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COMMISSION OF INTERNAL REVENUE vs. HANTEX TRADING CO., INC G.R. No. 136975.

March 31, 2005 Facts:

Hantex Trading Co is a company organized under the Philippines. It is engaged in the sale of plastic products, it imports synthetic resin and other chemicals for the manufacture of its products. For this purpose, it is required to file an Import Entry and Internal Revenue Declaration (Consumption Entry) with the Bureau of Customs under Section 1301 of the Tariff and Customs Code. Sometime in October 1989, Lt. Vicente Amoto, Acting Chief of Counter-Intelligence Division of the Economic Intelligence and Investigation Bureau (EIIB), received confidential information that the respondent had imported synthetic resin amounting to P115,599,018.00 but only declared P45,538,694.57. Thus, Hentex receive a subpoena to present its books of account which it failed to do. The bureau cannot find any original copies of the products Hentex imported since the originals were eaten by termites. Thus, the Bureau relied on the certified copies of the respondents Profit and Loss Statement for 1987 and 1988 on file with the SEC, the machine copies of the Consumption Entries, Series of 1987, submitted by the informer, as well as excerpts from the entries certified by Tomas and Danganan. The case was submitted to the CTA which ruled that Hentex have tax deficiency and is ordered to pay, per investigation of the Bureau. The CA ruled that the income and sales tax deficiency assessments issued by the petitioner were unlawful and baseless since the copies of the import entries relied upon in computing the deficiency tax of the respondent were not duly authenticated by the public officer charged with their custody, nor verified under oath by the EIIB and the BIR investigators. Issue: Whether or not the final assessment of the petitioner against the respondent for deficiency income tax and sales tax for the latters 1987 importation of resins and calcium bicarbonate is based on competent evidence and the law. Held: Central to the second issue is Section 16 of the NIRC of 1977, as amended which provides that the Commissioner of Internal Revenue has the power to make assessments and prescribe additional requirements for tax administration and enforcement. Among such powers are those provided in paragraph (b), which provides that Failure to submit required returns, statements, reports and other documents. When a report required by law as a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by law or regulation or when there is reason to believe that any such report is false, incomplete or erroneous, the Commissioner shall assess the proper tax on the best evidence obtainable. This provision applies when the Commissioner of Internal Revenue undertakes to perform her administrative duty of assessing the proper tax against a taxpayer, to make a return in case of a taxpayers failure to file one, or to amend a return already filed in the BIR. The best evidence envisaged in Section 16 of the 1977 NIRC, as amended, includes the corporate and accounting records of the taxpayer who is the subject of the assessment process, the accounting records of other taxpayers engaged in the same line of business, including their gross profit and net profit sales. Such evidence also includes data, record, paper, document or any evidence gathered by internal revenue officers from other taxpayers who had personal transactions or from whom the subject taxpayer received any income; and record, data, document and information secured from government offices or agencies, such as the SEC, the Central Bank of the Philippines, the Bureau of Customs, and the Tariff and Customs Commission. However, the best evidence obtainable under Section 16 of the 1977 NIRC, as amended, does not include mere photocopies of records/documents. The petitioner, in making a preliminary and final tax deficiency assessment against a taxpayer, cannot anchor the said assessment on mere machine copies of records/documents. Mere photocopies of the Consumption Entries have no probative weight if offered as proof of the contents thereof. The reason for this is that such copies are mere scraps of paper and are of no probative value as basis for any deficiency income or business taxes against a taxpayer

CIR V WYETH SUACO LABORATORIES, INC. 202 SCRA 125 (September 30, 1991) Monday, January 26, 2009 Posted by Coffeeholic Writes Labels: Case Digests, Taxation

Facts: On December 19, 1974, Wyeth Suaco received notice ofassessment from the BIR for its failure to remit withholding tax at source for the 4th quarter of 1973 on accrued royalties, remuneration for technical services paid abroad and cash dividends, including the deduction of non-deductible raw materials from its reports. The company, thru its tax consultant, SVG & co., sent BIR two letters dated January 17, 1975 and February 8, 1975 protesting theassessment and requesting their cancellation or withdrawal on the ground that said assessments lacked factual or legal basis. Also, there were letters from the company to the BIR to such effect. On September 12, 1975, the CIR offered to compromise but only resulted to a slight reduction of the tax as per the acting Commissioner s decision on December 10, 1979. On January 18, 1980, Wyeth Suaco filed petition for review with the CTA, praying that CIR be enjoined from enforcing the assessments by reason of prescription and that assessments be declared null and void for lack of legal and factual basis. The CTA decided against the CIR holding that while the assessments for the deficiency taxes were made within the five-year period of limitation, the right of CIR to collect the same has already prescribed, in accordance with Sec. 319(c) of the NIRC.

