CTA Case No. 4287 (Decision)

REPUBLIC OF THE PHILIPPIMEB COURT OF TAX APPEALS QUEZON CITY MAR FISHING CO., INC., Petitioner-~ - ver-sus - C.T.A. CASE NO. 4287 COMMISSIONER OF INTERNAL REVENUE, Respondent. >~ -- - - ------- X DEC I I DN This case involves an assessment of F'311~229.99 inclusive of surcharge and interest for alleged deficiency withholding tax at sour-ce on techni,cal s er-vice fees for- the year- 1982 due to Br-itish Co 1umbia Packers~ Ltd. of Canada~ a non - r-esident for-eign cor-por-ation. Petitioner~ Mar- Fishing Co.~ Inc. (MFCI)~ i s a domesti c cor-por-ation engaged in the busines s of tuna fishing and canning for expor-t. In the course of its business operation~ .i t e:�te c uted a three- year contr-act with British Columbia Packer-s~ Limited ( BCPL) ~ a Canadian fishing company~ for- technical services to be render-ed by BCPL to petitioner in the area of quality control, maintenance and other related . matters. Under.. the agreement, petitioner- shall pay 4 .12

DECISION CTA CASE NO. 4287 - 2- BCPL the amount of 60,000.00 Canadian dollars or equivalent to P430,500.00 per year. In a letter dated July 27, 1987, received by petitioner on August 5~ 1987, respondent assessed against petitioner the amount of P311,729.99 inclusive of surcharge and interest for alleged deficiency withholding ta :-: at source for the year 1982. In a letter dated August 6, 1987 petitioner protested the assessment on the ground that the technical services fees supposedly paid to British Columbia Packers , Ltd. of Canada were merely accrued in the books of petitioner but were not actually paid. On March 28, 1988, respondent served upon petitioner a warrant of levy of real property which seeks to enforce the collection of the said deficiency tax. In a letter dated April 4, 1988, petitioner requested for the cancellation of the warrant of 1evy as we 11 as the assessmer . n question. However, in a letter dated May 25, 1988, which petitioner received on June 9, 1988, respondent denied the request for cancellation of the assessment and the warrant of levy. Hence, on July 8, 1988, petitioner filed the instant petition for revie~. Petitioner alleged that although the said technical service fees were accrued in the books of the corporation they were 413

DECISION CTA CASE NO. 4287 - 3- never paid to BCPL. In fact, in view of financial losses incurred by petitioner~ said fees were condoned or waived by BCPL. Since no payment was actually effected and BCPL did not receive any income, there arose no legal obligation on the part of BCF'L to pay the ta:�: nor on the part of the petitioner to withhold the same. On the other hand~ respondent in his an";wer maintains that the 1iabi 1i ty to withhold and pay income tax attaches at the time of accrual and not at the time of actual remittance or payment thereof. He c~ted Section 54 of the Tax Code then applicable which expressly provides that payment of withholding tax - at-source shall be made within twenty-five (25) days from the close of each calendar quarter. As reported by a BIR examiner, the amount of F'413~196.00 has already been paid to BCPL. Based on the records and evidences presented, we agree with the petitioner that the technical service fees were never paid to BCPL. This conclusion is very evident from the following documentary evidence presented by the petitioner during the hearing, namely: Exhibit "B" . - notarized declaration of BCPL Vice President for Finance Mr. Morley Chang dated November 1, 1988 executed at the City of Vancouver, Canada to prove that 414

DECISION CTA CASE NO. 4287 - 4- technical fee was never remitted and in fact condoned/waived; "C" - Letter dated November 15~ 1988 of Gregorio R. Suarez, Director of Foreign Exchange Regulation Department of the Central Bank to prove that there was no application made for remittance of fees to BCPL during the year 1982; "D" - Certification dated November 22, 1988 of Joaquin, Cunanan and Company attesting that no technical service fees were remitted by the petitioner for the year 1982; "E" - Certification under oath dated April 4~ 1988, by Mr. P.P. Paul ina, Vice-President of Mar Fishing Company, that the said fees were merely accrued in the books of the company but were not pci:\id. Respondent for his part, never presented any evidence to controvert said facts. In fact~ he did not even present the BIR examiner who alleged that payment of the technical service fees was actually made. On the contrary, respondent sLtbmi tted his case based on the pleadings and records of the case and did not even bother to submit any memorandum. The remaining and only issue presented :. .. : r e this Court for resolution is whether or not petitioner is liable for deficiency withholding tax at source on technical service fees set up or accrued as payable to non-resident foreign 415

