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

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY EN BANC COMMISSIONER OF CTA EB NO. 1319 INTERNAL REVENUE, (CTA Case No. 8013) Petitioner, Present: DEL ROSARIO, PJ CASTANEDA, JR., BAUTISTA, - versus - UY, CASANOVA, FASON-VICTORINO, MINDARO-GRULLA, RINGPIS-LIBAN, and MANAHAN, JJ. EL PASO PHILIPPINES ENERGY COMPANY, INC., Promulgated: --------- =iJift- --x Respondent. MAR 0 6 2017 1.'3 t.~I'M.. )(- - - - - - - - - - - - - - - - - - - DECISION Fabon-Victorino, J.: On February 23, 2015, the Court in Division rendered a Decision 1 in CTA Case No. 8013, entitled El Paso Philippines Energy Company, Inc. (EPPECI) vs. Commissioner of Internal Revenue (CIR), the dispositive portion of which reads as follows: Assailed Decision of February 23, 2015: WHEREFORE, premises considered, the instant Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the assessments issued by respondent against petitioner for taxable year 2004 covering 1 En Bane docket, pp . 11 -48 .

DECISION CTA EB NO. 1319 deficiency income tax in the amount of P28,134,150.84, deficiency expanded withholding tax in the amount of P186,395. 72, deficiency improperly accumulated earnings tax in the amount of P35,153,053.99 and compromise penalty in the amount of P25,000.00 are hereby CANCELLED and WITHDRAWN. However, respondent's assessments covering deficiency value-added tax and final withholding tax for taxable year 2004 are hereby AFFIRMED, and petitioner is held liable to pay the modified amount of P12,120,947.06, inclusive of the twenty- five percent (25�/o) surcharge imposed under Section 248 (A) (3) of the NIRC of 1997, computed as follows: Value-added Tax BASIC TAX SURCHARGE TOTAL Final Withholding Tax p 3,258,957.25 p 814,739.31 p 4,073,696.56 Total 6,437,800.40 1,609,450.10 8,047,250.50 p 9,696,757.65 p 2,424,189.41 p 12,120,947.06 In addition, petitioner is held liable to pay: (a) Deficiency interest at the rate of twenty percent (20�/o) per annum on the basic deficiency VAT in the amount of P3,258,957.25 and basic FWT in the amount of P6,437,800.40 computed from January 25, 2005 and January 15, 2005, respectively, until full payment thereof, pursuant to Section 249 (B) of the NIRC of 1997, as amended; and (b) Delinquency interest at the rate of 20�/o per annum on the total amount of P12,120,947.06 and on the deficiency interest which have accrued as afore-stated in (a) computed from December 2, 2009 until full payment thereof, pursuant to Section 249 (C) of the NIRC of 1997, as amended. SO ORDERED. ./

DECISION CTA EB NO. 1319 The foregoing ruling was effectively affirmed when the Court in Division issued the similarly assailed Resolution 2 dated May 18, 2015, in the following fashion: WHEREFORE, in view thereof, both respondent's and petitioner's Motions for Partial Reconsideration are DENIED for lack of merit. SO ORDERED. Both unconvinced, the CIR and EPPECI elevated the foregoing Decision and Resolution via their respective Petitions for Review filed before the Court En Bane on June 5, 20153 and July 9, 2015, respectively. On December 22, 2015, EPPECI moved to withdraw its Petition for Review as it already paid the Bureau of Internal Revenue (BIR) the assessed Value Added Tax (VAT) and Final Withholding Tax (FWT) assessments, including the surcharge and interest in accordance with the ruling in the Decision dated February 23, 2015. Thus, only the Petition for Review filed by petitioner CIR remains for the determination and resolution of the Court En Bane. In his Petition, petitioner CIR prays to set aside the Decision dated February 23, 2015 and the Resolution dated May 18, 2015 and thereafter render judgment upholding the validity of the following assessments issued against EPPECI for taxable year 2004, to wit: 1. deficiency Income Tax (IT) in the amount of P28,134,150.84; 2. deficiency Expanded Withholding Tax (EWT) in the amount of P186,395. 72; 3. deficiency Improperly Accumulated Earnings Tax (IAET) in the amount of P35, 153,053.99; and J 2 En Bane docket, pp. 49-59. 3 En Bane docket, pp. 1-10.

DECISION CTA EB NO. 1319 4. compromise penalty in the amount of P25,000.00. THE FACTS AND THE PROCEEDINGS The established facts are as follows: Petitioner CIR is the Commissioner of the BIR vested with the power, among others, to collect national internal revenue taxes. He holds office at BIR National Office Building, Agham Road, Quezon City. Respondent EPPECI, on the other hand, is a domestic corporation, with principal place of business at the Ground Floor PFDA Building, Navotas Fish Port Complex, Navotas City. On August 23, 2005, respondent received from the BIR Revenue District Office (ROO) No. 43-Pasig City Letter of Authority (LOA) No. 000094624 dated August 18, 2005 for the examination of its books of accounts and other related accounting records for calendar year 2004. Attached to the said LOA is a formal request for the submission of respondent's books of accounts, financial statements, and other related accounting records and supporting documents. On September 5, 2005, respondent, in compliance with the said request, furnished the CIR with copies of its books of account, financial statements, and other pertinent accounting records and supporting documents with covering letter5 of even date. It was received by petitioner, through BIR RDO No. 43-Pasig City, on the same day. Additional documents were transmitted 6 to BIR ROO No. 43-Pasig City on November 22, 2006, as requested. Sometime in January 2007, BIR RDO No. 43-Pasig City issued a Notice 7 dated January 23, 2007, informing 4 Exhibit A-1, Rollo, pp. 903. / 5 Exhibits A and A-2, Rollo, p. 902. 6 Exhibits Band B-1, Rollo, p. 904. 7 Exhibit C, Rollo, p. 905.

DECISION CTA EB NO. 1319 respondent of its alleged tax liabilities and requ1nng it to appear before the said office for an informal conference set on February 1, 2007. Thereafter, respondent received a Revised Post Reporting Notice 8 dated October 30, 2007 from the same BIR RDO with attached Summary of Computation of Deficiency Taxes and Details of Discrepancy. On November 26, 2007, respondent filed a reply letter9, contesting the alleged deficiency taxes contained in the Revised Post Reporting Notice. On January 8, 2008, respondent received a Preliminary Assessment Notice10 (PAN) dated December 28, 2007 for its alleged deficiency IT, VAT, EWT, FWT, and IAET in the aggregate amount of P76,900,903.32, inclusive of interests, for calendar year 2004. On January 22, 2008, respondent received a Formal Letter of Demand 11 (FLO) No. 431130 dated January 15, 2008 with attached Assessment Notices, demanding payment of the deficiency tax assessments for calendar year 2004, computed as follows: I. DEFICIENCY INCOME TAX P48 641 323.00 - 1 044 141.23 Taxable Income_per return 1 154 982.00 PS6 102 300.36 Add: Disallowances/Adjustments per 4,973,138.20 56 102 300.36 17 952 736.11 investigation: 288 715.93 Unaccounted income - Unaccounted prime contractors P22,203,593.00 10 715 585.00 17 952 736.11 Professional fees not subjected to EWT 4 029 039.00 15 517 047.00 10 181 414.73 Interest expense not subjected to final 26 232 632.00 P28 134 150.84 tax Disallowed interest expense 26 232 632.00 Taxable income per investigation Income tax due thereon Less: Payments/tax credits Prior years excess tax credits claimed Creditable withholdinq tax claimed Total Less: Excess tax credits to be carried forward Deferred MCIT Deficiency income tax Add: 20% interest p.a. from 4.16.05 to 2.15.08 TOTAL AMOUNT DUE 8 Exhibit D, Rollo, pp. 908-912. 9 Exhibits E and E-1, Rollo, pp. 913-914. 10 Exhibit F, Rollo, pp. 915-918. 11 Exhibit G, Rollo, pp. 919-929.

