EL PASO PHILIPPINES ENERGY COMPANY, INC. v. COMMISSIONER OF INTERNAL REVENUE

\. REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY SPECIAL FIRST DIVISION EL PASO PHILIPPINES ENERGY CTA CASE NO. 7997 COMPANY, INC., Members: Petitioner, - versus - UY, Chairperson and FASON-VICTORINO, JJ Promulgated: COMMISSIONER OF INTERNAL OCJ .2.,9,2013 ;1o;~i> 0.�--. REVENUE, Respondent. x- - - - - - - - - - - - - - - - - - - - - - DECISION Fabon-Victorino, J.: Before the Court is a Petition for Review1 for the cancellation of the assessments issued against petitioner El Paso Philippines Energy Company Inc. for alleged deficiency income tax (IT) of P14,385,900.88, final withholding tax (FWT) of P6,850,981.93, and value-added tax (VAT) of P2,843,835.63, inclusive of interests, for calendar year 2005. Petitioner is a domestic corporation, with principal office at the Ground Floor PFDA Building, Navotas Fish Port Complex, Navotas City. 2 Respondent, on the other hand, is the Commissioner of the Bureau of Internal Revenue (BIR), the government agency tasked, among others, to collect national internal revenue taxes. She holds office at the BIR National Office V' Building, Diliman, Quezon City. 1 Docket, pp . 1-26. 2 Par. 11, The Parties, Petition for Review, docket, p . 5.

DECISION CTA CASE NO. 7997 Petitioner avers that on July 18, 2006 it received Letter of Authority (LOA) No. 00032295 dated July 7, 2006 from the BIR Revenue Region No. 7, Revenue District Office (RDO) No. 43, authorizing the examination of its books for calendar year 2005. 3 With the LOA is a letter dated July 18, 2006 requesting for petitioner's books of accounts, financial statements and other related accounting records and supporting documents. On January 18, 2008, petitioner, through its Group Controller, executed a Waiver of the defense of prescription under the Statute of Limitations of the National Internal Revenue Code (NIRC). 4 On January 21, 2008, the BIR issued a revalidation notice informing petitioner that LOA No. 00032295 had been revalidated as the "investigation is still on-going". 5 On February 15, 2008, petitioner received from the BIR a final request for presentation of records and documents. Thereafter, it submitted to RDO No. 43 the Waiver of Statute of Limitations it earlier executed. On March 26, 2008, petitioner received a copy of the Waiver of Statute of Limitations with the signature of the RDO in the "Accepted By" portion, sans the date of acceptance. 6 On July 25, 2008, petitioner received a Notice of Informal Conference with attached computation of deficiency taxes, for it to controvert the BIR findings. On January 30, 2009, petitioner received from respondent through the Regional Director of Revenue Region No . 7 a Formal Letter of Demand (FLD) No. 43-180 dated January 14, 20097 with attached Assessment Notices,8 finding it liable for deficiency IT of P14,385,900.88, 3Par. 1, Stipulated Fa cts, Joint Stipulation of Fa ct s and I ssues (JSFI), docket, p. 204 . / 4 Par. 2, Stipulated Facts, JSFI, docket, p. 20 5. 5Pa r . 3, Stipulated Facts, JSFI, docket, p. 205 . 6Par. 6, Stipulated Facts, JSFI, docket, p. 206 . 7 Exhibit " A"; Par. 8, Stipulated Facts, JSFI, docket, p. 206 . 8 Exhibits "B" to "B-3"

DECISION CTA CASE NO. 7997 deficiency FWT of P6,850,981.93, and deficiency VAT of P2,843,835.63, inclusive of interests, in the aggregate amount of P24,080, 718.44 for calendar year 2005. 9 The Schedule 1 of the FLD reads: DETAILS OF DISCREPANCIES I. DEFICIENCY INCOME TAX Income Payments not subjected to withholding tax (P28,255,462.21) - Verification disclosed that you failed to subject fully the interest expense to withholding tax as required under Revenue Regulations No. 2-98, as amended, thus disallowed as deductions from your gross income pursuant to Section 34(K) of the NIRC of 1997. Interest Expenses per FS P148,267,753.83 p 156,206,061 Less: Interest subject to Final Tax per 20,317,155.04 1601F 127,950,598.79 Less: Interest Expense pertaining to 2004 P28,255,462.21 Interest Expense not subjected to withholding tax II. DEFICIENCY VALUE ADDED TAX Verification disclosed that exempt sales amounting to P17,647,058.82 were not supported with sufficient evidence/documents, therefore, subject to 10�/o VAT pursuant to Sections 106, 108 and 109 of the NIRC of 1997. III. DEFICIENCY FINAL WITHHOLDING TAX Verification disclosed that the following income payments were not fully subjected to Final withholding tax, hence, you are assessed pursuant to Revenue Regulations No. 2-98. Interest Expenses per FS P156,206,061.00 Less: Interest subject to Final tax P148,267,753 .83 per 1601F Less: Interest Expense pertaining 20,317,155.04 127,950,598.79 to 2004 P28,255,462. 21 Interest Expense not subjected to withholding tax 9Par. 8, Stipulated Facts, JSFI, docket, p. 206 .

DECISION CTA CASE NO . 7997 IV. COMPROMISE PENALTV was imposed for non- submission of schedules pursuant to Sections 250 and 255 of the NIRC of 1997, with reference to Revenue Memorandum Order (RMO) No. 1-90. On February 27, 2009, petitioner protested 10 the assessments. In a letter dated March 11, 2009, the BIR Assessment Division informed petitioner that its protest letter would be forwarded to RDO No. 43-A Pasig City. In a letter dated May 20, 209, 11 RDO No. 43-A requested petitioner to submit documents in support of its protest. On July 6, 2009, petitioner submitted its letter reply/2with the attached schedule of computations and documents. On October 20, 2009, petitioner received a Preliminary Collection Notice13 from the Regional Task Force of Revenue Region No. 7-Quezon City dated August 10, 2009, stating the assessed deficiency taxes in the aggregate amount of P24,080, 718.44. On November 12, 2009, BIR Officer George Larin served upon petitioner a Final Notice Before Seizure dated August 17, 200914 issued by the Collection Task Force of Revenue Region No. 7-Quezon City which states as follows: In this connection, we would like to inform you that we are giving you the last opportunity to settle said account within FIVE (5) days from receipt of this reminder letter. 10 Exhibit "C". 11 Exhibit "E". 12 Exhibit "F". 13 Exhibit "G". 14Exhi bit " H"; Par. 16, Stipulated Facts, JSFI, docket, pp. 209 - 210.

DECISION CTA CASE NO. 7997 Should this office fail to hear from you within the time prescribed, we will be constrained, much to our regret, to enforce collection thereof thru summary and/or judicial remedies by issuing the corresponding Warrants of Distraint/Levy and filing the necessary action in the courts of law to protect the interest of the government. on November 19, 2009, petitioner filed the instant Petition for Review raising the following grounds15 : I. THE ALLEGED DEFICIENCY INCOME TAX AND FINAL WITHHOLDING TAX ASSESSMENTS ARE DEVOID OF FACTUAL AND LEGAL BASIS (sic), CONSIDERING THAT IT WAS BASED ON THE 'NET WORTH METHOD' ADOPTED BY RESPONDENT COMMISSIONER WITHOUT CAREFUL CONSIDERATION OF THE RECORDS AND DOCUMENTS PRESENTED DURING THE COURSE OF EXAMINATION OF PETITIONER'S BOOK OF ACCOUNTS. II. THE ALLEGED DEFICIENCY VALUE ADDED TAX (VAT) ASSESSMENTS ARE DEVOID OF FACTUAL AND LEGAL BASIS (sic), CONSIDERING THAT PETITIONER EPPECI IS EXEMPT FROM PAYING VAT WITH RESPECT TO THE SUBJECT TRANSACTION. In her Answer filed on January 25, 2010, 16 respondent argues that the assessments for deficiency IT, FWT and VAT for calendar year 2005 in the amounts of P14,385,900.88, P6,850,981.93, and P2,843,835.63, respectively, were in accordance with law and regulations and are presumed / correct and made in good faith. V' 15Grounds for the Petition, Petition for Review, docket, p. 12. 16 Docket, pp . 121- 124.

