Commissioner of Internal Revenue v. El Paso Philippines Energy Co., Inc.

EN BANC [C.T.A. EB CASE NO. 1319. March 6, 2017.] (C.T.A. Case No. 8013) COMMISSIONER OF INTERNAL REVENUE , petitioner , vs. EL PASO PHILIPPINES ENERGY COMPANY, INC. , respondent . DECISION FABON-VICTORINO , J p : On February 23, 2015, the Court in Division rendered a Decision 1 in CTA Case No. 8013, entitled El Paso Philippines Energy Company, Inc. (EPPECI) vs. Commissioner of Internal Revenue (CIR) ,the dispositive portion of which reads as follows: HTcADC Assailed Decision of February 23, 2015 : WHEREFORE ,premises considered, the instant Petition for Review is hereby PARTIALLY GRANTED .Accordingly, the assessments issued by respondent against petitioner for taxable year 2004 covering deficiency income tax in the amount of P28,134,150.84, deficiency expanded withholding tax in the amount of P186,395.72, deficiency improperly accumulated earnings tax in the amount of P35,153,053.99 and compromise penalty in the amount of P25,000.00 are hereby CANCELLED and WITHDRAWN .However, respondent's assessments covering deficiency value-added tax and final withholding tax for taxable year 2004 are hereby AFFIRMED , and petitioner is held liable to pay the modified amount of P12,120,947.06, inclusive of the twenty-five percent (25%) surcharge imposed under Section 248 (A) (3) of the NIRC of 1997, computed as follows: BASIC TAX SURCHARGE TOTAL Value-Added Tax P3,258,957.25 P814,739.31 P4,073,696.56 Final Withholding Tax 6,437,800.40 1,609,450.10 8,047,250.50 Total P9,696,757.65 P2,424,189.41 P12,120,947.06 In addition, petitioner is held liable to pay: (a) Deficiency interest at the rate of twenty percent (20%) per annum on the basic deficiency VAT in the amount of P3,258,957.25 and basic FWT in the amount of P6,437,800.40 computed from January 25, 2005 and January 15, 2005, respectively, until full payment thereof, pursuant to Section 249 (B) of the NIRC of 1997, as amended; and CAIHTE (b) Delinquency interest at the rate of 20% per annum on the total amount of P12,120,947.06 and on the deficiency interest which have accrued as afore-stated in (a) computed from December 2, 2009 until full payment thereof, pursuant to Section 249 (C) of the NIRC of 1997, as amended. SO ORDERED. The foregoing ruling was effectively affirmed when the Court in Division issued the similarly assailed Resolution 2 dated May 18, 2015, in the following fashion: WHEREFORE ,in view thereof, both respondent's and petitioner's Motions for Partial Reconsideration are DENIED for lack of merit. SO ORDERED. Both unconvinced, the CIR and EPPECI elevated the foregoing Decision and Resolution via their respective Petitions for Review filed before the Court En Banc on June 5, 2015 3 and July 9, 2015, respectively. On December 22, 2015, EPPECI moved to withdraw its Petition for Review as it already paid the Bureau of Internal Revenue (BIR) the assessed Value Added Tax (VAT) and Final Withholding Tax (FWT) assessments, including the surcharge and interest in accordance with the ruling in the Decision dated February 23, 2015. Thus, only the Petition for Review filed by petitioner CIR remains for the determination and resolution of the Court En Banc . In his Petition, petitioner CIR prays to set aside the Decision dated February 23, 2015 and the Resolution dated May 18, 2015 and thereafter render judgment upholding the validity of the following assessments issued against EPPECI for taxable year 2004, to wit: 1. deficiency Income Tax (IT) in the amount of P28,134,150.84; 2. deficiency Expanded Withholding Tax (EWT) in the amount of P186,395.72; 3. deficiency Improperly Accumulated Earnings Tax (IAET) in the amount of P35,153,053.99; and 4. compromise penalty in the amount of P25,000.00. THE FACTS AND THE PROCEEDINGS The established facts are as follows: Petitioner CIR is the Commissioner of the BIR vested with the power, among others, to collect national internal revenue taxes. He holds office at BIR National Office Building, Agham Road, Quezon City. aScITE Respondent EPPECI, on the other hand, is a domestic corporation, with principal place of business at the Ground Floor PFDA Building, Navotas Fish Port Complex, Navotas City. On August 23, 2005, respondent received from the BIR Revenue District Office (RDO) No. 43-Pasig City Letter of Authority (LOA) No. 00009462 4 dated August 18, 2005 for the examination of its books of accounts and other related accounting records for calendar year 2004. Attached to the said LOA is a formal request for the submission of respondent's books of accounts, financial statements, and other related accounting records and supporting documents. On September 5, 2005, respondent, in compliance with the said request, furnished the CIR with copies of its books of account, financial statements, and other pertinent accounting records and supporting documents with covering letter 5 of even date. It was received by petitioner, through BIR RDO No. 43-Pasig City, on the same day. Additional documents were transmitted 6 to BIR RDO No. 43-Pasig City on November 22, 2006, as requested. Sometime in January 2007, BIR RDO No. 43-Pasig City issued a Notice 7 dated January 23, 2007, informing respondent of its alleged tax liabilities and requiring it to appear before the said office for an informal conference set on February 1, 2007. Thereafter, respondent receive a Revised Post Reporting Notice 8 dated October 30, 2007 from the same BIR RDO with attached Summary of Computation of Deficiency Taxes and Details of Discrepancy. On November 26, 2007, respondent filed a reply letter, 9 contesting the alleged deficiency taxes contained in the Revised Post Reporting Notice. On January 8, 2008, respondent received a Preliminary Assessment Notice 10 (PAN) dated December 28, 2007 for its alleged deficiency IT, VAT, EWT, FWT, and IAET in the aggregate amount of P76,900,903.32, inclusive of interest, for calendar year 2004. On January 22, 2008, respondent received a Formal Letter of Demand 11 (FLD) No. 431130 dated January 15, 2008 with attached Assessment Notices, demanding payment of the deficiency tax assessments for calendar year 2004, computed as follows: I. DEFICIENCY INCOME TAX Taxable Income per return - Add: Disallowances/Adjustments per investigation: Unaccounted income P48,641,323.00 Unaccounted prime contractors 1,044,141.23 Professional fees not subjected to EWT 1,154,982.00 Interest expense not subjected to final tax 4,973,138.20 Disallowed interest expense 288,715.93 P56,102,300.36 Taxable income per investigation 56,102,300.36 Income tax due thereon 17,952,736.11 Less: Payments/tax credits Prior years excess tax credits claimed 10,715,585.00 Creditable withholding tax claimed 15,517,047.00 Total 26,232,632.00 Less: Excess tax credits to be carried forward P22,203,593.00 Deferred MCIT 4,029,039.00 26,232,632.00 - Deficiency income tax 17,952,736.11 Add: 20% interest p.a. from 4.16.05 to 2.15.08 10,181,414.73 TOTAL AMOUNT DUE P28,134,150.84 II. DEFICIENCY VALUE-ADDED TAX Taxable receipts per return 72,705 617.83 Add: Adjustments/discrepancies per investigation: Unaccounted income 48,641,323.00 Gross receipts