DECISION CTA EB NO. 1319 II. DEFICIENCY VALUE-ADDED TAX 48 641 323.00 72 705 617.83 32 584 572.81 Taxable receipts per return 81 225 895.81 Add: Adjustments/discrepancies per 6 194 285.89 153 931 513.64 investigation: 1 076 276.07 15 393 151.36 Unaccounted income Gross receipts not subjected to VAT 7 270 561.95 Taxable receipts per investigation 8 122 589.40 Value-added tax due thereon 4 967 019.05 Less: Allowable input tax/payments P13 089 608.45 Payments Input tax during the year 115-'-498.20 Deficiency_ value-added tax 71 197.52 Add: 20% interest p.a. from 1.25.05 to 2.15.08 TOTAL AMOUNT DUE P186 695.72 III. DEFICIENCY EXPANDED WITHHOLDING TAX 4,973,138.20 Expanded withholding tax due thereon 20% Add: 20% interest p.a. from 1.16.05 to 2.15.08 994,627.64 TOTAL AMOUNT DUE 613 126.63 IV. DEFICIENCY FINAL WITHHOLDING TAX ON P1 607 754.27 INTEREST EXPENSE 607 823.00 (435 096 750.00) Interest expense not subjected to final 171 352 773.00 withholding tax 485 906 173.00 657 866 769.00 Final withholding tax rate 222 770 019.00 Final withholding tax on interest expense due 5 265 024.50 thereon 8,827,931.49 4 029 039.00 Add: 20% interest p.a. from 1.16.05 to 2.15.08 218 740 980.00 TOTAL AMOUNT DUE 8 140 000.00 V. DEICIENCY IMPROPERLY ACCUMULATED 210 600 980.00 EARNINGS TAX 10% Taxable income 21 060 098.00 Add: Interest income subject to final tax 14,092,955.99 Equity in net earnings of subsidiary Losses P35 153 053.99 Balance Less: Income tax payable Balance Less: Capital stock Improperly accumulated earninqs Improperly accumulated earnings rate Improperly accumulated earnings tax Add: 25% Surcharge 20% interest p.a. from 1.11.06 to 2.15.08 TOTAL AMOUNT DUE Respondent protested 12 the said FLD on January 25, 2008. In a Letter 13 dated February 15, 2008, petitioner informed respondent that its protest shall be forwarded to BIR RDO No. 43-Pasig City. On April 30, 2008, respondent received a Tax Verification Notice 14 dated April 1, 2008 stating that 12 Exhibits Hand H-1, Rollo, pp. 930-934. 13 Exhibit I, Rollo, p. 935. 14 Exhibit J, Rollo, p. 936.

DECISION CTA EB NO. 1319 Revenue Officer Marjonie Ando had been authorized to verify supporting documents in relation to the "Re-investigation (AIRT)" covering the taxable year 2004. Attached thereto was a letter15 dated April 18, 2008, requesting respondent to submit supporting documents of its protest within ten (10) days from notice. On May 19, 2009, petitioner issued a Referral Note16 to Revenue Officer (RO) Rodrigo Peralta, directing him to continue the audit of respondent's tax liabilities. On September 11, 2009, RO Peralta made a Report of Investigation 17 to the Revenue District Officer of RDO No. 43A-East, Pasig City recommending the denial of respondent's request for reinvestigation for failure to substantiate its claim for cancellation of assessment. On November 27, 2009, respondent received from BIR Revenue Region No. 7, Quezon City, Regional Task Force a Preliminary Collection Notice 18 dated October 23, 2009, demanding payment of the alleged deficiency tax assessments in the aggregate amount of P78,196,263.26. This prompted respondent to file a Petition for Review with the Court in Division on December 28, 2009 for the cancellation of the questioned assessment issued by petitioner. In his Answer 19 , petitioner claimed that since the Petition for Review was filed beyond the 30-day prescriptive period provided under Section 228 of the Tax Code, as amended, the Court in Division no longer had the competence to hear and determine the case. Nevertheless, he argued that: (1) the assessments for deficiency IT, VAT, EWT, and IAET were valid and in accordance with law; (2) the said assessments were determined and computed based on respondent's records; and (3) assessments were prima facie presumed correct and made in good faith. 15 Exhibit J-1, Rollo, p.937. 16 Exhibit 11-a, BIR Records, p. 660.L. / 17 Exhibit 14, BIR Records, p. 667.L. 1B Exhibit K, Rollo, p. 938. 19 Rollo, pp. 236-239.

DECISION CTA EB NO. 1319 On May 21, 2010, petitioner moved for a preliminary hearing on the issue of prescription 20 , but the same was denied in the Resolution dated November 2, 2010, ruling that the Petition for Review was seasonably filed. 21 Petitioner's bid for a reconsideration suffered the same fate in the Resolution22 promulgated on February 9, 2011. Trial ensued during which both parties presented evidence in support of their respective positions. On February 23, 2015, the Court in Division rendered the assailed Decision which it affirmed in the similarly assailed Resolution of May 18, 2015. As earlier stated, both petitioner and respondent elevated the matter to the Court En Bane, however, respondent subsequently withdrew its appeal on ground of payment in accordance with the assailed Decision. On April 28, 2016, the instant Petition for Review was submitted for decision.23 THE ISSUE Petitioner anchored its appeal on the sole ground to wit: THE 2nd DIVISION OF THE HONORABLE COURT OF TAX APPEALS ERRED IN CANCELLING THE ASSESSMENT ON DEFICIENCY INCOME TAX IN THE AMOUNT OF P28, 134,150.84, DEFICIENCY EXPANDED WITHHOLDING TAX IN THE AMOUNT OF P186,395. 72, DEFICIENCY IMPROPERLY ACCUMULATED EARNINGS TAX IN THE AMOUNT OF P35,153,053.99 AND COMPROMISE PENALTY IN THE AMOUNT OF P25,000.00 FOR TAXABLE 20 TSN dated May 21, 2010, Rollo, p. 379. / 21 Resolution dated November 2, 2010, Rollo, pp. 421-435. 22 Rollo, pp. 458-461. 23 Resolution dated April 28, 2016, En Bane docket, pp. 183-185.

DECISION CTA EB NO. 1319 YEAR 2004 BECAUSE THE ASSESSMENTS ARE WITH FACTUAL AND LEGAL BASES AND THEREFORE, VALID. Petitioner insists that the deficiency assessments for income tax (IT), expanded withholding tax (EWT), improperly accumulated earning tax (IAET) and Compromise Penalty are valid given their factual and legal bases. Allegedly, respondent has deficiency IT as it has unaccounted source of income revealed through some discrepancies on its income tax return and creditable withholding tax and alphalist/BIR Form No. 1601-E. Respondent's receipts as reflected in its financial statements/income tax return (FS/ITR) and as computed based on the creditable income taxes withheld from it, show a discrepancy of P48,641,323.00. This amount represents unaccounted income subject to income tax per Section 32 of the Tax Code. The same is true with the discrepancy on respondent's income payments to its prime contractors per FS/ITR and per alphalist amounting to P1,044, 141.23. On the other hand, the discrepancy on respondent's professional fee per FS/ITR and per alphalist amounting to P1,154,982.00, represents professional fees not subjected to EWT, hence, disallowed as deduction from its gross income pursuant to Section 34(K) of the Tax Code. Part of respondent's interest expense was also disallowed due to its failure to subject the same to FWT. Moreover, the disallowance of respondent's interest expense in the amount of P288,715.93 was due to its failure to apply the limitation of deductibility of interest expense as provided under the Tax Code. Further, respondent failed to withhold and remit the EWTon professional fees paid amounting to P1,154,982.00, rendering liable to pay the deficiency EWT thereof amounting to P186,385. 72, pursuant to Revenue Regulations (RR) No. 2-98, as amended. Respondent as well has improperly accumulated earnings for taxable year 2004 amounting to P210,600,980.00, precisely it was assessed of deficiency / IAET of P35,153,053.99, by virtue of RR No. 02-99, as v/

