IBMS Technology Phils. Corp. v. Commissioner of Internal Revenue

SPECIAL FIRST DIVISION [C.T.A. CASE NO. 9970. October 5, 2023.] IBMS TECHNOLOGY PHILS. CORPORATION , petitioner , vs. COMMISSIONER OF INTERNAL REVENUE , respondent . DECISION MANAHAN , J p : Before this Court is a Petition for Review , praying that the Formal Assessment Notice (FAN) dated January 5, 2018, covering deficiency income tax, value-added tax (VAT), expanded withholding tax (EWT), withholding tax on compensation (WTC), final withholding tax (FWT), documentary stamp tax (DST), improperly accumulated earnings tax (IAET), and compromise penalty, in the amounts of P11,593,917.38, P618,371.99, P57,838.45, P7,933,580.45, P1,114,602.74, P46,441.78, P4,712,177.13, and P80,000.00, respectively, inclusive of increments, for taxable period 2014 be cancelled and withdrawn. 1 HTcADC THE PARTIES Petitioner IBMS Technology Phils. Corporation is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with principal office address located at Unit 29-C Chatham House Condominium, 116 Valero corner V.A. Rufino Streets, Salcedo Village, Makati City. 2 Respondent is the duly appointed Commissioner of Internal Revenue, with principal office address at the 5th Floor, Bureau of Internal Revenue (BIR) National Office Building, Agham Road, Diliman, Quezon City. 3 ANTECEDENTS (ADMINISTRATIVE LEVEL) On May 13, 2016, respondent issued Letter of Authority (LOA) No. eLA201200035835 dated May 13, 2016, 4 authorizing the examination of petitioner's books of account and other accounting records for deficiency internal revenue taxes, for the period from January 1, 2014 to December 31, 2014. On December 14, 2017, respondent issued Preliminary Assessment Notice (PAN), with Details of Discrepancies , covering deficiency income tax of P11,463,465.42, VAT of P611,604.58, EWT of P57,207.63, WTC of P7,847,051.97, FWT of P1,104,082.19, DST of P46,003.42, and IAET of P4,662,333.42, inclusive of interests, for taxable year (TY) 2014. 5 On January 12, 2018, petitioner received the FAN (Parts 1 and 2) dated January 5, 2018, covering deficiency income tax of P11,593,917.38, VAT of P618,371.99, EWT of P57,838.45, WTC of P7,933,580.45, FWT of P1,114,602.74, DST of P46,441.78, IAET of P4,712,177.13, and compromise penalty of P80,000.00, inclusive of interests and penalties, for TY 2014. 6 On February 12, 2018, petitioner filed a Protest/Request for Reinvestigation against the FAN. 7 Within sixty (60) days therefrom or on April 11, 2018, petitioner submitted the documents in support of its protest. 8 PROCEEDINGS BEFORE THIS COURT Petitioner filed the present Petition for Review on November 7, 2018. 9 On January 7, 2019, respondent filed his Manifestation with Motion to Admit Answer , 10 to which petitioner posted its Comment/Opposition with Motion on January 22, 2019. 11 In the said Motion to Admit , respondent attached his Answer , 12 interposing his special and affirmative defenses. CAIHTE In the Resolution dated April 12, 2019, 13 the Court granted respondent's Manifestation with Motion to Admit Answer and admitted the said Answer , and initially set the case for mediation on May 2, 2019. On May 29, 2019, petitioner filed a Manifestation with Motion , 14 praying that the mediation be rescheduled. Thus, in the Resolution dated June 10, 2019, 15 the mediation proceedings was reset to July 8, 2019. After the said proceedings, on January 14, 2020, the mediator filed her Mediator's Report , stating that the mediation is unsuccessful. 16 The Court initially set the case for Pre-Trial Conference on March 5, 2020, 17 but was finally reset to and held on August 27, 2020. 18 Prior thereto, respondent's Pre-Trial Brief was filed on March 2, 2020, 19 while petitioner's Pre-Trial Brief with Manifestation was submitted on March 3, 2020. 20 Respondent transmitted the BIR Records of the present case [consisting of one (1) folder, five hundred seventy-five (575) pages] on February 5, 2020. 21 On September 11, 2020, the parties filed their Joint Stipulation of Facts and Issues , 22 which was approved in the Resolution dated September 17, 2020, 23 thereby terminating the Pre-Trial. The Pre-Trial Order dated December 9, 2020 was then issued by the Court. 24 Trial then ensued. During trial, petitioner presented its documentary and testimonial evidence. It offered the testimonies of the following individuals, namely: (1) Ms. Chervie Rose Janapin, 25 petitioner's Finance Clerk; and (2) Revenue Officer (RO) Roland Dela Torre, 26 as hostile witness. In the meantime, during the hearing held on July 13, 2021, counsel for respondent manifested that she will dispense with the presentation of RO Dela Torre as her witness, subject to cross examination during RO Dela Torre's presentation as hostile witness of petitioner. 27 After presentation of RO Dela Torre as hostile witness during the hearing held on March 1, 2022, the Court granted petitioner a period of fifteen (15) days to file Formal Offer of Evidence , while respondent was granted the same period within which to file comment. Moreover, considering that respondent is no longer presenting any evidence, the Court gave both parties a period of thirty (30) days to file their respective memorandum. 28 aScITE Petitioner filed its Formal Offer of Evidence on March 17, 2022. 29 Respondent posted his Comment and Opposition (To Petitioner's Formal Offer of Evidence dated March 15, 2022) with Manifestation on March 31, 2022. 30 Respondent also posted a Motion for Leave of Court to File Demurrer to Evidence , with attached Demurrer to Evidence, on March 31, 2022. 31 Petitioner later filed its Comment/Opposition with Motion on April 12, 2022, 32 praying that the Motion for Leave be denied, and that RO Dela Torres' Judicial Affidavit dated February 28, 2020, and all attachments thereto, be expunged from the records of the case. In the Resolution dated June 14, 2022, 33 the Court denied respondent's Motion for Leave of Court to File Demurrer to Evidence , but gave petitioner the opportunity to comment on petitioner's Motion incorporated in its Comment/Opposition . In the same Resolution, the Court admitted petitioner's offered exhibits, except for the following: 1. Exhibits "P-9", "P-11" and "P-248", for failure to identify; 2. Exhibits "P-10", "P-11-a", "P-19", "P-19-a", "P-23", "P-25", "P-36", "P-40 to P-41", "P-46", "P-193 to P-195", "P-197 to P-200", "P-232 to P-233", "P-238", "P-293 to P-293-a", "P-297-b to P-297-c", "P-301", "P-305", "P-313", "P-338" and "P-339", for failure to present originals for comparison; 3. Exhibits "P-20", "P-20-a", "P-76", "P-77" and "P-78", for failure to submit duly marked exhibits; 4. Exhibits "P-109", "P-110", "P-111", "P-112", "P-113", "P-248-a", "P-251", "P-251-a" and "P-251-b", for failure to present originals for comparison and for failure to identify; and 5 Exhibits "P-207", "P-217", "P-253" and "P-253-a", for not being found in the records of the case. On July 22, 2022, petitioner filed a Motion for Leave to Admit with Tender of Excluded Evidence and Manifestation . 34 Respondent, on the other hand, posted his Comment/Opposition (To Petitioner's Motion for Leave to Admit with Tender of Excluded Evidence and Manifestation) on August 18, 2022. 35 Respondent's Memorandum was posted on July 20, 2022, 36 while petitioner filed its Memorandum on July 22, 2022. 37 In the Resolution dated August 18, 2022, 38 the Court granted petitioner's Motion to Expunge the Judicial Affidavit of Revenue Officer Roland S. Dela Torre dated February 28, 2020 , and ordered the Judicial Affidavit of RO Dela Torre dated February 28, 2020 expunged from the records of this case. On October 20, 2022, the Court issued a Resolution, 39 denying petitioner's Motion for Leave to Admit , while noting its Tender of Excluded Evidence and Manifestation . Accordingly, the Court made part of the records of the case Exhibits "P-9", "P-10", "P-11", "P-11-a", "P-19", "P-19-a", "P-20", "P-20-a", "P-23", "P-25", "P-36", "P-40 to P-41", "P-46", "P-76", "P-77", "P-78", "P-109", "P-110", "P-111", "P-112", "P-113", "P-193 to P-195", "P-197 to P-200", "P-232 to P-233", "P-238", "P-248", "P-248-a", "P-251", "P-251-a", "P-251-a", "P-251-b", "P-293 to P-293-a", "P-297-b to P-297-c", "P-301", "P-305", "P-313", "P-338" and "P-339". In the same Resolution, the Court submitted the present case for decision. DETACa THE ISSUES The parties stipulated the following issues for this Court's resolution, to wit: "1. Whether the Letter of Authority (LOA) is valid for lack of revalidation on or before the expiration of the 180-day period. 