ACE/SAATCHI & SAATCHI ADVERTISING, INC. V. THE HONORABLE COMMISSIONER OF INTERNAL REVENUE

Republic of the Philippines COURT OF TAX APPEALS Quezon City FIRST DIVISION ACE/SAATCHI & SAATCHI CTA Case No. 8439 ADVERTISING, INC., For: Assessment Petitioner, Members: -versus- DEL ROSARIO, Chairperson UY,and MINDARO-GRULLA, JJ. THE HON. COMMISSIONER OF Promulgated: l I ', 00 q,.rll'\. INTERNAL REVENUE, ,,it" ~ "'"1. '""\, Respondent. ; X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - DECISION MINDARO-GRULLA, l_.: This resolves the Petition For Review filed by Ace/Saatchi & Saatchi Advertising, Inc., as petitioner, against the Honorable Commissioner of Internal Revenue (CIR), as respondent, with the Court in Division, pursuant to Section 7 (a) (1) of Republic Act (RA) No. 1125, An Act Creating the Court of Tax Appeals, as amended 1, as well as Rule 4, Section 3 (a) (1), in relation to Rule 8, Section 4(a), of the Revised Rules of the Court of Tax Appeals (RRCTA?. c.. 1 Sec. 7. Jurisdiction. -The CTA shall exercise: (a) Exclusive appellate jurisdiction to review by appeal, as herein provided: XXX XXX (1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue; XXX XXX 2 Rule 4. Sec. 3. Cases within the jurisdiction of the Court in Division. - The Court in Division shall exercise: (a) Exclusive original over or appellate jurisdiction to review by appeal the following: XXX XXX

CTA Case No. 8439 Page 2 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION Petitioner seeks the reversal and setting aside of the Final Decision on Disputed Assessment (FDDA) issued by the Commissioner of Internal Revenue, finding it liable for deficiency income tax, value-added tax (VAT), withholding tax - compensation (WTC), withholding tax - expanded (EWT), and final withholding tax (FWT) in the total amount of P403,438,088.46 for the taxable year 2006. Petitioner Ace/Saatchi & Saatchi Advertising, Inc. is a domestic corporation duly organized and existing under Philippine laws, with principal office located at Saatchi House, 2296 Don Chino Races Avenue Extension, Makati City. 3 Respondent Commissioner of Internal Revenue is the chief of the Bureau of Internal Revenue (BIR), the government agency officially responsible for the assessment and collection of all national internal revenue taxes, fees and charges and the enforcement of all forfeitures, penalties and fines connected with such taxes. She holds office at the 4th Floor, BIR National Office Building, Agham Road, Diliman, Quezon City. On September 25, 2007, respondent, through her Head Revenue Executive Assistant (HREA) Cesar Charlie C. Lim,� (1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue; XXX XXX Rule 8. Sec. 4. Where to appeal; mode of appeal. - (a) An Appeal from a decision or ruling or the inaction of the Commissioner of Internal Revenue on disputed assessments or claim for refund of internal revenue taxes erroneously or illegally collected; the decision or ruling of the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade & Industry, the Secretary of Agriculture, and the Regional Trial Court in the exercise of their original jurisdiction, shall be taken to the Court by filing before it a petition for review as provided in Rule 42 of the Rules of Court. The Court in Division shall act on the appeal. 3 Par. 1, Admitted Facts, Pre-Trial Order, Docket, p. 188.

CTA Case No. 8439 Page 3 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION issued Letter of Authority No. 000122674 , for the examination of petitioner's books of accounts and other accounting records for all internal revenue taxes for the period covering January 1, 2006 to December 31, 2006. On December 14, 2007, respondent released a Memorandum5 to Revenue Officers Reynoso Bravo and Daniella Gabaon referring the case of petitioner for their investigation, and petitioner was informed of the same via letter6 dated December 21, 2007. Subsequently, respondent issued a First Notice for Presentation and Submission of Documents and Records7 dated October 19, 2007, as well as a Second Request for Presentation of Records8 dated January 3, 2008. Likewise, a letter9 dated February 1, 2008 was issued by Mitchell L. Yu, reiterating the request for petitioner to present its records. On August 15, 2008, Romulo L. Aguila, the HREA of the Large Taxpayers Service-Regular issued a Notice of Informal Conference10 . On October 15, 2008, Revenue Officers Reynoso Bravo, Walter Batoon, and Daniella Gabaon recommended to HREA Romulo L. Aguila the issuance of the Preliminary Assessment Notice (PAN). 11 On the same date, the latter issued the PAN 12, which petitioner received on November 7, 2008 through Leonardo C. Visto. Petitioner protested the PAN on November 24, 2008 by filing its Position Paper13 dated November 21, 2008.! 4 Exhibit "A", Docket, p. 773; Exhibit "2", BIR records, p. 3. 5 Exhibit "1", BIR records, p. 4. 6 Exhibit "4", BIR records, p. 6. 7 Exhibit "A-1", Docket, pp. 774-775; Exhibit "3", BIR records, pp. 1-2. 8 Exhibit "5", BIR records, p. 7. 9 Exhibit "A-2", Docket, pp. 776-777; Exhibit "6", BIR records, pp. 8-9. 10 Exhibit "A-3", Docket, p. 778; Exhibit "7", BIR records, p. 283. 11 Exhibit "8", BIR records, pp. 365-372. 12 Exhibit "9", BIR records, pp. 400-406. 13 Exhibit "A-4", Docket, pp 780-789.

CTA Case No. 8439 Page 4 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION On December 15, 2008, Revenue Officers Reynoso Bravo, Walter Batoon, and Daniella Gabaon recommended anew to HREA Romulo L. Aguila the issuance of assessment notices against petitioner for its failure to submit or present documents refuting or rebutting the findings stated in the PAN. 14 Respondent, through HREA Romulo L. Aguila, issued the Formal Letter of Demand 15 (FLD) and the assessment notices all dated December 15, 2008, 16 assessing petitioner for alleged deficiencies in income tax, VAT, creditable withholding on VAT, WTC, EWT, FWT, and fringe benefits tax (FBT); which petitioner received on January 20, 2009. Petitioner protested the FLD and the assessment notices through a letter17 dated February 8, 2009 and received by respondent on February 18, 2009. On March 5, 2009, respondent sent a Tax Verification Notice18, which petitioner received through a certain Leonardo C. Vista on March 11, 2009. Petitioner then filed its Supplemental Position Paper and its supporting documents on April 17, 2009 with respondent. 19 After evaluation of petitioner's supporting documents, Revenue Officer Bravo recommended the issuance of a Final Decision on Disputed Assessment. 20 Respondent, through Alfredo V. Misajon, OIC-Assistant Commissioner-Large Taxpayers Service, issued the FDDA21 on January 24, 2012, upholding the deficiency tax, 14 Exhibit "10", BIR records, pp. 420-426. 15 Exhibits "A-5" and "11", BIR records, pp. 630-636. 16 Par. 8, Admitted Facts, Pre-Trial Order, Docket, p. 189. 17 Exhibit "A-6", BIR records, pp. 605-618. 18 Exhibit "12", BIR records, p. 638. 19 Exhibit "A-7" Docket, pp. 820-825. 20 Exhibit "A-8", Docket, pp. 826-835; Exhibit "15", BIR records, pp. 694-702. 21 Exhibit "A-8", Docket, pp. 826-835; Exhibit "15", BIR records, pp. 694-702.

