Northern Tobacco Redrying Co., Inc. v. Commissioner of Internal Revenue

THIRD DIVISION [C.T.A. CASE NO. 8866. February 23, 2017.] NORTHERN TOBACCO REDRYING CO., INC. , petitioner , vs. COMMISSIONER OF INTERNAL REVENUE , respondent . DECISION BAUTISTA , J p : The Case This is a Petition for Review 1 filed on August 12, 2014, pursuant to Section 7 (a) (2) 2 of Republic Act ("RA") No. 1125 , 3 as amended by RA No. 9282 4 and RA No. 9503 , 5 praying that judgment be rendered: 6 1. Declaring null and void the assessment notices issued against petitioner assessing it for deficiency income tax ("IT"), value-added tax ("VAT"), expanded withholding tax ("EWT"), withholding tax on compensation ("WTC"), documentary stamp tax ("DST"), and improperly accumulated earnings tax ("IAET") for the year ending December 31, 2010, in the aggregate amount of Php89,823,645.18, inclusive of increments; 2. Declaring null and void the above-mentioned deficiency assessments for being based purely on mere assumptions; and 3. Other reliefs just and equitable under the premises. The Parties 7 Petitioner Northern Tobacco Redrying Co., Inc. is a corporation organized and existing under Philippine laws, with business address at No. 24 Fortune Avenue, Brgy. Fortune, Marikina City. Its primary purpose is to establish, operate, manage, acquire, buy, lease, and sell or otherwise dispose of tobaco re-drying and flue-curing plants, machineries and equipment. 8 It is registered with the Securities and Exchange Commission ("SEC"), with SEC Certificate No. 126605 9 issued on May 21, 1985; and with the Bureau of Internal Revenue ("BIR"), with BIR Certificate of Registration No. 8RC0000049826, 10 as a Large Taxpayer. Respondent Commissioner of Internal Revenue ("CIR") is the duly appointed Commissioner of the BIR vested, under appropriate laws, with the authority to carry out the functions, duties, and responsibilities of his office, including inter alia , the power to decide disputed assessments, and cancel and abate tax liabilities, pursuant to the provisions of the 1997 National Internal Revenue Code , as amended ("1997 NIRC") and other tax laws, rules and regulations. cEaSHC The Facts On February 25, 2010, petitioner (as transferor) and Fortune Landequities and Resources, Inc. ("FLRI"), a domestic corporation, (as transferee) entered into a Deed of Transfer 11 whereby petitioner agreed to transfer ownership over certain parcels of land located in Vigan, Ilocos Norte to FLRI in exchange for a total of 5,722 (4,292 additional subscription and 1,430 unpaid original subscription) common shares in FLRI. On June 7, 2010, FLRI filed its Request for Tax-Free Exchange Ruling of Transfer of Land in Exchange for Shares of Stock 12 with the BIR Law Division. On even date, an Application and Joint Certification 13 (BIR Form No. 1927) was likewise filed. On July 19, 2011, petitioner received Letter of Authority ("LOA") No. 124-2011-00000048 14 dated July 19, 2011, 15 authorizing Revenue Officers ("RO") Nicanor San Juan, Ponciano Garma, Lamberto Vasquez, and Group Supervisor ("GS") Ronaldo Camba to examine petitioner's books of accounts and accounting records for all internal revenue taxes for the period running from January 1, 2010 to December 31, 2010. On March 11, 2013, a Memorandum of Assignment 16 was issued by OIC-Chief, Excise LT Audit Div. II Lindagrace B. Sagun ("OIC Chief Sagun") to ROs Romualdo I. Plocios, Melinda M. Rugayan, and Lolita G. Sabado, and GS Samuel C. Reyes, to continue the audit or investigation against petitioner, replacing the previously-assigned RO Roque Doloiras, Jr. On March 14, 2013, petitioner, through Debbie Ting-Alcantara ("Ms. Alcantara"), received a letter, 17 with attached List of Requirements, 18 from OIC Chief Sagun dated March 13, 2013, informing petitioner of the change of ROs and GS authorized to conduct audit. On July 22, 2013, a Final Report 19 was submitted by ROs Plocios, Rugayan, Sabado, Lilia G. Pascual and GS Reyes to OIC-Assistant Commissioner LTS Alfredo V. Misajon, recommending the issuance of a Notice for Informal Conference ("NIC") against petitioner. On August 30, 2013, petitioner received an NIC 20 issued by OIC-Assistant Commissioner LTS Misajon. On October 21, 2013, ROs Plocios, Rugayan, Sabado, Pascual and GS Reyes submitted a Memorandum 21 to OIC-Assistant Commissioner LTS Misajon, recommending the issuance of a Preliminary Assessment Notice ("PAN") against petitioner. On November 22, 2013, petitioner, through Ms. Alcantara received a PAN, 22 with an assessment for deficiency IT, VAT, WTC, EWT, DST and IAET in the total amount of Php86,613,710.78, inclusive of surcharges, interest, and compromise penalties. On December 4, 2013, ROs Plocios, Rugayan, Sabado, Pascual and GS Reyes submitted a Memorandum 23 to OIC-Assistant Commissioner LTS Misajon, recommending the issuance of a Formal Assessment Notice ("FAN") against petitioner for failure to file a protest to the PAN. On December 16, 2013, petitioner, likewise through Ms. Alcantara, received a Formal Letter of Demand ("FLD") 24 with an assessment for deficiency IT, VAT, WTC, EWT, DST and IAET in the total amount of Php89,823,645.18, inclusive of surcharges, interest, and compromise penalties, along with the Final Assessment Notices 25 ("FANs") issued on December 11, 2013, detailed as follows: KIND BASIC TAX SURCHARGE INTEREST COMPROMISE TOTAL OF TAX PENALTY IT Php9,636,748.11 Php- Php5,227,605.82 Php50,000.00 Php14,914,353.93 VAT 6,608,093.99 - 3,892,438.93 50,000.00 10,550,532.92 WTC 215,300.47 - 127,410.69 16,000.00 358,711.16 EWT 5,349.32 - 3,165.62 1,500.00 10,014.94 DST 1,280,140.00 320,035.00 764,576.77 25,000.00 2,389,751.77 IAET 37,489,949.72 9,372,487.43 14,687,843.31 50,000.00 61,600,280.46 TOTAL PHP55,235,581.61 PHP9,692,522.43 PHP24,703,041.14 PHP192,500.00 PHP89,823,645.18 =============== ============== =============== ============= =============== On January 15, 2014, petitioner filed an administrative protest 26 with the Large Taxpayers Service, requesting for a reconsideration of the FLD and the FANs. There being no action on its protest, petitioner filed the present Petition for Review 27 on August 12, 2014. On October 13, 2014, respondent filed his Answer 28 by registered mail, interposing Special and Affirmative Defenses, in sum: (1) that the period to assess has not prescribed; and (2) that petitioner is liable to pay deficiency IT, VAT, WTC, EWT, DST and IAET. Respondent and petitioner filed their respective Pre-trial Briefs on February 20, 2015 29 and March 12, 2015. 30 On April 6, 2015, the parties filed their Joint Stipulation of Facts and Issues 31 ("JSFI"); thus, a Pre-Trial Order 32 was issued on April 20, 2015. Petitioner presented the following witnesses: (1) Ms. Melody Grace O. Ngo, its Accounting Officer; 33 and (2) Mr. Prudencio F. Tatunay, the Court-appointed 34 Independent Certified Public Accountant ("ICPA"). 