DECISION CTA EB NO. 1319 amended. The failure of respondent to file/pay its IAET warrants the imposition of P25,000.00 compromise penalty mandated under Revenue Memorandum Order (RMO) No. 1- 90. In rejecting petitioner's claim, respondent echoes the Court in Division's findings and submits that the Court in Division correctly cancelled the deficiency IT of P28, 134,150.84, the deficiency EWT of P186,395. 72, the IAET of P35,153,053.99, and the compromise penalty of P25,000.00. 24 RULING OF THE COURT EN BANC Petitioner's position in the present appeal could not be any different from his previous stance before the Court in Division. In fact, the ground relied upon by petitioner in this Petition for Review was practically truncated, if not reproduced verbatim, from his Motion for Partial Reconsideration filed on March 5, 2015. On this account and at the risk of being repetitive, the Court En Bane quotes with approval the discussion of the Court in Division in the assailed Decision pertaining to each and every item in the assessment to press the point, thus: I. DEFICIENCY INCOME TAX P28,134,150.84 Respondent (herein petitioner) computed the deficiency income tax assessment for taxable year 2004 in the amount of P28,134,150.84 as follows: Taxable income per return p - Add: Disallowances/Adjustments per investigation: P48,641 323.00 Unaccounted income Unaccounted prime contractors 1,044 141.23 Professional fees not subjected to EWT Interest expense not subjected to final tax 1,154 982.00 Disallowed interest expense Taxable income per investigation 4,973 138.20 288 715.93 56 102,300.36 p 56 102,300.36 24 EPPECI's Comment, En Bane docket, pp. 81-108.

DECISION CTA EB NO. 1319 Income tax due thereon p 17 952 736.11 Less: Payments/tax credits - Prior years excess tax credits claimed P10 715,585.00 p 17 952,736.11 15 517,047.00 10 181 414.73 Creditable withholding tax claimed P26 232 632.00 P28, 134,150.84 Total P22 203,593.00 Less: Excess tax credits to be 26 232 632.00 carried forward Deferred MCIT 4 029,039.00 Deficiency Income Tax Add: 20% Interest p.a. from 04.16.05 to 2.15.08 TOTAL AMOUNT DUE Petitioner (herein respondent) contends that the assessed deficiency income tax in the amount of P28,134,150.84 is baseless since it is based on the application of the "net worth" method. On the other hand, respondent insists that due to some discrepancies on petitioner's income tax return and creditable withholding tax and alphalist/1601-E, petitioner has unaccounted source of income. The Court will now determine the validity of the said assessment by looking into the propriety of the income imputed, as well as the expense deductions and tax credits disallowed by respondent, namely: Unaccounted income p 48,641,323.00 Unaccounted prime contractors 1,044,141.23 Professional fees not subjected to EWT 1,154,982.00 Interest expense not subjected to final tax 4,973,138.20 Disallowed interest expense 288,715.93 Excess tax credits to be carried forward Deferred MCIT 22,203,593.00 4,029,039.00 a. Unaccounted income - P48,641,323.00 Invoking Section 32 of the National Internal Revenue Code (NIRC) of 1997, as amended, respondent assessed petitioner of deficiency income tax on the alleged unaccounted income of P48,641,323.00, representing the discrepancy between petitioner's receipts as reflected in its financial statements/income tax return (FS/ITR) and as computed by respondent

DECISION CTA EB NO. 1319 based on the creditable income taxes withheld from petitioner: Receipts per investigation: P15,517,047.00 p 155,170,470.00 Creditable withholding tax 10% 106,529,147.00 Divided by the rate p 48,641,323.00 Receipts per FS/ITR Difference Petitioner asserted that respondent erred in using ten percent (10�/o) as the withholding tax rate in computing its gross receipts since the withholding tax rates applicable to its management fees vary from 10�/o to fifteen percent (15�/o). In support of its claim, petitioner presented the Certificates of Creditable Tax Withheld at Source (BIR Form No. 2307) issued by its clients for taxable year 2004 that reflected the following income payments and creditable taxes withheld therefrom: EXHIBIT PAYOR TAX CWT M Duracom Mobile Power Corp. INCOME PAYMENT RATE p 918,499.97 N East Asia Utilities Corp. p 9 184 999.70 10% 5 073 529.41 Cebu Private Power Corp. 5,294 117.65 ppp East Asia Power Resources Corp. 50 735 294.10 10% 4 233 224.81 0 TOTAL 35,294 117.67 15% P15,519 371.84 28 221 498.76 15% P123 435,910.23 For management fees from East Asia Utilities Corporation, the Court-commissioned Independent CPA found that the tax withheld was 15�/o (not 10�/o) per sales invoices examined and that income payments received amounted to P33,823,529.41 (not P50,735,294.10): EXHIBIT INVOICE NO. INVOICE TAX AMOUNT EWT NNN-7 N530N531-001 DATE RATE p 16 176 470.59 p 2,426 470.59 NNN-8 N530N531-002 8/18/2004 15% 17 647 058.82 2,647 058.82 TOTAL 8/18/2004 15% P33,823,529.41 p 5,073,529.41 The Independent CPA likewise observed that the net amount of P28,750,000.00 (P33,823,529.41 less P5,073,529.41) received by petitioner from East Asia Utilities Corporation is supported by a corporate check dated September 22, 2004.

DECISION CTA EB NO. 1319 As a result, petitioner's adjusted total gross receipts for taxable year 2004 amounted to P106,524,145.54, detailed as follows: EXHIBIT PAYOR INCOME PAYMENT M Duracom Mobile Power Corp. East Asia Utilities Corp. p 9 184,999.70 NNN-7 and NNN-8 Cebu Private Power Corp. PPP East Asia Power Resources Corp. 33 823,529.41 0 TOTAL 35 294,117.67 28 221,498.76 p 106,524,145.54 However, when the adjusted total gross receipts per withholding tax certificates and invoices are compared with that reported in petitioner's financial statements and income tax return, there remains a discrepancy of PS,001.46, computed as follows: Gross receipts per FS/ITR p 106 529,147.00 Adjusted gross receipts per withholding tax certificates Difference 106 524,145.54 p 5,001.46 In its Reconciliation of Unaccounted Income, petitioner noted of the foregoing difference, in this wise: "Note: The management fees billed to DMPC and EAPRC were in United States Dollars. As such, there are differences in foreign exchange rates used by the companies and upon payment/collection." On the other hand, the Independent CPA did not verify further the source of the difference because of the minimal amount involved. In sum, petitioner has sufficiently explained the alleged unaccounted income found by respondent, except for the amount of P5,001.46. Consequently, petitioner shall be liable to pay deficiency income tax on the unaccounted difference of P5,001.46 in line with the rule that tax assessments by tax examiners are presumed correct and made in good faith, with the taxpayer having the burden of proving otherwise. Failure to present proof of error in J

DECISION CTA EB NO. 1319 the assessment will justify the judicial affirmance of said assessment. b. Unaccounted payments to prime contractors - P1,044,141.23 Respondent's examiner compared petitioner's income payments to prime contractors as reported in its FS/ITR with those reflected in petitioner's alphalist/BIR Form No. 1601-E, and construed the difference as unaccounted source of income amounting to P1,044,141.23, broken down as follows: Payments to prime contractors: p 18,697.37 Per FS/ITR Per alphalist/BIR Forms No. 1601-E 1,062,838.60 Difference p 1,044,141.23 Petitioner explained that the difference pertains to travel expenses by company officers and several payments made by petitioner on behalf of El Paso Bangladesh, its affiliated company. Those payments were purportedly made to a travel agency and were recorded as either Travel and Transportation Expenses or Accounts Receivable and were reported in petitioner's financial statements as such. The Court finds for petitioner. A scrutiny of petitioner's Alphalist of Payees Subject to Expanded Withholding Tax as of December 31, 2004 shows the following: PAYEE ATC INCOME RATE EWT PAYMENT Travel Counsellors Inc. WC120 2% p 20,882.83 DHL Worldwide Express WC120 p 1 044 141.53 2% 211.02 Santiago, Jay Daniel R. WI010 10 551.07 10% Adfa Graph Enterprises WC120 55 000.00 2% 5,500.00 8 146.00 162.92 TOTAL P1,117,838.60 p 26,756.77 Based on the listing of Alphanumeric Tax Codes (ATC) under Revenue Memorandum Order (RMO) No. 29-98, all of the foregoing with ATC WC120 represent payments to prime contractors/sub-contractors subject to 2�/o

