AEGIS PEOPLE SUPPORT, INC. [ FORMERLY PEOPLESUPPORT (PHILIPPINES, INC..] v. COMMISSIONER OF INTERNAL REVENUE

REPUBliC OF THE PHiliPPINES Court at Tax Appeals QUEZON CITY FIRST DIVISION AEGIS PEOPLESUPPORT INC. C.T.A. CASE NO. 8085 [FORMERLY PEOPLESUPPORT (PHILIPPINES), INC. ] , Members : Petitioner, ACOSTA, P.J. UY, and - versus- FABON-VICTORINO, JJ. COMMISSIONER OF INTERNAL Promulgated: REVENUE, 2012 ,� J UL Q9 9 ;_jDa ,..._, Respondent. - ~ ~ X- - - - - - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - -------X DECISION UY, J.: Before the Court is a Petition for Review filed on April 15, 2010, seeking the tax refund or the issuance of tax credit certificate in the amount of P66,177,830.87, representing petitioner's alleged excess payment of its income tax for taxable year 2007. THE FACTS Petitioner, Aegis PeopleSupport, Inc., is a domestic corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with principal office at PeopleSupport Center, Ayala corner Senator Gil Puyat Avenues, Makati City. It is registered with the ~ 000701

DECISION CTA CASE NO. 8085 Board of Investments (BOI) under its former name PeopleSupport (Philippines), Inc., with Certificate of Registration No. 2003-059 dated April 22, 2003 as a new and pioneer IT Export Service firm in the field of Customer Contact Center. 1 As such, it was issued a Certificate of ITH 2 Entitlement CE No. 2008-000145 issued on March 24, 2008.3 Also, petitioner is registered with the Philippine Economic Zone Authority (PEZA), under its former name PeopleSupport (Philippines), Inc., as a new Ecozone IT (Export) Enterprise to engage in the establishment of a contact center which will provide outsourced customer care services and business process outsourcing (BPO) under Amended Registration Certificate No. 03-17-IT dated June 19, 2007.4 Petitioner is likewise registered with the SIR as an income taxpayer, with OCN No. 9RC0000247326 on March 9, 2000. 5 On the other hand, respondent is the duly appointed Commissioner of the Bureau of Internal Revenue (SIR) empowered to perform the duties of said office including, among others, the power to decide, approve and grant refunds or tax credits of erroneously or excessively paid taxes, as provided by law. r On April 15, 2008, petitioner filed with the SIR, through the electronic filing and payment system (eFPS), its Annual Income Tax Return (ITR) for 1 Par. 1.8, Admitted Facts, OSFI, Docket, pp. 200-201 2 Income Ta x Holiday 3 Exhibit "F" 4 Exhibits "G" and "I" 5 Exhibit "E" 000702

DECISION CTA CASE NO. 8085 taxable year 2007, under Reference No. 120800002188132. 6 Thereafter, petitioner filed its amended Annual ITR for taxable year 2007 via the BIR's eFPS, under Reference No. 120800002209352 on April 29, 2008.7 On the same date, petitioner filed its Audited Financial Statements with the Revenue District Office (ROO) No. 47 of the BIR. 8 Meanwhile, on December 3, 2008, petitioner amended its Articles of Incorporation changing its name from PeopleSupport (Philippines), Inc. to Aegis PeopleSupport, Inc.9 Subsequently, on April 8, 2010, petitioner filed with the BIR Revenue District Office (ROO) No. 47, an administrative claim for refund or issuance of tax credit certificate (TCC) and an Application for Tax Credits/Refunds (BIR Form No. 1914) for its excess payment of income tax for taxable year 2007 in the amount of P66,177,830.95. 10 Respondent's inaction on petitioner's administrative claim for refund prompted the filing of the instant Petition for Review on April 15, 2010. Respondent posted an Answer 11 to this petition, through registered mail, on June 7, 2010 interposing the following special and affirmative defenses: 6 Par. 1.13, Admitted Facts, OSFI, Docket, at p. 201, Exhibit " S" 7 Par. 1.15, Admitted Facts, OSFI, Docket, at p 201, Exhibit " U" 8 Pars. 1.16 and 1.18, Admitted Facts, OSFI, Docket, at pp. 201-202 9 Par. 1.3, Admitted Facts, OSFI, Docket, at p. 200; Exhibit "C" 10 Par. 1.19, Admitted Facts, OSFI, Docket, at p. 202; Exhibit "DD" 11 Docket, Vol. I, p. 174- 176 000703

