Subic Water & Sewerage Co., Inc. v. Commissioner of Internal Revenue

SPECIAL SECOND DIVISION [C.T.A. CASE NO. 9074. August 14, 2019.] SUBIC WATER & SEWERAGE CO., INC. , petitioner , vs. COMMISSIONER OF INTERNAL REVENUE , respondent . DECISION MANAHAN , J p : Before this Court is a Petition for Review 1 filed by Subic Water and Sewerage Co., Inc. (SWSCI) praying that the Final Decision on Disputed Assessment dated May 20, 2015, assessing it in the amount of P238,407,520.17 for the period April 1, 2011 to December 31, 2011, be annulled, reversed and set aside. THE PARTIES Petitioner SWSCI is a corporation duly organized and existing under Philippine laws with principal office at Subic Water Complex, Rizal Highway, SUBCOM Area, Subic Freeport Zone, 2200, Philippines. 2 Its primary purpose is to carry on the business of providing water and sewerage services in the Subic Special Economic and Free Port Zone. 3 HTcADC Petitioner is registered as a Subic Bay Freeport Enterprise, as shown in the Certificate of Registration and Tax Exemption 4 (Certificate No. 96-0064) dated May 5, 2011 issued by the Subic Bay Metropolitan Authority (SBMA) and effective until May 4, 2012. On the other hand, respondent is the Commissioner of the Bureau of Internal Revenue (BIR), the government agency charged with, among other powers and duties, the responsibility of collecting all national internal revenue taxes. He holds office at the BIR National Office Building, BIR Road, Diliman, Quezon City. THE FACTS A Letter of Authority (LOA) No. LOA-116-2012-00000029 (SN: eLA201100006952) 5 dated August 10, 2012 was issued authorizing Revenue Officers Maria Gracielle Cecilia San Pedro and Riza Budano and Group Supervisor Marivic Bautista to examine petitioner's books of accounts and other accounting records for all internal revenue taxes for the period from April 1, 2011 to December 31, 2011. On August 20, 2014, petitioner received the Preliminary Assessment Notice 6 (PAN) dated August 18, 2014 issued by respondent. 7 In response thereof, petitioner submitted a Reply 8 on September 3, 2014. 9 On October 7, 2014, petitioner received a Formal Letter of Demand 10 (FLD) with attached Final Assessment Notices 11 (FAN) of even date issued by respondent. 12 Thereafter, on November 5, 2014, or within thirty (30) days from receipt of the FLD, petitioner filed its Protest with Request for Reinvestigation 13 of even date. 14 Petitioner submitted supporting documents in support of its protest on December 5, 2014, 15 on December 5, 2014, 16 and on December 23, 2014. 17 On May 20, 2015, petitioner received the Final Decision on Disputed Assessment 18 (FDDA) issued by respondent on even date for deficiency income tax for taxable year ending December 31, 2011. 19 Based on the FDDA, petitioner is being assessed for deficiency income tax (IT), final withholding value-added tax (FWVAT), value-added tax (VAT), withholding tax on compensation (WTC), expanded withholding tax (EWT) and final withholding tax (FWT) in the total amount of P238,407,520.17, for the period covering April 1, 2011 to December 31, 2011, broken down as follows: aScITE Tax Type Basic Tax Surcharge Interest Compromise Penalty Total IT P79,154,105.10 - P49,400,836.01 P50,000.00 P128,604,941.11 FWVAT 9,577,926.59 P4,788,963.29 6,355,544.71 - 20,722,434.59 VAT 37,788,047.23 18,894,023.61 25,261,050.75 - 81,943,121.59 WTC 722,542.80 361,271.40 486,974.05 - 1,570,788.25 EWT 135,164.03 67,582.02 91,467.17 - 294,213.22 FWT 2,723,302.97 680,825.74 1,842,892.70 25,000.00 5,272,021.41 Total P130,101,088.72 P24,792,666.06 P83,438,765.39 P75,000.00 P238,407,520.17 On May 29, 2015, without prejudice to its position that the assessment is erroneous, petitioner paid a total of P5,182,566.92 to pay off assessment items: (1) Income Tax 20 P2,107,918.42; (2) Income Tax 21 P1,175,276.48; (3) Withholding Tax on Compensation 22 P1,570,788.25; (4) Expanded Withholding Tax 23 P294,213.22; and (5) Final Withholding Tax 24 P34,370.55. 25 Hence, on June 19, 2015, petitioner filed the instant Petition for Review pursuant to Section 3 (a) of Rule 8, in relation to Section 3 (a) (1) of Rule 4, of the Revised Rules of the Court of Tax Appeals. 26 In his Answer (to the Petition for Review dated 17 June 2015), 27 filed on September 29, 2015, respondent interposed Special and Affirmative Defenses, alleging, among others, that (1) petitioner's income is subject to the 30% corporate income tax and the corresponding 12% value-added tax; (2) petitioner is indirectly assailing the validity of a revenue regulations which the Court is bereft of any jurisdiction to pass upon; (3) the assessment has bases both in fact and in law; (4) petitioner is liable for deficiency income tax due to (a) Undeclared Income in the amount of P7,662,613.62; (b) Unaccounted Expenses in the amount of P7,326,148.13; (c) Unaccounted Expenses/Purchases based on vouching of Check Vouchers in the amount of P332,659.38; (d) Construction Revenue not subjected to Income Tax in the amount of P41,474,427.00; (e) disallowed expenses in excess of the amounts allowable pursuant to Revenue Regulations (RR) No. 13-2005 in the amount of P12,021,426.86; (f) Overclaimed Expenses based on matching of Audited Financial Statements, Trial Balance (TB) and Check Voucher Register in the amount of P2,273,999.62; (g) Unsupported Expenses/Purchases in the amount of P300,332.81; (h) Disallowed Purchases/Expenses in the amount of P3,991,363.02 for failure to withhold the corresponding taxes; (i) Disallowed Salaries Expenses in the amount of P5,815,653.33 for failure to withhold the corresponding taxes; and (j) Unsupported Creditable Withholding Tax Claimed in the amount of P25,626.72; (5) petitioner is liable for deficiency final withholding VAT due from income payments to non-resident foreign corporation and non-resident alien for services rendered within the Philippines; (6) petitioner is liable for deficiency VAT for Undeclared Income, Unaccounted Expenses/Purchases and Construction Revenue not subjected to Income Tax; (7) petitioner is liable for deficiency withholding tax on compensation; (8) petitioner is liable for deficiency expanded withholding tax; (9) petitioner is liable for deficiency final tax arising from payments to non-resident foreign corporation and non-resident alien; (10) the imposition of the 50% surcharge against petitioner has bases both in fact and in law; and (11) the LOA, the PAN, the FLD, the Final Assessment Notice, and the FDDA were issued in accordance with law, rules and jurisprudence. HEITAD Petitioner then filed a Reply, 28 through registered mail, on October 26, 2015. Thereafter, a Notice of Pre-Trial Conference 29 was issued by the Court, setting the case for pre-trial conference on November 26, 2015. However, upon respondent's Motion, 30 the pre-trial conference was reset to January 21, 2016. 31 On November 23, 2015, Petitioner's Pre-Trial Brief 32 was filed through registered mail, while Respondent's Pre-Trial Brief 33 was filed on January 14, 2016. Meanwhile, on January 14, 2016, petitioner filed a Motion for Commissioning of Independent Certified Public Accountant 34 praying that in the interest of speedy administration of justice, Mr. George V. Villaruz of Villaruz, Villaruz & Co., CPAs be commissioned as an Independent Certified Public Accountant (ICPA) pursuant to Rule 12, Section 5 of the Revised Rules of the Court of Tax Appeals. During the pre-trial conference on January 21, 2016, this Court granted petitioner's motion, thereby commissioning Mr. George V. Villaruz, as ICPA for the present case. 35 Thereafter, the parties submitted their Joint Stipulation of Facts and Issues 36 on February 10, 2016. Thus, the Court issued a Pre-Trial Order 37 on February 22, 2016 and the pre-trial was deemed terminated. Then, trial ensued. Petitioner presented as witnesses (1) Ms. Edna G. Canlas, 38 petitioner's Chief Operating Officer; (2) Mr. Graham J. Fairclough, 39 a member of petitioner's Board of Directors; (3) Mr. Rolly DC. Mulato, 40 Chief of the Technical Services Division of the Department of Environment and Natural Resources (DENR) Provincial Environment and Natural Resources Office of Pilar, Bataan; and, (4) Mr. George V. Villaruz, 41 the ICPA, who all testified on direct examination by way of judicial affidavits. Petitioner's Formal Offer of Documentary Evidence 42 was filed May 3, 2016 and Amended Formal Offer of Documentary Evidence 43 on April 10, 2017. After evaluation, all of petitioner's documentary exhibits were admitted by this Court except for Exhibits "AAA-4.345" and "AAA-5.147", pursuant to the Resolutions dated July 5, 2016 44 and October 10, 2017. 45 Thereafter, petitioner was deemed to have rested its case. When respondent was called to present his case, he presented his lone witness, Revenue Officer (RO) Maria Gracielle Cecilia F. San Pedro, 46 who likewise testified on direct examination by way of judicial affidavit. On February 5, 2018, respondent filed his Formal Offer of Evidence. 47 Accordingly, all of respondent's documentary exhibits were admitted by this Court in the Resolution 48 dated May 30, 2018. Thereafter, respondent was deemed to have rested its case. Furthermore, this Court ordered the parties to submit their respective memoranda within thirty (30) days. In view of the filing of respondent's Memorandum 49 on July 31, 2018 and petitioner's Memorandum 50 on July 31, 2018, the present case was deemed submitted for decision in the Resolution 51 dated August 15, 2018. ATICcS ISSUE The lone issue 52 submitted by the parties for the Court's resolution is, whether respondent is correct in assessing petitioner deficiency taxes for CY 2011 in the aggregate amount of P238,407,520.17, inclusive of interests and surcharge. Petitioner's Arguments Petitioner argues that respondent grossly violated the law when it considered the former's operations in Olongapo City as not entitled to the 5% preferential tax treatment (PTR) since under the law, rules and regulations, Olongapo City is part of the Subic Bay Special Economic Zone (SSEZ) and outside of the customs territory. Hence, the latter erred in assessing the subject deficiency taxes. Petitioner also argues that respondent grossly violated its constitutional right against impairment of contracts and the latter cannot supersede or repeal a law or contract entered into by a government instrumentality by mere regulation. Respondent's Counter-Arguments Respondent argues that petitioner's income is subject to 30% regular corporate IT and VAT and that revenue regulations enjoy presumption of regularity, hence, the assessments have bases both in fact and in law. Respondent also avers that petitioner is liable for deficiency IT for undeclared income, unaccounted expenses and purchases, disallowed expenses, overclaimed expenses unsupported expenses and purchases, disallowed salaries expenses, and unsupported creditable withholding tax claim. Respondent argues that petitioner is liable for deficiency VAT due from payments for services rendered by non-resident foreign corporation and alien, for undeclared income, unaccounted expenses and purchases, and construction revenue not subjected to IT. Respondent further avers that petitioner is liable for deficiency WTC, EWT, and final tax arising from payments to non-resident foreign corporation and alien for services rendered in the Philippines. He also avers that the issuance of LOA, PAN, FAN, FLD, and FDDA were issued in accordance with law, rules and jurisprudence. RULING OF THE COURT Before discussing each item of assessment, this Court shall first resolve whether the income derived by petitioner from outside the Freeport Zone, although within the Ecozone, such as those derived from Olongapo City, is income from Customs Territory. According to the Details of Discrepancies, attached to the FLD, Revenue Regulations (RR) No. 2-2005 states that Subic Ecozone-registered enterprise shall enjoy the special tax regime of 5%, with a condition that the income that may be generated from sources in the Customs Territory is restricted up to 30% of its total income from all sources, and in the event that it generates income from sources within Customs Territory in excess of 30% of its total income from all sources, all of its income shall be subject to the regular internal revenue tax rate imposed for enterprise in the Customs Territory. In this connection, extraction of the income transaction from the transactional General Leger allegedly revealed that 68% of petitioner's total income came from Customs Territory, to wit: TIADCc Total Income per Location Customs Territory 256,851,849.40 68% Freeport Zone 120,111,571.83 32% Total 376,963,421.23 100% Thus, petitioner's total income was considered to be subject to the 30% regular income tax rate. In his Memorandum, respondent stresses that his audit revealed that petitioner is catering to residents in the Subic Special Economic Zone or outside of the Freeport Zone. In addition, the Details of Discrepancies, attached to the FDDA, states that Section 6 (b) of RR No. 2-2005 provides that all income derived by service establishments within the Subic Ecozone shall be subject to the 5% preferential rate, provided that such services are paid in foreign currency inwardly remitted through the Bangko Sentral ng Pilipinas (BSP). On the other hand, petitioner argues that it is a Subic Special Economic Zone (SSEZ)-registered enterprise, authorized to operate within the entire SSEZ; and Olongapo City is expressly included in the SSEZ under Section 12 of Republic Act (RA) No. 7227 and echoed in Section 3 (c) of the Implementing Rules and Regulations (IRR) of RA No. 7227. Section 12 of RA No. 7227 or the Bases Conversion and Development Act of 1992, approved on March 13, 1992, created the Subic Special Economic Zone, to wit: SECTION 12. Subic Special Economic Zone. Subject to the concurrence by resolution of the Sangguniang Panlungsod of the City of Olongapo and the Sangguniang Bayan of the Municipalities of Subic, Morong and Hermosa, there is hereby created a Special Economic and Free-port Zone consisting of the City of Olongapo and the Municipality of Subic, Province of Zambales, the lands occupied by the Subic Naval Base and its contiguous extensions as embraced, covered, and defined by the 1947 Military Bases Agreement between the Philippines and the United States of America as amended, and within the territorial jurisdiction of the municipalities of Morong and Hermosa, Province of Bataan, hereinafter referred to as the Subic Special Economic Zone whose metes and bounds shall be delineated in a proclamation to be issued by the President of the Philippines. Within thirty (30) days after the approval of this Act, each local government unit shall submit its resolution of concurrence to join the Subic Special Economic Zone to the Office of the President. Thereafter, the President of the Philippines shall issue a proclamation defining the metes and bounds of the Zone as provided herein. On February 1, 1995, Proclamation No. 532 was signed by then President Fidel V. Ramos, delineating the exact metes and bounds of the Subic Special Economic and Free Port Zone (SSEFZ) established pursuant to RA No. 7227. Proclamation No. 532 was later amended by Proclamation No. 1475, issued on March 17, 2008, where a portion of land situated at Barangay Cawag, Municipality of Subic, Province of Zambales, was excluded from the coverage of the Subic Special Economic and Freeport Zone. In connection with this, petitioner presented a Map Showing Proclamation No. 532 (Subic Special Economic and Freeport Zone), 53 prepared by the DENR, showing that Olongapo City is within the SSEFZ. RA No. 7227 was later amended by RA No. 9400, which was approved on March 20, 2007. Section 12 (c) of RA No. 9400 provides for the 5% special tax rate on gross income accorded to enterprises within the Subic Special Economic Zone, to wit: SEC. 12. Subic Special Economic Zone. x x x xxx xxx xxx (c) The provision of existing laws, rules and regulations to the contrary notwithstanding, no national and local taxes shall be imposed within the Subic Special Economic Zone. In lieu of said taxes, a five percent (5%) tax on gross income earned shall be paid by all business enterprises within the Subic Special Economic Zone and shall be remitted as follows: three percent (3%) to the National Government, and two percent (2%) to the Subic Bay Metropolitan Authority (SBMA) for distribution to the local government units affected by the declaration of and contiguous to the zone, namely: the City of Olongapo and the municipalities of Subic, San Antonio, San Marcelino and Castillejos of the Province of Zambales; and the municipalities of Morong, Hermosa and Dinalupihan of the Province of Bataan, on the basis of population (50%), land area (25%), and equal sharing (25%). SDAaTC Section 4 (a) and (b) of Department of Finance (DOF) Department Order No. 3-08, issued on February 13, 2008 to implement RA No. 9400, clarified the above provision as follows: SECTION 4. Tax Incentives in Ecozones and Freeport Zones. Ecozone and Freeport Enterprises shall be entitled to the following tax incentives: a. Subic Special Economic Zone Ecozone Enterprises in the SSEZ shall be entitled to the 5% special tax on Gross Income Earned, in lieu of national and local taxes. b. Subic Freeport Zone Freeport Enterprises in the SFZ shall be entitled to: (i) the freeport status of the zone; and (ii) the 5% special tax on Gross Income Earned, in lieu of national and local taxes. However, in order to avail of the 5% special rate on gross income, Section 44 of the Implementing Rules and Regulations (IRR) of RA No. 7227 provides that the income generated by the Ecozone/Freeport Enterprise from sources within the Customs Territory should not exceed 30% of its total income from all sources, to wit: SECTION 44. Percentage of Income Allowable from Sources Within the Customs Territory. SBF Enterprises may generate income from sources within the Customs Territory of up to Thirty Percent (30%) of its total income from all sources; provided , that should an SBF Enterprise's income from sources within the Customs Territory exceed Thirty Percent (30%) of its total income from all sources, then it shall be subject to the income tax laws of the Customs Territory; provided , further, that in any case, customs duties and taxes must be paid with respect to income from sales of articles to the Customs Territory. Section 8 (A) of DOF Department Order No. 3-08 reiterated the 30% threshold provided in Section 44 of the IRR of RA No. 7227, in this wise: SECTION 8. Other Tax and Fiscal Obligations. A. If the Ecozone or Freeport Enterprise wants to avail of the incentives under the 5% special tax regime, it may generate income from sources outside the Ecozone or Freeport Zone or within the Customs territory of up to thirty percent (30%) of its total income from all sources, Provided, however, that if the income of an Ecozone or Freeport Enterprise exceeds said thirty percent (30%) threshold, then all of its income whether from the Zone or the Customs Territory shall be subject to the relevant internal revenue taxes under the National Internal Revenue Code of 1997, as amended. From the foregoing, to avail of the incentives under the 5% special tax regime, the income generated from sources outside the Ecozone or Freeport Zone or within the Customs Territory should be up to 30% of the Ecozone or Freeport Enterprise's total income from all sources, otherwise, all of its income, whether from the Zone or the Customs