Mabuhay Vinyl Corp. v. Commissioner of Internal Revenue

EIGHTH DIVISION [CA-G.R. SP NO. 80969. February 23, 2009.] MABUHAY VINYL CORPORATION , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . DECISION DICDICAN , J p : In case of false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or omission. 1 False return implies the deviation from the truth or fact, whether or not intentional, while a fraudulent return is the intentional or deceitful filing of a return with the aim of avoiding the correct tax due. 2 Before us for adjudication is a Petition for Review under Rule 43 of the 1997 Revised Rules of Court, seeking to set aside the Decision 3 of the Court of Tax Appeals promulgated on December 3, 2002 in a case docketed as CTA Case No. 5669. This Court took cognizance of the petition for review filed in the case at bench because the petition was filed in this Court on December 29, 2003 before the enactment of Republic Act No. 9282 entitled "An Act Expanding the Jurisdiction of the Court of Tax Appeals, elevating its rank to the level of a Collegiate Court with Special Jurisdiction and Enlarging its Membership, Amending for the Purpose Certain Sections of Republic Act No. 1125, otherwise known as the Law Creating the Court of Tax Appeals and for Other Purposes", on March 30, 2004. aSIDCT The pertinent and relevant facts, as unfurled by the record, are as follows: Petitioner Mabuhay Vinyl Corporation (hereinafter referred to as "MVC") is a domestic corporation organized and existing under the Philippine laws. For the period from January 1976 until December 1986, the Development Bank of the Philippines (hereinafter referred to as "DBP") granted various financial assistance to MVC in the form of guaranteed loans, direct industrial loans and peso and foreign currency denominated loans. DBP would either directly grant loans to MVC or it would act as MVC's guarantor of loans obtained from foreign creditors. As a guarantor of the foreign loans, DBP would assume to pay the loans for and in behalf of MVC upon failure of the latter to pay its foreign creditors. As of June 30, 1986, MVC was indebted to DBP in the aggregate sum of Php981,480,000.00. Thereafter, pursuant to Proclamation No. 50 mandating the transfer of non-performing assets of government financial institutions to the national government through the Asset Privatization Trust (hereinafter referred to as "APT"), all the loans of MVC were transferred to APT in January 1987 at a transfer price of Php662,335,000.00. Eventually, MVC's loans to DBP that were transferred to APT were discharged by way of a Direct Debt Buy-Out Scheme for the price of Php291,688,625.00. On April 17, 1989, MVC filed its annual income tax return for the taxable year 1988, declaring a net loss of Php94,330,876.00 and claiming a tax refund in the amount of Php449,602.00. MVC's accrued interest expenses and other charges for the taxable year were in the sum of Php288,085,515.00. HTaSEA On April 16, 1990, MVC filed its annual income tax for the taxable year of 1989, declaring a net loss of Php13,152,809.00 and the prior year's excess credit in the amount of Php449,602.00. MVC's accrued interest expenses and other charges for taxable year 1989 were in the amount of Php176,856,694.00. On November 21, 1990, Letter of Authority No. 0021383 was issued by the revenue regional director authorizing the examination of MVC's books of accounts and other accounting records pertaining to income and documentary stamp tax covering the taxable years 1988 and 1989. MVC, however, executed various waivers of the defense of prescription under the statute of limitations provided for by the National Internal Revenue Code. Thereafter, more particularly on March 10, 1994, Assistant Regional Director Virginia L. Trinidad issued her First Indorsement Letter which recommended the revalidation of Letter of Authority No. 0021383. Thus, on March 21, 1994, Letter of Authority No. 0040724 was issued to authorize the examination of MVC's books of accounts and other accounting records pertaining to income and business taxes covering the taxable years 1988 and 1989. After the examination of MVC's books of accounts and other accounting records, a Memorandum Report dated December 11, 1996 was made and MVC was found to be liable for deficiency income and withholding taxes in the following amounts: 1988 1989 Income Tax (inclusive of Php179,465,670.12 Php143,240,899.38 interest & surcharges) Withholding Tax (inclusive of Php209,603,939.30 Php123,799,685.80 interest & surcharges) TOTAL DEFICIENCY TAXES DUE Php389,069,609.42 Php267,040,585.18 DEFICIENCY INCOME TAX- Php179,465,670.12 for 1988 Php143,240,899.38 for 1989 The deficiency income taxes for the taxable years 1988 and 1989 