not subjected to VAT 32,584,572.81 81,225,895.81 Taxable receipts per investigation 153,931,513.64 Value-Added Tax due thereon 15,393,151.36 Less: Allowable input tax/payments Payments 6,194,285.89 Input tax during the year 1,076,276.07 7,270,561.95 Deficiency value-added tax 8,122,589.40 Add: 20% interest p.a. from 1.25.05 to 2.15.08 4,967,019.05 TOTAL AMOUNT DUE P13,089,608.45 III. DEFICIENCY EXPANDED WITHHOLDING TAX Expanded withholding tax due thereon 115,498.20 Add: 20% interest p.a. from 1.16.05 to 2.15.08 71,197.52 TOTAL AMOUNT DUE P186,695.72 IV. DEFICIENCY FINAL WITHHOLDING TAX ON INTEREST EXPENSE Interest expense not subjected to final withholding tax 4,973,138.20 Final withholding tax rate 20% Final withholding tax on interest expense due thereon 994,627.64 Add: 20% interest p.a. from 1.16.05 to 2.15.08 613,126.63 TOTAL AMOUNT DUE P1,607,754.27 V. DEFICIENCY IMPROPERLY ACCUMULATED EARNINGS TAX Taxable income (435,096,750.00) Add: Interest income subject to final tax 607,823.00 Equity in net earnings of subsidiary 171,352,773.00 Losses 485,906,173.00 657,866,769.00 Balance 222,770,019.00 Less: Income tax payable 4,029,039.00 Balance 218,740,980.00 Less: Capital stock 8,140,000.00 Improperly accumulated earnings 210,600,980.00 Improperly accumulated earnings rate 10% Improperly accumulated earnings tax 21,060,098.00 Add: 25% Surcharge 5,265,024.50 20% interest p.a. from 1.11.06 to 2.15.08 8,827,931.49 14,092,955.99 TOTAL AMOUNT DUE P35,153,053.99 Respondent protested 12 the said FLD on January 25, 2008. In a Letter 13 dated February 15, 2008, petitioner informed respondent that its protest shall be forwarded to BIR RDO No. 43-Pasig City. DETACa On April 30, 2008, respondent received a Tax Verification Notice 14 dated April 1, 2008 stating that Revenue Officer Marjonie Ando had been authorized to verify supporting documents in relation to the "Re-investigation (AIRT)" covering the taxable year 2004. Attached thereto was a letter 15 dated April 18, 2008, requesting respondent to submit supporting documents of its protest within ten (10) days from notice. On May 19, 2009, petitioner issued a Referral Note 16 to Revenue Officer (RO) Rodrigo Peralta, directing him to continue the audit of respondent's tax liabilities. On September 11, 2009, RO Peralta made a Report of Investigation 17 to the Revenue District Officer of RDO No. 43A-East, Pasig City recommending the denial of respondent's request for reinvestigation for failure to substantiate its claim for cancellation of assessment. On November 27, 2009, respondent received from BIR Revenue Region No. 7, Quezon City, Regional Task Force a Preliminary Collection Notice 18 dated October 23, 2009, demanding payment of the alleged deficiency tax assessments in the aggregate amount of P78,196,263.26. This prompted respondent to file a Petition for Review with the Court in Division on December 28, 2009 for the cancellation of the questioned assessment issued by petitioner. In his Answer, 19 petitioner claimed that since the Petition for Review was filed beyond the 30-day prescriptive period provided under Section 228 of the Tax Code, as amended, the Court in Division no longer had the competence to hear and determine the case. Nevertheless, he argued that: (1) the assessments for deficiency IT, VAT, EWT, and IAET were valid and in accordance with law; (2) the said assessments were determined and computed based on respondent's records; and (3) assessments were prima facie presumed correct and made in good faith. On May 21, 2010, petitioner moved for a preliminary hearing on the issue of prescription, 20 but the same was denied in the Resolution dated November 2, 2010, ruling that the Petition for Review was seasonably filed. 21 Petitioner's bid for a reconsideration suffered the same fate in the Resolution 22 promulgated on February 9, 2011. Trial ensued during which both parties presented evidence in support of their respective positions. HEITAD On February 23, 2015, the Court in Division rendered the assailed Decision which it affirmed in the similarly assailed Resolution of May 18, 2015. As earlier stated, both petitioner and respondent elevated the matter to the Court En Banc ,however, respondent subsequently withdrew its appeal on ground of payment in accordance with the assailed Decision. On April 28, 2016, the instant Petition for Review was submitted for decision. 23 THE ISSUE Petitioner anchored its appeal on the sole ground to wit: THE 2nd DIVISION OF THE HONORABLE COURT OF TAX APPEALS ERRED IN CANCELLING THE ASSESSMENT ON DEFICIENCY INCOME TAX IN THE AMOUNT OF P28,134,150.84, DEFICIENCY EXPANDED WITHHOLDING TAX IN THE AMOUNT OF P186,395.72, DEFICIENCY IMPROPERLY ACCUMULATED EARNINGS TAX IN THE AMOUNT OF P35,153,053.99 AND COMPROMISE PENALTY IN THE AMOUNT OF P25,000.00 FOR TAXABLE YEAR 2004 BECAUSE THE ASSESSMENTS ARE WITH FACTUAL AND LEGAL BASES AND THEREFORE, VALID. Petitioner insist that the deficiency assessment for income tax (IT), expanded withholding tax (EWT), improperly accumulated earning tax (IAET) and Compromise Penalty are valid given their factual and legal bases. Allegedly, respondent has deficiency IT as it has unaccounted source of income revealed through some discrepancies on its income tax return and creditable withholding tax and alphalist/BIR Form No. 1601-E. Respondent's receipts as reflected in its financial statements/income tax return (FS/ITR) and as computed based on the creditable income taxes withheld from it, show a discrepancy of P48,641,323.00. This amount represents unaccounted income subject to income tax per Section 32 of the Tax Code. The same is true with the discrepancy on respondent's income payments to its prime contractors per FS/ITR and per alphalist amounting to P1,044,141.23. On the other hand, the discrepancy on respondent's professional fee per FS/ITR and per alphalist amounting to P1,154,982.00, represents professional fees not subjected to EWT, hence, disallowed as deduction from its gross income pursuant to Section 34 (K) of the Tax Code. Part of respondent's interest expense was also disallowed due to its failure to subject the same to FWT. Moreover, the disallowance of respondent's interest expense in the amount of P288,715.93 was due to its failure to apply the limitation of deductibility of interest expense as provided under the Tax Code. Further, respondent failed to withhold and remit the EWT on professional fees paid amounting to P1,154,982.00, rendering liable to pay the deficiency EWT thereof amounting to P186,385.72, pursuant to Revenue Regulations (RR) No. 2-98, as amended. aDSIHc Respondent as well has improperly accumulated earnings for taxable year 2004 amounting to P210,600,980.00, precisely it was assessed of deficiency IAET of P35,153,053.99, by virtue of RR No. 02-99, as amended. The failure of respondent to file/pay its IAET warrants the imposition of P25,000.00 compromise penalty mandated under Revenue Memorandum Order (RMO) No. 1-90. In rejecting petitioner's claim, respondent echoes the Court in Division's findings and submits that the Court in Division correctly cancelled the deficiency IT of P28,134,150.84, the deficiency EWT of P186,395.72, the IAET of P35,153,053.99, and the compromise penalty of P25,000.00. 