CTA Case No. 8439 Page 5 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION assessments against petitioner. The FDDA was received by petitioner on February 7, 2012. On March 8, 2012 22, petitioner filed the instant Petition for Review. However, on March 13, 2012, petitioner paid its tax liabilities, except for income tax, VAT, and final tax assessments. 23 In her Answer24 filed on May 3, 2012, respondent interposed the following special and affirmative defenses: "On the basis of the foregoing allegations and in further support of the Specific Denials herein set forth, respondent CIR respectfully alleges as her defense that: The Assessment on Deficiency Income Tax, Value-Added Tax, Creditable Withholding Tax, Withholding Tax on Compensation, Expanded Withholding Tax, Final Withholding Tax and Final Fringe Benefit Tax was issued in accordance with law, rules and jurisprudence. 7. The assessment for the taxable year 2006 deficiency Income Tax, Value-Added Tax, Creditable Withholding Tax, Withholding Tax on Compensation, Expanded Withholding Tax, Final Withholding Tax and Final Fringe Benefit Tax in the aggregate amount of Four Hundred Three Million Four Hundred Thirty-Eight Thousand Eighty-Eight and 46/100 pesos (Php403,438,088.46) was issued in accordance with law, rules and jurisprudence., 22 Docket, p. 7. 23 Exhibit "F", Docket, pp. 891-919. 24 Docket, pp. 118-138.

CTA Case No. 8439 Page 6 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION 8. Under Revenue Regulations No. 12-99, a valid assessment is accomplished following the stages of Notice of Informal Conference, Preliminary Assessment Notice and Final Assessment Notice. The procedure prescribed under RR No. 12-99 have been complied with by respondent as can be deduced from the following narration of facts. 9. Foremost, petitioner acknowledged that it received the Letter of Authority No. 200700012267 dated 25 September 2007 on 22 October 2007, authorizing the revenue examiners named therein to examine the books of accounts and other accounting records of petitioner for all internal revenue taxes for the period January 1, 2006 to December 31, 2006. 10. Various request for presentation of records were issued and duly received by petitioner. A Notice of Informal Conference was received by petitioner on 27 August 2008 informing petitioner of its findings and giving the latter the opportunity to offer explanation, present objections and submit documentary evidence to refute the said findings. 11. The Preliminary Assessment Notice with Details of Discrepancy dated 15 October 2008 was issued to petitioner and received on 7 November 2008. Subsequently, the Formal Letter of Demand with Final Assessment Notices dated 15 December 2008 was issued to the petitioner as well. 12. On 24 January 2012, respondent issued Final Decision on Disputed Assessment with Computation of Deficiency Taxes and received by the petitioner on 7 February 2012. The details thereof is (sic) as follows: INCOME TAX Comparison between sales per re- investigation of P225,107,397.85 and Sales/Revenue subjected to income tax of P224,420,627 .00 showed discrepancy of P686,770.85. Applying the gross profit(

CTA Case No. 8439 Page 7 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION margin ratio (GPMR) of 40.49�/o yielded a taxable gross profit of P278,073.52. Hence, deficiency income tax is hereby assessed pursuant to Section 32 of the National Internal-Revenue Code. Sales per Schedule-VATABLE (VAT-SLS) 201,379,194.35 225,107,397.85 -ZERO RATED (VAT-SLS) 39/869J91.00 224,420,627.00 Total Sales per Schedule 241,248/985.35 686,770.85 Decrease in AR-Trade (Collection) 16.141.587.50 Sales per Income Tax Return (ITR) 278,073.52 Non-Operating & Taxable Other Income 222,110,442.00 Difference (unreported income) 2.310,185.00 Taxable Gross Profit (686,770.85 X.4049-GPM) Comparison made between the sales (per Certificate of Withholding Tax At Source- 2307) from selected company's customers amounting to Php364,292,707.10 and schedule of sales (SLS) submitted (VAT returns attachment) amounting to Php127,559,000.61 showed unreported sales/revenue of Php236,733,706.49. Applying the gross profit margin ratio (GPMR) of 40.49�/o yielded a taxable gross profit of Php95,853,477. 76. Hence, deficiency income tax is assessed pursuant to Section 32 of the Tax Code. Sales per Withholding Tax Certificates-2307 3 6 4 , 2 9 2 J 0 7 .10 Sales per SLS 127.559,000.61 Unreported Sales (Difference) 236,733,706.49 Taxable Gross Profit (237,420,477.34 x .4049-GPM) 95,853,477.76 Comparison made between interest income subject to regular income tax per re- investigation of P378,144.00 and interest income subject to regular income tax rate per return of P276,094.00 showed a discrepancy of P102,SOO.OO. Hence, deficiency income tax amounting to P35,717 .50 (35�/o) is hereby assessed pursuant to Section 32 of the National Internal Revenue Code (NIRC).,