2. Whether Petitioner is liable for deficiency Income Tax (IT) of Php11,593,917.38, Value-Added Tax (VAT) of Php618,371.99, Expanded Withholding Tax (EWT) of Php57,838.45, Withholding Tax on Compensation (WTC) of Php7,933,580.45, Final Withholding Tax (FWT) of Php1,114,602.74, Documentary Stamp Tax (DST) of Php46,441.78, Improperly Accumulated Earnings Tax (IAET) of Php4,712,177.13, and Compromise Penalty (MC) of Php80,000.00, inclusive of interests and penalties, for TY 2014, as indicated in the FAN dated 05 January 2018. 3. Whether Petitioner made an overpayment." 40 Petitioner's arguments: Petitioner argues that the LOA is invalid for lack of revalidation on or before the expiration of the 180-day period; and that even granting, for the sake of argument, that the LOA is valid, petitioner is not liable for the deficiency taxes as enumerated in the FAN. Respondent's counter-arguments: Respondent contends that failure to revalidate petitioner's LOA does not affect its validity nor the assessment made pursuant to the same; that the requirement on the issuance of Notice of Informal Conference was deleted under Revenue Regulations (RR) No. 18-2013 dated November 28, 2013, which amended RR No. 12-99; that respondent has fully complied with the due process requirement under Section 228 of the Tax Code, as amended, and RR No. 12-99, as amended by RR No. 18-2013; that petitioner is liable for the deficiency income tax, VAT, EWT, WTC, FWT, DST, IAET and compromise penalty; and that the necessity of proving that the tax assessment is invalid lies with the party assailing the validity of the assessment. THE COURT'S RULING The present Petition for Review is partially granted. The lapse of the audit period does not render the subject LOA invalid and will not have the effect of revoking the authority given thereunder to the concerned RO. Petitioner avers that the LOA is invalid because under Revenue Memorandum Order (RMO) No. 19-2015, the report of investigation/verification of cases covered by electronic Letters of Authority (eLAs) shall be submitted by the RO within one hundred eighty (180) calendar days only. Petitioner further alleges that under CTA Case No. 8837 dated March 19, 2018, the non-compliance of the concerned RO within the prescribed period and the required procedure of surrendering the LOA for revalidation would inevitably render the LOA invalid. HEITAD Petitioner claims that in the present case, respondent issued the LOA on May 13, 2016, which was received by petitioner on May 20, 2016. The PAN was issued on December 14, 2017, while the FAN was issued on January 5, 2018 which was received by petitioner on January 12, 2018. The period from the time the LOA was received by the petitioner on May 20, 2016 to the time when the PAN and FAN were issued on December 14, 2017 and January 5, 2018, respectively, is already more than eighteen (18) months, which is clearly beyond the six (6) months or 180-day prescribed period. Petitioner further maintains that after the lapse of the 180-day prescribed period, respondent did not also comply with the required procedure of surrendering the LOA for revalidation. This fact was admitted by RO Dela Torre himself during direct-examination on March 1, 2022 as according to him. 41 "There is no use of revalidating of the Letter of Authority." Petitioner further contends that the non-compliance within the one hundred eighty (180) calendar days to submit the investigation/verification of the case covered by the LOA, and the required procedure for surrendering the LOA for revalidation rendered the LOA invalid. Consequently, this also renders the PAN and FAN invalid. Thus, the PAN and FAN are void and ineffectual and bear no valid fruit. This Court disagrees with petitioner. Admittedly, under RMO No. 19-2015, 42 there is indeed a 180-day period for regional cases within which to submit a report of investigation. However, nothing therein states that in case the 180-day period to submit the said report of investigation is not observed, the LOA issued will be a nullity. In fact, in the same issuance, it was clearly stated that the failure to render a report of investigation/verification within the time frame shall not nullify the eLA. The pertinent portion of RMO No. 19-2015 reads: "28. Failure on the part of the RO to render a report of investigation/verification within the time frame prescribed above shall not nullify the eLA . The eLA is enforceable even if it remains outstanding beyond the time frame for submission of report of investigation/verification by the RO assigned to the case, subject to the period of limitation under Sections 203 and 222 of the Tax Code of 1997, as amended. However, the RO who fails to submit the report investigation/verification shall be subject to any applicable administrative sanction ." (Emphases and underscoring added) In this regard, it must also be noted that the requirement of revalidation of LAs for failure to complete audit was already withdrawn beginning June 1, 2010, pursuant to RMO No. 44-2010, 43 the pertinent portion of which reads: aDSIHc "8. Beginning June 1, 2010 , the rule on the need for revalidation of LAs for failure of the revenue officials to complete the audit within the prescribed period shall be withdrawn . Accordingly, there is no need for revalidation of the LA even if the prescribed audit period has been exceeded . However, the failure of the RO to complete the audit within the prescribed period shall be subject to the applicable administrative sanctions. " (Emphasis and underscoring added) Moreover, the above provision was reiterated in RMO No. 19-2015, the relevant portion of which reads: "29. As stated in Item Number IV.8 of RMO No. 44-2010, it is reiterated that pending eLAs as of the effectivity of the said Order shall no longer be revalidated . In case the report of investigation cannot be rendered within the prescribed period, the concerned RO shall prepare a monthly progress report starting from the time such audit report should have been rendered stating therein the reason for the delay in the submission of the report of investigation duly noted by his GS and approved by the RDO/LTD/LTAD. The said progress report/s shall be attached to the docket of the case." (Emphasis added) Clearly, the revalidation of LOAs which should be done "for failure of the revenue officials to complete the audit within the prescribed period," has been withdrawn beginning on June 1, 2010. The effect of such failure is merely to subject the concerned RO(s) to applicable administrative sanctions, not to render null the issued LOA . More significantly, the lapse of the said period of audit would not have the effect of revoking the authority given to the concerned RO(s). Thus, as correctly argued by respondent, the lapse of the 180-day period under RMO No. 19-2015, and the failure to revalidate the LOA, are of no moment; and thus, the same will not have the effect of nullifying the subject tax assessments. ATICcS The assessments are partially upheld. In the FAN, the aggregate amount of P26,156,929.92, inclusive of surcharges and interests was found to be deficient for taxable year 2014, summarized as follows: Tax Type Basic Deficiency Tax Surcharge Interest Total Income Tax P7,439,837.98 P- P4,154,079.40 P11,593,917.38 Value-Added Tax (VAT) 385,953.79 - 232,418.20 618,371.99 Expanded Withholding Tax (EWT) 35,976.54 - 21,861.91 57,838.45 Withholding Tax on Compensation (WTC) 4,934,827.65 - 2,998,752.80 7,933,580.45 Final Withholding