CE PHILIPPINES LTD., v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES Court of Tax Appeals QUEZON CITY SECOND DIVISION CE PHILIPPINES LTD., CTA CAS E NO. 7688 Petitioner, Members: - v e rsus- CASTANEDAJR., Chairperson CASANOVA and MINDARO-GRULLA J.J. COMMISSIONER OF INTERNAL Promulgated: REVENUE , DEC 2 3 2010 ~ / :20 pn.. Respondent. X--------------------------- ---------------------------X DECISION MINDARO -GRULLA, J.: This is a Petition for Review filed on October 17, 2007 by CE PHILIPPINES LTD., as petitioner, against the Commissioner of Internal Revenue (CIR) as respondent, for the Court in Division, pursuant to Rule 4, Section 3 (a) (2), in relation to Rule 8, Section 4(a), of the Revised r_ Rules of the Court of Ta x Appeals (RRCTA). v-: 1166

CE PHILIPPINES LTD. v. CIR Page 2 o f 24 CTA CASE NO. 7688 DECISION The said Petition is on appeal from respondent CIR's inaction over petitioner's administrative claim for a ta x refund or tax credit 1 in the aggregate amount of P29,700,584.82, representing alleged excess capital gains ta x (CGT) paid on the gains realized from the redemption b y CE Philippines II , Inc. (CEP II) of its Series A preferred shores owned by petitio ner on September 15, 2005 and October 17, 2005. Petitioner CE Philippines Ltd. is a non-resident foreign corporation duly organized and existing under and by virtue of the lows o f Bermuda with principal place of business at Clarendon House . Church St.. Hamilton, Bermuda. 2 Respondent is the duly appointed Commissioner of the Bureau of Internal Re venue (BIR), empowered to perform the duties of said office including, among others, the duty to act upon and approve claims for refunds or ta x credits as provided by law. Respondent ho lds office at the 5th Fl oor, BIR Notional O ffi ce Building , Aghom Rood, Diliman , Quezon City. On October 22, 1999, C EP II was incorporated and registered with the Securities and Exc hange Commission (SEC ) primarily to acquire, ho ld , own and use fo r investment or otherwise. and to sell o r dispose o f, any and all properties o f every ki nd and description and 'Exhibits "F" and " I", Docket, pp. 326-333 ancj 338-3Jj5 ( 2 Exhibits "A", "A-1" and "B", Docket. pp. 298-3 11 116 7

.. C E PHILIPPINES LTD. v . C IR Page 3 o f 24 C TA CASE N O . 7688 DECISIO N wherever situated, to the e xtent permitted by law.3 CEP II had an authorized capital stock of P80,000.00, divided into 40,000 common shares and 40,000 Series A preferred shares, both with a par value of P1.00 each. CEP II had an issued outstanding capital stock of P20,000.00, divided into 20,000 common shares, 100% of which were legally and beneficially owned by petitioner.4 On April 23, 2001, the SEC approved the increase of CEP ll's capital stock from P80,000.00 to P11 ,647,948.00, divided into 2,840,000 common shares and 8,807,948 Series A preferred shares, both with a par value of P1 .00 per share.s The entire amount of increase in the capital stock of CEP II (P1 ,567,948.00, divided into 2,800,000 common shares and 8,767,948 Series A preferred shares, both with a par value of P1.00 per share) was subscribed by petitioner and paid for by way of assignment of 100,000 common shares and 313,141 Series A preferred shares of CE Cebu Geothermal Power Company, Inc. (CE Cebu), which were valued at allegedly US$65,21 0,000.00, in fa vor of CEP II . In view of petitioner's subscription to 2,800,000 c o mmo n shares and 8,7 67,948 Series A preferred shares of CEP II on April 23, 2001 , and its ownership of 20,000 3 Exh ibits "M" a nd "M- 1" , Doc ke t, p p. 380-393; Par. 11(3). Jo int Stip ula ti on o f Fac ts and Issues (J SFI) . Docke t. p . 94 4 Exhibit s "M" a nd " M -1" , Docke t, p p. 380-393; Exhibit " N- 1" , Doc ke t, pp . 396-li 02 ; Exhib its " W" a nd "W- 1", Doc ke t, pp. 455-456 s Exhibit "N" . Doc ke t. p . 39 1i C... 116 8