DECISION CTA CASE NO. 8085 "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) Taxes paid and collected are presumed to be made in accordance with the laws and regulations, hence, not creditable or refundable; 9) It is incumbent upon the Petitioner to show that it has complied with the provision of Section 204(C) in relation to Section 299 of the 1997 Tax Code, as amended; 10) In an action for tax credit or refund, the burden is upon the taxpayer to prove that he is entitled thereto, and failure to discharge the said burden is fatal to the claim (Emmanuel & Zenaida Aguilar v. Commissione~ CA-GR No. Sp. 16432, March 30, 1990 cited Aban, Law of Basic Taxation in the Philippines, l 5t Edition, p. 206); 11) Claims for refund are construed strictly against the claimant, the same partake the nature of exemption from taxation (Commissioner of Internal Revenue vs. Ledesma, 31 SCRA 95) and as such, they are looked upon with disfavor. (Western Minolco Corp. vs. Commissioner ofInternal Revenue, 124 SCRA 121)." The issues having been joined , this case was set for pre-trial on July 9, 201012. As directed by the Court, the parties filed their Consolidated Joint Stipulation of Facts and Issues13 on July 26, 2010 which was approved in the Resolution 14 dated July 28, 2010. During trial, petitioner presented two (2) witnesses, Liana Lorenzo and ~ 12 Minutes of Pre-Trial Conference on July 9, 2010, Docket, Vol. I, p. 197 13 Docket, Vol. I, pp. 199-205 14 Docket, Vol. I, p. 207 000704

DECISION CTA CASE NO. 8085 ICPA Katherine Constantino, in support of its claim. On the other hand, respondent's counsel manifested during the hearing held on November 17, 2011 that he would not present evidence, as the issues involved in the instant case are purely legal. 15 On January 31, 2012, petitioner submitted its Memorandum 16; while respondent failed to file her Memorandum as per records verification dated February 1, 2012. 17 Accordingly, the case was submitted for decision on February 3, 2012. 18 Hence, this Decision. THE ISSUES The main issue and sub-issues submitted by the parties for this Court's resolution are as follows: Main Issue: "Whether or not petitioner is entitled to the refund or issuance of a TCC in the amount of Php66,177,830.95, representing the excess regular corporate income tax erroneously paid by the petitioner during CY 2007. 19" Sub-issues: "3.1. Whether or not petitioner derived income in the gross amount of One Hundred Eighty-Nine Million Seventy- Nine Thousand Five Hundred Seventeen Pesos (Php189,079,517.00) as foreign exchange gain for CY 2007; 3.2 Whether or not the foreign exchange gain of 15 Minutes of the Hearing held on November 17, 2011, Docket, Vol. II, p. 651; Resolution dated ~ November 29, 2011, Docket, Vol. II, p. 653 16 Docket, Vol. II, pp. 664-696 17 Docket, Vol. II, pp. 697 18 Docket, Vol. II, p. 699 19 Par. 2, Stipulated Issues for Trial, OSFI, Docket, Vol. I, p. 203 000705

DECISION CTA CASE NO. 8085 Php189,079,517.00 derived by petitioner was made subject to RCIT at the rate of thirty-five percent (35%); 3.3 Whether or not the RCIT on petitioner's foreign exchange gain for CY 2007, amounting to Php66,177,830.95, was remitted and paid to the BIR; 3.4 Whether or not the foreign exchange gain of Php189,079,517.00 derived by petitioner is attributable to petitioner's registered activity with the BOI and the PEZA; 3.5 Whether or not petitioner is entitled to an income tax holiday (ITH) for its registered activities for taxable year 2007 under the Omnibus Investments Code of 1987 pursuant to its Board of Investments and Philippine Economic Zone Authority (PEZA) registrations. 3.6 Whether or not the foreign exchange income derived by petitioner is exempt from the RCIT under Section 27(A), Tax Code; 3.7 Whether or not petitioner's right to claim a refund of its alleged erroneously/excessively paid income tax was duly substantiated. 20 " Petitioner's arguments Petitioner avers that it is entitled to an income tax holiday on its PEZA- registered customer support services for taxable year 2007, pursuant to Executive Order (EO) No. 226, as amended by Republic Act (RA) No. 7916. According to petitioner, it derived foreign exchange gains from its hedging activities in taxable year 2007 amounting to P189,079,517.00. Petitioner's r realized foreign exchange gains on hedging for taxable year 2007 was allegedly subjected to the thirty-five percent (35%) regular corporate income 20 Par. 3, Sti pulated Issues for Tria l, OSFI, Docket, Vol. I , pp. 203-204 00070G

DECISION CfA CASE NO. 8085 tax under Section 27(A) of the National Internal Revenue Code (NIRC) of 1997, as amended and the tax due thereon amounting to P66,177,830.95 was paid and duly remitted by petitioner to the BIR. Considering that the said realized foreign exchange gain on hedging for taxable year 2007 was allegedly attributable directly to petitioner's PEZA-registered activities, petitioner claims that it is exempt from the 35% regular corporate income tax under Section 27(A) of the NIRC of 1997, as amended. Respondent's arguments On the other hand, respondent argues that petitioner failed to demonstrate that the tax, which is the subject of this case, was erroneously or illegally collected. Furthermore, respondent alleges that the taxes paid and collected are presumed to be made in accordance with the laws and regulations, hence, not creditable or refundable. According to respondent, it is incumbent upon petitioner to show that it has complied with Section 204(C) in relation to Section 229 of the NIRC of 1997, as amended, to be entitled to a refund. THE COURT'S RULING In general, the applicable provisions of the NIRC of 1997, as amended, in filing a claim a refund or tax credit are Sections 204(C) and 229 thereof, which read: "SEC. 204. Authority of the Commissioner to .J\ Compromise/ Abate/ and Refund or Credit Taxes. - The Commissioner may - ~ 000707

DECISION CTA CASE NO. 8085 XXX XXX XXX (C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty: Provideft howeve~ That a return filed showing an overpayment shall be considered as a written claim for credit or refund." "SEC. 229. Recovery of Tax Erroneously or Illegally Collected. - No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provideft howeve~ That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid." Based on the foregoing, in filing a claim for a tax refund or issuance of a tax credit certificate for erroneously collected or illegally assessed taxes, the r administrative and judicial claims for refund must be filed with in two (2) years from payment thereof. 000708

DECISION CTA CASE NO. 8085 In the instant case, petitioner's refund claim pertains to taxes allegedly paid excessively or erroneously for the taxable year 2007. Records show that petitioner filed its 2007 Annual Income Tax Return on April 15, 2008 21 . Counting from this date, petitioner had until April 15, 2010 within which to file its claim for refund or issuance of tax credit certificate both in the administrative and judicial levels. Evidently, petitioner's administrative claim for refund filed on April 8, 201022 and the Petition for Review filed on April 15, 201023, were both filed within the two-year prescriptive period. We now look at the specific incidents which allegedly gave rise to petitioner's instant refund claim. Petitioner contends that as a BOI and PEZA registered enterprise, it is entitled to the income tax holiday incentive provided under Book VI of EO No. 226, otherwise known as the Omnibus Investments Code, as amended, in relation to Article 39 thereof; Section 23 of RA No. 7916, as amended, otherwise known as the Special Economic Zone Act of 1995 ("PEZA Law"); and PEZA Memorandum Circular No. 32-2005 dated September 15, 2005. Article 39 of Executive Order No. 226, as amended, the Omnibus Code, provides: "INCENTIVES TO REGISTERED ENTERPRISES ARTICLE 39. Incentives to Registered Enterprises. - All registered enterprises shall be granted the following incentives to the extent engaged in a .~ preferred area of investment; ~ 21 Exhibit " PPPP", Docket, Vol. II, pp. 611 -617 22 Exhibit " DD", Docket, Vol. II, pp. 553-561 23 Petition for Review, Docket, Vol. I, pp. 5-24 000709