DECISION CTA CASE NO . 7997 On March 30, 2010, the parties filed their Joint Stipulation of Facts and Issues, 17 which was approved on April 7, 2010. 18 In support of its case, petitioner presented its Officer- in-Charge, Honorio S. Cruz, who by way of a Judicial Affidavit/9 testified that on January 30, 2009, he received FLD No. 43-180 dated January 14, 2009 with attached Assessment Notices assessing petitioner of deficiency internal revenue taxes for the calendar year 2005. In a separate FLD dated January 14, 2009, petitioner was also assessed Compromise Penalty of P8,000.00 for alleged non- submission of Quarterly Summary List of Sales and Purchases. On February 27, 2009, petitioner formally protested the assessments. In a letter dated March 11, 2009, the Assessment Division of Revenue Region No. 7 informed petitioner that its protest would be forwarded to the Revenue District Office No. 43-A, East Pasig City which office subsequently issued a Tax Verification Notice for the reinvestigation of petitioner for taxable period from January 1, 2005 to December 31, 2005. This was followed by another letter dated May 20, 2009, requesting for computations and documents in support of the protest. On October 20, 2009, or after petitioner complied with the directive, it received a preliminary collection letter from Revenue Region No. 7, Regional Task Force, reiterating the assessed deficiency taxes contained in the FLD in the aggregate amount of P24,080, 718.44. On November 12, 2009, a Final Notice Before Seizure was served upon petitioner, hence, the instant petition. Jaime B. Robles, also testified for petitioner. He declared in his Judicial Affidavit20 that while he was the Controller of petitioner, he supervised and monitored the recording and documentation of petitioner's business transactions. He also prepared and filed petitioner's internal ./ 17 Docket, pp. 204-213 . 18 Docket, p. 215. 19 Docket, pp. 243 -253. 20Docket, pp.307-323 .

DECISION CTA CASE NO. 7997 revenue tax returns and supervised and reviewed all correspondences pertaining to any deficiency assessments. He opined that the alleged deficiency IT assessment of P14,385,900.88 is erroneous because the item "interest expense" of P28,255,462.21 should not be disallowed or be subject to any tax. He explained that the amount of P28,255,462.21 was arrived at by the BIR based on erroneous comparison of petitioner's interest expense per Financial Statements (FS) amounting to P156,206,061.39 with the one reported in its BIR Form No. 1601F (Final Withholding Tax Return) amounting to P127,950,598.00, net of P20,317,155.44 interest expense pertaining to year 2004. Had the BIR closely examined the components and supporting documents of the P156,206,061.39 interest expense per FS of 2005, to wit: Description Expense Amt. Tax Base net of EWT EWT 10% VAT Accrued interest pertaining amount rate to 2004 22,348,870.50 20,317,155.00 Interest payments in 2005 2,031,715.50 10% Non-deductible interest expense per ITR of 2005 131 089 479.74 119,172,254.31 16,253,157.21 15% Realized forex loss 2,725,121.39 Interest expense per FS 42,589.76 18,284,872.71 156,206,061.39 it would have realized that there was really no difference between the said amount and the interest expense declared in petitioner's BIR Form No. 1601F for the year 2005. In view thereof, petitioner should not be assessed for the deficiency IT of P14,385,900.88 and deficiency FWT of P6,850,981. 93. The alleged deficiency VAT assessment of P2,843,835.63, inclusive of interest, is likewise erroneous. The supporting documents for sales receipts for services rendered to East Asia Utilities Corporation (EAUC) in the amount of P17,647,058.82 show that it is exempt from 10�/o VAT required under Sections 106, 108 and 109 of the NIRC of 1997 or is subject to VAT at zero-percent rate since EAUC is registered with the Philippine Economic Zone Authority (PEZA). As such, petitioner cannot be subject to VAT for its / receipts from EAUC. v.l

DECISION CTA CASE NO. 7997 On November 5, 2010, the Court granted petitioner's Motion to Allow the Referral of Voluminous Documents to an Independent Certified Public Accountant21 and gave the ICPA thirty (30) days within which to submit her report. 22 The Court commissioned ICPA23 Atty. Rosario S. Bernaldo filed a Partial Report24 and a Final Report25on February 14, 2011. On March 7, 2011, she filed a Revised Final ICPA Report only to correct some material errors. 26 She testified that the BIR's findings in its FLD No. 43- 180 dated January 14, 2009 was derived by comparing the amount of interest expense reported in petitioner's FS and its interest expense subjected to FWT appearing in its BIR Form No. 1601F. Consequently, respondent disallowed as deductions from petitioner's gross income the amount of P28,255,462.21 under Section 34(K) of the NIRC of 1997 and correspondingly assessed petitioner IT and FWT. Verification shows that petitioner paid and remitted to the BIR the corresponding FWT amounting to P21,678,205.38 on P152,923,806.16 interest expense. Thus, her recommendation to reduce the 15�/o FWT imposed on the alleged P28,255,462.21 interest expense not subject to withholding tax. The reduction and/or total elimination can be done after the P3,384,323. 73 representing the remittance of withholding taxes on the accrual of interest expense for the period December 26-31, 2005 has been verified, as well as all the realized forex gains/losses arising from interest and FWT remittances of petitioner, which to date, only P982,500.82 has been validated. With respect to the deficiency IT assessment, since it is premised on the non-deductibility of interest expenses for alleged non-withholding on the P28,255,462.21 interest expense, she recommends that P152,923,806.16 be allowed as "interest expense" deduction for IT purposes. / 21 Docket, pp . 387 - 392. 22 Minutes of the hearing, docket, p. 416. 23 Docket, pp . 387 - 392. 24 Docket, p. 424 . 25 Docket, p. 462 . 26 Docket, p. 581.

DECISION CTA CASE NO. 7997 Finally, her audit shows that the deficiency VAT assessment pertains to petitioner's sales in the form of management fees paid by EAUC by virtue of the Management Agreement entered into between petitioner and EAUC. As a PEZA registered entity, EAUC is subject to 5�/o special income tax in lieu of all other internal revenue taxes, including VAT. That being the case, the assessment of P2,843,835.63 on VAT, inclusive of interest up to February 14, 2009, should be cancelled. After formal offer of exhibits, petitioner rested its case as indicated in the Resolution 27 dated March 23, 2012, which admitted previously denied exhibits. 28 For her part, respondent presented Revenue Officer III Ricardo C. Navarro who testified/9 that pursuant to Referral Memorandum No. 043-2128-2007 dated October 5, 2007 issued by Revenue District Officer Florante R. Aninag, he continued the audit and investigation of all internal revenue taxes of petitioner for the year 2005. On February 28, 2008, petitioner executed a Waiver of the Defense of Prescription under the Statute of Limitations of the NIRC, extending respondent's right to assess petitioner of its internal revenue taxes for taxable year 2005 until June 30, 2009. Thereafter, a Notice of Informal Conference with attached Computation of Deficiency Taxes was issued to allow petitioner to present its side on the result of the investigation. In his Memorandum Report, he recommended the issuance of assessment notices to petitioner. Upon submission of the said Memorandum Report, the case was forwarded to the Assessment Division and a Preliminary Assessment Notice (PAN) with Details of Discrepancies dated December 22, 2008 was issued against petitioner. This was followed by a FLD with Details of Discrepancies and Final Assessment Notices (FAN), all dated January 14, 2009. j When petitioner failed to reply on the Notice of Informal Conference, he forwarded the docket to the Assessment Division of the BIR. 27 Docket, pp . 1626-1629. 28 Docket, pp . 1592-1604. 29 Docket, pp. 1642-1647.