Tax (FWT) 600,000.00 150,000.00 364,602.74 1,114,602.74 Documentary Stamp Tax (DST) 25,000.00 6,250.00 15,191.78 46,441.78 IAET 2,842,648.79 710,662.20 1,158,866.14 4,712,177.13 Compromise Penalty 80,000.00 TOTAL P16,264,244.75 P866,912.20 P8,945,772.97 P26,156,929.92 ============ ============ ============ ============ I. Income Tax Respondent assessed petitioner for deficiency income tax for TY 2014 amounting to P11,593,917.38, with details as follows: 44 Taxable Income (Loss) per return P7,749,577.00 Add: Adjustments/disallowances Disallowed Expenses due to non-withholding (Schedule 1) P247,988.31 Salaries and Wages not subjected to withholding tax (Schedule 2) 20,114,158.05 20,362,146.36 Adjusted Taxable Income P28,111,723.36 Basic Income Tax Due P8,433,517.01 Less: Tax credits/payments Prior Year's Excess Credits P673,794.00 Creditable withholding tax P1,278,092.00 Less: Disallowed Creditable Withholding Tax 958,206.97 319,885.03 993,679.03 Basic Deficiency Income Tax P7,439,837.98 Add: Interest (04.16.15-01.29.18) 4,154,079.40 TOTAL AMOUNT DUE P11,593,917.38 =========== The following items comprised the deficiency income tax assessment: A. Disallowed Expenses due to non-withholding P247,988.31 B. Salaries and Wages not subjected to withholding tax 20,114,158.05 C. Disallowed Creditable Withholding Tax 958,206.97 A. Disallowed Expenses due to non-withholding Respondent's examiner found that the following expenses or deductions claimed by petitioner were not subjected to withholding tax, thus disallowed as deduction from gross income pursuant to Section 34 (K) of the NIRC of 1997, as amended: 45 ETHIDa Schedule 1: Expense/Income Payments Per ITR Per alphalist/ 1601-E Disallowed Expenses Rate EWT Due Rent P1,166,935.00 P1,138,754.05 P28,180.95 5% P1,409.05 Professional fees 510,370.00 290,562.64 219,807.36 10% 21,980.74 TOTAL P1,677,305.00 P1,429,316.69 P247,988.31 P23,389.79 =========== =========== =========== =========== Petitioner avers that it "religiously withheld and remitted the withholding taxes for rental and professional fees inclusive in the total of P1,736,412.84 as evidenced by BIR Form 1604-E." 46 47 However, the Court notes that the total amount of P1,736,412.84 includes all of petitioner's income payments/expenses for taxable year 2014 and does not solely pertain to withholding tax on rental and professional fees. Meanwhile, respondent disallowed only a portion of petitioner's rental and professional fees that were not subjected to withholding, as shown above. Petitioner submitted its monthly remittances for the year 2014. 48 However, other than the foregoing documents, petitioner did not explain or substantiate the discrepancy between the amounts of rental and professional fees per ITR and the amounts as shown per remittance returns. Hence, the disallowance of rental and professional fees expenses for the year 2014 amounting to P247,988.31 should remain. B. Salaries and Wages not subjected to withholding tax Respondent likewise compared the amount of salaries and wages claimed by petitioner as deduction in its income tax return with the total compensation reported in its monthly remittance returns for the year 2014. The discrepancy of P20,114,158.05 is disallowed for failure to withhold the corresponding tax on compensation, thus: 49 TIADCc Schedule 2: Salaries and Wages Per FS/ITR P25,405,954.00 Less: Salaries and Wages per 1601C 5,291,795.95 Salaries & wages not subjected to withholding tax P20,114,158.05 Multiplied by P1,209,036.44 P4,927,985.28 24.5341% Basic Deficiency Withholding Tax P4,934,827.65 =========== Based on records, respondent's total salaries and wages per FS/ITR in the amount of P25,405,954.00 consists of the following: Cost of services Direct labor P15,996,777.00 50 Operating expenses Salaries, wages and employee benefits 9,409,177.00 51 Total Salaries & wages per BIR audit P25,405,954.00 ============= Petitioner accounted and explained the foregoing discrepancy as follows: 52 Salaries & wages not subjected to withholding tax P20,114,158.05 Less: Reconciling items 1. Total compensation per BIR Form 1604-CF P7,981,916.48 Less: Per FAN 5,291,795.95 P2,690,120.53 2. Non-taxable fringe benefits 594,139.61 3. Payments to subcontractors and/or independent contractors 12,440,005.03 Total P15,724,265.17 Unaccounted Balance P4,389,892.88 =========== First, petitioner argues that respondent's basis on the BIR Forms 1601-C is incorrect because it refers only to remittances of withholding taxes on compensation and are incomplete. 53 Petitioner's monthly remittances of withholding taxes on compensation for the year 2014 is summarized as follows: Exhibit Month (2014) Total Compensation Taxable Compensation Tax Amount Remitted P-55 Jan P- P- P79,691.78 P-58 Feb - - 81,904.13 P-61 Mar - - 68,836.60 P-64 Apr - - 75,903.40 P-114 May 552,222.36 466,136.10 78,776.91 P-116 Jun 1,166,012.15 1,116,879.04 266,079.64 P-118 Jul 585,048.24 562,241.83 81,893.38 P-120 Aug 577,245.03 554,438.62 90,259.94 P-122 Sep 582,672.21 510,710.04 91,159.90 P-124 Oct 593,783.04 557,053.43 85,921.55 P-126 Nov 582,672.21 540,710.04 91,159.90 P-130 Dec 652,140.71 619,816.18 117,449.31 TOTAL P5,291,795.95 P4,927,985.28 P1,209,036.44 =========== =========== =========== As shown above, petitioner did not report the amounts of total compensation and total taxable compensation for the months of January to April 2014. Nonetheless, petitioner avers that in its Annual Information Return (BIR Form No. 1604-CF), total compensation for the year 2014 amounts to P7,981,916.48. Unfortunately, the said document was denied admission as evidence by the Court for petitioner's failure to present originals for comparison and for failure to identify. 54 As such, it cannot be used to support petitioner's assertion. cSEDTC Next, petitioner avers that the amount P594,139.61 55 pertains to either non-taxable fringe benefits or expenses for entertainment, amusement and recreation, which are recorded as part of the salaries and wages account as evidenced by various payment vouchers, official receipts (ORs) or invoices. 56 Examination of the foregoing documents shows that they are indeed expenses for entertainment, amusement, and recreation for petitioner's employees, which comprise of employees' uniform, expenses for birthday celebrations, anniversary, and Christmas party expenses and giveaways for the year 2014. However, only the amount of P135,835.60 is duly substantiated and is not subject to withholding tax, thus, deductible. The rest in the amount of P458,304.01 shall be disallowed as deductions from gross income for the reasons detailed as follows: Properly substantiated and deductible expenses Exhibit Date OR/Inv. No. Supplier Amount P-257-b 04/08/2014 413903 Amber Golden Chain of Restaurants P2,148.21 P-259 04/10/2014 0012715 Ordofood Enterprises, Inc. 270.54 P-261 04/24/2014 121424 7-Eleven Pesuena Enterprises 17.86 P-262 04/24/2014 13700 Chicken's R Us, Inc. 2,449.11 P-267 05/29/2014 06100 Goldilocks Bakeshop, Inc. 379.46 P-268 05/29/2014 4630 Clicc, Inc. 1,585.71 P-270 06/19/2014 14446 Chicken's R Us, Inc. 918.75 P-271 06/19/2014 001-395961 Pan de Mla. Food Co., Inc. 160.71 P-272 05/29/2014 429396 Amber Golden Chain of Restaurants 1,808.93 P-274 06/24/2014 12316 National Book Store, Inc. 356.92 P-276-b 07/21/2014 0851 Gain Tailoring Shop OR# 0851 30,566.25 P-278 08/08/2014 5053 Clicc, Inc. 1,644.65 P-279 08/08/2014 41636 LSS Fastfood Makati 600.00 P-280 08/08/2014 6147 The Sweet Life by Ange, Co. 1,400.00 P-284-b 08/18/2014 0853 Gain Tailoring Shop 30,566.25 P-286 09/15/2014 5302 Clicc, Inc. 2,812.50 P-287-b 09/15/2014 13377 Soundway Entertainment, Inc. 13,392.85 P-287-c 09/15/2014 13378 Soundway Entertainment, Inc. 2,372.90 P-288-b undated 0854 Gain Tailoring Shop 18,750.00 P-289-b 10/10/2014 0856 Gain Tailoring Shop 18,000.00 P-295 12/06/2014 00002 One Pix Photo Booth 5,634.00 Subtotal P135,835.60 Supported by documents other than official receipts or invoices P-255-b 04/14/2014 Email & Deposit Slip Banco de Oro P15,000.00 P-260-b 