Thai Airways International Public Co. Limited v. Commissioner of Internal Revenue

THIRD DIVISION [C.T.A. CASE NO. 8597. September 16, 2016.] THAI AIRWAYS INTERNATIONAL PUBLIC COMPANY LIMITED , petitioner , vs. COMMISSIONER OF INTERNAL REVENUE , respondent . DECISION RINGPIS-LIBAN , J p : This Petition for Review filed by Thai Airways International Public Company Limited prays for the reversal and setting aside of the Final Decision on Disputed Assessment (FDDA) and the Final Assessment Notice (FAN) issued by the Commissioner of Internal Revenue, assessing it for alleged deficiency income tax, percentage tax, value-added tax (VAT),expanded withholding tax (EWT),withholding tax on compensation (WTC),and fringe benefit tax (FBT),including surcharges, interests, and penalties, in the aggregate amount of P71,757,167.39 for taxable year (TY) 2008. THE PARTIES Petitioner Thai Airways International Public Company Limited is a foreign corporation organized and existing under the laws of Thailand, 1 with office address at 2nd Floor, Country Space 1 Building, Dela Costa Street, Salcedo Village, Makati City. 2 It is an international air carrier duly registered with the Securities and Exchange Commission (SEC),and a holder of a Foreign Air Carrier's Permit (FACP) issued by the Civil Aeronautics Board (CAB) from September 25, 2006 up to the present. 3 Petitioner is represented by its CEO/President/General Manager Sern Chupikulchai, and may be served with notices and processes of the Court through its counsel, with office address at 1603 Antel Corporate Center, 121 Valero St.,Salcedo Village, Makati City. 4 On the other hand, respondent is the duly appointed Commissioner of the Bureau of Internal Revenue (BIR), authorized to perform the duties of his office, including, among others, the power to decide disputed assessments or other charges and penalties imposed in relation thereto pursuant to the provisions of the National Internal Revenue Code (NIRC) of 1997, as amended. Respondent holds office at the 5th Floor, BIR National Office Building, Agham Road, Diliman, Quezon City. THE FACTS Respondent issued Letter of Authority (LOA) No. 2008 00033833 5 on August 4, 2009, authorizing a revenue officer to examine petitioner's books of accounts and other accounting records for all internal revenue taxes covering the period of January 1, 2008 to December 31, 2008. CAIHTE Petitioner executed two Waivers of the Defense of Prescription under the Statute of Limitations of the National Internal Revenue Code on January 10, 2011 and on December 9, 2011. 6 Respondent issued a Preliminary Assessment Notice (PAN) on April 10, 2012, which was received by petitioner on April 17, 2012, assessing petitioner for deficiency income tax, percentage tax, VAT, EWT, WTC, and FBT in the aggregate amount of P67,968,045.24. 7 Petitioner protested the said PAN on April 27, 2012. 8 On June 20, 2012, petitioner received the FAN, 9 with Details of Discrepancies 10 and Assessment Notices, 11 all dated June 14, 2012, assessing petitioner for the following alleged deficiency taxes: 12 Tax Type Basic Surcharge Interest Compromise Total Penalty Amount Due Income P32,457,188.32 P22,045,563.98 P50,000.00 P54,552,752.30 Tax Percentage 4,365,817.37 3,226,853.63 50,000.00 7,642,671.00 Tax VAT 1,548,320.51 P429,293.40 1,172,920.85 20,000.00 3,170,534.76 EWT 966,401.21 668,273.06 20,000.00 1,654,674.27 WTC 3,000.00 3,000.00 FBT 373,782.51 258,473.17 16,000.00 648,255.68 Total P39,711,509.92 P429,293.40 P27,372,084.69 P159,000.00 P67,671,888.01 ============ ============ ============ ============ ============ Consequently, petitioner disputed the FAN through a letter dated July 11, 2012. 13 On November 27, 2012, respondent denied petitioner's protest via the FDDA 14 with Details of Discrepancies, 15 a copy of which was received by petitioner on December 7, 2012. 16 Petitioner was assessed for alleged deficiency income tax, percentage tax, VAT, EWT, WTC, and FBT, detailed as follows: 17 Tax Type Basic Surcharge Interest Compromise Total Penalty Amount Due Income Tax P32,457,188.32 P25,392,821.01 P50,000.00 P57,900,009.33 Percentage 4,365,817.37 3,667,274.69 50,000.00 8,083,092.06 Tax VAT 1,548,320.51 P429,293.40 1,335,402.24 20,000.00 3,333,016.15 EWT 966,401.21 765,707.49 20,000.00 1,752,108.70 WTC 3,000.00 3,000.00 FBT 373,782.51 296,158.64 16,000.00 685,941.15 Total P39,711,509.92 P429,293.40 P31,457,364.07 P159,000.00 P71,757,167.39 ============ ============ ============ ============ ============ Thus, petitioner filed this Petition for Review on December 28, 2012. 18 In the Answer 19 submitted on February 25, 2013, respondent interposed the following special and affirmative defenses: "5. Respondent hereby reiterates and repleads the preceding paragraphs of this answer as part of her Special and Affirmative Defenses; 6. The assessment for 2008 deficiency income tax was issued in accordance with law, jurisprudence and relevant administrative issuances. Petitioner under-declared its revenue in the amount of P5,855,491.63 for taxable year 2008. 7. In its protest letter, petitioner cited that it is adopting a rolling estimate method in computing and reporting percentage tax base, reasoning that Passengers Flown Revenue are not yet available at the time the return is filed. On that basis, petitioner contended that it will in result a slight difference between the flown revenue per Audited Statement of Gross Philippine Billings and the percentage tax return. Therefore, adjustments are made in the following month. 8. However, reconciliation submitted is different from the basis of reconciliation made in the assessment. Petitioner merely pointed out that they are adopting the rolling estimate method. No pieces of evidence were adduced to support its claim. Mere mention of the process of computation unsupported by documents to prove its claim cannot be given weight or credit. 9. For lack of complete documentation on how the rolling estimate method met with actual flown subject to tax, petitioner is liable for its undeclared revenue in the amount of P5,855,491.63. Petitioner under-declared its revenue in the amount of P64,316,514.11 for taxable year 2008 for failure to support its claim of Non-revenue Passengers. 10. There is an unsupported non-revenue passengers as shown in the flown revenue schedule amounting to P64,316,514.11. This value is based on average amount per flight destination and classification of passengers using the adult rate. It did not support and substantiate the identities/personalities of the passengers so that it may determine whether or not they are indeed Non-revenue passengers. 11. Identity of such passenger is important to determine the veracity of petitioner's claim that they are non-revenue passengers. Identity of such passengers may open to possible other tax consequences or may determine if they are indeed Non-Revenue Passengers. 12. Respondent agrees with petitioner that non-revenue passengers shall not be given value for purposes of computing the taxable base subject to tax in consonance with Revenue Regulations No. 15-2002, however sufficient documents must be presented to show that these passengers are indeed non-revenue passengers. Identification and supporting documents are very important to determine the veracity of petitioner's claim. Giving credence absent such documents will open the gates for fraud to evade payment of taxes. DETACa The undeclared revenue on rebooking fee in the amount of P137,796.00 must be included in the computation of gross income tax. 13. There is undeclared revenue on rebooking fee amounting to P137,796.00 evidenced by journal vouchers. Accordingly, petitioner agreed with respondent's findings, however petitioner computed its tax liability based on 1.5% rate plus interest. Such must be subjected to a rate of 2.5% pursuant to Sec. 28(A) (3) (a) of the NIRC and not the 1.5% as stated in the Tax treaty since petitioner failed to apply with the requirements of written application to avail of the tax treaty with the International Tax Affair Division (ITAD) per RMO 1-2000. The undeclared commission paid to brokers in the amount of P4,369,695.63 must be included in the computation of gross income. 14. Examination disclosed that there is an undeclared commission paid to brokers amounting to P4,369,695.63. Petitioner declared the amount net of commission per verification of the journal vouchers (JV).The undeclared commission was verified in the JV as booked as commission paid. The overriding commission as contended by petitioner is still part of the total remittance to petitioner and in return it paid back to its agents, then it forms part of the gross amount subject to tax. Whether or not the same is reflected in the ticket, is not the issue. The undeclared commission paid to brokers in the amount of P9,796,614.39 must be included in the computation of gross income tax. 15. There is an unaccounted source of cash amounting to P9,796,614.39 wherein the said amount is the difference between alphalist and financial statement, after other audit adjustments. During the informal conference, Petitioner contended that any discrepancy is brought about by a clerical error. However during Preliminary Assessment Notice, petitioner contended that the discrepancy was due to the fact that the salaries of Expat Officers were paid in Thailand and not reported as part of locally paid expenses, but then they are subjected to withholding tax. 16. Petitioner's varying allegation in every assessment stage, unsupported by any evidence to support its claim cannot be given weight and credence. The undeclared commission paid to brokers in the amount of P9,796,614.39 must be included in the computation of gross income tax. All the above findings must be subjected to a rate of 2.5% pursuant to Section 28 (A)(3)(a) of the National Internal Revenue Code (NIRC) for failure of petitioner to apply for tax treaty relief application under Revenue Memorandum Order (RMO) 1-2000 and 72-2010. 17. All the above findings must be subjected to a rate of 2.5% pursuant to Section 28 (A)(3)(a) of the NIRC and not the 1.5% as stated in the Tax Treaty since petitioner failed to file an application to avail the benefit of the tax treaty as required under RMO 1-2000, which provides: xxx xxx xxx It is clear from the foregoing provision of law that anyone who wishes to avail of the benefit of a tax treaty must file an Application for Relief from Double Taxation fifteen (15) days prior to the transaction or payment of services rendered under the TSA, for that matter. Undoubtedly, the law requires the filing of the appropriate BIR Form before any transaction will be undertaken by the taxpayer. In Mirant (Philippines) Operations Corporation (formerly: Southern Energy-Asia Pacific Operations [Phils.] vs. Commissioner of Internal Revenue under CTA-E.B. No. 40 (CTA Case No. 6382) promulgated on June 7, 2005 ,the Court held that: xxx xxx xxx 'A foreign corporation wishing to avail of the benefits of the tax treaty should invoke the provisions of the tax treaty and prove that indeed the provision of the tax treaty applies to it, before the benefits may be extended to such corporation .In other words, a resident or non-resident foreign corporation shall be taxed according to the provision of the National Internal Revenue Code, unless it is shown that the treaty provision apply to said corporation ,and that, in case the same are applicable, the option to avail of the tax benefits under the tax treaty has been successfully invoked. Under Revenue Memorandum Order 01-2000 of the Bureau of Internal Revenue, it is provided that the availment of a tax treaty provision must be preceded by an application for a tax treaty relief with its International Tax Affairs Division (ITAD). This is to prevent any erroneous interpretation and/or application of the treaty provisions with which the Philippines is a signatory to. The implementation of the said Revenue Memorandum Order is in harmony with the objectives of the contracting state to ensure that the granting of the benefits under the tax treaties are enjoyed by the persons or corporations duly entitled to the same.' (Emphasis and underscoring supplied.) aDSIHc xxx xxx xxx In Manila North Tollways Corporation vs. Commissioner of Internal Revenue docketed as CTA Case No. 7864 promulgated on April 14, 2011 ,the Honorable Court propounded: xxx xxx xxx While it is undisputed that petitioner should withhold only 10% of the cash dividends it remitted to Egis, petitioner did not comply however