C E PHILIPPINES LTD. v. CIR Page 4 o f 24 CTA CASE NO. 7688 DECISIO N common shares prior to the increase in CEP ll's capital stock, petitioner became the beneficial and absolute owner of l 00% of CEP ll's capital stock (i.e ., P1l ,587,948.00, divided in to 2,820,000 common shares and 8,767,948 Serie s A preferred shares). 6 On March 25, 2004, CEP II obtained approval from the SEC to use the US d o llar as its fun c tio nal cu rrency in presenting its financial statements pursuant to SEC Memorandum Circular No. 14, Series of 2003.7 Consequently, the finan cia l statements o f CEP II were presented in US dollars beginning the ta xab le year 2003.8 On September 15, 2005, CEP ll's management. with the approval of the Board o f Directors , e ffected the redemption of 1,113,260 Series A preferred shares at a redemption price of US$8.59, or a total redemp tion amount of US$9,562,903.40.9 The cost per share of the Series A preferred shares is US$5.63. 10 Thu s, computing the capital gains based on the functional cu rren cy 6 Exhibi t " N- 1. Docket. pp. 396-402; Exhibits "W" and "W- 1", Docke t. pp. 455-456; and Exhibit "DO", Sworn Statemen t o f Ms. Trini ty Ga luz do led June 25, 2008, pp. 4-5 7 Gu idelines on Preparation o f Functional Currency Financial Statement; Exhibits "C" , "C- 1", and "C-2" . Docket. pp. 3 12-315; Exhibit "DO" , Sworn Statement o f Ms. Trinity Ga tuz dated June 25, 2008. pp. 3-4 s Exhibit s " U", "U-1 ", "U-2" . Docket. pp. 426-441 ; Exhibit "DO", Sworn Stat e m en t o f Ms . Trinity Ga luz dated June 25. 2008 9 Exhibit "D" . Docket. pp. 322-323; Exhibi t "L" , Sworn Stat emen t o f Ms. Trinit y Gatuz dated May 23, 2008, pp. 4-5 JO The cos t per share is compu ted by dividing CEP ll 's paid- up capi tal as of December 31. 2004 in th e amou nt o f US$65,2 10,000 wi th th e issued and ou tstanding shares as o f red empti on dale o f 11 ,587 ,948 shares; Exhibit "L" , Sworn Stat emen t o f Ms. Trinity Ga fu z doted May 23 . 2008, pp. 3-4 L. 1169

C E PHILI PPINES LTD. v. C IR Page 5 of 24 C TA CAS ENO. 7688 DECISIO N (by deducting the U.S. dollar cost from the U.S . dollar redemption price of the Series A preferred shores), petitioner realized a capital gain upon redemption of US$2.96 per shore, or a total of US$3,295,249.60, computed as follows: Capital Gain on the Redemption- in U.S. dollars Redemption value per share US$ 8.59 Cost per share Capital gain per share- in U.S. dollars 5.63 No. of shares redeemed Capital gain- in U.S. dollars US$ 2.96 1' 113,260.00 US$ 3,295,249 .60 However, for purposes of computing the capital gain and paying the CGT due, petitioner used the peso equivalent of the redemption price (based on the Philippine Dealing System' closing rate on the redemption date) and the peso equivalent of the cost per shore (which was translated based on historical rate), resulting in a capital gain of P370,729,950.66, computed as follows: Redemption Value per share in Philippine Pesos : Redemption price per share in US $ US$ 8.59 x PDS closing rate- Sept. 15, 2005 Less: Cost per share in Philippine Pesos p 55 .925 p 480.39 Paid-up Capital per Phil. Peso Books p 1,707,864,702 .00 147 .38 + No. of shares outstanding 11,587,948 Capital Gain per share No. of shares redeemed p 333.01 Capital Gain 1,113,260 P370 ,729 , 950 .66 L 1170

CE PHILIPPINES LTD. v. CIR Page 6 o f 24 CTA CASE NO. 7688 DECISION Based on the above computation , petitioner filed its Capitol Goins Ta x Return (BIR Form No . 1707) 11 on October 17, 2005, and paid CGT in the amount o f P37,067,995.07, compu ted as follows: Peso Equivalent of US Dollar Capital Gain Rate Capital Gains Tax at 5% p 100,000.00 at 10% p 5,000.00 370,629,950.66 37,062,992.07 p 370,729,950.66 p 37,067,995.07 On Oc tober 17, 2005, CEP ll 's management, with the approval of its Boord of Directors, effected the redemption of 662,290 Series A preferred shores at a redemption price of US$8.59, or a total redempti on amount of US$5,689,071.1 0.12 The cos t per shore of the Series A preferred shores is US$5.63.13 Thu s, compu ting the capitol gains by deducting from the redemption price in US dollars the original cost which is also in US dollars, petitioner realized a capitol gain upon redemption of $2.96 per shore or a total of $1 ,960,378.40, computed as follows : C apital Gain on the Redemption - in US dollars: 11 Exhibit "E" . Docket . pp. 324-325; Por.11(6), JSFL Dockel, p. 95 12 Exhibit "G", Docket. pp. 334-335; Par. 11(9) , JSFI, Docket, p. 95; Exhibit " L" , Sworn Statement o f Ms. Trinity Ga luz do led May 23, 2008, p. 5 13 The c os t pe r shore is compu ted by dividing th e paid-up capital as o f December 3 1, 2004 in th e amount o f $65,210,000 .00 with th e issued and ou tstanding shores as of said date o f II ,587 ,948 shores; Exhibit "L", Sworn Statemen t o f Ms. Trinity Galuz doled May 23, 2008, pp . 3- 4 ~ 117 1