DECISION CfA CASE NO. 8085 Pag e 10 of 21 (a) Income Tax Holiday.- (1) For six (6) years from commercial operation for pioneer firms and four (4) years for non-pioneer firms, new registered firms shall be fully exempt from income taxes levied by the National Government. Subject to such guidelines as may be prescribed by the Board, the income tax exemption will be extended for another year in each of the following cases:" (Emphasis supplied) Additionally, Section 23 of Republic Act No. 7916, otherwise known as the Special Economic Zone Act of 1995 ("PEZA Law"), provides that business establishments operating within the Ecozones shall be entitled to the fiscal incentives as provided under Presidential Decree No. 66, the Law creating the Export Processing Zone Authority, or those provided under Book VI of Executive Order No. 226. Section 23 of RA No. 7916, in relation to Presidential Decree (PD) No. 66 and EO No. 226, states: "SECTION 23. Fiscal Incentives. - Business establishments operating within the ECOZONES shall be entitled to the fiscal incentives as provided for under Presidential Decree No. 66, the law creating the Export Processing Zone Authority, or those provided under Book VI of Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987." Petitioner was incorporated with this primary purpose : "(t)o engage in the business of customer support services by providing information and database service on the Internet including web-based applications in the Philippines and providing or furnishing any and all forms or types of services, data and facilities relating to providing information on consumer products ~ 000710

DECISION CTA CASE NO. 8085 and services through the internet; and otherwise, to carry on and conduct a general business relating to internet services."24 In the Consolidated Joint Stipulation of Facts and Issues, the following matters were admitted by the parties: (a) that petitioner is registered with the Board of Investments, under its former name PeopleSupport (Philippines), Inc., under Certificate of Registration No. 2003-059 dated April 22, 2003 as a new and pioneer IT Export Service Firm in the field of Customer Contact Center pursuant to BOI Certificate of ITH Entitlement CE No. 2008-000145; and, (b) that petitioner is registered with the Philippine Economic Zone Authority, under its former name PeopleSupport (Philippines), Inc., as a new Ecozone IT (Export) Enterprise to engage in the establishment of a contact center that will provide outsourced customer care services and business process outsourcing under Amended Registration Certificate No. 03-17-IT dated June 19, 2007. In support of its claim, petitioner presented its BOI 25 and PEZA 26 Certificate of Registrations, Registration/Supplemental Agreements executed between PEZA and petitioner, 27 letter from PEZA,28 Notice of ITH Extension Approval 29 and Notice of Approval of Start of Commercial Operations (SC0)30 f' for its various operating locations, the details of which are summarized as follows: 24 Par. 1.2, Admitted Facts, OSFI, docket, p. 200; Exhibit "C", Docket, Vol. II, p. 395 25 Exhibit "F", Docket, Vol. II, p. 411 26 Exhibits "G" and "I", Docket, Vol. II, pp. 412- 414 27 Exhibits "K", "M", "N", "0", "P", and "NN", Docket, Vol. II, pp. 415-441 and 586-589 28 Exhibit "JJ", Docket, Vol. II, p. 582 29 Exhibits " HH ", Docket, Vol. II, pp. 579-580 30 Exhibit "II", "KK", "LL", and "MM", docket, pp. 581, 583, 584, and 585 000711