DECISION CTA CASE NO. 7997 On September 7, 2012, respondent formally rested its case. 30 In a Resolution31 dated December 20, 2012, the Court deemed the case submitted for decision. THE ISSUES Upon stipulation, the following issues were submitted by the parties for the resolution of the Court: 32 1. Whether or not petitioner has interest expense not subjected to withholding tax in the claimed amount of P28,255,462.21 subject of the Formal Letter of Demand No. 43-180 dated January 14, 2009. 2. Whether or not petitioner has unsupported VAT exempt sales in the claimed amount P17,647,058.82 subject of the Formal Letter of Demand No. 43-180 dated January 14, 2009. 3. Whether or not petitioner EAPRC (sic)is liable to pay respondent the subject assessments (inclusive of interests) in the alleged sums of: (a) deficiency income tax Php14,385,900.88; (b) deficiency final withholding tax - Php6,850,981. 93; (c) deficiency VAT Php2,843,835.63. 4. Whether or not petitioner is liable to pay Compromise Penalty in the sum of / Php8,000.00; ,/ 30 Docket, pp . 1698- 1701. 31 Docket, p. 1785. 32Stipulated Issues, JSFI, docket, pp. 210-2 11.

DECISION CTA CASE NO. 7997 5. Whether or not the Subject Assessments have become final and executory; The foregoing issues may be summarized as follows: Whether the subject assessments issued by respondent against petitioner for alleged deficiency income tax, deficiency FWT, and deficiency VAT in the total amount of P24,088,718.44, inclusive of interests, for calendar year 2005 have no factual and legal bases, hence, should be cancelled and set aside . RULING OF THE COURT The instant petition is partly meritorious. The Formal Letter of Demand33 issued by respondent on January 14, 2009 assessed petitioner for deficiency IT, VAT, and FWT in the total amount of P24,088,718.44, inclusive of twenty percent (20�/o) interest, and compromise penalty, broken down as follows: TAX TYPE BASIC INTEREST COMPROMISE TOTAL AMOUNT DEFICIENCY TAX PENALTY DUE Deficiency Income Tax P5 202 875.66 Deficiency VAT P9,183,025.22 1 079,129.74 p 8 000.00 P14 385 900 .88 1,764,705.89 2 612,662.60 PS,OOO.OO 2 843 835 .63 Deficiency FWT 4 238,319.33 6 850 981 .93 P8,894,668.00 8 000.00 Compromise Penalty P15,186,050.44 Total P24,088,718.44 Section 203 of the NIRC of 1997, as amended, requires that respondent should issue an assessment for deficiency taxes within three (3) years from the last day prescribed by law to file the tax return or the actual date of filing of such return, whichever comes later. Any assessment notice issued beyond the three-year prescriptive period shall not be 33Exhibits " A" to " B-3"

DECISION CTA CASE NO. 7997 valid save certain cases in Section 222 of the NIRC of 1997, as amended, to wit: SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day. (Emphasis supplied) SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. - (a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof. (b) If before the expiration of the time prescribed in Section 203 for the assessment of the tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such time, the tax may be assessed within the period agreed /

DECISION CTA CASE NO. 7997 upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon. (c) Any internal revenue tax which has been assessed within the period of limitation as prescribed in paragraph (a) hereof may be collected by distraintor levy or by a proceeding in court within five (5) years following the assessment of the tax. (d) Any internal revenue tax, which has been assessed within the period agreed upon as provided in paragraph (b) hereinabove, may be collected by distraint or levy or by a proceeding in court within the period agreed upon in writing before the expiration of the five (5)-year period.The period so agreed upon may be extended by subsequent written agreements made before the expiration of the period previously agreed upon. (e) Provided, however, That nothing in the immediately preceding Section and paragraph (a) hereof shall be construed to authorize the examination and investigation or inquiry into any tax return filed in accordance with the provisions of any tax amnesty law or decree. (Emphasis supplied) Based on the foregoing prov1s1on, the three-year prescriptive period may be extended through a written agreement between respondent or her duly authorized representative and the taxpayer wherein the latter waives the defense of prescription and the former duly accepts the same. In the case of Commissioner of Internal Revenue vs. Kudos Metal Corporation34, the Supreme Court enumerated/ 34 G.R. No. 178087, May 5, 2010 .

DECISION CTA CASE NO. 7997 the procedure for the proper execution of the waiver in accordance with Revenue Memorandum Order (RMO) No. 20-90 issued on April 4, 1990 and Revenue Delegation Authority Order (RDAO) No. 05-01 issued on August 2, 2001, to wit: 1. The waiver must be in the proper form prescribed by RMO 20-90. The phrase 'but not after 19 __', which indicates the expiry date of the period agreed upon to assess/collect the tax after the regular three-year period of prescription, should be filled up . 2. The waiver must be signed by the taxpayer himself or his duly authorized representative. In the case of a corporation, the waiver must be signed by any of its responsible officials. In case the authority is delegated by the taxpayer to a representative, such delegation should be in writing and duly notarized. 3. The waiver should be duly notarized. 4. The CIR or the revenue official authorized by him must sign the waiver indicating that the BIR has accepted and agreed to the waiver. The date of such acceptance by the BIR should be indicated. However, before signing the waiver, the CIR or the revenue official authorized by him must make sure that the waiver is in the prescribed form, duly notarized, and executed by the taxpayer or his duly authorized representative. 5. Both the date of execution by the taxpayer and date of acceptance by the Bureau should be before the expiration of j the period of prescription or before the lapse of the period agreed upon in case a subsequent agreement is executed.

DECISION CTA CASE NO. 7997 6. The waiver must be executed in three copies, the original copy to be attached to the docket of the case, the second copy for the taxpayer and the third copy for the Office accepting the waiver. The fact of receipt by the taxpayer of his/her file copy must be indicated in the original copy to show that the taxpayer was notified of the acceptance of the BIR and the perfection of the agreement. (Emphasis supplied) In the instant case, the waiver35 executed by petitioner is invalid for failure of respondent or her authorized representative to indicate therein the date of acceptance of such waiver. Without any pretension, respondent admitted this lapse in paragraph 6 of the parties' Joint Stipulation of Facts and Issues, viz.: 6. On March 26, 2008 petitioner received a copy of the said Waiver of Statute of Limitations signed by SIR's Revenue District Officer, Florante R. Aninag, in the 'Accepted By' portion thereof but without indicating the date of acceptance; 36 On account of this defect in the waiver, the period to assess the tax was not extended. However, such defect is of no moment under the obtaining circumstances. Section 203 of the NIRC of 1997, as amended, provides that in case the return is filed beyond the period prescribed by law, the three-year period to assess shall be counted from the day the return was filed. Record reveals that petitioner filed its VAT return on May 29, 2006, its FWT return on January 9, 2006, and Annual ITR on April 11, 2006; thus, the reckoning date of the three-year period / 35Exh ibit " 2". 36Par. 6, Stipulated Facts, JSFI , docket, p. 206 .

