creditors as held by the Supreme Court in the case of Western Minolco
PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES (PICOP) v.
CA, CIR and CTA, G.R. Nos. 106949-50 (1995)
Facts:
Paper Industries Corporation of the Philippines (PICOP) is a Philippine
corporation registered with the Board of Investments (BOI) as a preferred
pioneer enterprise with respect to its integrated pulp and paper mill, and
as a preferred non-pioneer enterprise with respect to its integrated
plywood and veneer mills. Petitioner received from the Commissioner of
Internal Revenue (CIR) two (2) letters of assessment and demand (a) one
for deficiency transaction tax and for documentary and science stamp tax;
and (b) the other for deficiency income tax for 1977, for an aggregate
amount of PhP88,763,255.00.
PICOP protested the assessment of deficiency transaction tax , the
documentary and science stamp taxes, and the deficiency income tax
assessment. CIR did not formally act upon these protests, but issued a
warrant of distraint on personal property and a warrant of levy on real
property against PICOP, to enforce collection of the contested assessments,
thereby denying PICOP's protests. Thereupon, PICOP went before (CTA)
appealing the assessments.
On 15 August 1989, CTA rendered a decision, modifying the CIR’s findings
and holding PICOP liable for the reduced aggregate amount of
P20,133,762.33. Both parties went to the Supreme Court, which referred
the case to the Court of Appeals (CA).
CA denied the appeal of the CIR and modified the judgment against PICOP
holding it liable for transaction tax and absolved it from payment of
documentary and science stamp tax and compromise penalty. It also held
PICOP liable for deficiency of income tax.
Issues:
1. Whether PICOP is liable for transaction tax
2. Whether PICOP is liable for documentary and science stamp tax
3. Whether PICOP is liable for deficiency income tax
Held:
1. YES. PICOP reiterates that it is exempt from the payment of the
transaction tax by virtue of its tax exemption under R.A. No. 5186, as
amended, known as the Investment Incentives Act, which in the form it
existed in 1977-1978, read in relevant part as follows: "SECTION 8.
Incentives to a Pioneer Enterprise. — In addition to the incentives provided
in the preceding section, pioneer enterprises shall be granted the following
incentive benefits: (a) Tax Exemption. Exemption from all taxes under the
National Internal Revenue Code, except income tax, from the date of
investment is included in the Investment Priorities Plan x x x”. The
Supreme Court holds that that PICOP's tax exemption under R.A. No. 5186,
as amended, does not include exemption from the thirty-five percent (35%)
transaction tax. In the first place, the thirty-five percent (35%) transaction
tax is an income tax, a tax on the interest income of the lenders or
Corporation v. Commissioner of Internal Revenue. The 35% transaction tax
is an income tax on interest earnings to the lenders or placers. The latter
are actually the taxpayers. Therefore, the tax cannot be a tax imposed
upon the petitioner. In other words, the petitioner who borrowed funds
from several financial institutions by issuing commercial papers merely
withheld the 35% transaction tax before paying to the financial institutions
the interest earned by them and later remitted the same to the respondent
CIR. The tax could have been collected by a different procedure but the
statute chose this method. Whatever collecting procedure is adopted does
not change the nature of the tax. It is thus clear that the transaction tax is
an income tax and as such, in any event, falls outside the scope of the tax
exemption granted to registered pioneer enterprises by Section 8 of R.A.
No. 5186, as amended. PICOP was the withholding agent, obliged to
withhold thirty-five percent (35%) of the interest payable to its lenders and
to remit the amounts so withheld to the Bureau of Internal Revenue ("BIR").
As a withholding, agent, PICOP is made personally liable for the thirty-five
percent (35%) transaction tax 10 and if it did not actually withhold thirty-
five percent (35%) of the interest monies it had paid to its lenders, PICOP
had only itself to blame.
