Unnumbered BIR Ruling

January 23, 1998 MEMORANDUM FOR: The Commissioner SUBJECT : This refers to the protest filed on April 24, 1992 by OLYMPIA BUSINESS MACHINES CO. (Phils.), INC. (taxpayer for brevity) against the deficiency income tax assessments issued to it in the respective amounts of P3,500,774.54 under FAS-1-88-92-001242 for 1988 and P2,975,725.75 under FAS-1-89-92-001243 for 1989. (p. 169) cdtech BASIS OF THE ASSESSMENT : The above deficiency income tax assessments stemmed from the disallowance of the following items of deductions: 1988 1) Accounts Receivable Written-Off P4,446,901.00 Reason: No proof of uncollectibility 2) Commission Expense 467,177.50 Reason: No expanded withholding tax 3) Undeclared Sales 51,313.01 Basis: Result of reconciliation of the output tax with Sales Account 1989 1) Accounts Receivable Written-Off P858,737.00 Basis/Reason-Balance of the 1988 A/R the alleged uncollectibility of which is unsupported 2) Inventories Written-Off 453,000.00 Reason: Unsupported 3) Commission Expense 1,030,775.00 Salaries & Wages 600,000.00 Insurance & Advertising 530,000.00 Representation & Entertainment Expenses 500,000.00 Traveling Expense 500,000.00 Professional Fees 45,000.00 Interest Expense 300,000.00 FACTS AND EVALUATION : Records of the case show that taxpayer is a domestic corporation licensed and authorized to engage in business as an importer and distributor of office machines. It is provided with the requisite books of accounts and other accounting records and has substantially complied with the existing revenue rules and regulations, per report of investigation dated January 10, 1992 submitted by Rev. Officer Manuel L. Apostol of the defunct Industry Audit Division of the Bureau of Internal Revenue (BIR). On September 3, 1992, December 3, 1992 and March 23, 1993 conference-hearings were conducted on the case which were both attended by Atty. Ismael Estella, as representative/counsel of the taxpayer, and Revenue Officer Manuel L. Apostol who investigated the herein case both held at the Appellate Division, BIR, National Office, Quezon City, before the hearing Officer Atty. Armistico G. Punzalan. During the said hearings the taxpayer's representative submitted some supporting documents as evidence and promised to submit more documents as the corporation was still in the process of gathering said documents to back up their protest. Also at the hearings, Atty. Estella, taxpayer's counsel, manifested that "not all receipts could be produced as it was not possible to do so since it has been a business practice that not all expenses are receipted for, like traveling expenses and advertising expenses especially when the transaction is made with people who are very much familiar to you". Taxpayer alleged that "it is a question of trust and confidence among each other, if it is just small (the amount involved) except if it is substantial" (T.S.N. dated 12/3/92 p. 7). Taxpayer further argued that those spare parts which were written off due to obsolescence were considered unsalable because they were already worn out due to exposure to heat resulting in their disfiguration/deformation hence, cannot even be used for shop repair. And that selling it to dealers will surely have adverse effect to the business of the herein taxpayer because of their reconditioning procedure while misrepresenting to the public that they are brand new ones. (Please see also Affidavit executed by Milagros G. Javier, taxpayer's Accountant dated March 13, 1997). Among the supporting documents taxpayer submitted are the following: 1. Xerox copy of complaint filed with the then CFI of Pasig, M.M. entitled Olympia Business Machine Co. (Phils.), Inc. vs. Inter-Ocean Enterprises and/or Ms. Cora K. Aguilar docketed as Civil Case No. 44685 received by the said Court on February 12, 1982 and marked as Exh. 4, to support its allegation of the uncollectibility of the accounts receivable which were written-off, these documents cover the years 1988 and 1989; 2. Xerox copies of cash vouchers showing payments of commission, advertising and traveling expenses. On September 5, 1996, taxpayer requested reconsideration of our previous memorandum-decision which has already reached the Legal Service. (Please see letter of taxpayer) Additional documents were submitted later, together with their position paper. A circumspect reading of the records of the case as well as the additional documents submitted disclosed the following: Bad-Debts Written-Off for 1988-89: 1. That the allegation of the examiner that taxpayer failed to prove the uncollectibility of the bad debts written off for the years 1988 and 1989 has