,000.00 GRAND TOTAL PHP11,275,288.19 =============== In addition, petitioner is also ORDERED TO PAY : 1. Deficiency interest at the rate of twenty percent (20%) per annum on the basic deficiency IT, VAT, EWT, WTC, FWT, FWT-VAT, DST, computed from dates indicated below until full payment thereof pursuant to Section 249 (B) 269 of the 1997 NIRC ,as amended: DcHSEa TAX TYPE BASIC TAX DEFICIENCY INTEREST COMPUTED FROM Income Tax Php3,957,558.71 April 16, 2008 Value Added Tax 84,338.10 January 26, 2008 Expanded Withholding Tax 47,605.95 January 16, 2008 Withholding Tax on Compensation 60,789.04 January 16, 2008 Final Withholding Tax 1,570,668.71 January 16, 2008 Final Withholding of VAT 3,286,658.04 January 11, 2008 Documentary Stamp Tax 10,212.00 January 06, 2008 2. Delinquency interest at the rate of twenty percent (20%) per annum on the amount of Php11,272,288.19 ,representing the basic deficiency IT, VAT, EWT, WTC, FWT, FWT-VAT, DST, and the corresponding twenty five percent (25%) surcharge; and the twenty percent (20%) deficiency interest which have accrued as aforestated in Item (1),computed from August 27, 2011 until full payment thereof pursuant to Section 249 (C) 270 of the 1997 NIRC ,as amended. SO ORDERED. (SGD.) LOVELL R. BAUTISTA Associate Justice Esperanza R. Fabon-Victorino, J. ,concurs. Ma. Belen M. Ringpis-Liban, J. ,is on leave. Footnotes 1. Records, CTA Case No. 8478, Vol. 1, Petition for Review ,pp. 10-220, with annexes. 2. "Sec. 7. Jurisdiction. The Court of Tax Appeals shall exercise: (a) Exclusive appellate jurisdiction to review by appeal, as herein provided: (1) . . .; (2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National Internal Revenue Code or other applicable law provides a specific period for action: Provided, that in case of disputed assessments, the inaction of the Commissioner of Internal Revenue within the one hundred eighty-day period under Section 228 of the National Internal Revenue Code shall be deemed a denial; . . ." 3. An Act Creating the Court of Tax Appeals, as amended. 4. An Act Expanding the Jurisdiction of the Court of Tax Appeals (CTA), Elevating its Rank to the Level of a Collegiate Court with Special Jurisdiction and Enlarging its Membership, Amending for the Purpose Certain Sections of Republic Act No. 1125, as amended, Otherwise Known as the Law Creating the Court of Tax Appeals, and for Other Purposes. 5. An Act Enlarging the Organizational Structure of the Court of Tax Appeals, Amending for the Purpose Certain Sections of the Law Creating the Court of Tax Appeals, and for Other Purposes. 6. "Rule 4. Jurisdiction of the Court ... Sec. 3. Cases within the jurisdiction of the Court in Division. The Court in Division shall exercise: (a) Exclusive original over or appellate jurisdiction to review by appeal the following: (1) . . .; (2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other applicable law provides a specific period for action: . . ." 7. A.M. No. 05-11-07-CTA ,November 22, 2005. 8. Records, Vol. 1, Petition for Review, Prayer ,p. 38. 9. Id.,Pre-Trial Order, Statement of the Case ,p. 466. 10. Records Box 1, Exhibit "I," Petitioner's Formal Offer of Evidence ("FOE"). 