with the guidelines set under RMO No. 1-2000, which provides that any availment of tax treaty relief should be preceded by an application for tax treaty relief with ITAD at least fifteen (15) days before the payment of dividends. Said RMO No. 1-2000 explicitly provides: '2. Any availment of the tax treaty relief shall be preceded by an application by filing BIR Form No. 0901 (Application for Relief from Double Taxation) with ITAD at least 15 days before the transaction i.e. ,payment of dividends, royalties, etc.,accompanied by supporting documents justifying the relief. Here, petitioner filed its Application for Relief from Double Taxation only on December 23, 2008 or more than one year from the payment of dividends to its stockholders. Clearly, it did not comply with the requirement laid down in RMO No. 1-2000; hence, it cannot avail of the tax treaty relief provisions laid down in the Protocol to the Tax Treaty. As a matter of fact, in Commissioner of Internal Revenue vs. CBK Power Company, Ltd. , the CTA En Banc had the occasion to rule that a prior application for tax treaty relief is required before a taxpayer can avail of the preferential tax treatment under Philippine tax treaties, to wit: 'Furthermore, as can be gleaned from the objectives of RMO 1-00, the issuance thereof is not without reason or foundation. Said objectives are as follows: . . . Furthermore, it is to the best interest of both the taxpayer and the Bureau of Internal Revenue that any availment of the tax treaty provisions be preceded by an application for treaty relief with the International Tax Affairs Division (ITAD).In this way, the consequences of any erroneous interpretation and/or application of the treaty provisions ( i.e. ,claim for tax refund/credit for overpayment of taxes, or deficiency tax liabilities for underpayment) can be averred before proceeding with the transaction and or paying the tax liability covered by the tax treaty.' (Emphasis supplied) It can be readily gathered from the foregoing that RMO 1-00 requires that an application for treaty relief must be filed with the ITAD prior to any availment of tax treaty provisions to avoid the consequences of any erroneous interpretation and/or application of treaty provisions prior to the transaction and/or payment of tax liability covered by a tax treaty. This requirement is reasonably in accord with the strict construction of tax exemptions. ... 'III. Policies In order to achieve the above-mentioned objectives, the following policies shall be observed: ... 2. Any availment of the tax treaty relief shall be preceded by an application by filing BIR Form No. 0901 (Application for Relief from Double Taxation) with ITAD at least 15 days before the transaction i.e. ,payment of dividends, royalties, etc.,accompanied by supporting documents justifying the relief.' ... Notably, in formulating the above policy, the word 'shall' was used in paragraph 2. Needless to state, in common or ordinary parlance and in its ordinary significance, the term 'shall' is a word of command, and one which has always and which must be given a compulsory meaning ,and it is generally imperative or mandatory. It has the invariable significance of operating to impose a duty which may be enforced, particularly if public policy is in favor of this meaning or when public interest is involved or where the public or persons have rights which ought to be exercised or enforced, unless a contrary intent appears. In addition, in 'CDL Hotels (Phils.) Corporation vs. Commissioner of Internal Revenue,' the CTA En Banc stated that the requirement to file an application for tax treaty before the ITAD of the BIR for the availment of the provisions of any tax treaty has been confirmed in the case of Mirant (Philippines) Operations Corporation [formerly: Southern Energy Asia-Pacific Operations {Phils},Inc.] vs. CIR. Pertinent portion of the Mirant case is quoted, as follows: ETHIDa 'However, it must be remembered that a foreign corporation wishing to avail of the benefits of the tax treaty should invoke the provisions of the tax treaty and prove that indeed the provisions of the tax treaty applies to it, before the benefits may be extended to such corporation. In other words, a resident or non-resident foreign corporation shall be taxed according to the provisions of the National Internal Revenue Code ,unless it is shown that the treaty provisions apply to the said corporation, and that, in cases the same are applicable, the option to avail of the tax benefits under the tax treaty has been successfully invoked.' (Emphasis and underscoring supplied). xxx xxx xxx 18. RMO 01-2000 provides that any availment of tax treaty must be preceded by an application, BIR Form No. 0901 (Application for Relief from Double Taxation) with ITAD at least fifteen days before transaction, accompanied by supporting documents justifying the relief sought. 19. Petitioner's allegation that 'tax treaty is equivalent to a Philippine Law and in fact supersedes the provisions of the NIRC affected by its provisions which includes Article 8 thereof granting preferential tax rate of 1.5% as against the NIRC provision under Section 28 (A)(3)(a)' lacks legal and factual basis. RMO 01-2000 was not issued to supersede a tax law or treaty, but it was issued for proper and orderly implementation of tax law or tax treaty. It must be implemented hand in hand with tax laws and tax treaties, and must complement each other. 20. The fact that international law has been made part of the law of the land does not by any means imply the primacy of international law over national law in the municipal sphere. Rules of International Law are given a standing equal, not superior to national legislative enactments. ( Philip Morris, Inc. vs. Fortune Tobacco G.R. No. 158589, June 27, 2006.) 21. The interpretation given by the administrative officer charged by reason of his office to carry out the provisions of the statute should be respected whenever such interpretation is assailed by someone who alleges no reasons of weight to contradict or weaken it. ( Commissioner vs. Ledesma 31 SCRA 95). TIADCc 22. The First Division of the Court of Tax appeals held in the case of Commissioner of Internal Revenue vs. CBK Power Ltd. ,that a prior application for tax treaty relief is required before a taxpayer can avail of the preferential tax treatment under the tax treaties. It further states that 'it is to the best interest of both the taxpayer and the Bureau of Internal Revenue that any availment of the tax treaty provisions be preceded by an application for treaty relief with the International Tax Affairs Division (ITAD).In this way, the consequences of any erroneous interpretation and/or application of the treaty provisions (can be averted before proceeding with the transaction and or paying the tax liability covered by the tax treaty. 23. Verily, respondent correctly assessed petitioner of its undeclared revenues at the rate of 2.5% pursuant to Section 28 (A)(3)(a) of the NIRC of 1997, as amended, for failure of the latter to file application for availment of tax treaty as provided in RMO No. 1-2000. Storage fee amounting to P14,309,779.86 is a revenue not forming part of the Gross Philippine Billings, thus subject to the regular rate of 35%. 24. The storage fee totaling P14,309,779.86 which is a revenue not forming part of GPB is subject to the Regular rate of 35% under the NIRC of 1997, as amended. Petitioner submitted photocopy of invoices/statements and accordingly claimed that only P3,520,183.78 was for storage fee and the amount of P10,789,596.08 was for cargo sales. Petitioner made partial admission, thus the amount of P1,973,328.48 was paid on April 18, 2012. 25. However the segregated amount of P10,789,596.08 was not supported by original documents. For failure of petitioner to present the originals thereof, respondent cannot validate the truthfulness of its contention. Petitioner is liable to pay common carriers tax at the rate of 3% pursuant to Section 118 (A). 26. Section 118 (A) of the NIRC of 1997, as amended, provides: Sec. 118. Percentage Tax on International Carriers . (A) International air carriers doing business in the Philippines shall pay a tax three percent (3%) of their quarterly gross receipts. 27. The above findings under the income tax account including all other Gross Philippine Billings, except Storage Fee, were subjected to common carriers tax at a rate of 3% pursuant to the above stated provision. Petitioner merely alleged that the assessments lack factual and legal basis. Bare allegation, without any document supporting, its claim cannot stand. Petitioner is liable to pay value added tax pursuant to Section 108 (A) of the NIRC. 28. Storage Income amounting to P14,309,779.86 was classified as Vatable revenue pursuant to Section 108(A) of the NIRC of 1997, as amended, which provides: xxx xxx xxx 29. The storage fee, being a service rendered in the Philippine territory to a third party which is in the Philippines, falls squarely under the destination principles under RR 4-2007. As stated and argued under the income tax, no concrete proofs were presented by petitioner to be given merit by the Bureau of Internal Revenue (BIR) examiners. As such, respondent maintains the position that the storage fee is to be assessed in full and credited the payment of partial admission via CCT totaling to P168,853.07 on April 19, 2012. Petitioner is liable for deficiency withholding tax on compensation, expanded withholding tax and penalty. 30. Verification of the salaries and wages per alpha list and per financial statement shows a difference amounting to P9,796,614.30 after audit adjustments. Petitioner alleged that the difference is brought about by Expat Officers' salaries paid in Thailand. However, petitioner failed to show factual proofs to support its allegation. 31. A compromise penalty of P3,000.00 was still part of the assessment for failure to file accurate information on the remittance. 32. Verification disclosed that some income payments were not subjected to Expanded Withholding Tax in violation of Section 57 of the NIRC of 1997, as amended, and implementing rules and regulations. 33. In its letter protest, petitioner cited certain exceptions from expanded withholding tax, however bare allegations without concrete proof to support its claim cannot be given merit. Thus, petitioner is liable for basic deficiency expanded withholding tax in the amount of P966,401.21. Petitioner is liable for deficiency fringe benefit tax, interest and penalty. 34. Verification of the benefits given to officers of petitioner disclosed that some of the benefits were not included in the computation of fringe benefit tax. 35. Petitioner's allegation that rent a car charges was taken from actual payment instead of the correct period of their use of vehicles as shown in fringe benefits tax lacks basis. Petitioner merely showed their computation without any supporting documents to support its claim. AIDSTE 36. For petitioner's failure to substantiate its claim, petitioner is liable to pay the amount P632,689.94 fringe benefit tax. 37. Finally, respondent anchors its stand on the principle enunciated by the Supreme Court in the case of CIR vs. Hantex Trading Co.,Inc. G.R. No. 136975, March 31, 2005 ,thus: 'As a general rule, tax assessments by tax examiners are presumed correct and made in good faith. All presumptions are in favor of the correctness of the assessment. It is said to be presumed, however, that such assessment was based on sufficient evidence. Upon the introduction of the assessment in evidence, a prima facie case of liability on the part of the taxpayer is made. If a taxpayer files a petition for review in the CTA and assails the assessment, the prima facie presumption is that the assessment made by the BIR is correct, and that in preparing the same, the BIR personnel regularly performed their duties. This rule for tax instigated suits is premised on several factors other than the normal evidentiary rule imposing proof of obligation on the petitioner-taxpayer: the presumption of administrative regularity; the likelihood that the taxpayer will have access to relevant information; and the desirability of bolstering the record-keeping requirements of the NIRC.' 38. The presumptions, therefore, that respondent's deficiency internal revenue tax assessments against petitioner is correct and made in good faith should apply and be given weight and consideration. The burden of proof rests upon a party to present evidence on the facts in issue necessary to establish his claim or defense by the amount of evidence required by law. 39. Based on the foregoing discussions, respondent respectfully submits that the subject assessment was issued in accordance with law, having the presumption of correctness and regularity. 