2. NO. The CIR assessed documentary and science stamp taxes, amounting to
PhP300,000.00, on the issuance of PICOP's debenture bonds. Tax
exemptions are, to be sure, to be "strictly construed," that is, they are not
to be extended beyond the ordinary and reasonable intendment of the
language actually used by the legislative authority in granting the
exemption. The issuance of debenture bonds is certainly conceptually
distinct from pulping and paper manufacturing operations. But no one
contends that issuance of bonds was a principal or regular business activity
of PICOP; only banks or other financial institutions are in the regular
business of raising money by issuing bonds or other instruments to the
general public. The actual dedication of the proceeds of the bonds to the
carrying out of PICOP's registered operations constituted a sufficient nexus
with such registered operations so as to exempt PICOP from taxes
ordinarily imposed upon or in connection with issuance of such bonds. The
Supreme Court agrees with the Court of Appeals on this matter that the
CTA and the CIR had erred in rejecting PICOP's claim for exemption from
stamp taxes.
3. YES. PICOP did not deny the existence of discrepancy in their Income Tax
Return and Books of Account owing to their procedure of recording its
export sales (reckoned in U.S. dollars) on the basis of a fixed rate, day to
day and month to month, regardless of the actual exchange rate and
without waiting when the actual proceeds are received. In other words,
PICOP recorded its export sales at a pre-determined fixed exchange rate.
That pre-determined rate was decided upon at the beginning of the year
and continued to be used throughout the year. Because of this, the CIR has
made out at least a prima facie case that PICOP had understated its sales
and overstated its cost of sales as set out in its Income Tax Return. For the
CIR has a right to assume that PICOP's Books of Accounts speak the truth in
this case since, as already noted, they embody what must appear to be
admissions against PICOP's own interest.
Dispositive:
WHEREFORE, for all the foregoing, the Decision of the Court of Appeals is
hereby MODIFIED and Picop is hereby ORDERED to pay the CIR the
aggregate amount of P43,794,252.51 itemized as follows:
(1) Thirty-five percent (35%) transaction
tax P 3,578,543.51
(2) Total Deficiency Income Tax
Due P 40,215,709.00
Aggregate Amount Due and Payable P 43,794,252.51
ESSO V. CIR- TESTS OF DEDUCTABILITY
Category: Income Taxation
For an item to be deductible as a business expense, the expense must be ordinary
and necessary; it must be paid or incurred within the taxable year; and it must be
paid or incurred in carrying on a trade or business. In addition, the taxpayer must
substantially prove by evidence or records the deductions claimed under law,
otherwise, the same will be disallowed.
FACTS: ESSO deducted from its gross income for 1959, as part of its ordinary
and necessary business expenses, the amount it had spent for drilling and
exploration of its petroleum concessions. The Commissioner disallowed the
claim on the ground that the expenses should be capitalized and might be
written off as a loss only when a “dry hole” should result. Hence, ESSO filed an
amended return where it asked for the refund of P323,270 by reason of its
abandonment, as dry holes, of several of its oil wells. It also claimed as ordinary
and necessary expenses in the same return amount representing margin fees it
had paid to the Central Bank on its profit remittances to its New York Office.
ISSUE: Whether the margin fees may be considered ordinary and
necessary expenses when paid.
HELD:
For an item to be deductible as a business expense, the expense must be
ordinary and necessary; it must be paid or incurred within the taxable year; and
it must be paid or incurred in carrying on a trade or business. In addition, the
taxpayer must substantially prove by evidence or records the deductions
claimed under law, otherwise, the same will be disallowed. There has been no
attempt to define “ordinary and necessary” with precision. However, as guiding
principle in the proper adjudication of conflicting claims, an expenses is
considered necessary where the expenditure is appropriate and helpful in the
development of the taxpayer’s business. It is ordinary when it connotes a
payment which is normal in relation to the business of the taxpayer and the
surrounding circumstances. Assuming that the expenditure is ordinary and
necessary in the operation of the taxpayer’s business; the expenditure, to be an
allowable deduction as a business expense, must be determined from the nature
of the expenditure itself, and on the extent and permanency of the work
accomplished by the expenditure. Herein, ESSO has not shown that the
remittance to the head office of part of its profits was made in furtherance of its
own trade or business. The petitioner merely presumed that all corporate
expenses are necessary and appropriate in the absence of a showing that they
are illegal or ultra vires; which is erroneous. Claims for deductions are a matter
of legislative grace and do not turn on mere equitable considerations
CIR VS. CTA AND SMITH KLINE & FRENCH OVERSEAS CO. (PHILIPPINE
BRANCH)
FACTS: Smith Kline and French Overseas Company, a multinational firm domiciled
in Pennsylvania, is licensed to do business in the Phils. It is engaged in the
importation, manufacture, and sale of pharmaceutical drugs and chemicals.