DECISION CfA CASE NO. 8085 PROJECT AS PER CERTIFICATE OF NUMBER OF INCOM ETAX EXHIBIT REGISTRATION REGISTRATION YEARS WITH HOLIDAY (ITH) AGREEMENT / C ER INCOME TAX PERIOD/STARTING Exhibit F DATE FOR TH E Exhibits K TIFICATE OF HOLIDAY AVAILMENT OF TH E and HH REGISTRATION INCENTIVE ITH PeopleSupport 2003-059 under 6 years April 22, 2003 to April (petitioner's former BOI dated April 22, name) 4 years plus 1 21 , 2009 Cebu Contact 2003 bonus yea r Center, Asia Town 03-17 IT under October 1, 2003 to I.T. Park, Cebu PEZA dated August September 30, 2008 12, 2003 New Project with 4 years June 2005 to May Exhibit M Base Figure at the 2009 and JJ PeopleSupport 6 years Center March 2006 (start of Exhibit N 2nd, 3'd, 4th and 5th 6 years commercial operation) and II 6 years Floors of Skyrise 4 years May 2007 (start of Exhibit P Building, Asiatown IT commercial operation) and MM Park December 2006 (start Exhibit 0 SM Baguio and KK Cyberzone Bldg. of commercial 6780 Ayala Avenue, operation) Exhibit NN Makati City (6th and and LL 8th Floors) August 1, 2007 to July 31, 2011 6780 Ayala Avenue, Makati City (11 th and 12th Floors) Based on the foregoing, petitioner is entitled to an income tax holiday for taxable year 2007 for its registe red activities, provided it complies with the conditions set forth by the PEZA Law and EO No. 226. In this regard, it must be emphasized that the income tax holiday incentive does not necessarily include all kinds of income which petitioner may receive during the period of entitlement. The Rules and Regulations Implementing Republic Act No. 7916, read in part: "PART VII Incentives to ECOZONE Enterprises Rule XIII Application and Entitlement 000712

DECISION CTA CASE NO. 8085 SECTION 1. Application for Availment ofIncentives- All applications for availment of incentives shall be filed with PEZA. SECTION 2. Scope of Entitlement - New or expanding ECOZONE Developers/Operators, Export, Free Trade, Domestic Market, Utilities, Facilities and Tourism Enterprises, except ECOZONE Service Enterprises as defined under Section 2(p), Rule I of these Rules, registered on or after the effectivity of these Rules, shall be entitled to the fiscal incentives provided in Sections 24 and 42 of the Act. XXX XXX XXX SECTION 5. Limitation of Entitlement to Incentives - Incentives granted by the PEZA shall apply only to registered operations of the ECOZONE Enterprises and only during the period of its registration with PEZA." (Emphasis supplied) Revenue Regulations No. 20-02 clarified the tax treatment of income earned from unregistered activities, to wit: "REVENUE REGULATIONS NO. 20-02 SUBJECT: Clarifying the Tax Treatment of Income Earned from Unregistered Activities by Enterprises Registered under the Bases Conversion and Development Act of 1992 and the Philippine Economic Zone Act of 1995 TO: All Internal Revenue Officers and Others Concerned These Regulations are issued to clarify the internal revenue tax treatment of income earned from unregistered activities by enterprises that are registered with the Subic Bay Metropolitan Authority, the Clark Development Authority, or the Philippine Economic Zone Authority, as the case may be. SECTION 1. Tax Treatment - Income derived by an enterprise registered with the Subic Bay Metropolitan Authority (SBMA), the Clark Development Authority (CDA), or the Philippine Economic Zone Authority {PEZA) from its registered activity/ies shall be subject to such tax treatment as may be specified in its terms of registration ~ (i.e., the 5% preferential tax rate, the income tax holiday, ,. 000713

DECISION CTA CASE NO. 8085 or the regular income tax rate, as the case may be). Nonetheless, whatever the tax treatment of said enterprise with respect to its registered activity/ies, income realized by such registered enterprise that is not related to its registered activity/ies shall be subject to the regular internal revenue taxes, such as the 20% final income tax on interest from Philippine Currency bank deposits and yield or any other monetary benefit from deposit substitutes, and from trust funds and similar arrangements, the 7.5% tax on foreign currency deposits and the 5%/10% capital gains tax or 1/2% stock transaction tax, as the case may be, on the sale of shares of stock." (Emphasis supplied) Clearly, to enjoy the incentives granted under the PEZA law, the taxpayer's income must be effectively related with the conduct of its registered trade or business. Likewise, Executive Order No. 226 provides that the incentives granted under the said law shall only be "to the extent engaged in a preferred area of investment."31 Thus, for petitioner to enjoy the income tax holiday incentive provided under the PEZA law and EO No. 226, petitioner's income must be effectively related with the conduct of its registered trade or business. An effectively related income may be interpreted to mean as those income derived from the business activity in which the corporation is engaged in, considering that a taxpayer may also receive income not directly connected or related to its business activity. Consequently, petitioner must also establish that its income relating to the subject tax refund is actually gained or received by it in relation to the conduct of its registered business activity. 31 Article 39 of Executive Order No. 226 000714

