UNITED INTERNATIONAL PICTURES AB v. COMMISSIONER OF INTERNAL REVENUE

REPUBUC OF THE PHIUPPINES COURT OF TAX APPEALS QUEZON CITY FIRST DIVISION ************** UNITED INTERNATIONAL PICTURES AB, C.T.A. CASE NO. 7244 Petitioner, Members: -versus- DECISION CASANOVA, C., J.: This is a Petition for Review seeking a refund or for the issuance of a Tax Credit Certificate (''TCC'') in the amount of P4,898,955.00 allegedly representing unutilized excess creditable withholding taxes (''CWT'') for the taxable year 2003. Petitioner is the Philippine branch of United International Pictures AB, a corporation duly organized and existing under the laws of Sweden and licensed to engage in business in the Philippines, with office address at the gth Aoor of Paci~

DECISION C.T.A. CASE NO. n44 Page 2 Star Builiding, Makati Avenue, Salcedo Village, Makati City. 1 It is primarily engaged in the business of acquiring and leasing motion pictures and other activities compatible therewith. 2 Respondent is the duly appointed Commissioner of International Revenue with authority to act as such, induding, among others, the power to decide, approve and grant refunds or tax credit of overpaid internal revenue taxes as provided by law. His office address is located at the BIR National Building, Diliman, Quezon City.3 On March 1, 2000, the petitioner entered into a Subdistribution Agreernent4 (''SA'') with Viva Productions, Inc. (''VIVA'') for the exdusive license (as of June 20, 2000) to exhibit and distribute in the Philippines feature motion pictures and their related trailers as may be designated by the petitioner. Under the SA, VIVA is entitled to deduct and retain as its distribution fee an amount equal to 6% of gross receipts from film rentals in respect of each picture generating gross receipts of P6 million or less, or 4% in respect of each picture generating gross receipts in excess of P6 million.5 According to the SA, any withholding, income or other similar tax imposed on any amount required to be paid by VIVA to the petitioner, VIVA shall deduct the sum of such tax from the payment and pay it to the competent taxing authority.6 On April 15, 2004, petitioner filed its Annual Income Tax Return (''ITR'') for the year ended December 31, 2003 with the following informationGL 1 Joint Stipulation ofFacts ("JSF?, Rollo, pp.S4 -57, duly approved by this Court in a Resolution dated August 12. 2005, Rollo, p. 58. 2 Exhibit 8-,Z Notes to Rnancial Statements, Rollo. p. 82. 3 Paragraph 2 of JSF, Ibid. 4 Exhibit I, Rollo. pp. 1D0-119. 5 Exhibit 8-4, Notes to Rnancial Statements, Rollo. p. 86 6 Paragraph 17 of Exhibit I, Rollo. p. 111 7 Exhibit 4. Rollo. p.73-75 , Paragraph 3 of JSF, Ibid.

DECISION C.T.A. CASE NO. 7244 Page 3 Sales/Revenues/Receipts/Fees p 169,242,436.00 135,377,819.00 Less: Cost of Sales/Services p 33,864,617.00 Gross Income from Operations 419,152.00 Add : Non-operating and Other Income p 34,283,769.00 23,014,510.00 Total Gross Income p 11,269,259.00 Less: Deductions 32% Taxable Income p 3.606.163.00 Tax Rate p -0- -0 - Income Tax Due 7,626,268.00 Less: Tax Credits/Payments 878,850.00 Prior Year's Excess Credits p 8,505,118.00 Tax Payments for First Three Quarters f ~,898 955 00 Creditable Tax Withheld for the First Three Quarters Creditable Tax Withheld per BIR Form No. 2307 for the Fourth Quarter Total Tax Credits/Payments Tax Overpayment On line 30 of the return, petitioner indicated its option to refund the excess creditable withholding tax for the year 2003 when it marked "X" the option "To be refunded".8 On April 15, 2005, petitioner filed its ITR for the year ended December 31, 2004 wherein it reported the following figures on the retum:9 Sales/Revenues/Receipts/Fees p 15,493,682.00 Less: Cost of Sales/Services Gross Income from Operations 10,697,294.00 Add: Non-operating and Other Income p 4,796,388.00 Total Gross Income Less: Deductions 759 037.00 Taxable Income p 5,555,425.00 Tax Rate Income Tax Due 4,830,212.00 Less: Tax Credits/Payments p 725,213.00 Prior Year's Excess Credits 32% Tax Payments for First Three Quarters p 232,068.00 Creditable Tax Withheld for the First Three Quarters Creditable Tax Withheld per BIR Form No. 2307 p -0- for the Fourth Quarter - 0- Total Tax Credits/Payments Tax Overpayment 636,108.00 -0 - p 636,108.00 p 404,040,00 ~ 8 Exhibit A-8, Rollo. p.73. 9 Exhibit G RoUo pp. 94-96, Paragraph 4 ofJSF, Ibid.