DECISION CTA CASE NO. 7997 to assess shall be counted on said filing dates as indicated below: Value-added Tax Last Day to File Actual Date of Last Day to Date of Formal Final Withholding Tax Return Filing Assess Letter of Demand January 14 2009j~ Income Tax January 25 2006j' May 29, 2006jts May 29 2009 January 15, 200640 January 9, 200641 January 15 2009 January 14 2009 April 11, 20064j January 14 2009 April 15 20064L April 15 2009 In the instant case, respondent issued and sent the FLO with Assessment Notices on January 14, 2009. 44 Since an assessment is deemed made when notice to this effect is released, mailed or sent to the taxpayer,45 the assessments for deficiency IT, VAT and FWT for calendar year 2005 were timely issued by respondent. The Court shall now proceed with the merit of the impugned assessment issued against petitioner. 37SEC. l14 .Return and Payment of Value-added Tax. - (A) In General. - Every person liable to pay the value-added tax imposed under this Title shall file a quarterly return of the amount of his gross sales or receipts within twenty-five (25) days following the close of each taxable quarter prescribed for each taxpayer: Provided, however, That VAT-registered persons shall pay the value -added tax on a monthly basis. Any person, whose registration has been cancelled in accordance with Section 236, shall file a return and pay the tax due thereon within twenty-five (25) days from the date of cancellation of registration: Provided, That only one consolidated return shall be filed by the taxpayer for his principal place of business or head office and all branches 38 BIR Form No. 2550-Q, BIR Records, p. 172. 39Exhibits "A-2" and " A-2-a" 40SEC. 58 .Returns and Payment of Taxes Withheld at Source. - (A) Quarterly Returns and Payments of Taxes Withheld. - Taxes deducted and withheld under Section 57 by withholding agents shall be covered by a return and paid to, except in cases where the Commissioner otherwise permits, an authorized Treasurer of the city or municipality where the withholding agent has his legal residence or principal place of business, or where the withholding agent is a corporation, where the principal office is located. The taxes deducted and withheld by the withholding agent shall be held as a special fund in trust for the government until paid to the collecting officers. The return for final withholding tax shall be filed and the payment made with in twenty-five (25) days from the close of each calendar quarter, while the return for creditable withholding taxes shall be filed and the payment made not later than the last day of the month following the close of the quarter during which withholding was made : Provided, That the Commissioner, with the approval of the Secretary of Finance, may require these withhold ing agents to pay or deposit the taxes deducted or withheld at more frequent intervals when necessary to protect the interest of the government. (As implemented by Section 2.58 of RR No. 2-98, as amended) 41 BIR Form No. 1601 - E, BIR records, p. 153 . 42SEC. 77 .Place and Time of Filing and Payment of Quarterly Corporate Income Tax. - (B) Time of Filing the Income Tax Return . - The corporate quarterly declaration shall be filed within sixty (60) days following the close of each of the first three (3) quarters of t he taxable year. The final adjustment return shall be filed on or before the fifteenth (15th) day of April , or on or before the fifteenth (15th) day of the fourth (4th) month following the close of the fiscal year, as the case may be. 43 BIR Form No. 1702, BIR Records, p. 58. 44 Exhibits "A-2" and " A-2-a" ' 45 Basi/an Estates, Inc. vs. The Commissioner of Internal Revenue and the Court of Tax Appeals, G.R. No. L- 22492, September 5, 1967 .

DECISION CTA CASE NO. 7997 Page 17 of 3 7 A. Deficiency Final Withholding Tax Respondent assessed petitioner of deficiency FWT for calendar year 2005 in the amount of P6,850,981.93, computed as follows: Amount Tax Rate Deficiency Interest Expense P28 255 462.21 15% p 4 238 319.33 Deficiency Final Withholding Tax p 4 238 319.33 Add : 20% Interest p.a . (01.17.06 to 02.14.09) 2 612 662.60 Total Amount Due P6,850,981.93 Respondent alleged that petitioner failed to subject fully its claimed interest expense to FWT as required under Revenue Regulation No. 2-98, as amended. Respondent computed the interest expense not subjected to FWT in the following manner: Interest Expense per FS P148,267,753.83 P156 206,06 1.00 Less: Interest subject to Final Tax per 1601F 20,317, 155.04 127,950, 598. 79 Less : Interest Expense pertaining to 2004 Interest Expense not subjected to withholding tax P28,255,462.21 In its protest letter,46 petitioner argued that the alleged expense not subjected to FWT was not taxable given that such amount was arrived at based on erroneous comparison of petitioner's interest expense per return and per Financial Statements. Petitioner claimed that the reported interest expense per Financial Statements in the amount of P156,206,061.00 were fully accounted and subjected to the corresponding FWT and the same was duly reconciled with its interest expense per BIR Form No. 1601-F. Petitioner accounted its interest expense as follows: Accrued Interest pertaining to 2004 Interest Expense Tax Base net EWT EWT Interest payments in 2005 of 10�/o VAT p 2,031 715.50 Rate Non-deductible interest expense per ITR of 2005 p 22 348 870.50 16,253 157.21 Realized for-ex loss 131 089 479 .74 P20 317 155.00 10% Interest expense per FS 119 172 254.3 1 P18,284,872.71 15% 2,725, 121.39 42 589.76 P156,206,061.39 46 Exhibit "C".

DECISION CTA CASE NO. 7997 The amount of P156,206,061.39 represents interest payments on loan from petitioner's parent company, EPEC Nederland Holding B.V., with office address at 1075AD, Amsterdam, Koningslaan 34, the Netherlands. 47 As indicated in petitioner's notes to parent company financial statements, the amount payable to EPEC Nederland Holding was originally from loans payable to a foreign bank. On June 23, 2004, petitioner gave the foreign bank a notice of its intent to prepay the outstanding loan of US$52.4 million (US$2 million was paid on June 10, 2004) in full together with accrued and unpaid interest of US$511,591.00 and breakage cost of US$3,348.00 (collectively, the "Prepayment Amount") permitted under the facility agreement. However, on June 30, 2004, EPEC Nederland Holding B.V. paid the "Prepayment Amount" to the foreign bank. In effect, EPEC Nederland Holding B.V. was subrogated to the rights of the foreign bank under the facility agreement.48 Section 28(B)(5)(a) of the NIRC of 1997 imposes twenty percent (20�/o) FWT on interest on foreign loans, to wit: SEC. 28. Rates of Income Tax on Foreign Corporations. - XXX XXX XXX (B) Tax on Nonresident Foreign Corporation.- XXX XXX XXX (5)Tax on Certain Incomes Received by a Nonresident Foreign Corporation.- (a) Interest on Foreign Loans.- A final withholding tax at the rate of twenty percent (20�/o) is hereby imposed on the amount of interest on foreign loans xxx. 47 Note 1, Corporate Information and Status of Operations of the Company and its j Subsidiaries, Parent Company Financial Statements, BIR Records, p. 44 . 48 Note 7, Payable to EPEC, Parent Company Financial Statements, BIR Records, p. 25.

DECISION CTA CASE NO. 7997 However, Article 11 of the Philippines-Netherlands tax treaty provides lower tax rates of ten percent (10�/o) and fifteen percent (15�/o) on the following instances: ARTICLE 11 Interest 1. Interest arising in one of the States and paid to a resident of the other State may be taxed in that other State. 2. However, such interest may also be taxed in the State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: a) 10 percent of the gross amount if such interest is paid: (i) in connection with the sale on credit of any industrial, commercial or scientific equipment, or (ii) on any loan of whatever kind granted by a bank, or any other financial institution, (iii) in respect of public issues of bonds, debentures or similar obligations. b) 15 per cent of the gross amount of the interest in all other cases. XXX XXX XXX 5. The term 'interest' as used in this Article means income from Government securities, bonds or I debentures, whether or not secured by mortgage v/

DECISION CTA CASE NO. 7997 but not carrying a right to participate in profits, and debt-claims of every kind as well as other income assimilated to income from money lent by the taxation law of the State in which the income arises. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. (Underscoring supplied) From the foregoing, petitioner subjected to withholding its interest payments to EPEC Nederland Holding using the preferential tax rate of 15�/o, which was not disputed by respondent. 49 The !CPA examined and verified the foregoing interest expense and was able to account for the same as follows: 50 Exhibit JV Date US$ Amount Remarks Equivalent No. No. $ 178,423.08 p 9,939,414.52 January Accrual 9,052,330 .85 February Accrual Y-Y.2 10514 01/31/05 165,215.05 187,817.44 10,222,884.64 March Accrual Z-Z.2 20512 02/28/05 3,297,966.45 Expense adjustment 59,458.22 AA-AA.2 30514 03/31/05 32,512,596.46 April Accrual 590,913.79 May Accrual AB-AB.2 60507 06/07/05 12,094,676.69 June Accrual 220,093.72 12,469,745.69 Total 229,440 .05 12,671,262.93 July Accrual 229,305.11 August Accrual AC-AC.3 40513 04/30/05 37,235,685.31 September Accrual 678,838.88 AD-AD.2 50518 05/30/05 13,704,211.47 4th Quarter Accrual 244,044.12 14,245,294.84 AE-AE.2 60533 06/30/05 252,196.35 14,420,853.32 260,229.75 Total 42,370,359.63 756,470.22 44,087,419.99 AF-AF.2 70522 07/31/05 833,317.78 P156,206,061.39 AG-AG.1 80516 08/31/05 $2,859,540.67 AH-AH.2 90527 09/30/05 Total AI-Al.4 12515 12/31/05 Total Interest Expense during 2005 per Books The interest relative to petitioner's loan from EPEC Nederland Holding B. V. was payable every quarter, not later than twenty (20) days after the end of each quarter. 51 Remittance covers interest from the 26th day of the last month of the previous quarter up to the 25th day of the last month of the current quarter. As such, the accrual for the J 49 See computation of Deficiency FWT Assessment, Exhibit " A" . 50 Schedule " A", Exhibit " DM", docket, pp. 1562 and 1551-1552 . 51 Note 8(a), Related Party Transactions, Parent Company Financial Statements, BIR Records, p. 25.