04/29/2014 Deposit Slip Banco de Oro 12,000.00 P-298-b 12/16/2014 Statement of Account Sodexo Benefits and Rewards Services Phils., Inc. 150,000.00 Subtotal P177,000.00 Supported by ORs or invoices but NOT issued in the name of the company P-281 08/08/2014 453767 Amber Golden Chain of Restaurants P1,800.00 P-282 08/09/2014 06226 Goldilocks Bakeshop, Inc. 1,397.00 P-283 08/09/2014 06227 Goldilocks Bakeshop, Inc. 99.00 Subtotal P3,296.00 Supported by payment vouchers and cash voucher only Exh. Date Voucher No. Particulars Amount P-256 04/10/2014 14 00593 Payment Voucher P3,569.20 P-263 04/30/2014 14 00660 Payment Voucher 15,000.00 P-264 05/08/2014 14 00710 Payment Voucher 3,247.35 P-265 05/06/2014 LMF 140048 Cash Voucher 664.00 P-266 06/04/2014 14 00828 Payment Voucher 3,959.10 P-269 06/23/2014 14 00916 Payment Voucher 1,098.75 P-273 07/03/2014 14 00961 Payment Voucher 356.92 P-275 07/10/2014 14 00982 Payment Voucher 1,230.00 P-277 08/11/2014 14 01091 Payment Voucher 5,567.42 P-285 09/17/2014 14 01284 Payment Voucher 3,801.03 P-290 10/16/2014 14 01412 Payment Voucher 7,357.23 P-291 11/26/2014 14 01620 Payment Voucher 2,575.00 P-292 11/24/2014 14 01568 Payment Voucher 5,000.00 P-294 12/09/2014 14 01696 Payment Voucher 3,175.00 P-296 12/03/2014 14 01686 Payment Voucher 100,000.00 Subtotal P156,601.00 Claimed twice per Annex B (including VAT portion) P-259 04/10/2014 0012715 Ordofood Enterprises, Inc. P303.00 P-262 04/24/2014 13700 Chicken's R Us, Inc. 2,743.00 Subtotal P3,046.00 Supported by documents which are denied admission as evidence P-293 12/03/2014 14 01676 Payment Voucher P5,000.00 P-297-b 12/03/2014 107201 Shopwise 110,063.85 Subtotal P115,063.85 VAT Portion of the expenses OR/Invoice Amount Net of VAT Input Tax P-257-b Amber Golden Chain of Restaurants P2,400.00 P2,148.21 P251.79 P-267 Goldilocks Bakeshop, Inc. 425.00 379.46 45.54 P-268 Clicc, Inc. 1,776.00 1,585.71 190.29 P-270 Chicken's R Us, Inc. 1,029.00 918.75 110.25 P-271 Pan de Mla. Food Co., Inc. 180.00 160.71 19.29 P-272 Amber Golden Chain of Restaurants 2,020.00 1,808.93 211.07 P-274 National Book Store, Inc. 399.75 356.92 42.83 P-278 Clicc, Inc. 1,842.00 1,644.65 197.35 P-286 Clicc, Inc. 3,150.00 2,812.50 337.50 P-287-b Soundway Entertainment, Inc. 15,000.00 13,392.85 1,607.15 P-287-c Soundway Entertainment, Inc. 2,657.00 2,372.90 284.10 Subtotal P30,878.75 P27,581.59 P3,297.16 TOTAL P594,139.61 ========== Thus, out of the amount of P594,139.61, only P135,835.60 can be allowed as deductions from gross income and the remaining P458,304.01 should be disallowed for petitioner's failure to properly substantiate and show that the same should not be subjected to withholding tax. AaCTcI Finally, petitioner argues that the amount of P12,440,005.03 57 recorded under salaries and wages are payments to sub-contractors and/or independent contractors. 58 The said expenses were allegedly subjected to 2% withholding tax, which were remitted as part of its total remittances for the taxable year 2014 of P1,736,412.84. 59 Further, petitioner maintains that these were recorded as Direct Labor and reported under Cost of Services in its Income Statement. Petitioner submitted the official receipts and invoices 60 to support its argument. However, the best document to prove that the foregoing expenses were indeed already subjected to withholding taxes would be the alphalist that is a required attachment to the monthly remittance returns. Petitioner did not submit as evidence such alphalists; thus, the Court cannot ascertain whether the corresponding income payments of the subject expenses are indeed included in the remittances. In fine, the disallowed salaries and wages expense is adjusted to the amount of P19,978,322.45, computed as follows: Salaries & wages not subjected to withholding tax P20,114,158.05 Less: Non-taxable fringe benefits 135,835.60 Unaccounted Balance P19,978,322.45 =========== C. Disallowed Creditable Withholding Tax Respondent's examiner found that of the claimed creditable withholding taxes for the year 2014 of P1,278,092.00, the amount of P958,206.97 should be disallowed for being unsupported. 61 acEHCD Petitioner counters that it actually supported the creditable withholding tax of P1,278,092.00 as evidenced by BIR Form No. 2307 62 issued by its various clients. However, upon scrutiny, only the amount of P835,490.29 is duly supported by certificates of withholding (BIR Forms No. 2307), to wit: Exh. Payor Income Payment CWT P-21 STI Educational System P2,863,375.87 P57,267.52 P-22 Datalec Technology Corp. 11,267.01 121.60 P-24 IBM Philippines, Inc. 5,112,500.00 102,250.00 P-26 Business Process Outsourcing Int'l. 38,483.11 384.83 P-27 Charoen Pokphand Foods 794,642.86 15,892.86 P-28 Charoen Pokphand Foods 1,170,000.00 23,400.00 P-29 Charoen Pokphand Foods 401,785.71 8,035.71 P-30 Concentrix Services Corp. 470,809.08 9,416.18 P-31 Concentrix Services Corp. 36,486.08 729.72 P-32 Concentrix Services Corp. 28,679.50 573.59 P-33 DB&B Philippines, Inc. 186,000.00 3,720.00 P-34 DB&B Philippines, Inc. 186,000.00 3,720.00 P-35 DB&B Philippines, Inc. 158,000.00 3,160.00 P-37 Filinvest Land, Inc. 77,625.00 776.25 P-38 Filinvest Land, Inc. 77,625.00 776.25 P-39 Filinvest Land, Inc. 3,200.00 32.00 P-42 Manulife Data Services, Inc. 1,660,714.29 33,214.29 P-43 Philippine Women's University 1,785.71 35.71 P-44 Philippine Women's University 12,946.43 258.93 P-45 Philippine Women's University 141,011.71 1,410.12 P-47 PH02 Damco Philippines, Inc. 19,967.21 399.34 P-48 Synnex-Concentrix Corp. 48,192.83 963.86 P-49 Synnex-Concentrix Corp. 43,799.06 875.98 P-50 Synnex-Concentrix Corp. 396,103.52 7,922.07 P-51 P.J. Lhuillier, Inc. 415,000.00 8,300.00 P-52 Thome Ship Management PTE. Ltd. 399,107.50 7,982.15 P-53 Thome Ship Management PTE. Ltd. 232,143.00 4,642.86 P-54 Thome Ship Management PTE. Ltd. 87,053.50 1,741.07 P-148 Manulife Data Services, Inc. 783,750.00 15,675.00 P-149 Towers Watson Global Business Services, Inc. 401,848.00 8,036.96 P-150 Holy Cross of Davao College, Inc. 5,985,000.00 119,700.00 P-151 IBM Philippines, Inc. 2,220,000.00 44,400.00 P-152 STI Educational System 484,483.22 9,689.66 P-153 Ateneo de Manila University 10,351.86 103.52 P-154 Business Process Outsourcing Int'l. 19,505.36 195.05 P-155 Concentrix Services Corp. 117,922.14 2,358.44 P-156 Concentrix Services Corp. 94,492.25 1,889.85 P-157 Concentrix Services Corp. 376,647.26 7,532.95 P-158 Concentrix Services Corp. 316,882.82 6,337.66 P-159 Concentrix Services Corp. 121,351.98 2,427.04 P-160 Concentrix Services Corp. 66,251.62 1,325.03 P-161 Concentrix Services Corp. 52,119.86 1,042.40 P-162 Concentrix Services Corp. 47,440.16 948.80 P-163 Concentrix Services Corp. 58,136.18 1,162.72 P-164 Concentrix Services Corp. 43,799.06 875.98 P-165 Concentrix Services Corp. 48,192.93 963.86 P-166 Concentrix Services Corp. 36,222.99 724.46 P-167 Concentrix Services Corp. 316,882.82 6,337.66 P-168 Concentrix Services Corp. 65,875.39 1,317.51 P-169 Concentrix Services Corp. 28,679.51 573.59 P-170 Concentrix Services Corp. 300,000.00 6,000.00 P-171 Concentrix Services Corp. 660,000.00 13,200.00 P-172 Concentrix Services Corp. 760,000.00 15,200.00 P-173 DB&B Philippines, Inc. 372,000.00 7,440.00 P-174 DB&B Philippines, Inc. 360,000.00 7,200.00 P-175 Filinvest Land, Inc. 4,267.00 42.67 P-176 Filinvest Land, Inc. 321,428.50 6,428.57 P-177 NCR Cebu Development Center, Inc. 3,900.00 78.00 P-178 One Stop Warehousing Solutions 88,081.00 880.81 P-179 PhilHealthCare, Inc. 413,284.50 8,265.69 P-180 Philippine Women's University 1,785.71 35.71 P-181 Philippine Women's University 4,017.86 80.36 P-182 Philplans First, Inc. 133,928.57 2,678.57 P-183 Philplans First, Inc. 107,142.86 2,142.86 P-184 Philplans First, Inc. 72,500.00 1,450.00 P-185 Pointwest Innovations Corp. 21,538.46 430.77 P-186 P.J. Lhuillier, Inc. 90,771.93 1,591.57 P-187 P.J. Lhuillier, Inc. 38,380.94 767.62 P-188 Thome Ship Management PTE. Ltd. 45,059.50 901.19 P-189 Thome Ship Management PTE. Ltd. 388,839.50 7,776.79 P-190 Thome Ship Management PTE. Ltd. 45,059.50 901.19 P-191 Thome Ship Management PTE. Ltd. 798,214.00 15,964.28 P-192 Thome Ship Management PTE. Ltd. 176,785.50 3,535.71 P-196 Holy Cross of Davao College, Inc. 1,354,125.00 27,082.50 P-201 Business Process Outsourcing Int'l. 5,285.71 52.86 P-202 Accutest Technologies Phils. 