DECISION CTA CASE NO. 8085 Pursuant to BOI Certificate of ITH Entitlement CE No. 2008-000145, petitioner is registered as a new and pioneer IT Export Service Firm in the field of Customer Contact Center. 32 Petitioner is likewise registered with the PEZA, under its former name PeopleSupport Philippines), Inc., as a new Ecozone IT (Export) Enterprise to engage in the establishment of a contact center which will provide outsourced customer care services and business process outsourcing under Amended Registration Certificate No. 03-17-IT dated June 19, 2007.33 Petitioner also cited PEZA Memorandum Circular No. 32-2005, which purportedly clarified the tax treatment of gains derived by PEZA-registered entities from their foreign exchange transactions. The pertinent portion of the said PEZA Memorandum Circular is hereunder reproduced: "The tax treatment of foreign exchange (forex) gains shall depend on the activities from which these arise. Thus, if the forex gain is attributed to an activity with income tax incentive (Income Tax Holiday or 5% Gross Income Tax), said forex gain shall be covered by the same income tax incentive. On the other hand, if the forex gain is attributed to an activity without income tax incentive, said forex gain shall likewise be without income tax incentive, i.e., therefore, subject to normal corporate income tax." Following the issuance of the above-mentioned PEZA Memorandum Circular are BIR Rulings interpreting the tax treatment of forex gains of PEZA/BOI-registered entities, where the BIR consistently held that the f realized forex gains are exempt from income tax provided that they are attributable, connected or intimately related to the registered activities which 32 Exhibit "F", docket, p. 411 33 Par. 1.11, Admitted Facts, OSFI, docket, p. 201; Exhibits "G" and "I", docket, pp. 412-414 000715

DECISION CTA CASE NO. 8085 enjoy similar fiscal incentive.34 Petitioner therefore, has the burden of proving that the foreign exchange gain of P189,079,517.00 is attributable to its registered activity with the BOI and the PEZA, specifically, the establishment of a contact center which will provide outsourced customer care services and business process outsourcing. According to petitioner, it significantly derived its service fees by servicing its US-based clients who pay in dollars. On the other hand, the bulk of its expenses consist of the payroll of its employees, the rent on the lease of office space, and utilities such as water, electricity, and communication service providers, which it necessarily had to incur in order to conduct its business and had to be paid in pesos. As a consequence, it was necessary to convert the dollars it received from its customers to pesos, which would be used for its expenses. To convert its dollars to pesos, petitioner allegedly entered into an agreement with a bank wherein it agreed to sell specified amounts of dollars to the bank on pre-determined dates and at pre-determined exchange rates. There were occasions when its pre-determined exchange rate would be higher than the prevailing market rate. Whenever petitioner would sell its dollars at a rate higher than the prevailing market rate, it would recognize a :::: 7 ::~::~:~:xt:r:~::~:::~~3: ::~ result thereof, petitioner realized afor} 34 BIR Ruling No. DA-195-08, BIR Ruling No. DA-375-08, BIR Ruling No. DA-(IL-011) 107-08, BIR Ruling No. DA-(C-295) 723-09, BIR Ruling No. DA-(IL-009) 089-10 35 Exhibit " FFFF" 000716