DECISION CTA CASE NO . 7997 26th to month end of the last month of such quarter was remitted in the subsequent quarter. Simply stated, interest remittance for the first quarter of 2005 covers December 26, 2004 to March 25, 2005, while interest remittance for the second quarter covers accruals from March 26 to June 25, 2005. For better appreciation of the facts, the accruals and remittances made by petitioner on the cited interest expense during 2005 shall be discussed below. During the first quarter of 2005, petitioner's accrual of interest expense amounted to US$531,455.57 (inclusive of 10�/o FWT) with peso equivalent of P29,214,630.01, covering the period from January 1 to March 31, 2005, broken down as follows: Exhibit JV In US Dollar No. No. Date Exclusive of Inclusive of In Peso Remarks FWT FWT p 9 939,414.52 January Accrual 9 052,330.85 February Accrual Y-Y.2 10514 01/31/05 $ 162 202.80 $ 178 423.08 7 898,587.32 March 1-25 Accrual Z-Z.2 20512 02/28/05 150 195.50 165 215.05 2 324,297.32 March 26-31 Accrual 131,922.60 145 114.86 AA-AA.2 30514 03/31/05 38 820.53 42,702.58 P29,214,630.01 Total $483,141.43 $ 531,455.57 As evidenced by Journal Voucher No. 04050752 with attached supporting documents, petitioner made interest payment on EPEC Nederland Holding loan on April 19, 2005 amounting to $471,845.17 (net of 10�/o FWT of $47,184.52) covering the period of December 26, 2004 to March 25, 2005, detailed as follows: In Dollar In Peso Interest Payments December 26-31, 2004 27,524.27 1,512,183.39 January 2005 162,202.80 8,911,421.83 February 2005 150,195.50 8,251,740.77 March 1-25 2005 131,922.60 7,247,827.64 Total Interest Payments 471,845.17 25,923,173.63 FWT Payable {100/o) 47,184.52 2,592,317.36 / 52Exhibits "AJ " to "AJ.S ".

.' DECISION CTA CASE NO. 7997 The corresponding FWT payable of US$47,184.52 was remitted to the BIRon May 10, 2005 based on the exchange rate at the time of the remittance as evidenced by the Filing Reference No., 53 the BIR EFPS payment confirmation, 54 the Monthly Remittance Return of Final Income Taxes Withheld (BIR Form No. 1601F), 55 and the Schedule of Income Payments, 56 thereby realizing a foreign exchange gain of P11,418.59, to wit: FWT Payable $47,184.52 at P 54.94 p 2,592,317.36 FWT Remitted $47,184.52 at P 54.70 2,580,898.77 Realized forex gain p 11,4 18 .59 Thus, as of the end of the first quarter of 2005, the interest expense representing accruals for the period March 26-31, 2005 in the amount of US$42,702.58 with peso equivalent of P2,324,297.32 remained outstanding as the payment was due for remittance to EPEC Nederland Holding not later than July 20, 2005. As for the second quarter of 2005, petitioner's accrual of interest expense amounted to US$680, 779.91 (inclusive of 15�/o FWT) with peso equivalent of P37,235,685.31 covering the period of April 1, 2005 to June 30, 2005 and adjustment of FWT for March 26-31, 2005, broken down as follows: Exhibit JV In US Dollar No. No. Dat e Exclusive of Inclusive of In Peso Remarks AC- 40513 AC.3 50518 04/30/05 FWT FWT P105,731.79 FWT adj. for Mar. 26-31 AD- 60533 05/31/05 11,988,944.90 April Accrual AD.2 Total 06/30/05 $ 1,941.03 $ 1,941.03 12,469,745.69 AE- 10,114,497.72 May Accrual AE.2 191,385.84 220,093.72 June 1-25 Accrual 2,556,765.21 June 26-30 Accrual 199,513.09 229,440.05 P37,235,685.31 159,162.34 183,036.69 40,233.41 46,268.42 $592,235.71 $680,779.91 j As shown in the Journal Voucher No. 07051357 with attached supporting documents, petitioner made interest 53Exhibit " DF". 54Exhibit "DF. l ". 55Exhibits " DF.2 " to " DF.4". 56Exhibit " DF.5" . 57Exhibits "AL" to " AL.8".

DECISION CTA CASE NO. 7997 payment on EPEC Nederland Holding loan on July 18, 2005 amounting to US$588,881.80 (net of 15�/o FWT of US$88,332.27) covering the period of March 26, 2005 to June 25, 2005, detailed as follows: Interest Payments In Dollar In Peso March 26-31 2005 April 2005 $ 38 820.53 p 2,173 949.68 May 2005 191 385.84 10,717 607.04 June 1-25, 2005 199,513.09 11,172,733.04 159,162.34 8,913 091.04 Total Interest Payments $588,881.80 P32,977,380.80 FWT Payable (15�/o) $ 88,332.27 p 4,946,607.12 The corresponding FWT payable of US$88,332.27 was remitted to the BIR on August 9, 2005 based on the exchange rate at the time of the remittance as indicated in the Filing Reference No., 58 the BIR EFPS payment confirmation, 59 the Monthly Remittance Return of Final Income Taxes Withheld (BIR Form No. 1601F),60 and the Schedule of Income Payments,61 thereby realizing a foreign exchange gain of P28,354.66, to wit: FWT Payable $ 88,332.27 at P 56.00 P4,946,607 .12 4,918,252.46 FWT Remitted $ 88,332.27 at P55.679 P28,354.66 Realized forex gain Likewise, on June 7, 2005, petitioner remitted to the BIR the amount of P3,297,966.45 (US$59,458.2262), representing the FWT for the interest payments made in October 2004, January 2005 and April 2005 as a consequence of the increase in tax rates of 10�/o to 15�/o, which was included in the 2005 interest expense of P156,206,061.00. The said remittance was supported by the Filing Reference No.,63 the BIR EFPS payment confirmation, 64 the Monthly Remittance Return of Final J 58Exhibit "DH". 59Exhibit "DH . l". 60Exhi bits "DH.2" to "DH.4". 61 Exhi bit "DH.5". 62 Exhibit "DM", docket, p. 1554. 63 Exhibit "DG". 64 Exhibit "DG.l".