40. All presumptions are in favor of the correctness of tax assessments (Sy Po vs. Court of Tax Appeals, 164 SCRA 524) .The good faith of tax assessors and validity of their actions are presumed. They will be presumed to have taken into consideration all the facts to which their attention was called (CIR vs. Construction Resources of Asia, Inc. 145 SCRA 671) .It is incumbent upon the taxpayer to prove the contrary (Mindanao Bus Company vs. CIR, 1 SCRA 538; CIR vs. Tuazon, Inc.,173 SCRA 397) and failure to do so shall vest legality to respondent's actions and assessments. Dereliction on the part of petitioner to satisfactorily overcome the presumption of regularity and correctness of the assessment will justify the judicial upholding of said assessment notices. 41. Well-settled is the rule that tax assessments are entitled to the presumption of correctness and made in good faith. The taxpayer has the duty to prove otherwise. In the absence of proof of any irregularities in the performance of duties, an assessment duly made by a Bureau of Internal Revenue examiner, and approved by his superior officers will not be disturbed. 42. The burden of proof is on the taxpayer contesting the validity or correctness of an assessment to prove not only that the Commissioner of Internal Revenue is wrong, but also that the taxpayer is right. The presumption in favor of the correctness of tax assessment stands where evidence to the contrary is wanting. Hence, the assessment contained in the Formal Letter of Demand is imbued with factual and legal bases." Respondent filed her Pre-Trial Brief 20 on May 7, 2013; while petitioner's Pre-Trial Brief 21 was filed on August 13, 2013. Upon motion of petitioner, the Court commissioned Mr. Wilfrido C. Rodriguez as Independent Certified Public Accountant (CPA) on September 19, 2013. 22 The parties submitted their Joint Stipulation of Facts and Issues 23 on September 30, 2013. Subsequently, the Court issued the Pre-Trial Order 24 on October 22, 2013 and terminated the pre-trial. During trial, petitioner presented Mr. Moises Visperas and Mr. Wilfrido C. Rodriguez as its witnesses. Thereafter, petitioner formally offered its documentary exhibits. The Court admitted all of petitioner's offered exhibits in the Resolution 25 dated February 24, 2015. On the other hand, respondent presented Revenue Officer Olivia S. Sison as his sole witness. Subsequently, the Court admitted all the documentary exhibits that respondent formally offered. 26 The case was declared submitted for decision on September 21, 2015, after the filing of petitioner's Memorandum 27 on September 14, 2015 and of respondent's Memorandum 28 on September 7, 2015. 29 THE ISSUES The parties submitted the following issues 30 for this Court's resolution: 1. Whether or not petitioner is liable to pay deficiency income tax, percentage tax, VAT, EWT, WTC, and FBT as well as surcharges, interests, and penalties in the total amount of P71,757,167.39 for taxable year 2008; and 2. Whether or not petitioner was correct in using the tax treaty rate of 1.5% based on the RP-Thailand Tax Treaty. Stated otherwise, whether or not respondent was correct in using the 2.5% rate under the NIRC of 1997, as amended, on the ground that petitioner failed to file an application to avail the benefit of the tax treaty, supposedly required under Revenue Memorandum Order No. 1-2000. AaCTcI THE RULING OF THE COURT Jurisdiction of the Court of Tax Appeals Before proceeding to the main issues, the Court shall determine first the timeliness of the filing of the instant petition. Section 228 of the NIRC of 1997, as amended, provides: "SEC. 228. Protesting of Assessment. When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: Provided, however ,That a preassessment notice shall not be required in the following cases: 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 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 the said decision, or from the lapse of the one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable." Based on the foregoing, petitioner had thirty (30) days from receipt of the FDDA on December 7, 2012 or until January 6, 2012 within which to appeal such FDDA. Since this Petition for Review was filed on December 28, 2012, the same was timely filed. The Court shall now proceed to resolve the issues stipulated by the parties. Respondent assessed petitioner for alleged deficiency income tax, percentage tax, VAT, EWT, WTC, and FBT for taxable year 2008 in the total amount of P71,757,167.39, inclusive of increments, broken down as follows: Tax Type Basic Surcharge Interest Compromise Total Amount Penalty Due Income Tax P32,457,188.32 P- P25,392,821.01 P50,000.00 P57,900,009.33 Percentage Tax 4,365,817.37 - 3,667,274.69 50,000.00 8,083,092.06 VAT 1,548,320.51 429,293.40 1,335,402.24 20,000.00 3,333,016.15 EWT 966,401.21 - 765,707.49 20,000.00 1,752,108.70 WTC - - - 3,000.00 3,000.00 FBT 373,782.51 - 296,158.64 16,000.00 685,941.15 Total P39,711,509.92 P429,293.40 P31,457,364.07 P159,000.00 P71,757,167.39 ============ ============ ============ ============ ============ I. Deficiency Income Tax Based on the FAN 31 and the FDDA, 32 respondent computed the deficiency income tax assessment for taxable year 2008 in the amount of P57,900,009.33, as follows: Taxable Net Income P2,731,350,151.17 Add: Adjustments 1. Under declaration of revenue P5,855,491.63 2. Under declaration of revenue on unsupported non-revenue passengers 64,316,514.11 3. Undeclared revenue on rebooking fee 137,796.00 4. Under declaration of revenue on undeclared commission paid to brokers 4,369,695.63 5. Unaccounted source of cash 9,796,614.39 84,476,111.76 Total Taxable Income P2,815,826,262.93 ============== Tax Due at 2.5% P70,395,656.57 Other Income Storage Income P14,309,779.86 Tax Due at 35% P5,008,422.95 Total Tax Due P75,404,079.52 Less: Tax paid Excess from previous year P448,817.77 Cash payment 31,435,605.53 Cash payment 3 quarters 9,085,828.97 40,970,252.27 Tax Still Due P34,433,827.25 Add: Interest (computed up to 4.18.12) 20,735,767.75 Total tax due before payment P55,169,595.00 Less: Voluntary payment made on 4.18.2012 1,976,638.93 Balance P53,192,956.08 33 Add: Interest (computed from 4.19.2012 to 12.31.2012) P4,657,053.26 34 Compromise Penalty 50,000.00 25,442,821.01 Total Amount Due Income Tax P57,900,009.33 ============= The assessment arose from respondent's imposition of 2.5% regular tax rate on petitioner's declared Gross Philippine Billings (GPB) amounting to P2,731,350,151.17 and on the adjustments made by respondent on petitioner's declared GPB, consisting of underdeclaration of revenue in the amount of P5,855,491.63; underdeclaration of revenue on unsupported non-revenue passengers in the amount of P64,316,514.11; undeclared revenue on rebooking fee in the amount of P137,796.00; underdeclaration of revenue on undeclared commission paid to brokers in the amount of P4,369,695.63; and unaccounted source of cash in the amount of P9,796,614.39. In addition, respondent imposed 35% income tax on the alleged P14,309,779.86 storage income of petitioner. The Court shall scrutinize the propriety of each item of the subject assessment. A. Correct Income Tax Rate (1.5% Tax Treaty Rate vs. 2.5% Tax Code Rate) In the Details of Discrepancies attached to the FDDA, respondent declared that all the findings of deficiency income tax, including all other taxable Gross Philippine Billings of petitioner, were subjected to a tax rate of 2.5% pursuant to Section 28 (A) (3) (a) of the NIRC of 1997, as amended, and not the 1.5% preferential rate under the RP-Thailand Tax Treaty for failure of petitioner to file with the BIR's International Tax Affairs Division (ITAD) a written application availing of the tax treaty in accordance with Revenue Memorandum Order (RMO) Nos. 1-2000 and 72-2010. 35 On the other hand, petitioner contends that it is only taxable at the preferential tax rate of 1.5% despite its failure to comply with the requirement of RMO No. 01-00 as it honestly believed that it did not need to obtain a ruling on the applicability of the RP-Thailand Tax Treaty. Respondent asserts that any availment of the tax treaty relief should be preceded by an Application for Relief from Double Taxation filed with the ITAD at least fifteen (15) days before the transaction, accompanied by pertinent supporting documents in accordance with RMO No. 01-00. It is further argued by respondent that petitioner's allegation that "tax treaty is equivalent to a Philippine Law and in fact supersedes the provisions of the NIRC affected by its provisions which includes Article 8 thereof granting a preferential tax rate of 1.5% as against the NIRC provision under Section 28 (A) (3) (a)," lacks legal and factual bases. Respondent avers that RMO No. 01-00 was not issued to supersede a tax law or treaty, but merely for proper and orderly implementation of tax law or treaty. Allegedly, the same must be implemented hand in hand with tax laws and tax treaties, and must complement each other. SDHTEC According to respondent, the fact that international law has been made part of the law of the land does not by any means imply the primacy of international law over national law in the municipal sphere. Rules of International Law are alleged to be given a standing equal, not superior to national legislative enactments. Allegedly, the interpretation given by the administrative officer charged by reason of his office to carry out the provisions of the statute should be respected whenever such interpretation is assailed by someone who alleges no reasons of weight to contradict or weaken it. The Court finds for petitioner. Generally, international air carriers doing business in the Philippines are subject to a tax rate of two and one-half percent (2 1/2%) based on their Gross Philippine Billings, pursuant to Section 28 (A) (3) (a) of the NIRC of 1997, as amended, to wit: "SEC. 28. Rates of Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporations. xxx xxx xxx (3) International Carrier. An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 1/2%) on its 'Gross Philippine Billings' as defined hereunder: (a) International Air Carrier. 'Gross Philippine Billings' refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document: Provided ,That tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further ,That for a flight which originates from the Philippines, but transshipment of passengers takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings." (Emphasis supplied) The rate of 2 1/2% on an international air carrier's GPB can be further reduced by an international agreement between the Philippines and another state. As properly invoked by petitioner, the relevant tax treaty in this case is the RP-Thailand Tax Treaty which became effective on January 1, 1983. The applicable provision is reproduced hereunder for easy reference: "The Government of the Republic of the Philippines and the Government of the Kingdom of Thailand, Desiring to conclude a Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, Have agreed as follows: Article 1 Personal Scope This Convention shall apply to persons who are residents of one or both of the Contracting States. xxx xxx xxx ARTICLE 8 Shipping and Air Transport 1. Profits derived by an enterprise of a Contracting State from the operation in international traffic of ships or aircraft shall be taxable in that State. 