DECISION CTA EB NO. 1319 creditable withholding tax; while the payment to Santiago, Jay Daniel R. with ATC WIOlO represents professional fees paid to an individual, such as lawyer, CPA, engineer, etc., subject to 10�/o creditable withholding tax. The latter was not included in the computation; thus, respondent's examiner arrived at the amount of P1,062,838.60 income payments per alphalist, as shown below: PAYEE INCOME PAYMENT EWT Travel Counsellors Inc. p 1 044 141.53 p 20 882.83 DHL Worldwide Express 10,551.07 Adfa Graph Enterprises 8,146.00 211.02 TOTAL P1,062,838.60 162.92 p 21,256.77 As regards petitioner's income payments to DHL Worldwide Express and Adfa Graph Enterprises in the respective amounts of P10,551.07 and P8,146.00, totalling P18,697.07, respondent's examiner correctly found that these were reported in petitioner's FS/ITR for taxable year 2004. Petitioner's general ledger for taxable year 2004 disclosed that the amount of P10,551.07, representing courier charges paid to DHL Worldwide Express, and the amount of P8,146.00, representing cost of printing invoices and official receipts paid to Adfa Graph Enterprises, were recorded under the "Communications" and "Miscellaneous" expense accounts, respectively. However, in its FS and ITR for taxable year 2004, both amounts were reported under "Others" and "Miscellaneous" expense accounts, respectively. With reference to the income payments to Travel Counsellors, Inc. totaling P1,044,141.23, the same were reported in petitioner's FS/ITR for taxable year 2004 contrary to respondent's allegation. As aptly found by the Independent CPA, the income payments of P1,044,141.23 were recorded as either "Transportation and Travel" expense or "Accounts Receivable-EPEIC" in J petitioner's general ledger for taxable year 2004.

DECISION CTA EB NO. 1319 Petitioner's Notes to its Audited Financial Statements as of December 31, 2004 and 2003, indicate that EPEIC stands for El Paso Energy International Company - foreign affiliate of petitioner. Below is the breakdown of the amount of P1,044,141.23: NAME OF OR OR DATE AMOUNT EWT REFERENCE DEBITED TO EXH. BIR PAYEE No. 25-Aug-04 p 147 440.00 p 2 948.80 JV#080407 ACCOUNT "P", "P- RECORDS Travel 38675 TILE AS (EXHIBIT 17-Seo-04 187 841.82 3 756.84 JV#090405 FOLLOWS 1" to Counsellors, 38858 13-0ct-04 394 462.73 7 889.25 JV#100411 "P-4" 1) Inc. 39057 26-Nov-04 210 739.09 4 214.78 JV#l10410 Transportation 39409 22-Dec-04 103 658.18 2 073.16 JV#120410 and Travel "Q", Page 229 Travel 39579 P1,044,141.82 P20 882.84 "Q-1" Counsellors, Transportation to "Q- Paqe 229 and Travel Inc. Accounts 6" Paqe 239 Travel Receivable- "R", "R- Counsellors, EPEIC Paqe 239 Accounts 1" to Inc. Receivable- "R-6" Paqe 239 Travel EPEIC "5", "5- Counsellors, Accounts 1" to Receivable- "5-5" Inc. EPEIC "T", "T- Travel 2" to Counsellors, "T-6" Inc. The above income payments of P147 ,440.00 and P187,841.82 formed part of petitioner's claimed deduction for "Transportation and Travel" in the amount of P845,528.00 in its ITR for the year 2004. In its Statement of Income for the year ended December 31, 2004, petitioner reflected as part of its Expenses the amount of P969,722.00 representing "Others", which composed of the P8,403.00 Representation and Entertainment, P845,528.00 Transportation and Travel, and P115,790.00 Miscellaneous expenses. On the other hand, the income payments in the amounts of P394,462. 73, P210,739.09, and P103,658.18 formed part of the Accounts Receivable-EPEIC ending balance as of December 31, 2004 in the amount of P1,261,700.02. The latter amount was included in the Receivable of P30,273,203.00, reflected in petitioner's Balance Sheet as of December 31, 2004. As indicated in Note 3 of petitioner's Notes J to Financial Statements, the Receivables in the

DECISION CTA EB NO. 1319 amount of P30,273,203.00 is composed of the following: Related Parties p 8,038,169.00 Creditable withholding tax and others 22,235,034.00 P30,273,203.00 The Receivables from Related Parties of P8,038,169.00 consisted of the balances of the following Accounts Receivables as of December 31, 2004: Accounts Receivable - EPEAC p 6,776,468.99 Accounts Receivable - EPEIC 1,261,700.02 p 8,038,169.01 Based on the foregoing, petitioner duly reported the income payments of P1,044,141.82 in its FS/ITR for taxable year 2004. Respondent's allegation that petitioner had undeclared income arising from the alleged unreported income payments of P1,044,141.82 is without factual basis. By comparing petitioner's income payments to prime contractors/subcontractors per alphalist with those allegedly shown in petitioner's FS/ITR, respondent concluded that the difference pertains to petitioner's undeclared income. By doing so, respondent merely relied on assumptions without obtaining any evidence corroborating such findings. This is contrary to the doctrine laid down by the Supreme Court in Collector of Internal Revenue v. Benipayo, wherein it was held that: XXX XXX XXX Even if these alleged unaccounted income payments are to be treated as income, the same shall be offset by reporting the equivalent payments as expenses. Hence, no taxable income will result from the said transactions. For lack of factual basis, the deficiency income tax assessment pertaining to the alleged

DECISION CTA EB NO. 1319 undeclared income from unaccounted income payments of P1,044,141.23 should be cancelled. c. Professional fees not subjected to EWT - P1,154,982.00 Pursuant to Section 34 (K) of the NIRC of 1997, as amended, respondent disallowed petitioner's claimed deduction for professional fees in the amount of P1,154,982.00, as computed below, for its alleged failure to subject the same to EWT: Professional fees: p 1,209,982.00 Per FS/ITR 55,000.00 Per alphalist Difference p 1,154,982.00 Petitioner argued that the difference represents payments made to general professional partnerships, which are exempt from withholding tax pursuant to Section 2.57.5 (B) (4) of Revenue Regulations (RR) No. 2-98, as amended by RR No. 14-02. Petitioner submitted various documents to support its position, to wit: EXHIBIT PAYEE AMOUNT p 74 122.00 X-2 andY SGV & Co. Z and Z-2 SGV & Co. 72,770.00 AA and AA-3 SGV & Co. 621000.00 BB BB-2 to BB-11 Puno & Puno Law Offices 221,938.17 DD and DD-3 Puno & Puno Law Offices 438,549.26 EE to EE-4 Puno & Puno Law Offices FF-3 and FF-4 Siguion Reyna Montecillo & Ongsiako Law Offices 40.36 GG and GG-4 Puno & Puno Law Offices 400.00 SGV & Co. 732.93 HH-4 Atty. Editha P. Talaboc 65,000.00 II, 11-9 and 11-10 SyCip Salazar Law Offices SyCip Salaazar Law Offices 80.00 JJ-3 206,420.00 KK-3 12,929.62 TOTAL P1,154,982.34 The Court agrees with petitioner. Payments amounting to P1,154,982.34 were made to general professional partnerships, such as law offices and accounting/auditing firms. Section 22 (B) of the NIRC of 1997, as amended, defines general professional partnerships as