DECISION CTA CASE NO . 7997 Page 24 of 3 7 Income Taxes Withheld (BIR Form No. 1601F),65 and the Schedule of Income Payments. 66 As of the end of the second quarter of 2005, the accrual for June 26-30, 2005 of US$46,268.42 remained outstanding, the payment of which to EPEC Nederland Holding was due for remittance not later than October 20, 2005. Petitioner's accrual of interest expense during the third quarter of 2005 amounted to US$756,470.22 (inclusive of 15�/o FWT) with peso equivalent of P42,370,359.63 covering the period of July 1, 2005 to September 30, 2005, broken down as follows: Exhibit In US Dollar No. JVNo. Date Exclusive of Inclusive of In Peso Remarks FWT FWT p 2,597,046.50 June 26-30 Accrual 10,605,055 .53 July 1-25 Accrual $ 40,233.41 $ 46,268.42 3,093,141.04 July 26-30 Accrual Reversal of June 26- 164,293.38 188,937.39 (2,591,031.60) 30 Accrual AF-AF.2 70522 07/ 31/05 47,918.90 55,106.74 14, 245,294 .84 August Accrual AG-AG .1 80516 08/31/05 2,591,494 .29 June 26-30 Accrual (40,233.41 ) (46,268.42) 10, 582,383.05 July 1-25 Accrual 3,086,528.23 July 26-30 Accrual 219,301.17 252, 196.35 14, 125, 517. 3 1 August Accrual 40,233.41 46 , 268.4 2 September 1- 164,293 .38 188,937 .39 11 , 632,010. 31 47,918.90 55 , 106.74 25Accrua l 219,301.17 252, 196.35 September 26-30 AH-AH .2 90527 09/30/05 180,589.03 207 ,677 .38 Accrual Reversal of Accruals 45,697.71 52, 55 2. 37 2, 943, 458 .05 made inJuly& August Total (471,746.86) (542,508.89) (30,540,537.91) $ 657,800.19 $ 756,470.22 P42,370,359.62 As evidenced by Journal Voucher No. 10051367 with attached supporting documents, petitioner made interest payment on EPEC Nederland Holding loan on October 19, 2005 amounting to US$652,335.89 (net of 15�/o FWT of US$97,850.38) covering the period of June 26, 2005 to September 25, 2005, to wit: / 65 Exh ibit s " DG .2" t o " DG .4". 66Exhibit "DG .5". 67 Ex hibits " AN " to " AN .9 ".

DECISION CTA CASE NO. 7997 Interest Payments In Dollar In Peso June 26-30, 2005 July 2005 $ 40,233.41 p 2 253,473.29 August 2005 212,212.28 11 886,009.80 September 1-25, 2005 219,301.17 12 283,058.53 180,589.03 10,114,791.57 Total Interest Payments $652,335.89 P36,537,333.19 FWT Payable (15�/o) $ 97,850.38 p 5,480,599.98 The corresponding FWT payable of US$97,850.38 was remitted to the BIR on November 8, 2005 based on the exchange rate at the time of the remittance as shown in the Filing Reference No. 68, the BIR EFPS payment confirmation 69, the Monthly Remittance Return of Final Income Taxes Withheld (BIR Form No. 1601F/0, and the Schedule of Income Payments71, thereby realizing a foreign exchange gain of P24,560.45, to wit: FWT Payable $ 97,850.38 at P56.01 P5,480,599.98 FWT Remitted $97,850.38 at P55.759 5,456,039.53 Realized forex gain p 24,560.45 As of the end of the third quarter of 2005, the accrual for September 26 to 30, 2005 of US $52,552.37 remained outstanding, the payment of which to EPEC Nederland Holding was due for remittance not later than January 20, 2006. Petitioner's accrual of interest expense during the fourth quarter of 2005 amounted to US$833,318.38 (inclusive of 15�/o FWT) with peso equivalent of P44,087,420.00, covering the period of September 26 to December 25, 2005, broken down as follows: Exhibit In US Dollar No. JVNo. Date Exclusive of Inclusive of In Peso Remarks 12/31/05 FWT FWT p 2,790,005.14 September 26-30 Accrual 14 647 544.22 October Accrual $ 45,697.71 $ 52,552.37 14,704,976.03 November Accrual 11,492,219.97 AI-AI.4 120515 239 913.26 275 900.25 December 1-25 2005 240,853.94 276 982.03 188,231.96 216,466.75 68 Exhibit " 01 " . 69Exhibit "01.1". 70Exhibits "01.2" to "01.3". 71 Exhibit "01.4".

DECISION CTA CASE NO. 7997 55 625.52 63 969.35 3 396 132.69 December 26-31, 2005 Reversal of Sept. 26-30 (45,697.71) (52,552.37) (2,943,458.05) Accruals made in Sept. 2005 Total $724,624.68 $833,318.38 P44,087,420.00 As evidenced by Journal Voucher No. 02060872 with attached supporting documents, petitioner made interest payment on EPEC Nederland Holding loan on February 24, 2006 amounting to US$714,696.87 (net of 15�/o FWT of US$107,204.53) covering the period of September 26, 2005 to December 25, 2005, with the following details: Interest Payments In Dollar In Peso September 26-30, 2005 October 2005 $ 45,697.71 p 2,426,091.42 November 2005 239,913.26 12,736,994.97 December 1-25, 2005 240,853.94 12 786,935.67 188,231.96 9 993,234.76 Total Interest Payments $7141696.87 P37,943,256.82 FWT Payable {15�/o) $107,204.53 p 5,691,488.52 The FWT payable of US$107,204.53 was remitted to the BIR only on March 9, 2006 based on the exchange rate at the time of the remittance as established by the Filing Reference No. 73 , the BIR EFPS payment confirmation 74, the Monthly Remittance Return of Final Income Taxes Withheld (BIR Form No. 1601Ff5, and the Schedule of Income Payments76, thereby realizing a foreign exchange gain of P115,888.09, to wit: FWT Payable $ 107,204.53 at P53.09 P5,691,488.52 FWT Remitted $107,204.53 at P52.009 5,575,600.43 Realized forex gain P115,888.09 As of the end of the fourth quarter of 2005, the accrual for December 26-31, 2005 of US$63,969.35 remained outstanding. 72 Exhi bits "AP" to "AP.9". j 73 Exhibit "DJ". 74 Exhibit "DJ.4". 75 Exhibits " DJ .l" and "DJ.S" 76Exhibit "DJ.3"

DECISION CTA CASE NO. 7997 From the foregoing, petitioner's total interest expense per books for the year 2005 amounted to US$2,861,482.30 with peso equivalent of P156,206,061.39, as summarized below: Accrual of the Period US $ Equivalent Peso Equivalent 1st Quarter 531,455.57 29,214,630.01 2nd Quarter 680,779.91 37,235,685.31 FWT adjustment 3rd Quarter 59,458.22 3,297,966.45 4th Quarter 756,470.22 42,370,359.62 833,318.38 44,087,420.00 TOTAL 2,861,482.30 156,206,061.39 On the other hand, the total interest payment on petitioner's EPEC Nederland Holding loan (inclusive of FWT) amounted to US$2,797,512.95 with peso equivalent of P153,547,166.43, computed as follows: 2005 Interest Payments FWT Remittances Total 1st Quarter In Dollar In Peso In Dollar In Peso In Dollar In Peso Adjustments 2nd Quarter $444 320.90 p 24 410 990.24 $44 432.09 p 2 430 346.51 $488 752.99 p 26 841 336.75 3rd Quarter 59 458.22 3 297 966.45 59 458.22 3 297 966.45 4th Quarter - - 88 332.27 4 918 252.46 37 895 633.26 97 850.38 5 456 039.53 677 214.07 Total 588 881.80 32 977 380.80 107 204.53 5,575 600.43 750 186.27 41 993 372.72 652 335.89 36 537 333.19 821 901.40 43 518 857.25 714 696.87 37 943 256.82 $397,277.49 P21,678,205.38 $2,797,512.95 P153,547,166.43 $2,400,235.46 P131 868 961.05 Due to dissimilarity of dollar exchange rate at the time of accruals and actual remittances, petitioner incurred foreign exchange loss from its interest payments on EPEC Nederland Holding loan amounting to P795, 771.33 and foreign exchange gain from remittance of final withholding taxes in the amount of P58,533.59, which both formed part of the total interest payment of P156,206,061.39, as shown below: Exhibit Accrual of Interest on Loan Exhibit Payment of Forex AJ -AJ.5 Interest on Loan Gain/(Loss) January 2005 Y-Y.2 $ 162,202.80 p 9,035,831.38 February 2005 Z-Z.2 150,195.50 8,229,391.68 p 8,911,421.83 p 124,409.55 March 1-25, 2005 AA-AA.2 131,922.60 7,180,533.93 8,251,740.77 (22,349.09) 7,247,827.64 (67,293.71) March 26-31, 2005 AA-AA.2 444,320.90 24,445,756.99 34,766.75 April2005 AC-AC.3 38,820.53 2,112,997.57 24,410,990.2477 (60,952.11) May 2005 AD -AD .2 191,385.84 10,425,169.48 2,173,949.68 (292,437.56) 199,513.09 10,843,257.12 10,717,607.04 (329,475 .92) 11,172,733.04 77 Total payment of P25,923,173. 64 less interest payment of P1,512,183.40 pertaining to December 26-31, 2004 accruals.