24 RULING OF THE COURT EN BANC Petitioner's position in the present appeal could not be any different from his previous stance before the Court in Division. In fact, the ground relied upon by petitioner in this Petition for Review was practically truncated, if not reproduced verbatim ,from his Motion for Partial Reconsideration filed on March 5, 2015. On this account and at the risk of being repetitive, the Court En Banc quotes with approval the discussion of the Court in Division in the assailed Decision pertaining to each and every item in the assessment to press the point, thus: I. DEFICIENCY INCOME TAX P28,134,150.84 Respondent (herein petitioner) computed the deficiency income tax assessment for taxable year 2004 in the amount of P28,134,150.84 as follows: Taxable income per return P- Add: Disallowances/Adjustments per investigation: Unaccounted income P48,641,323.00 Unaccounted prime contractors 1,044,141.23 Professional fees not subjected to EWT 1,154,982.00 Interest expense not subjected to final tax 4,973,138.20 Disallowed interest expense 288,715.93 56,102,300.36 Taxable income per investigation P56,102,300.36 Income tax due thereon P17,952,736.11 Less: Payments/tax credits Prior years excess tax credits claimed P10,715,585.00 Creditable withholding tax claimed 15,517,047.00 Total P26,232,632.00 Less: Excess tax credits to be carried forward P22,203,593.00 Deferred MCIT 4,029,039.00 26,232,632.00 - Deficiency Income Tax P17,952,736.11 Add: 20% Interest p.a. from 04.16.05 to 2.15.08 10,181,414.73 TOTAL AMOUNT DUE P28,134,150.84 Petitioner (herein respondent) contends that the assessed deficiency income tax in the amount of P28,134,150.84 is baseless since it is based on the application of the "net worth" method. ATICcS On the other hand, respondent insist that due to some discrepancies on petitioner's income tax return and creditable withholding tax and alphalist/1601-E, petitioner has unaccounted source of income. The Court will now determine the validity of the said assessment by looking into the propriety of the income imputed, as well as the expense deductions and tax credits disallowed by respondent, namely: Unaccounted income P48,641,323.00 Unaccounted prime contractors 1,044,141.23 Professional fees not subjected to EWT 1,154,982.00 Interest expense not subjected to final tax 4,973,138.20 Disallowed interest expense 288,715.93 Excess tax credits to be carried forward 22,203,593.00 Deferred MCIT 4,029,039.00 a. Unaccounted income P48,641,323.00 Invoking Section 32 of the National Internal Revenue Code (NIRC) of 1997, as amended, respondent assessed petitioner of deficiency income tax on the alleged unaccounted income of P48,641,323.00, representing the discrepancy between petitioner's receipts as reflected in its financial statements/income tax return (FS/ITR) and as computed by respondent based on the creditable income taxes withheld from petitioner: Receipts per investigation: Creditable withholding tax P15,517,047.00 Divided by the rate 10% P155,170,470.00 Receipts per FS/ITR 106,529,147.00 Difference P48,641,323.00 Petitioner asserted that respondent erred in using ten percent (10%) as the withholding tax rate in computing its gross receipts since the withholding tax rates applicable to its management fees vary from 10% to fifteen percent (15%).In support of its claim, petitioner presented the Certificates of Creditable Tax Withheld at Source (BIR Form No. 2307) issued by its clients for taxable year 2004 that reflected the following income payments and creditable taxes withheld therefrom: EXHIBIT PAYOR INCOME PAYMENT TAX RATE CWT M Duracom Mobile Power Corp. P9,184,999.70 10% P918,499.97 N East Asia Utilities Corp. 50,735,294.10 10% 5,073,529.41 PPP Cebu Private Power Corp. 35,294,117.67 15% 5,294,117.65 O East Asia Power Resources Corp. 28,221,498.76 15% 4,233,224.81 TOTAL P123,435,910.23 P15,519,371.84 For management fees from East Asia Utilities Corporation, the Court-commissioned Independent CPA found that the tax withheld was 15% (not 10%) per sales invoices examined and that income payments received amounted to P33,823,529.41 (not P50,735,294.10): ETHIDa EXHIBIT INVOICE NO. INVOICE DATE TAX RATE AMOUNT EWT NNN-7 N530N531-001 8/18/2004 15% P16,176,470.59 P2,426,470.59 NNN-8 N530N531-002 8/18/2004 15% 17,647,058.82 2,647,058.82 TOTAL P33,823,529.41 P5,073,529.41 The Independent CPA likewise observed that the net amount of P28,750,000.00 (P33,823,529.41 less P5,073,529.41) received by petitioner from East Asia Utilities Corporation is supported by a corporate check dated September 22, 2004. As a result, petitioner's adjusted total gross receipts for taxable year 2004 amounted to P106,524,145.54, detailed as follows: EXHIBIT PAYOR INCOME PAYMENT M Duracom Mobile Power Corp. P9,184,999.70 NNN-7 and NNN-8 East Asia Utilities Corp. 33,823,529.41 PPP Cebu Private Power Corp. 35,294,117.67 O East Asia Power Resources Corp. 28,221,498.76 TOTAL P106,524,145.54 However, when the adjusted total gross receipts per withholding tax certificates and invoices are compared with that reported in petitioner's financial statements and income tax return, there remains a discrepancy of P5,001.46, computed as follows: Gross receipts per FS/ITR P106,529,147.00 Adjusted gross receipts per withholding tax certificates 106,524,145.54 Difference P5,001.46 In its Reconciliation of Unaccounted Income, petitioner noted of the foregoing difference, in this wise: "Note: The management fees billed to DMPC and EAPRC were in United States Dollars. As such, there are differences in foreign exchange rates used by the companies and upon payment/collection." TIADCc On the other hand, the Independent CPA did not verify further the source of the difference because of the minimal amount involved. In sum, petitioner has sufficiently explained the alleged unaccounted income found by respondent, except for the amount of P5,001.46. Consequently, petitioner shall be liable to pay deficiency income tax on the unaccounted difference of P5,001.46 in line with the rule that tax assessments by tax examiners are presumed correct and made in good faith, with the taxpayer having the burden of proving otherwise. Failure to present proof of error in the assessment will justify the judicial affirmance of said assessment. b. Unaccounted payments to prime contractors P1,044,141.23 Respondent's examiner compared petitioner's income payments to prime contractors as reported in its FS/ITR with those reflected in petitioner's alphalist/BIR Form No. 1601-E, and construed the difference as unaccounted source of income amounting to P1,044,141.23, broken down as follows: Payments to prime contractors: Per FS/ITR P18,697.37 Per alphalist/BIR Forms No. 1601-E 1,062,838.60 Difference P1,044,141.23 Petitioner explained that the difference pertains to travel expenses by company officers and several payments made by petitioner on behalf of El Paso Bangladesh, its affiliated company. Those payments were purportedly made to a travel agency and were recorded as either Travel and Transportation