REPUBLIC OF THE PHILIPPINES DEPARTMENT OF FINANCE BUREAU OF INTERNAL REVENUE Revenue Region No.

8 -Makati ___________________

PRELIMINARY ASSESSMENT NOTICE

The President ABC Company Address 1234 TIN: xxx-xxx-xxx Sir/Madam: Please be informed that after investigation, there has been found due from you deficiency Income Tax and Expanded Withholding Tax for the taxable year 2007 as shown hereunder, to wit;
I. INCOME TAX Taxable Income (Loss) per return Add: Adjustments/disallowances Income on excess of standard input tax to actual input tax (Schedule 1) Undeclared Inconme (Schedule 2) Overclaimed Interest Expense (Schedule 3) Disallowed Expenses due to non withholding (Schedule 4) Total Add: Net Operating Loss Carry-Over Adjusted Taxable Income Basic Income Tax Due Less: Tax credits/payments: Excess Credits from previous period Creditable Income Tax Withheld Total Less: MCIT to be carried forward to succeeding period Excess Credits carried forward no succeeding period Basic Deficiency Income Tax Add: Interest (04.16.08 to 08.03.12) TOTAL AMOUNT DUE

P P 3,026,642.23 18,857,558.00 63,209.48 3,881,688.42 P P P P P 4,435,662.66 2,613,151.02 7,048,813.68 7,048,813.68 P P

(1,072,224.88)

25,829,098.13 24,756,873.25 1,072,224.88 25,829,098.13 9,040,184.35

584,956.21 6,463,857.47

9,040,184.35 7,777,035.30 16,817,219.65

II. EXPANDED WITHHOLDING TAX Basic Tax Due (Schedule 4) Add: Interest (01.16.08 - 08.03.12) Total Amount Due
Please note that the interest and the total amount due will have to be adjusted if paid after the date specified herein.

P P

309,522.11 281,707.52 591,229.63

The complete details covering the aforementioned discrepancies established during the investigation of this case are shown in the accompanying ANNEX A of this letter. The 20% interest per annum has been imposed pursuant to the provisions of Section 249(B) of the National Internal Revenue Code.

Pursuant to the provisions of Section 228 of the 1997 NIRC and its implementing Revenue Regulations, you are hereby given the opportunity to present in writing your side of the case within fifteen (15) days from receipt hereof. However, if you are amenable, you may pay the above assessment in a duly authorized agent bank in which you are enrolled using the BIR Payment Form (BIR Form 0605) attached herewith . Afterwards, submit proof of payment thereof to the Assessment Division, this Region, located at 3rd Floor, BIR Bldg., 313 Gil Puyat Avenue, Makati City for updating of your records and cancellation of the herein PAN, if warranted. If we fail to hear from you within the said period you shall be considered in default, in which case a formal letter of demand and assessment notice shall be issued by this office calling for payment of your aforesaid deficiency taxes, including civil increments. We hope that you will give this matter your preferential attention.

Very truly yours, XXXXXXXXXXXXXXXXX COMMISSIONER OF INTERNAL REVENUE By:

XXXXXXXXXXXXXXXX Regional Director

Annex A REPUBLIC OF THE PHILIPPINES DEPARTMENT OF FINANCE BUREAU OF INTERNAL REVENUE Revenue Region No. 8 -Makati ________________

The President ABC Company Address 1234 TIN: xxx-xxx-xxx

DETAILS OF DISCREPANCIES
I. INCOME TAX Income on excess of standard input tax to actual input tax, P3,026,642.23 Verification disclosed that you failed to close excess of standard input tax from sales to government to other income/expenses in violation of Section 4.114-2 of Revenue Regulations No. 16-2005 as amended by RR 4-2007 which states that, xxx if actual input VAT attributable to sale to government is less than seven percent (7%) of gross payment, the difference must be closed to expense or cost. Hence, the said excess was assessed pursuant to Section 32 of the National Internal Revenue Code as amended. Schedule 1:

Total Sales to government Multiplied by: Standard Input VAT Rate Standard Input VAT Actual Input VAT attributable to sales to Government Income on excess of standard input tax to actual input tax.

P P P

132,642,958.40 7% 9,285,007.09 6,258,364.86 3,026,642.23

Undeclared Income, P18,857,558.00 Comparison of your receipts per VAT Returns as against your declared income per Income Tax Returns filed yielded a discrepancy of P18,857,558.00. The same was added to your gross income pursuant to Section 32 of the NIRC and subject to income tax pursuant to Section 27 of the same Code. Schedule 2:

Total Receipts per VAT Returns Add: Trade Receivable, end net of VAT (P49,156,118.00 / 1.12) Subtotal Less: Trade Receivable beg, net of VAT (P63,060,230.00 / 1.12) Total income for the period per VAT Returns Less: Income declared per Income Tax returns Undeclared Income

P P P P

132,642,958.40 43,889,391.07 176,532,349.47 56,303,776.79 120,228,572.69 101,371,014.69 18,857,558.00