in the amount of Php179,465,670.12 and Php143,240,899.38, respectively, resulted from the disallowance of the interest expenses of MVC in the amounts of Php299,434,499.00 for 1988 and Php176,856,604.00 for 1989, which formed part of MVC's deductions for the said years. DSETcC On April 16, 1997, the respondent Commissioner of Internal Revenue (hereinafter referred to as "CIR") issued two pre-assessment notices for the taxable years 1988 and 1989 to MVC for its deficiency income and withholding taxes in the following amounts: (1) Deficiency income tax for 1988 in the sum of Php234,828,909.40; (2) Deficiency withholding tax for 1988 in the sum of PHP277,725,219.40; (3) Deficiency income tax for 1989 in the sum of Php173,110,140.60; and (4) Deficiency withholding tax for 1989 in the sum of Php151,654,615.10. On May 5, 1997, MVC filed its letter-reply and assailed the issuance of the aforementioned pre-assessment notices on the grounds of prescription and impropriety of the assessment. Thereafter, Revenue Officer Josephine Madera issued a memorandum dated January 16, 1998 addressed to the Chief of the Assessment Division of Revenue, Region No. 8, in Makati City, recommending the cancellation of the deficiency income tax assessments for the taxable years 1988 and 1989 but, at the same time, recommending the enforcement of the collection of the deficiency withholding taxes by issuing notices of assessment relative thereto. Thus, Assessment No. 000234-88-393 covering the deficiency withholding tax for the year 1988 and Assessment No. 00234-89-393 covering the deficiency tax for the year 1989 were issued on January 23, 1998. The details of the sums of money demanded are as follows: cICHTD BASIC TAX DUE Php59,886,899.80 ADD: Surcharges 20% & 50% 44,915,174.85 Interest 188,643,734.37 TOTAL Php293,445,809.02 =============== BASIC TAX DUE Php35,371,338.00 ADD: Surcharges 20% & 50% 26,528,503.50 Interest 99,039,746.40 TOTAL Php160,939,587.90 =============== On February 23, 1998, MVC filed its protest letter and requested for a reconsideration of the aforementioned assessment notices. MVC claimed that the assessments for the deficiency withholding taxes were without any legal and factual basis because the interest expenses in the sums of Php299,434,499.00 for 1988 and Php176,856,604.00 for 1989 arose from the loans guaranteed by and/or obtained from DBP which were not supposed to be subjected to final withholding tax. The CIR did not act on the protest letter filed by MVC but, instead, issued two (2) Pre-Assessment Notices dated March 6, 1998, this time only for deficiency income taxes covering the taxable years 1988 and 1989 in the sums of Php178,923,577.00 and Php143,685,010.00, respectively. MVC filed its reply to the foregoing pre-assessment notices on March 27, 1998, questioning their validity on the grounds of: (1) prescription; (2) that the income deficiency taxes stated in the aforementioned pre-assessment notices were already included in the previous pre-assessment notices dated April 16, 1997 that were withdrawn and/or canceled by the CIR and were not included in the assessment notices dated January 23, 1998, hence, those income deficiency taxes can no longer be revived; and (3) the imposition of the 50% surcharge on the income deficiency taxes were baseless and unwarranted because there was no finding of any fraud or falsity on the part of MVC. EICSDT More than one hundred eighty (180) days had lapsed from the date when MVC filed its reply to the pre-assessment notices dated March 6, 1998 and no action was taken by the CIR; hence, MVC filed a protest on February 23, 1998. Again, no action was taken by the CIR on the protest, thus, MVC elevated the matter to the Court of Tax Appeals by filing a Petition for Review therein on September 21, 1998. The petition for review was docketed as CTA Case No. 5669. After due consideration of the contentions and the evidence adduced by both parties, the Court of Tax Appeals rendered a Decision 4 promulgated on December 3, 2002. The dispositive portion of such decision reads as follows: "WHEREFORE, in view of all the foregoing, petitioner is hereby ordered to pay the amount of Php119,209,625.29 representing deficiency final withholding taxes for the years 1988 and 1989. In addition, petitioner is likewise ordered to pay 20% delinquency interest on the total deficiency withholding tax computed from February 24, 1998 until fully paid pursuant to Section 249 (a)(C)(3) of the 1997 Tax Code. "SO ORDERED." On January 24, 2003, MVC moved for the reconsideration of the aforementioned Decision of the Court of Tax Appeals. However, the court a quo resolved to deny the motion for reconsideration on November 17, 2003. Undaunted, the MVC filed the