C E PHILIPPINES LTD. v . CIR Page 7 o f 24 CTA C ASE NO. 7688 DECISIO N US$ 8.59 Redemption value per share 5.63 Cost per share Capital gain per share - in US dollars US$ 2.96 No. of shares redeemed Capital gain- in US dollars 662 ,290 US$ 1,960,378.40 However, for purposes of computing the capital gain and paying the CGT due, petitioner again used the peso equivalent of the redemption price (based on the Philippine Dealing System' closing rate on the redemption date) and the peso equivalent of the cost per share (whic h was translated based on historical rate). resulting in a capital gain of P220,0 10,657 .50, computed as follows: Redemption Value per share in Philippine Pesos : Redemptio n pric e per share in US $ US$ 8.59 x PDS closing rate - Oc t. 17, 2005 p 55.83 p 479 .58 Less: Cost per share in Philippine Pesos Paid-up Capital per Phil. Peso Books p 1.707,864.702.00 11,587,948 -:- No. of shares outstanding 147.38 Capital Gain per share p 332.20 No . of shares redeemed 662 ,290 Capital Gain . �- - - - ��� -- ---- ----- p 220,010,657.50 Based on the above computation . petitioner filed its Capital Gains Ta x Return (BIR Form No. 1707) 14 on November 16, 2005, and paid the CGT in the amount of P21 ,996,065 .75, computed as follows: Peso Equivalent of US Dollar Capital Gain Rate Capital Gains Tax at 5% p 100 ,000 .00 at 10% p 5,000 .00 2 19,910,657 .50 21,991,065.75 p 220,010,65 7.50 p 21,996,065.75 - - -- - � - � - - --- - -- 14 Exhibit "H " , Doc ke t. p p. 336-337; Par. II( 10) , JS FI , Doc ke t. p. 95 . J. 117 2

C E PHILIPPINES LTD. v. CIR Page 8 of 24 C TA CASE NO. 7688 DECISIO N On October 5, 2007, petitioner filed an administrative claim for refund with the BIR Large Ta xpaye rs District Office No . 122, requesting for a refund of the amount of P18,644,311.68 and P11 ,056,273 .14, representing the alleged excess CGT paid on the gain realized from the redemption by CEP II of its Series A preferred shares owned by petitioner on September 15, 2005 and October 17, 2005, respecti ve ly. 1s The above administrative claim for refund by petitioner was computed based on the foll owi ng: A. September 15, 2005 capital gain on redemption: Redemption va lu e per shore - in US dollars 8.59 Cost per shore- in US dollars 5 .63 Capital gain p er shore 2.96 No . o f shores redeemed 1,113,260 Capital gain- in US dollars $ 3,295,249.60 PDS closing ra te Sep tember 15, 2005 55.925 Capital gain - in Philippine peso p 184,286,833.88 CGT due Capital gain Rate CGT p 100,000 .00 at5% p 5 ,000.00 at 10% 184, 186,833.88 184 ,286 ,833.88 18,4 18,683.39 p 18,423,683.39 Excess C GT paid Capi tal Gains Tax paid p 37,067,995.07 Capi tal Gains Tax due 18,423,683.39 Excess Capital Gains Ta x Paid p 18.644,31 1.68 15 Exhibits " F", Docke t, pp. 326-333 and Exhibit " I", Docket, pp . 338-345 ; Pars. 11( 7) and II( 11 ), JSF I. Docke t. p. 95 f.. 111 3

