March 24, 2004

BIR RULING [DA-128-04]

Secs. 248; 249; 017-97; 036-02

Tax Counseling Integrated

Unit 2204-C, PSE Tower Center I
Exchange Road, Ortigas Center
Pasig City

Attention: Reynoso B. Floreza

Tax Counsel

Gentlemen :

This has reference to your letter dated January 12, 2004 requesting, on
behalf of your client Bechtel Overseas Corporation (BOC for brevity), a ruling on
the legality of the demand for the collection of increments i.e. surcharge, interest
and compromise penalty on the fringe benefit tax (FBT) for the four (4) quarters of
2000.

It is represented that in the early part of November 1999, BOC filed a claim
for cash refund of excess VAT payments in the amount of P52.5 Million. The
request was changed to the issuance of tax credit certificate (TCC) upon the advice
of the Chief, Revenue Accounting Division that there was no sufficient cash for
the said refund.

On January 5, 2000, the BIR approved the request and simultaneously

issued the TCC bearing the amount claimed. Consequently, BOC tendered the
TCC as payment for its fringe benefit tax for the first quarter of taxable year 2000
in the amount of P541,000.00. The Head Revenue Executive Assistant, Collection
Service, refused to accept the TCC as payment alleging that said tax that BOC is
required. to pay is a withholding tax in which case a TCC is not acceptable.

BOC, through counsel then went to the Chief, Revenue Accounting

Division and requested that the TCC be converted to cash so that BOC could
utilize the same as payment of its FBT liability. BOC was however informed that
the BIR has no available cash and that it would take months or even years before
the Department of Budget and Management (DBM) could provide for the

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 necessary allocation to cover the cash refund.

Knowing fully well that it could not have its TCC converted to cash
expeditiously, BOC filed a protest with the Appellate Division; this Bureau,
contending that the controversial tax is not a withholding tax but a fringe benefit
tax that is a direct liability of the employer i.e. BOC. Therefore, the TCC should
be accepted as payment for the same.

Notwithstanding the pendency of the protest, BOC also tendered the TCC
as payment of the FBT liabilities for the second, third and fourth quarters but these
payments were all rejected for the same reason as in the first quarter tender of
payment.

Exasperated with the pressure exercised by the Collection Unit, Large

Taxpayers Service for the collection of the FBT, BOC paid in cash on April 12,
2002 the demanded FBT for the 4 quarters of 2000, without increments.

However, on October 9, 2002 the Bureau issued BIR Ruling No. 036-02 at
the instance of BOC. The said ruling states in part that:

"From the foregoing discussion, it is quite clear that FBT is a

withholding tax on the employee although payment thereof is made directly
by the employer. It is a direct internal revenue tax liability of the employee,
and not the employer. Such being the case, Bechtel cannot use its TCC to
pay the FBT because of the prohibition under Section 204(C) of the 1997
Tax Code."

Based on this pronouncement of the Bureau that FBT is a withholding tax,

the Large Taxpayers Service demanded BOC to pay the increments (surcharge,
interest and compromise).

It is now your position that BOC is not liable for the alleged increments of
P1,121,249.28 because it has voluntarily paid the FBT due before the issuance of
the adverse ruling. In addition, the liability arises only if BOC has been delinquent
in the payment thereof after the issuance of the said ruling.

In reply thereto, please be informed that under Sections 248 (a)(3) and 249,
both of the Tax Code, as amended, the imposition of the surcharge and interest on
delinquency is mandatory. Strong reasons of policy support a strict observance of
the rule regarding the payment of tax. The laws imposing penalties for
delinquencies are clearly intended to hasten tax payments or punish evasions or
neglect of duty in respect thereof. If delays in tax payments are to be condoned for
light reasons, the law imposing penalties for delinquencies would be rendered
nugatory and the maintenance of the government and its multifarious activities
would be as precarious as taxpayers are willing or unwilling to pay their

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 obligations to the state on time. (Jamora vs. Meer, 74 Phil. 22) (BIR Ruling No.
017-97 dated 02-05-97)

Yet, the aforesaid provisions of the Tax Code upon which the Collection
Section of the Large Taxpayers Service based the imposition of increments speaks
of a situation where the tax that is supposed to be paid is already delinquent. This
boils down to the issue of whether or not BOC, under the antecedent facts
presented, became delinquent in the payment of its FBT..

For a conclusive start, this Office is of the opinion that BOC has not been
delinquent in the payment of the FBT. As such, it should not be required to pay the
increments. In the case of Cagayan Electric Power & Light Co., Inc. vs.
Commissioner of Internal Revenue (138 SCRA 629), the Supreme Court said that
"where imposition of a tax statute was controversial, taxpayer may not be
held-liable for the surcharge and interest."

Records show that BOC filed a protest after the Large Taxpayers Service
rejected the TCC as payment for the FBT. The protest involved more of a legal
issue rather than a factual one. Considerably, the determination as to the nature of
the FBT has been elevated for resolution. As such, in the absence of any ruling
that clarifies the issue of whether or not FBT is a withholding tax, BOC could not
have been considered delinquent in the payment of FBT that would justify the
imposition of interest, surcharge and compromise penalties.

BOC may, therefore, be considered delinquent only from the issuance of

the ruling by the Commissioner of Internal Revenue in which case the appropriate
assessment and demand could be issued on the basis of said ruling. Thus, if BOC
still fails to pay the tax despite the issuance of such ruling, then it would be
considered delinquent and any demand now to be made upon BOC for the
payment of the tax should include the statutory penalties incident to delinquency.

On the other hand, it may be said that the act of BOC in tendering the TCC
as payment for the FBT may have been prompted based on the opinion of the
Appellate and Law Divisions of the Legal Service that FBT is not a withholding
tax but a direct liability of the employer. In which case, TCC may be used as
payment for the same. Thus, the ruling that clarifies the issue, at the instance of
BOC, could not be given retroactive application but shall only be applied from the
day that the Bureau opined finally that FBT is a withholding tax that is on October
9, 2002.

Since the FBT of the four quarters of taxable year 2000 were already paid
on April 12, 2002 and the adverse ruling was issued only on October 9, 2002, it is
the opinion of this Office that BOC had not been delinquent in paying the FBT.
Therefore, no interest, surcharge and compromise penalties can be validly

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 demanded from BOC.

Finally, the act of BOC in accepting the TCC in lieu of cash refund can be a
laudable contribution for its part as a concerned, taxpayer in helping augment the
country's financial burden. Apropos, the imposition of increments even without a
clear basis as what happened in this case cannot be used as an opportunity by the
government to boost collection for it would slowly result to killing the hen that
lays the golden egg.

This ruling is being issued on the basis of the foregoing facts as

represented. However, if upon investigation, it will be disclosed that the facts are
different then this ruling shall be considered null and void. TIHCcA

Very truly yours,

(SGD.) JOSE MARIO C. BUÑAG

Deputy Commissioner
Legal & Inspection Group
Bureau of Internal Revenue

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