COVANTA ENERGY PHILIPPINE HOLDINGS INC. v. COMMISSIONER OF INTERNAL REVENUE

REP UB LI C OF THE PHILIPP INES C o urt o f Tax Appea ls QU EZON CITY SECOND DIVISION COVANTA ENERGY PHILIPPINE CT A CASE NOS. 7338 & 7365 HOLDINGS, INC . Pe titioner, Members: -versus- CASTAN EDA JR ., Chairperson CASANOVA and MINDARO-GRU LLA J.J. COMMISSIONER OF INTERNAL Promulgated : REVENUE, -· -. ~· ·'f:~>¥.-;""T .• JUL 2 7 2010 Respondent. , . -~-~~-~-----~----------------------------------------------------------------~1-~-~~--;~;:,-~-------x ~. I DEC I SION ~ r. .. . ·:MJND'AR . · ..,..-. .· . O~'GRULLA . . J.:.. . . ~-::~~~~1:-~~~;l~.- ~1:~~::~- <-,~~ - · .·... ' _,.·:-:~?4~(~~~~~1~~~~'1-i$,;{2{ P~t{ti.ons · _ . for Review separqtely fil ~d by petiti·oner •·. .-~:1;~:::~:.~ :~~:::·"~:.;;~-y .'?~~~~- ~ :. -·. ·.. . . . . . . . -·- .,'~~'()""?;onlo Eri..~rgy . f ·hil.ippine Holdings, Inc., docketed as CTA Case Nos, . . ?~::~--;-(~~):· :': ~ > .,:. .:-" .. . ·i~~ ·~.;c., .~·~'~~:;:7365, . but which · were consolidated. both seeking the , -~~:)',:·.~-"~~~ h~.e.11otb6 of. ·the assessments for deficiency minimum . corporate ·. . · . : . - _;- " = ~ :;o . .. . .. . . ·-.-..... . . ·. .·: · : inc.ome tm( value-added tax, and expanded withho lding tax' for taxable . . .-. .·. . . ye6r 2001 , in the aggregate amount of Pl ,222,298.98, broken down OS fo llows: {. 76 5

Covanta Energy Philippine Holdings, Inc. v. CIR Page 2 of 22 CfA Case Nos. 7338 and 7365 DECISION Basic Interest Compromise Total CT A Case No. 7338 VAT p 276 ,923 .26 p 163,669.95 p 25 ,000 .00 p 465 ,593 .21 EWT 180,904 .06 107,999.72 - 288 ,903.78 Subtotal p 457,827.32 p 271,669.67 p 25,000.00 p 754 ,496.99 CT A Case No. 7365 Basic Surcharg e Interest Total MCIT p 257,900 .03 p 64,475.00 p 145,426 .96 p 467 ,801 .99 TOTAL p 715,7 27 .35 p 336 ,144 .67 p 170,426 .96 p 1,222 ,298 .98 Petitioner Covanta Energy Philippine Holdings, In c. ("CEPHI") is a corporation duly o rganized and exis tin g under Philippine la ws , with principal office located at th e 17 1h Floor, Robinsons Equitable Tower, ADB Avenue corner Poveda Street, Ortiga s Center, Pasig City 1 and registered with the Bureau of Internal Revenue (BIR) Revenue Di stri ct Office (RDO) No. 43.2 Respondent Commissioner of Internal Revenue ("CIR") is the official authorized under Section 4 of the National Internal Revenue Code (NIRC) of 1-99..7 fo asse ss and collect internal revenue ta xes, as well as to decide \ t ' 1 Reg istered address per Certificate of Registration is 401 One Magnificent Mile Bldg., San Miguel Ave., San Antoni o, Pasig City 2 Annex " B", Petition for Review, CTA Case No. 7338, Docket, p. 19 [ 76 6

Covanta Energy Philippine Holdings, Inc. v. CIR Page 3 of 22 CfA Case Nos. 7338 and 7365 DECISION value-added tax (VAT) and expanded withholding tax (EWT) for taxable year 2001 , in the respective amounts of P465,593 .21 and P288 ,903.78.3 Respondent based his findings of deficiency VAT on the following grounds: 4 "Erroneous Computation of Output Tax- Verifi cation showed that taxpayer did not compute the output tax based on gross receipts as required under Section 108 of the Notional Internal Revenue Code. Disallowed Input Taxes - Verification showed that port of input taxes claimed were for the purchase of non-vat goods, while some were purchases properly attributable to its affiliates and subsidiaries in violation of Sec . 110 of the Notional Internal Revenue Code." The deficiency VAT assessment is detailed as fo llows: Accounts Receivable as of January 1 2001 p 1 749 930.00 Add: Management Fee for the year 21 362 425.00 Total p 23,112,355.00 Output Ta x p 2,311 235 .50 Less: Creditable In12ut Tax Input Tax per General Ledqer____ ·--- - - ~- 1,840,258.33 --~----- Less: Disa llowed In12ut Taxes 22 424.74 Add : Input Taxes from previous quarter 132 703.93 Allowable Input Ta x p 1 950 537.52 VAT Due p 360 697.98 Add: Input Ta x carried over to next quarter 210 852.87 Less: VAT Paid per return 294 627.59 Deficiency Value-Added Ta x p 276 923.26 Add: Interest up to January 10 2005 163 669.95 Compromise penalty for non-filing of Quarterly lists of Sales and Purchases 25,000.00 Tota.I--Deficien cy Valu e-Added Tax p 465 593.21 On the other hand, the basis of petitioner's alleged deficiency EWT is as follows: 5 "Fa ilure to withhold taxes - · Verification · showed that taxpayer foiled to withhold on various income payments subject to expanded wi thholdin g tax in viola tion of Revenue Regulation 2-98." 3 Exhibits "YYYY" and "ZZZZ", inclusive of submarkings, CTA Case No . 7338, Docket pp. 556-560 4 Exhibit "YYYY-2", CTA Case No. 7338, Docket p. 558 5 Exhibit "ZZZZ-2", CTA Case No. 7338, Docket, p. 561 (

Covanta Energy Philippine Holdings, Inc. v. CIR Page 4 of 22 erA Case Nos. 7338 and 7365 DECISION Account Withholding Tax Due Professional Fees p 320,228.71 Rental Ex12ense 371,522.69 Various contractors 79,480.67 Total EWT Due p 771 232 .07 Less: EWT remitted ----- - - · 590,328.01 Deficiency EWT --------·· 180,904.06 Add: Interest up to 01.10.05 107,999.72 Total Deficiency EWT p 288, 903.78 On January 19, 2005, petitioner fil e d two(2) separate protest letters addressed to respondent, 6 on th e assessments for VAT and EWT for taxable year 2001 in the aggregate amount of P7 54,496.99. On January 21, 2005, petitioner received respondent's Formal Letter of Demand and Assessment Notice dated · January 11 , 2005 , assessing petitioner for alleged deficienc y minimum c orporate income tax (MCIT) in the amount of P467 ,80 1.99 J On February 16, 2005, petitioner filed a protest letter on the foregoing · assessment, enumerating the factual and legal bases . --·. ... . ' ' --_ .:·, --~sl;,.~.port~ng ifs arguments against the subject assessment and requesting .· ~-. ~:~- -;'~- -~ :.;<~::~~·-::" _":' - - - - . . : · -:.~;·,~rtf\d'";dwal and cancellation of the same. 8 ..·' . .>;;~<,;---· . . = .~:--... ~- . . - . ··,; ~~-·;,.~!-~/te-<~~~~~q#-~t.-~f~~Je.:p _h_owever to render a · decision on petitioner' s ~-- ...... -~ ~.t·:~}~~ ~ r:~ '~ ~~~~-:' : ~~~ ._:.~... ' . . . .:~-; .-· j:;fg, '~i~ts,~bg?t)e.fi;tk).~er to elevate its claims before this Co-urt; which . . . .,. ':· -· ·~ :., ."' ~ ·~_;:.:~:; ._:::_~ ~~ -.- ~~:=· · . --.,, .- .... . . . . .:[:.' . ~ .. . . wer?'-docketed ,.as CT A Case No. 7338 and CTA Case No. 7365 . .. ~ ' - - - - - - - - -- - - 6 Par. 3, Stipulation of Facts, Joint Stipulation of Facts and Issues, erA Case No. 7338, Docket, p. 82 7 Annexes "C", "D",-and "E", Petition for Review, erA Case No. 7365, Docket, pp. 15-17 8 Annex "F", Petition for Review, CTA Case No. 7365, Docket, pp. 18-21 C.. 76 3

. "'" •' Covanta Energy Philippine Holdings, Inc. v. CIR Page 5 of 22 CTA Case Nos. 7338 and 7365 DECISION The Petition for Review docketed as CTA Case No . 7338 was fi led on October 10, 2005, seeking the cancellation and withdrawal of the assessments for deficiency VAT and EWT for taxable year 2001 in the total amount of P7 54,496.99. The Petition for Review docketed as CTA Case No . 7365 was filed on November 9, 2005, seeking the cance llation and withdrawal of the deficiency assessment for MCIT for taxable year 2001 in the total amount of P467,801.99. On December 6, 2005, respondent filed his Answer 9 for CTA Case No. 7338, interposing the following counter-arguments: "3. He SPECIFICALLY DENIES the allegations contained 1n paragraph 1 under the heading 'The Case'; paragraphs 3.4 and 3.5 under the heading 'Jurisdictional Allegations'; paragraph 5.1 under the heading 'The Issues'; paragraph 6.3 under the heading 'Discussion' (Computation of Output Tax); paragraphs 6.5, 6.6, 6.7 and 6.8 under the heading 'Discussion' (Disallowed Input Taxes) , paragraph 6.9 under the heading ' Discussion' (Compromise Penalty) , and paragraph 6.10 under the heading 'Discussion' (Expand~d Withholding Tax) of the Petition for being gratuitous and unfounded assertions of facts and/or law, the -trui h of the matter being that verification showed that .· ~ .c ·.-. • ·-'-'~ ~ · <pet~kmer did not compu te the output tax based on gross · ~~- ~: . ~;~ :. _~ceir)-t,5 -as- required under Section 108 of the National =:-·· '- ~~..7._~~~~ ·.:_ ·".;>.-I-nternal · Revenue Code of, 1997 which provides among · · ,. - --~ -~-- o thers: -·~ · .~· -. .... 'xxx XXX XXX The term 'gross receipts' means the tota l amount of money or its equivalent representing the contrac t price, compensation, serv1ce fee , rental or CTA C~se No. 7338, Docket, pp. 46-52 ~ 9 769

Covanta Energy Philippine Holdings, Inc. v. CIR Page 6 of 22 erA Case Nos. 7338 and 7365 DECISION royalty, including the amount charged for material supplied with the services and deposits and advanced payments actually or cons tructivel y received during the taxable quarter for the services performed or to be performed for another person, excluding va lue-added tax. XXX XXX xxx' Port of input ta xes cla im ed were for the purchase of non-vat goods, while some were purchases properly attributable to its affiliates and subsidiaries in violation of Section 110 of the Notional Internal Revenue Code of 1997 which provides, among others: 'xxx XXX XXX (2) The input tax on domestic purchase of goods or properties shall be creditable: (a) To the purchaser upon consummation of sole and on importation of goods or properties; and (b) To the importer upon payment of the value-added tax prior to the release of the goods from the cus tod y of the Bureau of Customs. However, in the case of purchase of services, lease or use of properties, the input tax shall be creditable to the purchaser, lessee or licensee upon payment of the compensation, rental, royalty or fee . XXX XXX xxx' The deficiency value-added tax was compu ted mainly from petitione r's failure to consid er the Accounts Receivable which accrued on December 31, 2000 in the computa tion of the output ta x and disallowance of some input taxes. The in come ta x re turns of foreign executives Oliver Cruz, Fronk Sine and Tim oth y Davis and their respective schedules showing their income tax computation and income details were submitted on 28 July 2004 and 9 August 2004, respectively. The ( 770

Covanta Energy Philippine Holdings, Inc. v. CIR Page 7 of 22 CTA Case Nos. 7338 and 7365 DECISION documents proved that the rental and other expenses from which input taxes amounting to P372,632.80 were previously disallowed in the Post-Reporting Notice formed port of th e foreign executives' compensation which was declared in their in come ta x return. Verification further showed that petitioner foiled to withhold on various in come payments subject to expanded withholding tax in violation of Revenue Regulations 2-98. Assessment of wi thholding taxes was based on the various contracts of lease and schedules of professional fees, rental expenses and repairs and maintenance accounts submitted by petitioner. All presumptions ore in favor of the correctness of tax assessments. The good faith of tax assessors and the validity of their actions ore presumed. They will be presumed to hove token into consideration all the facts to which their attention was called (C/R vs. Construction Resources of Asia, Inc. , 145 SCRA 671). It is incumbent upon the ta xpayer to prove the contrary (Mindanao Bus Company vs. CIR, 1 SCRA 538; CIR vs. Tuazon, In c., 173 SCRA 397) and failure to do so shall vest legality to re spondent's actions and assessments . Failure to present proof of error in the assessment will justify judicial affirmation of said assessment (Delta Motors Co. vs. Commissioner, CTA Case No. 3782, 21 May 1986; Commissioner of Internal Revenue vs. Court of Appeals, et a/., G .R. Nos. 104151 and 105563, IOMorch 1995) ." On January l 0, 2006-;- respondent filed his Answer 1o for CTA Case No . 7365, a ll eging the followir)g counter-arguments: "5. Verification by the Bureau of Internal Revenue examiners showed that petitioner foiled to pay the Minimum Corporate Income Tax (MCIT) required under Section 27(E) of the Notional Internal Revenue Code of 1997 (NIRC of 1997) which is imposed whenever the corporation has zero or negative taxable income. Section 27(E) of the NIRC of 1997 provides, thus: 10 CTA Case No. 7365, Docket, pp. 44-48 {,. 771

Covanta Energy Philippine Holding s, Inc. v. CI R Pag e 8 of 22 'CTA Case Nos. 7338 and 7365 DECISION 'Sec. 27. Rates of Income Tax on Domestic Corporations.- XXX (E) Minimum Corporate In come Tax on Domestic Corporations. - ( 1) Imposition of Tax. - A m1n1mum corporate income tax of 2% of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when minimum income tax is greater than th e tax compu ted under Subsection (A) of this Section for the taxable year. xxx' Revenue Regulation s No. 9-98 provides that 'for purposes of MC/T, the taxable year in which business operations commenced shall be the year in which the domestic corporation registered with the BIR '. Petitioner's Certificate of Registration with the BIR would show that it registered in 1997. Hence, petitioner became liable to MCIT beginning taxable year 2001. Re ve nue Regulations No. 9-98 further provides that the 2% MCIT rate shall be imposed on corporation's 'gross income' which is defined for sel ler of services, such as petitioner, as gross receipts less sales returns , allowances, discounts and cost of services . And 'cost of services' is defined as all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (a) salaries and employee benefits of personnel, consultants and specialists directly rendering the service, and (b) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies .t; 77 2

Covanta Energy Philippine Holdings, Inc. v. CIR Page 9 of 22 "ITA Case Nos. 7338 and 7365 DECISION Petitioner overs thai in order to provide its client the services specified in the alleged agreement it incurred expenses such as, but not limited to , salaries and employee benefits , offi c e re ntals , transportation , etc. which become port of its cos t . Ho wever, as found b y the BIR examiners petitioner was able to substantiate only the salaries and wages of its foreign e xecutives but not the direct costs and expenses it claimed it incurred to provide the services required by its client. Hence , the Iotter is disallowed . 6. The assessment was issued in accordance with low and regulations; 7. All presumptions ore in fa vor of the correctness of ta x assessments . (Commissioner of Internal Revenue vs . Construction Resources of Asia , Inc ., 145 SCRA 671) . " On March 27 , 2006, petitioner filed a Motion to Consolidate CTA Case No. 7338 with CTA Case No. 7365 11 , which was granted by this Court in a Resolution 12 dated April 28, 2006. During trial, petitioner presented documentary and testimonial evidence , which were formally offered in its Formal Offer of Evidence on July 21 , 2008. 13 .. Respondent likewise filed his Formal Offer of Evidence 14 on May 4, 2009 , which was admitted by the Court in a Resolution 15 dated June 22, 2009. 11 ITA Case No. 7338, Docket, pp. 77-80 12 ITA Case No. 7338, Docket, p. 95 13 ITA Case No. 7338, Docket, pp. 294-320 14 ITA Case No. 7338, Docket, pp. 729-732 15 ITA Case No. 7338, Docket, pp. 744 -745 { 77 3

Covanta Energy Philippine Holdings, Inc. v. CIR Page 10 of 22 ·GA Case Nos. 7338 and 7365 DECISION On October 7, 2008, petitioner filed a Supplemental Petition 16 with respect to its avoilment of tax amnesty under Republi c Act (R.A.) No. 9480. On August 24, 2009, petitioner filed a Supplemental Formal Offer of Evidence ,l7 as to Exhibits "IIIII" to "QQQQQ", representing the documents to prove its ovoilment of the tax amnesty. Upon admission of petitioner's supplemental documentary evidence, this Court ordered the parties to file their respective memorandum within thirty (30) doys.l s On January 4, 20 l 0, the consolidated cases were submitted for decision upon submission of respondent's Memorandum on December 9, 2009 and petitioner's Memorandum on December 17, 2009. The jointly stipulated issues 19 as stated in CTA Case No. 7338, ore as follows: "A . Deficien cy VAT Assessment I. WHETHER PETITIONER CORRECTLY COMPUTED ITS OUTPUT TAX BASED ON GROSS RECEIPTS FOR THE TAXABLE YEAR 200 l . II . WHETHER RESPONDENT ERRED IN DISALLOWING INPUT TAX IN THE AMOUNT OF ~22.424.74. 16 GA Case No. 7338, Docket, pp. 627-634 17 crA Case No. 7338, Docket, pp. 762-766 18 GA Case No. 7338, Docket, pp. 821-822 19 Stipulation of Issues, Joint Stipulation of Fads and Issues, GA Case No. 7338, Docket, pp. 84-85 C 77 4

Covanta Energy Philippine Holdings, Inc. v. CIR Page 11 of 22 ·CTA Case Nos. 7338 and 7365 DECISION Ill. WHETHER RESPONDENT ERRED IN IMPOSING A ~25 , 000.00 COMPROMISE PENALTY FOR ALLEGED NON-FILING OF QUARTERLY LISTS OF SALES AND PURCHASES. IV. WHETHER PETITIONER IS LIABLE FOR DEFICIENCY VALUE- ADDED TAX FOR THE TAXABLE YEAR 2001 IN THE AMOUNT OF ~465,593.21, INCLUSIVE OF INTEREST. B. Deficiency EWT Assessment I. WHETHER PETITIONER IS LIABLE FOR DEFICIENCY EXPANDED WITHHOLDING TAX FOR THE TAXABLE YEAR 2001 IN THE TOTAL AMOUNT OF ~288,903.78, INCLUSI VE OF INTEREST." The issues2o submitted by the parties for CTA Case No. 7365 are as follows: "1. WHETHER OR NOT PETITIONER RENDERS SERVICES PURSUANT TO A CONSULTANCY AND MANAGEMENT SERVICES AGREEMENT. II . WHETHER OR NOT PETITIONER'S COST OF SERVICES FOR 2001 CAN BE SUBSTANTIATED BY SUFFICIENT EVIDENCE. Ill. WHETHER OR NOT PETITIONER'S COST OF SERVICES FOR 2001 WAS GREATER THAN ITS GROSS RECEIPTS FOR THE SAME YEAR , THUS RESULTING IN A NEGATIVE GROSS INCOME FOR THE PETITIONER . IV. WHETHER OR NOT PETITIONER IS LIABLE FOR DEFICIENCY MINIMUM CORPORATE INCOME TAX AMOUNTING TO P47 6,801 .99 FOR TAXABLE YEAR 200 l." 20 Stipulation of Issues, Joint Stipulation of Facts and I ssues, CT A Case No . 7365, Docket, pp. 73-74 C 77 5

Covanta Energy Philippine Holdings, Inc. v. CIR Page 12 of 22 ITA Case Nos. 7338 and 7365 DECISION On October 7, 2008, petitione r filed a Supplemental Petition manifesting that it availed of the tax amnesty under Republic Act No. 9480 on March 3, 2008. In a Resolution dated June 22, 2009 , the Court held in abeyance the resolution of petitioner's availment of tax amnesty until the pertinent documents proving petitioner's application and compliance with the requirements of R.A. No. 9480 are submitted. Petitioner then filed its Supplemental Formal Offer of Evidence on August 24 , 2009 , submitting the following documents: 1. Exhibit "IIIII"- Notice of Availment of Tax Amnesty; 2. Exhibit "JJJJJ" -Tax Amnesty Payment Form (BIR Form No. 0617); 3. Exhibit "KKKKK"- UCPB BTR-BIR Deposit Slip; 4. Exhibit "LLLLL"- Tax Amnesty Return (BIR Form No. 2116); 5. Exhibit "MMMMM" - Petitioner' s Statement of Assets, Liabilities ·and Networth as o f December 31, 2005 (original declaration) ; 6. Exhibit "NNNNN" - Petitioner's Statement of Assets, Liabilities and Networth as of December 31, 2005 (amended declaration); 7. Exhibit "00000"- Petitioner's Annual Income Tax Return for taxable year 2005; 8. Exhibit "PPPPP" - Petitioner 's Audited Financial Statements as of December 31, 2005; and 9. Exhibit "QQQQQ" - Sworn Statement o f Ms . Kristine Sta. Maria. The foregoing exhibits were admitted by this Court on October 6, 2009. 21 21 CTA Case No. 7338, Docket, pp . 821·822 C.. 77G

Covanta Energy Philippine Holdings, Inc. v. CIR Page 13 of 22 'G A Case Nos. 7338 and 7365 DECISION At the outset, we address first the matter pertaining to petitioner's availment of tax amnesty. It is imperative that petitioner's alleged availment of tax amnesty and compliance with the requirements thereof be resolved. Should the validity of petitioner's alleged availment of tax amnesty and compliance with the requirements thereof be resolved in its favor, the stipulated issues in CTA Case No. 7338 specifically A. Deficiency VAT Assessment, Nos. I, II, Ill and IV and the stipulated issues in CT A Case No. 7365, Nos . I, II , Ill and IV will be rendered moot and the only issue which remains to be resolved would be whether petitioner is liable for the deficiency expanded withholding tax amounting to P288,903.78 for the taxable year 2001 in CTA Case No. 7338. A tax amnesty is a general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law. It partakes of an absolute forgiveness or waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a ... clean slate. 22 A taxpayer desiring to avail of the benefits of a tax amnesty must conform with the requirements specified under Section 2 of Republic Act (RA) No. 9480, effective May 24 , 2007 , which provides: 22 Commissioner of Internal Revenue vs. Marubeni Corpora!ion, G.R. No. 137377, December 18, 2001 C 77 7

Covanta Energy Philippine Holdings, Inc. v. CIR Page 14 of 22 ' CfA Case Nos. 7338 and 7365 DECISION "SECTION 2. A vailment of the Amnesty. - Any person , natural or juridical, who wishes to avail himself of the tax amnesty authorized and granted under this Act shall file with the Bureau of Internal Revenue (BIR) a notice and Tax Amnesty Return accompanied by a Statement of Assets , Liabilities and Networth (SALN) os of December 31 , 2005, in such form os may be prescribed in the implementing rules and regulations (IRR) of this Act , and pay the applicable amnesty tax within six months from the effectivity of the IRR." Revenue Memorandum Circular (RMC) No. 19-2008, enti tled "Circu larizing the Fu ll Text of A Basic Guide on the Tax Amnesty Act of 2007 for Taxpayers Who Wish to Avail of the Tax Amnesty Pursuant to Repub lic Act No . 9480 (Tax Amnesty Act of 2007)", specified the forms required to be submitted , to wit: 1. Notice of Availment of Tax Amnesty; 2. Statement of Assets , Liabilities and Networth (SALN) ; 3. Tax Amnesty Return (BIR Form No. 2116); and 4. Payment Form (BIR Form No. 0617)." The payment of the amnesty tax and the submission and accomplishment of the pertinent form s by the taxpayer shall be deemed full comp liance with the provisions of RA No. 9480. 23 A careful examination of the records shows that petitioner duly comp lied wi th · the requirements enumerated in RA No. 9480 as implemented by RMC No. 19-2008. Further, RA No. 9480 mandates that after a taxpayer qua lifies for tax amnesty, he shall be exempt from the payment of taxes, including civil, 23 Section 6(3) of Revenue Memorandum Circular No. 55-2007 { 778

Covanta Energy Philippine Holdings, Inc. v. CIR Page 15 of 22 · CTA Case Nos. 7338 and 7365 DECISION criminal or administrative penalties under the Ta x Code. Section 6 of RA No. 9480 reads: "SECTION 6. Immunities and Privileges.- Those who availed themselves of the tax amnesty under Section 5 hereof, and hove fully complied with all its conditions shall be entitled to the following immunities and privileges: (a) The taxpayer shall be immune from the payment of taxes, os well os additions thereto, and the appurtenant civil, criminal or administrative penalties under the Notional Internal Revenue Code of 1997, os amended , arising from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years." The foregoing is corroborated by respondent's witness, Ms. Dolores E. Somera , Assistant Chief of the Assessment Division of Revenue Region No. 9, who testified that petitioner availed of the tax amnesty granted under RA No. 9480 and that as a result , assessments on income and business taxes for taxable year 2005 and prtor years , including the subject year 2001, are abated and on]y the deficiency tax assessment on withholding taxes remained due and enforceable. 24 With the petitioner's availment of tax amnesty and compl ian ce with the said requirements under RA No. 9480, all the stipulated issues raised in CTA Case No. 7338 and CTA Case No. 7365 were rendered moot and academic, except the issue as to whether petitioner is liable for the deficiency expanded withholding tax amounting to P288,903.78. 24 Exhibit "1", Par. 6, CTA Case No. 7338, Docket, pp. 737-738 {. 779

· Covan t a Energy Philippine Holdings, Inc. v . CIR Page 16 of 22 · ITA Case Nos. 7338 and 7365 DECISION Based on respondent's finding that petitioner failed to w ithhold taxes on various income payments subject to expanded w ithhold ing tax in violation of Revenue Regulations No. 2-98, respondent assessed pe titioner for deficien c y EWT in th e amount P288 ,903 .78 (inclusive of interest) , computed as fo llows: Account Withholding Tax Due Professional Fees p 320 228.71 Rental Expense 371,522 .69 Various Contractors 79 480.67 Total EWT Due p 771,232 .07 Less : EWT Rem itted 590 328.01 Deficiency EWT p 180,904.06 Add : Interest up to 01.10.05 107 999 .72 Total Deficiency EWT p 288,903.78 The basic deficiency EWT assessment of P 180,904 .06 1s further broken down as follows: EWT Withheld Account EWT Due Deficiency EWT and Remitted Professional Fees p 320,228 .71 p 207,071.86 p 113,156.85 Rental Ex pense 371 522.69 309 811.77 61 710.92 Various Contractors 79,480 .67 73,444.38 6,036.29 . .. Tota l p 771, 232.07 p 590,328.01 p 180,904.06 On November 15, 2005, petitioner partia lly paid the deficiency EWT assessment in the amount of P188,204.96 which included the following: 2s p Basic ta x Interest 106,043.24 82,161.72 .. • Total p 188,204.96 --- 25 Exh ibits "QQQQ" and "QQQQ-1 ", crA Case No. 7338, Docket pp. 528-529 C 780

Covanta Energy Phi lippine Holdings, Inc. v. CIR Page 17 of 22 · CTA Case Nos. 7338 and 7365 DECISION Consequently, in its Memorandum, petitioner's discussion of the deficiency EWT assessment pertained to professional fees on ly. Thus , we find that respondent's deficiency EWT assessment on professional fees consisted of the following: 26 EWT Remitted per Professional Fees Paid to EWT Due Alpha list Difference 1 De Mesa p 9,774.70 p - p 9,774.70 2 J Beja 2,210.00 - 2,210.00 3 Jorkims Corp . 66,806.53 66,806.53 - 4 Lim 1,000.00 - 1 000.00 5 Luis Nakpil 46,031.51 46,031.51 - 6 Ma . Lourdes Mendoza 44,520.00 21,200.00 23,320.00 7 NSYNC 2,250.00 2,250.00 - 8 Various 50,244.70 - 50,244.70 9 R Manalo 800.00 - 800 .00 10 Reyes 1,000.00 - 1,000.00 11 Ruben Orillaza 49,482.82 49,482.82 - 12 Suatengco 1,250.00 - 1,250.00 13 Sycip Salazar Gatma itan - 1,301.00 (1,301.00) 14 William Mercer 20,000 .00 20,000 .00 - 15 Woodward Clyde 24,858.44 - 24,858.44 TOTAL p 320,228.70 p 207,071.86 p 113,156.84 Petitioner overs that respondent's assessment of deficiency EWT on professional fees was erroneous. Petitioner's Accounting Assistant, Ms. Rosita A. Beleno, in her sworn statement, explained the item described as "various" in respondent's computation of deficiency EWT, in this wiseY "Q: Under the heading 'Professional Fee' in this computation , there is an item described as 'various' with income payments allegedly amounting to P502,447 .04 and with alleged corresponding EWT o f P50,244.70. Pl ease tell us how th e amount of P502,447.04 desc ribed as 'v ari o us ' was arrived at, if you know? A: In the Schedule of Professional Fees 28 , there are several items described as ' Payroll' with no o ther details provided. So in the 26 Exhibit "FFFFF", CTA Case No. 7338, Docket, p. 585 27 Exh ibit "OOOO",CTA Case No. 7338, Docket, p. 504 28 Exhibits "EEEEE" and "EEEEE-1", CTA Case No. 7338, Docket, pp. 583-584 {. 78 1

Cova nta Energy Ph il ippine Holdings, Inc. v. CIR Page 18 of 22 · CTA Case Nos. 7338 and 7365 DECISION computation of deficiency EWT, the SIR lumped them all together under the title 'various'. Q: xxx Who received these payments which were described as 'Payroll' in the Schedule of Professional Fees? A: The majority of these payments under 'Payroll' were made to Mr. Ruben Orillaza, a consultant." In support of the foregoing testimony, petitioner presented in evidence various Check Vouchers, Journal Vouchers, General Ledger Batch Listings , Payroll Register/Summary, Schedule of Consultancy Fee and All owances and Monthly Remittance Returns of Creditable Income Taxes Withheld (Expanded) with Schedules of Tax on Compensation and Expanded . These documents showed that total professional fees paid by petitioner to Mr. Orillaza for taxable year 2001 amounted to P326 ,611.12 and the corresponding ten percent ( 10%) EWT of P32 ,661 .12 was withheld and duly remitted to the BIR , detailed as follows: Amoun t of EWT Professiona l Withheld and Exhibits Fees Paid Exhibits Remitted "GGGG" t o "GGGG-4", "GGGG-6" p 27 500.00 "III", "III -1" p 2,750.00 "FFFF" "FFFF-2" to "FFFF- 5" 27,500.00 "HHH", "HHH-1 " 2, 750.00 "EEEE" to "EEEE-5" 27,500.00 "GGG", "GGG-1" 2,750.00 "CCCC", "CCCC-2", "CCCC-4", "CCCC-5" 23,111.12 "EEE", "EEE-1" 2,311.12 "TTT" to "TlT-3" 32,000.00 "ZZ", "ZZ-1" 3,200.00 "NNN", "000" to "000-2" 32,000.00 "YY", "YY -1" 3,200.00 "KKKK", "KKKK-2", "KKKK-4" " KKKK-5", "VVVV" to " VVVV-5" 21,310.00 "KKK", "KKK-1" 2,131.00 "NNNN", "NNNN-2", "NNNN-3", "NNNN- 5" 27 500.00 "MMM " "MMM-1" 2 750.00 "MMMM-1" 27 500.00 "LLL" "LLL-1" 2 750.00 "JJJJ" "JJJJ-1" "JJJJ-3" 13 750.00 "JJJ" "JJJ-1" 1 375.00 "IIII" to "IIII-2" 13 750.00 "JJJ" "JJJ-1" 1 375.00 "HHHH" "HHHH-3" 6 190.00 "JJJ" "JJJ-1" 619.00 "YYY", "ZZZ" to "ZZZ-2", "AAAA", "AAAA-1 ", 81 -2 32,000.00 ''AAA'', ''AAA- 1'' 3,200.00 "SSSS" "SSSS-1" to "SSSS-2" 15,000.00 "KKK" "KKK-1" 1,500.00 78 2

Covanta Energy Philippine Holdings, Inc. v. CIR Page 19 of 22 · erA Case Nos. 7338 and 7365 DECISION Total P 326,611.12 I Total I P 32,661.12 I However, the Court noted that the payment to Mr. Orillozo in the amount of P15,000.00, as evidenced by Journal Voucher No. 271829 , was not listed under "Payro ll ", but it was separately indicated in the Schedule of Professional Fees prepared by petitioner.Jo Ms. Beleno , in her sworn statement, also stated that · another payment under "Payroll" was mode to Institutional Synergy, Inc. in the amount of P45,500.003l, with corresponding expanded withholding tax of P2,250.0Q.32 Evaluation of the computation of deficiency EWT assessment showed , however; that respondent's examiner recognized the said income payment and the remittance of the related expanded withholding tax. As regards the professional fees paid to Mr. De Meso , Bejo, and Manalo, petitioner was able to prove that the withholding taxes due thereon were duly remitted as evidenced by petitioner 's Journal Vouchers, General Ledger Botch Listing , Security Bonk Money Transfer App lication Form , Monthly Remittan ce Return of Creditable Income Taxes Withheld (Expanded) , and Schedule of Tax on Compensation and Expanded , summarized as follows: 29 Exhibit "SSSS", CTA Case No .. 7338, Docket, p. 533 30 Exhibit "EEEEE-1", CTA Case No. 7338, Docket, p. 584 31 Exhibits " PPPP" to "PPPP-3", CTA Case No. 7338, Docket, pp . 524-527 32 Exhibit "TI", erA Case No. 7338, Docket, pp. 397-399 { 783

Covanta Energy Philippine Holdings, Inc. v. CIR Page 20 of 22 • CTA Case Nos. 7338 and 7365 DECISION Amount of EWT Professional Withheld and Exhibits Fees Paid Exhibits Remitted "RRRR" to "RRRR-2" p 22,100.00 "KKK", "KKK-1" p 2 210.00 "ITIT" to "ITIT-2 8,000.00 "KKK", "KKK-1" 800.00 " UUUU" to "UUUU-2" 97,747.00 "KKK", "KKK-1" 9,774.70 Total p 127,847.00 Total p 12,784.70 In fine, petitioner's deficiency EWT liability for taxable year 2001 only amounts to P131 ,791 .02, computed as follows: Basic Deficiency EWT p 180 904 .06 Less: EWT on Professional Fees Paid to Ruben Oril laza p 32 661.12 De Mesa 9,774.70 J. Beia 2 210.00 R. Manalo 800 45,445.82 Adjusted Basic Deficiency EWT p 135 458.24 Add: 25% Surcharge 33 33,864.56 20% Deficiency Interest (01/10/02 to 01/ 10/05) 81 274.94 Total Amount Due on January 10, 2005 p 250,597.74 Add : 20% Deficiency Interest (01/ 11/05 to 11/ 15/ 05) 22 935.12 20% Delinquency Interest (01/ 10/05 to 11/ 15/05) P250 597.74 X .1698630 p 42 567.29 P 22,935.12 X .1698630 3,895.83 46,463 .12 Tota l Amount Due on November 15 2005 p 319 995.98 Less: Amount Pa id on November 15, 2005 Basic Tax P106 043.24 Interest 82,161.72 188,204.96 Amount Still Due P131,791.02 ,• ·r -. WHEREFORE , the instant Petitions for Review ore hereby PARTIALLY GRANTED . Accordingly, the deficiency value-added tax and deficiency minimum corporate income tax assessments for taxable year 2001 issued against petitioner ore CANCELLED and WITHDRAWN . However, petitioner is ORDERED TO PAY respondent the amount of . ONE HUNDRE D TH IRTY -O NE THOUSAND SEVEN HU NDRED NIN ETY -ONE PESOS 33 Imposed pursuant to Section 248(3) of the NIRC of 1997 C 784

Covanta Energ y Phili ppine Holdings, Inc. v. CIR Page 21 of 22 CTA Case Nos. 7338 and 7365 DECISION AND 02/100 (P131 ,791.02) , represen ting deficiency expanded withho lding tax, including the twenty-five percent (25%) surcharge imposed th ereon. Likewise, petitioner is ORDERED TO PAY : (a ) deficiency interest at the rate of twenty percen t (20%) per annum on the basic deficiency EWT of P29,415.0034 compu ted from November 16, 2005 until fu ll payment thereof pursuant to Section 249(B) of the NIRC of 1997; and (b ) delinquency interest at the ro te of 20% per annum of P 131 ,791 .02 which is the total amount sti ll due and on the 20% deficiency interest which have accrued as afore-s ta ted in paragraph (a) computed from January 10, 2005 until fu ll payment thereof, pursuant to Section 249(C) of the NIRC of 1997. SO ORDERED . ~ N. 1\11""~-C~ CIELITO N. MINDARO-GRULLA ,• Associate Justice WE CONCUR: Sk~~ c. ~~, o_. <juANITO C . CASTANEDA ,VJR . ~ CAESAR A. CASANOVA Associate Justice Associate Jus ti ce 34 Adjusted basic deficiency EWT of P135,458.24 less P106,043.24, which represents the amount pa id on November 15, 2005 78 5

.. Covanta Energy Philippine Holdings, Inc. v. CIR Page 22 of 22 GA Case Nos. 7338 and 7365 DECISION ATTESTATION I attest 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 . aA~~ c . G..r~d. . 2 VJ U'ANITO C. CASTANEDA, )f " . Associate Justice Chairperson CERTIFICATION Pursuant to Article VIII. Section 13 of the Constitution, and the Division Chairperson's Attestation , 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. L~- c._..A-.. ERNESTO D. ACOSTA Presiding Justice 78G