11. Id.,Exhibit "K-1," Judicial Affidavit of Margie B. Alabastro, Q&A 8 ,p. 2; Records, Vol. 2, Exhibit "WWW," Judicial Affidavit of Lina E. Jacob, Q&A 6 ,p. 599. 12. Records, Vol. 2, Exhibit "WWW," Judicial Affidavit of Lina E. Jacob, Q&A 7 ,p. 599. 13. Records Box 1, Exhibit "B," Petitioner's FOE. 14. While the ITR has a stamp dated "APR 14 2007," this appears to be a mistake in the receipt of the BIR and should instead read "APR 14 2008." Considering that the ITR for the year ending December 31, 2007 is due to be filed on April 15, 2008 and that the issue date of the Community Tax Certificate ("CTC") in the 2007 ITR is on January 23, 2008, it is impossible for the ITR to be filed on April 14, 2007 with a postdated CTC. Moreover, it cannot be claimed that the 2007 ITR is the 2006 ITR since petitioner already filed its 2006 ITR, that the 2007 ITR does not provide that it is an amended one. Moreover, the 2007 ITR expressly provides that it is for the year ending December 2007, and a comparison of the 2006 and 2007 ITRs shows that the latter is preceded by the former by referring to the amounts of NOLCO and Beginning/Ending Inventories. On top of this, a 2007 ITR was uncovered from the BIR Records showing a receiving stamp with "APR 15 2008" on the 2007 ITR, see BIR Records ,pp. 1-33, with annex. 15. Records Box 1, Petitioner's FOE, Exhibit "I." 16. Id.,Exhibits "J" and "J-1." 17. BIR Records ,p. 44. 18. Records, Vol. 1, Joint Stipulation of Facts and Issues ("JSFI") ,p. 284. 19. BIR Records ,p. 35. 20. BIR Records, Exhibits "R-3," "R-3-a," "R-3-b," and "R-3-c," pp. 265-267. 21. Id.,Exhibits "R-6," "R-6-a," and "R-6-b," pp. 358-363. 22. Id. at 370. 23. Records, Vol. 1, JSFI ,p. 284. 24. BIR Records ,p. 371. 25. Id. at 935-952. 26. Records, Vol. 1, JSFI ,p. 284. 27. Records Box 1, Petitioner's FOE, Exhibit "A;" BIR Records, Exhibit "R-1." 28. Records, Vol. 1, JSFI ,p. 284. 29. BIR Records ,p. 1303. 30. Records Box 1, Petitioner's FOE, Exhibits "B" and "B-1." 31. Records, Vol. 1, JSFI ,p. 284. 32. Records Box 1, Petitioner's FOE, Exhibit "F," BIR Form No. 2000. 33. Records, Vol. 1, Petition for Review ,pp. 10-220, with annexes. 34. Id.,JSFI ,p. 284. 35. Records, Vol. 1, Summons ,p. 221. 36. Id. at 222-223. 37. Records, Vol. 1, Minutes of Hearing dated May 15, 2012 ,p. 224. 38. Id. 39. Id. at 226. 40. Records, Vol. 1 ,pp. 228-229. 41. Id. at 231. 42. Records, Vol. 1, Answer ,pp. 232-238. 43. Id. at 233-235. 44. Id. at 235-236. 45. Id. at 236-237. 46. Records, Vol. 1, Reply ,pp. 240-247. 47. Id. at 248. 48. Id. at 249. 49. Records, Vol. 1, Petitioner's Pre-Trial Brief ,pp. 250-260. 50. Id.,Respondent's Pre-Trial Brief ,pp. 261-263. 51. Id.,Minutes of Hearing dated August 3, 2012 ,p. 264. 52. Id. at 265-266. 53. Id. at 267. 54. Id.,Minutes of Hearing dated August 3, 2012 ,p. 264; see pp. 269-270. 55. Records, Vol. 1 ,pp. 271-276, with annex. 56. Id.,JSFI ,pp. 284-291. 57. Id. at 293-294. 58. Id.,Pre-Trial Order ("PTO") ,pp. 466-471. 59. Id. at 482-487. 60. Id.,Minutes of Hearing dated October 18, 2012 ,pp. 488-489. 61. Records, Vol. 1 ,pp. 493-494. 62. Records, Vol. 2 ,p. 707. 63. Records, Vol. 1, Judicial Affidavit ("JA") of Margie B. Alabastro ,pp. 301-463, with annexes; Records, Vol. 1, Minutes of Hearing dated September 25, 2012 ,p. 464. 