18,086.68 180.87 P-203 DB&B Philippines, Inc. 69,642.86 1,392.86 P-204 DB&B Philippines, Inc. 45,000.00 900.00 P-205 DB&B Philippines, Inc. 22,500.00 450.00 P-206 Concentrix Services Corp. 79,220.70 1,584.41 P-208 Concentrix Services Corp. 94,161.82 1,883.24 P-209 Concentrix Services Corp. 240,000.00 4,800.00 P-210 Concentrix Services Corp. 14,534.04 290.68 P-211 Concentrix Services Corp. 660,000.00 13,200.00 P-212 Concentrix Services Corp. 245,000.00 4,900.00 P-213 DB&B Philippines, Inc. 23,214.29 464.29 P-214 Electro-Systems Industries Corp. 21,401.79 214.02 P-215 Filinvest Land, Inc. 624,107.00 12,482.14 P-216 Filinvest Land, Inc. 177,678.50 3,553.57 P-218 Filinvest Land, Inc. 80,357.00 1,607.14 P-219 Filinvest Land, Inc. 174,230.00 1,742.30 P-220 NCR Cebu Development Center, Inc. 6,670.00 133.40 P-221 Philippine Women's University 513,392.86 10,267.86 P-222 Philippine Women's University 282,200.82 5,644.02 P-223 Philippine Women's University 499,999.95 10,000.00 P-224 Philplans First, Inc. 214,285.71 4,285.71 P-225 Philplans First, Inc. 267,857.14 5,357.14 P-226 Pointwest Innovations Corp. 3,800.00 76.00 P-227 Pointwest Innovations Corp. 9,620.08 192.40 P-228 Thome Ship Management PTE. Ltd. 475,000.00 9,500.00 P-229 Torm Shipping Phils., Inc. 45,106.08 902.12 P-230 Pointwest Innovations Corp. 33,455.94 669.12 P-231 IBM Philippines, Inc. 338,750.00 6,775.00 P-234 DHL Global Forwarding Phils. 49,107.14 982.14 P-235 Towers Watson Global Business Services, Inc. 78,284.71 1,565.69 P-236 Towers Watson Global Business Services, Inc. 217,039.00 4,340.78 P-237 Towers Watson Global Business Services, Inc. 323,613.00 6,472.26 P-239 Holy Cross of Davao College, Inc. 1,363,393.00 27,267.86 P-240 Caspo, Incorporated 3,846.15 76.92 P-241 Concentrix Services Corp. 60,000.00 1,200.00 P-242 Concentrix Services Corp. 696,080.00 13,921.60 P-243 Concentrix Services Corp. 660,000.00 13,200.00 P-244 Pointwest Innovations Corp. 3,800.00 76.00 P-245 Pointwest Innovations Corp. 59,500.00 1,190.00 TOTAL P42,130,471.69 P835,490.29 ============ ============ Considering the foregoing, the Court finds that only the creditable withholding tax of P442,601.71 is unsupported: Creditable withholding tax for TY 2014 P1,278,092.00 Less: Creditable Withholding Tax properly supported by BIR Form 2307 835,490.29 Unsupported creditable withholding tax P442,601.71 =========== It should be noted that petitioner's income tax payments of P372,986.60 for the year 2014 have not been considered by respondent. The amount is broken down below: Exhibit Quarter (2014) Date Paid Amount Paid P-106 to 108 1st Qtr. 05/30/2014 P51,441.00 P-254 to 254-a 3rd Qtr. 11/27/2014 262,911.60 P314,352.60 63 P-13 4th Qtr. 58,634.00 64 TOTAL P372,986.60 ========== The Court finds that this amount should be incorporated in the computation of petitioner's deficiency income tax. EcTCAD In fine, petitioner is liable for deficiency income tax for the year 2014 in the adjusted amount of P6,510,495.44, computed thus: Taxable Income per return P7,749,577.00 Add: Adjustments/disallowances Disallowed Expenses due to non-withholding P247,988.31 Salaries and Wages not subjected to withholding tax 19,978,322.45 20,226,310.76 Adjusted Taxable Income P27,975,887.76 Basic Income Tax Due P8,392,766.33 Less: Tax credits/payments: Prior Year's Excess Credits P673,794.00 Income Tax Payment under Regular/Normal Rate from Previous Quarters 372,986.60 Creditable withholding tax P1,278,092.00 Less: Disallowed Creditable Withholding Tax 442,601.71 835,490.29 1,882,270.89 Basic Deficiency Income Tax P6,510,495.44 II. Value-Added Tax (VAT) Respondent assessed petitioner for deficiency VAT in 2014, as follows: 65 Taxable Receipts per return P62,618,614.42 Add: Receipts not Subjected to VAT (Schedule 3) 3,211,281.69 Taxable Sales as adjusted P65,829,896.11 Output Tax Due P7,899,587.53 Less: Input Tax claimed per return P8,979,765.02 Less: Input Tax Carried Forward to Succeeding Period 2,038,090.63 6,941,674.39 VAT Payable P957,913.14 Less: Payments per VAT returns 571,959.35 Basic Tax Due 385,953.79 Add: Interest (01.26.15-01.29.18) 232,418.20 TOTAL AMOUNT DUE P618,371.99 =========== A. Sales not subjected to VAT Respondent's examiner found that, upon comparison of the amount of receipts per ITR as against the amount of receipts subjected to VAT per VAT returns, there are receipts not subjected to VAT amounting to P3,211,281.69, hence, assessed and subjected to 12% VAT pursuant to Section 108 of the Tax Code, to wit: 66 SDHTEC Schedule 3: Sales per ITR/FS: Regular Sales P97,571,953.00 Other Income 606,898.00 P98,178,851.00 Sales per VAT 94,967,569.31 Sales not subjected to VAT P3,211,281.69 =========== As shown above, respondent picked up petitioner's reported sales as declared in its ITR, particularly Schedules 1 and 3. 67 However, petitioner asserts that respondent's findings "do not specify the receipts which were not subjected to VAT, hence, defective as it cannot respond to such finding specifically." 68 Petitioner also avers that some of its transactions are VAT zero-rated and submitted Philippine Economic Zone Authority (PEZA) certifications 69 to support it. Upon examination, the Court finds that respondent clearly considered all of petitioner's sales, including its zero-rated sales for the year 2014, as shown hereafter: Exhibit Period VATable Zero-rated Total Sales P-97 1st Qtr. P24,131,055.27 P1,938,367.45 P26,069,422.72 P-100 2nd Qtr. 17,781,377.75 4,452,201.62 22,233,579.37 P-102 3rd Qtr. 16,642,353.82 11,911,135.73 28,553,489.55 P-104 4th Qtr. 4,063,827.58 14,047,250.09 18,111,077.67 TOTAL P62,618,614.42 P32,348,954.89 P94,967,569.31 ============ ============ ============ We cannot subscribe to petitioner's assertion that the assessment is defective for respondent's failure to specify the receipts which were not subjected to VAT. On the contrary, it is incumbent upon petitioner to explain or account for the said discrepancy since respondent clearly indicated the source or how the amount in the above computation was arrived at. Hence, for petitioner's failure to explain the discrepancy, the subject assessment should remain. Once again, the Court reiterates that tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. In the absence of proof of any irregularities in the performance of duties, an assessment duly made by a BIR examiner and approved by his superior officers will not be disturbed. All presumptions are in favor of the correctness of tax assessments. 70 HSAcaE B. Input Tax Carried Forward to Succeeding Period By the end of the fourth quarter of taxable year 2014, petitioner had P2,038,090.63 excess input taxes. 71 Respondent deducted the same from the total input taxes for the taxable year in computing for the input taxes that are to be offset against the output tax due since this shall be carried over to the next succeeding period/quarter(s) as provided under Section 110 (B) of the Tax Code as amended. 