Filipinas Synthetic Fiber Corp. v. Court of Tax Appeals

EIGHTH DIVISION [CA-G.R. SP No. 32022. December 21, 1995.] (C.T.A. Case No. 3421) FILIPINAS SYNTHETIC FIBER CORPORATION , petitioner , vs. COURT OF TAX APPEALS AND COMMISSIONER OF INTERNAL REVENUE , respondents . D E C I S I O N LANTIN , J p : This is a petition for review filed by Filipinas Synthetic Fiber Corporation seeking to set aside the decision, dated May 10, 1993, of the Court of Tax Appeals in CTA Case No. 3421, the dispositive portion of which read as follows: "WHEREFORE premises considered, the instant petition for review is DISMISSED. The assailed decision of respondent Commissioner, dated September 10, 1981, is hereby AFFIRMED. Petitioner is ordered to remit to respondent the amount of P379,700.68, as deficiency withholding tax at source for the year 1976, as well as all interests and penalties accruing on it. SO ORDERED." On January 31, 1994, the Court, without necessarily giving due course to petition for review, ordered the respondents to comment thereon, which comment may be considered as answer should the petition be given due course. On April 20, 1994, the respondents filed their comment on the petition for review. On June 7, 1994, petitioner Filipinas Synthetic Fiber Corporation filed its reply to the comment of the respondents. Hence, we treat the comment as answer and decide the case on its merits. The antecedent facts are : On April 3, 1981, the then Acting Commissioner of the Bureau of Internal Revenue (BIR). Ruben B. Ancheta, assessed petitioner Filipinas Synthetic Fiber Corporation, hereinafter to be referred as Filsyn, for deficiency withholding tax at source in the total amount of P379,700.68, inclusive of interest and compromise penalties for the period covering the fourth quarter of 1975 to the fourth quarter of 1976. Filsyn's deficiency tax assessment was the result of its failure to remit the withholding taxes upon the accrual of the interest on foreign loans and royalties payable to non-resident foreign corporations, and dividends in its books. In a letter, dated May 18, 1981. Filsyn protested the assessment, claiming that the withholding taxes on the interest on foreign loans, royalties and dividends were paid correctly and in accordance with the law and court decisions. On September 10, 1981. Acting Commissioner Ancheta denied the protest on Filsyn, which denial was considered as the final decision on the matter. On February 4, 1982. Filsyn appealed the assessment to the Court of Tax Appeals in CTA Case No. 3421, alleging the following: "6. The assessment for withholding tax-at-source is based on the accrual of three items of income payable to foreign corporations/aliens, to wit: a. Interest accrued on foreign loans (payable to non-resident foreign creditors). b. Royalties accrued (payable to non-resident foreign licensors). c. Dividends accrued. The assessment is premised on respondent's erroneous ruling (BIR Ruling No. 71-003 dated February 26, 1971) to the effect that withholding tax is not dependent on remittance of the income payable to the non-resident foreign corporation but on accrual thereof, which in turn was adopted from a ruling of the United States Internal Revenue Service which, at the time BIR RulingNo.71-003 was issued, had already been declared obsolete by the issuing authority and likewise declared void by the United States District Court in L.D. Caulk Co. v. U.S., F. Supp. 835'; 7. BIR RulingNo.71-003 has likewise been declared erroneous by this Honorable Court in its decision in BayerPharmaceuticals, Inc.v.Commissioner ofInternal Revenue, CTA Case No. 2846, promulgated on March 16, 1979'; 8. Petitioner's liability for interest to foreign creditors arose from its loan agreement dated September 30, 1970 with Teijin Limited and Toyo Menka Kaisha, Ltd., both foreign corporations not engaged in trade or business in the Philippines, in the total amount of US$1,400,000 payable in seven (7) consecutive annual equal installments plus eight percent (8%) interest per annum: 9. On November 1, 1969. FILSYN and Teijin Limited entered into a LICENSE AND TECHNICAL ASSISTANCE AGREEMENT, whereby FILSYN is granted licenses under Teijins's certain patent rights and technical information and to disclose certain know-how for the manufacture of polyester fibers for which petitioner agreed to pay royalties to Teijin Limited, in consideration thereof; 10. During the first quarter of 1976, petitioner's Board of Directors declared dividends, among the recipients of which are those listed under Annex A hereof, which were accrued in the books of petitioner also in the first quarter of 1976, but were actually remitted in the second quarter of 1976. 