In its original incomes tax return in 1971, Smith Kline declared a net
taxable income of P1,489,277 and paid P511,247 as tax due. Among the deductions
claimed from gross income was P501,040 as its share of the head office overhead
expenses.
However, in its amended return in 1973, there was an overpayment of
P324,255 “arising from underdeduction of home office overhead.” It made a formal
claim for refund of the alleged overpayment because it appears that sometime in
October 1972, Smith Kline received from its international independent auditors an
authenticated certification to the effect that the Philippine share in the unallocated
overhead expenses of the main office for the year ended December 1971 was
actually P1,427,484, and that the allocation was made on the basis of the
percentage of gross income in the Philippines to gross income of the corporation as
a whole. By reason of the new adjustment, Smith Kline’s tax liability was greatly
reduced from P511,247 to P186,992, resulting in an overpayment of P324,255.
The CTA rendered a decision in 1980 ordering the Commissioner to refund
the overpayment or grant a tax credit to Smith Kline. The Commissioner appealed.
ISSUE: Is Smith Kline’s share of the head office overhead expenses incurred From the foregoing provisions, it is manifest that where an expense is
outside the Philippines deductible? clearly related to the production of Philippine-derived income or to Phil operations
(e.g., salaries of Phil personnel, rental of office building in the Phils), that expense
HELD: YES. Smith Kline’s share of the head officer overhead expenses incurred can be deducted from the gross income acquired in the Phils without resorting to
outside the Philippines is deductible. apportionment.
Section 37 of the old NIRC. Net Income from sources in the Philippines. The overhead expenses incurred by the parent company in connection
“From the items of gross income specified in subsection (a) of this section, with finance, administration, and research and development, all of which direct
there shall be deducted the expenses, losses, and other deductions properly benefit its branches all over the world, including the Phils, fall under a different
apportioned or allocated thereto and a ratable part of any expenses, losses, or category however. There are items which cannot be definitely allocated or
other deductions which cannot definitely be allocated to some item or class of gross identified with the operations of the Phil branch. For 1971, the parent company of
income. The remained, if any, shall be included in full as net income from sources Smith Kline spent $1,077,739. Under Sec. 37, Smith Kline can claim as its deductible
within the Philippines.” share a ratable part of such expenses based upon the ration of the local branch’s
Section 160. Apportionment of deductions. gross income to the total gross income, worldwide, of the multinational
“…The ratable part is based upon the ration of gross income from sources corporation. Smith Kline also presented ample evidence to support its claim for
within the Philippines to the total gross income.” refund. We hold that Smith Kline’s amended 1971 return is in conformity with the
EXAMPLE: A non-resident alien individual whose taxable year is the law and regulations. The Tax Court correctly held that the refund or credit of the
calendar year, derived gross income from all sources for 1939 of P180,000, resulting overpayment is in order.
including therein:
Interest on bonds of a domestic corporation P9,000
Dividends on stock of a domestic corporation 4,000
Royalty for the use of patents within the Phils 12,000
Gain from sale of real property located in the Phils 11,000
TOTAL 36,000
That is, 1/5 of the total gross income was from sources within the Philippines. The
remainder of the gross income was from sources without the Philippines. The
expenses of the taxpayer for the year amount to P78,000. Of these expenses,
P8,000 is properly allocated to income from sources within the Phils and P40,000 is
from sources without the Phils. The remainder of the expense, P30,000, cannot be
definitely allocated to any class of income. A ratable part thereof, based upon the
relation of gross income from sources within the Phils to the total gross income
shall be deducted in computing net income from sources within the Phils. Thus,
these are deducted from the P36,000 of gross income from sources within the Phils
expenses amounting to P14,000 (representing P8,000 properly apportioned to the
income from sources within the Philippines and P6,000, a ratable part (1/5) of the
expenses which could not be allocated to any item or class of gross income). The
remainder of P22,000 is the net income from sources within the Phils.