DECISION C.T.A. CASE NO. 7244 Page 4 On line 30 of the return, petitioner indicated its option to carry over to the following year/quarter its excess creditable withholding tax for the year 2004 when it marked "Xn the option "To be carried over as tax credit for next year/quarte~. 10 On March 31, 2005, petitioner filed its administrative application for refund with the Bureau of Internal Revenue ("BIR'') - Revenue District Office No. 43 in the a1110unt of P4,898,955.00 representing petitioner's excess creditable withholding taxes as of December 31, 2003. 11 The inaction of the BIR on its claim for refund prompted the petitioner to institute the present Petition for Review before this COurt on May 06, 2005.12 In his Answer filed on June 14, 2005, the COmmissioner of Internal Revenue alleged, inter-alia, that the claim for refund is still under examination; the burden of proof is upon the petitioner to prove that it is entitled to the claim for refund; the grant of a claim for refund is tantamount to an exemption from taxation which is construed strictly against the claimant and in favor of the taxing authority; the taxes sought to be refunded were paid in aa:ordance with law; and the burden of proof to the oontrary is upon the petitioner-claimant to show with dear and unambiguous provision of law supporting the same. 13 On November 22, 2006, the case was submitted for dedsion sans the memorandum of the respondent. 1~ 10 line 30 ofExhibit G Paragraph 4 of.JSF, Ibid. 11 Exhibit H, Rollo pp. 97-99, Paragraph 5 of.JSF, Ibid. 12 Rollo, p. 1 13 Rollo pp. 39-41 14 Rollo, p. 159

DECISION C.T.A. CASE NO. 7244 Page 5 The parties jOintly stipulated that the issue to be resolved by this Court will be the following, to quote: "Whether petitioner is entitled to be refunded its excess creditable withholding taxes as of calendar year ended December 31, 2003 in the amount of P4, 898,955.00 by showing that- a) The creditable withholding taxes amounting to P8,505,118.00 for the year 2003 are duly supported by Certificates of Creditable Tax Withheld at Source; b) The income from which these creditable taxes were withheld were duly declared as part of petitioner's inrome in its Annual Inrome Tax Return for calendar year December 31, 2003; c) Petitioner had shown that it did not carry over rts unutilized creditable withholding taxes as of calendar year ended December 31, 2003 to the succeeding taxable year 2004. d) Petitioner had duly filed both the administrative and judicial claims for refund within the two-year prescriptive period provided under Sections 204 and 229 of the Tax Code, as amended. "15 There are two basic issues that are to be resolved by Us, namely: (1) Whether or not petitioner has excess/unutilized creditable withholding tax for the calendar year ending December 31, 2003; and (2) whether or not petitioner is entitled for the refund or for the issuance of a TCC in its favor for its alleged excess creditable withholding tax and if legally entitled, whether or not the same is properly substantiated . We proceed to resolve the first issue. It is clear from the evidence presented that petitioner has excess/overpayment of creditable withholding tax for the calendar year ending December 31, 2003. Based on its 2003 ITR, petitioner was liable only for income.ez_