Held: CTA is wrong. The letters of Wyeth Suaco interrupted the running of the five-year perspective period to collect the deficiency taxes. Settled is the rule that the prescriptive period provided by law to make a collection by distraint or levy or by a proceeding in court is interrupted once a taxpayer requests for reinvestigation or reconsideration of the assessment. Wyeth Suaco admitted that it was seeking reconsideration of the tax assessments as shown in a letter of its president and General Manager. Further, although the protest letters prepared by SGV & Co. did not categorically state or use the words reinvestigation and reconsideration , the same are to be treated as letters of reinvestigation and reconsideration.

As to Wyeth Suaco s argument that withholding tax at source should only be remitted to the BIR once the incomes subject to withholdingtax at source have actually been paid, the SC cited the lifeblood doctrine, the express provision of the law which requires the filing of monthly return and payment of taxes withheld at source within 10 days after the end of each month. Further, the company uses accrual method of accounting and therefore the effect of transactions and other events on assets and liabilities are recognized and reported in the time periods to which they relate rather than only when cash is received or paid.

TANADA VS. TUVERA

Facts: Petitioners Lorenzo M. Tanada, et. al. invoked due process in demanding the disclosure of a number of Presidential Decrees which they claimed had not been published as required by Law. Thegovernment argued that while publication was necessary as a rule, it was not so when it was otherwise provided, as when the decrees themselves declared that they were to become effective immediately upon approval. The court decided on April 24, 1985 in affirming the necessity for publication of some of the decrees. The court ordered the respondents to publish in the official gazette all unpublished Presidential Issuances which are of general force and effect. The petitioners suggest that there should be no distinction between laws of general applicability and those which are not. The publication means complete publication, and that publication must be made in the official gazette. In a comment required by thesolicitor general, he claimed first that the motion was a request for an advisory opinion and therefore be dismissed. And on the clause unless otherwise provided in Article 2 of the new civil code meant that the publication required therein was not always imperative, that the publication when necessary, did not have to be made in the official gazette. Issues: (1) Whether or not all laws shall be published in the official gazette. (2) Whether or not publication in the official gazette must be in full. Held: (1) The court held that all statute including those of local application shall be published as condition for their effectivity, which shall begin 15 days after publication unless a different effectivity date is fixed by the legislature. (2) The publication must be full or no publication at all since its purpose is to inform the public of the content of the laws.

Conwi v. CTA FACTS: Petitioners are Filipino citizens and employees of Procter and Gamble Philippines with an office located at Ayala Ave. Makati. The corporation is a subsidiary of P&G based at Ohio USA. For the year 1970 and 1971, petitioners were assigned outside the Phil with their compensation paid in US dollars. When they filed their income tax returns for the year 1970, they ve computed the tax by applying the dollar-to-peso conversion based on the floating rate provided by the BIR. However, on 1973, they filed an amended tax return using the par value of the peso provided by Sec.40 of RA 265. They claim for a refund due to overpayment. Petitioners argued that since the dollar earnings does not fall within the classification of foreign exchange transaction; there occurred no actual inward remittances therefore NOT included in Central Bank Circular No. 289. CB no. 289 provides for specific instances when the par value of the peso shall not be the conversion rate. Therefore, they can base their conversion using the par value of the peso. The Commissioner of the BIR denied the claim of petitioners stating that the basis must be the prevailing free market rate of exchange and not the par value. CB No. 289 speaks of receipts for export products, receipts of sale of foreign exchange and investment but not income tax. The CTA also held that petitioner s dollar earnings are receipts derived from foreign exchange transactions.

ISSUES: 1) 2) WON petitioner s dollar earnings are receipts derived from foreign exchange transactions. WON the proper rate of conversion is the prevailing free market rate of exchange.

3) WON petitioners are exempt to pay tax for such income since there were no remittance/ acceptance of their salaries in UD Dollars into the Philippines.

HELD: 1) No. Income may be defined as an amount of money coming to a person or corporation within a specified time, whether as payment for services, interest or profit from investment. Unless otherwise specified, it means cash or its equivalent. Income can also be though of as flow of the fruits of one's labor. Petitioners are correct in claiming that their dollar earnings are not receipts derived from foreign exchange transactions. For a foreign exchange transaction is simply that-foreign exchange being the conversion of an amount of money of one country into an equivalent amount of money of another country. When petitioners were assigned to the foreign subsidiaries of P&G, they were earning in their assigned nation s currency and were also spending in said currency. There was no conversion from one currency to another. 2) Yes. Central Bank Circular no. 289 does not contemplate income tax payments. It shows that the subject matter involved therein are exports products, invisibles, receipts of foreign exchange, foreign exchange payments, new foreign borrowing and investments-nothing by way of income tax .Petitioners erred in concluding that CB Circ No. 289 does not apply to them. Therefore, the conversion should be the prevailing free market rate of exchange. 3) No. Even if there was no remittance and acceptance of their salaries and wages in US Dollars into the Philippines, they are still bound to pay the tax. Petitioners forgot that they are citizens of the Philippines, and their income, within or without, and in this case wholly without or outside the Philippines, are subject to income tax. The petitions were denied for lack of merit.

CIR V CA January 20, 1999


Facts: Sometime in the 1930 s, Don Andres Soriano, a citizen and resident of the United States, formed the corporation A. Soriano Y Cia , predecessor of ANSCOR with a 1,000,000.00 capitalization divided into 10,000 common shares at a par value of P100/share. ANSCOR is wholly owned and controlled by the family of Don Andres, who are all non-resident aliens. In 1937, Don Andres subscribed to 4,963 shares of the 5,000 shares originally issued. On September 12, 1945, ANSCOR s authorized capital stock was increased to P2,500,000.00 divided into 25,000 common shares with the same par value. Of the additional 15,000 shares, only 10,000 was issued which were all subscribed by Don Andres, after the other stockholders waived in favor of the former their pre-emptive rights to subscribe to the new issues. This increased his subscription to 14,963 common shares. A month later, Don Andres transferred 1,250 shares each to his two sons, Jose and Andres Jr., as their initial investments in ANSCOR. Both sons are foreigners. By 1947, ANSCOR declared stock dividends. Other stock dividenddeclarations were made between 1949 and December 20, 1963. On December 30, 1964 Don Andres died. As of that date, the records revealed that he has a total shareholdings of 185,154 shares. 50,495 of which are original issues and the balance

of 134,659 shares asstock dividend declarations. Correspondingly, one-half of that shareholdings or 92,577 shares were transferred to his wife, Doa Carmen Soriano, as her conjugal share. The offer half formed part of his estate. A day after Don Andres died, ANSCOR increased its capital stock to P20M and in 1966 further increased it to P30M. In the same year (December 1966), stock dividends worth 46,290 and 46,287 shares were respectively received by the Don Andres estate and Doa Carmen from ANSCOR. Hence, increasing their accumulated shareholdings to 138,867 and 138,864 common shares each. On December 28, 1967, Doa Carmen requested a ruling from the United States Internal Revenue Service (IRS), inquiring if an exchange of common with preferred shares may be considered as a tax avoidance scheme. By January 2, 1968, ANSCOR reclassified its existing 300,000 common shares into 150,000 common and 150,000 preferred shares. In a letter-reply dated February 1968, the IRS opined that the exchange is only a recapitalization scheme and not tax avoidance. Consequently, on March 31, 1968 Doa Carmen exchanged her whole 138,864 common shares for 138,860 of the preferred shares. The estate of Don Andres in turn exchanged 11,140 of its common shares for the remaining 11,140 preferred shares. In 1973, after examining ANSCOR s books of account and record Revenue examiners issued a report proposing that ANSCOR be assessed for deficiency withholding tax-at-source, for the year 1968 and the 2nd quarter of 1969 based on the transaction of exchange and redemption of stocks. BIR made the corresponding assessments. ANSCOR s subsequent protest on the assessments was denied in 1983 by petitioner. ANSCOR filed a petition for review with the CTA, the Tax Court reversed petitioners ruling. CA affirmed the ruling of the CTA. Hence this position.

Issue: Whether or not a person assessed for deficiency withholding tax under Sec. 53 and 54 of the Tax Code is being held liable in its capacity as a withholding agent.

Held: An income taxpayer covers all persons who derive taxable income. ANSCOR was assessed by petitioner for deficiency withholding tax, as such, it is being held liable in its capacity as a withholding agent and not in its personality as taxpayer. A withholding agent, A. Soriano Corp. in this case, cannot be deemed a taxpayer for it to avail of a tax amnesty under a Presidential decree that condones the collection of all internal revenue taxes including the increments or penalties on account of non-payment as well as all civil, criminal, or administrative liabilities arising from or incident to voluntary disclosures under the NIRC of previously untaxed income and/or wealth realized here or abroad by any taxpayer, natural or juridical. The Court explains: The withholding agent is not a taxpayer, he is a mere tax collector. Under the withholding system, however, the agent-payer becomes a payee by fiction of law. His liability is direct and independent from the taxpayer, because the income tax is still imposed and due from the latter. The agent is not liable for the tax as no wealth flowed into him, he earned no income.

CIR v. Mitsubishi Metal (Exclusions under the Tax Code certain passive income of foreign govts from Phil. Investments)
FACTS:

Mitsubishi Metal entered into Loan and Sales contract with Atlas Mining and Devt Corp. for the capacity expansion of Atlas mines in Cebu. Under the terms, Mitsubishi agreed to extend a US$20M loan in exchange for copper concentrates from Atlas. To comply with said contract, Mitsubishi loaned JPN Y4.32B from Export-Import Bank of Japan (which is owned and controlled by Japanese govt), and JPN Y2.88B from a consortium of Japanese banks. 15% withholding tax was assessed on interest payments by Atlas to Mitsubishi. Mitsubishi applied for tax credit on the

amount withheld, saying that it was a mere agent to Ex-Im Bank. It also claimed a tax credit on the portion loaned from a consortium of Japanese banks, stating that said loans ultimately came from Ex-Im Bank also. Respondents rely on Sec. 29 (b) (7,A) of NIRC which excludes from gross income: (A) Income received from their investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on their deposits in banks in the Philippines by (1) foreign governments, (2) financing institutions owned, controlled, or enjoying refinancing from themS. Appellate division of BIR granted the tax credit for which Mitsubishi executed a waiver and disclaimer in favor of Atlas. It stated that Mitsubishi was a mere arranger and conduit of ExIm Bank of Japan, thus falling within the exclusion of the NIRC. During the pendency of the case above, another 15% tax was withheld for which Atlas filed another claim for tax credit on the same basis and was again granted. Hence the appeal by the Commissioner. Issue: WON Mitsubishi is indeed merely a conduit of Ex-Im Bank, which determines WON the interest payments are excluded from gross income taxation Held: No.The loan between Ex-Im Bank and Mitsubishi is a distinct and separate contract from that between Mitsubishi and Atlas. Mitsubishi is the principal party in the contract between itself and Atlas. They are reciprocally obligated to each other. Mitsubishi was obliged to provide the funds for the installation of new machinery, while Atlas was obliged to sell copper concentrate to Mitsubishi for 15yrs. The contract is not a contract of agency and had nothing to do with Ex-Im bank. Thus, the contract does not fall within the ambit of Sec. 29 (b) (7,A) of NIRC, and the interest payments are not excluded from the 15% withholding tax. The court reiterated that exemption from taxation is not favored and presumed, and that tax exemption is strictly construed vs. the taxpayer.

BASILAN ESTATES V. CIR AND CTA (TAX)


The first question for resolution is whether depreciation shall be determined on the acquisition cost or on the reappraised value of the assets. DEPRECIATION is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescense. The term is also applied to amortization of the value of intangible assets, the use of which in the trade or business is definitely limited in duration. Depreciation commences with the acquisition of the property and its owner is not bound to see his property gradually waste, without making provision out of earnings for its replacement. Accordingly, the law permits the taxpayer to recover gradually his capital investment in wasting assets free from income tax. Precisely, Section 30 (f)(1) states: In general - a reasonable allowance for deterioration of property arising out of its use or employment in the business or trade, or out of its not being used: Provided, that when the allowance authorized under this subsection shall equal the capital invested by the taxpayer... no further allowance shall be made...

...allows deduction from gross income for depreciation but limits the recovery to the capital invested in the asset being depreciated. The income tax law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a deduction over and above such cost cannot be claimed and allowed. The reason is that deductions from gross income are privileges, not matters of right. They are not created by implication but upon clear expression in the law. Moreover, the recovery, free of income tax, of an amount more than the invested capital in an asset will transgress the underlying purpose of a depreciation allowance. for then what the taxpayer would recover will be, not only the acquisition cost but also some profit. Recovery in due time thru depreciation on investment made is the philosophy behind depreciation allowance; the idea of profit on the investment made has never been the underlying reason for the allowance of a deduction for depreciation. Accordingly, the claim for depreciation has no justification in the law. The determination therefore, of the Commissioner disallowing said amount, affirmed by the CTA is sustained. The second question for resolution is whether the miscellaneous expenses and officer's travelling expenses are allowable expenses as the same could not be supported by appropriate papers. On this ground, the petitioner may be sustained for under Section 337 of the Tax Code, receipts and papers supporting such expenses need be kept by the taxpayer for a period of 5 years from the last entry. At the time of the investigation, said 5 years have lapsed. Taxpayer's stand on this issue is therefore sustained. The third question is on the unreasonably accumulated profits. Section 25 of the Tax Code which imposes a surtax on profits unreasonably accumulated provides: Sec. 25. Additional tax on corporations improperly accumulating profits or surplus - (a) Imposition of tax. - If any corporation, except banks, insurance companies, or personal holding companies, domestic or foreign, is formed or availed of for the purpose of preventing imposition of tax upon its shareholders or members or the shareholders or members of another corporation, through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there is levied and assessed against such corporation, for each taxable year, a tax equal to 25% of the undistributed portion of its accumulated profits or surplus which shall be in addition to the tax imposed by Section 24, and shall be computed, collected, and paid in the same manner and subject to the same provisions of law, including penalties, as that tax. Petitioner failed to provide sufficient explanation. In order to determine whether profits were accumulated for the reasonable needs of the business or to avoid the surtax upon shareholders, the controlling intention of the taxpayer is that which is manifested at the time of the accumulation, not subsequently declared intentions which are merely the products of afterthought. As correctly held by the CTA, while certain expenses of the corporation were credited against large amounts, the unspent balance was retained by the stockholders without refunding them to petitioner at the end of each year. These advances were in fact indirect loans to the stockholders indicating the unreasonable accumulation or surplus beyond the needs of the business.

Case Digest on Bank of America, NT v. Court of Appeals 228 SCRA 357

Bank of America received by registered mail an irrevocable letter of credit purportedly issued by Bank of Ayudhya Samyek Branch, for the account of General Chemicals, Ltd., of Thailand in the amount of $2,782,000.00 to cover the sale of plastic ropes and agricultural files, with Bank of America as the advisingbank and Inter-Resin Industrial Corporation as beneficiary.

Bank of America notified Inter-Resin of theletter of credit. Upon request by Inter-Resin forBank of America to confirm the letter of credit, latter refused although one of its employee explained to Inter-Resin that there was no need for confirmation because the letter of credit is genuine.