Territory, shall be subject to the relevant internal revenue taxes under the National Internal Revenue Code (NIRC) of 1997, as amended. More so, Customs Territory is defined under Section 3 (n) of the IRR of RA No. 7227 as follows: acEHCD n. Customs Territory refers to the portion of the Philippines outside the SBF where the Tariff and Customs Code of the Philippines and other national tariff and customs laws are in force and effect. In relation thereto, Section 3 (c) of the IRR of RA No. 7227 provides that the SBF is a separate customs territory consisting of the City of Olongapo and the municipality of Subic, Province of Zambales, and the lands formerly occupied by the Subic Naval Base, to wit: c. SBF is the Subic Bay Freeport referred to as the Special Economic and Freeport Zone in Section 12 of the Act, a separate customs territory consisting of the City of Olongapo and the municipality of Subic, Province of Zambales, the lands occupied by the Subic Naval Base and its contiguous extensions as embraced, covered and defined by the 1947 Philippine-U.S. Military Base Agreement as amended and within the territorial jurisdiction of Morong and Hermosa, Province of Bataan, the metes and bounds of which shall be delineated in a proclamation to be issued by the President of the Philippines; provided , that pending the establishment of secure perimeters around the entire SBF, the SBF shall refer to the area demarcated by the SBMA pursuant to Section 13 hereof. Under Section 2 (o) of DOF Department Order No. 3-08, Customs Territory is defined as: o. Customs territory shall refer to the national territory of the Philippines outside of the boundaries of the Ecozones or Freeport Zones, duly defined or proclaimed in accordance with RA 7227, where the customs and tax laws of the Philippines are in full force or effect, and outside of those areas specifically declared by other laws and/or presidential proclamations to have the status of special economic zones and/or freeports. Meanwhile, Ecozones and Freeport Zones are defined under Section 2 (l) and (m) of DOF Department Order No. 3-08, as follows: 1. Ecozones shall refer to Special Economic Zones which are selected areas, already created and identified under RA 7227 with highly developed or which have the potential to be developed into agro-industrial, industrial, tourist, recreational, commercial, banking, investment, and financial centers. Provided that the areas declared or constituted as Special Economic Zones (SEZ) shall be fenced-in; xxx xxx xxx n. Freeport Zones shall refer to the presently fenced-in area within Subic Special Economic Zone, and the areas identified in R.A. 7227 as constituting the Clark Freeport Zone and the Poro Point Freeport Zone within which there shall be a free and unimpeded flow of goods and merchandise from one Freeport Enterprise to another or to other establishments and residents within the boundaries thereof in accordance with law; In this case, petitioner is registered as a Subic Bay Freeport Enterprise as shown in the Certificate of Registration and Tax Exemption 54 dated May 5, 2011 issued by the SBMA and effective until May 4, 2012. Articles I to III of the said certification states that: ARTICLE I The Company shall be classified as a Subic Bay Freeport Enterprise, as such term is defined under Section 3, Paragraph G of the Implementing Rules, for the following purpose: Engaged in the business of privatization of water and sewerage services of Subic Bay Freeport and Olongapo City from Subic Water Complex, Subcom Area, CBD, Subic Bay Freeport Zone . SDHTEC ARTICLE II The Company is hereby granted a PERMIT TO OPERATE the aforementioned business at the address specified in Article I. ARTICLE III The Company shall enjoy all the rights, privileges, and benefits established under the Act and the Implementing Rules with regard to the business and the location described above. 55 Section 3 (g) of the IRR of RA No. 7227 provides the definition of a Subic Bay Freeport Enterprise as follows: g. SBF Enterprise refers to any business entity or concern within the SBF duly registered with and/or licensed by the SBMA to operate any lawful economic activity within the SBF. It should be noted that under Section 2 (y) and (aa) of DOF Department Order No. 3-08 or the IRR of RA No. 9400, the rules made a distinction between an Ecozone Enterprise and a Freeport Enterprise, to wit: y. Ecozone Enterprise shall refer to a business entity located within the SSEZ, CSEZ, MSEZ and JHSEZ which is entitled to incentives as provided by law and duly registered with the Incentives Administration Authority, other than PEZA, of the Ecozone where the business entity is located; xxx xxx xxx aa. Freeport Enterprise shall refer to a business entity located within CFZ, PPFZ, and within the Subic Freeport Zone, which is entitled to incentives, including tax and duty free importation, as may be provided by law, and duly registered with the Incentives Administration Authority of the Freeport Zone where the business entity is located. However, considering that Section 3 (g) of the IRR of RA No. 7227 was referred to in petitioner's Certificate of Registration and Tax Exemption in classifying petitioner instead of the above classification, then, petitioner is a Subic Bay Freeport Enterprise, which is a "business entity or concern within the SBF duly registered with and/or licensed by the SBMA to operate any lawful economic activity within the SBF" and was granted a permit to operate at the "Subic Bay Freeport and Olongapo City from Subic Water Complex, Subcom Area, CBD, Subic Bay Freeport Zone." On the other hand, "SBF," as defined in Section 3 (c) of IRR of RA No. 7227, is the "Subic Bay Freeport referred to as the Special Economic and Freeport Zone in Section 12 of the Act, a separate customs territory consisting of the City of Olongapo and the municipality of Subic, Province of Zambales, the lands occupied by the Subic Naval Base x x x." Based on the following documents, Olongapo City is one of the areas serviced by petitioner: AScHCD Document Pertinent provision Terms of Reference dated August 1994 for the Privatization of Water and Sewerage Services 56 4.5 Basis for Inclusion of OCWD and SWD SBMA intend to privatise water and sewerage services throughout the Freeport Zone. The principal areas of activity for the present and early years will be the Secured Area, Olongapo City and Subic Municipality. x x x 57 5.4 Area of Appointment The Area of Appointment shall be the territory of the ex-Naval Base, referred to as the Secured Area, together with those areas in which responsibility for water services rests at present with Olongapo City Water District and Subic Water District. 58 Administrative boundaries are shown in Figure 1. 59 Joint Venture Agreement entered into by and among SBMA, Olongapo City Water District, Biwater International Limited and D.M. Consunji, Inc. dated November 24, 1996 60 1(a) Joint Venture In entering into this Agreement, the parties hereby declare and affirm that their primary contractual intent is to establish and operate a company engaged in the provision of water and sewerage services and in the establishment, operation and maintenance of water and sewerage facilities and systems in the Subic Special Economic and Free Port Zone ("Zone") consisting of the City of Olongapo and the Municipality of Subic, Province of Zambales and the lands occupied by the Subic Naval Base and its contiguous extensions as embraced, covered and defined by the 1947 Military Bases Agreement between the Philippines and the United States of America, as amended. 61 Franchise Agreement dated November 24, 1996 62 1.(a) The SBMA, pursuant to its power under Section 13 of Republic Act No. 7227, hereby grants to SUBIC WATER and SUBIC WATER hereby accepts, for the consideration and on the terms and conditions of this Agreement, the right, privilege, and authority ("Franchise") to carry on the business of providing water and sewerage services in the Subic Special Economic and Free Port Zone ("Zone"), and for this purpose, to establish, operate, manage, lease, maintain and purchase water and sewerage facilities and systems and to exercise any and all rights and privileges convenient or essential to efficiently carry out the purposes of the Franchise. 63 Certificate of Registration and Tax Exemption dated May 5, 2011 64 ARTICLE I The Company shall be classified as a Subic Bay Freeport Enterprise, as such term is defined under Section 3, Paragraph G of the Implementing Rules, for the following purpose: Engaged in the business of privatization of water and sewerage services of Subic Bay Freeport and Olongapo City from Subic Water Complex, Subcom Area, CBD, Subic Bay Freeport Zone . Considering that petitioner is registered as a Subic Bay Freeport Enterprise providing water and sewerage services in the Subic Special Economic and Freeport Zone, which includes Olongapo City pursuant to Section 12 of RA No. 7227, as implemented in Section 3 (c) of the IRR of RA No. 7227, hence, its income generated from Olongapo City should not be treated as income within the Customs Territory, which refers to the "portion of the Philippines outside the SBF" under Section 3 (n) of the IRR of RA No. 7227 or refers to the "national territory of the Philippines outside of the boundaries of the Ecozones or Freeport Zones" under Section 2 (o) of DOF Department Order No. 3-08. HESIcT From all the foregoing, petitioner's income generated from Olongapo City is considered income generated within the Subic Special Economic Zone, for purposes of determining whether petitioner's income generated from sources outside the Subic Special Economic Zone or within the Customs Territory exceeded the 30% threshold. As to respondent's contention in his FDDA that petitioner's income should be subject to the regular income tax rate since it is a service enterprise and payments were not made in the manner provided in Section 6 (b) of RR No. 2-2005 which provides that "all income derived by service establishments within SUBIC-ECOZONE, x x x shall be subject to the five percent (5%) preferential tax rate, provided that such services are paid in foreign currency inwardly remitted through the Bangko Sentral ng Pilipinas," as pointed out by petitioner, Section 6 of RR No. 2-2005 was suspended by RR No. 13-2005, which states: SECTION 2. Suspension of Certain Provisions of Revenue Regulations No. 2-2005 . The effectivity of Sections 3, 4, and 6 of Revenue Regulations No. 2-2005 is hereby suspended in so far as it applies to enterprises registered under paragraph (c) of Section 12 of R.A. 7227, pending the issuance of a new regulations pertaining on the matter related thereto. Pending the issuance of said new regulations, the provisions of Revenue Regulations No. 1-95, in so far as the same is not in conflict with these Regulations, shall apply. Evidently, there is nothing in DOF Department Order No. 3-08, implementing RA No. 9400, requiring that services should be paid in foreign currency inwardly remitted through the BSP in order that the Subic Ecozone or Freeport Enterprise shall be subject to the 5% preferential tax rate. Moreover, there is nothing in RA No. 7227 nor in RA No. 9400 requiring that payments should be made in foreign currency before a Subic Ecozone or Freeport Enterprise can avail of the 5% preferential tax rate. It is well-settled that the administrative agency issuing the regulations may not enlarge, alter or restrict the provisions of the law it administers; it cannot engraft additional requirements not contemplated by the legislature. In case of conflict, the law must prevail. A regulation adopted pursuant to law is law. Conversely, a regulation or any portion thereof not adopted pursuant to law is no law and has neither the force nor the effect of law. 65 That having been settled, this Court shall now discuss each item of assessment. In the FDDA, 66 respondent assessed petitioner of deficiency income tax (IT), final withholding VAT (FWVAT), value-added tax (VAT), withholding tax on compensation (WTC), expanded withholding tax (EWT), and final tax (FT) in the total amount of P238,407,520.17, inclusive of interest and penalties, for the period covering April 1, 2011 to December 31, 2011, broken down as follows: Tax Type Basic Surcharge Interest Compromise Total Income Tax P79,154,105.10 P- P49,400,836.01 P50,000.00 P128,604,941.11 FWVAT 9,577,926.59 4,788,963.29 6,355,544.71 20,722,434.59 VAT 37,788,047.23 18,894,023.61 25,261,050.75 81,943,121.59 WTC 722,542.80 361,271.40 486,974.05 1,570,788.25 EWT 135,164.03 67,582.02 91,467.17 294,213.22 FT 2,723,302.97 680,825.74 1,842,892.70 25,000.00 5,272,021.41 TOTAL P130,101,088.72 P24,792,666.06 P83,438,765.39 P75,000.00 P238,407,520.17 In relation thereto, on May 29, 2015, without prejudice to its position that the assessment is erroneous, petitioner paid a total of P5,182,566.92 to pay off assessment items: (1) Income Tax P2,107,918.42; (2) Income Tax P1,175,276.48; (3) Withholding Tax on Compensation P1,570,788.25; (4) Expanded Withholding Tax P294,213.22; and (5) Final Withholding Tax P34,370.55, 67 details of which are as follows: 68 Tax Type Basic Surcharge Interest Compromise Total Income Tax P1,267,105.64 P- P790,812.78 P50,000.00 P2,107,918.42 Income Tax 723,643.58 451,632.90 1,175,276.48 WC 722,542.80 361,271.40 486,974.05 1,570,788.25 WE 135,164.03 67,582.02 91,467.17 294,213.22 WF 5,000.00 1,250.00 3,120.55 25,000.00 34,370.55 Total P2,853,456.05 P430,103.42 P1,824,007.45 P75,000.00 P5,182,566.92 I. Income Tax (IT) P128,604,941.11 The details of respondent's assessment on petitioner's deficiency income tax are as follows: 69 TAIaHE Taxable Income per Return P202,581,077.00 Add: Adjustments per Audit Under-declared receipts/income: IT-1 Undeclared Income due to discrepancy on Other Income Credits per General Ledger (GL) vs. Audited Financial Statements (AFS)/Income Tax Return (ITR) 7,662,613.62 IT-3 Undeclared Income due to unaccounted expenses/purchases based on tracing of CV Register to Trial Balance (TB) to AFS 7,326,148.13 IT-4 Undeclared Income due to unaccounted expenses/purchases based on vouching of Check Vouchers 332,659.38 1T-5 Construction Revenue not subjected to Income Tax 41,714,427.00 Disallowance: IT-6 Disallowed expenses in excess of the amounts allowable pursuant to Revenue Regulations (RR) 13-2005 12,021,426.86 IT-7 Overclaimed Expenses based on matching of AFS vs. TB vs. CV Register 2,273,999.62 IT-8 Disallowed expenses/purchases for being unsupported 300,332.81 IT-9 Disallowed Purchases/Expenses due to failure to withhold 3,991,363.02 IT-10 Disallowed Salaries Expense due to failure to withhold 5,815,653.33 Total Taxable Income per Audit P284,019,700.77 Income Tax Rate 30% Total Income Tax Due P85,205,910.23 Less: Allowable Credit/Payments Payments P6,034,202.73 Creditable Withholding Tax Claimed Per ITR 43,229.12 IT-11 Less: Unsupported Creditable Withholding Tax (25,626.72) 6,051,805.13 BASIC DEFICIENCY INCOME TAX P79,154,105.10 Add: Penalties Interest on Basic Deficiency Tax until 05/29/2015 P49,400,836.01 Compromise Penalty 50,000.00 49,450,836.01 DEFICIENCY INCOME TAX PAYABLE P128,604,941.11 Based on the foregoing, the income tax assessment is composed of the following items: ICHDca IT-1 Undeclared Income due to discrepancy on Other Income-Credits per GL vs. AFS/ITR P7,662,613.62 IT-3 Undeclared Income due to unaccounted expenses/purchases based on tracing of CV Register to TB to AFS 7,326,148.13 IT-4 Undeclared Income due to unaccounted expenses/purchases based on vouching of Check Vouchers 332,659.38 IT-5 Construction Revenue not subjected to Income Tax 41,714,427.00 IT-6 Disallowed expenses in excess of the amounts allowable pursuant to RR 13-2005 12,021,426.86 IT-7 Overclaimed Expenses based on matching of AFS vs. TB vs. CV Register 2,273,999.62 IT-8 Disallowed expenses/purchases for being unsupported 300,332.81 IT-9 Disallowed Purchases/Expenses due to failure to withhold 3,991,363.02 IT-10 Disallowed Salaries Expense due to failure to withhold 5,815,653.33 IT-11 Unsupported Creditable Withholding Tax P25,626.72 IT-1. Undeclared Income due to discrepancy on Other Income-Credits per General Ledger (GL) vs. Audited Financial Statements/Income Tax Return (AFS/ITR) P7,662,613.62 Respondent's audit of petitioner's books of accounts revealed that the following credit entries in the Other Income account 70 does not fall within the definition of petitioner's registered activity as indicated in its Certificate of Registration and Tax Exemption: 71 Classification Amounts A. Sale of Scrap Materials P2,240,000.00 B. Sale to Non-Resident Foreign Corporation (NRFC) 654,574.32 C. Proceeds from Retirement Insurance 3,215,500.00 D. To amortize deferred credits based on a straight line-IFRIC 12 adjustment 1,552,539.30 Total Credits per GL P7,662,613.62 Respondent asserts that the income derived from sources other than the registered activity shall be subject to the regular corporate income tax pursuant to Sections 27 and 32 of the NIRC of 1997. In addition, Revenue Regulations No. 20-2002 specifically laid down the tax treatment of income earned from unregistered activities by Freeport Zone-registered enterprises, to wit: SECTION 1. Tax Treatment . Income derived by an enterprise with the Subic Bay Metropolitan Authority (SBMA) . . . from its registered activity/ies shall be subject to such tax treatment as may be specified in its terms of registration ( i.e. , the 5% preferential tax rate x x x) Nonetheless, whatever the tax treatment of said enterprise with respect to its registered activity/ies, income realized by such registered enterprise that is not related to its registered activity/ies shall be subject to the regular internal revenue taxes x x x (Emphasis supplied) A. Sale of Scrap Materials P2,240,000.00 B. Sale to Non-Resident Foreign Corporation P654,574.32 In his report, 72 Court-commissioned ICPA George V. Villaruz stated that the original copy of Official Receipt (OR) No. 462317 supporting the sale of scrap materials was not available and was not presented for examination. However, based on the file generated from the Point-of-Sales (POS) system, 73 the collection was received by petitioner from Ma. Elenita G. Bergira/Meng Junkshop. TCAScE The said sale of scrap materials was subjected to 5% preferential tax rate in the computation of petitioner's income tax per ITR for the period ended December 31, 2011. On the other hand, the alleged sale to Non-Resident Foreign Corporation (NRFC) pertains to disposal and sale of petitioner's software for Billing and Meter reading system to PT. ADHYA TIRTA BATAM, an NRFC located in Jakarta, Indonesia as per Sales Invoice (SI) No. SWSCI-0001 and Journal Voucher (JV) No. 719 with accompanying Bank of the Philippine Islands (BPI) Debit Memo/Credit Memo Statement as proof of collection. 74 Petitioner submits that the sale of scrap materials from its water treatment facilities is clearly related to its registered activity. While, the sale to NFRC pertains to the sale of billing software used in managing petitioner's registered activities. Unfortunately, this Court disagrees. "Scrap" is a term used to describe manufactured articles or parts rejected or discarded and useful only as material for reprocessing, especially waste and discarded metal. 