CTA Case No. 8439 Page 8 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION Interest income - per audited FS 539,850.00 917,994.00 Interest income subjected to final tax 276,094.00 Interest income subjected to regular income tax 815,944.00 Undeclared interest income - subject to regular rate 102,050.00 Income Tax (35%) 35,717.50 Disallowance of Interest Expense amounting to P46,203.00 to conform to Section 34(8) of the NIRC, as amended. Disallowed Salaries & Wages amounting to P7,828,343.96 were not subjected to withholding tax on compensation and Purchases or Services amounting to P3,943,512.01 were not subjected to expanded withholding tax for a total amount of P11,771,855.97. Hence, were disallowed for failure to withhold taxes pursuant to Section 34 (k) of the NIRC, as amended. Non-deductible interest expense 431,880.00 226,737.00 Interest income subjected to final tax 539,850.00 46,203.00 Gross-up value (divide by 80%) Non-deductible interest expense (multiply by 42%) 180,534.00 Deducted portion Additional deduction (Disallowed) Total Compensation subject to WHT 153,551,500.00 Less amount per alpha list 145,723,156.54 Amount not subjected to withholding tax 7,828,343.96 Amount subjected to 2% withholding tax-per alpha list 474,288.493.64 Amount subjected to withholding tax per 1601E 473,624,055.03 Amount not subjected to 2% withholding Rentals of Personal Property Subject to 2% (BPI Leasing) 664,438.61 Total amount not subjected to 2% withholding 3,279,073.40 3,943,512.01 Claimed creditable withholding taxes (CWT) aggregating P19,062.73 were not allowed for failure of the taxpayer to submit photocopies of certificates in violation of Section 2.58.3 of Revenue Regulations 2- 98.,

CTA Case No. 8439 Page 9 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION Creditable Tax claimed per Return (ITR) 7,791,522.00 Creditable Tax per Certificate (2307) 7,772,459.27 Difference 19,062.73 VALUE ADDED TAX Rate of 10�/o and 12�/o output tax amounting to P28,537,234.29 was imposed on the said unreported income pursuant to Sections 106 and 108 of the National Internal Revenue Code, as amended. Computation showed hereunder how we arrived at the said deficiency. Taxable Sales per Schedule (SLS) 82,689,185.70 8,268,918.57 201,379,194.35 Unreported Sales per CWT Certificates (2307) 357,733,900.14 42,928,068.02 236,733,706.49 Non-Operating & Taxable other Income Total Transaction Subject to Output Tax 2,310.185.00 Output Tax for January-2006 (10%) 440,423,085.84 Output Tax for February-December 2006 (12%) Output Tax per VAT returns 51,196,986.59 Output Tax payable per re-investigation _22,659252,:30 28,537,234.29 Output Tax amounting to P88,845,615.66 billed and collected from various agencies/customers was not reported for Value Added Tax (VAT) purposes. Hence, deficiency Value added Tax is hereby assessed pursuant to Sections 106 and 108 of the National Internal Revenue Code, as amended.- Total Output Tax Billed and Collected 236,733,706.49 1,972,780.89 116,859,104.26 Output tax imposed on Unreported sales 19,727,808.87 26,040,707.71 January output tax (1/12)-10% _2t3,01_:3,~t38..6.P February -Dec. output tax ( 11/12) -12% 217,005,897.62 Unreported Output Tax 88,845,615.66 Claimed input taxes for both domestic goods and services aggregating P507,893.26 were disallowed pursuant to Sections 110 and 113 (A) and (B) of the NIRC, as amended - Invoicing and('

CTA Case No. 8439 Page 10 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION Accounting Requirements for VAT Registered Persons. CREDITABLE WITHHOLDING ON VAT Withholding tax rate of 12�/o on VAT amounting to P33,467.15 were imposed on income payments made to Patrick Brett, a non-resident alien. The gross amount of P278,892.91 was subjected to creditable withholding VAT pursuant to Section 78, 79 and 80 of the National Internal Revenue Code, as amended. Payments made to Patrick Brett 8,366.79 278,892.91 Basic Deficiency Tax (12%) 34,022.70 33,467.15 Add: Surcharge (25%) 8,500.00 Interest (20% per annum) 50,8_82~1~ Compromise penalty Total Deficiency Withholding Tax on VAT 84,356.64 WITHHOLDING TAX- COMPENSATION (WC) Claimed Salaries and Wages aggregating P153,551,500.50 is P7,828,343.96 higher than the Alpha List submitted amounting to P145,723,156.54. Discrepancy amounting to P7,828343.96 is therefore subjected to deficiency withholding tax to conform with (sic) Sections 78, 79 and 80 of the NIRC, as amended. Total Compensation and Benefits 156,163,985.58 Less: 2006 profit sharing and bonuses payable in 2007 _12,623,?JHL08 143,540,697.50 Total 10,010,803.00 Add: 2005 profit sharing and bonuses paid in 2006 153,551,500.50 Total Compensation subject to WHT Amount per Alpha List 145,723,1~�,~4 Amount not subjected to Withholding Tax 7,828,343.96 Comparison made between amount withheld per alphabetical list (compensation) of P37,221,406.99 versus the amount remitted per monthly~

CTA Case No. 8439 Page 11 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION remittance return (1601 C) of P37,187,282.45 showed a difference of P34,124.54. Said discrepancy is therefore subjected to deficiency withholding tax to conform to Sections 78, 79 and 80 of the NIRC, as amended. Total Compensation subject to WHT 153,551,500.50 2,505,070.07 Less amount per alpha list 145.723.156.54 Amount not subjected to Withholding Tax -- _34/124.54: Withholding tax due (32%) 7,828,343.96 2,539,194.61 Amount withheld per alpha list Amount remitted per 1601C 37,221,406.45 2/606/:}45.24 Amount unremitted 37,187.282.45 5,145,539.84 Basic deficiency withholding tax - compensation Add: Interest (20% per annum) 2,581,345.24 25/000.00 Compromise penalty Total deficiency withholding tax - compensation EXPANDED WITHHOLDING TAXES (EWT) Reconciliation made between claimed expenses (purchases of services) subject to 2�/o EWT versus the amount subjected to the same rate per alpha list showed a difference of P3,943,512.01. Verification also reveals that a tax amounting to P3,781,391.69 withheld from talents, suppliers and BPI Leasing were not remitted. Hence, subjected to deficiency EWT to comply with Section 57(8) of the NIRC, as amended. Computation of expanded withholding tax deficiency is shown hereunder, to wit: Amount per 2% withholding tax-per alpha list 474,288,493.64 78,870.24 Amount subjected to withholding tax per 1601E 473,624,055.03 Amount not subjected to 2% withholding .3,1~1/391.(?9 Rentals of Personal property subject to 2% (BPI Leasing) 664,438.61 Total amount not subjected to 2% withholding 3.279,073.40 3,860,261. 93 Withholding tax due (2%) 3/943/512.01 Unremitted tax withheld from talents & suppliers 3/949,342.2~ BPI Leasing - amount withheld & unremitted 3,747,081.07 Basic deficiency withholding tax - expanded 34,310.62 7,so9,604.21C Add: Interest (20% per annum) 3,924,342.28 Compromise penalty 25/000.00 Total deficiency withholding tax - Expanded

CTA Case No. 8439 Page 12 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION FINAL WITHHOLDING TAX (FT) Final Withholding Tax rate of 35�/o was applied to the payments made to Saatchi & Saatchi - London with tax exposure amounting to P788,517.77 were imposed on the amount payable to Saatchi & Saatchi-London (as an affiliate share amounting to P2,252,907.91 on a certain income received by the company) pursuant to Section 33 (57) of the National Internal Revenue Code, as amended. Payable to Saatchi & Saatchi - London 1,046,867.91 JV No. 06-L0070 1,206,040.00 JV No. 06-J0045 2,252,907.91 Total 197,129.44 788,517.77 801,607.16 Withholding tax due (final) - 35% 1.018,736.61 Add: Surcharge (25%) 20.000.00 1,807,254.37 Interest (20% per annum) Compromise penalty Total deficiency withholding tax- Final FRINGE BENEFITS TAX (FBT) FBT amounting to P672,597.59 were imposed on the income payments (P2,858,539. 75) made to BPI Leasing (as company share on the employee's car plan) pursuant to Section 33 of the National Internal Revenue Code, as amended. FBT-Agency Share- BPI Leasing 1.429.269.88 672,597.59 Gross-Up Value 2,101,867.46 Fringe benefits tax due (32%) 7Q3J6~,7_1 Add: Interest (20% per annum) 683,762.71 20,000.00 1,376,360.30 Compromise penalty Total deficiency FBT Income Payment to BPI Leasing 2,858,539.75 Company Share {50%)- amount of benefits 1,429,269.88 Gross up amount (.68) 2,101,867.46 Fringe benefits Tax (32%) 672,597.59{

CTA Case No. 8439 Page 13 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION 13. Admittedly, petitioner filed a protest to the Preliminary Assessment Notice as well as to the Formal Letter of Demand with Final Assessment Notices. Hence, there is no denying that petitioner was informed of the factual and legal bases of the deficiency assessment. 14. The fact that petitioner filed protest means that it was informed of the findings of the Revenue Officer. The protest although erroneous and self- serving was accomplished with meticulous details trying in vain to overthrow the findings of underdeclaration. 15. In view of the foregoing, petitioner is liable to pay the assessed deficiency taxes. The examiner's assessment should be given full weight and credit, in the absence of proof submitted by petitioner to the contrary. This is in line with the High Court's ruling in several cases wherein the Court said that tax assessments by tax examiners are prima facie presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. In the absence of proof of any irregularities in the performance of duties, an assessment duly made by a Bureau of Internal Revenue examiner and approved by his superior officers will not be disturbed. All presumptions are in favor of the correctness of tax assessments. The case of Commissioner of Internal Revenue vs. Construction Resources of Asia, Inc., where the Court cited 51 Am. Jur. pp. 620-621, states the principle in detail, thus: All presumptions are in favor of the correctness of tax assessments. The good faith of tax assessors and the validity of their actions are presumed. They will be presumed to have taken into consideration all the facts to which their attention was called. No presumption can be indulged that all of the public officials of the State in the various counties who have to do with the assessment of property for taxation will(

CTA Case No. 8439 Page 14 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION knowingly violate the duties imposed upon them by law. 16. In another case decided by the Supreme Court, the Honorable Court espouse: We agree with the contention of the petitioner that, as a general rule, tax assessments by tax examiners are presumed correct and made in good faith. All presumptions are in favor of the correctness of a tax assessment. It is to be presumed, however, that such assessment was based on sufficient evidence. Upon the introduction of the assessment in evidence, a prima facie case of liability on the part of the taxpayer is made. If a taxpayer files a petition for review in the CTA and assails the assessment, the prima facie presumption is that the assessment made by the BIR is correct, and that in preparing the same, the BIR personnel regularly performed their duties. This rule for tax initiated suits is premised on several factors other than the normal evidentiary rule imposing proof obligation on the petitioner-taxpayer: the presumption of administrative regularity; the likelihood that the taxpayer will have access to the relevant information; and the desirability of bolstering the record-keeping requirements of the NIRC. (Emphasis supplied) 17. Unfortunately, petitioner failed to overcome the presumption of correctness of the respondent's assessment. BIR Form No. 2307 (Certificate of Creditable Tax Withheld at Source) is the best proof that the income earner is ACE/Saatchi & Saatchi 1..

CTA Case No. 8439 Page 15 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION 18. Petitioner alleged that 'upon payment to ACE, the advertisers withhold creditable withholding tax on the total amount billed and not only on the commission due to ACE. But how can mere weightless words ever destroy a clear, concise and well-informed assessment. The BIR Form No. 2307 (Certificate of Creditable Tax Withheld at Source) submitted by the petitioner shows that the payee is 'ACE/SAATCHI & SAATCHI ADVERTISING, INC.' Thus, it can only be concluded that the income earner is the petitioner itself. 19. The BIR Form No. 2307 (Certificate of Creditable Tax Withheld at Source) as described by the Bureau of Internal Revenue, is a certificate to be accomplished and issued to recipients of income subject to expanded withholding tax paid by a Payor/Withholding Agent including government money payments made by a government office showing therein the monthly breakdown of the total income payments made and the total taxes withheld and remitted during the quarter/period. 20. It is therefore crystal clear that the payee named in the said BIR form is the recipient of the income or the income earner itself, which in the case at bar is the petitioner. 21. Other than its own bare allegations, however, petitioner offers no other proof to the effect that indeed the withholding of tax by the payor/withholding agent includes the portion corresponding to the media and production suppliers. 22. No other evidence was presented to support such allegation. Bare allegations, unsubstantiated by evidence, are not equivalent to proof under our Rules of Court. It is a basic rule of evidence that the party making an allegation has the burden of proving it by preponderance of evidence.,

CTA Case No. 8439 Page 16 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION 23. The documents submitted by petitioner are conclusive to sustain respondent's findings that it has liability to pay the assessed deficiency taxes. Therefore, the original theory stands that the Final Assessment Notice is binding on the petitioner. 24. Again, tax assessments by tax examiners are presumed correct and made in good faith, and all presumptions are in favor of the correctness of a tax assessment unless proven otherwise. Petitioner is liable to pay VAT. 25. Petitioner is liable to pay VAT pursuant to Section 105 of the NIRC, as amended [which], provides: SEC. 105. Persons Liable. - Any person, who in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the valued-added tax (VAT) imposed in Sections 106 to 108 of this Code. (Emphasis supplied) 26. The phrase 'sale or exchange of services' is defined by Section 108 of the NIRC, as amended, as 'performance of all kinds of services for others for a fee, remuneration or considerations.' It includes 'similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties.' 27. Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payment for services rendered to its affiliates or a reimbursement on-cost-basis only, without realizing profit, for purposes of determining liability for VAT or services rendered. As long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT.{.