2. Notwithstanding the provisions of paragraph 1, profits from sources within a Contracting State derived by an enterprise of the other Contracting State from the operation of ships or aircraft in international traffic may be taxed in the first-mentioned State but the tax so charged shall not exceed the lesser of: (a) one and one-half per cent of the gross revenues derived from sources in that State; and (b) the lowest rate of Philippine tax that may be imposed on profits of the same kind derived under similar circumstances by a resident of a third State." (Emphasis supplied) Based on the foregoing, the contracting state may impose any tax to another contracting state regarding the operation of ships or air transport in international traffic, but the said tax should not exceed the 1 1/2% of the gross revenue. Also, it is clear that either or both residents of the Republic of the Philippines and the Kingdom of Thailand may avail of the aforementioned tax treaty. The Philippine Constitution provides for adherence to the general principles of international law as part of the law of the land. The time-honored international principle of pacta sunt servanda demands the performance in good faith of treaty obligations on the part of the states that enter into the agreement. In this jurisdiction, treaties have the force and effect of law. 36 In the case of Deutsche Bank AG Manila Branch vs. Commissioner of Internal Revenue , 37 the Supreme Court explained that the laws and issuances must ensure that the reliefs granted under tax treaties are accorded to the parties entitled thereto, but the BIR must not impose additional requirements that would negate the availment of the reliefs provided for under international agreements, to wit: AScHCD "Tax treaties are entered into 'to reconcile the national fiscal legislations of the contracting parties and, in turn, help the taxpayer avoid simultaneous taxations in two different jurisdictions.' CIR v. S.C. Johnson and Son, Inc. further clarifies that 'tax conventions are drafted with a view towards the elimination of international juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods. The apparent rationale for doing away with double taxation is to encourage the free flow of goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic economies. Foreign investments will only thrive in a fairly predictable and reasonable international investment climate and the protection against double taxation is crucial in creating such a climate.' Simply put, tax treaties are entered into to minimize, if not eliminate the harshness of international juridical double taxation, which is why they are also known as double tax treaty or double tax agreements. 'A state that has contracted valid international obligations is bound to make in its legislations those modifications that may be necessary to ensure the fulfillment of the obligations undertaken.' Thus, laws and issuances must ensure that the reliefs granted under tax treaties are accorded to the parties entitled thereto. The BIR must not impose additional requirements that would negate the availment of the reliefs provided for under international agreements. More so, when the RP-Germany Tax Treaty does not provide for any pre-requisite for the availment of the benefits under said agreement." (Emphasis supplied) The Supreme Court further pronounced in the Deutsche Bank case 38 that the application for a tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the tax treaty relief, viz. : "Likewise, it must be stressed that there is nothing in RMO No. 1-2000 which would indicate a deprivation of entitlement to a tax treaty relief for failure to comply with the 15-day period . We recognize the clear intention of the BIR in implementing RMO No. 1-2000, but the CTA's outright denial of a tax treaty relief for failure to strictly comply with the prescribed period is not in harmony with the objectives of the contracting state to ensure that the benefits granted under tax treaties are enjoyed by duly entitled persons or corporations. Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty relief as required by RMO No. 1-2000 should not operate to divest entitlement to the relief as it would constitute a violation of the duty required by good faith in complying with a tax treaty. The denial of the availment of tax relief for the failure of a taxpayer to apply within the prescribed period under the administrative issuance would impair the value of the tax treaty. At most, the application for a tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief. The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-2000. Logically, noncompliance with tax treaties has negative implications on international relations, and unduly discourages foreign investors. While the consequences sought to be prevented by RMO No. 1-2000 involve an administrative procedure, these may be remedied through other system management processes, e.g. ,the imposition of a fine or penalty. But we cannot totally deprive those who are entitled to the benefit of a treaty for failure to strictly comply with an administrative issuance requiring prior application for tax treaty relief." (Emphasis supplied) It is clear from the foregoing that a prior application for a tax treaty relief is not a necessity for petitioner to avail of the application of the preferential tax rate of 1 1/2% under the RP-Thailand Tax Treaty. The Court shall now carefully evaluate the evidence presented by petitioner to prove its entitlement to the special tax rate on GPB. Records show that petitioner is a corporation organized and existing under the laws of Thailand and is duly licensed to engage in commercial transportation by air of passengers, cargo and post mail in the Philippines. 39 Thus, petitioner is entitled to and has correctly applied the preferential tax treaty rate of 1.5% on its reported GPB for the year 2008 in the amount of P2,731,350,151.17. B. Underdeclaration of Revenue (P5,855,491.63) Based on the Details of Discrepancies 40 attached to the FDDA, this assessment was based on the difference between petitioner's actual flown revenue per respondent's audit and that reflected in petitioner's financial statement. In its protest letter, petitioner states that it has been adopting a rolling estimate method in computing and reporting percentage tax base because Passengers Flown Revenue is not yet available at the time the return is filed. On that basis, petitioner contends that it would surely make a slight difference between the flown revenue per Audited Statement of Gross Philippine Billings (Financial Statement) and Percentage Tax Return. Allegedly, the adjustments were made in the following months, and so on. 41 Petitioner presented its Reconciliation of Flown Revenue, Gross Philippine Billings (GPB) and Common Carrier's Tax (CCT) Tax Base for the Year Ended December 31, 2008, 42 including historical data on a month to month basis starting from December 2007. It is further explained by petitioner that the estimate flown revenue for the month of December 2007 was initially reported in its CCT Return in the amount of P205,741,703.42. When actual flown revenue came in, it was determined to be only P144,474,083.77, thus, resulting in an overestimate of P61,267,619.65 for December 2007. The said overestimate was deducted from the initial estimate for January 2008 of P171,694,720.18, resulting in P110,427,100.53 reported tax base for CCT for January 2008. The same process was done up to the end of the year 2008. Petitioner alleges that after the effects of the rolling estimates were reflected, the CCT and GPB tax bases were correctly reported for taxation for both GPB and CCT in the amount of P2,731,350,151.71. In effect, they are allegedly one and the same and there is no underdeclaration of revenue. AcICHD However, respondent sustained in the FDDA the assessment for the abovementioned underdeclared revenue due to lack of complete documentation to support or reconcile the difference on Flown Revenue per investigation and per Statement of Gross Philippine Billings, and noted that the reconciliation provided by petitioner was different from the basis upon which the assessment was built. The Court finds the assessment in order. Records reveal that respondent found the discrepancy upon comparison of the Statement of Gross Philippine Billings and the Flown Revenue schedules, which were both provided by petitioner during the audit examination. The Court notes that the underdeclaration of revenue (P5,855,491.63) apparently arose from the first two months of taxable year 2008, and the same is summarized as follows: 43 Per respondent's audit Per GPB Difference January P265,517,130.01 P262,602,290.38 P(2,914,839.63) February 221,863,520.86 218,922,868.87 (2,940,651.99) March 207,716,225.06 207,716,225.06 - April 283,093,976.25 283,093,976.25 - May 282,475,554.33 282,475,554.33 - June 263,779,285.38 263,779,285.38 - July 236,300,917.12 236,300,917.12 - August 246,657,132.97 246,657,132.97 - September 231,579,203.75 231,579,203.75 - October 207,004,350.32 207,004,350.32 - November 171,086,454.12 171,086,454.12 - December 120,131,892.62 120,131,892.62 - Total P2,737,205,642.79 P2,731,350,151.17 P(5,855,491.62)* =============== =============== =============== *difference due to rounding off Clearly, there is sufficient basis to assess petitioner deficiency income tax due to underdeclaration of revenues because the figures were derived from the flown revenue schedules forwarded by petitioner itself during the audit. This is confirmed by the Court-commissioned Independent CPA, Mr. Wilfrido C. Rodriguez, in his report, a portion of which reads as follows: 44 caITAC 1. Under-declaration of revenue-Php5,855,491.63 Procedures done: Reconciliation of Flown Revenue in Statement of Gross Philippine Billings versus in Percentage Tax Returns. 1. Checked percentage tax returns (CCT) (Exhibits "7-7.13.5") listed in IT Annex-A (Exhibit "7.13.6") per Thai Airways petition; 2. Checked Gross Philippine Billings (GPB) per quarter as certified by External Auditor as listed in Thai Airways petition IT Annex-A (Exhibits "8-8.3.7"); 3. Verified actual flown revenue based on revised report generated from Head office revenue accounting system (Exhibits "9.1-9.12.21"). Audit Findings: Prepared worksheet (Exhibit "10") to reconcile flown revenue report per GPB versus actual revised report based on Head office revenue accounting system. Noted that the GPB is understated by Php5,855,492.03. (Emphasis supplied) It is noteworthy that petitioner 45 conceded to the Independent CPA finding that petitioner's GPB for the year 2008 is understated in the amount of P5,855,492.03. Accordingly, the assessment for deficiency income tax on underdeclared revenue of P5,855,492.03 should be upheld but subject only to preferential tax rate of 1.5%. C. Underdeclaration of Revenue on Unsupported Non-Revenue Passengers (P64,316,514.11) As indicated in the Details of Discrepancies, 46 petitioner was assessed deficiency income tax by respondent on underdeclared revenue due to unsupported non-revenue passengers in the amount of P64,316,514.11. Respondent based the assessment on the average amount per Flight Destination and Classification of Passengers using the adult rate. Respondent claims that petitioner did not support and substantiate the identities or personalities of the passengers to determine whether they were indeed non-revenue passengers. Petitioner counter-argues that non-revenue passengers have been explicitly excluded from tax on Gross Philippine Billings under Section 5 (b) of Revenue Regulations (RR) No. 15-2002, viz. : "SECTION 5. Determination of Gross Philippine Billings. xxx xxx xxx (b) Non-revenue passengers shall not be given value for purposes of computing the taxable base subject to tax .Refunded tickets shall likewise not be included in the computation of Gross Philippine Billings." (Emphasis supplied) Petitioner refutes respondent's allegation that the former did not support and substantiate the identities or personalities of these non-revenue passengers. Respondent allegedly received the soft copy of Flown Revenue Reports on May 18, 2011 per Transmittal Letter dated May 18, 2011. 