Cynamid Philippines, Inc. v. Court of Tax Appeals

FORMER EIGHTH DIVISION [CA-G.R. SP No. 25942. December 8, 1992.] (C.T.A. Case No. 4250) CYNAMID PHILIPPINES, INC. , petitioner , vs . COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE , respondents . D E C I S I O N MARIGOMEN , J p : This is a petition for review seeking to annul and set aside the Decision dated August 6, 1992, rendered by the Court of Tax Appeals in C.T.A. Case No. 4250, which was an appeal of the decision rendered by the Commissioner of Internal Revenue, the dispositive portion which is quoted hereunder, to wit: "WHEREFORE, petitioner Cynamid Philippines, Inc., is ordered to pay respondent Commissioner of Internal Revenue the sum of P3,774,867.50 representing 25% surtax on improper accumulation profits for 1981, plus 10% surcharge and 20% annual interest from January 30, 1985 to January 30, 1987. Costs against petitioner SO ORDERED." The antecedents are as follows: The petitioner Cynamid Philippines, Incorporation (hereinafter referred to as petitioner corporation) is duly organized and existing under Philippine laws as a wholly-owned subsidiary of American Cynamid Company, based in the State of Maine, United States of America. In the Philippines, the petitioner corporation is engaged in the manufacture of pharmaceutical products and chemicals, the wholesale of imported finished goods, as wells as importer and indentor. The controversy arose when on February 28, 1987, petitioner corporation received a letter (Annex "A") from the Commissioner of Internal Revenue informing the former that it had been assessed a deficiency income tax of P119,817.00 for taxable year 1981. In addition, the twenty-five (25%) percent surtax assessed for the improper accumulation of earnings in the amount of P3,774,867.00, inclusive of interest, for the same taxable year. Both assessments were protested by the petitioner corporation (Annex "B"). In a letter dated October 20, 1987 (Annex "C"), the Commissioner of Internal Revenue rendered a final decision on the matter, disposing as follows: "It appears that your client availed of Executed (sic) Order No. 41 under File No. 32A-F-000455-41B as certified and confirmed by our Tax Amnesty Implementation Office on October 6, 1987. In reply thereto, I have the honor to inform you that the availment of the tax amnesty under Executive Order No. 41, as amended is sufficient basis, in appropriate cases, for the cancellation of the assessment issued after August 21, 1986. (Revenue Memorandum Order No. 4-87) said availment does not, therefore, result in cancellation of assessments issued before August 21, 1986, as in the instant case. In other words, the assessments in this case issued on January 30, 1985 despite your client's availments of the tax amnesty under Executive Order No. 41, as amended still subsist. Such being the case, you are therefore, requested to urge your client to pay this Office the aforementioned deficiency income tax and surtax on undue accumulation of surplus in the respective amounts of P119,817.00 and P3,774,867.50 inclusive of interest thereon for the year 1981, within thirty (30) days from receipt hereof, otherwise this Office will be constrained to enforce collection thereof thru summary remedies by law." Not satisfied with the above-quoted resolution of the Commissioner of Internal Revenue, the petitioner corporation filed a petition for review before the herein respondent Court of Tax Appeals. During the pendency of said petition for review, the petitioner corporation and the BIR Commissioner entered into a compromise agreement over the deficiency income tax assessment. In its petition (Annex "D"), docketed as CTA Case No. 4250, the petitioner corporation argued that the 25% surtax on accumulated earnings had no legal nor factual basis on the grounds that: "(a) Petitioner is a subsidiary of American Cynamid Company, a corporation duly organized and existing under and by virtue of the laws of the State of Maine, United States of America, the shares of stock of which beings traded in the New York Stock Exchange, are publicly held. Thus, the shares of stock of petitioner being publicly held indirectly, petitioner could not have been availed of for the purpose of avoiding tax on its shareholders by permitting its earnings and profits to accumulate instead of being distributed; (b) Petitioner accumulated its earnings and profits for reasonable business needs to (1) meet working capital needs and (2) retire indebtedness." On August 6, 1991, the respondent court rendered its Decision (pp. 19-23, Rollo ), disposing thus: "WHEREFORE, petitioner Cynamid Philippines, Inc., is ordered to pay respondent Commissioner of Internal Revenue the sum of P3,774,867.50 representing 25% surtax on improper accumulation profits for 1981, plus 10% surcharge and 20% annual interest from January 30, 1985 to January 30, 1987. Costs against petitioner SO ORDERED." In denying the petitioner corporation's petition the respondent court, made the following pertinent pronouncements: "The remaining issue is whether or not petitioner is liable for the 25% accumulated earnings tax in the tax year 1981. The Pertinent provisions of Section 25 NIRC, the law under which respondent assessed the corresponding 25% tax for unreasonable accumulation of surplus for the fiscal year 1982, reads as follows: 'SEC. 25. Additional tax on corporations improperly accumulating profits or surplus . (a) Imposition of tax If any corporation except banks, insurance companies, or personal holding companies, whether domestic or foreign, is formed or availed of for the purpose of preventing the imposition of tax upon its shareholders or members or the shareholders or members of another corporation, through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there is levied and assessed against such corporation, for each taxable year, a tax equal to twenty-five per centum