CTA Case No. 3544 (Decision)

fH!PtJBLlC 0 II" H�l ~t-IIUI"Pit~P~ ~OURT OF TAX I\.PP�AL.S QU~OI~ CJ!Y WESTERN PA LAWAN TIMBER CORPORATION, Petitioner, - versus - C.T.A. CASE NO. �3544 lt l THE COMMISSIONER OF IN TERNAL REVENUE , Respondent. X- - - - - ~ - - - - - - - - X DECI S I 0 N Petitioner Western Palawan Timber Corporation seeks a review of the ~ecision of r e s pondent Commis- sioner of Internal Revenue dated July 20 , 1981 denying its protest against the assessment for withholding tax at source for t he year . l975 in t he amount of e75,374.75, incl usive of interest and 25 % surcharge. The basis of the assessment is the alleged failure of petitioner to deduct, wit hhold and remit to the Bureau of Internal Revenue in accorddnce with Section 54 of the Notional Internal Revenue Code the corresponding 15 ~ withholding tax on t he accrual of interest o1 its foreign loan from the Mitsubishi Corporation . The facts are not disput e d, both pa r ties having submitted th"s case for decisi on on the basis of the \ 2 9'7

.. I � � DECISION - .... 2 ~ CTA CASE NO. 3544 .. records and the pleadings. (p. 95, CTA records.) And the records and pleadings show thst: '� 1~ Petitioner is a corporation duly organized and existing under the laws of the Philippines with pr in- ci pal of fice address presently located at 2nd Floor, Anson Building, 2304 Pasong Tamo Extension, Makati, Metro Ma nila. (p. l, CTA records.) 2~ As appearing in the corporate annual income tax return filed by petitioner for the fiscal year ended tvlay 31, 1975, it paid interest in the amount of ~300,899,20 t o the Mitsubishi Corporation (Hongkong), Ltd., a non- resident foreign corporation. (p. 106 , BIR records.) 3. Upon in vestigation of petitioner for income and business ta x purp oses, respondentVs revenue examiner reported that petitioner did not withhold and pay the 15% tax on the i nterest paid to the Mitsubishi Corporatio n. As al l eged by subject t axpayer, "no withholding tax at so urce was made since there was no actual payment during the period only o n the la t er years " . (p. 134, BIR records . ) 4. On SepLember 12, 1980, assessment notice and letter of demand were i ssued by the Regional Director, Revenue Region No. 4-B, Manila, against petitioner for deficiency withh old ing tax at source for the year 1975 \ 290

DECISION - CTA CASE NO 3544 - ...., 7~) in the total amount of 275 , 374.75, br ok en down as follows: Tax Due � 0 9 � 8L~5 ~ 13!-t., 88 ll , 2B3 . 72 Surcharge lB,9~6.65 Intr;.rest � � � (pp. 1-2~ & 7, CTA records.) 5 � . These assesBrnent notice and letter of demand of the Regional Director were confirmed by Deputy Com- missioner Romulo Mo Villa in his letter to petitioner dated January 27, 1981. (p. 142, BIR records . ) 6. On September 29, 19 BO, petition e r throu~Jh its auditors, Messrs. Guzman , Boca ling & Co., protested the assessment and requested that the same b e withdrawn on the ground that the interes t on the foreign loan had not yet been paid at the time, and therefore petitioner had no obligation to withhold and pay the withholding tax thereon. (pp . 2 & 9-10, CTA record s; PPo 240~241, BIH records . ) 7. On July 20, 1981, respondent denied the protest on the ground that the liability to withhold and pny the i n come tax withheld at source under Section 53 of the National Internal Revenue Code attache s at the time of the accrual of the interest and not at the time of the I actual remittance thereof. (pp. 249-250, SIR records; p. 3, CTA records.) \ 293