64. Records, Vol. 2, JA of Ms. Mary Ann C. Capuchino ,pp. 503-597, with annexes; Records, Vol. 1, Minutes of Hearing dated October 18, 2012 ,p. 488; Records, Vol. 2, Minutes of Hearing dated January 22, 2013 ,pp. 684-686. 65. Records, Vol. 1, JA of Ms. Mary Ann C. Capuchino ,pp. 477-480, with annex; Records, Minutes of Hearing dated October 18, 2012 ,pp. 488-489; see Records, Vol. 1, Oath of Commission dated October 18, 2012 ,p. 490. 66. Records, Vol. 2, Exhibits "WWW" and "WWW-1," JA of Ms. Lina E. Jacob ,pp. 598-683, with annexes; Minutes of Hearing dated January 22, 2013 ,pp. 684-686; Minutes of Hearing dated May 15, 2013 ,p. 796. 67. Id. at 797-803. 68. Id. at 806. 69. Id.,Minutes of Hearing dated July 11, 2013 ,p. 807. 70. Id. 71. Id. at 816. 72. Records, Vol. 2 ,pp. 808-814. 73. Records, Vol. 2 ,pp. 833-844. 74. Id. at 820-827. 75. Id. at 832. 76. Id. at 845-850. 77. BIR Records, Exhibit "R-14-c," pp. 1393-1398. 78. Records, Vol. 2 ,pp. 851-857. 79. Id. at 859-863. 80. Id.,Minutes of Hearing dated August 29, 2013 ,p. 864. 81. Id. 82. Id. at 866-867. 83. BIR Records, Exhibit "R-1," pp. 1417-1418. 84. Id. at 1457-1460. 85. Records, Vol. 2 ,pp. 869-870. 86. Id.,Minutes of Hearing dated November 25, 2013 ,p. 873. 87. Id. 88. Id. at 886. 89. Id. at 888-936 and 938-944. 90. Id. at 887 and 937. 91. Records, Vol. 2, Minutes of Hearing dated March 13, 2014 ,p. 947. 92. Id. 93. Id. 94. Records, Vol. 2, Minutes of Hearing dated March 13, 2014 ,p. 947. 95. Id. at 952-953. 96. Id. at 962-967. 97. Id. at 955-961. 98. Id. at 970-973. 99. See Records, Vol. 2 ,pp. 974-978 and 980. 100. Records, Vol. 2, Petitioner's FOE ,pp. 981-1005. 101. Id. at 1008-1009. 102. Records, Vol. 3 ,pp. 1010-1022. 103. Id. at 1069-1076. 104. Id. at 1025-1026. 105. Records, Vol. 3 ,pp. 1031-1032. 106. Id. at 1080. 107. Id. 108. Id.,Exhibits "R-15" and "R-15-a," JA of Revenue Officer ("RO") Fatima B. Pre ,pp. 1198-1207; Minutes of Hearing dated April 13, 2015 ,p. 1148. 109. Id.,Exhibits "R-16" and "R-16-a," JA of RO Emilio O. Romero ,pp. 1210-1215. 110. Id.,Minutes of Hearing dated July 7, 2015 ,p. 1175. 111. Records, Vol. 3, Minutes of Hearing dated July 7, 2015 ,p. 1175. 112. Id. 113. Id. at 1177-1178. 114. See Records, Vol. 3 ,pp. 1180-1184. 115. Records, Vol. 3, Respondents' FOE ,pp. 1186-1196. 116. Id. at 1234-1235. 117. Records, Vol. 3 ,pp. 1236-1250, with annexes. 118. Id. at 1252. 119. Id.,Memorandum for the Petitioner Ad Cautelam ,pp. 1255-1296. 120. Id. at 1253. 121. Id. at 1254. 122. Id. at 1298. 123. Records, Vol. 3 ,p. 1300. 124. Records, Vol. 1, PTO ,pp. 467-468. 125. Underscoring ours. 126. Records Box 1, Petitioner's FOE, Exhibit "A;" BIR Records, Exhibit "R-1;" Records, Vol. 1, JSFI ,p. 284. 127. Records Box 1, Petitioner's FOE, Exhibits "B" and "B-1;" Records, Vol. 1, JSFI ,p. 284. 128. Records, Vol. 1, JSFI ,p. 284. 129. G.R. Nos. 172045-46, June 16, 2009, 589 SCRA 253. 130. Records Box 1, Petitioner's FOE, Exhibit "B-1." 