72 The Court finds this deduction proper as the carried over excess input tax for the taxable year 2014 may have been utilized to offset against any output tax that petitioner may have incurred in the succeeding taxable period. Besides, petitioner failed to proffer any evidence to establish sufficiently that it did not utilize the said input tax carried over of P2,038,090.63 to the succeeding period. Thus, if the Court were to allow this without ascertaining that such excess input tax carried over is still available, taxpayers may end up benefiting twice from it, i.e. , tax credit against output VAT in the subsequent periods and payment for deficiency VAT at the expense of the government. It should be noted that per respondent's FAN, total input taxes for 2014 amounted to P8,979,765.02. However, upon verification of its quarterly VAT returns, petitioner's total input taxes amounted to P8,980,365.03, to wit: Exhibit Period Total Input Tax P-97 1st Qtr. P3,133,168.23 P-100 2nd Qtr. 2,225,623.80 P-102 3rd Qtr. 1,145,521.56 P-104 4th Qtr. 2,476,051.44 TOTAL P8,980,365.03 =========== Thus, petitioner's total input taxes that are applicable against the output tax due per respondent's audit should be P6,942,274.40, computed as follows: Total input tax per VAT returns filed P8,980,365.03 Less: Input tax carried over to succeeding period 2,038,090.63 Adjusted Allowable input tax P6,942,274.40 =========== As to petitioner's VAT payments per returns, while respondent picked up the amount of P571,959.35, the Court found that petitioner made total payments amounting to P1,138,823.02, as shown below: Exhibit Period VAT Paid P-79 to P-81 January 2014 P929,266.21 P-90 to P-92 August 2014 209,556.81 Total VAT Payments P1,138,823.02 =========== Upon recomputation, petitioner's deficiency VAT liability assessment for the taxable year 2014 should be cancelled, thus: AScHCD Taxable Receipts per return P62,618,614.42 Add: Receipts not Subjected to VAT 3,211,281.69 Taxable Sales as adjusted P65,829,896.11 Output Tax Due P7,899,587.53 Less: Input Tax claimed per return P8,980,365.03 Less: Input Tax Carried Forward to Succeeding Period 2,038,090.63 6,942,274.4 VAT Payable P957,313.13 Less: Payments per VAT returns 1,138,823.02 Basic Tax Due (P181,509.89) ============ III. Expanded Withholding Tax In addition to petitioner's rentals and professional fees previously found by respondent as not subjected to withholding tax, the following expenses are likewise found to be not subjected to withholding tax, thus, assessed for deficiency EWT in the total amount of P35,976.54: Schedule 4: Expense/Income Payments Per ITR Per Alphalist/ 1601-E Disallowed Expenses Rate EWT Due Purchase of Services & Contractors: Fuel and Oil P117,021.00 Office Supplies 379,082.00 Repairs and Maintenance 101,623.00 Acquisition of Equipment 2,465,390.00 Direct Charges-Materials, Supplies and Facilities 46,525,080.00 Sub-total P49,588,196.00 Less: Importations 18,271,392.82 TOTAL P31,316,803.18 P30,058,128.30 P1,258,674.88 1% P12,586.75 Add: EWT (Schedule 1) 23,389.79 TOTAL P35,976.54 ========= Again, petitioner insists that it withheld and remitted all the required withholding taxes on its payments for rental and professional fees. However, as previously discussed, without supporting documents submitted as evidence, petitioner's mere assertion cannot overcome the presumption of regularity of respondent's assessment. HESIcT With regard to the additional EWT assessment of P12,586.75, petitioner avers that it cannot be assessed as the company is not listed as one of the Top Twenty Thousand Corporations by the BIR. 73 However, the Court notes that in its monthly remittance returns, petitioner actually withheld as a Top 20,000 Corporation on income payments to local suppliers of goods and services: Exhibit Month Tax Base Tax Rate Tax Required to be Withheld P-132 May P5,001,382.61 1% P50,013.83 P-134 Jun 1,509,730.00 1% 15,097.30 P-136 Jul 919,943.00 1% 9,199.43 206,156.50 2% 4,123.13 P-138 Aug 212,456.17 2% 4,249.12 524,666.00 1% 5,246.66 P-140 Sep 1,219,593.97 2% 24,391.88 1,800,250.11 1% 18,002.50 P-142 Oct 841,647.10 2% 16,832.94 3,140,713.34 1% 31,407.13 P-144 Nov 1,871,810.50 2% 37,436.21 6,961,820.00 1% 69,618.20 P-146 Dec 2,774,341.00 2% 55,486.82 1,173,528.00 1% 11,735.28 Again, for failure of petitioner to submit evidence to prove otherwise, the assessment for deficiency EWT in the amount of P35,976.54 is upheld. IV. Withholding Tax on Compensation As previously discussed, respondent's examiner found salaries and wages that were not subjected to withholding tax on compensation, hence the expense was disallowed as a deduction from gross income. The corresponding withholding tax liability is likewise assessed herein: 74 Schedule 2: Salaries and Wages per FS/ITR P25,405,954.00 Less: Salaries and Wages per 1601C 5,291,795.95 Salaries & wages not subjected to withholding tax P20,114,158.05 Multiplied by P1,209,036.44 P4,927,985.28 24.5341% Basic Deficiency Withholding Tax P4,934,827.65 =========== To recall, the Court found that only the non-taxable fringe benefits amounting to P135,835.60 can be considered. Accordingly, petitioner is liable for deficiency withholding tax on compensation in the adjusted amount of P4,901,501.61, computed as follows: AcICHD Salaries & wages not subjected to withholding tax P19,978,322.45 Multiplied by: P1,209,036.44 P 4,927,985.28 24.5341% Basic Deficiency Withholding Tax on Compensation P4,901,501.61 =========== V. Final Withholding Tax Respondent's verification disclosed that petitioner failed to withhold and remit the FWT on the cash dividends declared amounting to P600,000.00, hence, assessed pursuant to Section 2.57.1 of RR No. 2-98, as amended. Petitioner counters that the final tax amounting to P840,000.00 was paid and remitted, although BIR Form No. 1601-E was used instead of BIR Form No. 1601-F. 75 However, petitioner's Monthly Remittance Return of Creditable Income Taxes Withheld (Expanded) (BIR Form No. 1601-E) for the month of April 2014 and the corresponding proofs of payment were denied admission as evidence by the Court. 76 Thus, for petitioner's failure to proffer evidence to support its claim, the following deficiency FWT assessment should remain: 77 Schedule 5: Cash dividends P6,000,000.00 Multiplied by: Tax rate 10% Basic Deficiency Final Withholding Tax P600,000.00 ========== VI. Documentary Stamp Tax Respondent's examiner found that petitioner failed to pay the DST on its advances pursuant to Section 179 of the NIRC of 1997, thus, petitioner was assessed as follows: 78 Schedule 6: Advances from related parties P5,000,000.00 Multiplied by DST Rate x P1.00/P200.00 Basic Deficiency Documentary Stamp Tax P25,000.00 ============ Petitioner counters that the subject amount pertains to its "Deposit for Future Subscription and that the proposed increase in capitalization was still pending with the SEC. Hence, subjecting the said deposit to 'Stamp on Debt Instruments' x x x is premature as there was no debt instrument then issued." 79 However, petitioner failed to support its allegation with documentary evidence. As a consequence, the foregoing assessment should be upheld. caITAC VII. Improperly Accumulated Earnings Tax Respondent's investigation disclosed that petitioner accumulated retained earnings and profits instead of having them distributed as dividends, hence, the latter assessed for IAET pursuant to Section 29 of the 1997 NIRC, as amended, and implemented by RR No. 2-2001, as follows: 80 Schedule 7: Taxable income for the year P7,749,577.00 Less: Income tax paid P2,351,821.10 Dividends declared 6,000,000.00 8,351,821.10 Total P(602,244.10) Add: Retained Earnings from prior years 29,528,732.00 Accumulated Earnings as of Dec. 31, 2014 P28,926,487.90 Less: Amount that may be retained 500,000.00 Improperly Accumulated Taxable Income P28,426,487.90 IAET Rate 10% Improperly Accumulated Earnings Tax P2,842,648.79 ============ Petitioner avers that it appropriated its retained earnings for the acquisition of a land/property to be used for its office, considering the high cost of rentals in Makati City and for future expansion. 81 To support its allegation, petitioner submitted a Secretary's Certificate dated July 15, 2020. 