75 At the outset, petitioner is organized for the business of providing water and sewerage services in the Subic Special Economic Zone and Freeport Zone. Thus, considering the nature of the two transactions, the sale of scrap materials and the disposal and sale of software for billing and meter reading system do not fall under the registered activities of petitioner. In fact, the Court had the occasion to rule in the case of Commissioner of Internal Revenue vs. Nidec Copal Philippines Corporation 76 that even when the sale of scrap materials is incidental to the taxpayer's registered activities, such sale shall be subject to regular income tax. Consequently, respondent's assessment shall be sustained. C. Proceeds from Retirement Insurance P3,215,500.00 Petitioner maintains that the proceeds from retirement insurance do not represent actual income but mere reimbursements made by Prudentialife Plans, Inc. for the amounts advanced by petitioner to its employees as pay out for their retirement insurance policy. In other words, the cash received as reimbursement is not income, but mere return of capital, thus, not subject to income tax. In his report, 77 the ICPA ascertained that the proceeds from Prudentialife Plans, Inc. amounting to P3,215,500.00 are supported by OR No. 0000324221 78 dated May 27, 2011. According to the ICPA, these proceeds were initially recorded under the account Other Income but subsequent reversing entries per JV No. 731 79 and proposed adjusting journal entry (PAJE) 80 during audit were made and reflected in the books as follows: JV No. 731 and jv#2011-0591 with accompanying computation of Maturity Benefits-Group Sale was made to reverse the Other Income account against Accounts Receivable-Others account in the amount of P2,067,000.00. This entry was made to close the initial recognition of Accounts Receivable-Others when petitioner made an initial payment to their employees amounting to P2,067,000.00 and subsequently applied for reimbursement before Prudentialife Plans, Inc. Thus, the cash received from reimbursement should not be treated and taxed as Other Income since this was properly corrected and adjusted in the Audited Financial Statement (AFS). A PAJE 81 during the year-end audit, the remaining amount of P1,148,500.00 under the Other Income account was closed/reversed and recorded to set-up Pension Liability in the same amount. The recognition of the Pension Liability was made to establish petitioner's liability to those employees who have not been paid of their benefits as of December 31, 2011 but reimbursements were already received from Prudential Life Plans, Inc. However, this Court is not convinced. Upon examination of the documents submitted before the Court, petitioner's actual payment of the retirement insurance to its employees was not established. JV No. 731 and the accompanying Computation of Maturity Benefits-Group Sale presented by petitioner deserve scant consideration as these merely create paper trails showing the purported allocation of the amount it received from Prudentialife Plans, Inc. The same do not prove the fact of petitioner's actual payment to the employees. In the case of Towne & City Development Corporation vs. Court of Appeals, et al. , 82 the Supreme Court held that a voucher remains a piece of paper having no evidentiary weight, to wit: x x x as correctly pointed out by the trial court which the appellate court upheld, vouchers are not receipts. It should be noted that a voucher is not necessarily an evidence of payment. It is merely a way or method of recording or keeping track of payments made. A procedure adopted by companies for the orderly and proper accounting of funds disbursed. Unless it is supported by x x x an actual payment of cash duly receipted for as is customary among businessmen, a voucher remains a piece of paper having no evidentiary weight. (Emphasis supplied) ITAaHc A receipt is a written and signed acknowledgment that money has been or goods have been delivered, while a voucher is documentary record of a business transaction. The references to alleged check payments in the vouchers presented by the petitioner do not vest them with the character of receipts. x x x Thus, respondent's deficiency IT assessment on the proceeds from retirement insurance of P3,215,500.00 shall remain. D. To amortize deferred credits based on a straight line-IFRIC 83 12 adjustment P1,552,539.30 Petitioner claims that the deferred credits pertain to the computed difference between the actual deposit received from customers and the fair value of the deposits at initial recognition, which are amortized over the remaining life of the franchise. Petitioner asserts that since the customer's deposit is an initial requirement before petitioner may provide water and sewerage services to its customers, these are necessary and directly related to petitioner's registered services. Thus, it should not be subjected to 30% corporate income tax. Upon examination of petitioner's AFS for the period ending December 31, 2011, the amortized deferred credit amounting to P1,552,539.30 was reflected as Other Income in the Statement of Comprehensive Income. 84 Moreover, under Note 19 85 of the same AFS, it was disclosed that this account pertains to deposits collected from customers and are carried at amortized cost. For purposes of implementing the tax incentive provision under Section 12 (c) of RA No. 7227, otherwise known as the Bases Conversion and Development Act of 1992, Section 3 (o) of RR No. 1-95, 86 as amended by RR Nos. 16-99 87 and 13-2005, 88 provides that the term "gross income earned" refers to gross sales or gross revenues derived from business activity within the Zone, net of sales discounts, sales returns and allowances and minus costs of sales or direct costs but before any deduction is made for administrative, marketing, selling and/or operating expenses or incidental losses during a given taxable period. cSaATC Considering that the customer's deposit is an initial requirement before petitioner can provide water and sewerage services to its customers, hence, an integral part of the administration of the registered activities of petitioner, then, these amortized deferred credits should not be subjected to 30% corporate income tax. Consequently, respondent's assessment pertaining thereto shall be cancelled. IT-3. Undeclared Income due to unaccounted expenses/ purchases based on tracing of Check Voucher (CV) Register to TB to AFS P7,326,148.13 Respondent's validation of petitioner's CV register to Auditor's Trial Balance/AFS revealed that there were expenses reflected in the books of accounts that were not reported in the AFS. The funds used on the said expenses were not accounted for and were declared as unaccounted sources of cash, which respondent translated to undeclared income, citing the case of Perez vs. Court of Tax Appeals, et al. , G.R. No. L-10507 dated May 30, 1958, where it has been held that unreflected sources of funds not accounted for in the taxpayer's tax returns led to the inference that part of his income had not been reported, hence, the noted discrepancies were added to the gross income pursuant to Section 32 of the NIRC of 1997 and subjected to income tax pursuant to Section 24 of the same Code. The schedule below summarizes the various accounts where the discrepancies were noted: 89 Account Name Amount per AFS/Auditor's Trial Balance Adjusted Amount per Books Unaccounted Expenses/ Purchases Supplies P1,223,489.00 P1,226,873.15 P3,384.15 Travel and Transportation 4,567,647.00 4,569,375.56 1,728.56 Entertainment, Amusement and Recreation 134,243.00 133,863.26 379.74 90 Repairs and Maintenance 934,758.00 1,023,389.83 88,631.83 91 License and Regulatory Fees P25,251.00 P7,257,274.87 7,232,023.87 Total P7,326,148.15 92 Petitioner counters respondent's assessment for unaccounted expenses/purchases for being unsupported by the records and merely based on presumption. Petitioner cites the ruling of this Court in the case of Agrinurture, Inc. vs. Commissioner of Internal Revenue 93 which involves an assessment based on undeclared purchases, to wit: "[W]hile there is a presumption of correctness of assessment issued by [the BIR], being a mere presumption, the same cannot be made to rest on another assumption, which is [the] presumption that the under-declared purchases translated and would automatically result in under-declared income or additional taxable sales, which would in turn increase petitioner's income tax." Moreover, petitioner contends that three (3) elements in the imposition of income tax are lacking, to wit: (a) there must be a gain or profit, (b) that the gain or profit is realized or received, actually or constructively, and (c) it is not exempted by law or treaty from income tax. 94 Income tax is assessed on income received from any property, activity or service. Thus, it must be clear that there was income received by the taxpayer. Income cannot be presumed when there is supposed under-declaration of purchases or expenses, as in this case. This Court agrees with petitioner. It is worthy to note that the imputation of alleged undeclared income is based on a mere presumption that since there were alleged unaccounted expenses and purchases in its FS, there was likewise undeclared income which corresponds to it. Even if these alleged undeclared expenses and purchases are to be considered as income, the same will be offset by recording the equivalent payment as expense. Hence, no taxable income will result from the said transaction. 95 Furthermore, it must be emphasized that, for income tax purposes, a taxpayer is free to deduct from its gross income a lesser amount or not claim any deduction at all. What is prohibited by the income tax law is to claim a deduction beyond the amount authorized therein. 96 Hence, even granting that there is an undeclared expense, the same is not prohibited by law. Bearing in mind that an undeclared expense is not prohibited by law, it goes without saying that petitioner can exercise its discretion on whether it will declare a lesser amount of deduction or none at all. 97 EATCcI While axiomatic is the fact 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. The presumption of correctness of assessment being a mere presumption cannot be made to rest on another presumption. 98 For lack of factual basis, the deficiency income tax assessment corresponding to the alleged undeclared income from unaccounted expenses and purchases amounting to P7,326,148.13 should be cancelled. IT-4. Undeclared Income due to unaccounted expenses/purchases based on vouching of Check Vouchers P332,659.38 The BIR's audit of the source documents such as vouchers, invoices, and official receipts vis--vis the CV register revealed that there were amounts per source documents that were not recorded in the CV register, thus, funds used on the said expenses were not accounted for and were declared as unaccounted source of cash, leading to the inference that part of petitioner's income had not been reported. Hence, the noted discrepancies of P332,659.38, as listed below, were added to the gross income pursuant to Section 32 of the NIRC of 1997 and subjected to income tax pursuant to Section 24 of the same Code: 99 CV No. Supplier's Name Amount 26063 Glocke Security System, Inc. P73,545.78 26468 U-Bix Subic Bay Corp. 10,350.00 26299 U-Bix Subic Bay Corp. 10,350.00 26157 IP Business Holdings, Inc. 61,810.00 26729 Olongapo City Treasurer's Office 103,390.00 26679 U-Bix Subic Bay Corp. 12,033.60 26507 IP Business Holdings, Inc. 61,180.00 Total P332,659.38 This Court finds respondent's conclusion untenable. Based on the documents submitted by petitioner, the alleged unaccounted purchases/expenses pertain to disbursements that are outside the scope of the period of assessment. 100 Even if such disbursements were within the scope of the period of assessment, it must be emphasized that the assessment, like under item IT 3, is bereft of merit as it was based on a mere presumption that since there were alleged unaccounted expenses and purchases in the FS, there were likewise unaccounted source of cash and undeclared income which correspond to said expenses. Thus, for lack of factual basis, the deficiency income tax assessment pertaining to the alleged undeclared income from unaccounted expenses of P332,659.38 shall be cancelled. DHITCc IT-5. Construction Revenue not subjected to Income Tax P41,714,427.00 Respondent's comparison of revenue declared per AFS versus Sales and Other Income per ITR revealed that Construction Revenue amounting to P41,714,427.00 was not declared as part of income in the ITR, thus, this amount is considered as undeclared income, computed as follows: 101 Revenue per AFS Services P355,085,514.00 Construction 41,714,427.00 Penalties, connection fees and others 12,853,324.00 P409,653,265.00 Per ITR Sales 355,085,514.00 Other Taxable Income P12,853,324.00 367,938,838.00 Total P41,714,427.00 Petitioner argues that the account "Construction Revenue" does not constitute actual income but was merely a booking/reclassification entry in compliance with International Financial Reporting Interpretations Committee (IFRIC) 12, as proposed by its external auditor. Petitioner explains that the assets it put up were originally booked under Plant, Property, and Equipment. At the end of the accounting year, to comply with the reportorial requirement of IFRIC 12, these were reclassified to Construction Costs. Thereafter, Concession Asset was debited and Construction Revenue was credited. Concession Asset is an intangible asset account representing a right to use these assets until the end of the concession. The principle here is that service concessions such as petitioner are only vested with the right to use the assets; these assets are to be turned over to the Government at the end of the concession period or franchise term. Petitioner avers that even though it spent money to acquire these assets, it is not the owner of these assets, but is merely allowed the right to use the same. It is as if these were sold to the grantor, or Government, and the consideration received is the right to use. This Court finds the assessment partly meritorious. As can be gleaned in the Statement of Comprehensive Income in the AFS, petitioner reflected the amount of P41,714,427.00 as Construction Revenue and at the same time, as Construction Costs. 102 The IFRIC 12 requires the operators under the concession agreement to account the revenues and cost relating to the construction or upgrade services phase of the contract. As ascertained by the ICPA, based on its Franchise Agreement with the SBMA, petitioner shall refurbish the existing facility and construct new water and/or sewerage facilities. In connection thereto, petitioner incurred costs of materials and labor. In turn, in accordance with IFRIC 12, petitioner recognized Construction Revenue based on the actual costs of construction of its sewerage facilities. The ICPA's examination of documents supporting the construction cost reveals the following: 103 Particulars Amount Duly supported by AP Invoice for Approval, Sales Invoices and Official Receipts 104 P13,369,182.08 Supported by JV and Order of Payment 23,854,554.51 Supported by IC Transaction Form 2,307,468.66 Supported by JVs for reclassification/accruals 280,902.58 No supporting documents presented for examination 1,902,319.31 Total P41,714,427.14 Based on records, the construction cost amounting to P23,854,554.51 refers to accrual of cost which is supported by Journal Vouchers and Order of Payment Form. Tracing from the Check Voucher Journal Listing shows that subsequent payments related to said accruals of cost amounting to P17,175,781.82 were made. However, only the amount of P8,221,781.82 was duly supported by Sales Invoices and/or Official Receipts. 105 Meanwhile, of the construction cost supported by IC Transaction Form amounting to P2,307,468.66, the ICPA alleged that these material issuances were from the accumulated sum of the beginning inventory balance of P15,300,398.00 and the purchases for the period of April 1, 2011 to December 31, 2011 amounting to P5,127,699.85, which sufficiently covered the material issuances for the period amounting to P2,307,468.66. Based on the records, the material purchases of P5,127,699.85 are duly supported by AP invoices for approval, sales invoices, delivery receipts and official receipts, 106 thus, the material issuances amounting to P2,307,468.66 may be validly claimed as part of the construction cost. IAETDc Anent the construction cost amounting to P280,902.58, petitioner alleges that the same pertains to reclassification entries and accrual entries. An examination of petitioner's AFS 107 reveals that it adopts the accrual method in reporting its income and expenses for income tax purposes. Verily, revenue is recognized as it accrues, while expenses are recognized and charged to operation as incurred. The employment of such accounting method, or any method for that matter, as long as it clearly reflects income, is recognized in Section 43 of the NIRC of 1997, as amended. In the case of Commissioner of Internal Revenue vs. Isabela Cultural Corporation , 108 the Supreme Court held that the accrual of income and expense is permitted when the all-events test has been met, to wit: The accrual method relies upon the taxpayer's right to receive amounts or its obligation to pay them, in opposition to actual receipt or payment, which characterizes the cash method of accounting. Amounts of income accrue where the right to receive them become fixed, where there is created an enforceable liability. Similarly, liabilities are accrued when fixed and determinable in amount, without regard to indeterminacy merely of time payment. For a taxpayer using the accrual method, the determinative question is, when do the facts present themselves in such a manner that the taxpayer must recognize income or expense? The accrual of income and expense is permitted when the all-events test has been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate determination of such income or liability. In the above-quoted case, the Supreme Court explained that the all-events test requires that the right to income or liability should be fixed, and the amount thereof should be determinable with reasonable accuracy. In the present case, a perusal of the records shows that petitioner failed to present sufficient evidence to satisfy the first condition of the all-events test, i.e. , the right to income or liability should be fixed. Petitioner should be able to substantiate the accruals made for the year 2011 with relevant pieces of evidence, such as, but not limited to, purchase agreements, billing statements, statement of accounts or invoices, as well as the official receipts proving the subsequent payments of the accruals made. In sum, only the unsupported construction cost of P17,815,994.58 shall be subject to deficiency income tax, as computed below: Construction Cost P41,714,427.14 Less: Allowable Construction Cost Duly supported by AP Invoice for Approval, Sales Invoices and Official Receipts P13,369,182.08 Supported by JV and Order of Payment 8,221,781.82 Supported by IC Transaction Form P2,307,468.66 23,898,432.56 Unsupported Construction Cost P17,815,994.58 IT-6. Disallowed expenses in excess of the amounts allowable pursuant to RR No. 13-2005 P12,021,426.86 Respondent contends that pursuant to RR No. 13-2005 dated April 25, 2005, there are allowable deductions for specific type of Subic Ecozone Enterprise that may be considered in computing the gross income subject to the special tax rate of 5%, to wit: DcHSEa 3. Service Enterprises: - Direct salaries, wages or labor expense - Service supervision salaries - Direct materials, supplies used - Depreciation of machineries and equipment used in the rendition of registered services, and of that portion of the building owned or constructed that is used exclusively in the rendition of the registered service - Rent and utility charges for buildings and capital equipment used in the rendition of registered services - Financing charges associated with fixed assets used in the registered service business the amount of which were not previously capitalized. Considering the allowable deductions, respondent noted a discrepancy in the amount claimed in the ITR compared with the expenses booked in the general ledger (GL). The following discrepancy was disallowed in respondent's assessment pursuant to the above-quoted provision: 109 Allowable Expenses (RR 13-2005) Per GL 1. Direct Salaries, wages or labor expense 39,004,613.78 2. Service Supervision Salaries 3. Direct Materials, supplies used 13,952,288.96 4. Depreciation of machineries, equipment used in the rendition of registered services 20,259,009.99 5. Financing Charges associated with fixed assets used in the service business the amount of which were not previously capitalized 501,600.63 6. Rent and utility charges for buildings and capital equipment used in the rendition of registered services 79,618,820.78 Total P153,336,334.14 Per ITR 165,357,761.00 Discrepancy P12,021,426.86 Petitioner maintains that the enumeration in RR No. 13-2005 must not be read exclusively and should take into account the nature of the business of every taxpayer. Otherwise, this may lead to a myopic view of the allowable direct costs, which is not the intention of Congress when it granted various fiscal and tax incentives via RA No. 7227. This Court finds the assessment partly meritorious. A perusal of pertinent exhibits showed that petitioner is a duly registered enterprise with the SBMA as a Subic Bay Freeport Enterprise 110 which provides water and sewerage services in the Subic Special Economic and Freeport Zone entitled to the 5% preferential tax rate on gross income under Section 12 (c) of RA No. 7227, as amended, by RA No. 9400, which provides: SCaITA SEC. 12. Subic Special Economic Zone . x x x xxx xxx xxx (c) The provision of existing laws, rules and regulations to the contrary notwithstanding, no national and local taxes shall be imposed within the Subic Special Economic Zone. In lieu of said taxes, a five percent (5%) tax on gross income earned shall be paid by all business enterprises within the Subic Special Economic Zone and shall be remitted as follows: three percent (3%) to the National Government, and two percent (2%) to the Subic Bay Metropolitan Authority (SBMA) for distribution to the local government units affected by the declaration of and contiguous to the zone, namely: the City of Olongapo and the municipalities of Subic, San Antonio, San Marcelino and Castillejos of the Province of Zambales; and the municipalities of Morong, Hermosa and Dinalupihan of the Province of Bataan, on the basis of population (50%), land area (25%), and equal sharing (25%). (Emphasis supplied) "Gross income" earned is defined in Section 57 (b) of the IRR of the Subic Special Economic and Freeport Zone and the Subic Bay Metropolitan Authority under RA No. 7227 as follows: b. "Gross Income Earned" for purposes of these Rules refers to gross sales or gross revenues derived from any business activity, net of returns, discounts and allowances, less costs of sales, cost of production or direct costs of services (depending on the nature of business) but before any deduction for administrative expenses and incidental losses during a given taxable period. Relative thereto, for purposes of computing the gross income subject to the 5% preferential tax rate, specific allowable deductions are enumerated under RR No. 13-2005 and DOF Department Order No. 3-08. RR No. 13-2005 dated April 25, 2005 provides for the list of costs which are allowed as deductions from gross income subject to 5% tax rate, pursuant to RA No. 7227, as enumerated above. Likewise, Section 5 (a) (2) (iii) of DOF Department Order No. 3-08, expressly provides that only the following costs of sales/direct costs shall be allowed as deductions for purposes of calculating the Gross Income Earned (GIE) by the following Ecozone or Freeport enterprises/industries, to wit: 2. Only the following cost of sales/direct cost shall be allowed as deductions for purposes of calculating the GIE earned for the following Ecozone or Freeport enterprises/industries, to wit: xxx xxx xxx iii. Service Enterprises Direct salaries, wages, or labor expenses, inclusive of training directly related to the registered activity; Service supervision salaries; aTHCSE Direct materials, supplies used; Depreciation of machinery, equipment used in the rendition of registered services, and of that portion of the building owned or constructed by the registered enterprise that is used exclusively in the rendition of the registered service; Rent and utility charges for buildings and capital equipment used in the rendition of registered services; Financing charges associated with fixed assets used in the registered service business the amount of which were not previously capitalized. Needless to say, only the above costs are allowed to be deducted from petitioner's gross income, applying the principle inclusio unius est exclusio alterius (what is not included is deemed excluded). The ICPA's reconciliation 111 of allowable expenses as declared by petitioner per ITR for the year 2011 versus the allowable expenses per BIR computation is shown as follows: Particulars Amount per BIR's FDDA and Details of Discrepancies Amount per ITR Variance Direct salaries, wages or labor expense and Service Supervision Salaries P39,004,613.78 P27,204,966.13 P11,799,647.65 Direct Materials, supplies used, rent and utility charges for buildings and capital equipment used in the rendition of registered services 93,571,109.74 87,998,872.80 5,572,236.94 Depreciation of machineries, equipment used in the rendition of registered services 20,259,009.99 21,856,112.08 (1,597,102.09) Financing charges associated with fixed asset used in the service business which were not previously capitalized 501,600.63 - 501,600.63 Other Direct Cost - 28,297,809.03 (28,297,809.03) Total P153,336,334.14 P165,357,760.04 (P12,021,425.90) The discrepancy amounting to P12,021,425.90 is further detailed as follows: Particulars Amount Expenses disallowed by BIR A. Other direct cost P28,297,809.22 B. Lease rental 4,500,000.00 C. Depreciation of vehicle 1,597,102.12 P34,394,911.34 Presented as General and Admin Expenses in the AFS but was considered by BIR as part of allowable expenses (12,640,799.40) Credit entries per General Ledger not considered by the BIR (9,732,686.88) Total P12,021,425.06 A. Other direct cost P28,297,809.22 Per ICPA report, Other Direct Costs pertain to the following: Particulars Amount a. Franchise Fee P7,232,024.25 b. Travel Expense 215,939.92 c. Safety 151,364.00 d. Other Direct Cost 979,525.95 e. Repairs and Maintenance 17,109,135.11 f. Direct Consultancy Fee 2,609,819.99 Total P28,297,809.22 a. Franchise Fee P7,232,024.25 The Franchise fee amounting to P7,232,024.25 pertains to payments made to SBMA for the right, privilege, and authority to carry on the business of providing water and sewerage services in the Subic Special Economic and Freeport Zone, which were supported by AP Invoice for Approval and official receipts. 112 However, considering that franchise fee is not among the costs allowed as deduction from gross income earned, the deficiency assessment thereon shall be sustained. b. Travel expense P215,939.92 The travel expense amounting to P215,939.92 pertains to costs incurred during technical seminars attended by petitioner's personnel and chemist under Water Distribution Department. This also includes per diem during concrete testing, seminar of personnel under Engineering Department as well as the per diem of Water Laboratory Supervisor during seminar. 113 However, considering that travel expense is also not among the costs allowed as deduction from gross income earned, the deficiency assessment thereon shall be sustained. c. Safety P151,364.00 The safety expense refers to purchase of safety supplies for the welfare of employees directly engaged in the performance of their registered activity. Upon examination of the supporting documents submitted by petitioner, the Court finds that only the amount of P103,317.00, as detailed below, is supported by official receipts and/or sales invoices. 114 Consequently, the remaining amount of P48,047.00 shall be disallowed as deduction in computing its gross income. Invoice Date Invoice No. OR Date OR No. Other Supporting Documents Amount Exhibit No. 3/16/2011 SI#46240 5/23/2011 OR#31739 CV 26788 P9,790.00 5.33 5/4/2011 SI#47282 5/23/2011 OR#31740 CV 26910 1,360.00 5.34 5/4/2011 SI#47308 5/23/2011 OR#31740 CV 26910 2,300.00 5.34 5/4/2011 SI#47309 5/23/2011 OR#31740 CV 26910 2,510.00 5.34 5/4/2011 SI#47281 5/23/2011 OR#31740 CV 26910 5,960.00 5.34 6/14/2011 SI#2691 online CV 27143 9,000.00 5.37 6/29/2011 SI#48447 7/7/2011 OR#32141 CV 27216 1,160.00 5.38 6/29/2011 SI#48459 7/7/2011 OR#32141 CV 27216 3,870.00 5.38 8/10/2011 SI#49619 9/22/2011 OR#33952 CV 27485 1,150.00 5.41 8/10/2011 SI#49619 9/22/2011 OR#33952 CV 27485 1,150.00 5.41 8/10/2011 SI 4927, 49430 CV 27468 dated 8/15/2011; PO 100001954; System generated printouts; PO 100001940; DR 29740 dated 9/9/2011 1,360.00 5.41 5/25/2011 None 6/23/2011 OR#0443 CV 27060 1,750.00 5.35 9/7/2011 SI#12687 CV 27371 2,800.00 5.39 SI#50053 11/15/2011 OR#34588 CV 27709 1,150.00 5.42 SI#50406 11/15/2011 OR#34588 CV 27709 11,500.00 5.43 Various invoices 7/7/2011 OR#0491 CV 27076 7,825.00 5.36 8/10/2011 SI 4927, 49430 CV 27468 dated 8/15/2011; PO 100001954; System generated printouts; PO 100001940; DR 29740 dated 9/9/2011 3,660.00 5.41 8/17/2011 SI#49304 9/22/2011 OR#33952 CV 27485 2,300.00 5.42 9/14/2011 SI#50231 11/14/2011 OR#34587 CV 27721 4,591.00 5.44 9/14/2011 SI#50231 11/14/2011 OR#34587 CV 27721 13,680.00 5.44 8/25/2011 CI#2451 None None CV 27986 350.00 5.46 8/27/2011 CI#2474 None None CV 27986 5,950.00 5.46 11/23/2011 SI#51737 1/26/2012 OR#35937 CV 28014 1,150.00 5.47 11/23/2011 SI#51738 1/26/2012 OR#35937 CV 28014 7,001.00 5.47 TOTAL P103,317.00 d. Other Direct Cost P979,525.95 The other direct cost refers to purchases of chemicals, supplies and materials used for water treatment and water testing as part of petitioner's quality control procedures. It also includes cost for environment monitoring, calibration charges and road restoration. Based on the examination of the supporting documents, out of the total amount of P979,525.95, only the amount of P722,841.81 pertaining to purchases of chemicals, supplies and materials directly used in its quality control procedures and duly supported by official receipts and/or sales invoices, 115 as detailed below, shall be recognized as allowable other direct cost, while the remaining amount of P256,684.14 shall be disallowed, viz. : IDSEAH Invoice Date Invoice No. OR Date OR No. Other Supporting Documents Amount Exhibit No. None None 5/4/2011 OR#22971 CV 26746 P8,850.00 5.50 4/26/2011 BI#4918 online CV 26925 16,000.00 5.53 5/21/2011 CI#247493 7/21/2011 OR#145677 CV 27000 228.00 5.54 5/21/2011 CI#247494 7/21/2011 OR#145677 CV 27000 3,648.00 5.54 5/21/2011 CI#247495 7/21/2011 OR#145677 CV 27000 2,856.00 5.54 5/21/2011 CI#247492 7/21/2011 OR#145677 CV 27000 37,032.00 5.54 None None 7/21/2011 OR#145679 CV 27017 29,500.00 5.55 3/22/2011 CI#244493 7/21/2011 OR#145679 CV 27017 25,896.00 5.55 5/21/2011 CI#247523 7/21/2011 OR#145678 CV 27027 16,644.00 5.56 4/25/2011 SI#21995 None OR#22294 CV 27103 71,762.50 5.57 6/16/2011 SI#1898 8/16/2011 OR#1502 CV 27172 15,054.56 5.58 None None 7/8/2011 OR#23904 CV 27215 71,762.50 5.59 6/9/2011 CI#0619 online CV 27285 4,610.00 5.60 6/30/2011 CI#249085 9/16/2011 OR#146880 CV 27336 10,422.00 5.61 7/20/2011 CI#249815 9/16/2011 OR#146880 CV 27336 40,031.00 5.61 None None 8/12/2011 OR#2336 CV 27380 171,800.00 5.62 7/21/2011 Invoice PHP170986 CV 27448 dated 8/11/2011; Price quotation; Test reports; Quotation request; 2307; SAP printouts dated 8/19/2011 6,892.50 5.63 7/21/2011 Intertek SI PH170985 CV 27455 dated 8/15/2011; PO 100001866; Photocopy of the test report; Quotation of the service; Subic Water's canvass sheet dated 8/19/2011 10,053.75 5.64 7/29/2011 SI PH171433 CV 27483 dated 8/22/2011; Annual water testing reports dated 8/26/2011 57,900.00 5.65 7/15/2011 SI#2909 9/9/2011 OR#4341 CV 27520 4,600.00 5.66 11/9/2011 CI#255129 12/28/2011 OR#149270 CV 27955 37,724.00 5.67 11/22/2011 SI#0838 None OR#3456 CV 28048 12,000.00 5.68 9/21/2011 BI#5904 on-line CV 28053 25,990.00 5.69 11/22/2011 SI#193549 on-line CV 28066 41,585.00 5.70 TOTAL P22,841.81 e. Repairs and Maintenance P17,109,135.11 Repairs and Maintenance pertains to preventive maintenance and regular cleaning of sewerage facility, repairs of leak and relocation of meters, tools and supplies relative to the repair and maintenance of the sewerage facilities. Upon examination of the supporting documents 116 submitted by petitioner, the Court finds that only the amount of P1,427,774.07 is supported by official receipts and/or sales invoices. Consequently, the remaining amount of P15,681,361.04 shall be disallowed as deduction in computing its gross income. Invoice Date Invoice No. OR Date OR No. Other Supporting Documents Amount 3/25/2011 Sales Invoice No. 0937 4/26/2011 OR 2378 CV 26765 dated 4/13/2011; PO 100001649; Billing Statement; 2307 dated 4/20/2011 P320.00 2/15/2011 SI#21206 4/25/2011 OR#36342 CV 26766 3,556.00 3/16-17/2011 Invoice 219602, 219603, 219604 CV 26771 dated 4/13/2011; Fuel and oil lubricant request; Schedule of shell invoices; SOA dated 3/16/2011 dated 4/20/2011 5,646.00 2/23/2011 SI#13811 9/20/2011 OR#8157 CV 26787 8,745.00 4/28/2011 SI 80965 7/13/2011 OR 30729 CV 26841 dated 4/29/2011; DR 61942; 2307; Letter of acknowledgment; PO 100001643; Quotation reply; Quotation query dated 6/28/2011 27,450.00 4/28-29/2011 Charge invoice 44828, 45228 5/25/2011 OR 38020 CV 26849 dated 4/29/2011 1,250.00 4/28-29/2011 Charge invoice 44828, 45228 5/25/2011 OR 38020 CV 26849 dated 4/29/2011 560.00 5/12/2011 Invoice 224740 CV 26864 dated 4/29/2011; Fuel and oil lubricant request; Schedule of shell invoices; Invoice 224838; SOA dated 5/1/2011; PO 100001731 dated 5/12/2011 18,660.00 2/25/2011 Sales Invoice 138079 CV 26891 dated 5/5/2011; PO 100001398; Bid Request; Bid reply; 2307; Printout of entry on SAP dated 5/12/2011 9,204.00 6/3/2011 SI 1635 6/10/2011 OR 1241 CV 26937 dated 5/12/2011; PO 100001382; DR 1579; Price quote; Quotation Request; SAP Printout of the entry; 2307 dated 6/3/2011 23,614.58 6/3/2011 SI 1635 6/10/2011 OR 1241 CV 26937 dated 5/12/2011; PO 100001382; DR 579; Price quote; Quotation Request; SAP Printout of the entry; 2307 dated 6/3/2011 23,614.58 5/19/2011 SI#10230 6/30/2011 OR#6544 CV 26990 72,550.00 5/18/2011 SI#4092 CV 27018 13,500.00 5/23/2011 SI#0430 6/17/2011 OR#00645 CV 27022 9,100.00 5/30/2011 SI#81115 online online CV 27029 226,800.00 5/13/2011 SI#14277 online online CV 27030 19,380.00 5/18/2011 SI#19750 6/8/2011 OR#13162 CV 27035 40,178.57 5/30/2011 SI 2119 7/12/2011 OR 1410 CV 27059 dated 6/3/2011; PO 100001885; Price quote; Quotation Request; SAP Printout of the entry; 2307 dated 6/30/2011 7,961.00 5/26/2011 SI 0433 6/17/2011 OR 00644 CV 27067 dated 6/6/2011; PO 100001913, 100001916, 100001931; SAP printout of entry; 2307 dated 6/13/2011 10,750.00 5/31/2011 SI 0435 6/17/2011 OR 00644 CV 27067 dated 6/6/2011; PO 100001913, 100001916, 100001931; SAP printout of entry; 2307 dated 6/13/2011 15,250.00 5/31/2011 SI 0436 6/17/2011 OR 00644 CV 27067 dated 6/6/2011; PO 100001913, 100001916, 100001931; SAP printout of entry; 2307 dated 6/13/2011 42,800.00 5/30-31/2011 Charge invoice 45490, 45431 6/23/2011 OR 39708 CV 27075 dated 6/6/2011; PO 100001909 dated 6/23/2011 3,750.00 6/8/2011 SI 05941 CV 27123 dated 6/13/2011; PO 10001876; DR 35638; 2307; Manufacturing request dated 7/8/2011 6,750.00 6/8/2011 SI 05941 CV 27123 dated 6/13/2011; PO 10001876; DR 35638; 2307; Manufacturing request dated 7/8/2011 6,750.00 5/30/2011 Invoice 33362 7/3/2011 OR 24392 CV 27140 dated 6/15/2011; Validated deposit slip BPI; SOA dated May 9, 2011; 2307 dated 6/22/2011 59,437.50 6/15/2011 SI 5340 7/22/2011 OR 3272 CV 27155 dated 6/22/2011; PO 100001953; Purchase Request; Price Quote; Quotation request; 2307 dated 6/29/2011 8,600.00 6/7/2011 SI#0438 None OR#00647 CV 27163 8,700.00 6/8/2011 Charge invoice 45753 7/8/2011 OR 39718 CV 27165 dated 6/21/2011 900.00 6/29/2011 SI 10303 8/19/2011 OR 6327 CV 27214 dated 6/30/2011; DR 13314; PO 100001064; Purchase requisition; Quotation request; Quotation reply; 2307 dated 7/22/2011 30,000.00 7/27/2011 SI 0067 and yellow duplicate 8/1/2011 OR 0848 CV 27218 dated 6/30/2011; PO 1000019606, DR 04-4326; Open bid analysis report; Quotation request; Quotation reply; 2307 dated 7/27/2011 10,548.72 3/28/2011 SI#44510 7/8/2011 OR#39719 CV 27227 2,280.00 6/30/2011 Multiple unreadable magnetic tape Charge invoices 6/30/2011 OR#29729 CV 27257 dated 7/6/2011; Schedule of Subic Gas Philippines invoices; SOA dated 6/30/2011 2,443.57 6/22/2011 SI 32679 8/3/2011 OR 26464 CV 27344 dated 7/26/2011; PO 100001724; DR 31982; Price quote; Quotation Request; SAP Printout of the entry; 2307 dated 8/3/2011 53,900.00 6/13/2011 SI#440 8/3/2011 OR#00642 CV 27351 35,750.00 7/15/2011 CI#46139 8/15/2011 OR#40410 CV 27369 1,260.00 7/23/2011 Invoice 231677 CV 27435 dated 8/11/2011; Fuel and oil lubricant request; Schedule of shell invoices; Invoice 231677 dated 8/29/2011 131.00 6/24/2011 Sales Invoice 136421, 139007, 143080, 143081 CV 27440 dated 8/11/2011; Sales Invoice 136421, 139007, 143080, 143081; PO 100001258, 100001959; Credit memo 11-187 and 11-262; Bid Request; Bid reply; 2307; Printout of entry on SAP dated 8/19/2011 29,318.50 1/17/2011 Sales Invoice 136421, 139007, 143080, 143081 CV 27440 dated 8/11/2011; PO 100001258, 100001959; Credit memo 11-187 and 11-262; Bid Request; Bid reply; 2307; Printout of entry on SAP dated 8/19/2011 10,780.00 6/24/2011 Sales Invoice 136421, 139007, 143080, 143081 CV 27440 dated 8/11/2011; PO 100001258, 100001959; Credit memo 11-187 and 11-262; Bid Request; Bid reply; 2307; Printout of entry on SAP dated 8/19/2011 29,318.50 9/23/2011 OR#44563 CV 27499 4,200.00 9/23/2011 OR#44563 CV 27499 468.00 9/23/2011 OR#44563 CV 27499 5,373.00 7/4/2011 SI#2882 9/9/2011 OR#4345 CV 27501 37,200.00 8/16/2011 SI#4666 10/27/2011 OR#4020 CV 27605 51,598.35 8/9/2011 SI#53515421025797 None None CV 27627 11,955.00 8/23/2011 CI#47434 9/23/2011 OR#44564 CV 27657 5,488.00 8/25/2011 CI#47246 9/23/2011 OR#44564 CV 27657 1,400.00 9/19/2011 SI#0080 9/26/2011 OR#0055 CV 27670 20,000.00 9/23/2011 SI#0210 10/24/2011 OR#0966 CV 27691 9,080.00 9/18/2011 Sales Invoice 146736 CV 27705 dated 9/30/2011; PO 100002434; Bid Request; Bid reply; 2307; Printout of entry on SAP dated 10/20/2011 12,230.00 9/2/2011 OR 5410 CV 27707 dated 9/30/2011; PO 100002433; SAP Printout of the entry; 2307 dated 10/5/2011 8,300.00 9/22/2011 SI 11903 10/26/2011 OR 5097 CV 27708 dated 9/30/2011; PO 100002392; DR 17101; Price quote; Quotation Request; SAP Printout of the entry; 2307 dated 10/26/2011 12,227.67 9/6, 8, 15/2011 Charge invoice 47792, 48023, 48098 10/14/2011 OR 44591 CV 27718 dated 9/30/2011; PO 100002437, 100002420, 100002449 dated 10/14/2011 220.00 9/6, 8, 15/2011 Charge invoice 47792, 48023, 48098 10/14/2011 OR 44591 CV 27718 dated 9/30/2011; PO 100002437, 100002420, 100002449 dated 