Expenses or Accounts Receivable and were reported in petitioner's financial statements as such. The Court finds for petitioner. A scrutiny of petitioner's Alphalist of Payees Subject to Expanded Withholding Tax as of December 31, 2004 shows the following: PAYEE ATC INCOME PAYMENT RATE EWT Travel Counsellors, Inc. WC120 P1,044,141.53 2% P20,882.83 DHL Worldwide Express WC120 10,551.07 2% 211.02 Santiago, Jay Daniel R. WI010 55,000.00 10% 5,500.00 Adfa Graph Enterprises WC120 8,146.00 2% 162.92 TOTAL P1,117,838.60 P26,756.77 Based on the listing of Alphanumeric Tax Codes (ATC) under Revenue Memorandum Order (RMO) No. 29-98, all of the foregoing with ATC WC120 represent payments to prime contractors/sub-contractors subject to 2% creditable withholding tax; while the payment to Santiago, Jay Daniel R. with ATC WI010 represents professional fees paid to an individual, such as lawyer, CPA, engineer, etc.,subject to 10% creditable withholding tax. The latter was not included in the computation; thus, respondent's examiner arrived at the amount of P1,062,838.60 income payments per alphalist, as shown below: cS EDTC PAYEE INCOME PAYMENT EWT Travel Counsellors, Inc. P1,044,141.53 P20,882.83 DHL Worldwide Express 10,551.07 211.02 Adfa Graph Enterprises 8,146.00 162.92 TOTAL P1,062,838.60 P21,256.77 As regards petitioner's income payments to DHL Worldwide Express and Adfa Graph Enterprises in the respective amounts of P10,551.07 and P8,146.00, totalling P18,697.07, respondent's examiner correctly found that these were reported in petitioner's FS/ITR for taxable year 2004. Petitioner's general ledger for taxable year 2004 disclosed that the amount of P10,551.07, representing courier charges paid to DHL Worldwide Express and the amount of P8,146.00, representing cost of printing invoices and official receipts paid to Adfa Graph Enterprises, were recorded under the "Communications" and "Miscellaneous" expense accounts, respectively. However, in its FS and ITR for taxable year 2004, both amounts were reported under "Others" and "Miscellaneous" expense accounts, respectively. With reference to the income payments to Travel Counsellors, Inc. totaling P1,044,141.23, the same were reported in petitioner's FS/ITR for taxable year 2004 contrary to respondent's allegation. As aptly found by the Independent CPA, the income payments of P1,044,141.23 were recorded as either "Transportation and Travel" expense or "Accounts Receivable-EPEIC" in petitioner's general ledger for taxable year 2004. Petitioner's Notes to its Audited Financial Statements as of December 31, 2004 and 2003, indicate that EPEIC stands for El Paso Energy International Company foreign affiliate of petitioner. Below is the breakdown of the amount of P1,044,141.23: NAME OF PAYEE OR No. OR DATE AMOUNT EWT REFERENCE DEBITED TO ACCOUNT TILE AS FOLLOWS EXH. BIR RECORDS (EXHIBIT 1) Travel Counsellors, Inc. 38675 25-Aug-04 P147,440.00 P2,948.80 JV#080407 Transportation and Travel "P","P-1" to "P-4" Page 229 Travel Counsellors, Inc. 38858 17-Sep-04 187,841.82 3,756.84 JV#090405 Transportation and Travel "Q","Q-1" to "Q-6" Page 229 Travel Counsellors, Inc. 39057 13-Oct-04 394,462.73 7,889.25 JV#100411 Accounts Receivable- EPEIC "R","R-1" to "R-6" Page 239 Travel Counsellors, Inc. 39409 26-Nov-04 210,739.09 4,214.78 JV#110410 Accounts Receivable- EPEIC "S","S-1" to "S-5" Page 239 Travel Counsellors, Inc. 39579 22-Dec-04 103,658.18 2,073.16 JV#120410 Accounts Receivable- EPEIC "T","T-2" to "T-6" Page 239 P1,044,141.82 P20,882.84 The above income payments of P147,440.00 and P187,841.82 formed part of petitioner's claimed deduction for "Transportation and Travel" in the amount of P845,528.00 in its ITR for the year 2004. AIDSTE In its Statement of Income for the year ended December 31, 2004, petitioner reflected as part of its Expenses the amount of P969,722.00 representing "Others",which composed of the P8,403.00 Representation and Entertainment, P845,528.00 Transportation and Travel, and P115,790.00 Miscellaneous expenses. On the other hand, the income payments in the amounts of P394,462.73, P210,739.09, and P103,658.18 formed part of the Accounts Receivable-EPEIC ending balance as of December 31, 2004 in the amount of P1,261,700.02. The latter amount was included in the Receivable of P30,273,203.00, reflected in petitioner's Balance Sheet as of December 31, 2004. As indicated in Note 3 of petitioner's Notes to Financial Statements, the Receivables in the amount of P30,273,203.00 is composed of the following: Related Parties P8,038,169.00 Creditable withholding tax and others 22,235,034.00 P30,273,203.00 The Receivables from Related Parties of P8,038,169.00 consisted of the balances of the following Accounts Receivables as of December 31, 2004: Accounts Receivable-EPEAC P6,776,468.99 Accounts Receivable-EPEIC 1,261,700.02 P8,038,169.01 Based on the foregoing, petitioner duly reported the income payments of P1,044,141.82 in its FS/ITR for taxable year 2004. Respondent's allegation that petitioner had undeclared income arising from the alleged unreported income payments of P1,044,141.82 is without factual basis. By comparing petitioner's income payments to prime contractors/subcontractors per alphalist with those allegedly shown in petitioner's FS/ITR, respondent concluded that the difference pertains to petitioner's undeclared income. By doing so, respondent merely relied on assumptions without obtaining any evidence corroborating such findings. This is contrary to the doctrine laid down by the Supreme Court in Collector of Internal Revenue v. Benipayo ,wherein it was held that: xxx xxx xxx Even if these alleged unaccounted income payments are to be treated as income, the same shall be offset by reporting the equivalent payments as expenses. Hence, no taxable income will result from the said transactions. For lack of factual basis, the deficiency income tax assessment pertaining to the alleged undeclared income from unaccounted income payments of P1,044,141.23 should be cancelled. SDAaTC c. Professional fees not subjected to EWT P1,154,982.00 Pursuant to Section 34 (K) of the NIRC of 1997, as amended, respondent disallowed petitioner's claimed deduction for professional fees in the amount of P1,154,982.00, as computed below, for its alleged failure to subject the same to EWT: Professional fees: Per FS/ITR P1,209,982.00 Per alphalist 55,000.00 Difference P1,154,982.00 Petitioner argued that the difference represents payments made to general professional partnerships, which are exempt from withholding tax pursuant to Section 2.57.5 (B) (4) of Revenue Regulations (RR) No. 2-98, as amended by RR No. 14-02. Petitioner submitted various documents to support its position, to wit: EXHIBIT PAYEE AMOUNT X-2 and Y SGV & Co. P74,122.00 Z and Z-2 SGV & Co. 72,770.00 AA and AA-3 SGV & Co. 62,000.00 BB, BB-2 to BB-11 Puno & Puno Law Offices 221,938.17 DD and DD-3 Puno & Puno Law Offices 438,549.26 EE to EE-4 Puno & Puno Law Offices 40.36 FF-3 and FF-4 Siguion Reyna Montecillo & Ongsiako Law Offices 400.00 GG and GG-4 Puno & Puno Law Offices 732.93 HH-4 SGV & Co. 65,000.00 II, II-9 and II-10 Atty. Editha P. Talaboc 80.00 JJ-3 