82 A reading of the said Secretary's Certificate reveals that at the special meeting of the Board of Directors of the corporation on February 8, 2015, petitioner declared a cash dividend in the amount of P4,000,000.00 to qualified stockholders of record as of December 31, 2014, which will be paid on or before April 25, 2015. Other documents submitted by petitioner purportedly supporting its contentions were denied admission as evidence, hence, cannot be considered, namely, the Board Resolution dated April 25, 2014, the Secretary's Certificate dated March 18, 2021 of the board meeting on April 25, 2014, and the appraisal report dated April 17, 2016. TAIaHE Pursuant to Section 3 of RR No. 2-2001, the following constitute accumulation of earnings for the reasonable needs of the business: "SECTION 3. Determination of Reasonable Needs of the Business . x x x For purposes of these Regulations, the following constitute accumulation of earnings for the reasonable needs of the business: a. Allowance for the increase in the accumulation of earnings up to 100% of the paid-up capital of the corporation as of Balance Sheet date, inclusive of accumulations taken from other years; b. Earnings reserved for definite corporate expansion projects or programs requiring considerable capital expenditure as approved by the Board of Directors or equivalent body; c. Earnings reserved for building, plants or equipment acquisition as approved by the Board of Directors or equivalent body; d. Earnings reserved for compliance with any loan covenant or pre-existing obligation established under a legitimate business agreement; e. Earnings required by law or applicable regulations to be retained by the corporation or in respect of which there is legal prohibition against its distribution; f. In the case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings intended or reserved for investments within the Philippines as can be proven by corporate records and/or relevant documentary evidence." (Emphasis supplied) However, petitioner failed to prove that the appropriation of its retained earnings is for the reasonable needs of the business for lack of evidence. On the other hand, examination of petitioner's Balance Sheet as of December 31, 2014 shows that petitioner's capital stock amounts to P5,000,000.00, 83 not P500,000.00 as determined by respondent's examiner. Thus, respondent's computation of IAET should be adjusted accordingly. Pursuant to the foregoing, petitioner's deficiency IAET should be P1,992,648.79, computed as follows: ICHDca Taxable income for the year P7,749,577.00 Less: Income tax paid P2,351,821.10 Dividends declared 2014 6,000,000.00 Dividends declared 2015 4,000,000.00 12,351,821.10 Total P(4,602,244.10) Add: Retained Earnings from prior years 29,528,732.00 Accumulated Earnings as of Dec. 31, 2014 P24,926,487.90 Less: Amount that may be retained 5,000,000.00 Improperly Accumulated Taxable Income P19,926,487.90 IAET Rate 10% Improperly Accumulated Earnings Tax P1,992,648.79 =========== Compromise penalty Respondent also imposed a compromise penalty of P80,000.00 for the following violations: 84 Nature of Violation Violated Provision Amount Due Failure to file and pay the improperly accumulated earnings tax return Section 29, NIRC P40,000.00 Failure to file and pay the documentary stamp tax return Section 179, NIRC 30,000.00 Failure to file and pay the final withholding tax return Section 255, NIRC 10,000.00 TOTAL P80,000.00 ========= Respondent's basis for the foregoing is Section 255 of the NIRC, as amended. 85 Such imposition cannot be sustained. Under Revenue Memorandum Order ("RMO") No. 007-15, compromise penalties are only amounts suggested in settlement of criminal liability, and may not be imposed on or exacted from the taxpayer in the event that a taxpayer refuses to pay the same. It is well-settled that the Court has no jurisdiction to compel a taxpayer to pay the compromise penalty because by its very nature, it implies a mutual agreement between the parties in respect to the thing or subject matter that is so compromised, and the choice of paying or not paying it distinctly belongs to the taxpayer. 86 Absent a showing that herein petitioner consented to the compromise penalty, its imposition should be cancelled. The imposition of the same without the conformity of the taxpayer is illegal and unauthorized. 87 To recapitulate, petitioner is liable for the following basic deficiency taxes for the year 2014: Type of Tax Basic Deficiency Income Tax P6,510,495.44 Expanded Withholding Tax (EWT) 35,976.54 Withholding Tax on Compensation (WTC) 4,901,501.61 Final Withholding Tax (FWT) 600,000.00 Documentary Stamp Tax (DST) 25,000.00 IAET 1,992,648.79 TOTAL P14,065,622.38 =========== In addition to the foregoing basic deficiency taxes, petitioner is liable to a penalty of 25% surcharge imposed on the basic deficiency taxes pursuant to Section 248 (A) (3) of the 1997 NIRC, as amended, which provides: cDHAES "SEC. 248. Civil Penalties . (A) There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to twenty-five percent (25%) of the amount due, in the following cases: xxx xxx xxx (3) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment; x x x" Moreover, petitioner is liable to pay the deficiency interest at the rates of 20% per annum computed from the date prescribed for its payment until December 31, 2017 and 12% computed from January 1, 2018, upon the effectivity of the TRAIN Law, until the demand made by the Commissioner or his authorized representative on February 5, 2018, in accordance with Section 249 (B) of the 1997 NIRC, as amended by TRAIN Law. To recall, the FAN issued by respondent states: 88 "In view thereof, you are requested to pay your aforementioned deficiency tax liabilities through the duly authorized agent bank in which you are enrolled using the electronic BIR Payment Form (eBIR Form 0605) within the time as shown in the enclosed assessment notice. x x x" The said Assessment Notices show a due date of February 5, 2018. 89 Likewise, petitioner is liable to pay the delinquency interest at the rate of 12% per annum imposed on the basic deficiency tax, 25% surcharge and deficiency interest computed from February 5, 2018 until full payment thereof pursuant to Section 249 (C) of the 1997 NIRC, as amended. Thus, for the taxable year 2014, petitioner is liable to pay the aggregate amount of P25,345,346.56, consisting of basic deficiency taxes, surcharges, and deficiency interest computed as of February 5, 2018, detailed as follows: TCAScE Income Tax EWT WTC Basic deficiency tax P6,510,495.44 P35,976.54 P4,901,501.61 Add: 25% Surcharge 1,627,623.86 8,994.14 1,225,375.40 Deficiency Interest on: Income Tax 20% from April 16, 2015 to Dec. 31, 2017 (P6,510,495.44 x 20% x 991/365 days) 3,535,288.21 12% from Jan. 1, 2018 to Feb. 5, 2018 (P6,510,495.44 x 12% x 36/365 days) 77,055.73 EWT 20% from Jan. 21, 2015 to Dec. 31, 2017 (P35,976.54 x 20% x 1,076/365 days) 21,211.37 12% from Jan. 1, 2018 to Feb. 5, 2018 (P35,976.54 x 12% x 36/365 days) 425.80 WTC 20% from Jan. 21, 2015 to Dec. 31, 2017 (P4,901,501.61 x 20% x 1,076/365 days) 2,889,871.63 12% from Jan. 1, 2018 to Feb. 5, 2018 (P4,901,501.61 x 12% x 36/365 days) 58,012.29 Total Amount Due on February 5, 2018 P11,750,463.24 P66,607.85 P9,074,760.93 FWT DST IAET Basic Deficiency Tax P600,000.00 P25,000.00 P1,992,648.79 Add: 25% Surcharge 150,000.00 6,250.00 498,162.20 Deficiency Interest on: FWT 20% from Jan. 21, 2015 to Dec. 31, 2017 (P600,000.00 x 20% x 1,076/365 days) 353,753.42 12% from Jan. 1, 2018 to Feb. 5, 2018 (P600,000.00 x 12% x 36/365 days) 7,101.37 DST 20% from Jan. 6, 2015 to Dec. 31, 2017 (P25,000.00 x 20% x 1,081/365 days) 14,945.21 12% from Jan. 1, 2018 to Feb. 5, 2018 (P25,000.00 x 12% x 36/365 days) 295.89 IAET 20% from Jan. 16, 2016 to Dec. 31, 2017 (P1,992,648.79 x 20% x 1,076/365 days) 781,773.44 12% from Jan. 1, 2018 to Feb. 5, 2018 (P1,992,648.79 x 12% x 36/365 days) 23,584.23 Total Amount Due on February 5, 2018 P1,110,854.79 P46,491.10 P3,296,168.66 TOTAL AMOUNT DUE P25,345,346.57 =========== In addition, petitioner is liable for delinquency interest at the rate of 12% per annum on the respective total amounts still due on February 5, 2018, computed from February 6, 2018 until full payment thereof pursuant to Section 249 (C) of the 1997 NIRC, as amended by TRAIN Law and implemented by Revenue Regulations No. 21-2018. WHEREFORE , the instant Petition for Review is PARTIALLY GRANTED . Respondent's VAT assessment and the compromise penalties are CANCELLED for lack of merit, while the assessments for deficiency income tax, EWT, WTC, FWT, DST and IAET are UPHELD , but with