10/14/2011 900.00 9/6, 8, 15/2011 Charge invoice 47792, 48023, 48098 10/14/2011 OR 44591 CV 27718 dated 9/30/2011; PO 100002437, 100002420, 100002449 dated 10/14/2011 5,195.00 9/2/2011 Invoice 236553, 235267, 234084 CV 27746 dated 10/6/2011; Fuel and oil lubricant request; Schedule of shell invoices; SOA dated 9/9/2011 dated 10/28/2011 262.00 9/19/2011 Invoice 236553, 235267, 234084 CV 27746 dated 10/6/2011; Fuel and oil lubricant request; Schedule of shell invoices; SOA dated 9/9/2011 dated 10/28/2011 1,120.00 8/19/2011 Invoice 236553, 235267, 234084 CV 27746 dated 10/6/2011; Fuel and oil lubricant request; Schedule of shell invoices; SOA dated 9/9/2011 dated 10/28/2011 524.00 9/7-8/2011 OR 4667, 4669 CV 27801 dated 10/18/2011; PO 100002480, 100002506; SAP printout of entry; 2307 dated 10/21/2011 14,500.00 9/7/2011 OR 4668 CV 27801 dated 10/18/2011; PO 100002480, 100002506; SAP printout of entry; 2307 dated 10/21/2011 3,000.00 10/18/2011 Sales Invoice 147982 CV 27886 dated 10/28/2011; PO 100002511, 100002497; Bid Request; Bid reply; 2307; Printout of entry on SAP dated 11/18/2011 7,750.00 10/18/2011 Sales Invoice 147982 CV 27886 dated 10/28/2011; PO 100002511, 100002497; Bid Request; Bid reply; 2307; Printout of entry on SAP dated 11/18/2011 39,581.00 11/2/2011 SI#1240 1/10/2012 OR#0841 CV 27925 59,800.00 None None 11/28/2011 OR#0507 CV 27932 35,699.20 11/10/2011 IR#1095 11/28/2011 OR#0507 CV 27932 10,975.00 10/4/2011 CI#52656/58 11/22/2011 OR#49334 CV 27935 1,255.00 10/4/2011 CI#52656/58 11/22/2011 OR#49334 CV 27935 8,495.00 10/20/2011 SI#0142 11/22/2011 OR#1108 CV 27936 20,932.00 11/14/2011 SI#1579 1/2/2011 OR#1420 CV 27951 26,000.00 11/23/2011 IR#1102 12/1/2011 OR# was cut CV 28007 60,000.00 10/11/2011 CI#53081 12/16/2011 R#51268 CV 28015 281.00 11/18/2011 SI#0234 None OR#3456 CV 28049 7,150.00 11/19/2011 OR#0011 CV 28050 9,600.00 None None 12/21/2011 OR#2886 CV 28051 5,710.00 None None 12/21/2011 OR#2886 CV 28051 11,700.00 Various invoices Various invoices online online CV 28103 393.00 10/19/2011 OR 834777 stamped as paid CV 27916 dated 11/10/2011; Work order 102120 with cost estimate; Letter Re: Stolen Secondary Line Replacement Cost dated 11/8/2011 35,704.33 TOTAL P1,427,774.07 f. Direct Consultancy Fee P2,609,819.99 The consultancy fees pertain to payments made to SEMBCORP Utilities Services Ltd. for the offshore consultancy services. Considering that consultancy fee is not among the costs allowed as deduction from gross income earned, the deficiency assessment thereon shall be sustained. B. Disallowed Lease P4,500,000.00 This disallowed lease expense refers to accrual of rental of real and personal property leased out by Olongapo City Water District. As ascertained by the ICPA, out of the total amount of P4,500,000.00 lease expense, the amount of P978,260.87 shall be disallowed for being in excess of the amount agreed upon per Amended Franchise Agreement vis--vis the Original Franchise Agreement. 117 Accordingly, only the amount of P3,521,739.13 shall be allowed as direct cost deductible in the computation of gross income subject to preferential tax rate. C. Disallowed Depreciation on Vehicle P1,597,102.12 The ICPA examined the list of vehicle assets against the vehicle registrations with Land Transportation Office (LTO) and identified the officers accountable for each vehicle. Based on verification and re-computation of depreciation expense, the ICPA confirmed that charges supported by Official Receipts and Certificate of Registration issued by the LTO amounting to P553,173.64 pertain to depreciation of vehicles used by the Water Production Division, Water Laboratory Division, Water Distribution Division, and Sanitary and Engineering Department. 118 While charges in the amount of P105,123.11 pertain to depreciation of vehicle used by the Finance, Commercial Service Division and the Integrated Management Services Department, the remaining amount of P938,805.37 is unsupported and unaccounted. Notwithstanding the above ICPA findings, as enumerated under RR No. 13-2005 and DOF Order No. 3-08 above, only the depreciation pertaining to machinery, equipment and a portion of the building owned or constructed by the registered enterprise shall be allowed as deduction from gross income earned. Consequently, the depreciation on vehicles amounting to P1,597,102.12 shall be disallowed. In view of the foregoing, the Court finds the disallowances made by respondent proper but only to the extent of P6,245,754.85, as computed below: AHCETa Disallowed expenses per FDDA P12,021,426.86 Less: Adjustment/Allowable Other Direct Cost Safety P103,317.00 Other Direct Cost 722,841.81 Repairs and Maintenance 1,427,774.07 Lease Rental P3,521,739.13 5,775,672.01 Disallowed expenses in excess of the amounts allowable pursuant to RR 13-2005 P6,245,754.85 IT-7. Over-claimed Expenses based on matching of AFS vs. TB vs. CV Register P2,273,999.62 BIR's validation of expenses claimed per AFS when traced back to the TB and then to the CV register revealed that there were over-claimed expenses in the AFS. These discrepancies were disallowed for failure to correctly reflect the amount of expense recorded in the books, pursuant to Section 34 of the NIRC of 1997. The details of the discrepancies are enumerated as follows: 119 Account Name Amount per AFS/Auditor's TB 31 December 2011 Adjusted Amount per Books Over-claimed Expenses/Purchases Utilities and Chemical P77,729,428.00 P75,559,921.14 P2,169,506.86 Rent and Utilities 2,106,527.00 2,002,034.24 104,492.76 Total P2,273,999.62 It may be observed that respondent arrived at the alleged over-claimed expenses based on the comparison of the amounts per petitioner's AFS and Trial Balance as against the amounts per CV register, instead of the amount per ITR. As stated in the matrix from FLD to FDDA, 120 the expenses amounting to P2,273,999.62 pertain to expenses not claimed in the computation of GIT subject to 5%. Considering that the same was not even claimed by petitioner as deduction in the ITR for tax purposes, respondent has no basis in disallowing the same as expense. Thus, the deficiency income tax thereon shall be cancelled. ScHADI IT-8. Disallowed expenses/ purchases for being unsupported P300,332.81 Respondent's verification of the invoices and official receipts issued by petitioner's suppliers disclosed that petitioner failed to substantiate with valid source documents some of the purchases as reflected in the CV register. Hence, the said purchases, as listed below, were disallowed pursuant to Section 34 (A) (1) (b) of the NIRC of 1997: 121 CV No. SAP No. Supplier's Name Amount per CV 27793 3423 Cleared, Inc. P5,880.00 27557 3169 DML Subic Freeport Corp. 5,411.00 27648 3275 Glocke Security Systems, Inc. 93,749.34 28068 3846 Infocom 4,900.00 28086 3865 Juanito P. Rellora 10,000.00 27772 3401 Landbank Insurance Brokerage, Inc. 96,592.67 27280 2875 LBC Express, Inc. 60,750.20 27255 2846 Subic Amusement Enterprises, Inc. 11,524.80 26942 2502 Subic Amusement Enterprises, Inc. 11,524.80 Total P300,332.81 Section 34 (A) (1) (b) of the NIRC of 1997, as amended, requires the taxpayer to substantiate deductions by sufficient evidence, to wit: SEC. 34. Deductions from Gross Income . x x x (A) Expenses . (1) Ordinary and Necessary Trade, Business or Professional Expenses . (a) In General . x x x (b) Substantiation Requirements . No deduction from gross income shall be allowed under Subsection (A) hereof unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (i) the amount of the expense being deducted, and (ii) the direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer. Based on the examination of the supporting documents 122 submitted by petitioner, the Court finds that only the amount of P255,992.21 is duly substantiated with sufficient evidence, such as the Statement of Accounts, Billing Invoices, and Bank Validated payment slips, while the remaining amount of P44,340.60 is not properly supported by sufficient evidence, to wit: Vendor Reference No. Other attachments Amount Cleared, Inc. Check No. 392245 Request for payment dated 10/13/11 amounting to P6,000. Signed: requested by, recommended by & approved by; subjected to EWT P5,880.00 Dml Subic Freeport Corp. 392129 Delivery receipts no. 345 dated 7/21/2011, no. 388 dated 8/5/2011, no. 387 dated 8/5/2011, no. 462 dated 8/16/2011 & no. 463 dated 8/16/11 5,411.00 Juanito P. Rellora Check No. 392594 Acceptance certification dated 11/24/2011 10,000.00 Subic Amusement Enterprises, Inc. Check No. 358541 Memo & Request for payment dated 07/06/11 amounting to P11,760. Signed: requested by, recommended by & approved by; BIR 2307 11,524.80 Subic Amusement Enterprises, Inc. Check No. 358312 Memo; BIR 2307 11,524.80 Total P44,340.60 As such, the disallowance by respondent to the extent of P44,340.60 shall be sustained. IT-9. Disallowed Purchases/ Expenses due to failure to withhold P3,991,363.02 Respondent's line by line analysis of the income payments per AFS accounts in comparison with the Alphalist of Annual Information Return of Creditable Income Taxes Withheld (BIR Form No. 1604E) disclosed that there were income payments that were not subjected or failed to be subject in full to EWT, which is in violation of RR No. 2-98, as amended. Hence, the following discrepancies were disallowed due to failure to withhold and remit the corresponding withholding tax pursuant to Section 34 (K) of the NIRC of 1997: 123 Supplier's Name Income Payment EWT Rate EWT Due Samasa Maintenance Services P19,500.00 2% P390.00 Aurora M. Ramos 18,242.81 15% 2,736.42 Avelinda G. Esma 126,369.19 15% 18,955.38 Mariquit C. Sunga 8,399.66 10% 839.97 Subic Bay Freeport Chamber of Commerce 5,000.00 2% 100.00 Fairclough, Graham J 20,000.00 25% 5,000.00 Crizaldy Duka 41,000.00 15% 6,150.00 Efren Amoguis 12,000.00 10% 1,200.00 Jardine Lloyd Thompson Insurance Brokers, Inc. 88,183.79 2% 1,763.68 Jimmy Mamolo 5,000.00 10% 500.00 Juanito P. Rellora 10,000.00 10% 1,000.00 Landbank Insurance Brokerage, Inc. 265,850.35 2% 5,317.01 Oilver Josafat 23,463.38 15% 3,519.51 Pahayagang Pang Masa 5,000.00 2% 100.00 Petron Corporation 2,400.18 1% 24.00 Philippine Institute of Certified Public Accountants 6,000.00 2% 120.00 Philippine Water Works Association, Inc. 6,000.00 2% 120.00 Ricky T. Romano 159,300.00 15% 23,895.00 Ridon's St. Jude Medical Center 500.00 10% 50.00 Small Enterprises Research and Development Foundation, Inc. 9,500.00 2% 190.00 Trade Union Congress of the Philippines Subic District Office 5,000.00 2% 100.00 Zambales II Electric Cooperative, Inc. 3,154,653.66 2% 63,093.07 Total P3,991,363.02 P135,164.03 Based on the examination of the documents presented by petitioner, the ICPA summarized his findings as follows: 124 HSCATc Particulars Amount Income Payments made to ZAMECO II duly registered with NEA P2,750,234.01 Duly Supported expenses subject to EWT 427,151.88 Duly Supported employee's reimbursement of expenses, not subject to EWT 111,226.03 Duly Supported expenses subject to Final Tax 20,000.00 Duly Supported expenses paid to Subic Bay Freeport Zone (SBFZ) enterprise, thus not subject to EWT 24,500.00 No Supporting documents presented for examination 658,251.10 Total P3,991,363.02 As ascertained by the ICPA, out of the alleged payment in the amount of P3,154,653.66 to Zambales II Electric Cooperative, Inc. (ZAMECO), a duly registered electric cooperative with the National Electrification Administration (NEA), 125 only the amount of P2,750,234.01 was duly supported. Relative thereto, Section A (3) of Revenue Memorandum Circular (RMC) No. 72-2003 126 provides that electric cooperatives registered with the National Electrification Administration are exempt from income tax. Cooperatives registered with NEA are governed by the provisions of Presidential Decree No. 269, which expressly grants exemption to cooperatives from income tax under Section 39 (a) (1) thereof, as held in the CTA En Banc case of Commissioner of Internal Revenue vs. Samar-I Electric Cooperative, Inc. , 127 which affirmed the following findings of the Court in Division: x x x since petitioner remained registered with NEA; thus, governed by the provisions of PD 269. This being the case, Section 39 of PD 269 clearly grants tax exemption to electric cooperatives, such as petitioner, from income tax. x x x Thus, petitioner's income payment to ZAMECO, being entitled to income tax exemption, is consequently not subject to 2% EWT. However, considering that the remaining amount of P404,419.65 is unsupported, the Court cannot ascertain whether the same indeed pertains to payment made to ZAMECO, thus, shall be disallowed. Meanwhile, in his Report, the ICPA alleged that the amount of P111,226.03 pertains to employee reimbursements from income payments to non-regular suppliers and/or single purchases, hence, not subject to withholding tax pursuant to Section 3 of RR No. 17-2003. Pursuant to RR No. 2-98, as amended by RR No. 14-2008, the casual purchases amounting to less than P10,000.00 are not subject to EWT, to wit: Sec. 2.57.2. Income payment subject to creditable withholding tax and rates prescribed thereon . Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines. xxx xxx xxx (M) Income payments made by the top twenty thousand (20,000) private corporations to their local/resident supplier of goods and local/resident supplier of services other than those covered by other rates of withholding tax . x x x xxx xxx xxx The term "local/resident suppliers of goods" pertains to a supplier from whom any of the top twenty thousand (20,000) private corporations , as determined by the Commissioner, regularly makes its purchases of goods. As a general rule, this term does not include a casual purchase of goods, that is, purchase made from a non-regular supplier and oftentimes involving a single purchase . However, a single purchase which involves Ten thousand pesos (P10,000.00) or more shall be subject to a withholding tax. The term "regular suppliers" refers to suppliers who are engaged in business or exercise of profession/calling with whom the taxpayer-buyer has transacted at least six (6) transactions, regardless of amount per transaction, either in the previous year or current year. The same rules apply to local/resident supplier of services other than those covered by separate rates of withholding tax. (Emphasis supplied) IDTSEH Furthermore, in the case of First Lepanto Taisho Insurance Corporation vs. Commissioner of Internal Revenue , 128 the Supreme Court ruled that the expenses would not be subject to withholding tax if the same were reimbursements for actual expenses of the company. In a number of rulings, even the BIR held the same. 129 In order for the expenses to be not subject to withholding tax, it must first be established that they are reimbursements of actual expenses. Be that as it may, petitioner fell short of establishing that the income payments are actually casual purchases from non-regular suppliers, as petitioner failed to present as evidence a list of its regular suppliers, required to be submitted every semester to the Large Taxpayers Assistance Division/Large Taxpayers District Office or Revenue District Office (RDO) having jurisdiction over petitioner's principal place of business, pursuant to RR No. 14-2008. Anent the income payments to Fairclough, Graham J. in the amount of P20,000.00, records reveal that petitioner indeed failed to subject the same to withholding tax. Petitioner's subsequent payment of the corresponding deficiency final withholding tax on May 29, 2015 is of no moment, as the same was made only after the issuance of the FDDA that is, beyond "the time of the audit/investigation or reinvestigation/reconsideration," pursuant to Section 2.58.5 of RR No. 2-98, as amended by RR No. 14-2002. 130 Thus, the same shall be disallowed. As to the expenses amounting to P24,500.00, verification disclosed that the same were paid to Samasa Maintenance Services and Subic Bay Freeport Chamber of Commerce in the amounts of P19,500.00 and P5,000.00, respectively. Petitioner, however, failed to present documents to prove that payments to the said entities are exempt from withholding tax, thus, this Court finds no reason to cancel the disallowance of the corresponding expenses. Accordingly, for failure of petitioner to prove that the income payments paid to the following entities/individuals are not subject and/or exempted to EWT, the Court finds the disallowance valid: Supplier's Name Income Payment Samasa Maintenance Services P19,500.00 Aurora M. Ramos 18,242.81 Avelinda G. Esma 126,369.19 Mariquit C. Sunga 8,399.66 Subic Bay Freeport Chamber of Commerce 5,000.00 Fairclough, Graham J. 20,000.00 Crizaldy Duka 41,000.00 Efren Amoguis 12,000.00 Jardine Lloyd Thompson Insurance Brokers, Inc. 88,183.79 Jimmy Mamolo 5,000.00 Juanito P. Rellora 10,000.00 Landbank Insurance Brokerage, Inc. 265,850.35 Oilver Josafat 23,463.38 Pahayagang Pang Masa 5,000.00 Petron Corporation 2,400.18 Philippine Institute of Certified Public Accountants 6,000.00 Philippine Water Works Association, Inc. 6,000.00 Ricky T. Romano 159,300.00 Ridon's St. Jude Medical Center 500.00 Small Enterprises Research and Development Foundation, Inc. 9,500.00 Trade Union Congress of the Philippines Subic District Office 5,000.00 Zambales II Electric Cooperative, Inc. 404,419.65 Total P1,241,129.01 IT-10. Disallowed Salaries Expense due to failure to withhold P5,815,653.33 The BIR's verification disclosed that, after comparing the income payment subject to withholding tax on compensation per Alphalist of Employees against the salaries claimed in the AFS, there were payments which were not subjected to withholding tax, hence, disallowed as mandated under Section 34 (K) 131 of the NIRC of 1997, as amended, viz. : SICDAa Particulars Non-Taxable Taxable Total Salaries PER ALPHALIST Schedule 7.1 13th Month P135,939.23 P18,840.40 De Minimis Benefits 302,307.82 - SSS, PHIC, etc. 66,670.20 - Salaries and Other Form of Comp 3,598,230.51 302,538.41 Basic Salaries - 1,227,103.66 P4,103,147.76 P1,548,482.47 P5,651,630.23 Schedule 7.3 13th Month P1,366,865.96 - De Minimis Benefits 3,202,306.52 - SSS, PHIC, etc. 803,386.19 - Salaries and Other Form of Comp 1,238,304.46 2,590,353.36 Basic Salaries - 14,707,851.93 P6,610,863.13 P17,298,205.29 P23,909,068.42 Schedule 7.4 13th Month P4,726.99 - De Minimis Benefits 10,295.25 - SSS, PHIC, etc. 5,308.40 - Salaries and Other Form of Comp - 43,894.83 Basic Salaries - 102,952.41 20,330.64 146,847.24 167,177.88 Total P10,734,341.53 P18,993,535.00 P29,727,876.53 PER FS/ITR Cost-Compensation & Employee Benefits P27,204,966.00 Salaries, wages and benefits 12,956,396.00 P40,161,362.00 Discrepancy 10,433,485.47 Alphalist for Confidential Payroll 4,617,832.14 Disallowed Salaries Expense due to failure to withhold P5,815,653.33 As ascertained by the ICPA, the composition of salaries and wages per AFS in the amount of P40,161,362.00 132 are as follows: 133 Account Amount Compensation and Employee Benefits per Note 13 of AFS Salaries & Wages P14,692,018.90 Overtime 1,042,499.33 Night Differential 337,565.53 Holiday Pay 244,503.71 13th month pay 1,170,957.14 Benefits 4,809,846.14 Performance & Incentive Bonus 2,259,874.68 Pension Costs 1,511,382.31 SSS, Medicare and HDMF contributions 1,136,318.39 Sub-total P27,204,966.13 Salaries, Wages, and Benefits per Note 14 of AFS Salaries & Wages P5,322,022.45 Overtime 60,468.91 Night Differential 2,157.86 Holiday Pay 1,178.03 13th month pay 537,859.34 Benefits 2,253,637.48 Temporary Staff 262,103.57 Security Services 628,800.77 Uniform 185,293.23 Performance & Incentive