DECISION CTA CASE NO . 7997 June 1-25, 2005 159,162.34 8,795,215.41 8,913,091.04 (117,875.63) 588,881.80 32,176,639.58 32,977,380.80 (800,741.22) June 26-30, 2005 AE-AH.2 40,233.41 2,223,676.43 AN-AN .9 2,253,473.29 (29,796.86) July 1-25, 2005 AH-AH .2 164,293.38 9,202,072 .2 1 AP-AP .9 9,202,072.21 July 26-31, 2005 47,918.90 2,683,937.59 2,683,937.59 - August 2005 AI-AI.4 219,301.17 12,283,058.53 12,283,058.53 - September 1-25, 2005 180,589.03 10,114,791.57 10,114,791.57 - 652,335.89 36,507,536.33 36,537,333.19 - September 26-30, 2005 45,697.71 2,426,091.42 2,426,091.42 October 2005 239,913.26 12,73 6,994 .97 12,736,994.97 (29,796.86) November 2005 240,853.94 12,786,935.67 12,786,935.67 December 1-25, 2005 188,231.96 9,993,234.76 9,993,234.76 - 714,696.87 37,943,256.82 37,943,256.82 - TOTAL $2,400,235.46 P131,073, 189.72 P131,868,961.05 - - - P(795,771.33) Exhibit Accrual of FWT Exhibit FWT Forex Y-Y.2 AK-AK.3 Remittances Gain/(Loss} January 2005 Z-Z.2 $ 16,220.28 p 903,583.14 AM-AM.3 February 2005 822,939.17 AB-AB .2 P 2 , 4 3 0 , 3 4 6 . 5 1 78 P14,229.19 March 1-25, 2005 M -M .2 15,019.55 718,053.39 13,192.26 AO-A0.3 4,918,252.46 (91,674.61} March 26-31, 2005 AC-AC.3 44,432.09 2,444,575.70 AQ-AQ.9 3,297,966.45 April 2005 AD-AD.2 317,031.55 - May 2005 AE-AE.2 5,823.08 5,456,039.53 June 1-25, 2005 AB-AB.2 28,707.88 1,563, 775.42 20,090.92 AE-AH.2 29,926.96 1,626,488.57 5,575,60 0.43 June 26-30, 2005 23,874.35 1,319,282.31 P21,678,205.38 115,888.09 July 1-25, 2005 AH-AH.2 88,332.27 4,826,577.85 P58,533.59 Ju ly 26-31, 2005 59,458 .22 3,297,966.45 August 2005 AI-AI.4 September 1-25, 2005 6,035.01 333,551.46 24,644.01 1,380,310.83 September 26-30, 2005 October 2005 7,187.84 402,590.64 November 2005 32,895.18 1,842,458. 78 December 1-25, 2005 27,088.35 1,517,218.74 97,850.39 5,476,130.45 TOTAL 6,854.66 363,913.71 35,986.99 1,910,549.25 36,128.09 1,918,040.35 28,234.79 1,498,985.21 107,204.53 5,691,488.52 P21,736,738.98 $ 397,277.50 Note that there is a difference between petitioner's total interest expense per books and the total interest remittance amounting to US$63,969.35, computed as follows: In Dollar In Peso Interest Remittances $2,797,512.95 P153,547, 166.43 / (-) Forex Loss on Interest Payment (795,771.33) (+)Forex Gain on FWT Remittance 58,533.59 78 Total remittances of P2,580,898.77 less FWT of P150,552 .26 pertaining to December 26-31, 2004 accruals.

DECISION CTA CASE NO. 7997 Total 2,797,512.95 152,809,928.69 Less: Interest Expense per books 2,861,482.30 156,206,061.39 Difference $ 63,969.35 P3,396,132.70 The difference actually pertains to the accrual for the period December 26-31, 2005 which remained outstanding as of the end of the fourth quarter of 2005. It was due for remittance to EPEC Nederland Holding not later than April 20, 2006. As verified, the amount of P3,396, 132.70 was included in the total interest expense per books of P156,206,061.39. On the other hand, the deductible interest expense per petitioner's 2005 ITR amounted to P153,480,940.00. 79 The difference of P2,725,121.39 represents forty-two percent (42�/o) of the interest income subjected to final tax and claimed by petitioner as non-deductible interest expense80 in its 2005 ITR, in accordance with Section 34(8)(1) of the NIRC of 1997, as amended, which reads as follows: SEC. 34. Deductions from Gross Income.- xxx XXX XXX XXX (B) Interest. - ( 1) In General.- 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 j reduced by forty-two percent ( 42�/o) of the interest income 79 Section D, Item 93, 200 5 Annual ITR, BIR Record s, p. 64. 80 Section E, Item 115, 2005 Annual ITR, BIR Records, p. 63 .

DECISION CTA CASE NO. 7997 subjected to final tax: xxx (Emphasis supplied) Since petitioner already recorded and accrued as expense in its book the income payment of US$55,625.52 and the corresponding FWT of US$8,343.83 or in the total amount of US$63,969.35 with peso equivalent of P3,396, 132.70, further claiming it as a deduction from its gross income under its 2005 Annual Income Tax Return81 ; it is incumbent upon petitioner to withhold and remit to the collecting agent of the BIR the corresponding taxes thereon, pursuant to Section 2.57.4 of RR No. 2-98, as amended by Section 4 of RR No. 12-01, which provides: SEC. 2.57.4.Time of withholding. - The obligation of the payor to deduct and withhold the tax under Section 2.57 of these Regulations arises at the time an income payment is paid or payable, or the income payment is accrued or recorded as an expense or asset, whichever is applicable, in the payor's books, whichever comes first. The term 'payable' refers to the date the obligation becomes due, demandable or legally enforceable. Provided, however, that where income is not yet paid or payable but the same has been recorded as an expense or asset, whichever is applicable, in the payor's books, the obligation to withhold shall arise in the last month of the return period in which the same is claimed as an expense or amortized for tax purposes. (Emphasis supplied) As clearly stated above, the duty of petitioner to withhold arises when the interest expense is paid, becomes payable, or is accrued/recorded as expense in petitioner's ~ 81 BIR Records, pp. 53-68.

DECISION CTA CASE NO. 7997 books, whichever comes first. In this case the accrual made on December 31, 200 5 covering the interest expense for December 26 to 31, 200 5 in the amount of P3,396,132.70 came first before t he same became due and payable on April 20, 2006. As such, petitioner was obligated to withhold the FWT corresponding to the interest expense of P3,396,132. 70 in 2005 and remit it to the BIR on or before January 15, 2006, pursuant to Section 2.58(A)(2) of Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 17-03. For petitioner's failure to show that it withheld and remitted the FWT of P442,973.93 (US$8,343.83 at P53.09), the assessment for the same must be sustained and petitioner should be held liable to pay basic deficiency FWT of P442,973. 93 for ca lendar year 2005. B. Deficiency Income Tax Based on the finding that petitioner failed to withhold the FWT on the interest expense of P28,255,462.21, respondent disal lowed the amount of P28,255,462.21 from petitioner's claimed deductions from gross income and assessed petitioner of deficiency income tax in the amount of P14,385,900.88, computed as follows: I. DEFICIENCY INCOM E TAX p 28 255 462.21 p 28 255 462.21 Taxable Income (Loss) per ITR Add: Adjustments per Investigation Income Payments not Subjected to FWT Taxable Income per Investigation Income Tax Due p 9 183 025.22 Less: Allowable Tax Credits/Payments: P22,203,593.00 Prior Year's Excess Credits Other Than MCIT 9,223 427.00 Creditable Tax Withheld Total P31,427 020.00 Less: Excess of MCIT Over Normal Income Tax p 2,907,744.00 (NIT) Carried Over to Succeeding Period Excess Tax Credits Carried Over to 28,519,276.00 31,427,020 .00 - Succeeding Period Deficiency Income Tax p 9,183 025.22 Add: 20% Interest p.a. (04.18.06 to 02.14.09) Total Amount Due 5 202 875.66 P14 , 3 8 5 , 9 0 0 . 8 8 /