47 Petitioner likewise states that it already attached to its protest letter the sample copies of the Flown Revenue Report for the month of January 2008, 48 which showed the following data: 1. Flight Number; 2. Flown Date; 3. Ticket Number; 4. Issue Date; 5. Final Destination; 6. Travel Class; 7. Pax type sub-classified as to Adult, Child, or Non-Revenue; 8. Net pro-rated value in USD (from MNL to Final Destination) which shows specific amount applicable for each ticket and for non-revenue naturally shows "0.00" value in accordance with Section 5 (b) of RR No. 15-2002; and 9. On the last page of the report, it likewise provides summarization by day and for the month of passengers boarded by Pax Type as to Adult, Child, Infant, Non-Revenue and sub-classified as to First, Business, and Economy class. According to petitioner, the above-stated Flown Revenue Report is a comprehensive summary of all boarded passengers and provides not only flown revenue data but also non-revenue data. The names or identity of non-revenue passengers were purportedly duly provided and formed part of the revenue report. Petitioner points out that all non-revenue passengers were pre-qualified prior to boarding as they went through a process of application, approval, until actual issuance of the corresponding ticket; which was a necessary document prior to check-in at the airport. Allegedly, the grant of non-revenue tickets is strictly adhered to by all airlines in accordance with International Air Transport Association standards, rules and regulations as "defined under Resolution No. 788 of the International Air Transport Association regarding Free and Reduced Fare or Rate Transportation and any other Free/Reduced Rate Mileage Programs Administered by individual International Air Carriers" 49 as provided for under RR No. 15-2002. The Court finds the assessment unmeritorious. ICHDca In the Supplemental Judicial Affidavit 50 of Moises M. Visperas, Jr.,petitioner's Independent Auditor and Tax Consultant, he explained the issuance and recording of non-revenue passenger tickets made by petitioner, as follows: Q4: Mr. Witness, you were asked questions about the Petitioner's non-revenue passengers from Q38 to Q45 which you all already answered. However, as an additional question on non-revenue passengers, could you please explain to us the different kinds of non-revenue passengers? A: The non-revenue passengers are non-paying passengers holding non-revenue tickets. The term "non-revenue passengers" is defined under BIR Revenue Regulations No. 15-2002. Q5: How does Revenue Regulations No. 15-2002 define "non-revenue passengers"? A: I have here a copy of Revenue Regulations No. 15-2002 which states under Section 2(j) Paragraph 2 that "Non-revenue passengers" "shall refer to the non-revenue passengers as defined under Resolution No. 788 of the International Air Transport Association regarding Free and Reduced Fare or Rate Transportation and any other Free/Reduced Rate Mileage Programs Administered by individual International Air Carriers." Q6: How about this International Air Transport Association Resolution No. 788, what does it say about non-revenue passengers? A: The International Air Transport Association or IATA has issued Resolution No. 788 which basically enumerates the kinds of persons who may be issued a "pass" or an authorization for free or reduced fare or rate transportation. These persons include the officers and employees of an air carrier, immediate family, dependents in the household, officers and staff of other air carriers and a list of such other persons who may be given a pass. Q7: I am showing you a copy of IATA Resolution 788 which for purposes of identification has been marked as Exhibit "P-31",what relation if any does this have to the IATA Resolution that you mentioned? A: That is the same IATA Resolution 788 that I was referring to. Q8: How about in the instant case, what are the kinds of non-revenue passengers who were issued free tickets? A: In the instant case, the non-revenue passengers are generally of two kinds. The first are passengers who redeemed free tickets based on the Royal Orchid Plus Program, and the second category are Thai Airways' officers, staff, retirees and their qualified members, as well as officers and staff of other air carriers who also do not pay when travelling on Thai Airways. Q9: What is this Royal Orchid Plus Program? A: The Royal Orchid Plus is a frequent flyer program wherein member passengers may earn mileage every time they travel on Thai Airways or on other program partners. A passenger who has accumulated sufficient qualifying mileage may redeem Thai Airways airline tickets for free from any Thai Airways station or office around the globe. The Royal Orchid Plus Program is a Free/Reduced Rate Mileage Program administered by the petitioner which is thus covered by Revenue Regulations No. 15-2002, more particularly Section 2(j), Paragraph 2 governing non-revenue passengers. Q10: How are the free tickets redemption recorded? A: If the ticket redeemed at any Thai Airways station around the globe involves a Manila flight sector, such as for example, Manila-Bangkok, that ticket will be reflected as non-revenue passenger ticket in the Philippines. The ticket number, the flight details, the date of travel and the passenger's details, such as the name and the itinerary of the passenger, will appear together with the code "ROP" or Royal Orchid Plus. That "ROP" means the ticket was redeemed through the Royal Orchid Plus Program free of charge; and therefore, reflected as a non-revenue passenger. Q11: Where can you find the "ROP" code in passenger tickets? A: If a ticket was redeemed through the Royal Orchid Plus Program, you will notice the "ROP" code on the left hand side of each of the ticket images. You will easily notice the "ROP" code on the ticket images which were earlier presented in several folders from January to December 2008. These were earlier submitted by Thai Airways to the honorable Court of Tax Appeals and marked as Exhibits P-7 to P-18 with submarkings. Q12: How about the other category that you mentioned, the Thai Airways' officers, staff, retirees and their qualified family members, as well as officers and staff of other air carriers, could you explain why they are considered non-revenue passengers? A: As I earlier mentioned, they are those covered by IATA Resolution 788. Thai Airways' officers, staff, retirees and qualified family members, as well as officers and staff of other air carriers, are entitled to free tickets by reason of their employment, present or past. These are actually very limited, and you will probably notice that there are not too many in this category among the ticket images that Thai Airways submitted and marked as Exhibits P-7 to P-18 (with submarkings). Q13: How can you identify the passengers holding this kind of tickets from the ticket images that you are referring to? A: The names of the officers and staff are reflected on the ticket, and if the passenger is a retiree, the ticket will also show the word "retiree." If the passenger is a relative of the retiree, the relationship will also be shown on the ticket, such as "retiree/spouse," "retiree/son" or "retiree/daughter." Furthermore, they are also identified by the code prefixes "ID" or "IDZ" on the itinerary lines of the tickets. TCAScE To support the above testimony, petitioner presented the summary of the Non-Revenue Passenger tickets issued for each month of 2008 and the electronically printed "images" of the tickets. 51 The Court observes that the ticket number, flight details, date of travel, and passenger's details, such as the name and itinerary of the passenger together with either of the following codes: "ROP" or Royal Orchid Plus (which means that the ticket was redeemed through petitioner's "Royal Orchid Plus Program" free of charge) and "ID" or "IDZ" (which means that the ticket was issued to petitioner's officers, staff, retirees and qualified family members or officers/staff of other air carriers, free of charge),were indeed indicated in the said summary and electronically printed tickets. In sum, petitioner has sufficiently proven that the amount of P64,316,514.11 pertained to non-revenue passenger tickets for the year 2008. Accordingly, the same should not form part of petitioner's GPB pursuant to Section 5 (b) of RR No. 15-2002. Thus, the deficiency tax assessment on the same should be cancelled. D. Undeclared revenue on rebooking fee (P137,796.00) Respondent found undeclared revenue of petitioner related to rebooking fees in the amount of P137,796.00 based on the latter's journal vouchers. As such, respondent assessed petitioner for the corresponding 2.5% GPB tax. Petitioner did not dispute the deficiency income tax on the undeclared revenue on rebooking fee in the amount of P137,796.00. Hence, petitioner paid the amount of P6,623.27, inclusive of the interest (computed based on 1.5% rate plus interest) on April 19, 2012. 52 Notwithstanding petitioner's payment of the said deficiency tax, respondent still assessed petitioner for the remaining deficiency tax due representing the 1% difference of the 2.5% tax rate used by respondent and 1.5% used by petitioner. As discussed earlier, petitioner is entitled to the preferential tax rate of 1.5% under the RP-Thailand Tax Treaty. Consequently, since petitioner already paid the corresponding tax on the undeclared revenue on rebooking fee, the assessment on this item should be cancelled. E. Underdeclaration of Revenue on Undeclared Commission paid to brokers (P4,369,695.63) Respondent imputed against petitioner undeclared revenue in the amount of P4,369,695.63 due to the alleged undeclared commissions paid to brokers. Petitioner avers that the alleged undeclared commissions paid to brokers refer to the override commissions deducted from the remittance of petitioner's General Sales Agent, Asia Pacific Chartering, based on their bi-monthly sales reports. Contrary to respondent's claim, petitioner contends that these were never deducted from GPB as they were arrived at and determined from the revenue accounting system of petitioner at the head office, which were independently accounted for from tickets flown from the Philippines to final destination irrespective of the place of sale or issue of passage documents. Petitioner points out that the commissions to the general sales agent were determined and accounted for after the tickets were sold. The alleged commission is never considered in the determination of the flown revenue because only ticket data and information are processed in the Revenue Accounting Department at the head office of petitioner. Petitioner further explains that the basis of the Flown Revenue Report is the flown tickets, and override commissions due to the General Sales Agent are never reflected in the ticket either as additional information or as a deduction. Thus, the Flown Revenue Report is still gross of any override commission. Petitioner claims that nowhere in the Flown Revenue Report can respondent pinpoint or show that any override commission was deducted from petitioner's reported gross receipts or GPB. The Court finds for petitioner. It is to be noted that the assessment on the undeclared revenue on commissions paid to brokers was derived from a list of journal vouchers for the pay out of commissions made by petitioner to its general sales agent, Asia Pacific Chartering Philippines. 53 The latter may have deducted the commissions due to it from the ticket sales proceeds it remitted to petitioner. Nevertheless, the same does not give rise to the inference that petitioner reported its GPB net of the said commissions. While it is axiomatic that all presumptions are in favor of the correctness of tax assessments, the assessment itself should not be based on presumptions no matter how logical the presumption might be. In order to stand the test of judicial scrutiny, the assessment must be based on actual facts. 54 In sum, the deficiency income tax assessment on the alleged underdeclaration of revenue on undeclared commission paid to broker in the amount of P4,369,695.63 should be cancelled for lack of factual basis. F. Unaccounted source of cash (P9,796,614.39) Upon comparison of the Salaries and Wages per petitioner's Financial Statement in the amount of P18,855,374.38 with that reflected in its Alphalist amounting to P28,651,988.77, respondent found a difference of P9,796,614.39, computed as follows: 55 Per FS Amount Tax Due Salaries and wages 16,755,588.17 Overtime 525,843.09 Transportation allowance 127,380.00 Special Compensation 1,403,200.37 Vacation Compensation 36,502.75 Uniforms and overalls 6,860.00 Total 18,855,374.38 7,246,838.66 Per Alphalist Non taxable 1,646,362.35 Taxable 27,005,626.42 Total 28,651,988.77 7,190,005.70 Difference (9,796,614.39) 56,832.96 =========== =========== Since the total amount per Alphalist was higher than that reflected in the FS, respondent concluded that petitioner had unaccounted source of cash or undeclared GPB. In doing so, respondent merely relied on assumptions or conjectures without obtaining any evidence corroborating such finding. This is contrary to the doctrine laid down by the Supreme Court in Collector of Internal Revenue vs. Benipayo , 56 which has been cited earlier, viz. : "...An assessment fixes and determines the tax liability of a taxpayer. As soon as it is served, an obligation arises on the part of the taxpayer concerned to pay the amount assessed and demanded. Hence, assessments should not be based on mere presumptions no matter how reasonable or logical said presumptions may be. .... In order to stand the test of judicial scrutiny, the assessment must be based on actual facts. The presumption of correctness of assessment being a mere presumption cannot be made to rest on another presumption ...." Therefore, the deficiency income tax assessment on unaccounted source of cash in the amount of P9,796,614.39 should be cancelled. G. Storage Income (P14,309,779.86) Respondent imposed 35% deficiency income tax on the alleged storage fees received by petitioner totaling P14,309,779.86 on the ground that the same did not form part of the latter's GPB subject to 2.5% tax rate. Petitioner has admitted its liability for the storage fees of P3,520,183.78. Accordingly, petitioner paid the deficiency income tax amounting to P1,973,328.43 on April 18, 2012, computed at 35% tax rate plus interest. 