Bonus 1,472,661.53 Medical Private 937,392.69 Pension Costs 698,268.89 SSS, Medicare and HDMF contributions 353,124.80 Training 241,426.52 Sub-total P12,956,396.07 Total per AFS/ITR P40,161,362.20 From the foregoing, the amount of P4,569,321.68 pertains to expenses classified under salaries and wages and employee benefits account which are allegedly not subject to withholding tax on compensation, listed as follows: DHIcET Particulars Amount Compensation and Employee Benefits per Note 13 of AFS Employer Contribution on SSS, Medicare and HDMF P1,136,318.39 Pension Costs 1,511,382.31 Salaries, Wages, and Benefits per Note 14 of AFS Employer Contribution on SSS, Medicare and HDMF 353,124.80 Pension Costs 698,268.89 Security services 628,800.77 Training 241,426.52 Total P4,569,321.68 i. Employer Contribution on SSS, Medicare and HDMF contributions P1,136,318.39 and P353,124.80 (P1,489,443.19) The Employer Contributions on SSS, Medicare and HDMF are not considered income payments to employees, thus, shall not form part of the taxable salaries and wages of the employees in computing the withholding tax on compensation. However, of the total amount of P1,489,443.19, only the amount of P1,219,850.50 is duly supported by documents, 134 to wit: Period Covered (2011) SSS PHILHEALTH HDMF TOTAL April P132,743.70 P25,400.00 P13,000.00 P171,143.70 May 130,660.20 25,100.00 12,700.00 168,460.20 June 128,671.40 24,712.50 12,500.00 165,883.90 July 127,717.30 24,675.00 12,400.00 164,792.30 August 127,857.20 24,850.00 12,361.49 165,068.69 September 125,945.20 24,412.50 12,300.00 162,657.70 October 123,714.30 23,937.50 12,100.00 159,751.80 November 126,615.90 25,512.50 12,000.00 164,128.40 December 129,144.00 25,337.50 12,100.00 166,581.50 Adjustment 500.00 375.00 100.00 975.00 Total P1,153,569.20 P224,312.50 P111,561.49 P1,489,443.19 Less: Unsupported Payments April P132,743.70 P132,743.70 September 24,412.50 24,412.50 Adjustment 500.00 375.00 875.00 April to December-HDMF 111,561.49 111,561.49 Total 133,243.70 24,787.50 P111,561.49 P269,592.69 Net Total P1,020,325.50 P199,525.00 P- P1,219,850.50 Hence, the unsupported income payments in the amount of P269,592.69 shall be disallowed. ii. Pension Costs P1,511,382.31 and P698,268.89 (P2,209,651.20) Section 79 (A) of the NIRC of 1997, as amended by RA No. 9504, as implemented by Section 2.79 (A) of RR No. 2-98, as amended by RR No. 10-2008, mandates the withholding of tax on compensation, as follows: SEC. 79. Income Tax Collected at Source . (A) Requirement of Withholding . Except in the case of a minimum wage earner as defined in Section 22(HH) of this Code, every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner. (Emphasis supplied) xxx xxx xxx Sec. 2.79. Income Tax Collected at Source on Compensation Income . (A) Requirement of Withholding . Every employer must withhold from compensation paid an amount computed in accordance with these Regulations. Provided , that no withholding of tax shall be required on the SMW, including holiday pay, overtime pay, night shift differential and hazard pay of MWEs in the private/public sectors as defined in these Regulations. Provided, further , that an employee who receives additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount of P30,000.00, taxable allowances and other taxable income other than the SMW, holiday pay, overtime pay, hazard pay and night shift differential pay shall not enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not exempt from income tax and, consequently, shall be subject to withholding tax. (Emphasis supplied) Clearly, from the foregoing law and regulations, the liability of the employer to withhold tax on its employees' compensation arises upon payment of the compensation and not upon mere accrual thereof. HcDSaT The P2,209,651.20 being assessed by respondent pertains to the accrued pension cost or expense of petitioner for the year 2011. As disclosed under Note 18 of the AFS, 135 petitioner has a funded and defined benefit pension plan covering all of its regular employees. The accrual of pension cost amounting to P2,209,651.20 for the period ended December 31, 2011 was computed based on Actuarial Valuation Report as of March 31, 2011. 136 However, as disclosed also in the same Note 18 of the AFS, the benefits paid out by petitioner during the year amounted to P2,819,752.00. Since the said amount has already been paid, the same should have been subjected to withholding tax. In relation to the foregoing, Section 32 (B) (6) (a) of the NIRC of 1997 provides: SEC. 32. Gross Income . xxx xxx xxx (B) Exclusions from Gross Income . x x x xxx xxx xxx (6) Retirement Benefits, Pensions, Gratuities, etc . (a) Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided , That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement: Provided, further , That the benefits granted under this subparagraph shall be availed of by an official or employee only once. For purposes of this Subsection, the term 'reasonable private benefit plan' means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees. It is noted that retirement benefits under a qualified private benefit plan within the contemplation of the afore-quoted provision of law shall not be included in gross income and shall be exempt from income tax and consequently from the withholding tax prescribed in Section 79 (A) of the NIRC of 1997, as amended. However, under Section 2.78.1 (B) (1) (a) of RR No. 2-98, in relation to Section 32 (B) (6) (a) of the NIRC of 1997, in order to avail of the exemption with respect to retirement benefits, the following requirements must be met: a) the plan must be reasonable; b) the benefit plan must be approved by the Bureau; c) the retiring official or employee must have been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of retirement; and d) the retiring official or employee should not have previously availed of the privilege under the retirement benefit plan of the same or another employer. In the present case, there is no showing that petitioner secured the BIR approval of its retirement benefit plan. Consequently, all contributions or accruals pertaining to its retirement benefit plan shall not be excluded from taxable income but rather be subject to tax. Accordingly, the Court finds that the assessment must be sustained, but only as much as the amount of P1,511,382.31 137 which petitioner declared as deductible expense per ITR. ASTcaE iii. Security services P628,800.77 As indicated in the ICPA Report, 138 the security services pertain to payments to Glocke Security Systems, Inc. for the reimbursement of salaries of security guards and agency fees. These security guards are not employees of petitioner, thus, their salaries are not subject to withholding tax on compensation. Sections IV and V of RMC No. 39-07 dated January 22, 2007 clarify the tax treatment of the salaries of security guards which form part of the contract price of the security services rendered by a security agency, to wit: SUBJECT: Clarifying the Income Tax and VAT Treatment of Agency Fees/Gross Receipts of Security Agencies Including the Withholding of Taxes Due thereon. xxx xxx xxx IV. MANNER OF ISSUING RECEIPT FOR THE ENTIRE CONTRACT PRICE. xxx xxx xxx With respect to the security guards' salaries which are mandated by law to be paid by the Client through the Security Agency, the amount so paid representing salaries must be covered by a Non-VAT Acknowledgement Receipt. This document, coupled with the notarized certification of the expanded withholding taxes prescribed in Paragraph V hereunder, shall be a sufficient substantiation for the expense that will be claimed as a deduction from gross income by the Client. V. WITHHOLDING TAX COMPLIANCE. xxx xxx xxx Insofar as the Agency Fee is concerned, the Client is constituted as the withholding agent of the EWT following the rule above-mentioned. However, with respect to the portion of the Contract Price representing the amount segregated and earmarked as salaries of the security guards, the Security Agency shall be the one responsible for the withholding of the tax on compensation income . This is so because while it is the Client who claims the payment as an expense, it is the Security Agency who physically controls the payment to the salaries of the Security Guards. However, in order to comply with the requirement for deductibility under Section 34 (K), in relation to Section 58 and 81, all of the National Internal Revenue Code, as amended, the Security Agency must furnish its Client, on or before January 31 of the year following the year of withholding, a Notarized Certification (see Annex "A") indicating the names of the guards employed by the Client, their respective TINs, the amount of their salaries and the amount of tax withheld from each. This certification together with the covering Non-VAT-acknowledgment Receipt must be kept on file by the Client as substantiation for the claim of the expense . (Emphasis supplied) Pursuant to the foregoing provisions of RMC No. 39-07, petitioner is mandated to withhold and remit EWT only on the agency fee, not on the salaries paid to the security guards, as it is the security agency which shall be responsible for the withholding of the tax on compensation income of the said security guards. However, in order that the salaries may be claimed as deductible expense by petitioner, the same must be supported by a non-VAT acknowledgement receipt and a notarized certification issued by the security agency indicating the names of the guards employed by petitioner, their respective TINs, the amount of their salaries and the amount of tax withheld from each one. cDSAEI Based on the examination of the supporting documents, the ICPA noted the following findings: Particulars Amount Supported by Accounts Payable (AP) Invoice for Approval, Sales Invoices, Official Receipts and Acknowledgement Receipt P558,287.47 No Supporting Documents presented for examination 65,513.30 Supported by Journal Voucher (JV) only 5,000.00 Total P628,800.77 While petitioner submitted the AP Invoice for Approval, Sales and Billing Invoices, Acknowledgement and Official Receipts, as well as the Billing Summary, 139 purportedly supporting the amount of P558,287.47, the Court finds the same insufficient to warrant the cancellation of the assessment, as petitioner failed to provide the Court with the breakdown of such payment; and petitioner failed to present before the Court the notarized certification issued by the security agency, indicating the names of the guards employed by petitioner, their respective TINs, the amount of their salaries and the amount of tax withheld from each one, as required by RMC No. 39-07. Verily, the security services amounting to P628,800.77 remain unsupported. Nevertheless, for income tax purposes, the Court finds that respondent has no basis in disallowing the same considering that it was not even claimed as deductible expense by petitioner in its ITR. Thus, the deficiency income tax thereon shall be cancelled. iv. Training P241,426.52 Based on the ICPA report, the training expenses pertain to payments for training and seminars attended by petitioner's employees. Hence, these are not salaries subject to withholding taxes. Particulars Amount Supported by AP Invoice for Approval and Official Receipts P108,804.85 No Supporting Documents presented for examination 134,696.67 Supported by JV for the reversal of entry re: return of CA due to cancellation of training (2,075.00) Total P241,426.52 Upon further verification, this Court finds that only the amount of P101,541.22, as shown below, is duly supported by sufficient pieces of evidence proving that the same is not subject to withholding tax on compensation: Name of the Payee/s Nature Exhibit No. OR Date OR No. Other Attachments Amount UP Natural Sciences Research Institute Training Fee AAA-8.57 4/28/2011 2303584 Check #358175 dated 4/18/2011; AP Invoice for approval dated 4/28/2011 P10,000.00 Philippine Red Cross Olongapo Chapter Training Fee AAA-8.58 5/13/2011 938134 Check #358216 dated 4/28/2011 10,200.00 Cleared, Inc. Seminar AAA-8.59 5/26/2011 38301 Check #358337 dated 5/25/2011; AP Invoice for approval dated 12/13/2011 5,000.00 Neville Clarke Phils., Inc. Training Fee AAA-8.61 12/13/2011 20597 AP Invoice for approval dated 12/13/2011 9,000.00 Environmental Counselors, Inc. Training Fee AAA-8.62 6/28/2011 1917 Check #358448 dated 6/20/2011; AP Invoice for approval dated 6/28/2011 6,900.00 Training Edge, Inc. Seminar AAA-8.63 6/30/2011 756 Check #358494 dated 6/28/2011; AP Invoice for approval dated 6/30/2011 28,061.22 Cleared, Inc. Seminar-Workshop AAA-8.64 9/14/2011 38609 Check #392085 dated 9/8/2011; AP Invoice for approval dated 9/14/2011 6,000.00 Punongbayan and Araullo Seminar AAA-8.65 9/7/2011 125233 Check #392063 dated 9/2/2011 7,500.00 Trust International Paper Corporation Training Fee AAA-8.66 11/17/2011 65480 Check #392239 dated 10/14/2011; AP Invoice for approval dated 11/15/2011 4,000.00 Kairos Management Technologies Seminar/ Training AAA-8.67 10/20/2011 3271 Check #392256 dated 11/20/2011 7,500.00 European Innovation, Technology and Science Center Foundation Training Fee AAA-8.68 11/21/2011 115 Check #392475 dated 11/15/2011; AP Invoice for approval dated 11/21/2011; Request for Payment 7,380.00 Total P101,541.22 Therefore, only the amount of P101,541.22 shall be allowed as deduction from gross income, while the remaining amount of P139,885.30 shall be disallowed. Nevertheless, for income tax purposes, this Court finds that respondent has no basis in disallowing the same considering that it was not even claimed as deductible expense by petitioner in its ITR. Thus, the deficiency income tax thereon shall be cancelled. In sum, the total salaries and wages that should be disallowed due to failure to withhold amount to P3,027,306.65, computed as follows: SSS, Medicare and HDMF Contributions P269,592.69 Pension Cost 1,511,382.31 Unaccounted Difference 1,246,331.65 Total Disallowed Salaries and Wages P3,027,306.65 IT-11. Unsupported Creditable Withholding Tax P25,626.72 Petitioner claimed in its Annual ITR, creditable withholding taxes (CWT) in the amount of P43,229.12. However, upon vouching of the Certificates of Taxes Withheld (BIR Form No. 2307), the BIR found that the CWT claimed amounting to P25,626.72 was unsupported with actual CWT returns, thus, disallowed as tax credit pursuant to Section 2.58.3 (B) of RR No. 2-98, as amended. 140 Recon on CWT Certificates Claimed per ITR P43,229.12 Per Actual Certificates 17,602.40 Unsupported CWT P25,626.72 Records show that petitioner did not present before the Court the certificates supporting the discrepancy noted by the BIR, hence, this part of assessment shall remain. In summary, petitioner is liable to pay the deficiency income tax subject to special rate of 5% and regular rate of 30% in the amounts of P248,049.62 and P7,177,820.67, respectively, re-computed as follows: cDCEIA Income subject to income tax per return Special Rate (5%) Regular Rate (30%) P202,581,077.00 Add: Adjustments per audit IT-1 Undeclared Income due to discrepancy on Other Income-Credits per GL vs. AFS/ITR A. Sale of Scrap Materials (2,240,000.00) P2,240,000.00 B. Sale to NRFC (654,574.32) 654,574.32 C. Proceeds from Retirement Insurance (3,215,500.00) 3,215,500.00 IT-5 Construction Revenue not subjected to Income Tax 17,815,994.58 IT-6 Disallowed expenses in excess of the amounts allowable pursuant to RR 13-2005 6,245,754.85 IT-8 Disallowed expenses/purchases for being unsupported 44,340.60 IT-9 Disallowed Purchases/Expenses due to failure to withhold 1,241,129.01 IT-10 Disallowed Salaries Expense due to failure to withhold 3,027,306.65 Total Taxable Income per Audit P207,029,533.79 P23,926,068.90 Income Tax Rate 5% 30% Total Income Tax Due P10,351,476.69 P7,177,820.67 Less: Allowable Credits/Payments Payments (3% to National) P6,034,202.73 Payments (2% to SBMA) 141 4,051,621.94 Creditable Withholding tax claimed per ITR 43,229.12 Less: IT 11 Unsupported Creditable Withholding Tax (25,626.72) 10,103,427.07 Basic Deficiency Income Tax P248,049.62 P7,177,820.67 However, in light of the payment made by petitioner on May 29, 2015, the said payment shall accordingly be deducted from petitioner's total deficiency income tax. Consequently, the basic deficiency income tax subject to special rate of 5% shall be cancelled, based on the following computation: ISHaCD Deficiency Income Tax Less: Payment on May 29, 2015 142 Remaining Balance Basic Deficiency Income Tax at Special Rate (5%) P248,049.62 P1,267,105.64 P(1,019,056.02) Surcharge (25%) 62,012.41 62,012.41 Deficiency Interest (20%) from April 16, 2012 to May 20, 2015 (P248,049.62 x 20% x 1,130 days/365 days) 153,586.89 790,812.78 (637,225.89) Total Amount Due, May 20, 2015 P463,648.92 Deficiency Interest (20%) from May 21, 2015 until payment on May 29, 2015 (P248,049.62 x 20% x 9 days/365 days) 1,223.26 1,223.26 Compromise Penalty 50,000.00 (50,000.00) Total Amount Due, May 29, 2015 P464,872.18 P2,107,918.42 P(1,643,046.24) On the other hand, petitioner shall still be liable to pay the deficiency income tax subject to 30%, the details of which shall be reflected in the dispositive portion. II. Value-Added Tax (VAT) P81,943,121.59 Respondent assessed petitioner of deficiency VAT amounting to P81,943,121.59, computed as follows: Total Collection per Books/Sales per ITR P355,085,514.00 Less: Collection from Services Rendered within Subic Bay Freeport (Excl. Domestic) 97,220,968.56 Vatable Collection/Sales (Services Rendered outside Subic Bay Freeport) 257,864,545.44 Add: Adjustments per Audit Discrepancies VT-1 Undeclared Income due to discrepancy on Other Income Credits per GL vs. FS/ITR P7,662,613.62 VT-3 Undeclared Income due to unaccounted expenses/purchases based on tracing of CV Register to TB to AFS 7,326,148.13 VT-4 Undeclared Income due to unaccounted expenses/purchases based on vouching of Check Vouchers 332,659.38 VT-5 Construction Revenue not subjected to Income Tax 41,714,427.00 VT-5.1 No supporting documents presented for examination Total Adjustments per Audit 57,035,848.13 Total Vatable Sales per Audit 314,900,393.57 Multiplied by VAT Rate 12% BASIC DEFICIENCY VALUE-ADDED TAX P37,788,047.23 Add: Penalties 50% Surcharge 18,894,023.61 Interest on Basic Deficiency Tax until 05/29/2015 P25,261,050.75 Compromise Penalty - 44,155,074.36 DEFICIENCY VALUE-ADDED TAX PAYABLE P81,943,121.59 Perforce, the deficiency VAT assessment arose from the following: Vatable Collection/Sales (Services Rendered outside Subic Bay Freeport) P257,864,545.44 VT-1 Undeclared Income due to discrepancy on Other Income Credits per GL vs. FS/ITR 7,662,613.62 VT-3 Undeclared Income due to unaccounted expenses/purchases based on tracing of CV Register to TB to AFS 7,326,148.13 VT-4 Undeclared Income due to unaccounted expenses/purchases based on vouching of Check Vouchers 332,659.38 VT-5 Construction Revenue not subjected to Income Tax P41,714,427.00 The above-listed VAT issues (VT-1, VT-3, VT-4, and VT-5) are related to the under-declaration of income as discussed under item "I. Income Tax (IT)." The alleged under-declared income was subjected by respondent to VAT pursuant to Section 108 of the NIRC of 1997. VATable Collection/Sales (Services Rendered outside Subic Bay Freeport) P257,864,545.44 Per FDDA, the amount of P257,864,545.44 represents petitioner's income derived from Olongapo City which respondent treated as outside the Subic Bay Freeport Zone. Consequently, respondent treated the same as income from within the Customs