131. Commissioner of Internal Revenue v. Hon. Raul M. Gonzalez, Secretary of Justice, et al. ,G.R. No. 177279, October 13, 2010, 633 SCRA 139, citing Rizal Commercial Banking Corporation v. Commissioner of Internal Revenue , G.R. No. 168498, April 24, 2007, 522 SCRA 144, citing Commissioner of Internal Revenue v. Hantex Trading Co., Inc. , G.R. No. 136975, March 31, 2005, 454 SCRA 301. 132. Records Box 1, Petitioner's FOE, Exhibit "A;" BIR Records, Exhibit "R-1." 133. Records Box 1, Petitioner's FOE, Exhibit "A;" BIR Records, Exhibit "R-1." 134. Records, Vol. 3, Memorandum for the Petitioner Ad Cautelam, item no. 24 ,p. 1260. 135. Records Box 1, Petitioner's FOE, Exhibit "J." 136. Id.,Exhibit "J-1," p. 38 of 39. 137. Id.,Exhibit "S-78." 138. Id.,Exhibit "S-79." 139. "SEC. 26. Tax Liability of Members of General Professional Partnerships. A general professional partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities. For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership." 140. "SECTION 2.57.5. Exemption from Withholding. The withholding of creditable withholding tax prescribed in these Regulations shall not apply to income payments made to the following: (A) ... (B) Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special ,such as but not limited to the following: (1) ... (4) General Professional Partnerships; ..." 141. Implementing Republic Act No. 8424 , An Act Amending the National Internal Revenue Code, as Amended Relative to the Withholding on Income Subject to the Expanded Withholding Tax and Final Withholding Tax, Withholding of Income Tax on Compensation, Withholding of Creditable Value-Added Tax and Other Percentage Taxes, effective January 1, 1998. 142. Manabat Sanagustin & Co. Manabat Sanagustin & Co. OR NO. OR AMOUNT OR DATE EXHIBIT OR # 9670 Php16,800.00 11/19/2007 S-70 OR # 9344 16,800.00 10/4/2007 S-67 OR # 9343 16,800.00 10/4/2007 S-64 OR # 9232 16,800.00 8/21/2007 S-61 OR # 9116 16,800.00 7/5/2007 S-58 OR # 9115 16,800.00 7/5/2007 S-55 OR # 9001 16,800.00 5/31/2007 S-52 OR # 8674 16,800.00 3/30/2007 S-50 OR # 8651 16,800.00 3/8/2007 S-47 OR # 8508 16,800.00 1/26/2007 S-44 TOTAL PHP168,000.00 ============ Britanico Sarmiento Franco & Associates OR NO. OR AMOUNT OR DATE EXHIBIT OR # 0508 Php8,848.00 10/19/2007 S-39 OR # 0402 21,840.00 3/30/2007 S-37 OR # 0273 93,546.00 1/22/2007 S-18 TOTAL PHP124,234.00 ============ 143. Php239,268.00 less Php168,000.00. 144. Php125,000.00 less Php124,234.00. 145. Records Box 1, Exhibit "U." 146. Records Box 4, Exhibit "UUU," ICPA Report p. 33 147. Rounding off difference of .01. 148. Records, Vol. 3, Memorandum for the Petitioner Ad Cautelam, item no. 27 ,p. 1261. 149. Records Box 1, Exhibits "V-001" to "V-032." 150. Id.,Exhibits "V-033" to "V-148." 151. Records, Vol. 3, Memorandum for the Petitioner Ad Cautelam, item no. 27 ,p. 1261. 152. Records Box 1, Petitioner's FOE, Exhibit "U-01." 153. Records Box 1, Petitioner's FOE, Exhibits "U-10" to "U-18." 154. Id.,Exhibits "Y-001" to "Y-306." 155. Id. 156. Id.,Exhibit "U-20." 157. Records Box 4, ICPA Report, Exhibit "UUU." 158. Id. 159. Id. at 36. 160. Records Box 1, Petitioner's FOE, Exhibits "AA-01" to "AA-28." 161. Php8,403.46 less Php1,426.68. 162. Records Box 4, Petitioner's FOE, Exhibit "UUU." 163. Id. at 37. 164. Records Box 1, Petitioner's FOE, Exhibits "BB-31," "BB-43," and "BB-53." 