C E PHILIPPINES LTD. v. C IR Page 9 o f 24 C TA C ASE NO . 7688 DECISIO N B. October 17, 2005 capital gain on redemption : Redemption value per share - in US dollars 8.59 Cost per share- in US dollars 5.63 Capital gain per share 2.96 No . of shares redeemed 662 ,290 Capital gain- in US dollars PDS closing rate September 15, 2005 $ 1,960,378.40 Capital gain- in Philippine peso 55.83 p 109,447,926.07 CGT due Capital gain Role CGT p 100,000.00 at 5% p 5,000.00 of 10% 109,347 ,926.07 10,934,792.61 109,447,926.07 p 10,939,792.61 Excess CGT paid Capital Gains Tax paid p 21,996,065.75 Capital Gains Tax due 10,939,792.61 Excess Capital Gains Tax Paid p 11 ,056,273.14 Respondent interposed the following Special and Affirmative Defenses in the Answer 16 to the Petition for Review: "6. Assuming but without admitting that Petitioner filed a claim for refund , the same is still subject to investigation by the Bureau of Internal Revenue; 7. Petitioner failed to demonstrate that the tax, which is the subject of this case , was erroneously or illegally collected ; 8. Petitioner has no legal capacity to sue; 9. Taxes paid and collected are presumed to be made in accordance with the lows and regulations , hence, not creditable or refundable; 16 Doc ket , pp. 65-66 c.. 117 4

CE PHILIPPINES LTD. v. CIR Page 10 of 24 CTA CAS ENO. 7688 DECISION 10. It is incumbent upon the Petitioner to show that it has complied with th e provision of Section(s) 204(C) in relation to Section 229 of the 1997 Tax Code. as amended; 11 . In on action for ta x c redit or refund. the burden is upon the ta xpayer to prove that it is entitled thereto , and failure to discharge the said burden is fatal to the claim (Emmanuel & Zenaida Aguilar v. Commissioner, CA-GR No. Sp. 16432, Marc h 30, 1990 cited in Abon, Low of Basic Taxatio n in the Phippines, /51 Edition, p. 206); 12. Claims for refund ore construed strictly against the claimant, the some partake the nature of exemption from ta xa tion (Co mmissio ner of Internal Revenue vs. Ledesma, 31 SCRA 95) and as such, they ore looked upon with disfavor. (Western Mino lco Corp. vs. Commissioner o f Internal Revenue, 124 SCRA 121 )." On March 17, 2008, respo ndent filed a Motion to Dismiss 17 on the ground that petitioner lacks the legal capacity to sue, which this Court denied in its Resoluti o n 18 dated May 14, 2008. During trial , petitioner presented its sole witness, Ms. Trinity Gatuz, CEP ll's Vice Pre side nt, who executed and identified her Judicial Affidavits dated May 23, 2008,1 9 June 25, 2008, 20 August 1, 2008, 21 Nove mber 19, 200822 and February 18, 200923. Thereafter, petitioner formally offered on April 30, 2009 Exhibits "A" to "QQ ", inclusive of sub-markings, to support its claims. This Court 17 Docket. pp. 100- 106 .,.;, 18 Docke t. pp. 13 1- 135 19 Exhibits "L" and "L- 1", Docket, pp. 370-379 .t.. 2o Exhibits "DD" and "DD- 1",Docke t, pp. 498-505 21 Exhibits "EE" and "EE-l", Docke l. pp. 508-520 22 Exhibits "MM", and "MM- 1", Docket , pp. 569-579 23 Exhibits "QQ" and "QQ- 1", Docket. pp. 592-595 117 5

CE PHILIPPINES LTD. v. CIR Page 11 of 24 CTA CASE NO. 7688 DECISION resolved to admit all of said exhibits in its Resolution dated June 22, 2009. On September 11, 2009, respondent filed a Manifestation24 stating that there is no report of investigation on petitioner's claim for refund and respondent is submitting this case for resolution based on available records. On January 13, 201 02s, the case was submitted for decision taking into consideration petitioner's Memorandum26 filed on December 16, 2009, sans respondent's Memorandum. As agreed upon by the parties, the main issue is whether petitioner is entitled to the refund or issuance of a tax credit certificate amounting to P29,700,584.82, representing the excess CGT paid on the gains realized from the redemption by CEP II of its Series A preferred shares owned by petitioner on September 15, 2005 and October 17, 2005. The sub- issues, are as follows: "1 . Whether or not petitioner has legal capacity to sue in the Philippines ; 2. Whether or not petitioner has erroneously over-remitted CGT in the amounts of P18,644,311.68 and P11 ,056,273.14 in relation to the gains realized from the redemption on September 15, 2005 and October 17, 2005, respectively, by CEP II of its Series A preferred shores owned by petitioner; 24 Doc ket. pp . 604-605 2s Doc ket, p . 64 3 26 Doc ket, pp . 617-64 2 ' 11 76