35 On October 14, 2015, Formal Offer of Evidence for the Petitioner 36 was filed, offering Exhibits "P-1" to "P-9," "P-9-A" to "P-9-J," "P-10," "P-10-A," "P-11" to "P-13," "P-15," "P-15-A" to "P-15-D," "P-15-D-1," "P-16," "P-16-A," "P-17," and "P-18." This was resolved by the Court in its Resolution 37 dated November 16, 2015, admitting all of petitioner's evidence, save for Exhibit "P-18" for not being properly marked. CTIEac Respondent presented its sole witnesses, RO Plocios, one of the ROs assigned to petitioner's case. 38 On February 26, 2016, Respondent's Formal Offer of Evidence 39 was filed, offering Exhibits "R-1" to "R-9," "R-9-a" to "R-9-f," "R-10," and "R-10-a." In its April 11, 2016 Resolution, 40 the Court admitted all of respondent's offered exhibits, and ordered the parties to file their respective memoranda within thirty (30) days from receipt thereof. After both parties were granted extension/s, 41 petitioner and respondent then filed their Memoranda on June 1, 2016, 42 and June 14, 2016, 43 respectively. On June 14, 2016, the Court promulgated a Resolution 44 submitting the case for decision; hence, this Decision. The Issues 45 WHETHER PETITIONER'S TRANSFER OF ITS PARCELS OF LAND TO FLRI, IN EXCHANGE OF 4,292 COMMON SHARES OF STOCK, CONSTITUTES A TAX-FREE EXCHANGE TRANSACTION, IN ACCORDANCE WITH THE 1997 NIRC ; WHETHER PETITIONER IS LIABLE TO PAY RESPONDENT PHP89,823,645.18 REPRESENTING ALLEGED DEFICIENCY IT, VAT, EWT, WTC, DST, AND IAET, INCLUSIVE OF SURCHARGES AND INTEREST FOR TAXABLE YEAR ("TY") 2010; WHETHER RESPONDENT'S RIGHT TO ASSESS PETITIONER FOR ALLEGED DEFICIENCY INTERNAL REVENUE TAXES HAS ALREADY PRESCRIBED; AND WHETHER A TAX RULING IS A CONDITION PRECEDENT FOR THE APPLICATION OF SECTION 40 (C) (2) OF THE 1997 NIRC. Petitioner's Arguments 46 Petitioner avers that it is not liable to pay respondent Php89,823,645.18 representing alleged deficiency IT, VAT, EWT, WTC, DST, and IAET, inclusive of surcharges and interest for TY 2010; that its transfer of parcels of land to FLRI in exchange of shares constitutes a tax-fee exchange transaction; that a tax ruling is not a condition precedent for the application of Section 40 (C) (2) of the 1997 NIRC ; and that respondent's right to assess has prescribed under Section 203 of the 1997 NIRC. Respondent's Counter-Arguments 47 Respondent counters that petitioner filed a false return, giving respondent ten (10) years from discovery of such falsity to assess petitioner, pursuant to Section 222 of the 1997 NIRC ; and that petitioner is liable to pay deficiency IT, VAT, WTC, EWT, DST, and IAET. The Ruling of the Court Petitioner's transfer of land to FLRI is a tax-free exchange transaction under Section 40 (c) (2) of the 1997 NIRC , and a tax ruling is not a condition precedent for the application thereof. Respondent assessed petitioner for deficiency IT, VAT, DST and IAET arising from alleged gains from exchange of parcels of land for shares of stock entered into between petitioner (along with other corporations) and FLRI. He anchored these on the failure of petitioner to secure a BIR Ruling declaring the said transaction as tax free. Petitioner argues that a BIR Ruling is not a condition precedent for the application of Section 40 (C) (2) of the 1997 NIRC since the law itself does not require said Ruling. The relevant provision is Section 40 (C) of the 1997 NIRC , to wit: SEC. 40. Determination of Amount and Recognition of Gain or Loss. xxx xxx xxx (C) Exchange of Property. (1) General Rule. Except as herein provided, upon the sale or exchange of property, the entire amount of the gain or loss, as the case may be, shall be recognized. (2) Exception. No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation (a) A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation; or (b) A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of another corporation also a party to the merger or consolidation; or (c) A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such corporation, solely for stock or securities in another corporation, a party to the merger or consolidation. SaCIDT No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said corporation: Provided, That stocks issued for services shall not be considered as issued in return for property. 48 From the above provision, the requisites for the non-recognition of gain under or loss under Section 40 (C) (2) of the 1997 NIRC are as follows: (1) the transferee is a corporation; (2) the transferee exchanges its shares of stock for property/ies of the transferor; (3) the transfer is made by a person, acting alone or together with others, not exceeding four (4) persons; and, (4) as a result of the exchange the transferor, alone or together with others not exceeding four (4), gains control of the transferee. 49 The term "control" is defined as "ownership of stocks in a corporation possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote." 50 In relation to the above-stated requirements, the Court finds that all the foregoing requirements were met, to wit: 1. It is undisputed that FLRI is a domestic corporation; 2. It is likewise undisputed that on February 25, 2010, petitioner and FLRI entered into a Deed of Transfer 51 whereby petitioner agreed to transfer ownership over certain parcels of land in exchange for a total of 5,722 (4,292 additional subscription and 1,430 unpaid original subscription) common shares in FLRI; 3. Petitioner and (4) four other companies, namely: Fortune Tobacco Corporation ("FTC"), Dominium Realty and Construction Co. ("DRCC"), Parity Packaging Corporation ("PPC") and Orecla Realty, Inc. ("ORI") entered into an exchange of properties with FLRI; 52 4. Records reveal that after the transfer, the combined ownership of petitioner (along with FTC, DRCC, PPC and ORI) went up to 99.99%, which shows that it gained control over FLRI, for reference: 53 SUBSCRIBER AFTER TRANSFER NO. OF SHARES PERCENTAGE FTC 334,295 34.82240% PPC 29,522 3.07521% DRCC 14,459 1.50615% NTRCI 5,722 0.59604% ORI 575,997 59.99969% 99.99948% Harry C. Tan 1 0.00010% 0.00010% Lucio K. Tan 1 0.00010% 0.00010% Christopher Nelson 1 0.00010% 0.00010% Varinia Elero 1 0.00010% 0.00010% Raymond Miranda 1 0.00010% 0.00010% TOTAL 960,000 100.00000% 100.00000% ======= ========== ========== As to respondent's claim that a BIR Ruling is a condicio sine qua non before petitioner can avail the benefits under Section 40 (C) of the 1997 NIRC , the Court finds no basis therefor. The Revenue Regulations that respondent relied upon merely provide the guidelines in monitoring tax-free exchanges of property, and in order that, in cases of subsequent sales of said property, they shall be taxed accordingly. Therefore, the BIR Ruling or Certification required under RR No. 18-01 is for determining gain or loss on a subsequent sale or disposition of property subject of the tax-free exchange, and not a precondition for a taxpayer to be entitled to an exemption. There is nothing therein explicitly requiring a party, in exchanging property for shares of stocks, to first secure a BIR confirmatory certification or tax ruling before it can avail itself of tax exemption. In view of the foregoing discussion, the subject transaction should be considered tax-free under Section 40 (C) of the 1997 NIRC. The assessments relating to VAT (first to third quarters), EWT (January to November), and WTC (January to November) already prescribed. Petitioner argues that since the deficiency assessments were issued on December 16, 2013, the assessments for VAT, EWT, WTC and DST, were issued outside the prescriptive period provided in Section 203 of the 1997 NIRC . It further posits that respondent's belated claim in his Answer that there was a false or fraudulent return does not justify the application of Section 222 of the 1997 NIRC since the same should have been explicitly stated at the earliest opportunity and in the assessment notices, for it is a fundamental requirement of due process that the taxpayer be informed of the factual and legal bases of the assessment. It is the contention of petitioner that if respondent truthfully claims entitlement to ten (10) years, he would not have indicated the due date of December 31, 2013 in its assessment notices. As to fraud, petitioner avers that it should be proved to exist by clear and convincing evidence, with the sole object of avoiding taxation, and not just by conjectures and speculations; that failure to file a return is not, in itself, evidence of fraud; and that the testimony of respondent's sole witness is absent of any sort of justification as to why his team issued the assessment beyond the three (3)-year period. Lastly, petitioner emphasized that it is a settled rule that an assessment should not be based on mere presumptions, no matter how reasonable or logical; and that due to respondent's failure to prove the basis for extending the period beyond the reglementary three (3) years, assessment beyond it is void. cHECAS Respondent, on the other hand insists that petitioner filed a false return, hence, respondent has ten (10) years from discovery thereof to assess petitioner, in view of Section 222 of the 