DECISION C.T.A. CASE NO. 7244 Page 6 tax amounting to P3,606,163.00 after applying the tax rate of 32% to its taxable income of P11,269,259.00. After deducting its income taxes withheld, in the amount of P8,505,118.00 of that year from the income tax due of P3,606,163.00, as dictated under the "Creditable Withholding Tax System" which considers income taxes withheld by the payor as creditable against the income taxes for that year, petitioner has excess/overpayment of creditable withholding tax for the calendar year ending December 31, 2003 of P4,898,955.00, detailed as follows: 16 Taxable Income p 11 ,269,259.00 Tax Rate 32% Income Tax Due Less: Tax Credits/Payments p 3.606.163.00 Prior Year's Excess Credits p -0- Tax Payments for First Three Quarters -0- Creditable Tax Withheld for the First Three Quarters Creditable Tax Withheld per BIR Form No. 2307 7,626,268.00 for the Fourth Quarter 878 850.00 Total Tax Credits/Payments p 8.505.118.00 Tax Overpayment p 4.898.955.00 Thus, petitioner has proven that it has excess/unutilized creditable withholding tax for the calendar year ending December 31, 2003. The issue of the legal justification for petitioner's refund or the issuance in its favor of a TCC will be discussed next. Petitioner anchored its daim for its refund or the issuance in its favor of a TCC on Section 76 of the 1997 National Internal Revenue Code C'NIRC''), to wit: SEC. 76. Final Adjusbnent Return - Every corporation liable to tax under section 27 shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either~ 15 Stipulation oFIssues, .JSF, Rollo. p. 56 16 Exhibits A, A-5 andA-7, Rollo. p. 73.

DECSION C.T.A. CASE NO. n44 Page 7 (A) Pay the balance of tax still due; or (B) carry-over the excess credit; or (C) Be credited or refunded with the excess amount paid, as the case may be. In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the ootion to cany-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made. such option shall be considered irrevocable for that taxable period an<l no application for cash refund or issuance of a tax credit certificate shall be allowed therefore.17 The law decrees that the corporate taxpayer's excess tax credits or overpaid income tax in a given taxable year may be refunded or claimed as a tax credit or carried over and applied against its income tax liabilities for the taxable quarters of the succeeding taxable years. These remedies are to be availed of in the alternative and not cumulatively. A perusal of petitioner's 2003 ITR18 unmistakably shows that petitioner chose the option to refund as evidenced by an "X" mark in the box corresponding to the phrase "To be refunded". Furthermore, in its ITR for the succeeding year 200419, petitioner did not indicate any amount of prior year's excess credifO, further proving the fact that it chose only one option, that is, to refund the excess amount paid rather than to carry-over. Thus, the amount of P4,898,955.00 may be a proper subject of a claim for refund under Section 76 of the 1997 NIRC, as amended.~ 17 Underscoring supplied 18 Exhibit A, Ibid. 19 Exhibit G; Rollo. pp. 94-96