C E PHILIPPINES LTD. v. CIR Page 12o f 24 CTA C ASE NO. 7688 DECISIO N 3. Whether or not petitioner remitted and paid to the BIR c apitol gains tax in the amount of P37,067,995 .07 and P21 ,996,065.75 in relation to the gains realized from the redemption on September 15, 2005 and October 17, 2005, respectively, by CEP II of its Series A preferred shores owned by petitioner; and 4. Whether or not petitioner filed its administrative and judicial claims for refund or issuance of TCC for the amounts of P18,644 ,311 .68 and P11 ,056,273 .14, representing the excess CGT paid on the gains rea lized from the redemption by CEP II of its Series A preferred shores owned by petitioner on September 15, 2005 and October 17, 2005, respectively, within the two-year presc riptive period provided under Sections 204(C) and 229, Tax Code."27 Suffice it to soy that anent the timeliness of petitioner's administrative and judicial claims for refund, records reveal that petitioner filed its Capitol Goins Tax Return (BIR Form 1707)28 and paid the capitol gains tax in the amount of P37,067,995.07 on October 17, 2005, representing gains realized from the redemption on September 15, 2005 by CEP II of its Series A preferred shores owned by petitioner. Petitioner also filed its Capitol Goins Ta x Return (BIR Form No. 1707) 29 on November 16, 2005 and paid the CGT in the amount of P21 ,996,065.75, representing gains realized from the redemption on October 17, 2005 by CEP II of its Series A preferred shores owned by petitioner. 21 Docke t, pp. 96-97. 2s Exhibit "E " , Doc ke t, pp. 324-325 ' 29 Exhibit " H", Doc ke t, p p . 336-337 117 7

C E PHILIPPINES LTD. v. CIR Page 13 of 24 CTA CAS E NO . 7688 DECISION On October 5, 2007, petitioner filed an administrative claim for refund in the amount of P18,644,311 .68 and P11 ,056,273.14 with the BIR Large Ta xpayers District Office No. 122. On October 17, 2007, petitioner filed with this Court the instant Petition for Review, due to respondent's inaction on petitioner's administrative claims for refund, praying for a refund or issuance of a tax credit certificate for its alleged excess capital gains ta x paid on the gain realized from the redemption by CEP II of its Series A preferred shares on September 15, 2005 and October 17, 2005 in the amount of P29,700,584.82. Petitioner filed the instant Petition for Review within the two-year prescriptive period to file claim for a refund/issuance of ta x credi t under Section 229 of National Internal Revenue Code (NIRC) of 1997. As to the main issue, Sections 24(C) and 25(B) of the NIRC of 1997, provide as follows: "SEC. 24. In come Tax Rates . XXX XXX XXX (C) Capital Gains from Sale o f Shares of Stock not Traded in the Stock Exchange . The prov1s1ons of Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation , except shores sold , or disposed of through the stock exchange . c.. 117 8

CE PHILIPPINES LTD. v. C/R Page 14 of 24 CTA CASE NO. 7688 DECISION 5% 10% Not over P100,000....... ....... . On any amount in excess of P100,000...... SEC. 25. Tax on Nonresident Alien Individual . XXX XXX XXX (B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines . -There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income . Capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation and real property shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24 ." (Emphasis supplied) Likewise , Section 42(E) of the NIRC of 1997 reads: "SEC. 42. Income from Sources Within the Philippines.- XXX XXX XXX (E) Income From Sources Partly Within and Partly Without the Philippines.- XXX XXX XXX Gains, profits and income derived from the purchase of personal property within and its sale without the Phi lippines, or from the purchase of personal property without and its sale within the Philippines shall be treated as derived entirely from sources within the country in which sold: Provided, however, That gain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely from sources within the Philippines regardless of where the said shares are sold . The transfer by a nonresident alien or a foreign corporation to anyone of any share of stock issued by a domeslic corporation shall not be effected or made in its book ( 117 9

CE PHILIPPINES LTD. v. CIR Page 15o f 24 CTA CASE NO. 7688 DECISION unless: (l) the transferor has filed with the Commissioner a bond co nditioned upo n the future payment by him of any income tax that may be due o n the gains derived from such transfer, or (2) the Commissioner has certified that the taxes, if any, imposed in this Title and due on the gain realized from such sa le or transfer have been paid . It shall be the duty of the transferor and the corporation the shares, of which are sold or transferred . to advise the transferee o f this requirement. " (Emphasis supplied ) Based on the foregoing, capital gains realized by a non-resident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation shall be subject to the inco me tax prescribed under Section 24(C), with tax rates of five percent (5%), for the amount no t over P100,000.00, and ten percent (10%), in excess there o f. The gain from the sale of shares of stock in a domestic corporation shall be treated as derive d entirely from sources within the Philippines regardless of where the said shares are sold. In the instant case, it is undisputed that CEP II is a domestic corporation, while petiti o ner is a non-resident alien individual not engaged in trade or business within the Philippines; which is made liable b y the fo regoing provisions for net capital gains tax, representing the gains realized fro m the redemption by CEP II of its Series A preferred shares owned by petitioner on September 15, 2005 and October 17, 2005. c. 11 80