1997 NIRC. He further stated that Section 8 of Revenue Regulations ("RR") No. 18-01 mandates the inclusion of certain information in the Final Adjustment Return and the Audited Financial Statements ("AFS") in cases of tax-free exchanges of property for shares under Section 40 (C) (2) of the 1997 NIRC ; that this strict mandate stems from a long established rule that tax-free exchange transactions partake the nature of tax exemptions, which are strictly construed against the taxpayer and liberally in favor of the state; and that petitioner is charged with the heavy burden of proving that it has complied with and satisfied all statutory and administrative requirements to be entitled thereto. It is claimed by respondent that petitioner cannot unilaterally assert that the transaction entered into is tax-free, and compliance with RR No. 18-01 is an indispensable requirement to such claim; that petitioner did not attach to its ITR and AFS its request for ruling and the corresponding certification/ruling from the BIR; that despite the fact that the request for ruling filed on June 7, 2010 has not yet been acted upon, petitioner still filed its ITR on April 15, 2011 excluding the transaction claimed to be tax-free; and that petitioner's failure to comply with the mandatory provisions of RR No. 18-01 constitutes an intentional wrong-doing, with the sole intent to evade taxes due on the exchange transaction. Sections 203 and 222 (a) of the 1997 NIRC mandates that respondent should issue an assessment for deficiency taxes within three (3) years from the last day prescribed by law to file the tax return or the actual date of filing of such return, whichever comes later; and any assessment notice issued beyond this three (3)-year prescriptive period shall not be valid, save in cases wherein no return was filed, in which assessment may be made within ten (10) years from discovery of the omission, to wit: SECTION 203. Period of Limitation upon Assessment and Collection. Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return , and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed . For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day. xxx xxx xxx SECTION 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. (a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed , or a proceeding in court for the collection of such tax may be filed without assessment, at any time within ten (10) years after the discovery of the falsity , fraud or omission: Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof. 54 As to the claim of falsity, in order to warrant a ten (10)-year period to assess, respondent must not only clearly state his basis, he must also present substantial evidence in support thereto. 55 Mere allegations in the pleadings that the case falls under the exception will not suffice. 56 Respondent's Formal Offer of Evidence 57 failed to provide any proof relating to his claim if falsity. Likewise, his sole witness, RO Plocos, never mentioned that petitioner filed a false return in his Judicial Affidavit 58 as well as during his cross, re-direct and re-cross examinations. 59 Therefore, the general rule [of three (3) years] applies. Nonetheless, the Court shall determine the issue of prescription for all the assessed taxes. Since the instant case involves deficiency IT, VAT, EWT, WTC, DST, and IAET, the prescribed due dates for the filing of the returns, to be used as bases for the three (3)-year [or ten (10) years for non-filing of a return] prescriptive period, vary accordingly. Income Tax Section 77 (B) of the 1997 NIRC provides that the filing of the Annual Income Tax Return shall be on or before the fifteenth (15th) day of April, or the fifteenth (15th) day of the fourth (4th) month following the close of the fiscal year, as the case may be, to wit: SECTION 77. Place and Time of Filing and Payment of Quarterly Corporate Income Tax. xxx xxx xxx (B) Time of Filing the Income Tax Return. The corporate quarterly declaration shall be filed within sixty (60) days following the close of each of the first three (3) quarters of the taxable year. The final adjustment return shall be filed on or before the fifteenth (15th) day of April, or on or before the fifteenth (15th) day of the fourth (4th) month following the close of the fiscal year, as the case may be. 60 Using the above as basis, the assessment relative to IT was timely received by petitioner on December 16, 2013 and has not yet prescribed, for reference: DUE DATE FOR ACTUAL DATE OF BASIS LAST DAY TO FILING OF RETURN FILING OF RETURN ASSESS 15-Apr-11 13-Apr-11 61 15-Apr-11 15-Apr-14 Value-Added Tax The filing of the Quarterly VAT Returns must be made within twenty-five (25) days after the close of each taxable quarter. Section 114 (A) of the 1997 NIRC provides, as follows: AHDacC SECTION 114. Return and Payment of Value-Added Tax. (A) In General. Every person liable to pay the value-added tax imposed under this Title shall file a quarterly return of the amount of [his/her/its] gross sales or receipts within twenty-five (25) days following the close of each taxable quarter prescribed for each taxpayer : Provided, however, That VAT-registered persons shall pay the value-added tax on a monthly basis. 62 Therefore, in view of the assessment for VAT on December 16, 2013, respondent's right to assess the first to third quarters of 2010 has prescribed and only the fourth quarter remains, to wit: 2010 DUE DATE FOR ACTUAL DATE OF BASIS LAST DAY FILING OF RETURN FILING OF RETURN TO ASSESS First Quarter 25-Apr-10 19-Apr-10 63 25-Apr-10 25-Apr-13 Second Quarter 25-Jul-10 19-Jul-10 64 25-Jul-10 25-Jul-13 Third Quarter 25-Oct-10 19-Oct-10 65 25-Oct-10 25-Oct-13 Fourth Quarter 25-Jan-11 25-Jan-11 66 25-Jan-11 25-Jan-14 Creditable and Expanded Withholding Taxes Withholding Tax on Compensation Monthly Remittance Returns of Creditable Income Taxes Withheld (Expanded) must be filed within ten (10) days after the end of each month. However, for the month of December, it shall be filed on or before January 15 of the following year. Section 58 of the 1997 NIRC provides that: SECTION 58. Returns and Payment of Taxes Withheld at Source. (A) Quarterly Returns and Payments of Taxes Withheld. xxx xxx xxx xxx The return for final withholding tax shall be filed and the payment made within twenty-five (25) days from the close of each calendar quarter, while the return for creditable withholding taxes shall be filed and the payment made not later than the last day of the month following the close of the quarter during which withholding was made : Provided, That the Commissioner, with the approval of the Secretary of Finance, may require these withholding agents to pay or deposit the taxes deducted or withheld at more frequent intervals when necessary to protect the interest of the government. 67 cAaDHT However, the above provision was amended by Section 2.58 (A) (2) of RR No. 2-98 , 68 as amended by RR No. 17-03 , 69 viz. : SECTION 2.58. Returns and Payment of Taxes Withheld at Source. (A) Monthly return and payment of taxes withheld at source xxx xxx xxx (2) WHEN TO FILE (a) For both large and non-large taxpayers, the withholding tax return, whether creditable or final (including final withholding taxes on interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements) shall be filed and payments should be made, within ten (10) days after the end of each month, except for taxes withheld for the month of December of each year, which shall be filed on or before January 15 of the following year ; and except for the final capital gains tax on the sale or other onerous disposition of real property considered as capital asset which must be taken/withheld from the seller by the buyer and remitted within thirty (30) days from the date of notarization of the transfer document to the collecting agent of the RDO having jurisdiction over the place where the property is located. xxx 70 Further, Section 6.3.2 (a) of RR No. 17-10 states the following relating to large taxpayers, such as petitioner: 