Overclaimed Interest Expense, P63,209.48 Verification disclosed that there was an overclaimed interest expense amounting to P63,209.48 in violation of Section 34(B)(1) of the NIRC which states that the amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business shall be allowed as deduction from gross income: Provided, however, that the taxpayer's otherwise allowable deduction for interest expense shall be reduced by forty-two percent (42%) of the interest income subjected to final tax Schedule 3:

Interest Income earned per Financial Statements Divided by rate (100% - Final tax rate of 20%) Gross up value of interest income Multiplied by the rate Non-deductible interest expense per audit Non-deductible interest expense per ITR Overclaimed Interest Expense

P P P P

120,399.00 80% 150,498.75 42% 63,209.48 63,209.48

Disallowed Expenses due to non-withholding tax, P3,881,688.42 - Verification disclosed that you have not withheld the appropriate withholding tax due on your income payments enumerated hereunder. Section 34 (K) of the NIRC, as amended, expressly provides that any amount paid or payable which is otherwise deductible from, or taken into account in computing the gross income or for which depreciation or amortization maybe allowed under this Section, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in accordance this Section of this Code.. Hence, the aforementioned expenses have been disallowed pursuant to the above provision of the law. Schedule 4:

Expenses/Income Payments Directors Fees Professional Fees Rentals Total Disallowed Expense P

Per F/S / ITR

Per Alphalist/ Discrepancy Returns filed 547,500.00 P 537,500.00 P 10,000.00 187,989.80 200,190.67 12,200.87 3,683,698.62 3,695,886.11 12,187.49 4,443,576.78 P 561,888.36 P 3,881,688.42

Rate 20% P 15% 5% P

EWT Due 2,000.00 28,198.47 184,184.93 214,383.40

Add: Deficiency EWT on Purchase of Goods Domestic Purchase of Goods per 25,697,091.86 VAT Returns Total Basic EWT Due

16,183,221.18

9,513,870.68

1% P

95,138.71 309,522.11

Note: The above disallowed expenses due to non-withholding shall be allowed as deduction from gross income upon payment of the corresponding withholding tax due thereof pursuant to Section 6 of Revenue Regulations No. 14-2002 amending Section 2.58.5 of RR 298 as amended.

Net Operating Loss Carry-Over (NOLCO), P1,072,224.88 - Investigation disclosed that your operation showed taxable income instead of net operating loss as previously claimed in your ITR. The tax benefit of this amount has already been forwarded to succeeding periods as provided for under Section 34(D) (3) of the NIRC which states that: The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss.

Excess Minimum Corporate Income Tax (MCIT) Carried Over to Succeeding Period, P584,956.21 The minimum corporate income tax paid was not allowed as tax credit against the computed deficiency income tax, considering that the said amount shall be carried over and credited against the normal income tax for the three (3) immediately succeeding taxable year in compliance with the provision imposed under Section 27 (E) (1) (2) of the Tax Code. Excess credits carried forward to succeeding year, P6,463,857.47 - Excess tax credit carried over to succeeding period in the amount of P6,463,857.47 was deducted from the total allowable tax credit considering that the said amount has been credited against the estimated quarterly income tax liabilities for the taxable quarter of the succeeding taxable years pursuant to Section 76 of 1997 NIRC.

II. EXPANDED WITHHOLDING TAX Basic expanded withholding tax due, P309,522.11- Since you have failed to withhold/remit the correct withholding tax due on several income payments previously disallowed as deductions from gross income (refer to Schedule 4), you are still liable to pay the deficiency withholding tax thereon pursuant to Section 2.57.1 of Revenue Regulations No. 298, as amended.

PERIOD OF PRESCRIPTION Since you/your authorized representative had executed a waiver of the defense of prescription under the statute of limitations prescribed in Sections 203 and 222, and other related provisions of the National Internal Revenue Code on December 23, 2010 and have consented to the assessment and/or collection of tax or taxes of said year which may be found due after investigation/reinvestigation/re-evaluation at any time before or after the lapse of the period of limitations fixed by said sections of the National Internal Revenue Code but not later than June 20, 2011, however, you had executed subsequent waiver of the defense of prescription on March 17, 2011 and January 17, 2012 extending the prescriptive period, but not later than June 30, 2012 and June 30, 2013 respectively, the period of prescription, therefore, is further suspended from the date of execution up to June 30, 2013. FILING OF VALID PROTEST In case you disagree to our proposed assessment, you or your authorized representative may protest administratively against the aforesaid Preliminary Assessment Notice (PAN) within fifteen (15) days from date of receipt thereof and submit the same at the Assessment Division, this Region, located at 3rd Floor, BIR Bldg., 313 Gil Puyat Avenue, Makati City, stating the facts, the applicable laws, rules and regulations or jurisprudence in support of your protest, otherwise, it shall be considered void and without force and effect, pursuant to Section 228 of the NIRC in accordance with Revenue Regulation Nos. 12-85 and 12-99. However, if you are amenable to the proposed assessment, whether in whole or in part, it is requested that you settle first the tax attributable to the undisputed issue before an action can be taken on your protest otherwise, Formal Assessment Notice will be issued to protect the interest of the government. Very truly yours, XXXXXXXXXXXXXXXX COMMISSIONER OF INTERNAL REVENUE By:

XXXXXXXXXXXXXXXXX Regional Director