CE PHILIPPINES LTD. v. CIR Page 16 of 24 CTA CASE NO . 7688 DECISION Rec o rds show that petitioner filed the Capi tol Goins Tax Return (BIR Form No . 1707) 30 and paid the capitol gains ta x in the amount of P37,067,995 .07 on October 17, 2005 representing gains realized from the redempti o n on September 15, 2005 by CEP II of its Series A preferred shores owned b y petitioner. Petitioner a lso filed its Capitol Goins Ta x Return (BIR Form 1707)31on November 16, 2005 and paid the CGT in the amount of P21 ,996,065.75 representing gains realized from the redempti o n on October 17, 2005 by CEP II of its Series A preferred shores owned by petitioner. On March 16, 2006, the Bureau of Internal Revenue issued Revenue Regu lations No . 06-06, reg ulating the use of fun c ti o nal currency o ther than the Philippine Peso in Financial Statements that will be submitted and in the Books o f Accou nts that will be maintained fo r Internal Re ve nue Ta x purposes. Re ve nue Regulations No. 06-06 defines "Functional Currency" ds the currenc y o f the primary eco nomic environment in which the rep o rting entity ope rates ; that is the cu rrency o f the environment in w hich on entity primarily generates and expends cos h. The fo regoing regulation likew ise provides that : "SECTION 8. Currency to be Used in th e Filing of Ta x Returns O th er than In come Ta x.- All tax returns other than the ITR shall 30 Exhibit "E". Docke t. p. 324-325; Par. 11( 6) . JSF I. Docke t p. 95 ( 31 Exhibits "H" and " H-1" , Docke t. p . 336-337; Por.ll(lO) . JSFI . Docke t p. 95 1181

CE PHILIPPINES LTD. v. CIR Page 17 of 24 CTA CASE NO. 7688 DECISION likewise be filed in Philippine peso currency using historical peso amount or actual conversion/ prevailing PDS rate on transaction day, whichever is applicable. XXX XXX XXX SECTION 12. Treatment of Gain or Loss on Sale of Investment Under Functional Currency. - An investor which invests in fun c tional currency (other than Philippine peso) securities can compute its gain or loss from the sale of said investment using the functional currency. For example, if Company A invests in a US dollar bond at US$1 00,000 when the US$:P rate was US$1 :40 and sells the same investment at US$1 02,000 when the US$:P rate was US$1 :50, the computation o f the capital gain shall be as follows : Selling price USD Peso s Cost 102,000 5,100,000 Taxable Gain 100,000 4,000,000 2,000 In the above illustration , the taxable gain that should be reported is only $2,000. Thus, in reporting for tax purposes of the $2,000 gain in equivalent or converted Philippine peso denomination, th e equivalent peso denomination is the peso equivalent of 2,000 U.S. dollars using the conversion rote on the date of the consumma tion o f th e transaction. The above rule sha ll also apply to non-resident stockholders of on investee company where such investee company in the Philippines uses a functional currency other than the Philippine peso for its financial statements. However, if an investor makes an investment in Philippine peso, then it shall compute the gain or loss from sale of said investment using the Philippine peso cost and Philippine peso selling price." (Emphasis supplied) On March 25, 2004, CEP II obtained approval from the SEC to use the US dollar as its functional currency in presenting its financial statements pursuant to SEC Memorandum Circular No. 14, Series of L 118 2

CE PHILIPPINES LTD. v. CIR Page 18 of 24 CTA CAS E NO. 7688 DECISION 2003.32 Consequently, the financial statements of CEP II were presented in U.S. dollars beginning the taxable year 2003.33 Thus , CEP II effected the redemption of 1,113,260 Series A preferred shares at a redemption price of US$8 .59, or a total redemption amount of US$9,562,903.4034 and the subsequent redemption of 662,290 Series A Preferred Shares at a redemption price of US$8.59, or a total redemption amount of US$5,689,071 .1035 instead of using the Philippine currency. However, prior to March 25, 2004, when CEP II was incorporated and registered with the Securities and Exc hange Commission and when petitioner subscribed and paid its subscription, the par value of CEP ll's common and Series A preferred shares were denominated in Philippine currency. The facts clearly indicate that the entire amount of increase in the capital stock of CEP II (i.e., P11 ,567,948.00, divided into 2,800,000 common shares and 8.7 67,948 Series A preferred shares, both with a par va lue o f P1.00 per share) had been subscribed by petitioner and paid for by way of assignment of 100,000 common shares and 313,141 Series A preferred shares of CE Cebu Geothermal 32 Guidelines on Preporalion o f Func ti onal Cu rrency Financial Slal emenl; Exhibits "C", "C-1 ", and "C-2"; Exhibit "DD", Sworn Stat emen t o f Ms. Trinity Go tuz doled June 25, 2008, Docket , pp. 498-505 33 Exhibits "U", "U-1", "U-2"; Exhibit "DD" Sworn Sta tement o f Ms . Trini ty Go tuz doled June 25, 2008, Docke t, pp. 498-505 3� Exhibit "D"; Exhibit "L" Sworn Slolemenl of Ms. Trinity Goluz do led May 23, 2008, Docket. pp . 370-379 C. 35 Exhibit "G"; Par. tl( 9), JSFt; Exhibit "L", Sworn Sta tement of Ms. Trinity Ga tuz doled May 23, 2008,Dockel. pp. 370-379 118 3