DECISION CTA CASE NO. 4287 - :5 - � corporation when said fees were not actually remitted and paid but were subsequently waived or condoned by the payee thereof. The pertinent provisions of law involved here are Section 53(e)(2) (now Section 50) and S ~; ,_L"'"'n 54 ( a) ( b) (c ) ( d ) (e) ( f ) (now Section 51) of the National Internal Revenue Code quoted hereunder: Section 53. Withholding of tax at source. x. >~ !{ XXX XX>: XXX (e) Non-resident aliens and foreign corporations. X X X. (2) Non-resident foreign corpo- rations.-- In the case of foreign corporations subject to tax under this Title, not engaged in trade or business within the Philippines, there shall be deducted and withheld at the source in the same manner and upon the same items as provided in subsection (b) (1) of this section, as well as on remunerations for technical services or otherwise, a taY equal to thirty-five per centum (35X) thereofa Provided, That interest on foreign loans shall be subject to withholding tax of fifteen per centum ( 15%) � This tax sha 11 be returned and paid in the same manner and subject to the same conditions as provided in Section 54. This deduction and withholding shall not be required in the case of reinsurance premiums ceded to foreign insurance corporations not engaged in trade or business in the Philippines. Section 54. Returns and payment of taxes withheld at source. (a) Quarterly returns and payment of taxes withheld. Taxes deducted and withheld under Section fifty-three shall be covered by a return and paid to the 416

DECISION CTA CASE NO. 4287 - 6- Revenue District Officer, Collection Agent, or duly author! zed Treasurer of the city, or municipality where the withholding agent has his legal residence or principal place of �business, or where the withholding agent is a corporation, where the principal office is located. The ta :-:es deducted and withheld by the withholding agent shall be held as a special fund in trust for the Government until paid to the collecting officers. The Commissioner of Internal Revenue may, with the approval of the Minister of Finance, require these withholding agents to pay or deposit the taxes deducted or withheld at more frequent intervals when necessary to protect the intere�t of the Government. I.h.e retyrn _____:tor:::._ fi.flal !1;i.t_t)hg_!d.:tf19 tax shall be filed and the Q~.:'t.IDJ~!.flt made wi _thin 2~----q~_s_ from___j;he ~lose of . each.. ca!_enQa_r:......_gg_ar~er, while the r_g..tur::n.___fq_r:__c;_red i tab 1e ~!_thho 1d_;i.I1Q taxes ?..b~!.L_.Q!:L_fJ led and the Qavment IT!,!:tde n_p1; l.~er:. . than the last day .of th~ mont.b .f_g_}J..Q.winq the !;_lose of the quarter dur inq !1hich withholding ~as made. (As amended by Batas Pambansa Blg. 41.) (Underscoring supplied) (b) Penalties for failure to render returns; for rendering false or fraudulent returns; for non-payment of taxes withheld.- The g;urcharges prescribed in Section seventy-three of this Title in cases of failure to render returns, for filing false or fraudulent returns and for failure to pay tax �hall apply to failure to file returns or pay the ta>: required Lmder this Section. In case the taxes deducted and withheld are not paid within the time prescribed, there shall be added to the amount of the unpaid ta>: a surcharge of twenty-five per centum plus interest at the rate of twenty per centum per annum from the date the same became due unti 1 paid. If the withholding agent is the government or any of its agencies, political subdivisions or instrumentalities, or is a government owned or controlled corporatio~, ~he employee thereof 417