petition for review in this Court, raising the following issues to be passed upon by us: I WHETHER OR NOT RESPONDENT'S RIGHT TO ASSESS DEFICIENCY WITHHOLDING TAXES FOR TAXABLE YEARS 1988 AND 1989 HAS PRESCRIBED; CAIaHS II WHETHER OR NOT PETITIONER IS LIABLE TO PAY DEFICIENCY WITHHOLDING TAX AMOUNTING TO PHP119,209,625.29; and III WHETHER OR NOT THE CIRCUMSTANCES WARRANT THE IMPOSITION OF THE FIFTY PERCENT (50%) PENALTY FOR FRAUD. After the last pleading required by this Court was submitted, the petition was deemed as submitted for decision. On May 29, 2008, MVC filed a Manifestation and Motion 5 informing this Court that it availed of the tax abatement program of the Bureau of Internal Revenue (BIR) pursuant to Revenue Regulations No. 15-2006 entitled "Implementing a One-Time Administrative Abatement of all Penalties/Surcharges and Interest in Delinquent Accounts and Assessments (Preliminary or Final, Disputed or not) as of June 30, 2006". Under the said regulations, a taxpayer, natural or juridical, may settle any delinquent account or assessment as of June 30, 2006 by paying an amount equal to one hundred percent (100%) of the basic tax assessed. Attached in the MVC's Motion and Manifestation was the Termination Letter 6 dated April 8, 2008 issued by the BIR, which reads as follows: SIAEHC " TERMINATION LETTER (ABATEMENT PROGRAM UNDER RR-15-2006) Case No. TL-116-08-000001 MABUHAY VINYL CORPORATION 3/F Philam Life Bldg., LP Leviste St., Salcedo Village, Makati City Sir/Madam: This refers to your ONE TIME ADMINISTRATIVE ABATEMENT of all penalties surcharge and interest, pursuant to the provisions of Section 204 of the Tax Code, as amended, and implemented by Revenue Regulations No. 15-2006, bearing on your internal tax liabilities, to wit: NAME OF TAXPAYER : MABUHAY VINYL CORPORATION TIN : 000-164-009 ADDRESS : 3/F Philam Life Bldg., L.P. Leviste St., Salcedo Village, Makati City DETAILS OF ASSESSMENT : Assessment Tax Taxable Basic Surcharge Interest Compromise Total No. Type Year Tax Penalties 000234- 1988 59,886,899.80 44,915,174.85 188,643,734.37 - 233,558,909.22 88-393 000234- WF 1989 35,371,338.00 26,528,503.50 99,039,746.40 - 125,568,249.90 89-393 TOTAL 95,258,237.80 71,443,678.35 287,683,480.77 - 359,127,159.12 =========== =========== ============ ====== ============ In this connection, we are pleased to inform you that in view of your availment of the aforesaid benefits granted under the special provisions of Section 204 of National Internal Revenue Code (NIRC), as amended, and its implementing rules and regulations, and the payment of the total amount of Ninety Five Million Two Hundred Fifty Eight Thousand Two Hundred Thirty Seven Pesos & 80/100 Only (P95,258,237.80), representing ONE HUNDRED PERCENT (100%) of the basic tax assessed under this ABATEMENT PROGRAM , the tax liability stated above is hereby CLOSED and TERMINATED . Very truly yours, (SGD.) ROMULO L. AGUILA, JR. OIC-Head Revenue Executive Assistant LTS, Regular Large Taxpayers" After a careful and judicious review of the record of the case as well as the applicable laws and jurisprudence, we find the petition filed in this case to be devoid of merit. TDcEaH Section 203 of the National Internal Revenue Code (NIRC) provides for a three-year prescriptive period within which the BIR may assess and collect internal revenue taxes from taxpayers. After such period, the BIR may not assess nor collect from the taxpayer anymore, except in cases provided for in Section 222 of the NIRC wherein a false or fraudulent return was filed by the taxpayer or the taxpayer failed to file a return altogether. In the latter cases, the prescriptive period for the assessment and collection of deficiency taxes is at anytime within ten (10) years after the discovery of the falsity, fraud or omission. Section 51 of the NIRC, on the other hand, gave the CIR with the approval of the Secretary of Finance, the power to require the withholding agents to pay or to deposit the taxes deducted or withheld at more frequent intervals when necessary to protect the interest of the Government. Pursuant to the aforementioned power, the CIR issued Revenue Regulations No. 5-85 which provided for the synchronization of the time and manner of filing and remitting of creditable and final income taxes withheld. The CIR required withholding agents to file monthly returns for income subject to final withholding taxes. The pertinent portion of such regulation reads as follows: "SEC. 2. Monthly return and remittance of taxes withheld. . . . "(iii) income subject to final withholding taxes, shall be remitted within ten (10) days after the end of each calendar month . . . ." aCIHcD In the case at bench, MVC only filed its monthly returns for the months