SyCip Salazar Law Offices 206,420.00 KK-3 SyCip Salazar Law Offices 12,929.62 TOTAL P1,154,982.34 The Court agrees with petitioner. Payments amounting to P1,154,982.34 were made to general professional partnerships, such as law offices and accounting/auditing firms. Section 22 (B) of the NIRC of 1997, as amended, defines general professional partnerships as partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. Corollary thereto, Section 26 of the same Code provides that a general professional partnership shall not be subject to income tax. Its partners are the ones liable in their individual capacity for the payment of income tax. AaCTcI The Supreme Court, in the case of Rufino R. Tan v. Ramon R. Del Rosario, Jr.,et al. , had the occasion to rule that the income tax is imposed not on the professional partnership, which is tax-exempt, but on the partners themselves in their individual capacity computed on their distributive shares of partnership profits. Considering that general professional partnerships are exempt from income tax, payments made to these partnership are not subject withholding tax pursuant to Section 2.57.5 of RR No. 2-98, as amended by RR No. 14-02, which states: xxx xxx xxx This means that respondent's disallowance of petitioner's claimed deduction for professional fees in the amount of P1,154,982.00 has no legal or factual basis. Consequently, the deficiency income tax assessment arising from the disallowed professional fees should be cancelled. d. Interest expense not subjected to final withholding tax (FWT) P4,973,138.20 Finding that part of petitioner's interest expense in the amount of P4,973,138.20 was not subjected to final withholding tax, respondent disallowed the same as deduction from petitioner's gross income, pursuant to Section 34 (K) of the NIRC of 1997, as amended. Below is the computation of the disallowed interest expense of P4,973,138.20: Interest expense: Per FS P133,047,207.00 Per alphalist 128,074,068.80 Difference P4,973,138.20 Petitioner disagreed stating that all of its income payments amounting to P133,047,207.00 were subjected to the corresponding final tax and were remitted to the BIR as evidenced by its BIR Form Nos. 1601-F and 1604-CF. Further, respondent's computation is erroneous because it failed to consider petitioner's payments of interest expense in the succeeding taxable year 2005 for interest incurred in 2004; thus, explaining why the interest expense was reported in 2004 but not subjected to FWT in the same year. To account for the difference of P4,973,138.20 found by respondent, petitioner submitted a Reconciliation of Interest Expense Per books and Per BIR Form No. 1701-F 67 and the related documents. Examination of the foregoing shows that out of the P14,188,231.91 FWT remitted by petitioner to the BIR for the year 2004, only the FWT of P9,880,327.69 pertains to its interest expense for the said year, as computed below: acEHCD FWT per Annual Information Return of income Taxes Withheld on Compensation and Final Withholding Taxes (BIR Form No. 1604-CF) P14,188,231.91 1) FWT on Interest Expense for taxable year 2003 Less: Paid in January 2004 P2,881,783.85 Paid in March 2004 33,483.84 2) Forex loss pertaining to FWT on Interest Expense for taxable year 2003 (see computation below) 11,811.55 3) FWT on Management Fee Expense for 2004 1,380,824.98 4,307,904.22 FWT per BIR Form No. 1604-CF pertaining to Interest Expense for taxable year 2004 P9,880,327.69 Forex gain (loss) per schedule [Exhs. "ZZ" and "ZZ-1"] January P(17,131.47) March 75.10 April 23,234.34 June (2,857.43) October 2,983.54 P6,304.08 Less: Forex loss pertaining to 2003 interest expense Included in the month of Jan. 2004 per schedule [Exhibit "ZZ"] US$ Amount FX Rate Php Amount Accrued Interest thru Dec. 31, 2003 (US$52.4M Loan) [Exhibit "KKK-1.b"] 519,240.33 55.50 28,817,838.32 Interest for Jan. 1-23, 2004 173,080.11 55.43 9,593,172.79 Interest paid on Jan. 23, 2004 692,320.44 38,411,011.11 FWT rate used 10% 10% FWT due 69,232.04 3,841,101.11 FWT remittance [Exhibit "ZZ"] 69,232.04 55.72900 3,858,232.58 Forex gain (loss) (17,131.47) Forex gain (loss) pertaining to Accrued Interest thru Dec. 31, 2003 51,924.03 (0.229) (11,890.60) (11,890.60) Included in the month of March 2004 per schedule [Exhibit "ZZ"] Accrued Interest Dec. 10, 2003-Feb. 29, 2004 (US$2M Loan) [Exhibit "KKK-5.a"] 23,270.63 56.3350 1,310,950.66 Accrued Interest March 1-10, 2004 2,872.92 55.3861 159,119.56 Interest Paid on March 10, 2004 26,143.55 1,470,070.22 FWT rate used 10% 10% FWT due 2,614.36 147,007.02 FWT remittance [Exhibit "ZZ"] 2,614.36 56.2020 146,931.92 Forex gain (loss) [Exhibit "ZZ"] 75.10 Accounted for as follows: Jan. 1-31, 2004 [Exhibit "KKK-2.a"] 890.13 0.1330 118.39 Feb. 1-29 [Exhibit "KKK-3.a"] 842.56 0.1330 112.06 March 1-10, 2004 [Exhibit "KKK-5.a"] 287.29 (0.8159) (234.40) Dec. 10-31, 2003 [Exhibit "KKK-2.a"] 594.37 0.1330 79.05 79.05 2,614.35 75.10 Forex loss pertaining to FWT on interest expense for 2003 (11,811.55) Forex gain pertaining to FWT on interest expense for 2004 P18,115.63 Documents submitted by petitioner further show that petitioner's interest expense for taxable year 2004 amounting to P133,047,207.00 pertains to the remaining balance of drawdowns made on a loan facility from a foreign bank, Hollandsche Bank-Unie N.V. of Netherlands, totaling US$54.4 million as of December 31, 2003. The first drawdown was made on January 28, 1999 and petitioner made partial payments to the foreign bank upon availability of funds. The US$2 million loan was paid on June 20, 2004, while the US$52.4 million loan was prepaid in full on June 30, 2004 by petitioner's parent company, EPEC Netherland Holdings B.V. of Netherlands. In effect, the latter was subrogated to the rights of the foreign bank under the loan facility agreement. By virtue of subrogation, the US$52.4 million loan originally owed by petitioner to Hollandsche Bank-Unie N.V. of Netherland became payable to EPEC Netherland Holdings B.V. of Netherlands. EcTCAD Considering that the US$54.4 million loan was obtained by petitioner from a non-resident foreign bank (Hollandsche Bank-Unie N.V.), and that US$52.4 million thereof was subrogated to a non-resident foreign corporation (EPEC Netherland Holdings B.V.), the imposable tax on the interest derived from said loan is 20% pursuant to Section 28 (B) (5) (a) of the NIRC of 1997, as amended, which states: xxx xxx xxx However, paragraphs 2 (a) (ii) and 2 (b) of Article 11 of the Philippines-Netherlands Tax Treaty provide for the following preferential tax rates on interest: xxx xxx xxx It is clear from the foregoing, prior to the subrogation of the US$52.4 million loan to EPEC Netherland Holdings B.V.,the applicable rate on the subject interest payments is the lower rate of ten percent (10%),pursuant to paragraph 2 (a) (ii) of Article 11 of the Philippines-Netherlands Tax Treaty. On the other hand, upon subrogation of the US$52.4 million loan to EPEC Netherland Holdings B.V. on June 30, 2004, the applicable rate on the subject interest payments is fifteen percent (15%),pursuant to paragraph 2 (b) of Article 11 of the Philippines-Netherlands