DECISION CTA CASE NO. 4287 - 7- responsible for the withholding and remittance of the tax shall be personally liable for the surcharge and interest imposed herein. (As amended by P.O. No. 1773.) (c) Statement of income payments made and taxes withheld.- Ever , withholding agent required to deduct and withhold taxes under Section fifty-three shall furnish each recipient~ in respect to his or its receipts during the calendar quarter or year, a written statement showing the income or other payments made by the withholding agent during such quarter or year, and the amount of the ta:�: deducted and withheld therefrom, simultaneously upon payment at the request of the payee, but not later than the 20th day following the close of the quarter in the case of corporate payee, or not 1ater than March 1 of the following year in the case of individual payee for creditable withholding taxes. For final withholding taxes, the statement should be given to the payee on or before January 31 of the succeeding year. (As amended by Batas Pambansa Blg. 41.) (d) Annual returns. - Ever: withholding agent required to deduct anti withhold taxes under Section fifty- three shall submit to the Commissioner of Internal Revenue a reconciliation statement of quarterly payments and list of payees and income payments. In the case of final withholding taxes, the return shall be filed on or before January 31 of the succeeding year, and for creditable withholding taxes, not later than March 1 of the year following the year for which the annual report is being submitted. This return, if made and filed in accordance with regulations approved by the Minister of Finance, shall be sufficient compliance with the requirements of Section seventy ~ seven of this Title in respect to the income payments. (Ibid.) � 41 8

DECISION CTA CASE NO. 4287 - B- The Commissioner may, by regulations , grant to any withholding agent a reasonable extension of time to furnish and submit the return required in this subsection. (I bid. ) (e) Surcharge and interest for failure to deduct and withhold. - If the withholding agent, in violation of the provisions of the preceding section and implementing regulations thereunder, fai 1s to deduct and withhold the amount of ta>: required under said section and regulations, he shall be liable to pay in addition to the tax required to be deduc ted and withheld, a surcharge of fifty per centum if the failure is due to willful neglect or, with intent to defraud the Government, or twenty- five per centum if the failure is not due to such causes, plus interest at the rate of fourteen per centum per annum from the time the tax is required to be withheld until the date of assessment. (Ibid.) (f) Income of recipient.- Income upon which any creditable tax is required to be withheld at the source under Section 53 shall be included in the return of its recipient but any excess of the amount of tax so withheld over the tax due on his return shall be refunded to him subject to the provisions of Section 295; if the income tax collected at source is less than the tax due on his return, the difference shai 1 be paid in accordance with the provisions of Section 51. (As amended by Ba tas Pambansa Blg , 41.) In accordance with the aforementioned provisions of the National Internal Revenue Code, a tax equivalent to 35% of the remunerations for technical services or other income due a non- resident foreign corporati on shall be deducted and withheld at source. The corresponding return for 419

DECISION CTA CASE NO. 4287 - 9- final withholding tax shall be filed and the payment made within 25 days from the close of each calendar quarter while the return for creditable withholding tax shall be filed and the payment made not later than the last day of the month following the close of the quarter during which the withholding was made. For failure to deduct, withhold, file and pay the tax, a corresponding penalty is provided for by the law. Under subsection (f) of Section 54, any income upon which a creditable tax has been withheld, the recipient is required to include such income in his return. Any excess of the amount of tax so withheld over the tax due on his return shall be refunded t~ him but if the creditable withholding tax is less than the tax due, the difference shall be paid to the Bureau of Internal Revenue. Necessarily, in case of withholding ta~< on income due a non-resident foreign corporation, the income is first accrued in the books of the withholding agent pending actual remittance abroad. For some reason or another; delay in actual remittance occurs and the determination when the tax is due became an issue in many previous cases. This Court had the occasJion to interpret the I aforequoted provisions of the Tax Code and to pass 4 2 ()