57 The said payment was credited by respondent from the total amount due. Respondent has sustained in the FDDA the assessment of the remaining storage income of P10,789,596.08 for petitioner's failure to submit the original copies of its supporting documents such as official receipts, complete schedule, and proof of cargo sales for 2008. ITAaHc However, with regard to the remaining amount of P10,789,596.08 storage fees being assessed by respondent, petitioner asserts that the same already formed part of its reported GPB as cargo sales. In support of the amount of P10,789,596.08 labelled by respondent as storage fees but alleged by petitioner as cargo sales, petitioner presented the following exhibits: Reference Date of Inv./ Amount O.R. Exhibits "P-20" to "P-20-2" 58 23/01/2008 P5,138,123.14 Exhibit "P-20-3" 59 and Exhibits "18" to "18.11" 5,651,472.94 P10,789,596.08 ============ The Court agrees with petitioner that the amount of P5,138,123.14 pertained to its cargo sales as supported by the foregoing exhibits and accounted for as follows: 60 Net Amount due to THAI per IATA Cargo Sales Report P5,267,693.33 Less: Amount receipted for per OR 550-31898 representing payment by Wide Wide World Cargo (129,570.19) Balance of Cargo Proceeds remitted by Deutsche Bank P5,138,123.14 =========== However, petitioner failed to prove that the said cargo sales of P5,138,123.14 already formed part of its P2,737,205,642.79 GPB per Flown Revenue Schedules. Consequently, the amount of P5,138,123.14 shall be subjected to deficiency 1.5% GPB tax. With reference to the amount of P5,651,472.94, petitioner presented an Export Billing Statement 61 covering the period February 1-15, 2008 to prove that the alleged net amount of P5,651,472.94 due to petitioner referred to cargo sales instead of storage fees. However, the said document has been provisionally marked for being a mere photocopy, and the same is insufficient without the supporting invoices and official receipts. While the Independent CPA provided the Court with the official receipts marked as Exhibits "18" to "18.11", nonetheless, the Court cannot consider the same since they were not formally offered in evidence as provided in Section 34 of Rule 132 of the Rules of Court. In fine, the Court sustains the deficiency income tax assessment at the tax rate of 35% for the unsupported amount of P5,651,472.94. In sum, petitioner is liable to pay basic deficiency income tax for taxable year 2008 in the reduced amount of P2,142,919.75, computed as follows: Taxable Gross Philippine Billings P2,731,350,151.17 Add: Underdeclaration of Gross Philippine Billings P5,855,491.63 Cargo Sales to Deutsche Bank 5,138,123.14 10,993,614.77 Total Taxable Gross Philippine Billings 2,742,343,765.94 Multiply by Preferential Tax Treaty Rate 1.5% Tax Due on Gross Philippine Billings 41,135,156.49 Add: Other Income subj to 35% regular corporate income tax Storage Income (P5,651,472.94 x 35%) 1,978,015.53 Total Basic Income Tax Due 43,113,172.02 Less: Tax Paid 40,970,252.27 Tax Basic Deficiency Income Tax P2,142,919.75 ============= II. Deficiency Value-added Tax Invoking Section 108 (A) of the NIRC of 1997, as amended, respondent classified the alleged storage income of petitioner in the amount of P14,309,779.86 as VATable revenue. According to respondent, the storage, being a service rendered in the Philippine territory to a third party, falls squarely under the destination principle under RR No. 04-07. Since there was supposedly no evidence submitted to prove that petitioner did not render any service for the storage fees it received, respondent assessed petitioner of 12% deficiency VAT on the amount of P14,309,779.86. Nevertheless, respondent credited petitioner's payment made on April 19, 2012 in the amount of P168,853.07, representing 3% percentage tax plus interest on the storage fees of P3,520,183.78. Below is respondent's computation of the deficiency VAT assessment for taxable year 2008 in the amount of P3,333,016.15, inclusive of increments: Other Income 1. Storage Income P14,309,779.86 Rate 12% Output Tax 1,717,173.58 Less: Input Tax - VAT Payable 1,717,173.58 Add: Interest (computed up to 4.18.12) 1,109,341.18 Amount Still Due 2,826,514.76 Less: Voluntary Payment made on 4.18.2012 168,853.07 Total Amount Still Due 2,657,661.69 Add: Surcharge P429,293.40 Interest (computed from 4.19.12 to 226,061.06 62 12.31.12) Compromise Penalty 20,000.00 675,354.46 Total Amount Due VAT P3,333,016.15 ============ On the other hand, petitioner argues that the share in storage fees received from the warehousing company is merely incidental to petitioner's cargo sale while awaiting release/loading of imported cargo and outgoing cargo of shippers. The alleged service was not rendered by petitioner but by the warehousing company. Petitioner is merely provided a certain percentage share in the storage fees collected by the warehousing company, for being the ultimate carrier of shipments. Petitioner further claims that the VAT only applies if the service is rendered by the taxpayer. In this case, petitioner is neither the owner nor lessor of the warehousing facility; thus, the same could not have rendered such warehousing service and does not deal with any such user of the facility. Allegedly, it is Peoples Air Cargo & Warehousing Co., Inc. which has full possession and control over the warehousing facility and which deals directly with such users of storage facilities. The incidental transaction of petitioner being paid by Peoples Air Cargo & Warehousing Co., Inc., which represents 20% share of storage fees received and earned by the latter, should not be considered as warehousing fee but merely an incidental fee similar to rebooking fee which is currently subject to 3% percentage tax under RR No. 11-2011. And even assuming for the sake of argument that the aforesaid fee is not merely incidental share in storage fee and classified as rental, the same is still within the provision of Section 10 of RR No. 11-2011. In other words, there is still no VAT deficiency. The Court finds the assessment partly meritorious. Section 108 of the NIRC of 1997, as amended, provides that a VAT equivalent to 12% of gross receipts derived from the sale or exchange of services shall be levied, assessed, and collected. Corollary thereto are the relevant portions of RR No. 16-05, which state: "SECTION 4.108-1. VAT on the Sale of Services and Use or Lease of Properties. Sale or exchange of services, as well as the use or lease of properties, as defined in Sec. 108(A) of the Tax Code shall be subject to VAT, equivalent to 10% 63 of the gross receipts (excluding VAT). SEC. 4.108-2. Meaning of 'Sale or Exchange of Services'. The term 'sale or exchange of services' means the performance of all kind of services in the Philippines for others for a fee, remuneration or consideration, whether in kind or in cash, including those performed or rendered by the following: xxx xxx xxx (4) persons engaged in warehousing services; CHTAIc xxx xxx xxx SECTION 4.108-3. Definitions and Specific Rules on Selected Services. xxx xxx xxx (b) 'Warehousing service' means rendering personal services of a warehouseman such as: (1) engaging in the business of receiving and storing goods of others for compensation or profit; (2) receiving goods and merchandise to be stored in his warehouse for hire; or (3) keeping and storing goods for others, as a business and for use." (Emphasis supplied) From the foregoing provisions, services, including warehousing services, performed in the Philippines for a fee or remuneration or consideration whether in kind or cash shall be subject to VAT equivalent to 12% of the gross receipts. A scrutiny of the official receipts 64 issued by petitioner to Peoples Air Cargo & Warehousing Co. shows that the amounts received by petitioner from the latter totaling to P3,520,183.78 represent "share in storage fees" or "cargo storage." Clearly, such amounts pertain to receipts from warehousing services rendered by petitioner which are subject to 12% VAT pursuant to Section 4.108-3 of RR No. 16-05 implementing Section 108 (A) of the NIRC of 1997, as amended. With regard to the remaining amount of P10,789,596.08 (P14,309,779.86 less P3,520,183.78), as discussed earlier under the deficiency income tax assessment, the amount of P5,138,123.14 actually pertains to petitioner's cargo sales to Deutsche Bank which petitioner failed to prove that it formed part of the reported GPB. Accordingly, the amount of P5,138,123.14 is not subject to 12% VAT but to the 3% percentage tax imposed under Section 118 (A) of the NIRC of 1997, as amended. Finally, regarding the storage fees of P5,651,472.94 (P10,789,596.08 less P5,138,123.14),respondent's deficiency VAT assessment thereon should be upheld in the absence of any contrary evidence. In sum, petitioner is liable to pay basic deficiency VAT for taxable year 2008 in the amount of P1,100,598.81, computed as follows: Storage Income P14,309,779.86 Less: Petitioner's cargo sales to Deutsche Bank subject to 3% Percentage Tax 5,138,123.14 Storage Income subject to 12% VAT 9,171,656.72 ============ Output Tax 1,100,598.81 Less: Input tax - Deficiency VAT P1,100,598.81 ============ III. Deficiency Percentage Tax Respondent computed the deficiency percentage tax assessment for taxable year 2008 in the amount of P8,083,092.06, inclusive of increments, as follows: Taxable Income Per Financial Statement P2,731,350,151.17 Add: Adjustments 1. Underdeclaration of Revenue P5,855,491.63 2. Underdeclaration of Revenue on Unsupported Non-revenue Passengers 64,316,514.11 3. Undeclared revenue on rebooking fee 137,796.00 4. Under declaration of Revenue on Undeclared Commission paid to brokers 4,369,695.63 5. Unaccounted source of cash 9,796,614.39 84,476,111.76 Total Taxable Income as Adjusted 2,815,826,262.93 Tax Rate 3% Percentage Tax Due 84,474,787.89 Less: Payment Per Returns 80,102,347.24 Amount Still Due 4,372,440.65 Add: Interest (computed up to 4.19.12) 2,839,091.60 Total Tax Still Due 7,211,532.25 Less: Voluntary Payment made on 4.19.12 6,623.27 Balance 7,204,908.98 Add: Interest (computed from 4.20.12 to 12.31.12) 828,183.09 Compromise Penalty P50,000.00 878,183.09 Total Amount Due Percentage Tax P8,083,092.06 65 ============ Except for the storage fees, the discrepancies found by respondent under the deficiency income tax assessment were subjected to the common carriers tax at a rate of 3% pursuant to Section 118 (A) of the NIRC of 1997, as amended. As discussed earlier under the deficiency income tax assessment, respondent's assessment on the following items is devoid of factual basis and should be cancelled and withdrawn: Underdeclaration of Revenue on Unsupported Non-revenue Passengers P64,316,514.11 Underdeclaration of Revenue on Undeclared Commission paid to brokers 4,369,695.63 Unaccounted source of cash P9,796,614.39 Similarly, the deficiency percentage tax assessment on the above items is also cancelled. EATCcI As regards the undeclared revenue on rebooking fee in the amount of P137,796.00, petitioner already paid on April 19, 2012 the amount of P6,623.27 66 which represents 3% of P137,796.00 plus interest, and that respondent already recognized and deducted the said payment from the total deficiency percentage tax due. Consequently, the deficiency percentage tax assessment on this item is cancelled. Considering that petitioner admitted its liability for the underdeclared revenue in the amount of P5,855,491.63, 67 it is liable for the corresponding deficiency percentage tax. In summary, petitioner is liable to pay basic deficiency percentage tax in the amount of P2,167,965.74, broken down as follows: Taxable Net Income P2,731,350,151.17 Add: Underdeclaration of Revenue 5,855,491.63 Cargo sales to