165. Records Box 4, Petitioner's FOE, Exhibit "UUU," p. 37. 166. Id. 167. Php5,700 plus (Php62,120.00 less Php26,145.00). 168. Id. 169. CUSTOMER OR NUMBER AMOUNT PER OR EXHIBIT Lambert Williams Logistics, Inc. 7587 Php180,335.64 CC-02 Lambert Williams Logistics, Inc. 7856 172,196.10 CC-07 Lambert Williams Logistics, Inc. 7938 175,454.02 CC-11 Lambert Williams Logistics, Inc. 8107 207,896.04 CC-18 Lambert Williams Logistics, Inc. 8171 196,614.34 CC-24 Lambert Williams Logistics, Inc. 8348 236,813.89 CC-29 Lambert Williams Logistics, Inc. 8542 205,726.52 CC-34 Lambert Williams Logistics, Inc. 8714 239,822.56 CC-39 Lambert Williams Logistics, Inc. 8858 218,961.85 CC-47 Lambert Williams Logistics, Inc. 9085 214,789.27 CC-53 Total Amount Per OR Php2,048,610.23 Total Amount Subjected to EWT 2,908,922.50 per BIR Form 1604-E DIFFERENCE PHP(860,312.27) ============= 170. Records Box 1, Petitioner's FOE, Exhibit "J-1," p. 38 of 39. 171. Records Box 4, Petitioner's FOE, Exhibit "UUU," p. 38. 172. NAME OF ISSUER OR NO. AMOUNT EXHIBIT Maxicare Healthcare 022179v Php389,436.00 DD-02 Maxicare Healthcare 022180v 27,527.74 DD-02 Maxicare Healthcare 024797v 6,811.52 DD-11 Maxicare Healthcare 023957v 23,771.48 DD-15 Cocolife 63661 60,139.41 DD-18 AON Philippines 15429 20,682.92 DD-23 AON Philippines 16674 10,507.40 DD-29 Total Php538,876.47 Over-booked expense 1,086.63 TOTAL PHP539,963.10 ============ 173. Records Box 4, Petitioner's FOE, Exhibit "UUU," p. 38. 174. Php220,000.00 less Php117,064.29. 175. Records Box 1, Exhibits "EE-01" to "EE-24." 176. Records Box 4, Petitioner's FOE, Exhibit "UUU," p. 38. 177. Records Box 4, Exhibit "UUU," p. 39. 178. Records Box 1, Exhibits "GG-01" to "GG-61." 179. Records Box 4, Exhibit "UUU," p. 40. 180. Id. at 41. 181. Id. 182. Records Box 4, Exhibit "UUU," p. 41. 183. Records Box 1, Exhibits "II-01" to "II-34." 184. Records Box 4, Exhibit "UUU," p. 41. 185. Records Box 1, Exhibits "JJ-1" to "JJ-6." 186. Records Box 4, Exhibit "UUU," p. 41. 187. Id. 188. Records Box 1, Exhibits "LL-1" to "LL-3." 189. Records Box 4, Exhibit "UUU," p. 42. 190. Records Box 1, Formal Assessment Notice, Exhibit "A," Annex "A," par. d. 191. Records Box 4, Exhibit "UUU," Annex S. 192. Id.,Annex T. 193. Rounding off difference of .14. 194. Records Box 4, Exhibit "UUU," p. 48. 195. Id.,Annex S. 196. Id. at 49. 197. Records, Vol. 3, Memorandum for Petitioner ,p. 1267. 198. DETAILS AMOUNT Statutory Minimum Wage (Jan to Aug 2007) Php350/day * 26 days/month * 8 months Php72,800.00 Statutory Minimum Wage (Aug to Dec 2007) Php362/day * 26 days/month * 4 months Php37,648.00 TOTAL PHP110,448.00 ============= 199. Records Box 4, Exhibit "UUU," p. 49. 200. Id. 201. Id. at 50. 202. Id. at 53. 203. Exhibit "A," FAN Schedule 1a. 204. Records Box 1, Exhibits "P-01" to "P-53," total per BIR Form 1601E is Php124,804,929.65, with rounding off difference of 0.08. 205. Id.,Exhibit "O-20." 206. Id.,Exhibit "A," Schedule 2. 207. Records Box 4, Exhibit "UUU," p. 66. 208. Id.,Annex W, Exhibits "CCC-01" to "CCC-42." 209. Id.,Exhibit "UUU," Annex X, Exhibits "DDD-1" to "DDD-5." 210. Id.,Exhibit "UUU," Annex Y, Exhibits "EEE-1" to "EEE-4." 211. Id.,Exhibit "UUU," Annex Z. 212. Records Box 4, Exhibit "UUU," pp. 68-69. 