CTA Case No. 8439 Page 17 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION 28. In view of the foregoing, petitioner is liable to pay the deficiency assessment on VAT. Petitioner as withholding agent has the legal duty to collect the tax for the government. 29. Furthermore, in the assessment for deficiency withholding tax on compensation, expanded withholding tax, fringe benefit tax and final tax, what is being sought to be collected from petitioner are penalties for failure to withhold the tax. The Tax Code only makes the agent personally liable for the tax arising from the breach of its legal duty to withhold as distinguished from its duty to pay tax since the government's cause of action against the withholding agent is not for the collection of income tax, but for the enforcement of the withholding provision of Section 53 of the Tax Code, compliance with which is imposed on the withholding agent and not upon the taxpayer. 30. In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, this Court pointed out that a withholding agent is in fact the agent both of the government and of the taxpayer, and that the withholding agent is not an ordinary government agent: 'The law sets no condition for the personal liability of the withholding agent to attach. The reason is to compel the withholding agent to withhold the tax under all circumstances. In effect, the responsibility for the collection of the tax as well as the payment thereof is concentrated upon the person over whom the Government has jurisdiction. Thus, the withholding agent is constituted the agent of both the Government and the taxpayer. With respect to the collection and/or withholding of the tax, he is the Government's agent. In regard to the filing of the necessary(

CTA Case No. 8439 Page 18 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION income tax return and the payment of the tax to the Government, he is the agent of the taxpayer. The withholding agent, therefore, is no ordinary government agent especially because under Section 53 (c) he is held personally liable for the tax he is duty bound to withhold; whereas the Commissioner and his deputies are not made liable by law.' 31. Hence, petitioner as withholding agent has the legal duty to collect the tax for the government particularly the Bureau of Internal Revenue. 32. Also without merit is the contention of the petitioner that amount paid by petitioner to Saatchi London as negotiator's fees for services rendered by said company is considered income earned in London and not subject to Philippine Withholding Tax. 33. Such allegation is dearth of merit. As provided in Section 28 (B) of the NIRC, as amended - a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35�/o) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income and capital gains. 34. Correlatively, Section 42 (A) of the NIRC, as amended provides: Gross income from Sources Within the Philippines. - The following items of gross income shall be treated as gross income from sources within the Philippines: (1) Interests - x x x (2) Dividends- x x x/.

CTA Case No. 8439 Page 19 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION (3) Services - Compensation for labor or personal services performed in the Philippines; (4) X X X 35. However, in a Court of Appeals case, Philam Insurance vs. CTA and CIR, CA-GR No. 31283, 25 April 1995, the Honorable Court states that a non- resident foreign corporation is taxed on compensation derived from sources within the Philippines even if the services are performed abroad. While it is true that a non-resident foreign corporation has no properties here in the Philippines, in entering into a management contract with a domestic corporation here in the Philippines, the non- resident foreign corporation's income from said contract is well within the ambit of Section 37(a)(7) of the 1980 Tax Code. In our jurisprudence, the test of taxability is the 'source' and the 'source' of an income is that activity which produced the income. 36. Petitioner's view that it is beyond the ambit of the authority of the Bureau of Internal Revenue to tax income considered earned outside the territorial limits of the Philippines must be set aside. What is important to consider is that there is an income earned and the necessary tax must be imposed thereon. 37. Accordingly, petitioner cannot claim that it is not liable to withhold taxes on the negotiator's fees because it was income derived by Saatchi London, a non-resident foreign corporation, from sources within the Philippines. 38. Following the law, rules and jurisprudence Saatchi London must pay the tax for its income earned and the petitioner must withheld the said tax as collector of the government. 39. To our mind, petitioner has not pointed out any provision or item in the assessment notice which bears a trace of falsity. Its averments were based on('" '--

CTA Case No. 8439 Page 20 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION conjectures, surmises and speculations. These cannot supply the basis for the charge of impropriety in the assessments made. 40. At any rate, it is worthy to stress that the power to tax, an inherent prerogative, has to be availed of to assure the performance of vital state functions. It is the source of the bulk of public funds. To paraphrase a recent decision, a tax being the lifeblood of the government, its prompt and certain availability is of the essence. The state will be deprived of the taxes validly due it and the public will suffer if taxpayers will not be held liable for the proper taxes assessed against them. 41. Well-settled is the principle that taxes are imposed for the support of the government in return for the general advantage and protection which the government affords to taxpayers and their property. Taxes are the lifeblood of the government. It is imperative that the power to impose them to be clothed with the implied authority to devise the ways and means to accomplish their collection in the most effective manner. Without this implied power the end of government may falter or fail." Petitioner filed a Reply25 to respondent's Answer on May 18, 2012. Respondent's Pre-Trial Brief and the Pre-Trial Brief (For the Petitioner) were filed on June 1, 2012 and June 5, 2012, respectively. 26 The Court issued the Pre-Trial Order27 on July 17, 2012. During trial, petitioner presented Felipe Barcelon, Jr., Maria Luisa M. Podador, Ma. Gigi M. Garcia, Ma. Milagros Padernal, and Ruby F. Reyes as its witnesses. On the other{ 25 Docket, pp. 140-146. 26 Docket, pp. 149-157 and 159-171, respectively. 27 Docket, pp. 188-195.

CTA Case No. 8439 Page 21 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION hand, respondent presented her sole witness, Reynoso C. Bravo. The parties formally offered their respective documentary and testimonial evidence. Petitioner offered the following exhibits: Exhibit Description A A-1 Letter of Authority from the Bureau of Internal Revenue (BIR) dated 25 September 2007 A-2 A-3 First Notice for Presentation and Submission of A-4 Documents and Records from the BIR dated 19 October A-5 2007 A-6 A-7 Letter from the BIR dated 01 February 2008 A-8 B Notice of Informal Conference from the BIR dated 15 B-1 August 2008 B-2 ACE's Position Paper dated 21 November 2008, stamped c received by the BIRon 24 November 2008 C-1 BIR Formal Letter of Demand dated 15 December 2008 ACE's Protest Letter dated 08 February 2009, stamped received on 18 February 2009 Supplemental Position Paper dated 17 April 2009, stamped received on 17 April 2009 Final Decision on Disputed Assessment dated 24 January 2012, received by ACE on 07 February 2012 ACE Invoice No. 06-C0283 dated 13 July 2006 for General Mills Foods, Inc. Cutting Edge Productions, Inc. Invoice No. 0350 dated 29 June 2006 Red Eye, Inc. Invoice No. 235 dated 07 July 2006 Standards of Trade Practices and Conduct in the Advertising Industry of the ADBOARD. (Fourth Revision, 2006) ["ADBOARD Standards" hereafter] Paragraph 3.10 of ADBOARD Standards (p. 20)(

CTA Case No. 8439 Page 22 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION C-2 Definition of "Gross Amount" and "Gross Billings" (ADBOARD Standards, p. 6) C-3 Applicability of Coverage (ADBOARD Standards, p. 2) C-4 Definition of "Advertising Agency" or "Agency" (ADBOARD Standards, p. 3) C-5 Definition of "Advertising Services Suppliers" (ADBOARD Standards, p. 4) C-6 Definition of "Commissions" (ADBOARD Standards, p. 6) C-7 Definition of "Net Amount" and "Net Billing" (ADBOARD Standards, p. 8) C-8 Paragraph 2.9 of ADBOARD Standards (p. 16) C-9 Paragraph 3.4 of ADBOARD Standards (p. 18) D ACE Invoice No. 06-B0044 dated 1S May 2006 for Boehringer Ingelheim D-1 R.S. Video & Film Productions Sales Invoice No. 3076 dated OS May 2006 D-2 R.S. Video & Film Productions Sales Invoice No. 3077 dated OS May 2006 E ACE's Audited Financial Statement for the year ended 2006 E-1 Note 21, par. B of ACE's Audited Financial Statement for the year ended 2006 (p. 22) E-2 Note 21, par. a of ACE's Audited Financial Statement for the year ended 2006 (p. 22) F ACE Letter to BIR dated 13 March 2012 with eFPS payment slips stamped received by the BIR on 14 March 2012 G Certification from Ms. Rina R. Manuel, Tax Department Head of SMART Communications, Inc. dated 23 July 2012 H Association of Accredited Advertising Agencies Philippines (4As) Letter to BIR Commissioner Kim S. Jacinto-Henares dated 2S May 2011 H-1 Laya Mananghaya & Co. Letter to Assistant Commissioner James Roldan dated 17 June 200S H-2 Draft Revenue Memorandum Circular on "Clarification of Issues Affecting the Advertising Industry" attached to("

CTA Case No. 8439 Page 23 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION Laya Mananghaya & Co. Letter to Assistant Commissioner James Roldan dated 17 June 2005 H-3 Letter of OIC-Commissioner Internal Revenue Jose Mario C. Bunag to 4As dated 06 September 2005 H-4 4As Letter to Commissioner Bunag dated 30 August 2005, together with Minutes of Meeting of 24 August 2005, and Power Point presentation on "The Treatment of Gross Receipts and Value-Added Taxes of Advertising Agencies H-5 Manubat San Agustin & Co. Letter to Department of Finance Secretary Margarita B. Teves dated 28 March 2008 H-6 4As Letter to BIR Law Division Chief Mapemaroma M. Cantillep dated 06 February 2009 H-7 4As Letter to BIR Commissioner Joel L. Tan-Torres dated 16 December 2009 H-8 BIR/Office of the Commissioner stamp "RECEIVED" dated 25 May 2011 I Judicial Affidavit (Amended) of Mr. Felipe M. Barcelon, Jr., Finance Director of petitioner, dated 01 August 2012 I-1 Signature of Mr. Barcelon on his Judicial Affidavit (Amended) dated 01 August 2012 J Judicial Affidavit of Ms. Maria Luisa M. Podador, Billing Department Head of petitioner, dated 07 September 2012 J-1 Signature of Ms. Podador on her Judicial Affidavit dated 07 September 2012 K ACE Invoice No. 06-E0288 dated 17 April 2006 for Smart Communications K-1 ACE Commprod Television Cost Estimate No. 06-UDD-TP- 002 dated 11 April 2006 K-2 "CONFORME" of ACE Commprod Television Cost Estimate No. 06-UDD-TP-002 dated 11 April 2006, signed by a representative of Smart Communications K-3 Production Village Corporation Invoice No. 7773 form dated 11 April 2006 L ACE Invoice No. 06-E0343 dated 15 May 2006 for Smart Communications L-1 Photocopy of ACE Commprod Television Cost Estimate No. 06-UDD-TP-002 dated 11 April 2006(

CTA Case No. 8439 Page 24 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION L-2 Production Village Invoice No. 7811 dated 11 May 2006 L-3 Production Village Certification of Completion dated 03 May 2006 L-4 ACE Supplies Issue Slip dated 04 May 2006 M ACE Invoice No. 06-E0343 dated 1S May 2006 for Smart Communications M-1 Photocopy of ACE Commprod Television Cost Estimate No. 06-UDD-TP-002 dated 11 April 2006 M-2 ADBOARD Official Receipt No. 66924 dated OS May 2006 M-3 ACE Check Voucher No. 0000016262 dated OS May 2006 N ACE Invoice No. 06-E0446 dated 13 June 2006 for Smart Communications N-1 Photocopy of ACE Commprod Television Cost Estimate No. 06-UDD-TP-002 dated 11 April 2006 N-2 Contract for voice over talent Ms. Ma. Fe F. Ferma dated 03 May 2006 N-3 Contract for voice over talent Ms. Myleen San Pedro dated 03 May 2006 N-4 Audio Dyn FARM Productions, Inc. Sales Invoice No. 3924 dated 22 May 2006 N-5 Statement of Account by Mr. Tristan Suguitan for musical score for 'Smart "Parlor" TVC 30's' dated 25 May 2006 0 ACE Invoice No. 06-EOS1S dated OS July 2006 for Smart Communications 0-1 Photocopy of ACE Commprod Television Cost Estimate No. 06-UDD-TP-002 dated 11 April 2006 0-2 Statement of Account by Mr. Tristan Suguitan for musical score for 'Smart "Parlor" TVC 30's' dated 2S May 2006 P ACE Invoice No. 06-E0646 dated 14 August 2006 for Smart Communications P-1 Photocopy of ACE Commprod Television Cost Estimate No. 06-UDD-TP-002 dated 11 April 2006 P-2 ADBOARD Official Receipt No. 67190 dated 18 May 2006 {

CTA Case No. 8439 Page 25 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION Q ACE Invoice No. 06-E0638 dated 09 August 2006 for Roche (Phils.) Inc. R ACE Invoice No. 06-E0758 dated 12 September 2006 for Roche (Phils.) Inc. R-1 Television Budget Summary dated 16 June 2006 R-2 Television Cost Estimate dated 16 June 2006 R-3 GMA Network, Inc. Invoice No. C-00083125 dated 02 September 2006 R-4 GMA Network, Inc. Certificate of Performance No. C- 00114004 dated 01 September 2006 S ACE Invoice No. 06-E0759 dated 12 September 2006 for GMA Network, Inc. S-1 Photocopy of Television Budget Summary dated 16 June 2006 S-2 Photocopy of Television Cost Estimate dated 16 June 2006 S-3 GMA Network, Inc. Invoice C-00083125A dated 02 September 2006 S-4 GMA Network, Inc. Certificate of Performance No. C- 00114004 dated 01 September 2006 T Judicial Affidavit of Ms. Ma. Gigi R. Garcia, Vice President and Client Services Director of ACE and former Director and President of the 4As (Association of Accredited Advertising Agencies of the Philippines), dated 06 September 2006 T-1 Signature of Ms. Garcia on her Judicial Affidavit dated 06 September 2006 U Judicial Affidavit of Ms. Ma. Milagros F. Padernal dated 02 October 2012 U-1 Signature of Ms. Padernal on her Judicial Affidavit dated 02 October 2012 U-2 Resume' of Ms. Padernal containing Summary of Work Experience and List of CTA Cases Handled V Judicial Affidavit of Ms. Ruby F. Reyes, Treasury Cashier and former Billing Section Unit Head of GMA Network, Inc. dated 30 October 2012 V-1 GMA Network, Inc. Official Receipt dated 27 October 2006 (

CTA Case No. 8439 Page 26 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION V-2 ACE Check Voucher No. 0000017419 dated 26 October 2006 for GMA Network, Inc. V-3 Signature of Ms. Reyes on her Judicial Affidavit dated 30 W October 2012 W1-1 to W1-4011 Schedule of ACE Billings for 2006 W2-26 to W2-3998 ACE Billing Invoices for 2006 W3-1 to W3-4009 Media Supplier Invoices for 2006 X Y ACE Check Vouchers for 2006 Z AA Schedule of ACE Billings without supporting invoices BB CC Schedule of Accruals and Adjustments DO Schedule of ACE Collections in Peso for 2006 EE Schedule of ACE Collection in Dollars for 2006 FF Schedule of ACE Receivables offset against payables GG Schedule of ACE Accounts Receivable At 01 January 2006 GG-1 Schedule of ACE Accounts Receivable At 31 December HH 2006 HH-1 BIR Receipt for Payment of Unremitted Tax on Rental and Other Payments dated 07 March 2012 Certification from Ms. Rina R. Manuel, Tax Department Head of SMART Communications, Inc. dated 23 July 2012 "REPORT TO THE COURT OF TAX APPEALS: ACE/SAATCHI & SAATCHI ADVERTISING, INC.: PETITION FOR REVERSAL OF DEFICIENCY TAX ASESSMENT (sic) (CTA CASE NO. 8439) For the Taxable Year Ended December 31, 2006 (Part 1 of 3)" dated 16 November 2012 [the "!CPA Report"] Signature of Ms. Padernal on the ICPA Report dated 16 November 2012 Judicial Affidavit of Independent CPA Ms. Padernal dated 31 January 2013 Signature of Ms. Padernal on her Judicial Affidavit dated 31 January 2013<'

CTA Case No. 8439 Page 27 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION KK Judicial Affidavit of Mr. Felipe M. Barcelon, Jr. dated 20 February 2014 KK-1 Signature of Mr. Barcelon on his Judicial Affidavit dated 20 February 2014 LL to LL-8 ACE's Annual Income Tax Return (BIR Form No. 1702) for the year 2006, with the attached schedules, and Quarterly Income Tax Returns (BIR Form 1702Q) for the 1st to 3rd quarters of 2006 Respondent's formal offer of documentary evidence is as follows: Exhibit Description 1 2 Memorandum dated 14 December 2007 with referral No. D-07-12-07 3 4 Letter of Authority No. 00012267 dated 25 September 5 2007 issued by Cesar Charlie C. Lim, Head Revenue 6 Executive Assistant and received by Leonardo C. Visto on 7 22 October 2007 8 First Notice for Presentation and Submission of 9 Documents and Records dated 19 October 2007 Letter dated 21 December 2007 addressed to the President/Gen. Manager of Ace/Saatchi & Saatchi Advertising Second Request for Presentation of Records dated 3 January 2008 Letter dated 1 February 2008 reiterating request for presentation of records issued by Mitchell L. Yu Notice of Informal Conference dated 15 August 2008 issued by Romulo L. Aguila, Jr., Head Revenue Executive Assistant, Large Taxpayers Service-Regular Memorandum dated 15 October 2008 by Reynoso C. Bravo, Walter A. Batoon and Daniella S. Gabaon for Romulo L. Aguila, Jr., Head Revenue Executive Assistant, Large Taxpayers Service-Regular Preliminary Assessment Notice dated 15 October 2008 issued by Romulo L. Aguila, Jr., Head Revenue Executive Assistant, Large Taxpayers Service-Regular(

CTA Case No. 8439 Page 28 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION 10 Memorandum dated 15 December 2008 by Reynoso C. Bravo, Walter A. Batoon and Daniella S. Gabaon for Romulo L. Aguila, Jr., Head Revenue Executive Assistant, Large Taxpayers Service-Regular 11 Formal Letter of Demand and Assessment Notices dated 15 December 2008 issued by Romulo L. Aguila, Jr., Head Revenue Executive Assistant, Large Taxpayers Service- Regular 12 Tax Verification Notice dated 5 March 2009 issued by Romulo L. Aguila, Jr., OIC - Head Revenue Executive Assistant, Large Taxpayers Service-Regular 14 Memorandum dated 24 January 2012 by Reynoso C. Bravo for Alfredo V. Misajon, Ore-Assistant Commissioner, Large Taxpayers Service 15 Final Decision on Disputed Assessment dated 24 January 2012 issued by Alfredo V. Misajon, Ore-Assistant Commissioner, Large Taxpayers Service 16 Judicial Affidavit of Reynoso C. Bravo submitted on 7 June 2013 16-A Signature of Reynoso C. Bravo The case was submitted for decision on May 22, 2014, 28 considering respondent's Memorandum29 filed on May 14, 2014 and petitioner's Memorandum30 submitted through registered mail on May 12, 2014 and received by the Court on May 15, 2014. The parties submitted the following issue31 for this Court's disposition: Whether or not petitioner is liable to pay deficiency assessment for income tax, value- added tax, withholding tax on compensation, expanded withholding tax, and final withholding tax for taxable year 2006. C 28 Docket, p. 1575. 29 Docket, pp. 1504-1521. 30 Docket, pp. 1523-1572. 31 Stipulated Issue, Pre-Trial Order, Docket, p. 190.