Deutsche Bank 5,138,123.14 Total Taxable Income 2,742,343,765.94 Multiply by Tax Rate 3% Percentage Tax Due 82,270,312.98 Less: Payment Per Returns 80,102,347.24 Basic Deficiency Percentage Tax P2,167,965.74 ============= It must be noted that the above computation includes the deficiency percentage tax due on the P5,138,123.14 cargo sales made by petitioner to Deutsche Bank which was discussed earlier under the deficiency VAT assessment. IV. Expanded Withholding Tax Finding that there were income payments made by petitioner in the year 2008 that were not subjected to EWT in violation of Section 57 of the NIRC of 1997, as amended, and its implementing regulations, particularly RR No. 02-98, as amended by RR Nos. 06-01, 12-01, 17-03, and 30-03, respondent assessed petitioner of the corresponding deficiency EWT, detailed as follows: Amount Rate Tax Due Rental P22,393,567.12 5% P1,119,678.36 Contractor 207,443,545.88 2% 4,148,870.92 Professional fee 2,142,718.02 10% 214,271.80 Professional fee 373,500.00 15% 56,025.00 Top 10T Corp. (Services) 2,753,296.66 2% 55,065.93 Top 10T Corp. (Purchases) 271,708,863.79 1% 2,717,088.64 Commission/broker 144,982.20 10% 14,498.22 Allowances paid to govt. Employees 4,043,906.00 15% 606,585.90 Total 511,004,379.67 P8,932,084.77 ============ Less: Payment 7,965,683.55 Amount Still Due P966,401.21 Add: Interest (computed up to 12.31.12) 765,707.49 Compromise Penalty 20,000.00 785,707.49 Total Amount Due EWT P1,752,108.70 ============ In arriving at the said deficiency EWT assessment, respondent listed down all the expenses/income payments found in the books of petitioner and subjected the same to EWT rates as respondent deemed fit, and then compared the resulting EWT due per investigation to the EWT declared in petitioner's Alphalist. In its protest letter, 68 petitioner explained each item involved in the assessment, as follows: 1. Payments totaling P23,579,339.53 for Air Navigation charges to Air Transportation Office (ATO) (now the Civil Aviation Authority of the Philippines or CAAP),a government office, is not subject to EWT. 2. Payments to Tagalinis, Inc.,a janitorial service provider, was correctly classified as contractor instead of commission broker per your proposed assessment. Accordingly, we have totally deducted such payment P144,982.20 from the Commission broker column and added the same to the contractor's column. 3. Other personnel expenses reimbursed to expat officers totaling P337,266.30 are not subject to withholding tax as these are mere reimbursement of expenses initially advanced by expat officers via petty cash fund. 4. Commissions deducted by credit card companies totaling P757,414.73 were deducted from their remittances to petitioner and thus there is no way by which a withholding tax could be implemented. Had it been petitioner who paid the same, petitioner could have implemented withholding tax thereon. 5. Parking Fees initially paid for by sales team totaling P36,021.00 were reimbursed via petty cash fund and thus not subjected to EWT. 6. Repairs of vehicles initially advanced by sales team totaling P16,680.00 were reimbursed via petty cash fund by the company and thus there is no way EWT can be implemented. 7. Service for administration fees totaling P1,737,918.02 represents visa fees paid to consular offices of foreign embassies, and condominium fees and dues paid condominium corporation on which office facilities are being rented are not subject to withholding tax. DHITCc 8. Ground handling charges paid to Macroasia totaling P8,700,595.91 should be classified as contractor instead of rental as proposed to be assessed. Accordingly 2% was added to the contractor column and 5% was deducted from rental column to effect the correction. 9. Reimbursement of local transportation expense of admin staff of P280,575.73 and of sales staff of P500,888.17 paid via petty cash fund are not subject to EWT, the fact being, these were initially paid for by employees concerned and later reimbursed via petty cash fund. 10. Claims paid to shippers for damages sustained totaling P1,336,314.37 are not subject to EWT being not an income payment. Petitioner asserts that after considering the foregoing adjustments, there appears to be in fact an over-remittance of EWT in the amount of P16,897.04 as shown in its reconciliation schedule. 69 The Independent CPA has verified the foregoing claims of petitioner against the assessment and has found petitioner not liable of any deficiency EWT for taxable year 2008. In his Judicial Affidavit, 70 the Independent CPA states: Q30: How about for Expanded Withholding Tax, what did you do to check the claims of Thai Airways as against the assessment of the BIR? A: I analyzed Thai Airways EWT Annex 1 (2 pages) (which I marked as Exhibits "31.0.1-31.0.2") for the transaction "adjustments" totaling Php983,298.25. I evaluated the "adjustments" items. I examined BIR Forms 1601E and the corresponding bank validation and remittance slips. I examined BIR Form 1604E (Annual) which tallied with the monthly BIR Forms 1601E. Based on the prepared worksheets, I noted certain payments to the Air Transportation Office, outsourced services, such as security agency, reimbursement of expat expenses, credit card fees, expenses paid to sales team, expenses paid for repair of vehicles, expenses paid for admin services, expenses paid for transportation, expenses paid for ground handling, expenses paid for representation, and expenses paid for claims regarding damaged cargo. I examined the related vouchers and found everything duly substantiated. These are found in my report's Exhibit 31 etc. In fact, per worksheet analysis, after considering payment of Php7,965,683.55 (marked as Exhibits "31.14-31.14.1"),there was proof of overpayment of Php139,404.51 (please refer to Exhibits "31.1-31.1.2").Therefore, there is no tax liability on the part of Thai Airways for Expanded Withholding Tax. In support of his findings, the Independent CPA submitted the following exhibits: Particulars Reference Exhibit 1. Payments to Air Transportation Office Exhibit Nos. "31.2-31.2.1" and "31.2.2- (ATO) 31.2.27" 2. Additional Payments to ATO Exhibit Nos. "31.3" and "31.3.1- 31.3.25" 3. Payments to Outsourced Services Exhibit Nos. "31.4" and "31.4.1- (security agency) 31.4.23" 4. Reimbursement of expat expenses Exhibit Nos. "31.5" and "31.5.1- 31.5.41" 5. Credit card fees Exhibit No. "31.6" 6. Expenses paid to sales team Exhibit Nos. "31.7-31.7.1" 7. Expenses paid for repairs of vehicle Exhibit No. "31.8" 8. Expenses paid for admin services Exhibit Nos. "31.9.1-31.9.5" 9. Expenses paid for transportation expenses Exhibit No. "31.10" 10. Expenses for ground handling expenses Exhibit Nos. "31.11-31.11.5" 11. Expenses paid for representation expenses Exhibit No. "31.12" 12. Expenses paid for claims re: damaged cargo Exhibit No. "31.13" However, the foregoing exhibits were not formally offered in evidence, hence, inadmissible and cannot be considered by this Court. It is well-settled that courts cannot consider evidence which has not been formally offered pursuant to Section 34 of Rule 132 of the Revised Rules of Court. 71 Since petitioner failed to present evidence such as invoices and official receipts in support of the above expenses, the Court cannot verify the amounts and nature of the transactions, and their appropriate tax implications. Thus, the Court sustains respondent's basic deficiency EWT assessment for taxable year 2008 in the amount of P966,401.22, as shown below: Amount Rate EWT Due Rental P22,393,567.12 5% P1,119,678.36 Contractor 207,443,545.88 2% 4,148,870.92 Professional fee 2,142,718.02 10% 214,271.80 Professional fee 373,500.00 15% 56,025.00 Top 10T Corp. (Services) 2,753,296.66 2% 55,065.93 Top 10T Corp. (Purchases) 271,708,863.79 1% 2,717,088.64 Commission/broker 144,982.20 10% 14,498.22 Allowances paid to gov't. Employees 4,043,906.00 15% 606,585.90 Total P511,004,379.67 P8,932,084.77 ============= Less: Payment 7,965,683.55 Basic Deficiency EWT P966,401.22 ============ V. Deficiency Fringe Benefits Tax Respondent's verification disclosed that some of the benefits given to petitioner's officers were not included in the computation of FBT in violation of Section 33 (B) of the NIRC of 1997, as amended, and RR No. 03-98. Thus, respondent assessed petitioner of the corresponding deficiency FBT in the amount of P685,941.15, computed as follows: House Rent P3,237,000.00 Housing Utensils and Expenses 52,412.16 School Expenses 2,304,755.81 Fuel & Oil for Vehicle 391,054.60 Car Registration Fee 2,949.06 Rent of Car 987,000.00 Total Fringe Benefit 6,975,171.63 =========== Grossed up (68%) 10,257,605.34 Rate 32% FBT Tax Due 3,282,433.71 Less: Tax Paid 2,908,651.20 Amount Still Due 373,782.51 Add: Interest (computed up to 12.31.12) P296,158.64 Compromise Penalty 16,000.00 312,158.64 Total Amount Due FBT P685,941.15 =========== Petitioner posits that the FBT assessment on House Rent and Car Rental was erroneous as it was based on the actual payment of rent instead of actual use of the housing facilities and the vehicles which were normally paid for in advance. Petitioner expresses that the purpose of recognizing rentals as fringe benefits as these are utilized even if these were prepaid, is to ensure that proper FBT is correctly accrued and paid when due. Petitioner points out that there may be an instance when no FBT was due and payable when the advance or prepaid rent was never used by an expat officer due to early transfer to the head office prior to the end of the term of the rented facility. Thus, petitioner requests the cancellation of the said assessment for being without factual basis. Section 33 of the NIRC of 1997, as amended, provides for the imposition of fringe benefits tax on the grossed-up monetary value of the fringe benefit granted by the employer to its managerial or supervisory employees, to wit: "SEC. 33. Special Treatment of Fringe Benefit. (A) Imposition of Tax. A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-three percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 and thereafter, is hereby imposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank and file employees as defined herein) by the employer ,whether an individual or a corporation (unless the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer). The tax herein imposed is payable by the employer which tax shall be paid in the same manner as provided for under Section 57(A) of this Code. The grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by sixty-six percent (66%) effective January 1, 1998; sixty-seven percent (67%) effective January 1, 1999; and sixty-eight percent (68%) effective January 1, 2000 and thereafter: Provided, however, That fringe benefit furnished to employees and taxable under Subsections (B),(C),(D) and (E) of Section 25 shall be taxed at the applicable rates imposed thereat: Provided, further ,That the grossed-up value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by the difference between one hundred percent (100%) and the applicable rates of income tax under Subsections (B),(C),(D),and (E) of Section 25." (Emphasis supplied) cEaSHC Section 33 (B) of the NIRC of 1997, as amended, defines "fringe benefits" as any good, service, or other benefit furnished or granted by an employer, in cash or in kind, in addition to basic salaries, to an individual employee such as, but are not limited to the following: 1. Housing; 2. Expense account; 3. Vehicle of any kind; 4. Household personnel, such as maid, driver and others; 5. Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; 6. Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; 7. Expenses for foreign travel; 8. Holiday and vacation expenses; 9. Educational assistance to the employee or his dependents; and 10. Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. Corollary to this, Sections 2.33 (B) (1) (a) and (3) (f) of RR No. 03-98 further explain the composition, rules, and valuation of the fringe benefits on housing privilege and motor vehicle of any kind, as follows: "SEC. 2.33. SPECIAL TREATMENT OF FRINGE BENEFITS. xxx xxx xxx (B) Definition of Fringe Benefit In general, except as otherwise provided under these regulations, for purposes of this Section, the term 'FRINGE BENEFIT' means any good, service, or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries, to an individual employee (except rank and file employee as defined in these regulations) such as, but not limited to the following: xxx xxx xxx (1) Housing privilege (a) If the employer leases a residential property for the use of his employee and the said property is the usual place of residence of the employee, the value of the benefit shall be the amount of rental paid thereon by the employer, as evidenced by the lease contract. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit. xxx xxx xxx (3) Motor vehicle of any kind xxx xxx xxx (f) If the employer leases and maintains a fleet of motor vehicles for the use of the business and the employees ,the value of the benefit shall be the amount of rental payments for motor vehicles not normally used for sales, freight, delivery, service and other non-personal use. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit." (Emphasis supplied) Based on the foregoing, the FBT on leased housing facilities and motor vehicle is imposed upon the usage thereof by the employee. Since the FBT is a tax on the employee's receipt of the fringe benefit, any advance rental payment made by the employer which has not been availed of the employee is not yet taxable on the part of the employee. Thus, as correctly pointed out by petitioner, the monetary value of the fringe benefit on the house rent and car rental of its employees shall be based on the actual usage thereof for taxable year 2008, computed as follows: House rent Voucher Period Exhibit Date No. Expat Occupant Amount Paid Covered 2008 "P-25", "P-25- Feb to July 2" 16-Apr-08 63804 Krich Tamagul P702,000.00 2008 P702,000.00 "P-25- 3" "P- Nivat May 2008 to 25-4" 27-May-08 63954 Chantarachoti 1,560,000.00 Apr 2009 1,170,000.00 "P-25- 6" "P- Thirasak July 2008 to 25-8" 24 Jun-08 64074 Churiganon 1,404,000.00 June 2009 702,000.00 "P-25- August 2008 10" 22 Jul-08 64211 Kxish Tamagul 2,808,000.00 to July 2010 585,000.00 Total P6,474,000.00 P3,159,000.00 =========== Multiply by x 50% Monetary Value of Fringe Benefit on House Rent P1,579,500.00 ============ Car Rental Voucher Period Exhibit Date No. Expat Occupant Amount Paid Covered 2008 "P-26" "P-26- Nivat March 2008 1" 3-Mar-08 63623 Chantarachoti P600,000.00 to Feb 2009 P500,000.00 "P-26- 2" "P- Nivat August 2008 26-4" 14-Aug-08 64302 Chantarachoti 960,000.00 to July 2009 480,000.00 Total P1,560,000.00 P980,000.00 =========== Multiply by x 50% Monetary Value of Fringe Benefit on Car Rental P490,000.00 ============ In sum, the correction of these two items alone would eliminate the deficiency FBT assessment and result in an overpayment in the amount of P640,099.84, which, according to petitioner, pertains to advance rentals paid in 2007 but utilized in 2008, to wit: House Rent P1,579,500.00 Housing Utensils and Expenses 52,412.16 School Expenses 2,304,755.81 Fuel & Oil for Vehicle 391,054.60 Car registration fee 2,949.06 Rent of Car 490,000.00 Total Fringe Benefits 4,820,671.63 Grossed-up value (68%) 7,089,222.99 Multiply by Tax Rate 32% FBT Due 2,268,551.36 Less: Tax Paid 2,908,651.20 Remitted for FBT due on advance payments for rental in 2007 but pertaining to 2008 P(640,099.84) =========== In view of the foregoing, the deficiency FBT assessment should be cancelled and withdrawn. VI. Compromise Penalties and Withholding Tax on Compensation The Court shall discuss the withholding tax on compensation together with the compromise penalties since petitioner was assessed for deficiency WTC by respondent imposing a compromise penalty for petitioner's failure to file accurate information on the remittance. Respondent's verification of the salaries and wages as per petitioner's Alphalist and per Financial Statement/Return showed a difference amounting to P9,796,614.39 after audit adjustments. On that basis, respondent assessed petitioner a compromise penalty in the amount of P3,000.00. Also, suggested compromise penalties as found in the FAN and the FDDA amounted to P156,000.00, computed as follows: Compromise Tax Type Penalty Income Tax P50,000.00 Percentage Tax 50,000.00 Value-added Tax 20,000.00 Expanded Withholding Tax 20,000.00 Fringe Benefit Tax 16,000.00 Total P156,000.00 ========== It must be stressed that compromise penalty is imposed to avoid prosecution for violation of the provision of the Tax Code. Pursuant to RMO No. 01-90, 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 a taxpayer refuses to pay the same. It is well-settled that the Court cannot compel a taxpayer to pay the compromise penalty because by its very nature, it implies a mutual agreement between the parties in respect to the thing or subject matter that is so compromised, and the choice of paying or not paying it distinctly belongs to the taxpayer. 72 Absent a showing that the taxpayer consented to the compromise penalty, its imposition should be deleted. The imposition of the compromise penalty without the taxpayer's conformity is illegal and unauthorized. 73 In this case, there is nothing in the records which would show that petitioner consented to the compromise penalty. Consequently, the compromise penalty should not be imposed and must be cancelled. It must be noted that petitioner's partial payment of percentage tax on April 18, 2012 in the amount of P168,853.07 74 shall be deducted in the settlement of its final deficiency percentage tax liability, including surcharge, deficiency and delinquency interests. WHEREFORE ,premises considered, the assessments issued by respondent against petitioner for taxable year 2008 covering deficiency value-added tax (P3,333,016.15),withholding tax on compensation (P3,000.00),and fringe benefits tax (P685,941.15) are CANCELLED and WITHDRAWN. However, the assessments issued by respondent against petitioner for taxable year 2008 covering deficiency income tax, percentage tax, and expanded withholding tax are AFFIRMED but with modifications. Accordingly, petitioner is ORDERED TO PAY respondent the amount of SEVEN MILLION NINE HUNDRED SEVENTY-TWO THOUSAND THREE HUNDRED FIFTY-SIX PESOS AND 89/100 (P7,972,356.89) representing basic deficiency income tax, value-added tax, percentage tax, and expanded withholding tax and the twenty-five percent (25%) surcharge imposed under Section 248 (A) (3) of the NIRC of 1997, as amended, computed as follows: Type of Tax Basic Tax 25% Surcharge Total Income Tax P2,142,919.75 P535,729.94 P2,678,649.69 Value-added Tax 1,100,598.81 275,149.70 1,375,748.51 Percentage Tax 2,167,965.74 541,991.43 2,709,957.17 Expanded Withholding Tax 966,401.22 241,600.30 1,208,001.52 Total P6,377,885.52 P1,594,471.37 P7,972,356.89 =========== =========== =========== In addition, petitioner is ORDERED TO PAY: a) Deficiency interest at the rate of twenty percent (20%) per annum on the basic deficiency income tax, percentage tax and expanded withholding tax computed from the dates indicated below until full payment thereof pursuant to Section 249 (B) of the NIRC of 1997, as amended: DcHSEa Tax Type Basic Tax Deficiency interest computed from Income Tax P2,142,919.75 April 15, 2009 Value-added Tax 1,100,598.81 January 25, 2009 Percentage Tax 2,167,965.74 January 25, 2009 Expanded Withholding Tax P966,401.22 January 12, 2009 b) Delinquency interest at the rate of 20% per annum on the total amount of P7,972,356.89 and on the 20% deficiency interest which have accrued as afore-stated in (a) computed from December 10, 2012 until full payment thereof pursuant to Section 249 (C) of the NIRC of 1997, as amended. SO ORDERED. (SGD.) MA. BELEN M. RINGPIS-LIBAN Associate Justice Lovell R. Bautista and Esperanza R. Fabon-Victorino, JJ., concur. Footnotes 1. Exhibit "P-1",docket, vol. II, p. 647. 2. Resolution dated March 14, 2014, docket, vol. II, pp. 541 to 542. 3. Par. I (2),Joint Stipulation of Facts and Issues (JSFI),docket, vol. I, p. 440; Exhibits "P-1","P-2 to P-2-1",and "P-2-a, P-2-a-1 to P-2-a-3",docket, vol. II, pp. 647 to 649, pp. 650 to 651, and pp. 652 to 655, respectively. 4. Resolution dated March 14, 2014, docket, vol. II, pp. 541 to 542. 5. Exhibit "R-1",BIR records, p. 877. 6. Pars. I (11.1) and (11.2),JSFI, docket, vol. I, p. 443. 7. Exhibit "R-12",BIR records, pp. 1855 to 1858. 8. BIR records, pp. 1964 to 1980. 9. Exhibit "P-3",docket, vol. I, pp. 276 to 279; Exhibit "R-14",BIR records, pp. 2041 to 2044. 10. BIR records, pp. 2037 to 2040. 11. Exhibits "R-14-A" to "R-14-F",BIR records, pp. 2032, 2030, 2028, 2026, 2024, and 2022, respectively. 12. Pars. I (4) and (6),JSFI, docket, vol. I, pp. 440 and 442. 13. Par. I (7),JSFI, docket, vol. I, p. 442; Exhibit "P-4",docket, vol. I, pp. 280 to 300. 14. Exhibit "R-16",BIR records, pp. 2167 to 2170. 15. Exhibit "R-16-A",BIR records, pp. 2163 to 2166. 16. Pars. I (8) and (10),JSFI, docket, vol. I, pp. 442 and 443. 17. Par. I (9),JSFI, docket, vol. I, p. 443. 18. Docket, vol. I, p. 6; Par. I (10),JSFI, docket, vol. I, p. 443. 19. Docket, vol. I, pp. 167 to 181. 20. Docket, vol. I, pp. 191 to 196. 21. Docket, vol. I, pp. 236 to 242. 22. Docket, vol. I, p. 425. 23. Docket, vol. I, pp. 439 to 450. 24. Docket, vol. I, pp. 468 to 479. 25. Resolution dated February 24, 2015, docket, vol. II, pp. 722 to 723. 26. Resolution dated July 2, 2015, docket, vol. II, pp. 793 to 794. 27. Docket, vol. II, pp. 828 to 864. 28. Docket, vol. II, pp. 807 to 825. 29. Resolution, docket, vol. II, p. 867. 30. Par. II, JSFI, docket, vol. I, p. 444. 31. Exhibit "R-14",BIR Records, pp. 2041 to 2044; Exhibit "P-3",docket, vol. I, pp. 276 to 279. 32. Exhibit "R-16",BIR Records, pp. 2167 to 2170. 33. It should be P53,192,956.07 (P55,169,595.00 - P1,976,638.93). 34. 20% Interest up to 12/31/12 per FDDA P25,392,821.01 Less: 20% Interest up to 4/18/12 per FAN 20,735,767.75 20% Interest from 04/19/12 to 12/31/12 P4,657,053.26 ============ 35. Exhibit "R-16-A",under Income Tax, item no. 1 (f),BIR records, p. 2165. 36. CBK Power Company Limited vs. Commissioner of Internal Revenue ,G.R. Nos. 193383-84, and Commissioner of Internal Revenue vs. CBK Power Company Limited ,G.R. Nos. 193407-08, January 14, 2015. 37. G.R. No. 188550, August 28, 2013. 38. G.R. No. 188550, August 19, 2013; see also CBK Power Company Limited vs. Commissioner of Internal Revenue ,G.R. Nos. 193383-84, Commissioner of Internal Revenue vs. CBK Power Company Limited ,G.R. Nos. 193407-08, January 14, 2015. 39. Exhibits "P-1","P-2" to "P-2-1" and "P-2-a","P-2-a-1" to "P-2-a-3",docket, vol. II, pp. 647 to 649, pp. 650 to 651, and pp. 652 to 655, respectively. 40. Exhibit "R-16-A",BIR records, p. 2166. 41. Exhibit "P-4",docket, vol. I, p. 282. 42. Exhibit "P-5",docket, vol. I, p. 309. 43. BIR records, pp. 1733-1750. 44. Exhibit "P-28",pp. 3 to 4, docket, vol. I, pp. 484 to 485. 45. Petitioner's Formal Offer of Evidence, p. 10, docket, vol. II, p. 643; Petitioner's Memorandum, pp. 9 and 10, docket, vol. II, pp. 876 to 877. 46. Exhibit "R-16-A",under Income Tax, item no. 1 (b),BIR records, p. 2166. 47. Exhibit "P-6",docket, vol. I, p. 310. 48. Exhibit "P-7". 49. Exhibit "P-31",docket, vol. II, pp. 696 to 698. 50. Exhibit "P-30",docket, vol. II, pp. 690 to 692. 51. Exhibits "P-7" to "P-18". 52. Exhibits "P-23" and "P-23-1" to "P-23-4",docket, vol. I, p. 338 and pp. 339 to 342. 53. BIR records, pp. 1729 to 1731. 54. Collector of Internal Revenue vs. Benipayo ,G.R. No. L-13656, January 31, 1962. 55. BIR records, p. 1877. 56. G.R. No. L-13656, January 31, 1962. 57. Exhibits "P-22" and "P-22-1" to "P-22-4",docket, vol. I, pp. 332 to 333 and pp. 334 to 337, respectively. 58. Docket, vol. I, pp. 325 to 327. 59. Docket, vol. I, pp. 328. 60. Exhibits "P-20-1" to "P-20-2",docket, vol. I, pp. 326 to 327. 61. Exhibit "P-20-3",docket, vol. I, p. 328. 62. 20% Interest up to 12/31/12 per FDDA P1,335,402.24 Less: 20% Interest up to 4/18/12 per FAN 1,109,341.18 20% Interest from 04/19/12 to 12/31/12 P226,061.06 =========== 63. Now 12%,per RMC No. 7-2006 issued January 31, 2006. 64. Exhibits "P-21" and "P-21-1" to "P-21-2",docket, vol. I, p. 329 and pp. 330 to 331. 65. Should be P8,083,092.07. 66. Exhibit "P-23-1" to "P-23-4",docket, vol. I, pp. 339 to 342. 67. Petitioner's Formal Offer of Evidence, docket, vol. II, p. 643. 68. Exhibit "P-4",docket, vol. I, pp. 280 to 300. 69. Exhibit "P-24-5",docket, vol. I, p. 350. 70. Exhibit "P-29",pp. 11 to 12, docket, vol. II, pp. 516 to 517. 71. Far East Bank & Trust Company vs. Commissioner of Internal Revenue ,G.R. No. 149589, September 15, 2006. 72. The Philippines International Fair, Inc. vs. The Collector of Internal Revenue, et al. ,G.R. Nos. L-12928 and L-12932, March 31, 1962. 73. Commissioner of Internal Revenue vs. Lianga Bay Logging Co., Inc., et al. ,G.R. No. L-35266, January 21, 1991. 74. Exhibits "P-24","P-24-1" to "P-24-3",docket, vol. I, pp. 343 to 347.