213. Id. at 69. 214. Records Box 3, Exhibits "HHH-0001" to "HHH-0034." 215. Records Box 3, Exhibits "HHH-0035" to "HHH-0432." 216. Records Box 1, Exhibit "D." 217. Id. at 2. 218. Records Box 4, Exhibits "III-02," "III-04," "III-06," "III-08," "III-10," "III-12," "III-14," "III-16," "III-18," "III-19," "III-21," "III-23," and "III-25." 219. Id.,Exhibits "III-01," "III-03," "III-05," "III-07," "III-09," "III-11," "III-13," "III-15," "III-17," "III-20," "III-22," "III-24," and "III-26." 220. Id.,Exhibits "III-28," "III-30," "III-32," "III-34," "III-36," "III-38," "III-40," "III-42," "III-44," "III-46," "III-48," and "III-50." 221. Id.,Exhibit "AAA-1." 222. Id.,Exhibit "AAA-3." 223. Records Box 4, Exhibits "JJJ-1" to "JJJ-7." 224. Id.,Exhibits "KKK-01" to "KKK-49." 225. Id.,Exhibits "KKK-46" and "KKK-47." 226. Id.,Exhibit "UUU," p. 70. 227. Id.,Exhibits "LLL-01" to "LLL-69." 228. Id. 229. Records Box 4, Exhibit "MMM-33." 230. Id.,Exhibits "MMM-01," "MMM-03," "MMM-06," "MMM-09," "MMM-12," "MMM-15," "MMM-18," "MMM-21," "MMM-24," and "MMM-28." 231. Id.,Exhibits "MMM-02," "MMM-04," "MMM-07," "MMM-10," "MMM-13," "MMM-16," "MMM-22," "MMM-25," "MMM-26," "MMM-29," "MMM-30," and "MMM-32." 232. Id.,Exhibit "MMM-31." 233. Records Box 4, Exhibits "MMM-05," "MMM-08," "MMM-11," "MMM-14," "MMM-17," "MMM-20," "MMM-23," and "MMM-27." 234. Id.,Exhibit "NNN-2." 235. Id.,Exhibit "OOO-2." 236. Records Box 3, Exhibit "GGG-1." 237. Records Box 1, FAN, Exhibit "A." 238. Records Box 4, Exhibits "PPP-01," line 15B + "PPP-09," line 15B + "PPP-19," line 15B + "PPP-28," line 15B. 239. Records Box 4, Exhibits "PPP-01," line 22 + "PPP-09," line 22 + "PPP-19," line 22 + "PPP-28," line 22. 240. Records Box 1, FAN, Exhibit "A." 241. Please see discussions under section 1.a. 242. Records Box 1, Exhibit "J." 243. Id.,Exhibit "J-1," p. 38 of 39. 244. Id.,Exhibit "S-78." 245. Id.,Exhibit "S-79." 246. Records Box No. 4, Exhibit "UUU," pp. 75-77. 247. Records, Box 1, Exhibit "A," Schedule 5. 248. Id.,Schedule 1a. 249. "Sec. 28. Rates of Income Tax on Foreign Corporations. ... xxx xxx xxx (B) Tax on Non-resident Foreign Corporation. 1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5 (c): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." 250. "Sec. 28. Rates of Income Tax on Foreign Corporations. ... xxx xxx xxx (B) Tax on Non-resident Foreign Corporation. (1) ... xxx xxx xxx (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. (a) Interest on Foreign Loans. A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1986; (b) ..." 251. Records Box 1, Exhibit "A," Details of Discrepancies par. (f). 252. "Sec. 42. Income from Sources within the Philippines. (A) ...(1) ...; 4) Rentals and Royalties. Rentals and royalties from property located in the Philippines or from any interest in such property, including rentals and royalties for a) The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; b) The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment; c) The supply of scientific, technical, industrial or commercial knowledge or information; d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a),any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c); e) The supply of services by a non-resident person or his employee in connection with the use of property rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person; f) Technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; and g) The use of or the right to use: (i) motion picture films; (ii) films or video tapes for use in connection with television; and (iii) tapes for use in connection with radio broadcasting." 