DECISIO N -� CTA CASE NO$ 3544 Hence, this petition for review. Respondent poses lwo issues for this Court's .;; ,, consideration, the first of which is a lso the sole issue presented by petitioner: 1. Whether the liability of peti t ioner to withhold and pay the 15% t ax on the in- terest on its foreign loan from t he Mitsubishi Co poration (Hongkong), Ltd. atta ches at the time of accrual or act 1al remittan ce thereof. 2. Whether petitioner is liable for the amount of P75,374.75 as deficiency with- holding tax at so urce 9 inclu sive of s ur- charge and interest, for the f ic cal ~ea r ended May 31, 1975s Indeed, the first issue is not one of fir s t impression$ Analogous to the case at bar on thi s point by reason of the close or exact id entity of the factual setting, issue liti gated and l aw involved , i s Co ns t r uc t i o n Re s our c e s o f ~s i a , I n c o vs � Com rn i s s i one r of Inte r nal Re venue, CTA Ca s e No. 330 7, November 25, ____,- 1983, certiorari denied in Construction Resources of Asia, Inc. vs. Commi ss ioner of Internal Revenue, G.R. \ 300

DECISION .... CTA CASE NO. 3544 J' N~Jecember 10 , 19 84 , c. ~ n that case , the taxpayer invo lv ed therein, just ;, lik e petitioner he r ein , is a domestic corporation . In July, 1977, it enter ed into a contrac t with the Malaysian government for the cons truc tion of a r oad at ~) a bah. In co nn ectio n th erewi t h , the ta xpayer incurred foreign l oa ns in the amou nt of $3,9DO,OOO.DO at 9-3/16% interest per an num. For the per iod from December 7, 1977 to June 5 , 197 8, the t ax payer pa id the sum of $179,156.25 to the f or eign creditors as interest on its loans. In an invest igatio n co n d uct ed by e >u:1minerG o f the Bureau of Intern a l Revenu e, i t was ascertained that the taxpayer failed to file withholding tax ret u rn and La withhold 15% tax on interest o n for eig n loans remitte d abroad. Thu s , in a demand letter dated January 25p 1980, the Commissioner of Inte rnal Revenue sought payment of the withholding tax a t source in the amou nt of 8300,170.46~ The tax payer , in lett ers da ted November 7, 1979 and February 15, .1980, protested the assessment f o r with- holding tax at s ourc e, s tating that the actual payment of inter es t was made only on June 5 , 1978 a nds therefore, it had nothing yet to withhold in 1977. This Court rul e d that the liability of the taxpayer \ 30 ...

DECISION - CTA CASE NO, 3544 - 6- to withhold and pay the income tax vdthheld at source c a l from i nterest due to foreign corporation interest ' ) attaches at the time of th and not at the time of actual payment or remittance thereof. Because of its controlling effects on the present case, we will quote the pertinent portion of the decision. Payme nt of the withholding tax-at- source dt.re om a fo:ceign lender attaches upon r ~ccrual of the interest to be remit- ted a.ornad-. The interest accrues at the time it is earnede At such time, the tax on the interest attaches and the contractor is obligated to remit the tax to the govern- ment since it already and properly belongs to the government. Indeed, t here is no reason why the overseas contractor, peti- tioner in this case, who is based in the Philippines, should wai t until it remits the interest due the foreign lender before paying the withholding tax-at-source~ Otherwise, the government will be at the mercy of the taxpayer who may toke time in remitting the interest to the foreign lender. Petitioner herein Western PaJawon Timber Corpo- ratio n wou ld, however, seek refuge in Bayer Pharmaceu - ticals, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 2846, Mar ch 16, 1979, certiorarj denied in Commissioner of Internal Revenue vs. Court of Tax App~als, et al ., G.R. No. 7 2054, October 10 , 1 986 , whe rein this Court ruled: \ 302

DECISION - CTA CASE NO. 3544 - 7- "We, accordingly, rule that since the royalties in question could not be paid or remitted in 1972 by petitio-ner Bayer Pharmaceuticals, Inc. to non- resident foreign corporation Bayer Aktiengesellschalft , Leverkusen Bayer- merk due . to Central Bank restrictions, petitioner was under no obli~ation to withhold and pay income tax-at-source on said royalties and, therefore, it is not liable for the deficiency with- holding tax-at-source assessment of Respondent Commissioner of Internal Revenue in the amount of B36,834.73 for the year 1972." In that case, the taxpayer therein is a domestic corporation engaged in business of manufacturing and selling chemical, medicinal, pharmaceutical and bio- logical products. Sometime in 1966, the taxpayer and the Bayer Aktiengesellschalft, Leverkusen Bayerme rk (Bayer for short), a non-resident foreign corporation, ent~red into an agreement whereby the taxpayer was granted by Bayer the right to manufacture certain'phar- maceutical products from actual ingredients of Bayer, in accordance with Bayer's prescriptions, and to sell such products under the trademarks registered in the Phili r pines :n Bayer's name. In consideration of such ight, the taxpayer agreed to pay Bayer ~ f / 5% on the net sales proceeds of the licensed products. \ 303

