CTA Case No. 5238 (Decision)

\ REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY THE COCA-COLA EXPORT CORPORATION, Petitioner, - versus - C.T.A. CASE NO. 5238 COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - - - DECISION The issue presented for our consideration is whether or , not petItIoner's cIa i med net foreIgn exchange Ioss in cthe--�� amount-of' ?16,753,404.00 for the year 1992, falls ',,:. . .. ,�w-Ithin -the-defJ,n,l..tlon of "losses actually sustained" as a deductible Item under Section 29 (d) (2) of the Tax Code, , which- wl I I entitle petitioner to the refund or tax credit of Its erroneously <over> paid income tax for the year �1992. In the~ amount of- P5, 863-,691.00. �PetItIoner - Is a - corporatIon organ Ized and exIsting under the laws of the State of Delaware, U.S.A. and is duly I lcensed to do business In the Phi I ippines through Its Phi I ippine Branch speclfical ly in the manufacture and ., sale of beverage base and concentrates. It employed the accrual method of accounting wherein it recognizes income when earned and expenses when Incurred regardless of when cash Is received or disbursed. On Apr I I 141 1993, petitioner filed its Annual Income Tax Return for the calendar year 1992 and paid the respondent its tax due for the said period In the amount of -P92,021,284.00 <Exh. A to A-57). The contents of said �.return, Is summarized as follows:_

DECISION C. T .A �. CASE� NO. 5238 - 2- Gross Income P1,960,392,477.00 Less:. Deductions 639,781,176.00 Taxable Net Income P1,320,611,301.00 -Tax-Due p 462,213,955.00 Less: Quarterly payments: 370,192,671.00 p 92,021,284.00 1-st Qua~ter P112,556,729 ~-2n~ Quarter 153,880,670 . 3rd Quarter 103,755,272 -Tax Payable {Refundable) On November 19, 1993, petitioner filed with the respondent an AMENDED Annual Income Tax Return for the calendar year ending December 31, 1992, showing a -ref-undable amount of-.�� P5,863,691.00 <Exh. B to B-57), on ~ .,.. ,grounds,... that in the original Annual Income Tax Return it .. filed on April 14, 1993, it omitted ~o deduct from Its .gross-� Income the - foreIgn exchange Ioss It sustained in 1992 amounting to P16,753,404.00. In summary, the said �AMENDED,, Income tax .. return contains the following: ...Gross Income P1,960,392,477.00 ~-~Less:- Deductions 656,534,580.00 -�-Taxable-Net Income P1,303,857,~97.00 --Tax. Due ... 456,350,264.00 Less:� Quarterly Payments: .ts,t Quarter P112,556,729.00 - ...2nd .,Quar-ter.; ... 153,880,670.00 .- .3r,d Quarter 103,755,272.00 4th Quarter 370,192,671.00 462,213,955.00 <�Annua 1� Return> .92, 021! 284.00' ,-.Tax Payable <Refundable) .: .. p . { 5 1 8 6 3 ' 6 9 1 � 0 0 ) On October 19, 1994, petitioner filed with the .respondent Its administrative claim for refund or tax .d. credit of the ~forementioned amount-- of- P5,863,691.00 , allegedly representing Its erroneously {over> paid income 1J65

DECISION C.T.A. CASE NO. 5238 - 3- � tax for the calendar year ending December 31, 1992 (Exh. c. to C-2 >. ~he aforesaid claim for refund or tax credit was not acted upon by the respondent, hence, on Apri I 12, 1995, pe~ltloner fl led with this Court the Instant petition for review. �Petitioner presents the propositions as reason for the �overpayment .was that In 1989, 1990 and 1991 its Head Off.lce.. In Atlanta, Georgia, USA bi lied the Phi I ippine branch Its pro-rated~share of Head Office expenses. This �Was properly accrued In the books of the petitioner for said years . These I iabl I ities were paid by the . ��Ph I I I pp I ne branch on Iy. In. January and March of 1992. However, �due to the devaluation of Philippine peso in 1992, ~foreign currency loss arose as it has to pay more pesos In buying U.S. dol Iars to pay its Home Office its pro-rata . share of the home office expenses. .,Thus It reasoned, that said foreign exchange loss in the amount � of p.t.6,753,404.00 was actually sustained in 1992, the -year. of Its. payment and the year the transactions were c I osed and comp Ieted, and not in 1989, 1990, 1991, hence, .should be deductible from Its gross income for 1992. Petitioner stressed that since Its taxable income for 1992 was overstated due to understatement of its �deduction from gross income or its failure to include foreign exchange loss as one of its deductible items from l3G~