6.3.2 Withholding Tax Remittance and Information Returns. a. All withholding taxes for remittance by the Head Office and/or all branches/units of a Large Taxpayer shall be e-filed in a consolidated return within ten (10) days following the end of each month for January to November, and on or before January 15 of the following year for the month of December, using BIR Form Nos. 1601-C, 1601-E, 1601-F and 1602, respectively, on a staggered basis according to the classification of industry pursuant to existing issuances. For the e-payment, the taxpayer shall give instruction to the AAB to debit its account for the amount of tax payable on or before the due date for payment thereof as prescribed under the prevailing/applicable laws/regulations. xxx xxx xxx 71 In view of petitioner's enrollment with the Electronic Filing and Payment System ("EFPS") of the BIR, filing of returns (except for December) shall be in accordance with the schedule set forth in RR No. 26-2002 , to wit: Group A Fifteen (15) days following the end of the month Group B Fourteen (14) days following the end of the month Group C Thirteen (13) days following the end of the month Group D Twelve (12) days following the end of the month Group E Eleven (11) days following the end of the month Considering that petitioner is in the business on "curing and re[-]drying tobacco leaves" and "other business activities, N.E.C.," it belongs to Group B and fourteen (14) days apply. Therefore, as to EWT and WTC, respondent's right to assess from January to November 2010 has prescribed, leaving December 2010 for which he has the right to assess, viz. : EWT 2010 DUE DATE FOR FILING OF RETURN ACTUAL DATE OF FILING OF RETURN BASIS LAST DAY TO ASSESS January 14-Feb-10 8-Feb-10 72 14-Feb-10 8-Feb-13 February 14-Mar-10 9-Mar-10 73 14-Mar-10 14-Mar-13 March 14-Apr-10 10-Apr-10 74 14-Apr-10 14-Apr-13 April 14-May-10 6-May-10 75 14-May-10 14-May-13 May 14-Jun-10 8-Jun-10 76 14-Jun-10 14-Jun-13 June 14-Jul-10 9-Jul-10 77 14-Jul-10 14-Jul-13 July 14-Aug-10 7-Aug-10 78 14-Aug-10 14-Aug-13 August 14-Sep-10 7-Sep-10 79 14-Sep-10 14-Sep-13 September 14-Oct-10 7-Oct-10 80 14-Oct-10 14-Oct-13 October 14-Nov-10 8-Nov-10 81 14-Nov-10 14-Nov-13 November 14-Dec-10 8-Dec-10 82 14-Dec-10 14-Dec-13 December 15-Jan-11 10-Jan-11 83 15-Jan-11 15-Jan-14 WTC 2010 DUE DATE FOR FILING OF RETURN ACTUAL DATE OF FILING OF RETURN BASIS LAST DAY TO ASSESS January 14-Feb-10 8-Feb-10 84 14-Feb-10 14-Feb-13 February 14-Mar-10 8-Mar-10 85 14-Mar-10 14-Mar-13 March 14-Apr-10 10-Apr-10 86 14-Apr-10 14-Apr-13 April 14-May-10 6-May-10 87 14-May-10 14-May-13 May 14-Jun-10 7-Jun-10 88 14-Jun-10 14-Jun-13 June 14-Jul-10 7-Jul-10 89 14-Jul-10 14-Jul-13 July 14-Aug-10 7-Aug-10 90 14-Aug-10 14-Aug-13 August 14-Sep-10 7-Sep-10 91 14-Sep-10 14-Sep-13 September 14-Oct-10 7-Oct-10 92 14-Oct-10 14-Oct-13 October 14-Nov-10 8-Nov-10 93 14-Nov-10 14-Nov-13 November 14-Dec-10 8-Dec-10 94 14-Dec-10 14-Dec-13 December 15-Jan-11 10-Jan-11 95 15-Jan-11 15-Jan-14 Documentary Stamp Tax Section 200 (B) of the 1997 NIRC provides, as follows: SECTION 200. Payment of Documentary Stamp Tax. xxx xxx xxx (B) Time for Filing and Payment of the Tax. Except as provided by rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner, the tax return prescribed in this Section shall be filed within ten (10) days after the close of the month when the taxable document was made, signed, issued, accepted, or transferred, and the tax thereon shall be paid at the same time the aforesaid return is filed. Corollary thereto, Section 5 of RR No. 06-01 mandates the filing of DST Returns and payment of the DST due thereon within five (5) days after the close of the month when the subject document was made, signed, issued, accepted, or transferred, to wit: SECTION 5. Time for Filing of Documentary Stamp Tax Returns and the Payment of Taxes Due Thereon. The time for filing of the documentary stamp tax returns and the payment of the taxes due thereon shall be revised in accordance with the appropriate amendments to existing regulations, as presented below. (1) Paragraph 19 of Revenue Memorandum Circular No. 1-98 is hereby amended to read as follows: "(19) The documentary stamp tax return shall be filed within five (5) days after the close of the month when the taxable document was made, signed, accepted, or transferred, and the tax thereon shall be paid at the same time the aforesaid return is filed. " (2) For large taxpayers, Section 4(3.6) of Revenue Regulations No. 1-98 is hereby amended to read as follows: "Section 4. Filing of Returns and Payment of Taxes . xxx xxx xxx 3. When to File and Pay 3.6 Documentary Stamp Taxes Large taxpayers shall pay their documentary stamp taxes within five (5) days after the close of the month when the taxable document was made, signed, issued, accepted or transferred by the filing of the documentary stamp tax returns, through purchase or actual affixture or by imprinting the documentary stamps through a documentary stamp tax metering machine. " 96 DST is paid on a per transaction basis. Hence, it is important to look into whether petitioner filed the required returns relative to the transactions assessed. Based on the FLD, 97 DST assessment relates to the following transactions: aCIHcD 1. Advances from stockholders on the taxable amount of Php71,000,000.00 pursuant to Section 179 of the 1997 NIRC ; and 2. Exchange of Assets on the taxable amount of Php61,675,544.00 pursuant to Section 196 of the 1997 NIRC. 1. Advances from stockholders Based on the AFS, advances from stockholders relate to in the amount of Php132,500,000.00 as of December 31, 2010, which are non-interest bearing, uncollaterized and payable on demand. 98 A study of petitioner's 2010 General Ledger 99 shows the components of the advances from stockholders for TY 2010, to wit: Beginning Balance Php61,500,000.00 January 2010 31,000,000.00 April 2010 20,000,000.00 July 2010 30,000,000.00 TOTAL PHP132,500,000.00 =============== Pursuant to Section 200 (B) of the 1997 NIRC , as amended by Section 5 of RR No. 06-01 , the DST Return shall be filed within five (5) days after the close of the month when the taxable document was made, signed, issued, accepted, or transferred. Also, Sections 203 and 222 (a) of the 1997 NIRC mandates that respondent should issue an assessment for deficiency taxes within three (3) years from the last day prescribed by law to file the tax return or the actual date of filing of such return, whichever comes later. Records reveal that petitioner submitted its Documentary Stamp Tax Declaration/Return (BIR Form No. 2000) 100 on January 4, 2012 covering accumulated DST from the year 2009 to 2011, including the above transactions in January, April, and July 2010 in the amounts of Php31,000,000.00, Php20,000,000.00, and Php30,000,000.00, respectively. Considering that assessment was made on December 16, 2013, the DST assessment relating to advances from stockholders on the taxable amount of Php71,000,000.00 has not yet prescribed. 2. Exchange of Assets The item on exchange of assets relates to a transaction entered into on February 25, 2010 per Deed of Transfer. 101 Considering that petitioner never filed a DST Return relating thereto for taxable year 2010, the assessment may be made within ten (10) years from discovery of the omission. Records reveal that as early as July 22, 2013, respondent, through its ROs and GS, already found petitioner liable for deficiency DST 102 for the "Exchange of Assets/Disposal of Land (@1.5%, Section 196, NIRC) [Php]61,675,544.00." Hence, it was recommended that an NIC be issued. Using July 22, 2013 as the date of discovery of petitioner's omission to file a DST Return, the right of respondent to assess will prescribe on July 22, 2023. Records reveal that the assessment was received by petitioner on December 16, 2013, hence, respondent's right to assess has not yet prescribed. Improperly Accumulated Earnings Tax The Improperly Accumulated Earnings Tax Return shall be filed within fifteen (15) days after the close of the year immediately succeeding the taxpayer's covered TY, as stated in Section 6.3.1 (b) of RR No. 17-10 , viz. : Section 6. FILING OF RETURNS AND PAYMENT OF TAXES BY LARGE TAXPAYERS. xxx xxx xxx 6.3 When to File and Pay for Large Taxpayers 6.3.1 Income Tax xxx xxx xxx b. Corporate taxpayers with Improperly Accumulated Earnings Tax (BIR Form No. 1704), shall e-file and e-pay within fifteen (15) days after the close of the year immediately succeeding taxpayer's covered taxable year. Considering that petitioner never filed an IAET for TY 2010, the assessment may be made within ten (10) years from discovery of the omission. Records reveal that as early as July 22, 2013, respondent, through its ROs and GS, already found petitioner liable for deficiency IAET 103 in the total amount of Php58,457,287.42, inclusive of surcharge, interest and compromise penalty; and by virtue of the above findings, the ROs and GS recommended the issuance of an NIC. Using July 22, 2013 as the date of discovery of petitioner's omission to file its IAET Return, the right of respondent to assess will prescribe on July 22, 2023. Considering that assessment was received by petitioner on December 16, 2013, respondent's right to assess has not yet prescribed. Petitioner is liable to pay deficiency IT, EWT, and WTC, in reduced amounts. Having settled the issue of prescription, the Court shall now determine the tax liabilities of petitioner. cHaCAS Income Tax Php14,914,353.93 Respondent computed the deficiency IT assessment in the amount of Php14,914,353.93, inclusive of increments, as follows: DETAILS AMOUNTS 1. Disallowed salaries and wages not subjected to WTC Php304,487.77 2. Disallowed expenses/income payment No EWT A. Expenses/income payments subject to 1% EWT Php252,410.00 B. Expenses/income payments subject to 2% EWT 141,260.93 393,670.93 3. Gain on sale of assets 31,424,335.00 Taxable Income Per Audit Php32,122,493.70 Tax Rate 30% Deficiency Tax Due Php9,636,748.11 Add: Interest (4-16-11 to 12-31-13) Php5,227,605.82 Compromise Penalty 50,000.00 Php5,277,605.82 TOTAL DEFICIENCY INCOME TAX DUE PHP14,914,353.93 =============== Three (3) items are vital in the determination of whether or not petitioner is liable for any deficiency IT for TY 2010, namely: ITEMS AMOUNTS 1. Disallowed salaries and wages not subjected to WTC Php304,487.77 2. Disallowed expenses/income payments not subjected to EWT 393,670.93 3. Gain on sale of assets 31,424,335.00 1. Disallowed Salaries and Wages not Subjected to WTC Php304,487.77 Respondent computed the disallowed salaries and wages not subjected to WTC as follows: DETAILS AMOUNTS Total compensation payments per audited FS/ITR Cost of services salaries and wages Php49,440,135.00 Operating expenses and charges salaries and wages 9,688,385.20 Total Php59,128,520.20 Less: Cost and expenses/compensation subject to WTC per alphalist 58,824,032.03 TOTAL COMPENSATION NOT SUBJECTED TO WTC PER AUDIT PHP304,488.17 ============== Petitioner argued that the assessment lacks factual and legal basis; and that the disallowed amount represents monetized unused vacation leave credits which is part of the de minimis benefits given to managerial, and rank and file employees not subject to WTC, as provided in RR No. 2-98 , in relation to Section 32 (B) (7) (e) (iv) of the 1997 NIRC. While petitioner submitted supporting documents, such as Alphabetical List of Employees/Payees from whom Taxes were Withheld for the Year 2010, 104 Summary of Payroll for the year 2010 105 and General Ledger 2010-Vacation Leave, 106 the disallowed amount cannot be considered as de minimis benefits because petitioner failed to provide payroll lists, with relevant details or schedule detailing the names of its employees; as well as the number of monetized leave credits and its corresponding amount received by each employees; in order for this Court to ascertain whether the same did not exceeded the acceptable ceiling for de minimis set by Section 2.78.1 of RR No. 02-98 , that is the monetized value of unused vacation leave credits of ten (10) days or less, which were paid to the employee during the year. Hence, respondent's assessment on this item is upheld. 2. Disallowed Expenses/Income Payments not Subjected to EWT Php393,670.93 2.1 Expenses/Income Payments Subject to 1% EWT Php252,410.00. In the FLD's Details of Discrepancies, 107 respondent stated that the disallowed expenses/income not subjected to one percent (1%) EWT can be broken down as follows: ITEMS AMOUNTS Machinery and Equipment Php79,464.00 Car and Delivery Equipment 62,500.00 n Office Equipment 109,446.00 Medical Supply 1,000.00 TOTAL PHP252,410.00 ============= The Court-appointed ICPA stated in his ICPA Report 108 that the amount of Php251,410.00 (Php79,464.00 plus Php62,500.00 and Php109,446.00) was reflected as an increase in Property, Plant and Equipment ("PPE") in the 2009 AFS. The same amount was subjected to EWT, as verified and validated against the 2009 Alphalist of Payees Subject to [EWT]. 109 The Court agrees with these findings, an examination of the 2010 AFS 110 also reveals that these PPEs were already disposed as of December 31, 2009, thus, non-existent throughout the assessment period. On this account, the assessment on disallowed expenses/income not subject to one percent (1%) EWT amounting to Php251,410.00 is cancelled. However, the assessment on medical supply of Php1,000.00 remains for petitioner's failure to provide documents in support thereto. 2.2 Expenses/Income Payments Subject to 2% EWT Php141,260.93. On the other hand, respondent computed the disallowed expenses/income payments not subjected to two percent (2%) EWT in the following manner: DACcIH Insurance Php249,446.50 Transportation and Travel 48,605.62 Communication, Light and Water 8,625.21 Miscellaneous 590,936.08 Total Php897,613.41 Less: Expenses/income payments subjected to 2% EWT 756,352.48 EXPENSES/INCOME PAYMENTS NOT SUBJECTED TO 2% EWT PHP141,260.93 ============ 2.2.a) Insurance Php249,446.50 Petitioner paid insurance to Value Care Health Systems, Inc. amounting to Php748,339.48 (without VAT) with Official Receipt ("OR") No. 057078. 111 An examination of the said OR reveals that petitioner paid EWT of Php14,966.79 or two percent (2%) of Php748,339.48. Hence, this Court agrees with the ICPA that the amount or Php249,446.50, being referred to by respondent, represents the amortized portion of the Prepaid Insurance Account, thus, subjecting it to two percent (2%) EWT is improper. 2.2.b) Transportation and Travel Php48,605.62 This amount of Php48,605.62 represents reimbursements for local transportation, e.g. , jeepney, bus, padyak and kalesa, where obtaining a receipt and subjecting it to withholding tax is impossible. However, petitioner did not present documents such as ORs, invoices, schedules, and reimbursements vouchers to corroborate such expenses, thus, this assessment remains. 2.2.c) Communication, Light and Water Php8,625.21 This was paid to Digitel Telecommunications Philippines, Inc. amounting to Php8,014.00 with OR Nos. 000146842, 112 000146843, 113 000146844, 114 000146845 115 and 000146846. 116 Upon scrutiny of the said ORs, the Court finds that petitioner did not withhold EWT for these transactions. Although the ICPA stated that this amount was subjected to EWT, which was remitted and reported per BIR Form No. 1604E, such BIR Form was not presented, hence, the assessment is upheld. 