Tax Treaty. Therefore, the FWT due on the P133,047,207.00 interest expense claimed by petitioner for taxable year 2004 amounted to P16,318,128.04, as computed below: EXH. JV NO. DATE PARTICULARS 2004 FINAL WITHHOLDING TAX RATE AMOUNT DUE KKK-1 010411 1/23/2004 Jan 1-23, $2.4M loan P10,552,489.87 10% P1,055,248.99 KKK-2 010413 1/31/2004 Jan 1-31, $2M loan 551,601.72 10% 55,160.17 KKK-2 010413 1/31/2004 Jan 24-31, $52.4M loan 3,671,252.99 10% 367,125.30 KKK-3 020406 2/29/2004 Feb 1-29, $2M loan 522,121.72 10% 52,212.17 KKK-3 020406 2/29/2004 Feb 1-29, $52.4M loan 13,415,968.74 10% 1,341,596.87 KKK-4 030405 3/10/2004 Mar 1-10, $2M loan 175,031.51 10% 17,503.15 KKK-5 030408 3/31/2004 Mar 1-31, $52.4M loan 14,207,619.56 10% 1,420,761.96 KKK-5 030408 3/31/2004 Mar 10-31, $2M loan 368,156.76 10% 36,815.68 KKK-6 040407 4/23/2004 Apr 1-23, $52.4M loan 10,547,423.33 10% 1,054,742.33 KKK-7 040416 4/30/2004 Mar 31-Apr 30, $2M loan 524,823.40 10% 52,482.34 KKK-7 040416 4/30/2004 Apr 24-30, $52.4M loan 3,248,146.39 10% 324,814.64 KKK-8 050404 5/31/2004 Mar 1-31, $2M loan 534,725.73 10% 53,472.57 KKK-8 050404 5/31/2004 Mar 1-31, $52.4M loan 14,285,587.66 10% 1,428,558.77 KKK-9 060402 6/10/2004 June 1-10, $2M loan 174,111.86 10% 17,411.19 Subtotal P72,779,061.24 P7,277,906.13 KKK-10 060405 6/30/2004 June 1-30, $52.4M loan P14,254,490.72 15% P2,138,173.61 KKK-11 070409 7/31/2004 Jul 1-31, $52.4M loan 7,197,333.59 15% 1,079,600.04 KKK-12 080411 8/31/2004 Aug 1-31, $52.4M loan 6,856,461.75 15% 1,028,469.26 KKK-13 090418 9/30/2004 Sep 1-25, $52.4M loan 5,661,894.69 15% 849,284.20 KKK-14 090418 9/30/2004 Sep 26-30, $52.4M loan 1,424,892.94 15% 213,733.94 100417 10/20/2004 Add'l Accrual of on interest for Jul 1-Sep 25 1,986,302.16 15% 297,945.32 100421 10/31/2004 Oct 1-31, $52.4M loan 7,852,003.81 15% 1,177,800.57 110411 11/30/2004 Nov 1-30, $52.4M loan 7,542,540.90 15% 1,131,381.14 120414 12/31/2004 Dec 1-25, $52.4M loan 5,790,893.15 15% 868,633.97 120414 12/31/2004 Dec 26-31, $52.4M loan 1,701,332.38 15% 255,199.86 Subtotal P60,268,146.09 15% P9,040,221.91 Total P133,047,207.33 P16,318,128.04 After comparing the FWT due of P16,318,128.04 against the FWT remittances of P9,880,327.64, the Court finds petitioner liable for deficiency FWT of P6,437,800.40 on its interest expense of P45,003,324.53, computed as follows: SDHTEC EXHIBIT JV NO. DATE FWT DUE FWT REMITTED FWT STILL DUE DISALLOWED INTEREST (FWT STILL DUE DIVIDED BY APPLICABLE RATE) KKK-1 10411 1/23/2004 P1,055,248.99 P959,317.26 P95,931.73 KKK-2 10413 1/31/2004 55,160.17 50,145.61 5,014.56 KKK-2 010413 1/31/2004 367,125.30 333,750.27 33,375.03 KKK-3 020406 2/29/2004 52,212.17 47,465.61 4,746.56 KKK-3 020406 2/29/2004 1,341,596.87 1,219,633.52 121,963.35 KKK-4 030405 3/10/2004 17,503.15 15,911.96 1,591.19 KKK-5 030408 3/31/2004 1,420,761.96 1,291,601.78 129,160.18 KKK-5 030408 3/31/2004 36,815.68 33,468.80 3,346.88 KKK-6 040407 4/23/2004 1,054,742.33 958,856.67 95,885.66 KKK-7 040416 4/30/2004 52,482.34 47,711.22 4,771.12 KKK-7 040416 4/30/2004 324,814.64 295,286.04 29,528.60 KKK-8 050404 5/31/2004 53,472.57 48,611.43 4,861.14 KKK-8 050404 5/31/2004 1,428,558.77 1,298,689.79 129,868.98 KKK-9 060402 6/10/2004 17,411.19 15,828.35 1,582.84 Subtotal P7,277,906.13 P6,616,278.31 P661,627.82 P6,616,278.20 KKK-10 060405 6/30/2004 P2,138,173.61 P1,295,862.79 P842,310.82 KKK-11 70409 7/31/2004 1,079,600.04 719,733.36 359,866.68 KKK-12 080411 8/31/2004 1,028,469.26 685,646.18 342,823.08 KKK-13 090418 9/30/2004 849,284.20 566,189.47 283,094.73 KKK-14 090418 9/30/2004 213,733.94 213,733.94 100417 10/20/2004 297,945.32 14,733.16 283,212.16 100421 10/31/2004 1,177,800.57 1,177,800.57 110411 11/30/2004 1,131,381.14 1,131,381.14 120414 12/31/2004 868,633.97 868,633.97 120414 12/31/2004 255,199.86 255,199.86 Subtotal P9,040,221.91 P3,282,164.96 P5,758,056.95 38,387,046.33 Total P16,318,128.04 P9,898,443.27 P6,419,684.77 P45,003,324.53 Forex gain pertaining to FWT on interest expense for 2004 (18,115.63) 18,115.63 Net Amount P16,318,128.04 P9,880,327.64* P6,437,800.40 P45,003,324.53 * The P.05 difference between the P9,880,327.69 FWT computed earlier and as computed above is due to rounding-off. For failure to withhold and remit the corresponding FWT of P6,437,800.40, petitioner cannot claim the interest expense of P45,003,324.53 as deduction from its gross income for taxable year 2004, pursuant to Section 34 (K) of the NIRC of 1997, as amended, which states that: xxx xxx xxx e. Disallowed interest expense P288,715.93 Petitioner's ITR for taxable year 2004 showed interest income subjected to final tax in the amount of P607,823.00. Pursuant to Section 34 (B) of the NIRC of 1997, as amended, respondent applied the limitation of deductibility of interest expense and disallowed the amount of P288,715.93, computed as follows: HSAc aE Interest income subjected to final tax P607,823.00 Disallowed interest expense (P607,823.00/80% x 38%) P288,715.93 It can be inferred from the foregoing that respondent assumed that the final tax rate on petitioner's interest income is 20%.Petitioner argued that the foregoing computation is erroneous because the applicable final tax rates on its interest income for the year 2004 are 7.5% (for US dollar accounts) and 20% (for Philippine peso accounts).Petitioner alleged that it had computed the interest expense limitation based on the amounts of interest income earned from its peso and US dollar accounts. The Court agrees with petitioner. Section 34 of the NIRC of 1997, as amended, prior to its amendment under Republic Act No. 9337, provides that the amount of interest that a taxpayer can deduct from his taxable gross income should be reduced by an amount equal to 38% of his interest income subjected to final tax, thus: xxx xxx xxx For taxable year 2004, petitioner earned interest income in the amount of P607,823.34 (net of withholding tax) on its US dollar and Philippine peso savings accounts as evidenced by the various journal vouchers, entries in petitioner's Security Bank US dollar and peso savings accounts passbooks, Security Bank's Confirmations of Purchase, as well as Confirmations of Sale without Recourse of Fixed Rate Treasury Notes (FXTN),and petitioner's Temporary Investment Advice and letters to Security Bank Corporation. Under Section 27 (D) (1) of the NIRC of 1997, as amended, the interest income derived by a domestic corporation from a depositary bank under the expanded foreign currency deposit system is subject to a final tax at the rate of either seven and a half percent (7.5%) for US dollar accounts and twenty percent (20%) for Philippine peso accounts. Consequently, petitioner's non-deductible interest expense for taxable year 2004 amounted to P274,557.00, as correctly computed by petitioner, detailed as follows: EXHIBIT DATE EARNED AMOUNT OF INTEREST (NET OF FWT) DIVISOR LIMITATION RATE NON-DEDUCTIBLE INTEREST EXPENSE On US Dollar Accounts LLL-1 and LLL-1.b 3/31/2004 2,544.67 92.5% 38% 1,045.38 LLL-2 and LLL-2.b 6/30/2004 9,731.40 92.5% 38% 3,997.76 LLL-6 and LLL-6.a 9/20/2004 20,861.90 92.5% 38% 8,570.29 LLL-7 and LLL-7.c 9/30/2004 4,934.71 92.5% 38% 2,027.23 LLL-9 and