of the undistributed portion of its accumulated profits or surplus which shall be in addition to the tax imposed by Section 24, and shall be computed collected and paid in the same manner and subject to the same provisions of law, including penalties, as that tax.' '(c) Evidence determinative of purposes . the fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members unless the corporation, by clear preponderance of the evidence, shall prove the contrary." xxx xxx xxx In as much as ' purpose ' involves a state of mind or intent, it is always necessary to look at the surrounding circumstances and the attendant facts on a case by case basis to determine whether the non-distribution of earnings and profits was to permit the shareholders to avoid income or if such was for some legitimate purpose, such as, its use for the reasonable needs of the business. In this regard, although the testimony of the taxpayer, officers and stockholders is entitled to some weigh, generally, the issue is to be resolved in the light of the surrounding circumstances, including the interests of those in control of their actual conduct. (Mertens, Law of federal Income Taxation, Vol. 7 Chapter 39, p. 45). Respondent submits the following findings and analysis allegedly determinative of petitioners accumulation of profits or earnings for the taxable year involved as being the needs of its business; (Examiner's Memorandum; Exh. 2-A, pp. 169 BIR Records.) 'A. That the corporation, while declaring stock and cash dividends in 1980, did not or failed to declare any during the year under review, permitting the accumulation of profits instead of being divided or distributed to taxable shareholders; B. The financial position of the company as of November 30, 1981; Assets were P52,316,680.00 while liabilities amounted to P22,212,063.00 or a ratio of 2.5 to;1 C. That the corporation had considerable liquid funds consisting of Cash, Receivables, Inventories and even its sales for the period would adequately provides the normal needs of the business.' Petitioner contends that it did not declare dividends for the year 1981 in order to use the accumulated earnings as working capital reserve to meet its 'reasonable business need'. The law permits a stock corporation to set aside the portion of its retained earnings for specified purposes. In the case at bar, however, petitioner's purpose for accumulating its earnings does not fall within the ambit of any of these specified purposes. More compelling is the finding that there was no need for petitioner to set aside a portion of its retained earnings as working capital reserve as it claims since it had considerable liquid funds. A thorough review of petitioner's financial statement (particularly the Balance Sheets, p. 127, BIR Records) reveals that the corporation had considerable liquid funds consisting of cash, accounts, receivable, inventory and even its sales for the period is adequate to meet the normal needs of the business. This can be determined by computing the current asset to liability ratio of the company; current assets current ratio = current liabilities = P47,052,535.00 21,275,544.00 = 2.21 : 1 ====== The significance of this ratio is to serve as a primary test of a company's solvency to meet current obligations from current assets as a going concern or a measure of adequacy of working capital. Petitioner in this case failed to prove the immediacy of its need for the accumulation of earnings, hence the accumulation was not for the reasonable needs of the business and thus, the surtax should then apply. (The Manila Wine Merchants, Inc. vs. The Commissioner of Internal Revenue, G.R. No. L-26145, February 20, 1984, 127 SCRA 483)." On the issue that the accumulated earnings tax does not apply to the petition corporation, the respondent court held that: "We further reject petitioners argument that 'the accumulated earnings tax does not apply to a publicly-held corporation' citing American jurisprudence to support its position. The reference finds no application in the case at bar because under Section 25 of the NIRC, as amended by Section 5 of P.D.No.1379 (dated September 17, 1980), the exceptions to the accumulated earnings tax are expressly enumerated, to wit: Bank, non-bank financial intermediaries, corporations organized primarily, and authorized by the Central Bank of the Philippines to hold shares of stock of banks, insurance companies, or personal holding companies, whether domestic or foreign. The law on the matter is clear and specific. Hence, there is no need to resort to applicable cases decided by the American as to whether the provision of Section 25 of the NIRC should apply to petitioner. Equally clear and specific are the provisions of E.O. 41 particularly with respect to its effectivity and coverage. It appears that petitioner availed of the tax amnesty under E.O. 41 under File No. 32A-F000455-418 as certified and confirmed by respondent through its Tax Amnesty Implementation Office on October 6, 1987. The availment of the tax amnesty under E.O. 41 as amended is sufficient basis, in appropriate cases, for the cancellation of the assessment issued after August 21, 1986 (Revenue Memorandum Order No. 4-87). Said availment does not result in cancellation of assessments issued before August 21, 1986 as petitioner seeks to do in the case at bar. Therefore, the assessment in this case, issued on January 30, 1985 despite petitioner's availments of the tax amnesty under E.O. 41 as amended, still subsist. Based on the foregoing, we find the petitioner liable for the payment of the aforementioned 25% surtax in the amount of P3,774,867.50 inclusive of interest. Petitioner was unable to prove its non-liability by a clear preponderance of evidence." Hence, this petition for review before Us, assigning to the respondent court the following errors: A. Respondent Court of Tax Appeals erred in holding that