DECISION CTA EB NO. 1319 partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. Corollary thereto, Section 26 of the same Code provides that a general professional partnership shall not be subject to income tax. Its partners are the ones liable in their individual capacity for the payment of income tax. The Supreme Court, in the case of Rufino R. Tan v. Ramon R. Del Rosario, Jr., et a/., had the occasion to rule that the income tax is imposed not on the professional partnership, which is tax-exempt, but on the partners themselves in their individual capacity computed on their distributive shares of partnership profits. Considering that general professional partnerships are exempt from income tax, payments made to these partnerships are not subject to withholding tax pursuant to Section 2.57 .5 of RR No. 2-98, as amended by RR No. 14-02, which states: XXX XXX XXX This means that respondent's disallowance of petitioner's claimed deduction for professional fees in the amount of P1,154,982.00 has no legal or factual basis. Consequently, the deficiency income tax assessment arising from the disallowed professional fees should be cancelled. d. Interest expense not subjected to final withholding tax (FWT) - P4,973,138.20 Finding that part of petitioner's interest expense in the amount of P4,973,138.20 was not subjected to final withholding tax, respondent disallowed the same as deduction from petitioner's gross income, pursuant to Section 34 (K) of the NIRC of 1997, as amended. Below is the computation of the disallowed interest expense of P4,973,138.20: Interest expense: J PerFS I P 133,047,207.00

DECISION CTA EB NO. 1319 Per alphalist 128,074,068.80 p 4,973,138.20 Difference Petitioner disagreed stating that all of its income payments amounting to P133,047,207 .00 were subjected to the corresponding final tax and were remitted to the BIR as evidenced by its BIR Form Nos. 1601-F and 1604-CF. Further, respondent's computation is erroneous because it failed to consider petitioner's payments of interest expense in the succeeding taxable year 2005 for interest incurred in 2004; thus, explaining why the interest expense was reported in 2004 but not subjected to FWT in the same year. To account for the difference of P4,973,138.20 found by respondent, petitioner submitted a Reconciliation of Interest Expense Per books and Per BIR Form No. 1701-F 67 and the related documents. Examination of the foregoing shows that out of the P14,188,231.91 FWT remitted by petitioner to the BIR for the year 2004, only the FWT of P9,880,327.69 pertains to its interest expense for the said year, as computed below: FWT per Annual Information Return of income Taxes Withheld on Compensation and Final Withholding Taxes (BIR Form No. 1604-CF) P14,188 231.91 1) FWT on Interest Expense for taxable Less: year 2003 Paid in January 2004 P2,881 783.85 33 483.84 Paid in March 2004 2) Forex loss pertaining to FWT on 11,811.55 Interest Expense for taxable year 1,380 824.98 4,307 904.22 2003 (see computation below) 3) FWT on Management Fee Expense for p 9,880,327.69 2004 FWT per BIR Form No. 1604-CF pertaining to Interest Expense for taxable year 2004 Forex gain(loss) per schedule [Exhs. "ZZ" and "ZZ-1"] P(17 131.47) p 6 304.08 January 75.10 March April 23 234.34 June (2 857.43) October 2 983.54 Less: Forex loss pertaining to 2003 interest expense

DECISION CTA EB NO. 1319 Included in the month of Jan. 2004 per schedule US$ Amount FX Rate Php Amount (11 890.60) [Exhibit "ZZ"l 519 240.33 55.50 28 817 838.32 173 080.11 55.43 79.05 Accrued Interest thru Dec. 31, 2003 692 320.44 9 593 172.79 (11,811.55) (US$52.4M Loan) [Exhibit "KKK-l.b"] 10% 55.72900 38 411 011.11 p 18,115.63 69 232.04 (0.229) Interest for Jan. 1 - 23 2004 69 232.04 56.3350 10% 55.3861 3 841 101.11 Interest paid on Jan. 23 2004 51,924.03 3 858 232.58 56.2020 FWT rate used 23 270.63 (17 131.47) 0.1330 (11 890.60) FWT due 0.1330 (0.8159) 1 310 950.66 FWT remittance [Exhibit "ZZ"l 0.1330 159 119.56 Forex qain (loss) 1 470 070.22 Forex gain (loss) pertaining to Accrued 10% Interest thru Dec. 31 2003 147 007.02 Included in the month of March 2004 per 146 931.92 schedule [Exhibit "ZZ"l 75.10 Accrued Interest, Dec. 10, 2003 - Feb. 29, 2004 (US$2M Loan) [Exhibit "KKK-5.a"l 118.39 112.06 Accrued Interest March 1-10 2004 2 872.92 (234.40) Interest Paid on March 10 2004 26 143.55 79.05 FWT rate used 10% 75.10 FWT due 2 614.36 FWT remittance [Exhibit "ZZ"] 2 614.36 Forex qain (loss) [Exhibit "ZZ"l Accounted for as follows: 890.13 842.56 Jan. 1-31 2004 [Exhibit "KKK-2.a] Feb. 1-29 [Exhibit "KKK-3.a] March 1-10 2004 [Exhibit "KKK-5.a] 287.29 Dec. 10-31 2003 [Exhibit "KKK-2.al 594.37 2 614.35 Forex loss pertaining to FWT on interest expense for 2003 Forex gain pertaining to FWT on interest expense for 2004 Documents submitted by petitioner further show that petitioner's interest expense for taxable year 2004 amounting to P133,047,207.00 pertains to the remaining balance of drawdowns made on a loan facility from a foreign bank, Hollandsche Bank-Unie N.V. of Netherlands, totaling US$54.4 million as of December 31, 2003. The first drawdown was made on January 28, 1999 and petitioner made partial payments to the foreign bank upon availability of funds. The US$2 million loan was paid on June 20, 2004, while the US$52.4 million loan was prepaid in full on June 30, 2004 by petitioner's parent company, EPEC Netherland Holdings B.V. of Netherlands. In effect, the latter was subrogated to the rights of the foreign bank under the loan facility agreement. By virtue of subrogation, the US$52.4 million loan originally owed by petitioner to Hollandsche Bank-Unie N.V. of

DECISION CTA EB NO. 1319 Netherland became payable to EPEC Netherland Holdings B.V. of Netherlands. Considering that the US$54.4 million loan was obtained by petitioner from a non-resident foreign bank (Hollandsche Bank-Unie N.V.), and that US$52.4 million thereof was subrogated to a non-resident foreign corporation (EPEC Netherland Holdings B.V.), the imposable tax on the interest derived from said loan is 20�/o pursuant to Section 28 (B) (5) (a) of the NIRC of 1997, as amended, which states: XXX XXX XXX However, paragraphs 2(a)(ii) and 2(b) of Article 11 of the Philippines-Netherlands Tax Treaty provide for the following preferential tax rates on interest: XXX XXX XXX It is clear from the foregoing, prior to the subrogation of the US$52.4 million loan to EPEC Netherland Holdings B.V., the applicable rate on the subject interest payments is the lower rate of ten percent (10�/o), pursuant to paragraph 2 (a) (ii) of Article 11 of the Philippines- Netherlands Tax Treaty. On the other hand, upon subrogation of the US$52.4 million loan to EPEC Netherland Holdings B.V. on June 30, 2004, the applicable rate on the subject interest payments is fifteen percent (15�/o), pursuant to paragraph 2 (b) of Article 11 of the Philippines-Netherlands Tax Treaty. Therefore, the FWT due on the P133,047,207 .00 interest expense claimed by petitioner for taxable year 2004 amounted to P16,318,128.04, as computed below: FINAL WITHHOLDING TAX EXH. JV NO. DATE PARTICULARS 2004 RATE AMOUNT DUE KKK-1 010411 1/23/2004 Jan1-23 $52.4M loan p 1 055 248.99 KKK-2 010413 1/31/2004 p 10 552 489.87 10% KKK-2 010413 1/31/2004 Jan1-31 $2M loan Jan24-31 $52.4M loan 551 601.72 10% 55 160.17 3 671 252.99 10% 367 125.30