DECISION CTA CASE NO. 4287 - 10 - upon similar issues in the following cases, namely1 ll11stern PalaN~n Corporation vs. 3544; Dillingha� (Philippin�sJ Inc., vs. Th� 3139, affirmed by the Court of Appeals in CA-GR 20425 dated May 3i, 1990; Bay�r Phar�ac�uticals, Case No. 2846, March 16, 1979, affirmed by the Supreme Court in GR No. 72054 dated Oct. 10, 1986J and lately the case of Uy11th Suaco Laboratori11s vs. 3981, affirmed by the Court of Appeals in CA-GR SP� No. 16111 dated May 23, 1991. In all the above cases cited except the Bayer case, this Court has consistently held that the withholding taxes on various income due .. __ -,_ resident foreign taxpayers are payable at the time of accrual of said income and not at the time of actual remittance. In the Bayer case, in view of the different situation involved, this Court has deviated from the above ruling and held that the withholding tax is not due on accrual but on actual remittance. This is so because of Central Bank restrictions whic:h prevented the withholding � agent to remit earlier the income due the non-resident 4 2 1. -��r ,

.� DECISION CTA CASE NO. 4287 - 11 - foreign taxpayer. The decision of this Court lies not only on the provisions of law involved but also on equity and fair play. If the withholding agent and the non- resident foreign taxpayer have in fact recognized in the books income due the latter by reason of their contract or agreement and in fact have accrued the same, the government to which the corresponding tax is due should not be prejudiced by the laxity, delay or negligence of the withholding agent in remitting the income abroad. Withholding taxes should immediately be pajd ~ respondent within the period provided under Section 54 aforequoted. Along the same principle, if the withholding agent who wishes to remit the income abroad is prevented by the government to do so~ it is but equitable that he should not be held liable immediately but should wait until such time the withholding agent can comply with his remittance obligation. This is so because the government itself is the one who prevented the taxpayer from receiving the "gains, profit or income", equitably it should not ask for the tax due. However, the instant case is different from the rest of the cases aforementioned. Unlike the Bayer case and the other cases cited, the income 4?2

DECISION CTA CASE NO. 4287 - 12 - due the non-resident foreign corporation in the instant case was never remitted for it wag condoned or waived by the recipient BCPL due to substantial financial losses by MFCI. Basic as it is, if there is no income received, there is no tax to be paid. Withholding tax is a system introduced by the government to ensure collection of taxes due, especially considering the difficulties it may encounter in collecting the same as in the caw � of a non - resident foreign corporation without a branch or off ice in the Phi 1ippines. If the income from which tax shall be imposed was not actually realized, no tax may be collected therefrom. Inasmuch as the amount of P413,196.00, the technical service fee due the BCPL, was condoned by it, the same may be considered as a gift or donation to MFCI subject to gift tax as of taxable year 1988, the year said income was waived by BCPL in favor of MFCI. This manner of treating condonation as gift is provided for under Section 50 of Revenue Regulations No. 2, issued by """ the Secretary of Finance upon recommendation of the Commissioner of Internal Revenue, quoted hereunders "The cancellation and forgiveness of indebtedness may amount to a payment of income~ to a gift~ or to a capital transaction~ dependent upon the circumstances. If, for example, an 4?3

DECISION CTA CASE NO. 4287 - 13 - individual p~rforms services for a creditor who~ in consideration thereof, cancels the debt, income to that amount is realized by the debtor as compensation for his service. If, however, a creditor merely desires to benefit .;a debtor and w~ thout any consideration therefor cancels the debt, the amount of the debt ~s a_gif~frqm the creditor to the debtor ~nd need not be included in the latter ' s gro_!?_~_income. If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of the payment of a dividend.'! (Underscoring supplied) WHEREFORE, this instant assessmlfnt is her&by dismissed, without prejudice to the detar~nination by the respondent of the Qift tax liability of the petitioner and British Columbia Packers Ltd. (BCPL) in accordance with the provisions of Sections 101 and 102 (now Sections 91 and 92) of the National Internal Revenue Code. No pronouncement as to cost. SO ORDERED. Quezon City, Metro Manila~ October 4, 1991. t~\Q~ Q~c.. ERNESTO D. ACOSTA Associate Judge WE CONCUR: ~~ ,...__ C. ROAilUIN te Judge 4?4

DECISION CTA CASE NO. 4287 - 14 - CERT I F I CAT I 0 N I hereby certify that this decision was reached after due consultation among the members of the Court of Tax Appeals in accordance with Section 13~ Article VIII of the Constitution. ~-~ � Presiding Judge Court of Tax Appeals .. 4?5