of January, April, July and October for the taxable year 1988 and January, April and July for the taxable year 1989. Other than for those said months, MVC failed to file its monthly remittance returns reflecting its income payments subject to final tax as required by Revenue Regulations No. 5-85. The failure of MVC to file the required monthly returns for the months of February, March, May, June, August, September, November and December of the taxable year 1988, and for the months of February, March, May, June, August, September, October, November and December of the taxable year 1989, is considered as an omission on its part to file the return, which can be assessed within 10 years from the discovery of the omission in accordance with Section 222 of the NIRC; hence, the assessment notices issued on January 23, 1998 are not time-barred. Moreover, MVC also failed to file its annual withholding tax returns for the taxable years 1988 and 1989 which constitutes willful neglect on its part. Under Section 236 of the Revenue Regulations No. 2, there is willful neglect in the case of a taxpayer which, being obliged to file a return, knowingly delays the filing of such return. Where the filling of the return has been delayed for a considerable length of time, the delinquency is presumed to be due to willful neglect. The monthly returns filed by MVC for the taxes withheld for the months of January, April, July and October for the taxable year 1988 and January, April and July for the taxable year 1989 failed to mention its interest payments to DBP on which withholding taxes were due. MVC contended that it was in its honest belief that the interest payments to DBP were not subject to withholding taxes, hence, it did not reflect the same in its monthly returns. However, we are not convinced by the foregoing contentions of MVC because, even assuming that MVC believed that the interest payments to DBP were not subject to final tax, it could have reflected the same in the annual information return/alpha list of income payments not subjected to withholding tax. Unfortunately, MVC failed to do so. As the Court of Tax Appeals observed, the monthly returns filed by MVC deviated from the truth, making the same "false" returns within the purview of Section 222 (a) of the NIRC and subject to the ten-year prescriptive period as well. DIETcC MVC's contention that it was not obligated to file the monthly final withholding tax returns on interest expenses for the reason that the interest payments became due only quarterly is also without merit. A careful perusal of the record of the case would show that, contrary to MVC's contentions, its accrued interest expenses were recorded monthly relative to its SWAP/Other loans, DBP loans, and income bonds. Section 3 of Revenue Regulations No. 6-85 provides that: "SEC. 3. Time withholding. The obligation of the payor to deduct and withhold under these regulations arises at the time an income which is subject to withholding under Section 1 hereof is payable or paid. The term "payable" in accounting parlance means that an expense has already been incurred but actual payment has not yet been made. On the other hand, the term "paid" means that an expense has already been incurred and, at the same time, actual payment has been made. "Accrued liabilities" constitute liabilities for expenses incurred on or before the balance sheet date but payable at a later date, usually to specific persons, and determinable with reasonable accuracy. Examples are accruals of salaries, interests and rentals. 7 In the case at bench, MVC adopted the accrual method of accounting in recording its liabilities and also in taking into account all interests expenses on a monthly basis for purposes of financial reports to management. The "accrual basis" is the method under which income, gains, and profits are included in gross income when earned, whether received or not, and the expenses are allowed as deductions when incurred, although not yet paid. For an expense to be considered incurred under the accrual method, it is essential that the liability therefor has become fixed and the amount is either ascertained or ascertainable in the taxable year. 8 MVC's application of the accrual basis of accounting in recording its interest expenses presupposes that MVC treated such interest expenses as incurred although actual payments have not yet been made. Pursuant to Revenue Regulations No. 6-85, the obligation of MVC to deduct and withhold the taxes due arises at the time when an income which is subject to withholding is payable or paid; hence, MVC's failure to file the corresponding monthly final withholding tax returns for the months of February, March, May, June, August, September, October, November