DECISION CTA CASE NO. 8085 In its original and amended Annual Income Tax Returns36 for taxable year 2007, petitioner refl ected taxable income of P196,129,583.00 and a corresponding income tax due of P68,645,354.05 using the regular corporate income tax rate of 35% as follows: Sa les/Reven uesjRecei pts/Fees p - Less: Cost of Sa les/Services Gross Income from Operation 4 411,542.00 Add: Non-Operating and Other Income Total Gross Income ( 4,411,542.00) Less: Deductions Taxable Income 201,246,931.00 Tax Rate (except MCIT rate) Income Tax Due (35%) 196,835,389.00 705,806.00 196 129,583.00 35% P68, 645, 354 .0 5 The Non-Operating and Other Income in the total amount of P201,246,931.00, which was reported under the regular rate column shown above, included realized foreign exchange gains on hedging in the amount of P189,079,517.00. Breakdown of the Schedule of Non-Operating and Taxable Other Income from Schedule 4 of its Annual Income Tax Return is as follows: Commission Income p 113 848.00 Interest Income from Loan Other Income 11,956,746.00 Realized Forex Gains Total Other Income 96,820.00 189, 079, 51 7. 00 p 201,246,931.00 Out of the P68,645,354.05 total income tax due, P66,177,830.9537 pertains to the income tax on the realized foreign exchange gains on hedging, which is the subject of the present claim . The alleged realized foreign of t exchange gains on hedging in the amount of P189,079,517.00, being part 36 Exhibits " PPPP", "S" or "RR", "SS", "W", " UU ", " VV", and "WW" 37 P189,079,517.00 x 35% regular corporate income tax rate 000717

DECISION CTA CASE NO. 8085 "non-operating and other income", was thus subjected to 35% regular corporate income tax. The Court-commissioned Independent Certified Public Accountant (ICPA) Katherine 0. Constantino, provided an independent computation of realized foreign exchange gain on hedging as follows: 38 A B c d e (b-e) FORWARD SPOT (d *a) RATE AT RATE PER DIFFERENCE DOLLAR MATURITY IN RATES FOREIGN EXCHANGE AMOUNT 49 .0500 BOOKS 0.45694 MATURITY 49 .0800 48 .59306 0.48629 GAIN ON HEDGING SOLD DATE 49 .0580 48 .59371 0 .8 2 9 1 2 $ 3,000 ,000.00 49 .0750 48 .22888 0 .84588 PER COMPUTATION 02/28/07 49 .0480 48 .22912 1.51200 2 '000 '000 .00 02/28/07 49 .0700 47 .53600 1.53400 p 1,370 ,807 .52 3,000 ,000 .00 03/30/07 49 .0460 47 .53600 2 .8 6 8 0 0 2 ,000 ,000 .00 03/30/07 49 .0650 46.17800 2 .88700 972 ,578.48 3,000 ,000.00 04/30/07 49 .0400 46.17800 2.79400 2 ,000 ,000.00 04/30/07 49.0600 46 .24600 2.81400 2 ,487 ,365 .88 3,000 ,000.00 05/31/07 49.0350 46.24600 3 .6 9 1 0 0 2 ,000 ,000 .00 05/31/07 49 .0550 45 .34400 3.71100 1,691 ,763 .93 3,000 ,000 .00 06/29/07 49 .0300 45.34400 2.36600 2 ,000 ,000 .00 06/29/07 49 .0500 46 .66400 2 .38600 4 ,536 ,000 .00 3,000 ,000 .00 07/31/07 49 .0300 46 .66400 4 .05600 2,000 ,000 .00 07/31/07 49 .0450 44 .97400 4 .07100 3,068 ,000 .00 3,000,000 .00 08/31/07 49 .0250 44 .97400 5 .2 9 5 0 0 2,000 ,000 .00 08/31/07 49 .0400 43 .73000 5 .3 1 0 0 0 8,604 ,000.00 3,000 ,000 .00 09/28/07 49 .0200 43 .73000 6 .2 6 1 0 0 2,000 ,000 .00 09/28/07 49 .0350 42 .75900 6 .27600 5,774 ,000 .00 3, 000 ,000 .00 10/31/07 49.0150 42 .75900 7 .6 0 4 0 0 2,000 ,000 .00 10/31/07 49 .0300 41.41100 7.61900 8,382 ,000 .00 11/29/07 41.41100 3 '000 '000 .00 11/29/07 5,628 ,000 .00 2,000 ,000 .00 12/28/07 3,000 ,000 .00 12/28/07 11 ,073,000 .00 2,000 ,000 .00 $55,000,000.00 7,422 ,000 .00 7,098 ,000 .00 4 ,772 ,000 .00 12,168,000 .00 8 ,142 ,000.00 15,885 ,000 .00 10,620 ,000 .00 18,783 ,000 .00 12,552 ,000 .00 22 ,812 ,000 .00 15,238 ,000 .00 p 189,079,515.81 Petitioner submitted its Certificate of Foreign Exchange Contracts from Citibank, Schedules of Service Revenue, Certificate of Inward Remittances t and customer advices, System Generated General Ledger, Citibank N.A.'s credit advices, Schedule of Gain/Loss on Foreign Exchange Contracts, Bank 38 Annex 7, Exhibit " HHHH" (ICPA Report)