C E PHILIPPINES LTD. v. C/R Page 19 o f 24 CTA CAS E NO. 7688 DECISIO N Power Company, Inc ., which were valued at US$65,210,000.00. In view of petitioner's subscription to 2,800,000 common shares and 8,767,948 Series A preferred shares of CEP II on April 23, 2001, and its ownership of 20,000 common shares prior to the increase in CEP II 's capital stock, petitioner became the beneficial and absolute owner of 100% of CEP ll ' s capital stock (i.e. , P11 ,587,948 .00, divided into 2,820,000 common shares and 8,767,948 Series A preferred shares). 36 As the abso~ute owner of 100% of CEP II , a domestic corporation whose c apital stock is den o minated in Philippine Peso, petitioner's investment clearly tran slates to Philippine Peso, even though the source of such inv estment may be in other foreign currenc y den o minated unit (FCDU) . Petitioner effectively makes an inv estment in Philippine Peso, and a c cording to Re venue Regulations No . 06-06, it shall compute the gain or loss from sale of said investment using the Philippine Peso cost a nd Philippine Peso selling price . Petitioner computed its claim for refund b y finding the difference o f the redemption value per share in US dollars against the cost per share, also in US dollars, and such difference is multiplied by the number of shares redeemed b y CEP II, resulting in its computed capital gains tax du e in US dollars . Thereafter, the capital gains tax in 36 Exhibits " N- 1", "W", a nd "W- 1"; Exhibit " DO ", Sworn Sta te m e nt o f M s. Trinity G otuz dote d June 25, 2008, Doc ke t. p p . 498-505 c. 1184

C E PHILIPPINES LTD. v. CIR Page 20 o f 24 CTA CAS E NO. 7688 DECISIO N US dollar is then multiplied by the Philippine Dealing System peso equivalent to one US dollar as of closing date of redemption. This computation lacks legal basis . It is evident from the provision of Section 24(C) of the NIRC that the capital gains considered in the computation thereof should be in Philippine Peso considering that the applicable rate of 5% is based on the amount not over P100.000.00, and the rate of 10% is based on the amount in excess of P1 00,000.00, which is in Philippine Peso. The low. in fact. did no t provide for an FCDU or foreign exchange equivalent of the capital gains to be con v erted to Philippine Peso as of the date of tran saction subject to said ta x. Thus, it can be safely concluded that in computing the capital gains in this case , the redemption value per shore, the cost per shore, and the capital gains subject to ta x, should all be in Philippine Peso . Re venue Regulations No . 06-06 reinforced su c h w a y of c omputing the c apital gains by providing that "it shall compute the gain or loss from sale of said in vestment using the Philippine Peso cost and Philippine Peso selling" . Here , petitioner computed its capital gains and CGT in the following manner: ( 11 85

C E PHILIPPINES LTD. v. CIR Page 21 o f 24 CTA C ASE NO . 7688 DECISIO N September 15, 2005 redemption : Redemption price per share in US $ US$ 8.59 x PDS closing rate- Sept. 15, 2005 p 55 .925 p 480 .39 Less : Cost per share in the Philippine Pesos p 1,707,864,702.00 Paid-up Capital per Phil. Peso Books .;. No. of shares outstanding 11,587,948 147.38 Capital Gain per share p 333 .01 No. of shares redeemed 1,113,260 Capital Gain p 370,729 ,950.66 Peso Equivalent of US Dollar Capital Gain Rate Capital Gains Tax at 5% p 100,000.00 at 10% p 5,000.00 370,629,950 .66 37,062.992.07 p 370,729,950.66 p 37,067,995.07 October 15, 2005 redemption : US$ 8.59 Redemption price per share in US $ p 55.83 p 479.58 x PDS closing rate - Oct. 17, 2005 p 1,707,864,702.00 147.38 11,587 ,948 Less: Cost per share in the Philippine Pesos Paid-up Capi tal per Phil. Peso Books p 332.20 .;. No . of shares outstanding Capital Gain per share 662 ,290 No. of shares redeemed p 220,010,657.50 Capital Gain Peso Equivalent of US Dollar Capital Gain Rate Caeital Gains Tax at 5% p 100,000.00 at 10% p 5,000.00 219,910,657.50 21,991,065.75 p 220,010,657.50 p 21,996,065.75 As discussed , CEP II is a domestic corporation with an authorized capital stock denominated in Philippine Peso. The basis of purchasing L. 118 6

CE PHILIPPINES LTD. v. C/R Page 22 o f 24 C TA CASE NO. 7688 DECISION such shores of stock is necessarily in Philippine Peso, the some having been necessarily reflected in the books/records of CEP 11 .37 Moreover, this Court hod ruled in a similar case entitled CE Philippines Ltd. vs. Commissioner of Internal Revenue3B, which involved the some parties and similar claim for refund o f excess capitol gains tax paid on the gain realized from redemption mode by CEP II of its preferred shores owned by CE Philippines, Ltd . In the said case, this Court denied petitioner's claim for a refund or issuance of a tax credit certificate by ruling that despite the fact that at the time CEP II redeemed its shores from petitioner it was already using the US dollar as its functional currency, it remains undisputed that when petitioner mode its investment in CEP II , it did so by using the Philippine Peso . This Court held in this wise: "Based on the above discussion, therefore, it is evident that the investment of petitioner to CEP II was mode in Philippine peso, since as indica ted in the Deed of Assignment as well as in the Treasurer's Affidavit, petitioner has mode its investment to CEP II , in Philippine peso, by assigning to CEP II, petitioner's shores in CE Cebu Geothermal Power Company, Inc., consisting of 100,000 common shores of stock with par value of P28.00 and 313, 141 Series A preferred shores of stock with par value of P28.00, and amounting to P11 ,567.9. 48.00 worth of shores. Even assuming that CEP II obtained approval from the Securities and Exc hange Commission to use the U.S . Dollar as its fun c tional cu rrency, such approval was only obtained on March 24, 2005. Hence, when the Boord of Directors of CEP II issued a resolution authorizing the rede mption of its shores from petitioner, consisting of 187,348 Series A Preferred Shores, it computed the redemption price 37 Exhibits "M", "M-1". " N- 1" . and " N-2". Docket. pp. 380-403 38 CTA Case No. 764 1, Sep tember 23. 2010 ( 118 7

C E PHILIPPINES lTD. v. CIR Page 23 of 24 CTA CAS E NO. 7688 DECISIO N using its U.S. Dollar functional currency. However, despite of the fact that at the time CEP II redeemed its shores from petitioner, it was already using the U. S. Dollar as its functional currency, it remains undisputed that when petitioner mode its investment to CEP II, it did so by using the Philippine Peso." It is well settled that petitioner, as taxpayer claimant, has the burden of proof that it is entitled to a refund of the amount claimed as refundable because taxes are presumed to have been collected in accordance with laws and regulations . The burden of proof rests upon the ta xpayer to establish by sufficient and competent evidence its entitlement to a refund. 39 Basic is the rule that tax refunds are in the nature of tax exemptions and are to be construed strictissimi juris against the entity claiming the same. 4o Moreover, statutes in derogation of sovereignty, such as those containing e xemption from taxation, should be strictly construed in favor of the state. 41 In fine , for failure of petitioner to establish the factual basis of its claim for refund, this Court is constrained to deny its claim. 39 Commissioner o f Int e rn a l Revenue vs . Tokyo Shipping Co. , Ltd .. 244 SC RA 336 �o Philippine Geo th e rmal , In c. vs . Commissione r o f Int ern a l Re venu e, G .R . No. 154028, July 29 , 2005 � 1 PLOT vs . Ci ty o f Da va o , G .R. No . 143867 . Marc h 25, 2003 c.. 118 8

C E PHILIPPINES LTD. v. CIR Pa ge 24 o f 24 C TA CASE NO. 7688 DECISIO N WHEREFORE, the instant Petition for Review is hereby DENIED . SO ORDERED . WE CONCUR: ~N . M~ ~G~ Q. ~rc . ~~ 1 <1. CIELITO N. MINDARO-GRULLA Associate Justice f'liANITCJC . CASTANEDA,ca'R. Associate Justice __&2_ CAESAR A. CASANOVA Associate Justice CERTIFICATION Pursuant to Arti c le VIII. Section 13 of the Constitution , and the Division Chairperson's Attestatio n, it is hereby c ertified that the conclusions in the above Decisio n were reached in consultation before the c ase was assigned to th e writer of the opinio n of the Court's Division . 0~----~C . ~ CL atJ'ANilo c. CASTANEDAVJR." Acting Presiding Justice 118 9