11. The petitioner's duty to withhold the tax due on interest, royalties and dividends described under Section 53 of the TaxCode then in force arises only upon actual remittance or payment of the amounts due to said recipients, while its liability to pay to the government the tax so withheld is on or before the 25th of the month following the end of the quarter when such tax had been withheld on any actual remittance or payment of the aforesaid items or income during the quarter: 12. Petitioner has withheld and paid to the government the withholding tax prescribed under Section 53 of the TaxCode then in force within the period provided for therein in relation to Section 54 of the same Code as interpreted by this Honorable Court in the case of Bayer Pharmaceuticals, Inc. v. Commissioner of Internal Revenue , supra : 13. Assuming, arguendo, that the withholding tax is due at the time of accrual, the computations of the amounts assessed are erroneous as interest has been imposed on interest and penalties, in addition to other errors: xxx xxx xxx After trial, the respondent Court of Tax Appeals rendered the assailed decision on May 10, 1993. On June 2, 1993, Filsyn filed a motion for reconsideration, which motion was denied by the respondent Court of Tax Appeals on September 1, 1993, there being no new matters raised therein which had not been satisfactorily considered and passed upon in its decision of May 10, 1993. Hence, this petition for review, in which Filsyn raised the lone assignment of error that: "THE CTA ERRED IN HOLDING THAT FILSYN'S LIABILITY TO WITHHOLD THE INCOME TAX FOR INTEREST. ROYALTIES AND DIVIDENDS, WHICH WERE PAYABLE TO NON-RESIDENT FOREIGN CORPORATIONS, ATTACHED UPON 'SETTING-UP' OR ACCRUAL OF THESE AMOUNTS IN FILSYN'S BOOKS (EVEN THOUGH THESE WERE NOT YET DUE AND DEMANDABLE UNDER THE APPLICABLE CONTRACTS) RATHER THAN WHEN SAID AMOUNTS BECAME DUE AND DEMANDABLE UNDER THE APPLICABLE CONTRACTS." As correctly stated by the respondent Court of Tax Appeals, the pivotal issue to be resolved in the present case is whether Filsyn is required to withhold taxes at source on the interest on its foreign loans, royalties and dividends which have accrued as liabilities in its books but have not yet become due and demandable. The duty of Filsyn to withhold taxes on the interest on foreign loans and the royalties due to non-resident foreign corporations as well as the dividends declared is expressly provided by the National Internal Revenue Code, particularly Sections 53 and 54, which was in force in 1975-1976, the period covered by the deficiency assessment. SEC. 53. Withholding tax at source . . . . (b) Non-resident aliens foreign corporations . (1) Non-resident aliens . Every individual, corporation, partnership, or association, in whatever capacity acting, including a lessee or mortgagor of real or personal property, trustee acting in any trust capacity, executor, administrator, receiver, conservator, fiduciary, employer, and every officer or employee of the Government of the Republic of the Philippines having the control, receipt, custody, disposal, or payment of interest, dividends, rents, royalties, salaries, wages, premiums, annuities, compensation, remunerations, emoluments, or other fixed or determinable annual, periodical, or casual gains, profits, and income, and capital gains, of any nonresident alien not engaged in trade or business within the Philippines, shall (except in the case provided in sub-section (a)(1) of this Section) deduct and withhold from the annual, periodical, or casual gains, profits, and income, and capital gains, a tax equal to 30 per cent thereof. . . . (2) Non-resident foreign corporations . In the case of foreign corporations subject to tax under this Title, not engaged in trade or business within the Philippines, there shall be deducted and withheld at the source in the same manner and upon the same items as is provided in subsection (b) (1) of this section, as well as on remunerations for technical services or otherwise, a tax equal to thirty-five (35) per cent thereof. Provided , That interest on foreign loans shall be subject to withholding tax at fifteen per cent. This tax shall be returned and paid in the same manner and subject to the same conditions as provided in Section fifty-four. This deduction and withholding shall not be required in the case of re-insurance premiums ceded to foreign insurance corporations not engaged in trade or business in the Philippines. (c) Resident individuals and corporations . Dividends received by individuals residing in the Philippine from a domestic corporation, as well as royalties in any form received by such individuals and domestic and/or resident foreign corporations from any person whether natural or juridical shall be subject to withholding tax at source at the rate of 10% thereof. A tax shall be withheld by the payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided in Section 54 of the National InternalRevenueCode: Provided, however , That the tax withheld under this sub-paragraph shall be credited against the income tax liability of the recipient-taxpayer for the taxable year. xxx xxx xxx It is the contention of Filsyn that the duty to withhold