DECISION C.T.A. CASE NO. 7244 Page 8 Petitioner's entitlement to a refund, however, will still depend on its compliance with the three requirements prescribed under Section 2.58.3 of Revenue Regulations No. 2-98 (Withholding Tax Regulations), as amended, namely: 1. That the claim for refund was filed within the two-year prescriptive period prescribed under Section 204(C), in relation to Section 229 of the NIRC of 1997; 2. That the fact of withholding is established by a copy of a statement duly issued by the payor (withholding agent) to the payee, showing the amount paid and the amount of tax withheld therefrom; and 3. That the income upon which the taxes were withheld was induded in the return of the recipient. 21 As to the first requirement, it is dear from the records that petitioner has complied with the same. Long settled is the rule that the reckoning period of the two-year prescriptive period for the filing of a claim for refund/tax credit certificate of excess creditable withholding taX/quarterly income tax payment starts from the date of filing of the annual income tax return.22 Petitioner's daim covers the calendar year 2003 for which it filed its ITR on April 15, 2004. 23 Counting the two-year prescriptive period from the said date of filing of its ITR, petitioner had until April 15, 2006 within which to file its daim for refund, both in administrative and judidal levels. Since petitioner's 2003 ITR already constitutes a formal application for refund when it had indicated in its ITR its option to refund the excess taxes,24 petitioner'~ 20 Exhibit (T1, Rollo. p. 94. 21 Citibank, NA vs. Court ofAppeills and QR_ 280 SOlA 459; Acc;:t?A Investments Corporation vs. Court ofAppeals, 204 SOlA 963. 22 Acc;:t?A Investments Corporation vs. Court ofAppeil/s, 204 SCR4 957 (1991); Commissioner ofInternal Revenue vs. TMX Sales, Inc., 205 SCRA 184 (1992). 23 Paragraph 3, JSF. Ibid. 24 SECTION 2.58.3 Gaim for Tax Credit or Refund.- (C) Excess O'�fls.- X X X

DECISION C.T.A. CASE NO. 7244 Page 9 administrative daim is therefore considered filed on April 15, 2004, the date when petitioner filed its 2003 ITR. The Petition for Review, on the other hand, was filed with this Court on May 6, 2005. Hence, both dates of filing fell within the two-year prescriptive period. Petitioner also satisfied the second requirement. To prove the fact of withholding, petitioner presented the Certificates of Creditable Tax Withheld at Source (''BIR Form No. 2307'') issued by VIVA Productions, Inc. for the taxable year 2003 reflecting creditable withholding taxes in the amount of P8,505,117.52, which is lower by P.4825 than the reported amount in the 2003 ITR of P8,505,118.00, detailed as follows: Exhibit Period Covered Pal�or'S Name Income Pavment Tax Withheld VIVA Productions, Inc. p 35,975,102.40 p 1,798,755.12 c 01-01-2003 to 03-31 -2003 VIVA Productions, Inc. 42 ,236 ,054 .60 2,111,802.73 VNA Productions, Inc. 74,314,200.40 3,715,710.02 D 03-01-2003 to 06-30-2003 VIVA Productions, Inc. 17,576,993.00 878,849.65 E 07-01-2003 to 09-30-2003 TOTAL f 11Q.1Q~350,40 f �.so~. 1H.~z F 10-01-2003 to 12-31-2003 As for the third requirement, the gross revenues reported in petitioner's 2003 ITR was P169,242,436.00, which is lower by P859,914.40 as compared with the total income payments reflected in its Certificates of Creditable Tax Withheld presented amounting to P170,102,350.40 as shown above. To explain the difference, petitioner stated that the amount of P859,914.40 "pertains to advertising sales (''adsales'') consisting of advertising materials shippe~ (1)/f in lieu of the automatic application ofhis excess credit. the taxpayer wants a cash reFund or a tax credit certificate for use in payment of his other fliltioflill internal revenue tax liabilties, he shall make a wdten request therefore, wlhin mo years after the payment of the tax {Ref. Sees. 204(c) and 229 tf the Code), prolflded h-rer, tlut If the QJq�yer IYs lndluted In hs Income biJt nttum hs option for either � ullh rehlnd or mx credit ctutif!CIIte, such lndlution llhiiU be coMidered sul11t:lent for the purpo.e. Upon fling of his request_ the taxpayer's income tax return showing the creaJts excess expanded withhokling tax shall be examined. The excess expanded withholding tax so determined, shall be refunded/credited to the taxpayer. (Emphasis suppled) 25 Amount is too smal and therefore inmaterial