modification. Accordingly, petitioner is ORDERED TO PAY respondent the following: ASEcHI Basic Deficiency 25% Surcharge Deficiency Interest as of Feb. 5, 2018 Total Income Tax P6,510,495.44 P1,627,623.86 P3,612,343.94 P11,750,463.24 Expanded Withholding Tax (EWT) 35,976.54 8,994.14 21,637.17 66,607.85 Withholding Tax on Compensation (WTC) 4,901,501.61 1,225,375.40 2,947,883.92 9,074,760.93 Final Withholding Tax (FWT) 600,000.00 150,000.00 360,854.79 1,110,854.79 Documentary Stamp Tax (DST) 25,000.00 6,250.00 15,241.10 46,491.10 IAET 1,992,648.79 498,162.20 805,357.67 3,296,168.66 TOTAL P14,065,622.38 P3,516,405.60 P7,763,318.59 P25,345,346.57 In addition, petitioner is ORDERED TO PAY respondent delinquency interest at the rate of twelve percent (12%) per annum on the total amount due of P25,345,346.57 as of February 5, 2018, as determined above, or equivalent to the amount of P8,332.72 90 per day, computed from February 6, 2018 until full payment thereof pursuant to Section 249 (C) of the 1997 NIRC, as amended by TRAIN Law and implemented by Revenue Regulations No. 21-2018. cTDaEH SO ORDERED. (SGD.) CATHERINE T. MANAHAN Associate Justice Roman G. del Rosario, P.J. and Marian Ivy F. Reyes-Fajardo, J. , concur. Footnotes 1. Prayer, Petition for Review , Docket Vol. I, p. 17. 2. Parties, Petition for Review , Docket Vol. I, p. 11. 3. Par. 1, Admitted Facts, Joint Stipulation of Facts and Issues (JSFI), Docket Vol. I, p. 176. 4. Exhibit "P-1", BIR Records, p. 2. 5. Par. 2, Admitted Facts, JSFI, Docket Vol. I, p. 176; Exhibit "P-15", BIR Records, p. 512. 6. Par. 3, Admitted Facts, JSFI, Docket Vol. I, pp. 176 to 177; Exhibit "P-16", BIR Records, pp. 525 to 538. 7. Par. 4, Admitted Facts, JSFI, Docket Vol. I, p. 177; Exhibit "P-17", Docket Vol. II, pp. 468 to 473. 8. Exhibit "P-18", Docket Vol. II, pp. 474 to 475. 9. Docket Vol. I, pp. 10 to 19. 10. Docket Vol. I, pp. 47 to 50. 11. Docket Vol. I, pp. 68 to 69. 12. Docket Vol. I, pp. 51 to 55. 13. Docket Vol. I, pp. 74 to 75. 14. Docket Vol. I, pp. 76 to 77. 15. Docket Vol. I, p. 82. 16. Docket Vol. I, p. 93. 17. Refer to the Resolution dated January 22, 2020, Docket Vol. I, p. 104; Notice of Pre-Trial Conference dated January 23, 2020, Docket Vol. I, pp. 105 to 106. 18. Refer to Notice of Resetting dated February 26, 2020 and June 30, 2020, Docket Vol. I, pp. 110 and 158, respectively; Minutes of hearing held on, and Order dated, August 27, 2020, Docket Vol. I, pp. 164 to 168, and 172 to 175, respectively. 19. Docket Vol. I, pp. 111 to 118. 20. Docket Vol. I, pp. 139 to 143. 21. Compliance dated February 5, 2020, Docket Vol. I, p. 107. 22. Docket Vol. I, pp. 176 to 178. 23. Docket Vol. I, p. 200. 24. Docket Vol. I, pp. 255 to 270. 25. Exhibit "P-207", Docket Vol. I, pp. 144 to 155; Minutes of hearing held on, and Order dated, March 2, 2021, Docket Vol. I, pp. 333 to 337. 26. Minutes of hearing held on, and Order dated, March 1, 2022, Docket Vol. II, pp. 427 to 427-A, and 428 to 428-A, respectively. 27. Minutes of the hearing held on, and Order dated, March 1, 2021, Docket Vol. I, pp. 384 to 388. 28. Minutes of hearing held on, and Order dated, March 1, 2022, Docket Vol. II, pp. 427 to 427-A and 428 to 428-A, respectively. 29. Docket Vol. II, pp. 429 to 439. 30. Docket Vol. II, pp. 995 to 1000. 31. Docket Vol. II, pp. 983 to 992. 32. Docket Vol. II, pp. 1004 to 1006. 33. Docket Vol. II, pp. 1009 to 1015. 34. Docket Vol. II, pp. 1017 to 1020. 35. Docket Vol. II, pp. 1057 to 1059. 36. Docket Vol. II, pp. 1033 to 1047. 37. Docket Vol. II, pp. 1022 to 1032. 38. Docket Vol. II, p. 1056. 39. Docket Vol. II, pp. 1066 to 1070. 40. Statement of Issues, JSFI, Docket Vol. I, p. 177. 41. Transcript of Stenographic Notes (TSN), March 1, 2022, p. 35. 42. SUBJECT: BIR Audit Program. 43. SUBJECT: Electronic Issuance of Letters of Authority. 44. Exhibit "P-16", BIR Records, p. 538. 45. Exhibit "P-16", BIR Records, p. 536. 46. Exhibits "P-250" and "P-250-a", Docket Vol. II, pp. 743 to 744. 47. Paragraph 9 (a), III. Discussion/Arguments, Memorandum for Petitioner, Docket Vol. II, pp. 1025 to 1026. 48. Exhibits "P-67", "P-70", "P-73", "P-132", "P-134", "P-136", "P-138", "P-140", "P-142", "P-144", and "P-146", Docket Vol. II, pp. 542 to 544 and 607 to 631. 49. Exhibit "P-16", BIR Records, p. 536. 50. Schedule 2C, Line 20, Exhibit "P-13", BIR Records, p. 280. See also BIR Records, p. 269. 51. Schedule 4, Line 29, Exhibit "P-13", BIR Records, p. 279. See also BIR Records, p. 268. 52. Paragraph 9 (b), III. Discussion/Arguments, Memorandum for Petitioner, Docket Vol. II, pp. 1026 to 1028. 53. Paragraph 9 (b), III. Discussion/Arguments, Memorandum for Petitioner, Docket Vol. II, p. 1026. 54. Resolution dated June 14, 2022, Docket Vol. II, p. 1013. 55. Paragraph 9 (b), III. Discussion/Arguments, Memorandum for Petitioner, Docket Vol. II, p. 1026. See also Annex B of Formal Offer of Evidence, Docket Vol. II, p. 980. 56. It is noted that in its protest to the FAN, petitioner avers that the amount P744,408.60 pertains to either non-taxable fringe benefits or expenses for entertainment, amusement and recreation. Exhibit "P-17", Docket Vol. II, pp. 469 to 470. 57. It is noted that in its protest to the FAN, petitioner avers that the amount P15,996,777.00 pertains to payments to Third Generation Network Solutions Corp. (TGNSC), a company sub-contractor, and other sub-contractors and/or independent contractors. Exhibit "P-17", Docket Vol. II, pp. 470 to 471. 58. Paragraph 9 (b), III. Discussion/Arguments, Memorandum for Petitioner, Docket Vol. II, pp. 1027 to 1028. See also Annex C of Formal Offer of Evidence, Docket Vol. II, p. 981. 59. Exhibits "P-250" and "P-250-a", Docket Vol. II, p. 743. 60. Exhibits "P-299" to "P-346-b", Docket Vol. II, pp. 813 to 963. 61. Exhibit "P-16", BIR Records, p. 536. 62. Exhibits "P-21" to "P-54" and "P-148" to "P-245", Docket Vol. II, pp. 500 to 537 and "P-632" to "P-737". 63. Line 3, Schedule 7 Tax Credits/Payments, Exhibit "P-13", BIR Records, pp. 266 and 277. 64. Total amount paid is P85,582.00 consisting of income tax due for the quarter of P58,634.00 and penalties of P26,948.00. See Exhibits "P-13" and "P-14", BIR Records, pp. 261 to 263 and 282. 65. Exhibit "P-16", BIR Records, p. 538. 66. Exhibit "P-16", BIR Records, pp. 535 to 536. 67. Exhibit "P-13", BIR Records, pp. 268 to 269. 68. Paragraph 10, III. Discussion/Arguments, Memorandum for Petitioner, Docket Vol. II, p. 1029. 69. Exhibits "P-109 to P-113" and "P-246", Docket Vol. II, pp. 572 to 576 and 738. 70. Commissioner of Internal Revenue vs. Traders Royal Bank , G.R. No. 167134, March 18, 2015. 71. Exhibit "P-105", Docket Vol. II, p. 570. 72. Exhibit "P-16", BIR Records, p. 535. 73. Paragraph 11, III. Discussion/Arguments, Memorandum for Petitioner, Docket Vol. II, p. 1029. 74. Exhibit "P-16", BIR Records, p. 536. 75. Paragraph V of Exhibit "P-17", Docket Vol. II, p. 472. See also Paragraph 13, III. Discussion/Arguments, Memorandum for Petitioner, Docket Vol. II, p. 1030. 76. Resolution dated June 14, 2022, Docket Vol. II, pp. 1009 to 1015. 77. Exhibit "P-16", BIR Records, p. 535. 78. Exhibit "P-16", BIR Records, pp. 534 to 535. 79. Paragraph 14, III. Discussion/Arguments, Memorandum for Petitioner, Docket Vol. II, p. 1030. 80. Exhibit "P-16", BIR Records, p. 534. 81. Paragraph 15, III. Discussion/Arguments, Memorandum for Petitioner, Docket Vol. II, p. 1030. 82. Exhibit "P-12", Docket Vol. II, p. 466. 83. Schedule 10, Line 13, Exhibit "P-13", BIR Records, p. 276. See also BIR Records, p. 265. 84. Exhibit "P-16", BIR Records, p. 533. 85. Exhibit "P-16", BIR Records, p. 533. 86. The Philippines International Fair, Inc. vs. The Collector of Internal Revenue, et al. , G.R. Nos. L-12928 and L-12932, March 31, 1962, 4 SCRA 781. 87. Commissioner of Internal Revenue vs. Liangga Bay Logging Co., Inc. and the Court of Tax Appeals , G.R. No. 35266, January 21, 1999, 193 SCRA 92-93. 88. Exhibit "P-16", BIR Records, p. 537. 89. Exhibit "P-16", BIR Records, pp. 525 to 532. 90. P25,345,346.57 multiplied by 12% divided by 365 days.