DECISION - CTA CASE NO. 3544 - 8 ... Verification of the taxpayer ' s books of accounts by an examiner of the Bureau of Internal Revenue dis- �� closed that for the year 1972, the amount of royalty r � due from the t~xpayer to Bayer pursuant to the royalty agreement amou n ted to ~69,529o00 and the same had been set up in the books of the taxpayer as liability and \'las claimed as deduction from its gross incom.e for 1972. Bayer had likewise issued a debit memo to the taxpayer for the royaltiesG Accordingly, for failure of the tax- payer to withhold and pay the tax on the royalties, the Commissioner of Internal Revenue issued a deficiency assessment for e36,834.73 against the taxpayer through his demand letter dated November 25, 1974. The taxpayer, in a letter dated January 10, 1975, contested the assessment, arguing that it had no liability to withhold and pay the tax, since the 6bli- gation to withhold and pay the tax arises only upon actual payment or remittance. It maintain s that there was no obligation t? deduct, withhold and pay the with- holding tax in 1972 since the royalties could not be rem i tted due to Central Bank restrictions . The Com- missioner of Internal Revenue however contends that I the liability to withhold and pay the income tax withheld \ 30�1

DECISION - CTA CASE NO. 3544 - 9- at source from royalty payments to a non-resident foreign corporation is at the time of the acc~ual of said royalties and not at the time of the actual rem.it�' ' tance or payment thereof. This Court unequivocally ruled that since the royalti~~ tou ld not be r~mitted to the non-resident foreign corporatiori due to Central Bank restriction~, the time of payment of the royalties is the maturation point of the withholding duty. It bears empha~is, therefore, that if the income payable to a non-resident foreign corporation can be paid or remitted because there are no restrictions against its payment or remit- e: tax thereon attaches at the time accrual not at the time of actual remittance. Here, in the case at bar, there is no alleg~tion or showing whatsoever that petitioner was restricted y rom remitting in 1975 the interest on its foreign loan from non-resident Mitsubishi Corporation. The liability of petitioner to withhold and pay the income tax with- held at source from interest due its foreign creditor attaches therefore at the time of the accrual of said I int~rest and not at the time of actual payment or \ 300

DECISION - CTA CASE NO. 3544 �� 10 �- remittance thereof. As a matter of fact , as appearing from the corporate annual income tax :retu rn fil�ed b y I, petitioner for the fiscal year ended May 31, 1975, it �Bid interesj_;_already i n the amount of P-300 ,899.20 to the Mitsubi sh i Corporation~ (p. 10 6 1 BIR records ) It is t h us clear beyond doubt that petitioner was not restricted from remitting in 1975 the i nterest to its foreign creditor for it had already paid such interest in the taxable year involved in this case. And undoubted- ly, whether the liability of petitioner to withhold and pay the 15% tax on the interest on its foreign loan i n accordance with Section 54 of the National Internal Revenue Code attaches at the time of accrual (since petitioner was not restricted from remitting) or actual remittance theieof, the maturation point of the withholdi ng duty and payment of tax has become due ln 1975. Be cau se of peti- tio ner 1s failure to withhold and re mit to the Bureau of Internal Revenue the withholding tax on the nccr ual or payment of interest on its foreign loan in 1975, the Court agrees with respondent Commi ssioner of Internal Re venue that petitioner Western Pal owa n Timber Corpo- ration is liable for the amount of e75?3-4.75 as defi- cie~cy withholding tax at source, in clusi ve of surcharge \ 30G