) 'I CDECISION C.T~A~ �CASE-NO~ 5238 - 4- ,, gross Income for 1992, it claimed that it is entitled to a refund or Issuance of a tax credit certificate in the amount� of P5,863,691.00, as computed and shown in its AMENDED Annual Income Tax Return for 1992. Respondent in her Answer, raises the defenses that <1�>� � t he pet I t Ion has no c au s e of act I on , ( 2 > I o s s e s t o be deductible must be actually sustained during� the year, ...... ,. incurred .In bus Iness or trade x x x, thus Iosses in' 1990 and 1991 cannot be claimed in the taxable year 1992, (3) -petitioner did not show that the losses claimed were not compensated for by insurance or otherwise, ( 4) losses claimed were not evidenced by a closed and completed transaction, (5) claims for refund or tax credit are construed strictly against the clarmant, the same being In the nature of exemption from taxes, and (6) petitioner fal led . to show that it Is exempt from the payment of the subject tax under clear and unmistakable terms found in the..,, statute . .As... earlier adverted to at the outset, the issue to be. resolved by the Court is whether or not petitioner's cIa Imed . foreIgn e.xchange I oss in the- amount of '" P-16,753,404.00 for the year 1992 fal Is within the �.�defInItIon� of "I osses actua I Iy sustaIned and charged off within the taxable yea~" as a deductible item und~r Sect I on � 2 9, <d > (2) of the Tax Code, which wl I I entitle petitioner. to the refund-or tax credit of Its erroneously l 0'"i cf..�'- ,I...

DECISION C~~.A. CASE NO. 5238 � - 5. - (over) paid income tax for the year 1992 in the amount of P5., 863�, 69.1. 00. As' �mentioned 1n the preceed I ng paragraph., Sec. 29 (d) , (2)� of the Tax Code Is pertinent to the resolution of the� case at bar, hence, It Is quoted hereunder for easy \,. reference. Section 29. Deductions from gross lncome.-x x x. (d) Losses-(1) .sy individuals.-x x x. (2) By corporation.-ln the case of a ... corporatIon,�~ a I I I asses actua I I y sustained. and charged ~ff within the taxable year and not compensated for by insurance or otherwise. (underscoring supplied) XXX X X X. .. we� find nothing ambiguous nor obscure in the language of Section 29 (d) (2) of the Tax Code, insofar as�. the same is brought. to bear upon the circumstances of the petItIoner In the �case at bar. The provIsion Itse If ... furnishes. the.best means of Its own exposition ~hat alI losses actual Jy sustained during the taxable year not compensated by Insurance or otherwise are deductible from .gross Income. It does not specify that the Joss must be the result of transactions in the taxable� year only. What the Jaw require~ Is that the Joss must be actually sustaIned.. In the taxab Ie year and not compensated by Insurance or otherwise. In other words, what is needed to be ent it Ied to a Ioss deduct Ion, is. for the taxpayer

.DECISION C.T~A. CASE NO. 523~ - 6- to prove that a closed and completed transaction sets the loss In the taxable year or In the year claimed and It is not� compensated by Insurance or otherwise. A closed and completed transaction Is one in which the fa~ts Indicate the �transaction sufficiently final to ascertain that a \,. Ioss .� � has� occured. (MERTENS Law of Federal Income Taxation, Chapter 28, Page 3). Thus, applying the latin max Im -"Ubi lex non distlnguit nee nos distinguere debemos", where the law does not distinguish, we should . not distinguish, the� loss which is the result of a foreign exchange fluctuation ascertained and realized .durIng the taxable period and not compensated by Insurance or otherwise, except those provided In Sec. �30( b) of the Tax Code, Is deduct Ib Ie from gross Income of said taxable period, albeit It may relate to ~ransactions of .prior years � ., ., such . provIsIon of law was intended to rei ieve hardships or to compensate the financial detriment suffered by the taxpayer, hence, It should be construed In favor of those who are the intended beneficiaries. The taxpayer must however demonstrate In a clear and convincing manner that it has in fact suffered an actual Ioss for the taxab Ie� per Iod and the said Ioss was not compensated by Insurance or otherwise, to be entitled to a Ioss. deduct Ion from. Its. gross income for the saId taxable period.

�DECISION C.T.A. CASE NO. 5238 - 7- In the case at bar, petitioner stressed that whl le the- foreign exchange loss arose from forel~n exchange denominated I labl I ity Incurred in 1989, 1990 and 1991, the forelgn exchange loss Itself, as earlier pointed out, was actually sustained, ascertained, and determined in \. 1992 when the transact I on.. was c I osed and terminated by .... �the payments of said I iabi I ity. To prove that it indeed -suffered a foreign currency loss of P16,753,404 and that It was not compensated by insurance, petitioner adduced exhibits D to D-39,�E to E-9, E-10 to E-37, F to F-1, F- , to 1-5, K to K-18, L to L- 2, F-3, G to G-5, H to H-5, 14, .. M, M-1, M-2, N, N-1, N-2, 0, 0-1 and 0-2, and the testimony of its witness, Mrs. Evangeline B. Cayaba. The evidence thus presented were not controverted by the respondent. After a careful study, of the evidence presented, the ., Court agrees with the petitioner's ratiocination that, what was. reflected In Its book as Its llabi llty to its home office was the amount before the foreign exchange fluctuated, thus, since the payment of said .1 iabi I ity was done In 1992 when the value of the peso depreciated, it suffered a foreign exchange loss when It used more pesos- to pay its foreign currency obi igations. The petl.tloner's case stands on more solid grounds when respondent presented its evidence and her sole -�-.wIt ness , Rev en ue 0 f f i c e r , Ma . Carmen c i t a Va Ie nz ue I a , who l._r;o

DECISION C.T.A~ CASE.NO. 5238 - 8- -investigated the books of accounts of the petitioner Insofar as the claim for tax credit/refund Is concerned. The results of the audit of the pertinent accounts and othe~ documents pertinent to the instant case conducted by �sald�examlner clearly shows that indeed petitioner is \,. entitled to a refund�or. tax credit but only in the amount '�� �'Of� � .P4, 684, 584. 91 � This was due to the fact that out of � .. ..,...the� -total foreign exchange loss of P16, 753,404.00 alleged " -to .,have-been actually sustained,� .P3,368,8.75.69 remained \. ,,:' unrealized and therefore the tax component of which in .the. amount o.f P1,179,106.49 should not be allowed for tax ,.,efund/credlt. purposes. <Exh. 2}. The analysis, computation and explanation of said examiner was openly laid.. and fully disclosed In respondent's exhibits 3 and 4, thus, they deserve the credence that should normally be 4Ccorded. Hence, the Court feels compel led to affirm the Import and force of the results of the investigation .,. conducted by the respondent which may not be suffered to petrify in futl I ity. IN THE LIGHT OF ALL THE FOREGOING, we are persuaded to extend the rei ief sought by the petitioner but to a Iesser amount as computed� by the respondent. The Iatter Is hereby ORDERED to REFUND or ISSUE a Tax Credit Certificate In favor of herein petitioner the amount of -.P4,684,584.91, without pronouncements as to costs.

DECISION C.T.A �. CASE NO. 5238 - 9- �SO ORDERED. '" ,.. �. WE CONCUR: " / CERTIFICATION I I / / I hereby cert.ify that this decision was reached after due consultation with the members of the Court of Tax Appeals in accordance with Section 13, Article VI I I ~~-o~ the Constitution.� ~(Q~~ ERNESTO D. ACOSTA Presiding Judge 1 "; "'1 q �J! ~