no basis in fact since it is borne out by the records that a complaint was filed with the then CFI-Pasig (now RTC) docketed therein as Civil Case No. 44685 entitled "Olympia Business Machines vs. Inter-Ocean Enterprises and/or Cora Aguilar" for the collection of a sum of money. Up to the present, the subject debts of the defendant, has not yet been collected hence, RTC Judge Manuel D. Victoria ordered that the case be archived. (Please see attached certified duplicate copy of the Order dated September 9, 1997.) Based on the above-cited facts, we believe that the writing-off of the accounts receivable from those collectible is valid and proper since the taxpayer has complied with the requirements of the law. On Inventories Written-Off. Taxpayer contended that this item of deduction consists of typewriter spare parts which were written off in 1989 due to obsolescence. These spare parts were typewriter models no longer manufactured by the supplier who had withdrawn said models from the market. The examiner disallowed this writing off due to non-substantiation thereof. However, at the hearing held on December 3, 1992, taxpayer submitted certification dated February 15, 1989 issued by Mr. Eduardo Bautista, Service Manager of the Company, certifying the writing off of the subject obsolete spare parts totaling P453,000.00 (Please see page 3, T.S.N. dated December 3, 1992). As to the findings of undeclared sales of P51,313.01 which the examiner based on the result of reconciliation of the output and sales account for 1988, taxpayer's accountant explained that it resulted from the difference between the Total Sales reported by the investigating examiner and the amount stated in the Financial Statements. The accountant contended that the examiner based his total sales on the Output Tax Account Balance, notwithstanding that the said balance included the tax on the company's Deferred Service Income under maintenance Contract since they did not have Deferred Output Tax Account during that year (1988) hence, it was consolidated on the Output Tax Account. BIR Ruling on VAT provides that Service Income will only be recognized upon actual rendition of service. Regarding the disallowances of claimed expenses, additional documents were submitted by the taxpayer consisting of xerox copies of the cash vouchers for commission payments, insurance & advertisement, representation & entertainment and traveling expenses. However, the previously disallowed expenses could not be allowed in full but only up to the respective amounts supported by the cash vouchers submitted. (See Folder No. 1) As to the disallowed salaries and wages expense of P600,000.00 for 1989, the xerox copy of the cash voucher bearing the amount of P600,000.00 labeled as bonus cannot be considered due to taxpayer's failure to subject the same to withholding taxes. Accordingly, the deficiency income tax for 1988 and 1989 are recomputed as shown hereunder: 1988 Net Income per return P143,855.00 Add: Disallowance Commission Expense 47,177.50 Net Taxable P191,032.50 Tax Due P66,861.38 Less: Payment made 50,349.00 Balance of Tax Due P16,512.38 Add: 25% surcharge P4,128.10 20% int. fr. 4/1/90 to 4/16/96 P28,896.67 Compromise Penalty P15,000.00 48,024.77 Amount Collectible P64,537.15 1989 Net Income per return P732,405.00 Add: Disallowances Commission Expense P36,287.45 Salaries & Wages 600,000.00 Insurance & Advertisement 53,896.88 Representation & Entertainment 143,040.15 Traveling 51,928.71 885,153.19 Taxable Income P1,617,558.19 Tax Due Thereon P566,145.37 Less: Payment made 256,342.00 Balance of Tax Due P309,803.37 Add: 25% surcharge P77,450.84 P77,450.84 20% int. fr. 4/16/90 to 4/16/96 P462,705.10 Compromise Penalty P15,000.00 555,155.94 TOTAL AMOUNT COLLECTIBLE P864,959.31 Financial Statements from 1982 to 1989 submitted by the taxpayer show that the Company had mostly been incurring losses from operations and because of that, an offer has been made to compromise the above assessments per letters of the taxpayer dated May 21, and September 2, 1997, offering to pay the basic taxes of P16,512.38 for 1988 and P309,803.37 for 1989. LLcd RECOMMENDATION : PREMISES CONSIDERED, it is respectfully recommended that the offer for a compromise settlement of its 1988 and 1989 deficiency income tax by paying the total amount of P326,315.75 be accepted, after payment of which this case should be considered closed and terminated. Respectfully submitted: (SGD.) RODULFO L. SALAZAR Chief, Appellate Division I CONCUR: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group Recommendation APPROVED (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue