CTA Case No. 3951 (Decision)

REPUBL%C OF THE PH%L%PP%NE9 COURT OF TAX APPEALS C'IUEZON C%TV FILIPINAS SYNTHETIC FIBER CORPORATION, Petit i onet~, - '- vet~sus C.T.A. CASE NO. 3951 THE COMMISSIONER OF INTERNAL REVENUE, Respondent. X -� - - -X DEC a :r: 0 N This is an assessment case on the alleged deficiency withholding tax at on the interest, royaltie and .gu ar<antee fees payable to non-resident foreign corporati ons. Pet i t i on e r, a d om e s t i c cot' pot' at i on, t' e c e i v e d on December 2.7, 1979 a letter of demand ft' om the respondent assessing it for deficiency withholdin g tax at sourc e in the total amou nt of P829, 7L~8. 77, inclusive of interest and compt'omise penalties, fot' the period from the fourth quarter of 1974 to the fourth qu art et� of 1975 . <Annex A, pp. 6-10, CTA rf?cords.) The b ulk of the deficiency withholding I 1 _, 4Su

DECISION - C.T.A. CASE NO. 3951 - 2- t ax as s e s s men t , h owe v e r, co n s i s t e d o f i n t e t' e s t and compromise penalties f or a ll eged late payment of ~ooJithholding taxes due on inte't'es t on 1 oans, royaltie s and guarantee fees paid by he p e t it ioner to non-re s ident corporations. The assessment was seasonably protested by the petitioner th ro�..1gh it s audi tor, SGV and Co., which was denied b y the respondent on the g l'' ound that "Fo r Philippine i.nternal r ev e n i.A e tax pllt'po ses , the liabili ty to wit hhold and pay income tax wit hheld at so�..trc e f am cert ain payment d t.H.? t o a f o t' e i g n corporation is at the time of c:Cc't"Ua l and not at the t i me of a e t � 1 ay men t or t'e mittanc e thet'eof ." <S ee letter denying petitionet'' s protest, pp. 2~5-29 G, BIR re cord.) In s L1ppot't of his d e cision, the respond~nt re lied upon BIR Ruling No. 71 - 003 and BIR Ruling No. 24-71-003- 154- 84 dated Septembel"" 12, 1984 a we 11 as t he Co t..tt' t' s decisio11 in Con truc:tion Resources of Asia, Inc. v. Comm. of Int. Rev. <CTA C~ s e No. 3307) holdi ng "that the li. .:;\bil i't;y of the taxp ;:~yEn' -to withhold C::\l'ld pay the in c omR tax withheld at sourc e from certai n paym~?nts du e �to'"' non �- t'esident fot��~ ign coPpot��~. ti.o n at t r.H.: h e s at t h e t i me o f a c c t' 1.1a l o f t h e a f o t ' e sa i d P0yments Hnd nn t at the time of actui='. l payment ot' t h e t ' E! o f " an c:l "the vJithhold ing f.

DECISION - C.T.A. CASE NO. 395 1 - 3- a ~~ e n t I c o t �� p en �� at i o 11 i s o b 1 i. ~] e d t o t ' e 111 i t t h e t a >< t o 1; h ~? ~] C' v e t �t"lllt e n t si.ncr~ it and belongs to the g overn me nt. F! i n c P t h e t a ~ p <.-:~. y �~ t ' i n i n t e t ' ~? s t , t' o y a 1 t i e s an d ~l u i:::l t' t:\ Tl t H �~ f e e at t h e t i. 111 P o f t h �~ i 1�' .:1 c c ,.. ' .l ,,, l .i. n t h f~ b o n I{~; o f t h e c o 1�� fJ o ,... '"' t i. on ( f:l e P t ' t'? ~� p o n d e n t 1 r,; t 1 r-~ \�; P 1�� o f c:l P n i .:~ l t o f.H? t i '\:; i tl TH? t' ' S f. t' () \; > S t 1 i b i d � ) He n ce , this p tition for re vi ew . The isst.<e a t bar is whethe r the liability to withhold tax at s o�Jrce on inco me p;ay ments to non - resident foreig n corporation s upon remitt�nc~ of the amounts du to the creditors or upon accrual there f. Petit i onet"" likew:i. !H? r ais e d the issue on whethrn"" ot' not the ass'!:ls s ment~ for the fourth quar t er of 1975 shou ld be included in this case or in C.T.A. Case No.3421, also enti.'t;led "F"ILSYN v. CIR." In prot est in g the assessme nt s , the pet it i one t"" maintal n s t h at "the withholding tax on the said interest income an d ro yalties were pa id to the government when the said interest a nd royalties whate ve t"" amount h as been accr � ed in the books, the vlithhold ing tax due thereon is t..tltimate ly paid to /( 40 j

DECISION - C.T.A. CASE NO. 3951 - 4- the governm a nt upon S�~.!d.~_t "!m i t i..~..Dce .::l.t.n- o a d of the sc.\ i d .:\ mount .:\\C:Ct't.\ed. " In of it s positiDn, p�?t i t ion~?l� ' that "this p t ' o c e d u t' ~? i s i t"l a c co .,.~ dan ce w i t h t h e d e c i s i on .) of the Ccn.n-t of T ax. npp~al .i in the Ci.!\Se o f Bayer Pharmaceuticals, Inc. v. Commissioner of Internal Revenue <CTR Ccse Nu. 1. '37'3. ) II ( ibid.) In this petition for review, the pet itioner is consistent in its line of rgument mphasizing that "th e pet'tioner�s duty to with hold th e tax due is on interest, royalti es and fees prescribed �.mder Section 53 of theTa>< Cod e which provides th a t the duty to withhol d ar i s es only upon actua l remittance or payment of th e a mount s due to said ree'pientt , wi-lile it s liab ilit y to pay to t he x sd wi ~hhe ld is on r befo re the 25th o f the month follow i ng the end of the quarter t:.~ mit t_~@..tl.~Et IH' payme nt of the a fen� e s a i :1 i t e ms o f i n c o me d t..W i n g t h e cp.l <i.H' t e t' " <P e t i t i em f o t' Re v :i. e w, p � 4; Under sco~in g e upplied.) H e n c e , " t; h e t~ e b e i n g n o leg a l and fat~ the deficiency li'lithh o ldin g ta><, the imposition of intet�es t a nd compr�omi se penaltit?s i n comH~ction thet~ewith at�e",

DECISION - C.T.A. CASE NO. 3951 - 5- l ~?g a l a nd f c:\c� t u c.'\ 1 l1a s i s 11 � ( i bid. p . 5 ) We d i s a g t' e e � On the contrary, it appears that the 1 ine of defense adopted by the petitioner is that which is wanting in legal and factual basis. The provisions of law pet'tinent to this case are Sections 53 and 54 of the Na tional Intet'nal Revenue Code in force in 1974- 1975. The t' elevant portions of said sections provide, thus: "SEC. 53. Withholding tax at SOIJrce.- X X X "(b) Non-resident aliens and fot'eign corporations. - (1) Nonresident alien s .- Every individual, corporation, partnership, or association, in what evet' capacity acting, includ i ng a le s see ot' mortgagor of real or personal pt'opet'ty, t ~U i t e acting in any t r ust c~p c ity, e xe c ut or, administrator, reQ i ver, e e nsHw vato~" , f i~ tu,t' a y 9 emple ytH" ~ e nd the ev e~ y office r or am ~ loye e of Govern ment of th ~ ep r.t bl ic of t he Philippines having the contr' ol, t"eceipt, c�Jstody, disposal, or payment of interest, dividends, rents, t"oyalties, salaries , wages, premiums, annuities, compensation, remuneration s , emoluments, or other fixed or determinable annua l, per i 0 d i c a 1' 0 r cas ua 1 ga i n s ' pt'0 f it s , and income, and capita l gains, of any nonresident alien not engaged in trade or business within the Philippines, shall <except in the case provided in sub- section (a) (1) of this Section ) deduct and 1-lithhold from the annual, pet'iodica l, or casual gains, profit s , and income, and capital gains, a tax equal to 30 per cent thereof. .J

DECISION - C.T.A. CASE NO. 3951 - 6- XXX C2> Nonresident foreign corp t1 r .::~ t � on s � - l n t h c:: s e of f o~.. e i g n corpor~t � on s sub.; e~t to t x lind tH" t hi s n n t i t J. e , n 0 t P. tl .::1 r. r_i i 1\ t t ' c�\ t1 e 0 t ' b l.l S i T1P S S vii t h i n t he P h i l i. p p i 11 n. s , t h P 1��� e s h c-:\ ] l be dedu c t ed and vJi t hh t> ld a -t t h e s nut�'ce in th !~ s."me m<:Hlnet' <:'l.nd up o n th e <:><:'IlTle i t ems ,::\ s i s f.W' ovided i n s; IJb se c~; ion (b) (t) o f t h i s s ect i. o n, .:~ s wI!' 1 J. a s o n t ' e mu n P t ' <.:\ t i o n s f lH' t (�' C h T1 i C a J. S !H' V i. C f~ 5 IH' 0 t h e t ' W i c; e , 2\ t a >< e q 1.1 a 1 t o t h i t' t y -- f j v f~ ( :~ ;::; ) p e t ' c e n t thet" r?of. Th i~; tL"IX !;;h :.:\ ll be t� e t ut� ned t:tnd paid in an d ~. uhjf'c t t o the s<.:\me condition as prov3.ded in S c::tion 51_.. x x x" X XX "SEC. ;:~4. Retm"ns and p yment of tax~s withheld at sou~ee.- <a > Qua terly return and payment of taxes vdthheld . T )( educt d nd \'Jithheld �.m er Sect i on 53 sh all ~ e uver�ed y a et wn t'.f'lct pai to the Comm s ionet" of I n te~nDl R v nue or to hi s c ollection a gent i n the pr ovince, c y, or muniei '8. 1 t y whtH''t! th withh o ld ing ag e nt h s his legal residence or withhold ing agent is a corporation, where the principal office is located. The taxes d@clUQt d 81') with h eld by the withh oldi ng ag nt ~hall b~ held ~ ~ special fund in trust fol"' t t1e GoV(H"nm nt 1.mtil p id to t he coll ecting officer s. The Commissioner of Internal Revenlle may, with the approval of the 9 cretary of Finance, requir t h se withholdin agents to pay or depo sit the t xes d educted and withtH!ld at more fl"'eq� ent inte r~ vals when neces sary to protect th e int eres t of the Government. The return shall be filed and the payment ma d e within 25 days from the c lose of each ca lenda r quarter. x x x" It should be noted that noth ing in he above - quo t ed provisio ns of law can on e find that the tax wo l\ ld

DECISION - C.T.A. CASE NO. 395 1 - 7 -- be "withheld on a ny actual remittahc e ot~ payment of the aforesaid items of income dl..n~i ng the quat~tet'" as alleged by the petitione r in its Petition fat~ Review. The l aw is clear as to "who" at'e t' equh'ed to deduct and withhold taxes due on "what" items of income, but it is admitted that the law is not conclusive as to "when" the duty to withhold the taxes arises. The issue however as to "when" the duty to withhold the taxes ari s es has clearly been defined already by this Court. In other words, the issue is not of first impression. In at least three analogous cases this Com~t had l..tnmistakably defined that the duty "to withhold and pay the income tax withheld at source from interest due to a non-resident foreign corporation attaches at the time of the accrual of said interest and not at the time of actual payment � ot~ t~ e mitt ance t h et'eof. Because of its controlling effects on the pt~ esent case, we will quote the per tinent pot~tion of the decision: "Payment of the withholding ta>< at s6urce due from a foreign lender attaches upon accrual of the intet~est to be remitted abroad. The interest accrues at the time it is earned. At such time, the tax on the intere st attaches and the contractor is obliged to remit the tax to the government since it alt~ eady and properly belongs to the govet~nment. Indeed, there is no reason � why the overseas contractor, petitioner in this

DECISION - C.T.A. CASE NO. 3951 - 8- case, who i s based in the Phili ppin es, should wait until it remits the intet'est due the foreig n lender before payi ng t he withholding tax-at - source . Othe rw i se , the government wi 11 be at the met' CY of the taxpayer wt1o may take t i me in remitting t h e inte rest to the fore ign l ender." <West rn P lawan Ti�ber Corpor tion v. Co111missioner of Internal Revenue, CTn Ca s e Nt1. 3f.'5L~'�, J�1..t TlP. 5, l ~387, quoting Construct�on Resources of As ia, Inc. v . Co ~is s ion r of Interna l Reven ue, CTA Ca s e No . 3307, Nev. 2 5 ,. 1983.) We do not intend to depart ft-om the t'Lilin gs th ese precedent cases . In fa ct, We have to pr eserv e the ~ g ~ci ty of th e j udg ment. P tition ttr, h taken efl..1 in the much r� earlier case of B ye r Ph eeutieals, Inc. v. Co mis sion e r of Internal Revenue, "W., � r. ctn� c:li.n~lly , t" Ul~ t ll c:tt s in e �~ t h e t' n y a 1 t � e s i n q u e s t i o n c o u . I !:!..!)_:!;. b e p a i. d en' t' e 111 i t t e d i n 1. '3 7 ~~~ b y p e> t i t i D 11 e t' Ba y e t ' Ph a r ' ma c e t l t i c c.~ 1 s , Inc � t; o n o n -- t ' e s i d !?!Yt f' o t' e i ~] n c nt' p o t' at i n n Ba y P t' Akttenge s 3 ll s c h a lft, lerverkus e n n ya e r' m~ l'~ I< ~...1o~..R._______j;_g___________~_ .!:n t.t:.?.J�________.!-2..~n.h. !:g.?.:.tcJ �::.t. .i.PJ~_�., P 1'1 �~ i t j o n ��) t~ w'"" r; t\ n d f! t ' n o obli~Filtion t o wU~ hhold i" lld p a y inco me t <.~ x - -at - s o u t ' c !? nn s "� i d t' o y a l t i e s � � � " <Underscoring su~pl.ed) ln that case , the r oyaltie s cou ld not be remitted to the non-resident foreign corporation due to Central Bank restrictions, and so the Cout't ruled th at the time of payment of the royalties is the mat1.1ration p o int of the wit hholding duty. It bears emphasis, therefore, that if the income

DECISION - C.T.A. CASE NO. 3951 - 9- payable to a non-resident cot"pOt"ation can be paid or remitted because there are no restrictions again st its payment or remittance thereof, the liability to withhold and pay the ta~ thereon attaches at the time of accrual, not at the time of actual remittance. In this case , there are no such restrictions , hence, the li ability of petitioner to withhold and pay the income ta~ withheld at source from interest due it foreign c reditor attaches at the time of the accrual of s id int er st and not at the time of etual p~yment or remitt ance thereof. It is interesting to n ote, whethet" by co incidence or by design th t th p titio n et", in the admin i s t rat ive 1 v 1 or even in its pleadings in this Court , nev Qr 111ent ioned about t he liability "to withhold arose only when the paym nts become with thi s duty as well as th e mand a te of Secti on 54 that the withholding t a x b p a id within 2 5 days from the end of th e c a lend ar quarter when the wi t hh t1 1 ding was mi:l de. an "acct"ltal" vet"S lts "due~ma11dable a nd paya ble" situation." ( p. 18, petit i onet"' s memot"andum; Und erscoring s upplied) The intt"o duction of the :

DECISION - C.T.A. CASE NO. 3951 - 10 - mi splace d becau se it creates a nPw ver s ion from the position t ."\I< en by the p e t i t i o n e t' i n t h e ad mi n i s t t' at i v e l e v e l '"' n c:l f:' v e n i n ple adin!;,l S fi led in thi s that "the w i t h h o l d j n q t a >< o n t h e s ;a i d i n t e t' e s t i n c o m�~ an d royalties were paid to the government when the said and WP.t' e abt'oad �� � \.'lh ;.::~ tf?Vet' a mount has been acct' ued i n the bool-<s, the withholding tax due is ultimately paid to the upon of the sai d a mou nt acc t� ued." ( Un de t' scot' in g sup p J. i e d ; P1�' o test; 1 e t t e t' , PP� 2L~4 - 2 4 5, BIR records.) We could only sur mise th at the We stf?t' n Palawan deci sio n pt� obahly influ e nced s u c h t'f?--a lignment �of at'gt.tments. But just the s.":\me , the ins e t'�l; i on of the ph t' a s e "d ue, and dem a ndab l e" is of no mo ment and \.'Jill not in a ny wa y alter the stand this Co u rt h as co nsistently taken. It should be reme mbe re d that the p etit ioner is usin~J the acct�ual systE>m of accou n t i ng . Und e t' t h at .) s y s t e m, an i t e m t h at i s d e f i n i t e 1 y a s c e t' t a i tH~ d a s to .":\mot..m t and ac l<no~o-Jled ge d to be due has " acc t' t_\ed", t' e c e i p t o f i nco me i s n o t e s s en t i a 1 t o co n s t i t u t e "inco me". <R ev enue Act l ':H 8, ~7~ U=.:, 40 Sta. lOEA, Lichtenberger Fet~guson Co. v. Welch C. C. A., Cal. f Thus a "cot'pot�at ion which 5L~ �, F. �=~ nd 570, ~)72 .) /

--- DECISION - C.T.A. CASE NO. 3951 - 11 - made i t s income tax t~ettwn on acct~tlal ba s is, by deducting from gross in co me all losses and expenses acct~uing dt_n~ing t h a t yeat~, whethr!t~ payable ot~ not, was t~ e q u i t~ e d t o d e d u c t a 1 1 t~ e s e t~ v e s on i t s b o o k s , including t~eset~ve fot~ income taxes �. � ; tax having " acc t~ued" in economic and bool<keeping se n se" <U .s. v. An de t~son, '+55 Ct. 131, 13L�, ;:;::E,g U.S. 422 70 L . Ed. 3'+7 >. In the same vein, the wit hh o l di n g tax s ho uld be paid to t h e govern ment upon accr u a l The seco n d issue raised by the petitioner involves a question as the assessment made for the fourth <4th> quarter (1975) should have bee n included in the CTA Case No. 3421. In fact, i t has alt~eady been t~esolved in that cas e and that herein petitioner was ordered to pay such deficiency withholding tax. To assess again herein Petitioner would be tantamount to double assessment on the same taxab l e year which is grossly unfa i r to t h e petitionet~ . ihe Court recognizes that the burden of proof is on the taxpayer contest i ng the validity or correctness of an as s essment to prove not only that the respondent is wrong but that he <taxpayet") is right. All pre s umpti on s are in favor of the a sse s sment. I <Inter- correctness of the tax /~ I

'. DECISION - C.T.A. CASE NO. 3951 - 12 - provincial Autobus Co., Inc. v. Collector of Internal Revenue, 98 Phil. 2'30, Jan. 31, 1'356. > n n d i f 1: h P. t a x p <"'. y e t' f a i 1 s t o p t �� 1:' 5 e n t e v i d e n c e o t' .) rw o o f i. n s '-' p p en~ t o f h i s a 1 l e q '" t i n. n ~; , t h i c:; Co IJ r�t w i l 1 s IJ c:; t a i n t h e as s e c:; s men t a g a i n s t t h e t a>< pay e t~ No. 3 7 1 3 , J C'\ n tt a t"y' i.~ 5, 1r::J8 5 . ) IN VI EW OF THE FOREGO 1NG, j t 11 d Q 111 ��' n i c:; h P. t' e by render e d or derinq p e titioner tn p a y r~spo nd ent the amount of P 3 05, 1E,3. 35 as def ic iency withholdi ng tax annuf\1 intet"e s t ft� o m Nove mbet' ;?. '3 , 1979 t o July 31, 1'3BO, plu s ;=: oi'. intet"est f t� om Aur,;p.1s t 1, 1'380 until fully paid b~t no y n. t o a p e t' i o c:f o f t h t ' e e <3 > e r.w s p tit' <; '-' "" n t t o P � No � 1 7 0 ~3 . SO ORDERED. ~E .) GRUBA ~s~oei Judg l! 46u

.. DECISION - C.T.A. CASE NO. 3951 - 1 3 -- WE CONCUR : C R T ::t F 1: CA,- ::t 01'-.J I h en� e by c e 1�' t i f y t h �"~ t t h i s d e c i s i on was reached after due consu lt ation a mong the members of the Cour' �t of Ta>< ApptHill~; i ll ar.�c tn' c:l i':"I !1C(> ~�Jith Se ction n rticl~ VIII o f th e Constitutio n . ~ ;,;\Q.. ~ ERNESTO D. ACOSTA no P1�' !�? ~-, i. d i. J u r1 ~~ P. Court of Ta M nppea ls 46~