petitioner's accumulation of its earnings for working capital reserve does not exempt it from the accumulated earnings tax B. The Respondent Court erred in finding that petitioner had no need to accumulate retained earnings for working capital reserve because it had considerable liquid funds C. Respondent Court erred in holding that the accumulated earnings tax applies to petitioner, a wholly-owned subsidiary of a publicly-held company. To Our mind, the pivotal, if not all-encompassing, issue in this case is whether or not petitioner corporation is liable for the 25% accumulated earnings tax in the year 1981. After a careful and thorough review of the facts and applicable jurisprudence, We find that the petitioner corporation cannot claim exemption from the payment of accumulated earnings tax. Section 25 of the National Internal Revenue Code, as amended by P.D. No. 1379, expressly enumerates the exceptions as "banks, non-bank financial intermediaries, corporations organized primarily, and authorized by the Central Bank of the Philippines, to hold shares of stock of banks, insurance companies or personal holding companies, whether domestic or foreign." Clearly, the petitioner corporation, being a manufacturer of parmaceutical products and chemicals, cannot argue that it is exempted from said accumulated earnings tax. There is even no need to consult American Federal Court decisions as Philippine law on this matter is specific and unambiguous. The rule is well-settled that laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally construed in favor of the taxing power (Comm. of Internal Revenue vs. Mitsubishi Metal Corp., 181 SCRA 214). Be that as it may, such taxing power cannot be used as a bludgeon to oppress taxpayers, and thus, tax exemptions cannot be merely implied, but must be categorically and unmistakably expressed (National Development Corporation vs. Comm. of Internal Revenue, 151 SCRA 472). In the instant case, there is no doubt as to which taxpayers are exempt and which are not, and that petitioner corporation, is clearly not exempted from liability. Hence, the law must be strictly construed against it. The petitioner corporation also argued that it is exempt from tax liability because the accumulation of its earnings for the year 1981 was for the working capital reserve. While it is true that tax laws permit a stock corporation to set aside a portion of its retained earnings for specific purposes, the petitioner corporation's very purpose for accumulating its earnings does not fall under any of the specific purposes under our corporation laws. Section 43 of the Corporation Code provides that: "Stocks corporations are prohibited from retaining surplus profits in excess of one hundred (100%) per cent of their paid-in capital stock, except; 1) when justified by definite corporate expansion projects or programs approve by the board of directors; or 2) when the corporation is prohibited under any loan agreement with any financial institution of creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or 3) when it can be clearly shown that such retention in the corporation, such as when there is a need for special reserve for probable contingencies." And yet, the petitioner corporation failed to convince the respondent Court that there was a need to retain surplus earnings as working capital reserve. The respondent Court ruled that under the circumstances, there was obviously no need to accumulate surplus earnings over and above that allowed by law, because the petitioner corporation had considerable liquid funds. Following the formula of computing the current asset to liability ratio of the company, the respondent Court found that the petitioner corporation's considerable liquid funds was adequate to meet the normal needs of the business. Hence, the respondent Court was not convinced that there existed special circumstances that called for an immediate need to accumulate surplus earnings. In fine, the petitioner corporation failed to prove by clear preponderance of evidence that such retention or accumulation of surplus earnings was necessary. If, indeed, the retained surplus earnings were later used in the business operations of the petitioner corporation, it does not necessarily mean that said accumulation was proper at the time it was implemented, and it does not exempt the petitioner corporation from liability. The touchstone of liability is the purpose behind the accumulation of the income and not the consequences of the accumulation (Comm. of Internal Revenue vs. Antonio Tuason, Inc., 173 SCRA 397). It is sufficient that at the time such surplus earnings were retained, the purpose for such retention was not clearly shown nor warranted under the circumstances. In reviewing the instant petition and the arguments raised herein, We find no compelling reason to reverse the findings of the respondent Court. The respondent Court's decision is supported by evidence, such as petitioner corporation's financial statement and balance sheets (p. 127, BIR Records). On the other hand, the petitioner corporation could only cone up with an alternative formula lifted from a decision rendered by a foreign court (Bardahl Mfg. Corp. vs. Commissioner, 24 T.C.M. [CCH 1030]. Applying said formula to its particular financial position, the petitioner corporation attempts to justify its accumulated surplus earnings. To Our mind, the petitioner corporation's alternative formula cannot overturn the persuasive findings and conclusion of the respondent Court based, as it is, on the applicable laws and jurisprudence, as well as standards in the computation of taxes and penalties practiced in this jurisdiction. WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED and the decision of the Court of Tax Appeals dated August 6, 1992 in CTA Case No. 4250 is AFFIRMED in toto . No costs. SO ORDERED. Lombos-Dela Fuente and Rasul, JJ ., concur.