and December of 1988 and February, March, May, June, August, September, October, November and December of 1989 as well as the Annual Withholding Tax Returns for the same years is considered assessable within the ten-year prescriptive period while, for the months wherein MVC was able to file its return, failure to mention in the monthly tax returns its interest payments to DBP on which withholding taxes were due was tantamount to filing of false returns. Thus, the respondent had the right to assess petitioner anytime within ten (10) years from the date of discovery of the fraud or omission pursuant to Section 222 (a) of the 1997 Tax Code. HSTaEC Anent the second issue, we do not find any error in the ruling of the Court of Tax Appeals that MVC is liable to pay deficiency final withholding taxes for the years 1988 and 1989 in the sum of Php119,209,625.29. The Court of Tax Appeals, in its Decision dated December 3, 2002, was able to discuss in full the basis for the imposition of the deficiency final withholding taxes. As observed by the court a quo, MVC's monthly accrued interest expenses from loans are composed of the Swap/Other loans, DBP loans and income bonds in the sums of Php225,823,302.00 for taxable year 1988 and Php175,438,897.27 for taxable year 1989. The Swap/Other loans were foreign loans not guaranteed by DBP, while the DBP loans were those comprised of domestic loans, foreign currency denominated direct loans and loans obtained from foreign creditors which were guaranteed by DBP. The amount of Php119,209,625.29 imposed by the court a quo as deficiency final withholding taxes came from the Swap/Other loans which were subjected to 20% final withholding tax, and the DBP Foreign Currency Denominated Direct Loans which were subjected to 10% final withholding tax. The loans obtained from foreign creditors which were guaranteed by DBP and were subjected to subrogation were not included in the computation of the court a quo of the deficiency final withholding taxes for the years 1988 and 1989. However, the said loans obtained from foreign creditors which were guaranteed by DBP were only a portion of the monthly accrued interest expenses of MVC; hence, only that portion were not subjected to tax. The Swap/Other loans and DBP Foreign Currency Denominated Direct Loans which were not covered by the subrogation were, therefore, properly considered by the court a quo as taxable. ICESTA Anent the third issue, Section 248 (B) of the NIRC provides that: "In case of willful neglect to file the return within the period prescribed by this Code or regulations, or in case a false or fraudulent return is willfully made, the penalty to be imposed shall be fifty percent (50%) of the tax or of the deficient tax, in case any payment has been made on the basis of such returns before the discovery of the falsity or fraud." The 50% surcharge may rightfully be imposed in the case at bench, considering that there is a willful neglect on the part of MVC for knowingly delaying the filing of the returns required of it for a considerable length of time. Also, as pointed out by the court a quo, MVC's failure to file the monthly remittance returns reflecting its interest payments subject to final tax for the months of February, March, May, June, August, September, October, November and December of 1988 and February, March, May, June, August, September, October, November and December of 1989 constituted willful neglect on its part. Moreover, MVC's failure to report the said interest payments to DBP in the annual information return/alpha list as among the income payments not subjected to withholding tax, believing that the same are not subject to final tax, made its returns as false returns. Thus, the imposition of the 50% penalty is legal and proper. WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by us DENYING the petition filed in this case and AFFIRMING the assailed order dated December 3, 2002 issued by the Court of Tax Appeals in CTA Case No. 5669. However, in view of the Termination Letter dated April 8, 2008 issued by the respondent, the tax liability of the petitioner for the taxable years 1988 and 1989 is hereby considered as already paid. SO ORDERED. SaIHDA (SGD.) ISAIAS DICDICAN Associate Justice Bienvenido L. Reyes and Marlene Gonzales-Sison, JJ., concur. Footnotes 1. Section 222 (a) of the National Internal Revenue Code of the Philippines. 2. Aznar vs. Court of Tax Appeals and Collector of Internal Revenue, 58 SCRA 519. 3. Rollo, pp. 46-79. 4. Supra, footnote no. 3. 5. Rollo, pp. 285-291. 6. Ibid., p. 302. 7. Statement of Financial Accounting Standards No. 5, par. 8 (e). 8. Comprehensive Review of Taxation 6th Edition (1998), Hector S. de Leon, p. 243. cHCSDa