DECISION CTA EB NO. 1319 KKK-3 020406 2/29/2004 Feb1-29 $2M loan 522 121.72 10% 52 212.17 KKK-3 020406 2/29/2004 Feb1-29 $52.4M loan 13 415 968.74 10% 1 341 596.87 KKK-4 030405 3/10/2004 10% KKK-5 030408 3/31/2004 Mar1-10 $2M loan 175 031.51 10% 17 503.15 KKK-5 030408 3/31/2004 Mar1-31 $52.4M loan 14 207 619.56 10% 1 420 761.96 KKK-6 040407 4/23/2004 Mar10-31 $2M loan 10% KKK-7 040416 4/30/2004 Aor1-23 $52.4M loan 368 156.76 10% 36 815.68 KKK-7 040416 4/30/2004 Mar31-Aor30 $2M loan 10 547 423.33 10% 1 054 742.33 KKK-8 050404 5/31/2004 Aor24-30 $52.4M loan 10% KKK-8 050404 5/31/2004 524 823.40 10% 52 482.34 KKK-9 060402 6/10/2004 May1-31 $2M loan 3 248 146.39 10% 324 814.64 Subtotal Mav1-31 $52.4M loan 534 725.73 53 472.57 June1-10 $2M loan 14 285 587.66 1 428 558.77 174.111.86 17 411.19 tt 72 779 061.24 tt 7,277,906.13 KKK-10 060405 6/30/2004 June1-30 $52.4M loan p 14 254.490.72 15% p 2 138 173.61 KKK-11 070409 7/31/2004 Jul1-31 $52.4M loan 7 197 333.59 15% 1 079 600.04 KKK-12 080411 8/31/2004 Aug1-31 $52.4M loan 6 856.461.75 15% 1 028 469.26 KKK-13 090418 9/30/2004 Seo1-25 $52.4M loan 5 661 894.69 15% 849 284.20 KKK-14 090418 9/30/2004 Seo26-30 $52.4M loan 1 424 892.94 15% 213,733.94 Add'l Accrual of on Subtotal 100417 10/20/2004 interest for Jui1-Seo25 1 986 302.16 15% 297 945.32 Total 100421 10/31/2004 Octl-31 $52.4M loan 7 852 003.81 15% 1 177 800.57 110411 11/30/2004 Nov1-30 $52.4M loan 7 542 540.90 15% 1 131,381.14 120414 12/31/2004 Dec1-25 $52.4M loan 5 790 893.15 15% 120414 12/31/2004 Dec26-31 $52.4M loan 1 701 332.38 15% 868,633.97 ,. 60 268,146.09 15% 255 199.86 tt133 047.207.33 p 9 040 221.91 P16 318 128.04 After comparing the FWT due of P16,318,128.04 against the FWT remittances of P9,880,327.64, the Court finds petitioner liable for deficiency FWT of P6,437,800.40 on its interest expense of P45,003,324.53, computed as follows: EXHIBIT JV NO. DATE FWT DUE FWT REMITTED FWT STILL DISALLOWED KKK-1 10411 1/23/2004 p 1 055 248.99 p 959 317.26 DUE INTEREST KKK-2 10413 1/31/2004 (FWT STILL KKK-2 010413 1/31/2004 55 160.17 so 145.61 p 95931.73 KKK-3 020406 2/29/2004 367 125.30 5 014.56 DUE DIVIDED KKK-3 020406 2/29/2004 333 750.27 BY APPLICABLE KKK-4 030405 3/10/2004 52,212.17 47 465.61 33 375.03 KKK-5 030408 3/31/2004 1 341 596.87 4 746.56 RATE) KKK-5 030408 3/31/2004 1 219 633.52 KKK-6 040407 4/23/2004 17 503.15 15 911.96 121.963.35 KKK-7 040416 4/30/2004 1 420,761.96 1 591.19 KKK-7 040416 4/30/2004 1 291 601.78 KKK-8 050404 5/31/2004 36 815.68 33 468.80 129,160.18 1 054,742.33 3.346.88 958 856.67 52,482.34 47 711.22 95 885.66 324,814.64 4,771.12 295 286.04 53 472.57 48 611.43 29.528.60 4 861.14

DECISION CTA EB NO. 1319 KKK-8 050404 5/31/2004 1 428 558.77 1 298 689.79 129 868.98 KKK-9 060402 6/10/2004 17,411.19 Subtotal 15 828.35 1 582.84 p 7,277 906.13 p 6,616,278.31 p 661,627.82 p 6,616,278.20 KKK-10 060405 6/30/2004 p 2 138 173.61 p 1 295 862.79 p 842 310.82 KKK-11 70409 7/31/2004 1 079 600.04 719 733.36 359 866.68 KKK-12 080411 8/31/2004 1 028 469.26 685 646.18 342 823.08 KKK-13 090418 9/30/2004 849 284.20 566 189.47 283 094.73 KKK-14 090418 9/30/2004 213 733.94 14 733.16 213 733.94 100417 10/20/2004 297 945.32 283 212.16 Subtotal 100421 10/31/2004 1 177 800.57 p 3,282 164.96 110411 11/30/2004 1,131 381.14 1,177 800.57 120414 12/31/2004 868 633.97 1,131 381.14 120414 12/31/2004 255 199.86 868 633.97 p 9,040 221.91 255 199.86 38 387,046.33 P5,758,056.95 Total P16 318,128.04 p 9,898,443.27 P6,419,684.77 P45 003,324.53 Forex gain pertaining to FWT on interest expense for 2004 (18 115.63) 18,115.63 Net Amount P16 318,128.04 P9 880,327.64* P6,437,800.40 P45 003,324.53 *The P.OS difference between the P9,880,327.69 FWT computed earlier and as computed above IS due to rounding-off. For failure to withhold and remit the corresponding FWT of P6,437,800.40, petitioner cannot claim the interest expense of P45,003,324.53 as deduction from its gross income for taxable year 2004, pursuant to Section 34 (K) of the NIRC of 1997, as amended, which states that: XXX XXX XXX e. Disallowed interest expense P288,715.93 Petitioner's ITR for taxable year 2004 showed interest income subjected to final tax in the amount of P607,823.00. Pursuant to Section 34 (B) of the NIRC of 1997, as amended, respondent applied the limitation of deductibility of interest expense and disallowed the amount of P288,715.93, computed as follows: Interest income subjected to final tax P 607,823.00 Disallowed interest expense (P607,823.00/80% x 38%) P288,715.93 It can be inferred from the foregoing that respondent assumed that the final tax rate on petitioner's interest income is 20�/o. Petitioner

DECISION CTA EB NO. 1319 argued that the foregoing computation is erroneous because the applicable final tax rates on its interest income for the year 2004 are 7.5�/o (for US dollar accounts) and 20�/o (for Philippine peso accounts). Petitioner alleged that it had computed the interest expense limitation based on the amounts of interest income earned from its peso and US dollar accounts. The Court agrees with petitioner. Section 34 of the NIRC of 1997, as amended, prior to its amendment under Republic Act No. 9337, provides that the amount of interest that a taxpayer can deduct from his taxable gross income should be reduced by an amount equal to 38�/o of his interest income subjected to final tax, thus: XXX XXX XXX For taxable year 2004, petitioner earned interest income in the amount of P607,823.34 (net of withholding tax) on its US dollar and Philippine peso savings accounts as evidenced by the various journal vouchers, entries in petitioner's Security Bank US dollar and peso savings accounts passbooks, Security Bank's Confirmations of Purchase, as well as Confirmations of Sale Without Recourse of Fixed Rate Treasury Notes (FXTN), and petitioner's Temporary Investment Advice and letters to Security Bank Corporation. Under Section 27 (D) (1) of the NIRC of 1997, as amended, the interest income derived by a domestic corporation from a depositary bank under the expanded foreign currency deposit system is subject to a final tax at the rate of either seven and a half percent (7.5�/o) for US dollar accounts and twenty percent (20�/o) for Philippine peso accounts. Consequently, petitioner's non-deductible interest expense for taxable year 2004 amounted to P274,557 .00, as correctly computed by petitioner, detailed as follows:

DECISION CTA EB NO. 1319 EXHIBIT DATE . AMOUNT OF DIVISOR LIMITATION NON- On US Dollar Accounts EARNED INTEREST RATE DEDUCTIBLE LLL-1 and LLL-l.b 92.5% LLL-2 and LLL-2.b 3/31/2004 (NET OF FWT) 92.5% INTEREST LLL-6 and LLL-6.a 6/30/2004 92.5% EXPENSE LLL-7 and LLL-7.c 9/20/2004 2 544.67 92.5% LLL-9 and LLL-9.a 9/30/2004 9 731.40 92.5% 38% 1 045.38 LLL-11 and LLL-11.a 10/19/2004 20 861.90 92.5% 38% 3 997.76 LLL-12 and LLL-12.a 11/18/2004 4 934.71 92.5% 38% 8 570.29 LLL-13 and LLL-13.c 12/20/2004 67 650.07 92.5% 38% 2 027.23 12/29/2004 67 092.27 38% 27 791.38 Subtotal 38 498.40 38% 27 562.23 9 266.19 38% 15 815.56 220,579.61 38% 3 806.65 90,616.49 On Peso Accounts 3/31/2004 10 391.83 80% 38% 4 936.12 6/30/2004 7 696.26 80% 38% 3 655.72 LLL-1 and LLL-l.a 7/9/2004 80% 38% 18 366.67 LLL-2 LLL-2.a LLL-3.a 7/19/2004 38 666.67 80% 38% 7 713.02 8/19/2004 16 237.93 80% 38% 27 796.25 LLL-3 and LLL-3.a 9/30/2004 58 518.42 80% 38% 3 589.96 LLL-3.d and LLL-4 10/812004 80% 38% 37 825.37 LLL-5 to LLL-S.c 7 557.81 LLL-7 to LLL-7.b 11/10/2004 79 632.35 80% 38% 75 735.06 LLL-8 and LLL-8.a 12/29/2004 80% 38% 4 322.61 LLL-10 to LLL-10.d, 159 442.23 Subtotal 9 100.23 183,940.77 LLL-11.a LLL-13 to LLL-13.b 387,243.73 Total 607,823.34 274,557.26 Examination of petitioner's ITR for taxable year 2004 shows that petitioner's claimed deduction for interest expense amounted to P132,772,650.00, an amount lower by P274,557 .00 when compared with the interest expense of P133,047,207.00 reflected in its audited FS for the same year. Clearly, petitioner did not claim all of its reported interest expense by applying the limitation, as provided by the NIRC of 1997, as amended. As a result, the disallowance of petitioner's interest expense in the amount of P288,715.93 should be cancelled. f. Excess Tax Carried Over to Succeeding Year - P22,203,593.00 Respondent disallowed petitioner's excess tax credits for taxable year 2004, but gave no explanation in the Details of Assessment/ Discrepancies. The Court could only surmise

DECISION CTA EB NO. 1319 that the excess tax credits carried over to the succeeding year was disallowed in order to recapture the tax benefit realized by petitioner in carrying the said amount to the succeeding year. However, it was improper for respondent to disallow the said excess tax credits because any tax benefit derived by petitioner from the carry-over of the said amount redounds to the succeeding year 2005. Since the tax benefit will be in the succeeding year, at most, petitioner may only be assessed in the said succeeding year. g. Minimum Corporate Income Tax (MCIT) P4,029,039.00 Respondent likewise disallowed petitioner's MCIT payment in the amount of P4,029,039.00 without further explanation. Considering that the MCIT will be credited against the normal income tax for the three (3) immediately succeeding taxable years, pursuant to Section 27(E)(2) of the NIRC of 1997, as amended, its benefit will redound on the succeeding years. Thus, it is inappropriate to disallow the same for such is beyond the scope of the present assessment. In fine, notwithstanding the P45,008,325. 99 adjustments on petitioner's taxable income, representing the sum of petitioner's unaccounted income in the amount of P5,001.46 and disallowed interest expense in the amount of P45,003,324.53, petitioner still incurred a net loss in the amount of P390,088,424.04. Thus, petitioner's income tax liability was at the MCIT rate of two percent (2�/o) based on its gross income for taxable year 2004. However, petitioner's MCIT liability of P4,029,039.00 per its 2004 ITR shall be adjusted to P4,029,139.21 to reflect the unaccounted income of P5,001.46. Since petitioner's income tax credits were more than sufficient to cover its MCIT liability of P4,029,139.21, petitioner is not liable to pay

DECISION CTA EB NO. 1319 any deficiency MCIT for taxable year 2004, as shown below: Sales/Revenues/Receipts/Fees P636 548 709.00 p 106 529 147.00 Less: Cost of Sales/Services 45 003 324.53 9 205 500.00 Gross Income from Operation Add: Non-operating_ and Other Income p 97 323 647.00 Total Gross Income 104 128 312.00 Add: Unaccounted income Adjusted Total Gross Income p 201 451 959.00 Less: Deductions 5 001.46 Less: Disallowed Interest Expense p 201 456 960.46 Adjusted Net Loss 591 545 384.47 P(390 088 424.01) Minimum Corporate Income Tax Due p 4 029 139.21 Less: Tax Credits p 10 715,585.00 Prior Year's Excess Credits 11 286 147.00 26 232 632.00 Creditable Tax Withheld for the First Three 4 230 900.00 P{22,203,492.79) Quarters Creditable Tax Withheld for the Fourth Quarter Excess Tax Credits XXX XXX XXX III. DEFICIENCY EWT - P186,395.72 Upon investigation, it was found by respondent that petitioner failed to withhold and remit the EWT on professional fees paid. Thus, pursuant to Revenue Regulations No. 2-98, respondent assessed petitioner for deficiency EWT in the amount of P186,695. 72, inclusive of interest, computed as follows: Professional fees per FS/ITR p 1,209 982.00 Professional fees per AL/1601-E 55 000.00 Professional fees not subjected to EWT EWT rate p 1 154 982.00 EWT due thereon 10% Add: 20% interestp.a. from 01.16.05 to 2.15.08 TOTAL AMOUNT DUE p 115 498.20 71 197.52 p 186,695.72 As discussed and determined earlier [see discussion under deficiency income tax assessment, item I(c)], the subject income payments amounting to P1,154,982.00 were made to general professional partnerships, which are exempt from income tax, pursuant to Section 26 in relation to Section 22(8) of the

DECISION CTA EB NO. 1319 NIRC of 1997, as amended, and consequently, to withholding tax, as provided for under Section 2.57 .5 of RR No. 2-98, as amended by RR No. 14-02. Therefore, respondent's deficiency EWT assessment on the said income payments shall be cancelled. XXX XXX XXX V. DEFICIENCY IMPROPERLY ACCUMULATED EARNINGS TAX - P35,153,053.99 xxx. Petitioner was assessed of improperly accumulated earnings tax in the total amount of P21,060,098.00, computed thus: Taxable income p 607 823.00 p (435 096 750.00) Add: Interest income subject to final tax 171,352 773.00 485,906 173.00 657,866 769.00 Equity in net earnings of subsidiary p 222,770 019.00 Losses Balance 4,029 039.00 Less: Income tax payable p 218,740 980.00 Balance Less: Capital stock 8,140 000.00 Improperly accumulated earninqs p 210,600 980.00 Improperly accumulated earnings rate Improperly accumulated earnings tax 10% p 21,060,098.00 As correctly pointed out by petitioner, it cannot possibly have any improperly accumulated earnings, because it has a deficit of P3,707,998,535.00; thus, no earnings to speak of, much more accumulation thereof. Petitioner's Statements of Changes in Stockholders' Equity (Capital Deficiency) show that it has sustained a capital deficiency from the year 2002 until 2004. Therefore, respondent's assessment against petitioner for deficiency improperly accumulated earnings tax of P35,153,053.99 is devoid of factual basis and should be cancelled. VI. COMPROMISE PENALTV - P25,000.00 For alleged non/late/filing/payment of improperly accumulated earnings tax, respondent imposed compromise penalty