LLL-9.a 10/19/2004 67,650.07 92.5% 38% 27,791.38 LLL-11 and LLL-11.a 11/18/2004 67,092.27 92.5% 38% 27,562.23 LLL-12 and LLL-12.a 12/20/2004 38,498.40 92.5% 38% 15,815.56 LLL-13 and LLL-13.c 12/29/2004 9,266.19 92.5% 38% 3,806.65 Subtotal 220,579.61 90,616.49 On Peso Accounts LLL-1 and LLL-1.a 3/31/2004 10,391.83 80% 38% 4,936.12 LLL-2, LLL-2.a, LLL-3.a 6/30/2004 7,696.26 80% 38% 3,655.72 LLL-3 and LLL-3.a 7/9/2004 38,666.67 80% 38% 18,366.67 LLL-3.d and LLL-4 7/19/2004 16,237.93 80% 38% 7,713.02 LLL-5 to LLL-5.c 8/19/2004 58,518.42 80% 38% 27,796.25 LLL-7 to LLL-7.b 9/30/2004 7,557.81 80% 38% 3,589.96 LLL-8 and LLL-8.a 10/8/2004 79,632.35 80% 38% 37,825.37 LLL-10 to LLL-10.d, LLL-11.a 11/10/2004 159,442.23 80% 38% 75,735.06 LLL-13 to LLL-13.b 12/29/2004 9,100.23 80% 38% 4,322.61 Subtotal 387,243.73 183,940.77 Total 607,823.34 274, 557.26 Examination of petitioner's ITR for taxable year 2004 shows that petitioner's claimed deduction for interest expense amounted to P132,772,650.00, an amount lower by P274,557.00 when compared with the interest expense of P133,047,207.00 reflected in its audited FS for the same year. Clearly, petitioner did not claim all of its reported interest expense by applying the limitation, as provided by the NIRC of 1997, as amended. As a result, the disallowance of petitioner's interest expense in the amount of P288,715.93 should be cancelled. AScHCD f. Excess Tax Carried Over to Succeeding Year P22,203,593.00 Respondent disallowed petitioner's excess tax credits for taxable year 2004, but gave no explanation in the Details of Assessment/Discrepancies. The Court could only surmise that the excess tax credits carried over to the succeeding year was disallowed in order to recapture the tax benefit realized by petitioner in carrying the said amount to the succeeding year. However, it was improper for respondent to disallow the said excess tax credits because any tax benefit derived by petitioner from the carry-over of the said amount redounds to the succeeding year 2005. Since the tax benefit will be in the succeeding year, at most, petitioner may only be assessed in the said succeeding year. g. Minimum Corporate Income Tax (MCIT) P4,029,039.00 Respondent likewise disallowed petitioner's MCIT payment in the amount of P4,029,039.00 without further explanation. Considering that the MCIT will be credited against the normal income tax for the three (3) immediately succeeding taxable years, pursuant to Section 27(E)(2) of the NIRC of 1997, as amended, its benefit will redound on the succeeding years. Thus, it is inappropriate to disallow the same for such is beyond the scope of the present assessment. In fine, notwithstanding the P45,008,325.99 adjustments on petitioner's taxable income, representing the sum of petitioner's unaccounted income in the amount of P5,001.46 and disallowed interest expense in the amount of P45,003,324.53, petitioner still incurred a net loss in the amount of P390,088,424.04. Thus, petitioner's income tax liability was at the MCIT rate of two percent (2%) based on its gross income for taxable year 2004. However, petitioner's MCIT liability of P4,029,039.00 per its 2004 ITR shall be adjusted to P4,029,139.21 to reflect the unaccounted income of P5,001.46. Since petitioner's income tax credits were more than sufficient to cover its MCIT liability of P4,029,139.21, petitioner is not liable to pay any deficiency MCIT for taxable year 2004, as shown below: HESIcT Sales/Revenues/Receipts/Fees P106,529,147.00 Less: Cost of Sales/Services 9,205,500.00 Gross Income from Operation P97,323,647.00 Add: Non-operating and Other Income 104,128,312.00 Total Gross Income P201,451,959.00 Add: Unaccounted income 5,001.46 Adjusted Total Gross Income P201,456,96.46 Less: Deductions P636,548,709.00 Less: Disallowed Interest Expense 45,003,324.53 591,545,384.47 Adjusted Net Loss P(390,088,424.01) Minimum Corporate Income Tax Due P4,029,139.21 Less: Tax Credits Prior Year's Excess Credits P10,715,585.00 Creditable Tax Withheld for the First Three Quarters 11,286,147.00 Creditable Tax Withheld for the Fourth Quarter 4,230,900.00 26,232,632.00 Excess Tax Credits P(22,203,492.79 xxx xxx xxx III. DEFICIENCY EWT P186,395.72 Upon investigation, it was found by respondent that petitioner failed to withhold and remit the EWT on professional fees paid. Thus, pursuant to Revenue Regulations No. 2-98, respondent assessed petitioner for deficiency EWT in the amount of P186,695.72, inclusive of interest, computed as follows: Professional fees per FS/ITR P1,209,982.00 Professional fees per AL/1601-E 55,000.00 Professional fees not subjected to EWT P1,154,982.00 EWT rate 10% EWT due thereon P115,498.20 Add: 20% interest p.a. from 01.16.05 to 2.15.08 71,197.52 TOTAL AMOUNT DUE P186,695.72 As discussed and determined earlier [see discussion under deficiency income tax assessment, item I[(c)], the subject income payments amounting to P1,154,98 2.00 were made to general professional partnerships, which are exempt from income tax, pursuant to Section 26 in relation to Section 22(B) of the NIRC of 1997, as amended, and consequently, to withholding tax, as provided for under Section 2.57.5 of RR No. 2-98, as amended by RR No. 14-02. Therefore, respondent's deficiency EWT assessment on the said income payment shall be cancelled. AcICHD xxx xxx xxx V. DEFICIENCY IMPROPERLY ACCUMULATED EARNINGS TAX P35,153,053.99 xxx. Petitioner was assessed of improperly accumulated earnings tax in the total amount of P21,060,098.00, computed thus: Taxable income P(435,096,750.00) Add: Interest income subject to final tax P607,823.00 Equity in net earnings of subsidiary 171,352,773.00 Losses 485,906,173.00 657,866,769.00 Balance P222,770,019.00 Less: Income tax payable 4,029,039.00 Balance P218,740,980.00 Less: Capital stock 8,140,000.00 Improperly accumulated earnings P210,600,980.00 Improperly accumulated earnings rate 10% Improperly accumulated earnings tax P21,060,098.00 As correctly pointed out by petitioner, it cannot possibly have any improperly accumulated earnings, because it has a deficit of P3,707,998,535.00; thus, no earnings to speak of, much more accumulation thereof. Petitioner's Statements of Changes in Stockholders' Equity (Capital Deficiency) show that it has sustained a capital deficiency from the year 2002 until 2004. Therefore, respondent's assessment against petitioner for deficiency improperly accumulated earnings tax of P35,153,053.99 is devoid of factual basis and should be cancelled. VI. COMPROMISE PENALTY P25,000.00 For alleged non/late/filing/payment of improperly accumulated earnings tax, respondent imposed compromise penalty against petitioner for taxable year 2004 in the amount of P25,000.00. caITAC Pursuant to RMO No. 01-90, as amended by RMO No. 19-07, compromise penalties are only 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. Thus, compromise penalty implies mutual agreement between the taxpayer, on one hand, and the BIR, on the other. Absent any showing that petitioner consented to the compromise penalties, the same should not be imposed. Accordingly, respondent's imposition of compromise penalties, without the consent