DECISION C.T.A. CASE NO. 7244 Page 10 from petitioner's Head Office in Sweden to be distributed to cinemas exhibiting its motion pictures throughout the Philippines. The local dnema owners reimbursed petitioner the cost of "adsales'' without mark up. As consistently adopted on a yearly basis by its external auditor SyCip Gorres Velayo and Company, the "adsales" do not form part of its gross receipts nor was it reported as deductible expenses in its annual income tax return and audited finandal statements. However, since payments by cinema owners indude reimbursement of "adsales'' at cost, the gross receipts indusive of the "adsales" were [was] subjected to withholding tax. Thus in its calendar year [CY] 2003 annual income tax return, petitioner's gross receipts is lower by an amount equal to the "adsales" of P859,914.27 when compared to its four (4) withholding tax certificates."26 The above assertion was supported by a notarized Certification27 of petitioner's witness, Ms. Irene Jose. However, this Court is not convinced with the above reasons given by petitioner in its compliance with the third requirement. Firstly, there was no spedfic mention in the Notes to Rnancial Statement in the Audited Financial Statement of their external auditor regarding the accounting treatment of "adsales" amounting to P859,914.27. Secondly, after a perusal of the Certification of Ms. Jose, there was no concrete evidence presented on the reimbursements of the "adsales". What was only presented is a monthly breakdown of the amount with no supporting documents/evidence annexed therewith proving actual reimbursements. @-- 26 Page 10 ofPetrioners Memorandum. submKted October 30, 2006, Rollo. pp. 145-157 27 Rollo, pp. 120-122

DECISION C.T.A. CASE NO. 7244 Page 11 To quote again the third requirement, "3. That the income upon which the taxes were withheld was included in the return of the recipient." Applying the above requirement here, the income upon which the taxes were withheld amounted to P170,102,350.40 however only P169,242,436.00 was induded in the return of the recipient-petitioner. Therefore, of the P8,505,118.00 total amount of taxes withheld for the year 2003, only a portion of such will be allowed to be refunded because the whole P8,505,118.00 corresponds to P170,102,350.40. Thus, only the portion that corresponds to P169,242,436.00, the income reflected in the 2003, will be allowed as available for refund. Hence, applying pro-rata, the amount of income included in the return (P169,242,436.00) over the amount of income reflected in the Certificates of Creditable Tax Withheld (P170,102,350.40) against the total taxes withheld (P8,505,118.00), the product will be P8,462,122.28 and after subtracting the amount of income tax due of P3,606,163.00 to the latter, the amount available for refund will only be P4,855,959.28, computed as follows: Taxes Withheld Taxes Withheld Available for Refund Amount of Income Reflected in the 20031TR P169.242.436.00 8,505,118.00 P8 462122 28 Amount of Income Relfected in the CertifiCates P170, 102,350.40 x Taxes Withheld Available for Refund P8,462,122.28 Less: Income Tax Due 3,606,163.00 Tax Available for Refund P4,855.959.28 Therefore, petitioner complied with the substantiation requirements with respect to its claim of excess/unutilized tax credits for the Cf 2003 in the reduced amount of P4,855,959.28 as shown above. Considering that petitioner's chose~

DEOSION C.T.A. CASE NO. 7244 Page 12 option, as indicated in its 2003 income tax return is ''To be refunded", and, its daim with the BIR filed on March 31, 2005, was to refund its excess creditable withholding taxes,28 the Court grants petitioner's claim for refund. WHEREFORE, premises considered, the Petition is hereby PARTIALLY GRANTED. Respondent is ORDERED to REFUND in favor of the petitioner the reduced amount of Four Million Eight Hundred Fifty Five Thousand Nine Hundred Fifty Nine and 28/100 pesos (P4,855,959.28) representing excess/unutilized creditable withholding taxes for taxable year 2003. SO ORDERED. ~ CAESAR A. CASANOVA Associate Justice WE CONCUR: ~u-~ ERNESTO D. ACOSTA Pr siding Justice 28 Exhibit H, Rollo. pp. 97-99

DECISION C.T.A. CASE NO. 7244 Page 13 CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certified that the ronclusions in the above Dedsion were reached in ronsultation before the case was assigned to the writer of the opinion of the Court's Division. Q___~. ~ ERNESTO D. ACOSTA Presiding Justice Chairman, First Division