253. Records, Vol. 2, JA of Lina E. Jacob ,offered as testimony of Ms. Jacob during the May 15, 2013 hearing. 254. Records Box 4, Exhibit "UUU," Annex U ,computed as Php93,646,823.00 divided by Php92,035,511.03 multiplied by Php41,292,473.00. 255. Id.,Exhibit "UUU," Annex V. 256. Php710,489.20 x 10%. 257. Records Box 4, Exhibit "BBB-5." 258. Records Box 4, Exhibits "TTT-3" to "TTT-4." 259. Php4,464,722.00 x 12%. 260. Records Box 1, Exhibit "O-7." 261. Id.,Exhibit "O-21," Note to FS No. 15. 262. Id. 263. "Sec. 179. Stamp Tax on All Debt Instruments. On every original issue of debt instruments, there shall be collected a documentary stamp tax of one peso (Php1.00) on each Two Hundred pesos (Php200.00),or fractional part thereof, of the issue price of any such debt instruments: Provided ,that for such debt instruments with terms of less than one (1) year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ratio of its term in number of days to three hundred sixty five (365) days; Provided, further ,That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan." 264. Records Box 1, Exhibit "F." 265. Amendments to the Provisions of a "Revised Schedule of Compromise Penalties" for Internal Revenue Violations as Prescribed in RMO 26-86, November 28, 1989. 266. The Consolidated Revised Schedule of Compromise Penalties for Violations of the National Internal Revenue Code, August 8, 2007. 267. RMO No. 19-07, par. 6. 268. "Sec. 250. Failure to File Certain Information Returns. In the case of each failure to file an information return, statement or list, or keep any record, or supply any information required by this Code or by the Commissioner on the date prescribed therefor, unless it is shown that such failure is due to reasonable cause and not to willful neglect, there shall, upon notice and demand by the Commissioner, be paid by the person failing to file, keep or supply the same, One thousand pesos (Php1,000.00) for each such failure: . . ." 269. "SEC. 249. Interest. (A) ... (B) Deficiency Interest. Any deficiency in the tax due, as the term is defined in this Code, shall be subject to the interest prescribed in Subsection (A) hereof, which interest shall be assessed and collected from the date prescribed for its payment until the full payment thereof. . . ." 270. "SEC. 249. Interest. (A) ...(B) ... (C) Delinquency Interest. In case of failure to pay: (1) The amount of the tax due on any return to be filed, or (2) The amount of the tax due for which no return is required, or (3) A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the Commissioner, there shall be assessed and collected on the unpaid amount, interest at the rate prescribed in Subsection (A) hereof until the amount is fully paid, which interest shall form part of the tax. ..."