2.2.d) Miscellaneous Php590,936.08 This represents penalties for late payments of land acquisition amounting to Php428,110.75 and various petty cash expenses amounting to Php162,825.33. Petitioner presented Withholding Tax Remittance Return (BIR Form No. 1606) 117 and PNB BTR-BIR Payment Slip 118 reflecting the payment of surcharge, interest and compromise for land acquisition amounting to Php428,110.75. For this reason, the Court cancels this assessment. However, the assessment on various petty cash expenses amounting to Php162,825.33 is proper since petitioner provided only its Cash Disbursements Book ("CDB") to dispute this assessment. It must be noted that ORs, invoices, schedules, and other documents are necessary to support the entries in the CDB. 3. Gain on Sale of Assets Php31,424,335.00 As previously discussed, petitioner's exchange of assets is considered tax-free, as provided under Section 40 (C) of the 1997 NIRC ; thus, any gain resulting therefrom is not subject to tax. Consequently, respondent's assessment on this transaction is inappropriate. Based from the foregoing, petitioner is liable for basic deficiency IT for TY 2010 in the amount of Php157,663.18, computed as follows: DETAILS AMOUNTS 1. Disallowed salaries and wages not subjected to WTC Php304,487.77 2. Disallowed expenses/income payment No EWT A. Expenses/income payments subject to 1% EWT Medical Supply Php1,000.00 B. Expenses/income payments subject to 2% EWT Transportation and Travel 48,605.62 Communication, Light and Water 8,625.21 Miscellaneous 162,825.33 Php221,056.16 Taxable Income Per Audit Php525,543.93 Tax Rate 30% BASIC DEFICIENCY INCOME TAX DUE PHP157,663.18 ============ Value-Added Tax Php10,550,532.92 Respondent assessed petitioner for deficiency VAT for TY 2010 amounting to Php10,550,532.92, inclusive of increments, for failure to account for the proceeds on exchange/disposal of land, computed as follows: DETAILS AMOUNTS Total Sales per Return Php72,103,957.20 Adjustments per investigation Proceeds on Exchange of Assets (Gross up by /1.12) Php61,675,544.00 Less: VAT Portion 6,608,094.00 55,067,450.00 Total Taxable Sales per Audit Php127,171,407.20 =============== Output Tax Due Output Tax Due (12%) Php15,260,568.86 Less: Input Tax Per Return 6,446,060.15 Output Tax Payable Php8,814,508.71 Less: Payment Per Return 2,206,414.72 VAT Still Due Php6,608,093.99 Add: Interest (1/26/2011 to 12/31/2013) Php3,892,438.93 Compromise Penalty 50,000.00 3,942,438.93 TOTAL VAT PAYABLE PHP10,550,532.92 =============== The above VAT assessment arose purely from petitioner's transfer of property, which was already settled by this Court as a tax-free transaction. For this reason, respondent's deficiency VAT assessment bears no merit. HSCATc Withholding Tax on Compensation Php358,711.16 Respondent's assessment on deficiency WTC arises from a discrepancy between the salaries and wages per alphalist and per AFS/ITR, which petitioner failed to substantiate with proper documents. Such deficiency was computed as follows: DETAILS TAX BASE TAX DUE Total compensation payments per audited FS/ITR Cost of Services Salaries and Wages Php49,440,135.00 Operating Expense and Charges Salaries and Wages 9,688,385.20 Total Php59,128,520.20 Php2,848,494.82 Cost and Expenses subject to WTC per Alphalist 58,824,032.03 2,633,194.35 Cost and Expenses not subjected to WTC Php304,488.17 ============== Basic Deficiency WTC (using ave. rate of 0.04817) Php215,300.47 Add: Interest (20% from 1-16-11 to 12-31-13) 127,410.69 Compromise Penalty 16,000.00 TOTAL WTC DUE PHP358,711.16 ============== This Court will use the amount of Php304,488.17 as the basis for cost/expenses not subjected to WTC since it cannot determine how respondent computed the assessment pertaining to the "Tax Due" portion. The Court noticed that there were mathematical errors committed like Php59,128,520.20 multiplied by 0.04817 is Php2,848,220.82, and not Php2,848,494.82; as well as Php58,824,032.03 multiplied by 0.04817 is Php2,833,553.62, and not Php2,633,194.35. As previously discussed, Php304,488.17 represents employee benefits in the form of monetization of unused vacation leaves. As previously discussed, this was upheld by the Court since petitioner failed to provide relevant documents or schedules to determine compliance with the ten (10)-day ceiling of monetization of unused vacation leaves. In line with the issue on prescription, the Court already ruled that respondent's right to assess from January to November 2010 has already prescribed, leaving December 2010 for which he has the right to assess. Accordingly, petitioner is only liable for basic deficiency WTC in the amount of Php782.39 for December 2010, computed as follows: DETAILS AMOUNTS Monetized Vacation Leaves for 2010 119 Php304,488.17 120 Monetized Vacation Leaves January to November 2010 288,245.96 December 2010 16,242.21 Average Rate 0.04817 BASIC DEFICIENCY WTC PHP782.39 ============== PAYROLL PERIOD PAYEES AMOUNT 12/3/2010 Officers and Staff Php5,207.67 121 12/4/2010 Daily-Regular 5,887.00 122 12/11/2010 Daily-Regular 3,157.50 123 12/13/2010 Officers and Staff 815.38 124 12/15/2010 Officers and Staff 1,174.66 125 TOTAL PHP16,242.21 =========== Expanded Withholding Tax Php10,014.94 Respondent computed the deficiency EWT amounting to Php10,014.94, inclusive of increments, in the following manner: Expanded Withholding Tax Per Return Php18,802.05 Income Payments not Subjected to EWT @ 1% EWT (Php252,410.00) Php2,524.10 @ 2% EWT (Php141,260.93) 2,825.22 Php5,349.32 Total Php24,151.37 EWT remitted per Return 18,802.05 Basic EWT Deficiency Php5,349.32 Interest (1-16-11 to 12-31-13) 3,165.62 Compromise Penalty 1,500.00 TOTAL EWT DUE PHP10,014.94 =========== As earlier discussed, petitioner failed to provide substantial documents to refute respondent's assessment on EWT, hence, petitioner has expenses not subjected to EWT in the amount of Php221,056.16, broken down as follows: IDTSEH Disallowed expenses/income payment No EWT A. Expenses/income payments subject to 1% EWT Medical Supply Php1,000.00 B. Expenses/income payments subject to 2% EWT Transportation and Travel Php48,605.62 Communication, Light and Water 8,625.21 Miscellaneous 162,825.33 220,056.16 DISALLOWED EXPENSES/INCOME PAYMENTS NOT SUBJECTED TO EWT PHP221,056.16 ============= As already settled by this Court, respondent's right to assess from January to November 2010 already prescribed. Therefore, only unsupported/disallowed transactions for December 2010 will be assessed for non-withholding of EWT. ORs 126 supporting communication, light and water expenses amounting to Php8,625.21 were all dated January 23, 2010, thus prescribed. Miscellaneous expenses amounting to Php162,825.33 represents various petty cash purchases. However, an examination of the CDB reveals that only Php5,248.00 (Php2,800.00 127 plus Php2,448.00) 128 were incurred in December 2010, therefore only the said miscellaneous expenses will be subjected to two percent (2%) EWT. For not being supported by any document, the full amounts of expenses relating to Medical Supply, and Transportation and Travel, amounting to Php1,000.00 and Php48,605.62, respectively, are subject to EWT since it is impossible for this Court to determine the expenses in relation thereto incurred solely in December 2010. In fine, petitioner is liable for basic deficiency EWT amounting to Php1,087.07 computed as follows: ITEMS EXPENSES RATES EWT Medical Supply Php1,000.00 1% Php10.00 Transportation and Travel 48,605.62 2% 972.11 Miscellaneous 5,248.00 2% 104.96 BASIC EWT DUE PHP1,087.07 =========== Documentary Stamp Tax Php2,389,751.77 Respondent assessed petitioner for deficiency DST resulting from transactions involving advances from stockholders and exchange of assets, computed as follows: DETAILS AMOUNTS RATES DST DUE Advances from Stockholders Php132,500,000.00 Less: Beg. Balance included in 2009 PAN 61,500,000.00 Loans during the Year Php71,000,000.00 1.00 per 200.00 Php355,000.00 Exchange of Assets Land Php61,675,544.00 1.5% Php925,140.00 Basic Deficiency DST Due Php1,280,140.00 Add: Surcharge Php320,035.00 Interest (1-6-11 to 12-31-13) 764,576.77 Compromise Penalty 25,000.00 Php1,109,611.77 TOTAL DST DUE PHP2,389,751.77 ============== 1. Advances from Stockholders Php355,000.00 Petitioner submitted Documentary Stamp Tax Declaration/Return (BIR Form No. 2000), 129 filed on January 4, 2015 and paid 130 on January 5, 2012, pertaining to "bonds, loan agreements," with the computation below: DETAILS AMOUNTS Tax Base Php212,500,000.00 Tax Rate 1.00 per 200.00 DST PAID PHP1,062,500.00 =============== The Court agrees with the analysis of the ICPA that the above DST payment represents accumulated DST from TYs 2009 to 2011. Considering that the corresponding DST due for TY 2010 was already paid, the assessment relating to DST on advances from stockholders is hereby cancelled. 2. Exchange of Assets Php925,140.00 Records disclose that no DST was paid on this particular transaction, thus, petitioner was assessed for non-payment of DST. However, as discussed earlier, this involves a tax-free transaction, hence, imposing DST is erroneous. Moreover, Section 199 (m) of the 1997 NIRC provides that the same is not subject to DST, to wit: SECTION 199. Documents and Papers Not Subject to Stamp Tax. The provisions of Section 173 to the contrary notwithstanding, the following instruments, documents and papers shall be exempt from the documentary stamp tax : SICDAa xxx xxx xxx (m) Transfer of property pursuant to Section 40(c)(2) of the National Internal Revenue Code of 1997, as amended . 131 Improperly Accumulated Earnings Tax Php61,600,280.46 Section 29 of the 1997 NIRC is the basis for the imposition of IAET, for reference: SECTION 29. Imposition Improperly Accumulated Earnings Tax. (A) In General. In addition to other taxes imposed by this Title, there is hereby imposed for each taxable year on the improperly accumulated taxable income of each corporation described in Subsection B hereof an improperly accumulated earnings tax equal to ten percent (10%) of the improperly accumulated taxable income. (B) Tax on Corporations subject to Improperly accumulated Earnings Tax. (1) In General. The improperly accumulated earnings tax imposed in the preceding Section shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed. xxx xxx xxx 132 The Court agrees with the ICPA in his reliance on Section 5 133 of SEC Memorandum Circular No. 11 , which states that actual earnings or profits, net of unrealized items, shall be considered for a corporation to declare dividends, to wit: SECTION 5. Retained earnings available for dividends. Dividends, whether cash, property or stock, shall be declared out of unrestricted retained earnings of the Corporation. Accordingly, a corporation cannot declare dividends when it has zero or negative retained earnings otherwise known as Retained Earnings deficit. For such purpose, the surplus profits or income must be a bona fide income founded upon actual earnings or profits. The existence, therefore, of surplus profits arising from the operation of corporate business is a condition precedent to the declaration of dividend. Respondent assessed petitioner for deficiency IAET, amounting to Php61,600,280.45, inclusive of increments, computed as follows: Taxable Income from Operations Php(143,057.90) Add: Income Subject to Final Tax Php31,424,335.00 Effects of Change in Accounting for Employee Benefits 4,395,628.00 35,819,963.00 Total Php35,676,905.10 Income Tax for the Year 525,992.95 Improperly Accumulated Earnings Php35,150,912.15 Add: Retained Earnings from prior period 349,748,585.00 Accumulated Earnings as of the Taxable Year Php384,899,497.15 Less: Amount that may be retained (100% of paid-up 10,000,000.00 as of 2010) Taxable IAET Php374,899,497.15 Rate 10% Basic IAET Due Php37,489,949.72 Add: Surcharge Php9,372,487.43 Interest (1-16-12 to 12-31-13) 14,687,843.31 Compromise Penalty 50,000.00 24,110,330.74 TOTAL DEFICIENCY IAET PHP61,600,280.46 =============== The above assessment arose from transactions involving petitioner's gain on exchange land amounting to Php31,424,335.00 and unrealized gain on exchange of assets amounting to Php349,748,585.00, which the Court already ruled to be tax-free, hence, not subject to IAET. The effects of change in accounting for employee benefits of Php4,395,628.00 represents the actuarial revaluation of retirement benefits. This accrued benefit cost is an unfunded obligation, 134 therefore not a realized revenue but only a theoretical income. Therefore, this Court agrees with the findings of the ICPA that in accordance with SEC Memo Circular No. 11 , 135 there is no Distributable Income, 136 therefore, there is no improperly accumulated earnings that could be subjected to IAET. Consequently, the assessment on basic deficiency IAET, as well as its increments, amounting to Php61,600,280.46 is hereby canceled. Petitioner is not liable to pay Php192,500.00 as total compromise penalty. Respondent's imposition of compromise penalties amounting to Php192,500.00 cannot be sustained. Under Revenue Memorandum Order ("RMO") No. 01-90 , as amended by RMO No. 19-07 , compromise penalties are only amounts suggested in settlement of criminal liability, and may not be imposed or exacted on the taxpayer in the event that the taxpayer refuses to pay the same. It is well-settled that the Court has no jurisdiction to compel a taxpayer to pay the compromise penalty because, by its very nature, it implies a mutual agreement between the parties with respect to the thing or subject matter that is so compromised, and the choice of paying or not paying the penalty distinctly belongs to the taxpayer. 137 The imposition of the same without the conformity of the taxpayer is illegal and unauthorized. 138 DHIcET Absent any clear showing that petitioner consented to the compromise penalties, its imposition should be deleted. In view of the foregoing, the present Petition for Review is hereby PARTIALLY GRANTED . Petitioner is hereby ORDERED TO PAY deficiency IT, WTC and EWT in the reduced amount of Php199,415.80, inclusive of the twenty five percent (25%) surcharge imposed under Section 248 (A) (3) of the 1997 NIRC , computed as follows: TAX TYPE BASIC 25% SURCHARGE TOTAL IT Php157,663.18 Php39,415.80 Php197,078.98 WTC 782.39 195.60 977.99 EWT 1,087.07 271.77 1,358.84 TOTAL Php159,532.64 Php39,883.16 Php199,415.80 =========== =========== =========== In addition, petitioner is also ORDERED TO PAY : 1. Deficiency interest at the rate of twenty percent (20%) per annum on the basic deficiency IT, WTC and EWT computed from the dates indicated below until full payment thereof, pursuant to Section 249 (B) of the 1997 NIRC ; and DEFICIENCY INTEREST TAX TYPE BASIC COMPUTED FROM IT Php157,663.18 April 15, 2011 WTC 782.39 January 15, 2011 EWT 1,087.07 January 15, 2011 2. Delinquency interest at the rate of twenty percent (20%) per annum on the amount of Php199,415.80, representing the basic deficiency IT, WTC and EWT and the corresponding twenty five percent (25%) surcharge, and on the twenty percent (20%) deficiency interest which have accrued as aforestated in item (1), computed from December 16, 2013 139 until full payment thereof, pursuant to Section 249 (C) of the 1997 NIRC. SO ORDERED. (SGD.) LOVELL R. BAUTISTA Associate Justice Esperanza R. Fabon-Victorino and Ma. Belen M. Ringpis-Liban, JJ. , concur. Footnotes 1. Records, CTA Case No. 8866, Vol. 1, Petition for Review ("PFR") , pp. 14-187, with annexes. 2. "Sec. 7. Jurisdiction. The Court of Tax Appeals shall exercise: (a) Exclusive appellate jurisdiction to review by appeal, as herein provided. xxx xxx xxx (2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relations thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National Internal Revenue Code provides a specific period of action, in which case the inaction shall be deemed a denial; xxx" 3. An Act Creating the Court of Tax Appeals, as amended. 4. An Act Expanding the Jurisdiction of the Court of Tax Appeals (CTA), Elevating its Rank to the Level of a Collegiate Court with Special Jurisdiction and Enlarging its Membership, Amending for the Purpose Certain Sections of Republic Act No. 1125, as Amended, Otherwise Known as the Law Creating the Court of Tax Appeals, and for Other Purposes. 5. An Act Enlarging the Organizational Structure of the Court of Tax Appeals, Amending for the Purpose Certain Sections of the Law Creating the Court of Tax Appeals, and for Other Purposes. 6. Records, Vol. 1, PFR, Prayer , p. 54. 7. Records, Vol. 2, Joint Stipulation of Facts and Issues ("JSFI") , pp. 610-611. 