DECISION CTA EB NO. 1319 against petitioner for taxable year 2004 in the amount of P25,000.00. Pursuant to RMO No. 01-90, as amended by RMO No. 19-07, compromise penalties are only suggested in settlement of criminal liability, and may not be imposed or exacted on the taxpayer in the event that a taxpayer refuses to pay the same. Thus, compromise penalty implies mutual agreement between the taxpayer, on one hand, and the BIR, on the other. Absent any showing that petitioner consented to the compromise penalties, the same should not be imposed. Accordingly, respondent's imposition of compromise penalties, without the consent of petitioner, cannot be sustained. (Citations omitted) WHEREFORE, the Petition for Review filed by the Commissioner of Internal Revenue on June 5, 2015, is hereby DENIED, for lack of merit. Accordingly, the assailed Decision and Resolution dated February 23, 2015 and May 18, 2015, respectively, are AFFIRMED. SO ORDERED. We Concur: ROMAN G. DE[ ROSARIO Presiding Justice Q,~~c.~~,9... LOVELL (.BAUTISTA JffANITO C. CASTANEDf<, JR. Associate Justice Associate Justice

DECISION CTA EB NO. 1319 CAES~ASANOVA Concurri~ (with ER~mnfP.issenting Opinion) UY Associate Justice Associate Justice ~ W.M~~~b~ Q'!4, ~ ~ . .(_I MA. BELEN M. RINGPIS-LIBAN CIELITO N. MINDARO-GRULLA Associate Justice Associate Justice (1~7~~ CATHERINE T. MANAHAN Associate Justice CERTIFICATION Pursuant to Section 13, Article VIII of the Constitution, 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. ROMAN G. DE ROSARIO Presiding Justice

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY ENBANC ********* COMMISSIONER OF INTERNAL CTA EB No. 1319 REVENUE, (CTA Case No. 8013) Petitioner, Present: -versus- DEL ROSARIO, P.J., CASTANEDA, JR., BAUTISTA, UY, CASANOVA, FASON-VICTORINO, MINDARO-GRULLA, RINGPIS-LIBAN, and MANAHAN , JJ. EL PASO PHILIPPINES Promulgated: ENERGY COMPANY, INC., Respondent. MAR 0 6 2017 ~~ ~ � X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ~ X CONCURRING AND DISSENTING OPINION UY, J.: With all due respect to the learned ponente and my other colleagues, while I concur on the affirmation of the ruling of the Second Division of this Court that El Paso Philippines Energy Company, Inc. is only liable for value-added tax (VAT) and final withholding tax (FWT), plus the corresponding 25% surcharges imposed thereon , for calendar year 2004, I dissent on the imposition of the deficiency interest thereon on the basis of Section 249(8) of the National Internal Revenue Code (NIRC) of 1997, and the inclusion of said deficiency interest in the computation of delinquency interest under Section 249(C) of the same Code. Section 249 of the NIRC of 1997 reads: "SEC. 249. Interest. -

CONCURRING AND DISSENTING OPINION CTA EB No. 1319 Page 2 of4 (A) In General. - There shall be assessed and collected on any unpaid amount of tax, interest at the rate of twenty percent (20%) per annum, or such higher rate as may be prescribed by the rules and regulations, from the date prescribed for its payment until the amount is fully paid. (B) Deficiency Interest. - Any deficiency in the tax due, as the term is defined in this Code, shall be subject to the interest prescribed in Subsection (A) hereof, which interest shall be assessed and collected from the date prescribed for its payment until the full payment thereof. (C) Delinquency Interest. - In case of failure to pay: XXX XXX XXX (3) A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the Commissioner, there shall be assessed and collected on the unpaid amount, interest at the rate prescribed in Subsection (A) hereof until the amount is fully paid, which interest shall form part of the tax." (Emphases supplied) Based on the foregoing Section 249(B), the "Deficiency Interest" shall be imposed on '1a]ny deficiency in the tax due, as the term is defined in this Code", i.e., as the term "deficiency" is defined in the NIRC of 1997. Relative thereto, an examination of the said Code discloses that there are only three (3) instances where it defines the term "deficiency", and this relates only and respectively to three (3) types of internal revenue taxes, namely, income tax, estate tax, and donor's tax, pursuant to Sections 56(B), 93 and 104 of the NIRC of 1997, viz: "SEC. 56. Payment and Assessment of Income Tax for Individuals and Corporations.- XXX XXX XXX (B) Assessment and Payment of Deficiency Tax.- After the return is filed, the Commissioner shall examine its and assess the correct amount of the tax. The tax or deficiency income tax so discovered shall be paid upon

CONCURRING AND DISSENTING OPINION CTA EB No. 1319 Page 3 of4 notice and demand from the Commissioner. As used in this Chapter1, in respect of a tax imposed by this Title2, the term 'deficiency' means: (1) The amount by which the tax imposed by this Title exceeds the amount shown as the tax by the taxpayer upon his return; but the amount so shown on the return shall be increased by the amounts previously assessed (or collected without assessment) as a deficiency, and decreased by the amount previously abated, credited, returned or otherwise repaid in respect of such tax; or (2) If no amount is shown as the tax by the taxpayer upon his return, or if no return is made by the taxpayer, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency; but such amounts previously assessed or collected without assessment shall first be decreased by the amounts previously abated, credited, returned or otherwise repaid in respect of such tax." (Emphasis supplied) "SEC. 93. Definition of Deficiency. -As used in this Chapter-3, the term 'deficiency' means: (a) The amount by which the tax imposed by this Chapter exceeds the amount shown as the tax by the executor, administrator or any of the heirs upon his return; but the amount so shown on the return shall first be increased by the amounts previously assessed (or collected without assessment) as a deficiency and decreased by the amounts previously abated, refunded or otherwise repaid in respect of such tax; or (b) If no amount is shown as the tax by the executor, administrator or any of the heirs upon his return, or if no return is made by the executor, administrator, or any heir, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency; but such amounts previously assessed or collected without assessment 1 Chapter IX- RETURNS AND PAYMENT OF TAX. 2 Title II- TAX ON INCOME. 3 CHAPTER I- ESTATE TAX (under TITLE III- ESTATE AND DONOR'S TAXES).

CONCURRING AND DISSENTING OPINION CTA EB No. 1319 shall first be decreased by the amounts previously abated, credited, returned or otherwise repaid in respect of such tax." (Emphasis supplied) "SEC. 104. Definitions. - xxx The term 'deficiency' means: (a) the amount by which the tax imposed by this Chapter-4 exceeds the amount shown as the tax by the donor upon his return; but the amount so shown on the return shall first be increased by the amounts previously assessed (or collected without assessment) as a deficiency, and decreased by the amounts previously abated, refunded or otherwise repaid in respect of such tax, or (b) if no amount is shown as the tax by the donor upon his return, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency, but such amounts previously assessed or collected without assessment shall first be decreased by the amounts previously abated, credited, returned or otherwise repaid in respect of such tax." (Emphasis supplied) Such being the case, the deficiency interest under Section 249(8) should be applied only whenever there is a deficiency income tax, a deficiency estate tax, and a deficiency donor's tax. For this reason, in this case, no deficiency interest under Section 249(8) should be imposed on the deficiency VAT and deficiency FWT against El Paso Philippines Energy Company, Inc. Correspondingly, the computation of the delinquency interest imposed under Section 249(C) should not as well include the said deficiency interest. Correspondingly, I vote for the DELETION of: (1) the imposition of deficiency interests on El Paso Philippines Energy Company, Inc.'s basic deficiency VAT in the amount of P2,958,405.41 and basic deficiency FWT in the amount of P6,437,800.40, both at the rate of 20% per annum; and (2) the inclusion of said deficiency interests in the computation of the delinquency interest to be imposed on the same basic deficiency VAT and basic deficiency FWT. ER~P.UY Assoc1ate Justice 4 CHAPTER II - DONOR'S TAX (under TITLE III - ESTATE AND DONOR'S TAXES).