DECISION CTA CASE NO. 7997 As stated, petitioner failed to withhold and remit the FWT on the interest expense of only P3,396, 132.70 and not P28,255,462.21 for calendar year 2005 as found by respondent. For failure to withhold and remit the corresponding FWT, petitioner cannot claim the interest expense of P3,396, 132.70 as deduction from its taxable gross income for the year 2005 pursuant to Section 34(K) of the NIRC of 1997, which states: SEC. 34. Deductions from Gross Income. - XXX XXX XXX (K) Additional Requirements for Deductibility of Certain Payments. -Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be 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 with this Section, Sections 58 and 81 of this Code. But despite the disallowance of the interest expense of P3,396, 132.70, petitioner would still be in a net loss position in the amount of P45,259,013.30 with a Minimum Corporate Income Tax (MCIT) due of P2,907,744.00, which when applied against petitioner's tax credits of P31,427,020.00 would still not result in any deficiency income tax, as shown below: Sales/Revenues/Receipts/Fees p 52,941,176.00 Less: Cost of Sales/Services Gross Income from Operation P194,042,342.00 52,941,176.00 Add: Non-Operating and Taxable Other Income 3,396,132. 70 92,446,020.00 Total Gross Income p 145,387,196.00 Less: Deductions / 190,646, 209 .30 Less: Disallowed Interest Expense

DECISION CTA CASE NO . 7997 Page 33 of 3 7 Net Loss P(45,259,013 .30) Tax Due (MCIT) p 2,907,744.00 Less: Tax Credits/Payments: 22,203,593 .00 31 , 427, 020 .00 Prior Year's Excess Credits Other Than MCIT 9,173,927.00 Creditable Tax Withheld for the First Three Quarters 49,500.00 P(28,519,276.00) Creditable Tax Withheld for the Fourth Quarter Tax Overpayment C. Deficiency Value-added Tax As to the deficiency VAT, respondent assessed petitioner as follows: Taxable Sales per VAT Returns p 31,439.73 P35,294, 117.65 Add : Adjustments per Investigation 307,031.21 17,647, 058 .82 Unsupported Exempt Sales 3,191 , 171.23 P52,941, 176.47 Sales/Receipts Subject to 10% VAT per Investigation 3,529,642 . 17 10% Tax Rate Output Tax Due 230.41 p 5,294,117.65 Less: Allowable Tax Credits/Payments: 3, 529,411.76 Input Tax Carried Over From Previous Period p 1,764,705.89 Input Tax per Returns Payments 1,079, 129.74 Total Less: Excess Tax Credits Carried Over to Succeeding Period P2,843,835.63 Deficiency VAT Add: 20% Interest p.a . (01.26.06 to 02.14.09) Total Amount Due Respondent alleged that verification disclosed that exempt sales amounting to P17,647,058.82 were not supported with sufficient evidence/documents, which will subject petitioner to ten percent (10�/o) VAT pursuant to Sections 106, 108, and 109 of the NIRC of 1997. In its protest letter, petitioner emphasized that the alleged unsupported VAT-exempt sale is not taxable as it j pertains to sales/receipts from East Asia Utilities Corporation (EAUC), which is a PEZA-registered company and, as such, exempt from paying VAT.

DECISION CTA CASE NO. 7997 In the BIR letter dated May 20, 2009,82 respondent requested petitioner to submit proof of sales in the amount of P17,647,058.82 in favor of EAUC, and to further submit a certification from the appropriate government office that EAUC is in good standing as of December 2005 as per Republic Act No. 7916 and paragraph 3 of Certificate of Board Resolution No. 00-033. In compliance with the said requirements, petitioner submitted the following documents: a. Management Service Agreement83 between /. ,/ petitioner and EAUC dated February 10, 2003; b. PEZA Certificate of Board Resolution 84 ; c. PEZA Certification85 dated July 18, 2005; d. PEZA Certification86 dated October 8, 2007; e. Petitioner's Journal Voucher No. 090501 87 dated September 2, 2005 to recognize the Management and Advisory Fee Income of P52,941, 176.47; f. Petitioner's Invoice No. 000188 dated August 3, 2005 issued to Cebu Private Power Corporation (CPPC) for Management Services Fee of P35,294,117.65 subject to 10�/o VAT of P3,529,411.75; g. Petitioner's Invoice No. N530N531-00489 dated August 3, 2005 issued to EAUC for Management Services Fee of P17,647,058.82; h. Petitioner's Official Receipt90 dated September 2, 2005 issued to CPPC; i. Petitioner's Acknowledgment Receipt91 dated September 2, 2005 for payment received from EAUC; and j. Petitioner's Security Bank Peso Savings Account Passbook92 and Check Deposit Slip93 dated September 2, 2005. 82 Ex hibit "E". 83 Exhibit "I". 84Exhibit "K". 85Exhibit "L". 86Exhibit "M". 87 Exhibit "DL". 88 Exhibit "DL.3". 89Exhibit "DL.S" 90 Exhibit "DL.4" 91 Exhibit "DK" 92 Exhibit "DL.l"

DECISION CTA CASE NO. 7997 Scrutiny of the foregoing documents shows that the amount of P17,647,058.82 subject of the present deficiency VAT assessment pertains to sale of services to a PEZA entity subject to zero percent VAT pursuant to Section 108(B)(3) of the NIRC of 1997, as amended, and as clarified in Revenue Memorandum Circular (RMC) No. 74-99. Consequently, the present assessment for deficiency VAT should be cancelled. D. Compromise Penalty The compromise penalty imposed by respondent against petitioner for non-submission of Quarterly Summary List of Sales and Purchases in the amount of P8,000.0094 must be cancelled as well, there being no compromise agreement entered into by the parties. WHEREFORE, the instant Petition for Review is hereby PARTIALLY GRANTED. The assessments issued by respondent Commissioner of Internal Revenue against petitioner El Paso Philippines Energy Company, Inc. for calendar year 2005 covering deficiency Income Tax in the amount of P14,385,900.88 and deficiency Value-Added Tax in the amount of P2,843,835.63 are CANCELLED and SET ASIDE. However, the deficiency Final Withholding Tax assessment for calendar year 2005 is UPHELD IN PART. Accordingly, petitioner is hereby DIRECTED TO PAY respondent basic deficiency Final Withholding Tax in the amount of P442,973. 93 and the corresponding twenty-five percent (25�/o) surcharge in the amount of P110,743.48 as imposed under Section 248(A)(3) of the NIRC of 1997, as amended, or in the sum of P553,717.41, computed as follows: Basic Deficiency FWT p 442,973 .93 110,743.48 Add: 25% Surcharge Total P553,717 .41 93 Exhibit " DL. 2" 94 Exhibit " A-1"

DECISION CTA CASE NO. 7997 In addition, petitioner is ORDERED TO PAY: (a) deficiency interest at the rate of twenty percent (20�/o) per annum on the basic deficiency FWT of P442,973.93 computed from January 15, 2006, until full payment thereof pursuant to Section 249(8) of the NIRC of 1997; and (b) delinquency interest at the rate of 20�/o per annum on the total amount of P553,717 .41 and on the deficiency interest which have accrued as afore-stated in (a) computed from February 14, 2009 until full payment thereof pursuant to Section 249(C)(3) of the NIRC of 1997, as amended. SO ORDERED. I Concur: AEsRs~ �~~�stiUcYe ATTESTATION I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. � ERL~.UY Chairperson

DECISION CTA CASE NO. 7997 CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairperson's Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court. ~,~ c . a;t-~, Q . .fDANITO C. CASTANEB'A, JR. Acting Presiding Justice