Territory, thus, subject to VAT. cDTACE Based on records, 143 the amount of P257,864,545.44 pertains to the following sales of petitioner: A. City Domestic P189,641,808.46 Industrial/Commercial 39,306,226.31 Institutional 11,114,798.82 Shipping 213,428.38 Total P240,276,261.97 B. Freeport Domestic 17,588,782.97 Sub-total P17,588,782.97 Total P257,865,044.94 144 As discussed earlier, petitioner's income generated from Olongapo City is considered income generated within the Subic Special Economic Zone, for purposes of determining whether petitioner's income generated from sources outside the Subic Special Economic Zone or within the Customs Territory exceeded the 30% threshold. Consequently, the VAT assessment pertaining thereto shall be cancelled. VT-1 Undeclared income due to discrepancy on Other Income-Credits per GL vs. per AFS/ITR P7,662,613.62 This assessment was based on the same finding under the deficiency income tax assessment (IT-1) pertaining to the following items: Classification Amounts A. Sale of Scrap Materials P2,240,000.00 B. Sale to Non-Resident Foreign Corporation (NRFC) 654,574.32 C. Proceeds from Retirement Insurance 3,215,500.00 D. To amortize deferred credits based on a straight line-IFRIC 12 adjustment 1,552,539.30 Total Credits per GL P7,662,613.62 As previously discussed, petitioner had undeclared income pertaining to items A, B and C with a total amount of P6,110,074.32, to wit: Particulars Amount A. Sale of Scrap Materials P2,240,000.00 B. Sale to Non-Resident Foreign Corporation (NRFC) 654,574.32 C. Proceeds from Retirement Insurance 3,215,500.00 Total Undeclared Income P6,110,074.32 Consequently, the same shall be subject to VAT. VT-3 Undeclared income due to unaccounted expenses/purchases based on tracing of CV register to TB to AFS P7,326,148.13 VT-4 Undeclared income due to unaccounted expenses/purchases based on vouching of Check Vouchers P332,659.38 As discussed under IT-3 and IT-4, the assessment lacks factual basis because it was based on a mere presumption that since there were alleged unaccounted expenses, there must be a corresponding undeclared income. Even if these alleged unaccounted expenses are to be considered as income subject to output VAT, the same will be offset by treating the equivalent payments as purchases for which input tax credits may be claimed. Hence, no VATable income will result from the said transactions. Accordingly, the deficiency VAT assessment on these items shall be cancelled. cCHITA VT-5 Construction Revenue P41,714,427.00 As discussed under IT-5 (Construction Revenue not subjected to Income Tax P41,714,427.00), petitioner shall be liable for deficiency VAT on the unsupported construction cost resulting in undeclared construction revenue in the amount of P17,815,994.58. In sum, the Court finds that the basic deficiency VAT must be reduced to P2,871,128.27: VT-1 Undeclared Income due to discrepancy on Other Income-Credits per GL vs. AFS/ITR P6,110,074.32 VT-5 Construction Revenue not subjected to Income Tax 17,815,994.58 Total Undeclared Income subject to VAT 23,926,068.90 Multiplied by VAT Rate 12% BASIC DEFICIENCY VALUE-ADDED TAX P2,871,128.27 III. Withholding Tax on Compensation (WTC) P19,570,788.25 As stated in the FDDA, respondent's verification disclosed that petitioner failed to pay the corresponding withholding tax on compensation/salaries expense claimed in the audited FS, pursuant to Section 80 (A) of the NIRC of 1997, in the amount of P1,570,788.25, computed as follows: Salaries/Compensation Expense Per FS P40,161,362.00 Per Alphalist 34,345,708.67 Salaries/Compensation Expense subject to W/Tax P5,815,653.33 Tax Rate 12.4241% Basic Deficiency Tax P722,542.80 Add: Increments 50% Surcharge P361,271.40 Interest-Until 05/29/2015 486,974.05 Compromise Penalty 848,245.45 Deficiency Withholding Tax on Compensation P1,570,788.24 As earlier discussed under "I. Income Tax (IT)" (item IT-10) , the Court finds that the total salaries and wages not subjected to withholding amount to P4,494,261.61, computed below: SSS, Medicare and HDMF Contributions P269,592.69 Pension Cost 2,209,651.20 Security Services 628,800.77 Training 139,885.30 Unaccounted Difference 1,246,331.65 Total Salaries and Wages not subjected to WT P4,494,261.61 Accordingly, the corresponding basic deficiency withholding tax on compensation shall be upheld but in the reduced amount of P558,371.56, computed as follows: Salaries and Wages not subjected to withholding tax P4,494,261.61 Tax Rate 12.4241% Basic Deficiency Withholding Tax on Compensation P558,371.56 However, in light of the full payment by petitioner of the deficiency withholding taxes on compensation in the total amount of P1,570,788.25, including interest and surcharges 145 on May 29, 2015, the same shall be cancelled. IV. Expanded Withholding Tax (EWT) P294,213.22 Respondent assessed petitioner of deficiency expanded withholding tax in the amount of P294,213.22, pursuant to RR No. 2-98, as amended, detailed as follows: Supplier's Name Income Payment EWT Rate EWT Due Samasa Maintenance Services P19,500.00 2% P390.00 Aurora M. Ramos 18,242.81 15% 2,736.42 Avelinda G. Esma 126,369.19 15% 18,955.38 Mariquit C. Sunga 8,399.66 10% 839.97 Subic Bay Freeport Chamber of Commerce 5,000.00 2% 100.00 Fairclough, Graham J 20,000.00 25% 5,000.00 Crizaldy Duka 41,000.00 15% 6,150.00 Efren Amoguis 12,000.00 10% 1,200.00 Jardine Lloyd Thompson Insurance Brokers, Inc. 88,183.79 2% 1,763.68 Jimmy Mamolo 5,000.00 10% 500.00 Juanito P. Rellora 10,000.00 10% 1,000.00 Landbank Insurance Brokerage, Inc. 265,850.35 2% 5,317.01 Oilver Josafat 23,463.38 15% 3,519.51 Pahayagang Pang Masa 5,000.00 2% 100.00 Petron Corporation 2,400.18 1% 24.00 Philippine Institute of Certified Public Accountants 6,000.00 2% 120.00 Philippine Water Works Association, Inc. 6,000.00 2% 120.00 Ricky T. Romano 159,300.00 15% 23,895.00 Ridon's St. Jude Medical Center 500.00 10% 50.00 Small Enterprises Research and Development Foundation, Inc. 9,500.00 2% 190.00 Trade Union Congress of the Philippines Subic District Office 5,000.00 2% 100.00 Zambales II Electric Cooperative, Inc. 3,154,653.66 2% 63,093.07 Total P3,991,363.02 P135,164.03 Add: Surcharge 67,582.02 Interest 91,467.17 Total Deficiency Expanded Withholding Tax P294,213.22 As earlier discussed under "I. Income Tax (IT)" (item IT-9) , petitioner failed to prove that the income payments amounting P1,241,129.01 are not subject and/or exempted to EWT. Accordingly, petitioner shall be held liable for the corresponding basic deficiency EWT, in the amount of P75,159.35 (for income payments amounting to P1,221,129.01), 146 as detailed below: TaDCEc Supplier's Name Income Payment EWT Rate EWT Due Samasa Maintenance Services P19,500.00 2% P390.00 Aurora M. Ramos 18,242.81 15% 2,736.42 Avelinda G. Esma 126,369.19 15% 18,955.38 Mariquit C. Sunga 8,399.66 10% 839.97 Subic Bay Freeport Chamber of Commerce 5,000.00 2% 100.00 Crizaldy Duka 41,000.00 15% 6,150.00 Efren Amoguis 12,000.00 10% 1,200.00 Jardine Lloyd Thompson Insurance Brokers, Inc. 88,183.79 2% 1,763.68 Jimmy Mamolo 5,000.00 10% 500.00 Juanito P. Rellora 10,000.00 10% 1,000.00 Landbank Insurance Brokerage, Inc. 265,850.35 2% 5,317.01 Oilver Josafat 23,463.38 15% 3,519.51 Pahayagang Pang Masa 5,000.00 2% 100.00 Petron Corporation 2,400.18 1% 24.00 Philippine Institute of Certified Public Accountants 6,000.00 2% 120.00 Philippine Water Works Association, Inc. 6,000.00 2% 120.00 Ricky T. Romano 159,300.00 15% 23,895.00 Ridon's St. Jude Medical Center 500.00 10% 50.00 Small Enterprises Research and Development Foundation, Inc. 9,500.00 2% 190.00 Trade Union Congress of the Philippines Subic District Office 5,000.00 2% 100.00 Zambales II Electric Cooperative, Inc. 404,419.65 2% 8,088.39 Total Deficiency Expanded Withholding Tax P1,221,129.01 P75,159.35 However, in light of the full payment by petitioner of the deficiency expanded withholding taxes in the total amount of P294,213.22, including interest and surcharges 147 on May 29, 2015, the same shall be cancelled. V. Final Withholding VAT (FWVAT) P20,722,434.59 Respondent's verification disclosed that petitioner failed to withhold on the following income payments to NRFC and Non-Resident Alien for services rendered within the Philippines, in violation of Section 4.114-2 (b) (3) of RR No. 16-2005 and Section 7 of RR No. 14-2002: 148 aHSTID Payments Made To CV Register A. Sembcorp Utilities Services Ltd. P9,061,009.91 B. Cascal Services Ltd. 55,793,327.40 C. Sembcorp Utilities (Netherlands) NV 14,781,717.60 D. Fairclough, Graham J 180,000.00 Total P79,816,054.91 Thus, respondent assessed petitioner of the corresponding deficiency FWVAT in the amount of P20,722,434.59, computed as follows: 149 Income Payments to NRFC P79,816,054.91 FWVAT 9,577,926.59 Add: Increments 50% Surcharge 4,788,963.29 Interest until 05/15/2015 6,355,544.71 Total Deficiency Final Withholding VAT P20,722,434.59 A. Payments made to Sembcorp Utilities Services Ltd. P9,061,009.91 According to petitioner, the payments made to SEMBCORP Utilities Services Ltd. (SEMBCORP) in the amount of P9,061,009.91 refer to specialized financial and engineering services and offshore support in relation to petitioner's operational and management responsibilities under its Franchise Agreement with SBMA. Petitioner founded its claim on the provision under RMC 50-2007 which states that the Philippine VAT Law adheres to the "cross border doctrine" of the VAT system, which basically means that no VAT shall be imposed to form part of the cost of goods destined for consumption outside the territorial border of the Philippine taxing authority. As such, the income payments to SEMBCORP for services rendered outside the Philippine tax jurisdiction should not be subjected to final withholding VAT. This Court finds merit in petitioner's claim. It bears stressing that the VAT imposed under Section 108 of the NIRC of 1997, as amended, applies only to services performed in the Philippines and not to services rendered outside the Philippines. According to the Destination Principle, goods and services are taxed only in the country where these are consumed. 150 In connection with the said principle, the "Cross Border Doctrine" mandates that no VAT shall be imposed to form part of the cost of the goods destined for consumption outside the territorial border of the taxing authority. 151 Relative thereto, pursuant to Sections 12 and 15 of RA No. 7227, as amended by RA No. 9400, Subic Bay Freeport (SBF), operating within the Subic Special Economic and Freeport Zone (SSEFZ), is operated and managed as separate custom territory and as such, by legal fiction, is regarded as foreign territory. As held by the Supreme Court, this legal fiction is necessary to give meaningful effect to the policies of the special law creating the said freeport zone. 152 Further, in the case of Coconut Oil Refiners Association, Inc., et al. vs. Hon. Ruben Torres, et al. , 153 the Supreme Court quoted the Senate discussion of the concept of "special economic zone," to wit: CDHaET The records of the Senate containing the discussion of the concept of "special economic zone" in Section 12 (a) of Republic Act No. 7227 show the legislative intent that consumer goods entering the SSEZ which satisfy the needs of the zone and are consumed there are not subject to duties and taxes in accordance with Philippine laws, thus: xxx xxx xxx Senator Enrile. For as long as the goods remain within the zone, whether we call it an economic zone or a free port, for as long as we say in this law that all goods entering this particular territory will be duty-free and tax-free, for as long as they remain there, consumed there or reexported or destroyed in that place, then they are not subject to the duties and taxes in accordance with the laws of the Philippines? Senator Guingona. Yes . Simply put, the services rendered by SEMBCORP within the SSEFZ shall be regarded as services outside the custom territory. As such, the same is beyond the taxing jurisdiction of the Philippine taxing authority or the BIR. In support of the said payment amounting to P9,061,009.91, petitioner submitted in evidence the invoices issued by SEMBCORP as well as its Application to Purchase Foreign Exchange and the Telegraphic Transfer 154 of its payment. Upon verification, the Court finds that, indeed, petitioner's payment for services rendered by SEMBCORP were performed outside the custom territory, thus, not subject to FWVAT. B. Payments made to Cascal Services Ltd. P55,793,327.40 C. Payments made to Sembcorp Utilities (Netherlands) NV P14,781,717.60 According to petitioner, the payments made to CASCAL Services Ltd. in the amount of P55,793,327.40 and SEMBCORP Utilities (Netherland) NV in the amount of P14,781,717.60 pertain to payment of cash dividends. Petitioner asserts that these payments of cash dividends are not subject to 12% Final Withholding VAT. This Court agrees with petitioner. As indicated in its Secretary's Certificates dated June 17, 2011 155 and December 8, 2011, 156 petitioner resolved to declare and distribute cash dividends to its stockholders. Such cash dividends are not subject to 12% Final Withholding VAT. Foremost, VAT is a form of sales tax. It is a tax on consumption levied on the sale, barter, exchange or lease of goods or properties and services in the Philippines and on importation of goods into the Philippines. Accordingly, attention should be drawn to the statutory definition of what constitutes "dividends." Pursuant to Section 73 (A) of the NIRC of 1997, as amended, "[t]he term 'dividends' x x x means any distribution made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders, whether in money or in other property." Based on the foregoing, the amounts distributed by petitioner among its stockholders are outside the scope of VAT as they do not represent consideration for any sale, barter, exchange or lease of goods or properties and services, but rather, as payment out of its earnings or profit. Consequently, the FWVAT assessment pertaining thereto shall be cancelled. D. Payments made to Fairclough, Graham J P180,000.00 According to petitioner, the payments to Fairclough, Graham J, pertain to payment of per diem for attending board meeting with SWSCI. 157 These payments are not subject to 12% Final Withholding VAT consistent with the "cross border doctrine." Again, this Court agrees. As earlier discussed, petitioner is registered with the Subic Bay Freeport operating within the Subic Special Economic and Freeport Zone, which is operated and managed as separate custom territory and as such, by legal fiction, is regarded as foreign territory. Considering that it is beyond the taxing jurisdiction of the Philippine taxing authority or the BIR, the management fees for services rendered by Fairclough, Graham J outside the custom territory cannot be imposed with FWVAT. VI. Final Withholding Tax (FWT) P5,272,021.41 Respondent's verification disclosed that petitioner had income payments to NRFC and Non-Resident Alien, which petitioner failed to subject to final withholding tax pursuant to Section 28 (B) and Section 25 (B) of the NIRC of 1997 and RR No. 2-1998, as amended, to wit: Payments Made To CV Register Final Tax Base Discrepancy Rate FWT Due Sembcorp Utilities Services Ltd. P9,061,009.91 - P9,061,009.91 0.30 P2,718,302.97 Cascal Services Ltd. 55,793,327.40 P55,793,327.40 - - Sembcorp Utilities (Netherlands) NV 14,781,717.60 14,781,717.60 - - Fairclough, Graham J 180,000.00 160,000.00 20,000.00 0.25 5,000.00 Total P2,723,302.97 Add: Increments 25% Surcharge 680,825.74 Interest until 5/29/2015 1,842,892.70 Compromise Penalty 25,000.00 Deficiency Final tax P5,272,021.41 A. Payments made to Sembcorp Utilities Services Ltd. P9,061,009.91 As mentioned earlier, petitioner avers that the payments made to SEMBCORP Utilities Services Ltd. in the amount of P9,061,009.91 refer to specialized financial and engineering services and offshore support services in relation to petitioner's operational and management responsibilities under its Franchise Agreement with SBMA. EDCTIa Petitioner is of the view that payments made to this entity are not subject to Philippine tax pursuant to the Republic of the Philippines-United Kingdom (RP-UK) Tax Treaty. According to petitioner, SEMBCORP is a UK tax resident and has no permanent establishment in the Philippines. Consequently, its income is not subject to final tax. This Court rules otherwise. Article 7 (1) of the Convention Between the Government of the Republic of the Philippines and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains (RP-UK Tax Treaty) provides that profits derived by an enterprise of the United Kingdom (UK) may be taxed in the Philippines if the profits are attributable to a permanent establishment of the enterprise situated in the Philippines, to wit: ARTICLE 7 Business Profits 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein . If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment. (Emphasis supplied) Relative thereto, Article 5 of the RP-UK Tax Treaty defines a permanent establishment as follows: ARTICLE 5 Permanent Establishment 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business in which the business of the enterprise is wholly and partly carried on. 2. The term "permanent establishment" shall include especially; (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, oil well, quarry or other place of extraction of natural resources; (g) an installation or structure used for the exploration of natural resources; (h) a building site or construction or assembly project which exists for more than 183 days. 3. An enterprise of a Contracting State shall likewise be deemed to have a permanent establishment in the other Contracting State if: (a) it carries on supervisory activities within that other Contracting States for more than 183 days in connection with a building site, or a construction or assembly project which is being undertaken, in that other Contracting State; or (b) it furnishes services, including consultancy services, in that other Contracting State through its employees or other personnel (other than agents of an independent status within the meaning of paragraph (7) of this Article) for a period exceeding in the aggregate 183 days within any twelve-month period . (Emphasis supplied) In the Management Services Agreement 158 dated March 27, 2006 executed between petitioner and Cascal Services Limited (CSL), CSL agreed to provide Specialized Financial and Engineering Services and Offshore Support Services in connection with petitioner's operational and management responsibilities under the Franchise Agreement. Based on the Certificate of Incorporation on Change of Name 159 dated November 8, 2010, Cascal Services Limited changed its name to SEMBCORP Utilities Services Limited. However, the Court noted that petitioner did not present in evidence any certification issued by the taxing authority of the UK stating that SEMBCORP Utilities Services Ltd. is a resident of such country for purposes of the tax treaty being invoked as proof of its residency. Likewise, the Articles of Incorporation (or its equivalent) of SEMBCORP Utilities Services Ltd. was not presented in evidence. To prove that CSL/SEMBCORP Utilities Services Ltd. has no branch or is not registered to engage in business in the Philippines, petitioner presented the Securities and Exchange Commission (SEC) Certificate of Withdrawal of License of a Foreign Corporation of Cascal Services Limited 160 dated May 31, 2011 and SEC Certification of Non-Registration of Company 161 of SEMBCORP Utilities Services Ltd. Nonetheless, under Article 5 of the RP-UK Tax Treaty quoted earlier, a permanent establishment is not limited to having a branch or office in the Philippines. It also includes the furnishing of services, including consultancy services, in the Philippines by an enterprise of the UK (through employees or other personnel thereof) for a period exceeding an aggregate of 183 days within any twelve-month period. In this case, petitioner's witness, Ms. Edna Canlas, testified as follows: 159. Q: You also mentioned Respondent erroneously found SWSCI liable for Final Income Tax. What is your basis? ScaCEH A: The amount assessed pertained to payments of consultancy services to Sembcorp Utilities Services, Ltd. (formerly Cascal Services Limited), a tax resident of United Kingdom. The consultancy services were rendered by Sembcorp Utilities Services, Ltd. abroad and its representative only came to the Philippines for the purpose of attending board meetings of SWSCI, which did not exceed forty (40) days within any twelve (12)-month period . Hence, the foregoing payment is exempt from Philippine income tax pursuant to Article (VII)(1) of the Republic of the Philippines United Kingdom Tax Treaty. It has no permanent establishment in the Philippines. On 8 February 2010, SWSCI, through its counsel, filed a tax treaty relief application ("TTRA") with the International Tax Affairs Division ("ITAD") of the BIR requesting for confirmation that fees paid to Cascal Services Limited (now Sembcorp Utilities Services, Ltd.), is exempt from Philippine taxes. 