taxes arises only when there is income and that with respect to the taxpayer, i.e., the non-resident foreign corporation from whose income the taxes are withheld, there can be income only when the interest, dividends, or royalties, as the case may be, are legally due and demandable by such taxpayer, and not when the amount concerned is accrued in the books of the withholding agents, Filsyn in this case. On the other hand, it is the position of the Commissioner of Internal Revenue, which was sustained by the respondent Court of Tax Appeals, that Filsyn's obligation to remit the withholding tax arose from the time the payments of the interest on loans, royalties and dividends have accrued in its books, regardless of the actual remittance thereof, We sustain the contention of the respondents Commissioner of Internal Revenue and the Court of Tax Appeals. 1. It is admitted by Filsyn that it uses the accrual method of accounting wherein the expenses incurred in a given period are matched with the revenue earned within the same period. Furthermore, Filsyn alleged that under the matching principle, certain expense items may be accrued and the corresponding liabilities set-up in its books even if they are not yet due and demandable. The Hon. Supreme Court in Commissioner of Internal Revenue vs. Wyeth Suaco Laboratories, Inc. , 202 SCRA 125, held that: "Moreover, the records show that Wyeth Suaco adopted the accrual method of accounting wherein the effect of transactions and other events on assets and liabilities are recognized and reported in the time periods to which they relate rather only when cash is received or paid. The Report of Investigation" submitted by the tax examiner indicated that accrual was the basis of the taxpayer' return. Thus, private respondent recorded accrued royalties and dividends payable as well as the withholding tax at source and having recorded payable on these incomes. Having deducted and withheld the tax at source and having recorded the withholding tax at source payable in its books of accounts, private respondent was obligated to remit the same to the Bureau of Internal Revenue." Thus, Filsyn was liable to remit the taxes withheld at source on the interest, royalties and dividends even if the same had not been actually paid to the non-resident foreign corporations and to the stockholders. 2. In support of its contention. Filsyn cited the decision of the Court of Tax Appeals in Bayer Pharmaceuticals, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 2846, dated March 16, 1979. In said case, the respondent Court of Tax Appeals ruled that the obligation to withhold and pay the tax arises only upon actual payment or remittance of the taxable income. A perusal of the Bayer decision will show that Bayer Pharmaceuticals, Inc. could not pay or remit royalties due to Bayer Aktiengesellschaft, Leverkusen Bayermerk, a non-resident foreign corporation, even if it wanted to, due to Central Bank restrictions. Thus, Bayer Pharmaceuticals, Inc. was under no obligation to withhold and pay the tax on the royalties despite accrual of the same in its books. In the subsequent decision of the respondent Court of Tax Appeals in Western Palawan Timber Corporation vs. The Commissioner of Internal Revenue, CTA Case No. 3544, dated June 5, 1987, it ruled that, taking into account the decision in the Bayer case, if the income payable to a non-resident foreign corporation can be paid or remitted because there are no restrictions against its payment or remittance thereof, the liability to withhold and pay the tax thereon attaches at the time of the accrual, not at the time of actual remittance. While Filsyn admitted that there was not government restriction on the remittance of the income due to the non resident foreign corporation, it contended that the fact that the accrued amounts were not yet due and demandable is such a circumstances or force that effectively blocked the non-resident foreign corporations from receiving the income accrued in its books. We cannot sustain this argument of Filsyn. While it is alleged by Filsyn that the non-resident foreign corporations did not have the right then to demand payment of the amounts due them since under their contracts with Filsyn they were not yet due and demandable. Filsyn is not barred by the contract from paying in advance the amount due to the non-resident foreign corporations upon the accrual thereof in its books. As stated by the respondent Court of Tax Appeals, "there is nothing beyond the control of petitioner which would prevent or stop it from remitting the said incomes even before they become due and demandable under the pertinent contracts." WHEREFORE, the present petition for review is DISMISSED and the decision of the Court of Tax Appeals, dated May 10, 1993, in CTA Case No. 3421 is AFFIRMED. Costs against petitioner Filipinas Synthetic Fiber Corporation (Filsyn). IT IS SO ORDERED. Montenegro and Dela Rama , JJ ., concur.