DECISION CTA CASE NO. 8085 Statements - peso and dollar, Service Agreements, Sales Invoices, General Ledger of Revenues, Reconciliation of Detailed Schedule of Revenue to General Ledger and Credit Memos39 to support its service revenues. It also submitted Summary of Payments and supporting documents covering disbursements40 to support its expenses. Even though the ICPA matched the revenues with inward remittances 41 , showed the movement of petitioner's Citibank dollar account for the revenues42, and provided schedules of some of the significant expenses43, petitioner still failed to establish that the foreign exchange gain of P189,079,517.00 derived by petitioner is attributable to its registered activity. Simply put, petitioner's evidence failed to support its allegation that the activities from which the amount of foreign exchange gain arose are attributable to activities with income tax incentive, as it failed to establish the nature of the foreign exchange contracts entered by it with Citibank from which the subject foreign exchange gains were derived. Further, a perusal of the movement of petitioner's Citibank dollar account shows other credits which can be part of the source of the realized foreign exchange gain on hedging that is not directly attributable to petitioner's registered activity with the BOI and the PEZA. Thus, a determination of the amount of foreign exchange gain, which is actually 39 Exhibits "AAA", " BBB", "CCC", " DOD", "EEE", "FFF-1" to "FFF-48", " GGG ", "LLL- 1" to "LLL-24", "MMM", "NNN'', "000", " PPP" to "PPP-3", "QQQ-1 " to "QQQ-233", "XXX", " YYY" "ZZZ", "AAAA", " BBBB" and "EEEE-1" to "EEEE-29" 40 Exhibits "HHH" "III" "JJJ" "KKK" and " WWW-1" to "WWW-299" lO, 41 Annexes 8, 9, and 11, Exhibit :'HHHH " (ICPA Report) 42 Annex 12, Exhibit "HHHH" (ICPA Report) 43 Annexes 13, 14, 15, and 16, Exhibit "HHHH" (ICPA Report) 000719

DECISION CTA CASE NO. 8085 related to petitioner's PEZA/BOI-registered activity, would be difficult, if not impossible. At this juncture, it is well-settled that a tax refund is in the nature of a tax exemption which must be construed strictissimi juris against the taxpayer. The taxpayer must present convincing evidence to substantiate a claim for refund. 44 Considering that petitioner failed to submit substantial evidence to support its claim for refund, the instant Petition for Review must necessarily fail. WHEREFORE, the instant Petition for Review is hereby DENIED for insufficiency of evidence. . SO ORDERED . EARs~ ~~~ticUeY WE CONCUR: Lz:-co. ~ ERNESTO D. ACOSTA Presiding Justice 44 Phi/am Asset Management Inc. vs. Commissioner of Internal Revenue, G.R. Nos. 156637/162004, December 14, 2005; Far East Bank and Trust Company vs. Commissioner of Internal Revenue, G.R. No. 149589, Resolution promulgated on September 15, 2006 0007~0

DECISION CTA CASE NO. 8085 CERTIFICATION Pursuant to Article VIII, Section 13 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's Division. ~~- ~ ERNESTO D. ACOSTA Presiding Justice 000721