DECISION - - 11 - CTA CASE NO. 35 44 it " and interest, for the fiscal year ended May 31, 1975. Nonethel e s s , petitione r alleges under pa~agraph 4 of its pe ti ti on for review th at : �� 4 � . On November 6, 19 80, petitioner remitted and paid to the B~r~au of In t er-� na l Rev e nue the amount of 8142 , 307.03 co rresp o ndi n g to the 15% tax based on th e tot a l a mount of 8948,713.55 actually remit - t e d as i terest payment to Mitsubi s hi Corporation. The interest amounting to 84 5,134.88 which wa s the b a sis of the ass essme nt by respondent forms par t of t he 8948,713.55 on whi ch is ba se d th e 1 ~ % t ax . A true c opy of the corre spond- ing o f ficial receipt for s uch pay me nt i s her e t o at tached and ma de part her eo f as Ann ex "D ". Th i s is howeve r specifically de ni e d b y re s pondent in paragrap h 3 of hi s answer: �3. He SPECIFICALLY DENI ES the al legation in paragraph 4 of th e pe ti - tion that on November 6, 1980, pet i t i on er r e mitted and paid to the Bureau of In te r- n a l Re v enue the amount of 8142,307 . 03, f or lack of knowledge or information su fficient to form a belief as to the truth t hereof. Whether .the all ege d payment was actually paid to and re - ceived by the government is stil l be ing verified. Moreover, assuming without admitting that. the said amount was actually remitt e d, he SPECIFICALLY DENIES th e averment that the same cons- titutes payment of the assessm en t for bei ng a mere opinion and/or conclusion o n the part of petitioner, and is fal s e , the truth being as stated in the here- under Special and Affirmative Defenses. And as sp e cia l and affirm at ive def e nse t h e reto respon dent contends th at : 30'7

DECISION - CTA CASE NO. 3544 - 12 - 8. The alleged receipt for 8142,307.03 (Annex "D", petition) do es not specify tha t it is in payment of the assessment involv�d in this case. '� As aptly ,stated by respondent: In spite of respondent's denial of the above factual allegations (par. 3, Answer), petitioner failed to present evidence in support thereof. The alleged xerox copy of an � official receipt showing payment of the amount of 8142,307.03, without corro- borating evidence, is not sufficient to prove that the amount of 8142,307.03 in- cludes the amount of 875,374.75 assessed against petitioner. Furthermore, assuming arguendo that petitioner has already paid the withholding tax on the interest due Mitsubishi Corpor ation in the amount of 8300,899.20, it would still be liable for the corresponding penalties incident to delinquency (surcharge and interest) since the alleged payment was made on November 6, 1980, after the issuance of the assessment on Sept em ber 12, 1980. I The Court recognizes that the burden of proof is 1 the taxpayer contesting the validity or correctness on I of an assessment to prove not o nly that the Commissioner of Internal Revenue is wrong but that he (taxpayer) is right. All presumptions are in favor of the correctness of the tax assessment. (Inter-provincial Autobus Co., Inc. vs. Collector of Internal Revenue, L-6741, January 31, 1956, 98 Phil. 290; Tan Guan vs. Court of Tax Appeals, L-23676, April 27, 1967, 19 SCRA 903.) And if the taxpayer ~ fails to present evidence or proof in support of his \ 30d

DECISION - ... 13. ~ CTA CASE NDo 3544 J" a llegations in his pe ti tion for review, ( spec ially if they are s pecifically denied in the answer /1 as '� in this case, conformably to the doctrine of the presumption in favor of the correctness of th~ tax assessment (Inter-provincial Autobus Co., I nc, vs. Collector of Internal Revenue , sup ra; Collector of Internal Revenue vs. Bohol Land Transportation, L-13099 and L-13463, April 29, 1960, 107 Phil. 965), the Court of Ta x Appeals will merely sustain the assessment against the taxp aye r (Caresosa vs. Bureau of Internal Revenue , CTA Case No. 3713, January 25, 1985 , certiorari denied in G.R. No. L-70758, August 30, 1985) . Accordingly, petitioner Western Pa1 awan Timber Corporation is ordered to pay to respondent Commis - si~ner of Internal Revenue the amo unt of 875,374.75 as withholding tax at source for 1975~ plus surc~arges and interest incident to delinquency pursuant to the provisions of Section Sl(e) of the applicable National Internal Revenue Code, as amended . WHEREFORE, the decision appealed from is her e by affirmed at petitioner~s cos ts . \ 308 ~ .

- - - - - - = = = - -=--�- DECISION - CTA CASE NO. 3544 - 14 - SO ORDERED. Quezon City, Metro Manila, June 5, 1987. '' AMANT FILLER Presiding Judge WE CONCUR: "-...... C. ROAQUIN -~;~~~atEeRo~~~ \ 310