8. Id., Exhibit "P-2," Articles of Incorporation , p. 304. 9. Id., Exhibit "P-1," SEC Certificate of Registration , p. 302. 10. Id., Exhibit "P-3," BIR Certificate of Registration , p. 323. 11. Records, Vol. 2, Exhibit "P-8," Deed of Transfer , pp. 376-378, with annex. 12. Id., Exhibit "9," Request for Tax-Free Exchange Ruling , pp. 380-392, with annex. 13. Id., Exhibit "P-9-C," Application and Joint Certification , pp. 716-725. 14. Id., Exhibit "P-4," Letter of Authority ("LOA") , p. 325. 15. Id., JSFI , p. 611. 16. BIR Records, Exhibit "R-1," Memorandum of Assignment , p. 213. 17. Id., Exhibit "R-2," p. 216. 18. Id., Exhibit "R-3," pp. 214-215. 19. BIR Records, Exhibit "R-4," Final Report , pp. 278-288, with annexes. 20. Id., Exhibit "R-5," Notice of Informal Conference ("NIC") , p. 298. 21. Id., Exhibit "R-6," pp. 349-353. 22. Records, Vol. 2, Exhibit "P-5," Preliminary Assessment Notice ("PAN") , pp. 327-333, with annexes; BIR Records, Exhibit "R-7," PAN , pp. 358-363, with annexes. 23. BIR Records, Exhibit "R-8," pp. 385-389. 24. Records, Vol. 3, Exhibit "P-6," Formal Letter of Demand ("FLD") , pp. 902-907, with annexes; BIR Records, Exhibit "R-9," FLD , pp. 405-410. 25. Records, Vol. 3, Exhibit "P-6," Final Assessment Notices ("FAN") , pp. 908-913; BIR Records, Exhibits "R-9-a," "R-9-b," "R-9-c," "R-9-d," "R-9-e," "R-9-f," FANs , pp. 394, 396, 398, 400, 402, and 404. 26. Records, Vol. 3, Exhibit "7," Administrative Protest , pp. 914-940. 27. Id., Vol. 1, PFR , pp. 14-187, with annexes. 28. Id., Answer , pp. 218-237. 29. Id., Vol. 2, Respondent's Pre-Trial Brief , pp. 258-263. 30. Id., Pre-Trial Brief , pp. 283-288. 31. Id., JSFI , pp. 610-617. 32. Records, Vol. 2, Pre-Trial Order ("PTO") , pp. 625-637. 33. Records, Vol. 2, Judicial Affidavit ("JA") of Ms. Melody Grace O. Ngo , pp. 292-300; Supplemental JA of Ms. Ngo , pp. 646-652; Records, Vol. 3, June 26, 2015 Minutes of Hearing , p. 760. 34. Records, Vol. 3, JA of Prudencio F. Tatunay , pp. 764-777, with annexes; Records, Vol. 3, July 6, 2015 Minutes of Hearing , p. 778; Records, Vol. 3, Compliance , pp. 779-785, with annexes; Records, Vol. 3 , pp. 795-796. 35. Records, Vol. 3, Exhibits "P-15," "P-15-a," "P-15-b," "P-15-c," "P-15-d," and "P-15-d-1," Independent Certified Public Accountant ("ICPA") Report, Executive Summary , pp. 800-805; Records, Vol. 3, Exhibit "P-16," ICPA Report , pp. 806-861; Records, Vol. 3, JA of Prudencio F. Tatunay , pp. 869-890; Records, Vol. 3, October 5, 2015 Minutes of Hearing , p. 891. 36. Records, Vol. 3, Formal Offer of Evidence for the Petitioner , pp. 892-901. 37. Id., Vol. 3 , pp. 949-950. 38. Id., Vol. 2, Exhibit "R-10," JA of Revenue Officer ("RO") Romualdo I. Plocos , pp. 268-277; Records, Vol. 3, February 16, 2016 Minutes of Hearing , p. 953. 39. Records, Vol. 3, Respondent's Formal Offer of Evidence , pp. 954-964. 40. Id., Vol. 3 , pp. 979-980. 41. Id. at 981-987, 1038-1041, in relation to 1043-1044. 42. Id., Memorandum for Petitioner , pp. 988-1037. 43. Id., Memorandum (For Respondent) , pp. 1045-1062. 44. Id., Vol. 3 , p. 1064. 45. Records, Vol. 2, PTO, Issues , p. 626. 46. Records, Vol. 3, Memorandum for Petitioner , pp. 1000-1036. 47. Id., Memorandum (For Respondent) , pp. 1047-1059. 48. Underscoring ours. 49. Commissioner of Internal Revenue v. Filinvest Development Corporation , G.R. Nos. 163653 and 167689, July 19, 2011. 50. Section 40 (C) (6) (c) of the 1997 NIRC. 51. Records, Vol. 2, Exhibit "P-8," Deed of Transfer , pp. 376-378, with annex. 52. Id., Exhibit "P-9-C," Application and Joint Certification , pp. 716-725, with annex. 53. Records, Vol. 2, Exhibit "P-9-C," Application and Joint Certification , pp. 716-725, with annex. 54. Underscoring ours. 55. Commissioner of Internal Revenue v. Next Mobile, Inc. , G.R. No. 212825, December 5, 2015, affirming the CTA's findings in Next Mobile, Inc. v. Commissioner of Internal Revenue , CTA Case No. 7965, December 11, 2012. 56. Id. 57. Records, Vol. 3, Respondent's Formal Offer of Evidence , pp. 954-964. 58. Id., Vol. 2, Exhibit "R-10," JA of RO Romualdo I. Plocos , pp. 268-277. 59. Transcript of Stenographic Notes ("TSN"), February 16, 2016 Hearing , pp. 5-28. 60. Underscoring ours. 61. BIR Records , pp. 195-210. 62. Underscoring ours. 63. BIR Records , pp. 120-121. 64. Id. at 110-111. 65. BIR Records , pp. 101-102. 66. Id. at 88-90. 67. Underscoring ours. 68. Implementing Republic Act No. 8424 , "An Act Amending the National Internal Revenue Code, as Amended, Relative to the Withholding on Income Subject to the Expanded Withholding Tax and Final Withholding Tax, Withholding of Income Tax on Compensation, Withholding of Creditable Value-Added Tax and Other Percentage Tax," April 17, 1998. 69. Amending Further Pertinent Provisions of Revenue Regulations No. 2-98, as Amended, Providing for Additional Transactions Subject to Creditable Withholding Tax; Re-Establishing the Policy that the Capital Gains Tax on the Sale, Exchange or Other Disposition of Real Property Classified as Capital Assets shall be Collected as a Final Withholding Tax, Thereby Further Amending Revenue Regulations Nos. 8-98 and 13-99, as Amended by Revenue Regulations No. 14-2000; and for Other Purposes, March 31, 2003. 70. Underscoring ours. 71. Underscoring ours. 72. BIR Records , p. 81D. 73. Id. at 81. 74. Id. at 79. 75. Id. at 77. 76. Id. at 75. 77. Id. at 71. 78. BIR Records , p. 69. 79. Id. at 67. 80. Id. at 65. 81. Id. at 64. 82. BIR Records , p. 62. 83. Id. at 58. 84. Id. at 55. 85. Id. at 51-52. 86. Id. at 48-49. 87. Id. at 44-45. 88. BIR Records , pp. 41-42. 89. Id. at 37-38. 90. Id. at 33-34. 91. Id. at 30-31. 92. Id. at 25-26. 93. Id. at 21-22. 94. BIR Records , pp. 17-18. 95. Id. at 13-14. 96. Underscoring ours. 97. Records, Vol. 3, Exhibit "P-6," FLD, Details of Discrepancies, DST , p. 339. 98. Records, Vol. 2, Exhibit "P-10-A," AFS, Note 13 , p. 416; in relation to Records, Vol. 2, Exhibit "P-10," AFS , p. 396. 99. ICPA Report Annexes, Exhibit "P-17," Annex IC-74 (III.e) , p. 605. 100. Id., Exhibit "P-17," Annex IC-75 (III.e) , pp. 606-607. 101. Records, Vol. 2, Exhibit "P-8," Deed of Transfer , pp. 376-378, with annex. 102. BIR Records, Exhibit "R-4," July 22, 2013 Memorandum , p. 284. 103. BIR Records, Exhibit "R-4," July 22, 2013 Memorandum , p. 284. 104. Records, Vol. 2, Exhibit "P-13," pp. 439-596. 105. ICPA Report Annexes, Exhibit "P-17," Annexes IC-32.1 (III.a) to IC-32.84 (III.a) , pp. 165-419. 106. Id., Exhibit "P-17," Annex IC-32 (III.a) , p. 164. 107. Records, Vol. 3, Exhibit "P-6," p. 903. 108. Id., Exhibit "P-16," p. 819. 109. ICPA Report Annexes, Exhibit "P-17," Annex IC-34 (III.a) , pp. 451-461. 110. Records, Vol. 2, Exhibit "P-10-A," p. 414. 111. ICPA Report Annexes, Exhibit "P-17," Annex IC-36 (III.a) , p. 477. 112. ICPA Report Annexes, Exhibit "P-17," Annex IC-37 (III.a) , p. 479. 113. Id. 114. Id. 115. Id. at 480. 116. Id. 117. Id., Annex IC-38.1 (III.a) , p. 505. 118. ICPA Report Annexes, Exhibit "P-17," Annex IC-38.1 (III.a) , p. 506. 119. Records Vol. 3, Exhibit "P-16," pp. 816-818. 120. Difference of Php363.63. 121. Records Vol. 3, Exhibit "P-16," p. 817. 122. Id. 123. Id. 124. Id. at 818. 125. Id. 126. ICPA Report Annexes, Exhibit "P-17," Annex IC-37 (III.a) , pp. 479-480. 127. Id., Annex IC-38 (III.a) , p. 503. 128. Id. at 504. 129. ICPA Report Annexes, Exhibit "P-17," Annex IC-75 (III.e) , pp. 606-607. 130. Id. at 608. 131. Underscoring ours. 132. Id. 133. ICPA Report Annexes, Exhibit "P-17," Annex IC-78 (III.f) , p. 617. 134. Records, Vol. 2, Exhibit "P-10," Notes to AFS, Note 14 , pp. 416-417. 135. Series of 2008. 136. ICPA Report Annexes, Exhibit "P-17," Annex IC-79 (III.f) , p. 621. 137. The Philippines International Fair, Inc. v. Collector of Internal Revenue, et al. , G.R. Nos. L-12928 and L-12932, March 31, 1962, 4 SCRA 774. 138. Commissioner of Internal Revenue v. Lianga Bay Logging Co., Inc., et al. , G.R. No. L-35266, January 21, 1991, 193 SCRA 86. 139. Records, Vol. 2, Exhibit "P-6," p. 335. n Note from the Publisher: Written as "62,500.000" in the original document.