162 (Emphasis supplied) However, aside from the above testimony, petitioner did not present any evidence to substantiate such claim, such as the passport of the employees concerned showing the dates of arrival in and departure from the Philippines. From the foregoing, there is no sufficient evidence to prove that SEMBCORP Utilities Services Ltd. is a non-resident foreign corporation which is a tax resident of the UK and that it has no permanent establishment in the Philippines. Consequently, the assessment pertaining thereto shall be upheld. B. Payments made to Fairclough, Graham J P20,000.00 Records show that as member of the Board, Fairclough, Graham J received per diem from petitioner in the amount of P180,000.00. 163 However, only the amount of P160,000.00 was subjected to FWT. As a consequence, the discrepancy of P20,000.00 shall be subject to deficiency FWT. To recapitulate, the deficiency FWT assessment issued by respondent is upheld. Accordingly, petitioner shall be liable to pay the amount of P2,723,302.97, as computed below: Payments Made To Tax Base Tax Rate Final Withholding Tax Due Sembcorp Utilities Services Ltd. P9,061,009.91 30% P2,718,302.97 Fairclough, Graham J P20,000.00 25% 5,000.00 Total Deficiency Final Withholding Tax P2,723,302.97 This Court also notes that petitioner filed and paid on May 29, 2015 via eFPS the Final Tax amounting to P34,370.55 including interest, surcharge and compromise penalties per BIR Tax Payment Details Acknowledgement No. ELY05292015000951042 on income payment made to Fairclough, Graham J. amounting to P20,000.00. 164 Accordingly, the same shall be deducted from petitioner's total deficiency FWT due (to be reflected in the dispositive portion). VII. Compromise Penalties P75,000.00 Respondent imposed compromise penalty in the total amount of P75,000.00 against petitioner for its failure to file and/or pay an internal revenue tax at the time or times required by law or regulation pursuant to Section 255 of the Tax Code, as amended, as determined using the schedule of suggested compromise penalties prescribed under Revenue Memorandum Order (RMO) No. 19-2007, broken down as follows: 165 TIEHDC Income Tax P50,000.00 Final Withholding Tax 25,000.00 Total Compromise Penalties P75,000.00 It must be stressed that a compromise penalty is imposed to avoid prosecution for violation of the provisions of the Tax Code. 166 Under RMO No. 01-90, as amended by RMO No. 19-2007, 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. Absent a showing that petitioner consented to the compromise penalty, its imposition should be deleted. The imposition of the same without the conformity of the taxpayer is illegal and unauthorized. 167 Since there is nothing in the records which would show that petitioner consented to the compromise penalty, the amount of suggested compromise penalties of P75,000.00 cannot be sustained. WHEREFORE , premises considered, the instant Petition for Review is PARTIALLY GRANTED . Consequently, the assessments issued by respondent against petitioner for the period April 1, 2011 to December 31, 2011 covering deficiency income tax subject to special rate of 5%, FWVAT, WTC, and EWT, including the imposition of compromise penalties are CANCELLED and SET ASIDE . On the other hand, the deficiency income tax subject to regular rate of 30%, VAT and FWT assessments are AFFIRMED but with MODIFICATION . Accordingly, petitioner is ORDERED TO PAY respondent the amount of P22,062,463.26, P9,876,075.45 and P9,347,043.20 , representing basic deficiency IT, VAT and FWT, respectively, inclusive of the 25% surcharge, 20% deficiency interest and 20% delinquency interest imposed thereon under Sections 248 (A) (3), 249 (B) and (C) of the NIRC of 1997, as amended, respectively, computed until December 31, 2017, as determined below: Deficiency Income Tax Less: Payment on May 29, 2015 168 Remaining Balance Basic Deficiency Income Tax at Regular Rate (30%) P7,177,820.67 P723,643.58 P6,454,177.09 Surcharge (25%) 1,794,455.17 1,794,455.17 Deficiency Interest (20%) from April 16, 2012 to May 20, 2015 (P7,177,820.67 x 20% x 1,130 days/365 days 4,444,349.24 451,632.90 3,992,716.34 Total Amount Due, May 20, 2015 P13,416,625.08 Deficiency Interest (20%) from May 21, 2015 until payment on May 29, 2015 (P7,177,820.67 x 20% x 9 days/365 days 35,397.47 35,397.47 Total Amount Due, May 29, 2015 P13,452,022.55 P1,175,276.48 P12,276,746.07 Deficiency Interest (20%) from May 30, 2015 to December 31, 2017 (P6,454,177.09 x 20% x 947 days/365 days 3,349,099.02 Delinquency Interest (20%) from May 21, 2015 until payment on May 29, 2015 (P13,416,625.08 x 20% x 9 days/365 days 66,164.18 from May 30, 2015 until December 31, 2017 (P12,276,746.07 x 20% x 947 days/365 days 6,370,453.99 Total Deficiency Income Tax Due as of December 31, 2017 P22,062,463.26 Deficiency VAT Basic Deficiency VAT P2,871,128.27 Surcharge (25%) 717,782.07 Deficiency Interest (20%) from January 26, 2012 to May 20, 2015 (P2,871,128.27 x 20% x 1,211 days/365 days) 1,905,170.59 Total Amount Due, May 20, 2015 P5,494,080.93 Deficiency Interest (20%) from May 21, 2015 to December 31, 2017 (P2,871,128.27 x 20% x 956 days/365 days) 1,503,999.25 Delinquency Interest (20%) from May 21, 2015 until December 31, 2017 (P5,494,080.94 x 20% x 956 days/365 days) 2,877,995.27 Total Deficiency VAT Due as of December 31, 2017 P9,876,075.45 Deficiency FWT Less: Payment on May 29, 2015 169 Remaining Balance Basic Deficiency FWT P2,723,302.97 P5,000.00 P2,718,302.97 Surcharge (25%) 680,825.74 1,250.00 679,575.74 Deficiency Interest (20%) from January 14, 2012 to May 20, 2015 (P2,723,302.97 x 20% x 1,223 days/365 days 1,824,986.05 3,120.55 1,821,865.50 Total Amount Due, May 20, 2015 P5,229,114.76 Deficiency Interest (20%) from May 21, 2015 until payment on May 29, 2015 (P2,723,302.97 x 20% x 9 days/365 days) 13,429.99 13,429.99 Compromise Penalty 25,000.00 (25,000.00) Total Amount Due, May 29, 2015 P5,242,544.75 P34,370.55 P5,208,174.20 Deficiency Interest (20%) from May 30, 2015 to December 31, 2017 (P2,718,302.97 x 20% x 947 days/365 days 1,410,538.58 Delinquency Interest (20%) from May 21, 2015 until payment on May 29, 2015 (P5,229,114.76 x 20% x 9 days/365 days) 25,787.42 from May 30, 2015 until December 31, 2017 (P5,208,174.20 x 20% x 947 days/365 days) 2,702,543.00 Total Deficiency FWT Due as of December 31, 2017 P9,347,043.20 In addition, petitioner is ORDERED TO PAY delinquency interest at the rate of 12% computed from January 1, 2018 until full payment thereof, pursuant to Section 249 (C) of the NIRC of 1997, as amended by Republic Act No. 10963, also known as the Tax Reform for Acceleration and Inclusion (TRAIN) and as implemented by RR No. 21-2018, on the following amounts: Income Tax P12,276,746.07 VAT P5,494,080.93 FWT P5,208,174.20 SO ORDERED. (SGD.) CATHERINE T. MANAHAN Associate Justice Juanito C. Castaeda, Jr., J. , concurs. Footnotes 1. Docket, CTA Case No. 9074, Vol. I, pp. 10-48. 2. Par. 1, Stipulation of Facts, Joint Stipulation of Facts and Issues (JSFI), docket (vol. III), p. 1295. 3. Exhibit "P-1". 4. Exhibit "P-4". 5. Exhibit "R-1". 6. Exhibit "P-5"; Exhibit "R-9". 7. Par. 3, Stipulation of Facts, JSFI, docket (vol. III), p. 1296. 8. Exhibit "P-6". 9. Par. 4, Stipulation of Facts, JSFI, docket (vol. III), p. 1296. 10. Exhibit "P-7"; Exhibit "R-11". 11. Exhibits "R-12" to "R-12-f". 12. Par. 5, Stipulation of Facts, JSFI, docket (vol. III), p. 1296. 13. Exhibit "P-8". 14. Par. 6, Stipulation of Facts, JSFI, docket (vol. III), p. 1296. 15. Exhibit "P-8.1". 16. Exhibit "P-8.2". 17. Exhibit "P-8.3". 18. Exhibit "P-9"; Exhibits "R-14". 19. Par. 7, Stipulation of Facts, JSFI, docket (vol. III), p. 1296. 20. Exhibit "P-10.1.4". 21. Exhibit "P-10.1.5". 22. Exhibit "P-10.1.6". 23. Exhibit "P-10.1.7". 24. Exhibit "P-10.1.8". 25. Par. 8, Stipulation of Facts, JSFI, docket (vol. III), p. 1296. 26. Par. 9, ibid . 27. Docket (vol. II), pp. 583-604. 28. Ibid. , pp. 616-641. 29. Docket, vol. II, pp. 613-614. 30. Motion to Defer Pre-Trial Conference (Set on November 26, 2015) filed on November 10, 2015, docket (vol. II), pp. 643-646. 31. Order dated November 12, 2015, docket (vol. III), p. 1218. 32. Docket, vol. III, pp. 1198-1214. 33. Ibid. , pp. 1219-1226. 34. Id. , pp. 1251-1255. 35. Minutes of the Hearing dated January 21, 2016, docket (vol. III), p. 1289. 36. Docket (vol. III), pp. 1295-1305. 37. Ibid. , pp. 1307-1314. 38. Minutes of the Hearing dated February 29, 2016, docket (vol. III), p. 1319; Amended Judicial Affidavit of Ms. Edna G. Canlas, filed on November 21, 2016, docket (vol. V), pp. 2368-2411. 39. Minutes of the Hearing dated March 28, 2016, docket (vol. III), p. 1600; Judicial Affidavit of Mr. Graham J. Fairclough, filed on March 23, 2016, docket (vol. III), pp. 1347-1357. 40. Minutes of the Hearing dated March 28, 2016, docket (vol. III), p. 1600; Judicial Affidavit of Mr. Rolly DC. Mulato, filed on March 23, 2016, docket (vol. III), pp. 1329-1337. 41. Minutes of the Hearing dated April 18, 2016, docket (vol. IV), p. 1619; Amended Judicial Affidavit of Mr. George V. Villaruz, filed on April 10, 2017, docket (vol. V), pp. 2428-2437. 42. Docket (vol. IV), pp. 1620-1650. 43. Docket (vol. V), pp. 2447-2478. 44. Ibid. , pp. 2283-2285. 45. Id. , pp. 2481-2483. 46. Minutes of the Hearing dated January 22, 2018, docket (vol. V), p. 2499; Exhibit "R-17", docket (vol. III), pp. 1235-1250. 47. Docket (vol. V), pp. 2507-2517. 48. Ibid. , pp. 2532-2533. 49. Id. , pp. 2552-2571. 50. Id. , pp. 2623-2666. 51. Id. , p. 2669. 52. Statement of Issue, JSFI, docket, vol. III, p. 1296. 53. Exhibit "P-14". 54. Exhibit "P-4". 55. Exhibit "P-4.1". 56. Exhibit "P-3.4". 57. Exhibit "P-3.4.5". 58. Exhibit "P-3.4.4". 59. Docket (vol. III), p. 1437. 60. Exhibit "P-2". 61. Exhibit "P-2.2". 62. Exhibit "P-3". 63. Exhibit "P-3.1". 64. Exhibit "P-4". 65. Commissioner of Internal Revenue vs. Central Luzon Drug Corporation , G.R. No. 159647, April 15, 2005. 66. Exhibit "P-9". 67. Par. 8, Stipulation of Facts, JSFI, docket (vol. III), p. 1296. 68. Exhibits "P-10-1.4" to "P-10-1.8". 69. Exhibit "P-9". 70. Details of Discrepancies, Exhibit "P-9". 71. "The Company (Subic Water) shall be classified as a Subic Bay Export Zone Enterprise, as such term is defined under Section 3, Paragraph G of the Implementing Rules, for the following purposes: Engaged in the business of privatization of water and sewerage services of Subic Bay Freeport x x x, " Article I of Exhibit "P-4". 72. Exhibit "P-20" (ICPA Report), pp. 6-7. 73. Exhibit "AAA-1.1". 74. Exhibit "AAA-1.2". 75. Webster's New Collegiate Dictionary, 1977 edition, p. 1037. 76. CTA EB Nos. 250 and 255 (CTA Case No. 6577), October 1, 2007. 77. Exhibit "P-20" (ICPA Report), p. 7. 78. Exhibit "AAA-1.3". 79. Exhibit "AAA-1.3". 80. Exhibit "AAA-1.4". 81. Exhibit "AAA-1.4". 82. G.R. No. 135043, July 14, 2004. 83. International Financial Reporting Interpretations Committee. 84. BIR Records, Folder No. 1, p. 283. 85. BIR Records, Folder No. 1, p. 256. 86. Rules and Regulations to Implement the Tax Incentives Provisions under Paragraphs (b) and (c) of Section 12, Republic Act No. 7227 Otherwise Known as the Bases Conversion and Development Act of 1992. 87. Amending Revenue Regulations No. 1-95, as Amended, and Other Related Rules and Regulations to Implement the Provisions of Paragraphs (b) & (c) of Section 12 of Republic Act No. 7227, Otherwise Known as the "Bases Conversion and Development Act of 1992" Relative to the Tax Incentives Granted to Enterprises Registered in the Subic Special Economic and Freeport Zone. 88. Regulations Defining "Gross Income Earned" to Implement the Tax Incentive Provision under Paragraph (c) of Section 12 of Republic Act No. 7227, otherwise known as "The Bases Conversion Development Act of 1992" Revoking Section 7 of Revenue Regulations No. 2-2005, and Suspending the Effectivity of Certain Provisions of Revenue Regulations No. 2-2005. 89. Details of Discrepancies, Exhibit "P-9". 90. Rounding off difference, per BIR's schedule P380.00. 91. Rounding off difference, per BIR's schedule P88,631.55. 92. With P0.02 difference due to rounding off, per BIR's schedule P7,326,148.13. 93. CTA Case No. 8345, May 29, 2013, as affirmed in CTA EB No. 1054, January 13, 2015. 94. Philippine Daily Inquirer, Inc. v. CIR , CTA Case No. 7853, February 16, 2012. 95. IDS Logistics (Phils.), Inc. vs. Commissioner of Internal Revenue , CTA Case No. 7540, May 20, 2010; Philippine Aerospace Development Corporation vs. Commissioner of Internal Revenue , CTA Case No. 7830, December 11, 2012; FSM Cinemas, Inc. vs. Commissioner of Internal Revenue , CTA Case No. 8551, October 2, 2015; PNOC Development and Management Corporation vs. Commissioner of Internal Revenue , CTA Case No. 8649, January 22, 2016; Ithiel Corporation vs. Commissioner of Internal Revenue , CTA Case No. 8872, February 23, 2017. 96. The Commissioner of Internal Revenue vs. Phoenix Assurance Co., Ltd. , G.R. No. L-19727, May 20, 1965. 97. Modern Imaging Solutions, Inc. vs. Commissioner of Internal Revenue , CTA Case No. 8987, March 21, 2017. 98. Collector of Internal Revenue vs. Benipayo , G.R. No. L-13656, January 31, 1962. 99. Details of Discrepancies, Exhibit "P-9". 100. Exhibits "AAA-3.2" to "AAA-3.6". 101. Details of Discrepancies, Exhibit "P-9". 102. BIR Records, Folder No. 1, p. 283. 103. Exhibit "P-20" (ICPA Report), p. 11. 104. Exhibits "AAA-4.1" to "AAA-4.803"; Exhibits "AAA-4.832" to "AAA-4.838". 105. Exhibits "AAA-4.841" to "AAA-4.855". 106. Exhibits "AAA-4.804" to "AAA-4.831"; Exhibits "AAA-4.839" to "AAA-4.840". 107. BIR Records, Folder No. 1, pp. 250-288. 108. G.R. No. 172231, February 12, 2007. 109. Details of Discrepancies, Exhibit "P-9". 110. Exhibit "P-4". 111. Exhibit "P-20" (ICPA Report), p. 12. 112. Exhibits "AAA-5.1" to "AAA-5.9". 113. Exhibits "AAA-5.10" to "AAA-5.32"; Exhibit "AAA-5.809". 114. Exhibits "AAA-5.33" to "AAA-5.49". 115. Exhibits "AAA-5.50" to "AAA-5.207". 116. Exhibits "AAA-5.78" to "AAA-5.801"; Exhibits "AAA-5.810" to "AAA-5.817". 117. Exhibits "AAA-5.806" to "AAA-5.808". 118. Exhibit "AAA-5.804". 119. Details of Discrepancies, Exhibit "P-9". 120. BIR Records, Folder 1, p. 609. 121. Details of Discrepancies, Exhibit "P-9". 122. Exhibits "AAA-7.1" to "AAA-7.9". 123. Details of Discrepancies, Exhibit "P-9". 124. Exhibit "P-20" (ICPA Report), p. 21. 125. Certificate of Registration issued by NEA, Exhibit "AAA-8.20". 126. Tax Implications of Electric Cooperatives Registered with the National Electrification Administration and Cooperative Development Authority. 127. CTA EB Nos. 460 and 462, March 11, 2010. 128. G.R. No. 197117, April 10, 2013. 129. BIR Ruling Nos. 28-80, undated, 156-84 dated September 12, 1984, and 129-92, dated April 20, 1992. 130. Sec. 2.58.5. Requirements for Deductibility . Any income payment which is otherwise deductible under the Code shall be allowed as a deduction from the payor's gross income only if it is shown that the income tax required to be withheld has been paid to the Bureau in accordance with Secs. 57 and 58 of the Code. A deduction will also be allowed in the following cases where no withholding of tax was made: xxx xxx xxx (C) The withholding agent erroneously under withheld the tax but pays the difference between the correct amount and the amount of tax withheld, including the interest, incident to such error, and surcharges, if applicable, at the time of the audit/investigation or reinvestigation/reconsideration . (Emphasis supplied) 131. SEC. 34. Deductions from Gross Income . x x x xxx xxx xxx (K) Additional Requirements for Deductibility of Certain Payments . Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this Section, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in accordance with this Section, Sections 58 and 81 of this Code. 132. With P0.20 difference due to rounding off. 133. Annex B9 of Exhibit "P-20" (ICPA Report). 134. Exhibits "AAA-8.24" to "AAA-8.39". 135. BIR Records, Folder 1, pp. 257-258. 136. Exhibit "AAA-8.71". 137. P1,511,382.31 is included in the Salaries, Wages and Benefits of P27,204,966 declared as part of Cost of Services, see Schedule of Taxable Income and Deductible Expenses for the year ended December 31, 2011, attached to Exhibit "P-11", docket, vol. II, p. 1103. 138. Par. 9.iv of Exhibit "P-20" (ICPA Report), p. 23. 139. Exhibits "AAA-8.40" to "AAA-8.56". 140. Details of Discrepancies, Exhibit "P-9". 141. Exhibits "P-10.1.1" to "P-10.1.3". 142. Exhibit "P-10.1.4". 143. Exhibit "R-8". 144. With unexplained discrepancy of P499.50. 145. Exhibit "P-10.1.6". 146. The payment to Fairclogh, Graham J. in the amount of 20,000.00 was excluded as the same is subject to FWT, not EWT. 147. Exhibit "P-10.1.7". 148. Details of Discrepancies, Exhibit "P-9". 149. Exhibit "P-9". 150. Commissioner of Internal Revenue vs. Seagate Technology (Philippines) , G.R. No. 153866, February 11, 2005. 151. Atlas Consolidated Mining and Development Corporation vs. Commissioner of Internal Revenue , G.R. Nos. 141104 and 148763, June 8, 2007. 152. Commissioner of Internal Revenue vs. Seagate Technology (Philippines) , G.R. No. 153866, February 11, 2005 and Commissioner of Internal Revenue vs. Toshiba Information Equipment (Phils.), Inc. , G.R. No. 150154, August 9, 2005. 153. G.R. No. 132527, July 29, 2005. 154. Exhibits "AAA-9.1" to "AAA-9.3". 155. Exhibit "P-15.1". 156. Exhibit "P-15.2". 157. Exhibits "AAA-9.7" to "AAA-9.13". 158. Exhibit "P-17"; Exhibit "AAA-9.14". 159. Exhibit "AAA-9.15". 160. Exhibit "AAA-9.15". 161. Exhibit "P-16". 162. Q/A159, Amended Judicial Affidavit of Ms. Edna G. Canlas, docket (vol. V), pp. 2407-2408. 163. Exhibits "AAA-9.7" to "AAA-9.13". 164. Exhibit "P-10.1.8". 165. Exhibit "P-9". 166. The Philippines International Fair, Inc. vs. The Collector of Internal Revenue, et al. , G.R. Nos. L-12928 and L-12932, March 31, 1962. 167. Commissioner of Internal Revenue vs. Lianga Bay Logging Co., Inc., et al. , G.R. No. L-35266, January 21, 1991. 168. Exhibit "P-10.1.5". 169. Exhibit "P-10.1.8".