of petitioner, cannot be sustained. (Citations omitted) WHEREFORE ,the Petition for Review filed by the Commissioner of Internal Revenue on June 5, 2015, is hereby DENIED ,for lack of merit. Accordingly, the assailed Decision and Resolution dated February 23, 2015 and May 18, 2015, respectively, are AFFIRMED . SO ORDERED. (SGD.) ESPERANZA R. FABON-VICTORINO Associate Justice Roman G. del Rosario, P.J.,Juanito C. Castaeda, Jr.,Lovell R. Bautista, Caesar A. Casanova, Cielito N. Mindaro-Grulla, Ma. Belen M. Ringpis-Liban and Catherine T. Manahan, JJ. ,concur. Erlinda P. Uy, J. ,with Concurring and Dissenting Opinion. Interest. (A) In General. There shall be assessed and collected on any unpaid amount of tax, interest at the rate of twenty percent (20%) per annum ,or such higher rate as may be prescribed by the rules and regulations, from the date prescribed for its payment until the amount is fully paid. (B) Deficiency Interest. Any deficiency in the tax due, as the term is defined in this Code ,shall be subject to the interest prescribed in Subsection (A) hereof, which interest shall be assessed and collected from the date prescribed for its payment until the full payment thereof. (C) Delinquency Interest. In case of failure to pay: TAIaHE xxx xxx xxx (3) A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the Commissioner, there shall be assessed and collected on the unpaid amount, interest at the rate prescribed in Subsection (A) hereof until the amount is fully paid, which interest shall form part of the tax." (Emphases supplied) Based on the foregoing Section 249 (B),the "Deficiency Interest" shall be imposed on "[a] ny deficiency in the tax due, as the term is defined in this Code, " i.e. , as the term "deficiency" is defined in the NIRC of 1997. Relative thereto, an examination of the said Code discloses that there are only three (3) instances where it defines the term "deficiency", and this relates only and respectively to three (3) types of internal revenue taxes, namely, income tax, estate tax, and donor's tax, pursuant to Sections 56 (B), 93 and 104 of the NIRC of 1997, viz. : "SEC. 56. Payment and Assessment of Income Tax for Individuals and Corporations . xxx xxx xxx (B) Assessment and Payment of Deficiency Tax. After the return is filed, the Commissioner shall examine its and assess the correct amount of the tax. The tax or deficiency income tax so discovered shall be paid upon notice and demand from the Commissioner. As used in this Chapter, 1 in respect of a tax imposed by this Title, 2 the term 'deficiency' means: (1) The amount by which the tax imposed by this Title exceeds the amount shown as the tax by the taxpayer upon his return; but the amount so shown on the return shall be increased by the amounts previously assessed (or collected without assessment) as a deficiency, and decreased by the amount previously abated, credited, returned or otherwise repaid in respect of such tax; or (2) If no amount is shown as the tax by the taxpayer upon his return, or if no return is made by the taxpayer, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency; but such amounts previously assessed or collected without assessment shall first be decreased by the amounts previously abated, credited, returned or otherwise repaid in respect of such tax." (Emphasis supplied) "SEC. 93. Definition of Deficiency . As used in this Chapter, 3 the term 'deficiency' means: ICHDca (a) The amount by which the tax imposed by this Chapter exceeds the amount shown as the tax by the executor, administrator or any of the heirs upon his return; but the amount so shown on the return shall first be increased by the amounts previously assessed (or collected without assessment) as a deficiency and decreased by the amounts previously abated, refunded or otherwise repaid in respect of such tax; or (b) If no amount is shown as the tax by the executor, administrator or any of the heirs upon his return, or if no return is made by the executor, administrator, or any heir, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency; but such amounts previously assessed or collected without assessment shall first be decreased by the amounts previously abated, credited, returned or otherwise repaid in respect of such tax." (Emphasis supplied) "SEC. 104. Definitions . xxx The term 'deficiency' means: (a) the amount by which the tax imposed by this Chapter 4 exceeds the amount shown as the tax by the donor upon his return; but the amount so shown on the return shall first be increased by the amounts previously assessed (or collected without assessment) as a deficiency, and decreased by the amounts previously abated, refunded or otherwise repaid in respect of such tax, or (b) if no amount is shown as the tax by the donor upon his return, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency, but such amounts previously assessed or collected without assessment shall first be decreased by the amounts previously abated, credited, returned or otherwise repaid in respect of such tax." (Emphasis supplied) Such being the case, the deficiency interest under Section 249 (B) should be applied only whenever there is a deficiency income tax, a deficiency estate tax, and a deficiency donor's tax. For this reason, in this case, no deficiency interest under Section 249 (B) should be imposed on the deficiency VAT and deficiency FWT against El Paso Philippines Energy Company, Inc. Correspondingly, the computation of the delinquency interest imposed under Section 249 (C) should not as well include the said deficiency interest. Correspondingly, I vote for the DELETION of: (1) the imposition of deficiency interests on El Paso Philippines Energy Company, Inc.'s basic deficiency VAT in the amount of P2,958,405.41 and basic deficiency FWT in the amount of P6,437,800.40, both at the rate of 20% per annum ;and (2) the inclusion of said deficiency interests in the computation of the delinquency interest to be imposed on the same basic deficiency VAT and basic deficiency FWT. Footnotes 1. En Banc docket, pp. 11-48. 2. En Banc docket, pp. 49-59. 3. En Banc docket, pp. 1-10. 4. Exhibit A-1, Rollo ,p. 903. 5. Exhibits A and A-2, Rollo ,p. 902. 6. Exhibits B and B-1, Rollo ,p. 904. 7. Exhibit C, Rollo ,p. 905. 8. Exhibit D, Rollo ,pp. 908-912. 9. Exhibits E and E-1, Rollo ,pp. 913-914. 10. Exhibit F, Rollo ,pp. 915-918. 11. Exhibit G, Rollo ,pp. 919-929. 12. Exhibits H and H-1, Rollo ,pp. 930-934. 13. Exhibit I, Rollo ,p. 935. 14. Exhibit J, Rollo ,p. 936. 15. Exhibit J-1, Rollo ,p. 937. 16. Exhibit 11-a, BIR Records, p. 660.L. 17. Exhibit 14, BIR Records, p. 667.L. 18. Exhibit K, Rollo ,p. 938. 19. Rollo ,pp. 236-239. 20. TSN dated May 21, 2010, Rollo ,p. 379. 21. Resolution dated November 2, 2010, Rollo ,pp. 421-435. 22. Rollo ,pp. 458-461. 23. Resolution dated April 28, 2016, En Banc docket, pp. 183-185. 24. EPPECI's Comment, En Banc docket, pp. 81-108. UY, J.,concurring and dissenting opinion: 1. Chapter IX RETURNS AND PAYMENT OF TAX. 2. Title II TAX ON INCOME. 3. CHAPTER I ESTATE TAX (under TITLE III ESTATE AND DONOR'S TAXES). 4. CHAPTER II DONOR'S TAX (under TITLE III ESTATE AND DONOR'S TAXES).