explained to Inter-Resin that there was no need for confirmation because the letter of credit is genuine. Inter-Resin therefore twice sought availment under the letter of credit. Bank of America issued P10,219,093 in the first availment upon being satisfied of the documents submitted by Inter-Resin. However, Bank of America stopped the processing of the second availment upon being informed by Bank of Ayudhya that the letter of credit was fraudulent. Further, upon conducting an examination of the vans sent by Inter-Resin, it found out that they contain not ropes but plastic strips, wrappers, rags and waste materials. Bank of America sued Inter-Resin for recovery of the money it gave under the first availment, considering theletter of credit has been disowned by Bank of Ayudhya. However, the trial court ruled in favor of InterResin which was affirmed by the Court of Appeals. Supreme Court reversed the decision of the lower courts. It ruled that the crucial point of dispute in this case is whether, under the letter of credit, Bank of America has incurred any liability to the beneficiary thereof, an issue that largely is dependent on the banks participation in that transaction: as a mere advising or notifying bank, it would not be liable, but as a confirming bank, had this been the case, it could be considered as having incurred that liability. It cannot seriously be disputed, looking at this case, that Bank of America has, in fact, only been an advising, not confirming, bank, and this much is clearly evident, among other things, by the provisions of the letter of credit itself, the petitioner banks letter of advice, its request for payment of advising fee, and the admission of Inter-Resin that it has paid the same. That Bank of America has asked Inter-Resin to submit documents required by the letter of credit and eventually has paid the proceeds thereof, did not obviously make it a confirming bank. As an advising or notifying bank, Bank of America did not incur any obligation more than just notifying Inter-Resin of the letter of credit issued in its favor, let alone to confirm the letter of credit. Bringing the letter of credit to the attention of the seller is the primordial obligation of an advising bank. The view that Bank of America should have first checked the authenticity of the letter of credit with Bank of Ayudhya, by using advanced mode of business communications, before dispatching the same to InterResin finds no real support in the UCP. As advising bank, Bank of America is bound only to check the apparent authenticity of the letter of credit, which it did. Websters explains that the word apparent suggests appearance to unaided senses that is not or may not be borne out by more rigorous examination or greater knowledge. May Bank of America then recover what it has paid under the letter of credit when the corresponding draft for partial availment thereunder and the required documents therefore were later negotiated with it by Inter-Resin? The answer is yes. This kind of transaction is what is commonly referred to as a discounting arrangement. This time, Bank of America, has acted independently as a negotiating bank, thus saving Inter-Resin from the hardship of presenting the documents directly to Bank of Ayudhya to recover payment. As a negotiating bank, Bank of America has a right of recourse against the issuer bank and until reimbursement is obtained, InterResin, as the drawer of the draft, continues to assume a contingent liability thereon. SC noted that the additional ground raised by Bank of America, i.e. that Inter-Resin sent waste instead of its products, is really of no consequence. In the operation of a letter of credit, the involved banks deal only with documents and not on goods described in those documents.

COMMISSIONER OF INTERNAL REVENUE, vs. PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE COURT OF TAX APPEALS G.R. No. L-66838 December 2,
Monday, January 26, 2009 Posted by Coffeeholic Writes Labels: Case Digests, Taxation

FACTS: Procter and Gamble Philippine Manufacturing Corporation declared dividends payable to its parent company and sole stockholder, Procter and Gamble Co., Inc. (USA) from which dividendsthe thirty-five percent (35%) withholding tax at source was deducted. In 1977, private respondent filed with petitioner Commissioner of Internal Revenue a claim for refund or tax credit.There being no responsive action on the part of the Commissioner, it filed a petition for review with CTA. In 1984, the CTA rendered a decision ordering petitioner Commissioner to refund or grant the tax credit.

On appeal by the Commissioner, the Court reversed the decision of the CTA. Thus, this petition

ISSUE: Whether or not the issue on whether a withholding agent in the Philippines is legally entitled to refund may be raised for the first time on appeal by the Government.

HELD: The BIR should not be allowed to defeat an otherwise valid claim for refund by raising this question of alleged incapacity for the first time on appeal before this Court. This is clearly a matter of procedure. Petitioner does not pretend that P&G-Phil., should it succeed in the claim for refund, is likely to run away, as it were, with the refund instead of transmitting such refund or tax credit to itsparent and sole stockholder. It is commonplace that in the absence of explicit statutory provisions to the contrary, the government must follow the same rules of procedure which bind private parties. It is, for instance, clear that the government is held to compliance with the provisions of Circular No. 1-88 of this Court in exactly the same way that private litigants are held to such compliance, save only in respect of the matter of filing fees from which the Republic of the Philippinesis exempt by the Rules of Court.