CTA Case No. 8439 Page 29 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION The Court shall determine first if it has jurisdiction over the present case. Section 228 of the National Internal Revenue Code (NIRC) of 1997, as amended, states: "SEC. 228. Protesting Assessment. - When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: Provided, however, That a preassessment notice shall not be required in the following cases: XXX XXX XXX The taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void. Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an assessment based on his findings. Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final. If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the(.

CTA Case No. 8439 Page 30 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION lapse of the one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable." Records reveal that respondent issued the Formal Letter of Demand and Assessment Notices on December 15, 2008, which petitioner received on January 20, 2009. On February 18, 2009, petitioner protested the said letter of demand and assessment notices through a letter dated February 8, 2009, and subsequently submitted its supporting documents on April 17, 2009. On January 24, 2012, respondent issued the FDDA32, which petitioner received on February 7, 2012. On the thirtieth day after receipt of the FDDA or on March 8, 201233, petitioner filed the Petition for Review. Accordingly, the Court has jurisdiction over the instant Petition for Review. The Court shall now proceed to determine whether or not petitioner is liable to pay deficiency assessment for income tax, value-added tax, withholding tax on compensation, expanded withholding tax, and final withholding tax for the taxable year 2006. Respondent issued the FDDA34 on January 24, 2012, demanding payment of petitioner's deficiency taxes in the aggregate amount of P406,264,841.62, broken down as follows: Income Tax p 93,332,881.91 - - -.... ------------- - - - - - .. --- - - - - - - - - � � � � - - - - - - - - � - � � � - - - - - - - - - - - Value-added Tax 296,683,844.35 Withholding on VAT 84,356.64 _.YYltb_bolding_~Comperl?_atio_l'l____________ 5,145,539.84 - - - - - - �----~----- Withholding Tax- Expanded 7,809,604.21 -~i_t_hhQI.Q.lng Tax- FiQal__ _ _____________ ________ J L80]_L254.37 _ Fringe Benefits Tax 1,376,360.30 Compromise Penalty �-� ��---------~~,000.00_ ------------ --�------ -���-- �-�----------�-���--------- . - Total . -� - - � - - - - - - - - - - - - - ----------- -- ----------�- ---�- P406,264,841.62 { -----------~-- 32 Exhibit "A-8", Docket, pp. 826-835; Exhibit "15", BIR records, pp. 694-702. 33 Docket, p. 7. 34 Exhibit "A-8", Docket, pp. 826-835; Exhibit "15", BIR records, pp. 694-702.

CTA Case No. 8439 Page 31 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION However, in a letter dated March 13, 2012, petitioner informed respondent that relative to the FDDA for the year 2006, it had made the following payments amounting to P2,368,539.33, as shown below: 35 Date Tax I Compromise Paid Type Assessment Interest Surcharge Penalty Total p 1 481 031.42 3/2/2012 FBT p 672,597.59 p 788 433.83 p 20,000.00 269,131.69 3/7/2012 VT 123,110.42 146 021.27 p 8 366.79 8 500.00 90,029.33 3/7/2012 33,467.15 39 695.38 74,126.08 3/2/2012 cwrv 34,124.54 40 001.54 74,530.29 we 35 127.11 147 145.18 3/2/2012 EWT 34,310.62 40 219.67 172 418.23 25 000.00 3/2/2012 IT 16,171.05 18 956.06 P2,368,539.33 3/7/2012 IT 54,780.23 64 974.83 27 390.12 3/7/2012 EWT 78/870.24 93 547.99 3/7/2012 25 000.00 _!()tal _ -��� - L_P1,04L_-1.31.81_'--P1,2=!b8SO.SZ_ LP35,75�;_.91 ~~3,500.00 Due to the said payments, petitioner is seeking the reversal of the FDDA with respect to the alleged deficiency taxes in the amount of P403,438,088.46, details of which are as follows: Income Tax p 93,188,430.71 Value-added Tax 295,715,499.85 � - - - - - - - - - - - - - - - - - - � - - - - - - - � -~-------~---------� .. �---- --- -� - - - - - - - - - � - Withholding Tax - Compensation 5,145,539.84 __withh()]ding__J~~-=-Exg~ndeg ___ -------~-- _ -----�- 7,581,363.69 Final Withholding Tax 1,807,254.37 Total P403,438,088.46 Using the assessed amounts indicated in the FDDA as reference, the Court shall now discuss the validity of the assessments in the following sequence: _-------~~fic~_ll_cy T~~------- _________ _ _____ ~~ount~---- f- _I._ W_i!_hh9ld_i_Q_g_o_nyp._T_ __ ___ ___ --~---------~4,~?_�.&1_ II. Fringe Benefits Tax 1,376,360.30 III. Withholding Tax- Final 1,807,254.37 IV. Withholding -Compensation 5,145,539.84 lc ----- -- ------------~---------------�---~---------------------'--'-----'------1 35 Exhibit "F", Docket, pp. 891-919.

CTA Case No. 8439 Page 32 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION '!_.____ _Wi_thQglding Tax- Expand~d=--��------+--~ 7,809,604.21 VI. Income Tax 93,332,881.91 VII. Value-Added Tax 296,683,844.35 VIII. Compromise Penalty 25,000.00 - - � � - - - --- - - - � - - - - - - � � - - - - - - � �-�-�------~----1---------�-�--�-----'-----1 Total P406,264,841.62 I. DEFICIENCY WITHHOLDING ON VAT- P84,356.64 Pursuant to Section 57 of the NIRC of 1997, as amended, respondent imposed twelve percent (12�/o) VAT on the amount of P278,892.91 representing income payments made by petitioner to Patrick Brett, a non-resident alien. Below is the computation of the assessment, inclusive of surcharge, interest and compromise penalty: - -- - _E?J_yments r'!:!9_Q~_ to Patrick Br~_t:t: _ -----~------ -----� --�--�-- P278,892.91 Basic Deficiency Tax (12%) 33,467.15 Add: _S_LJr:_c_t}_ar_ge (25�/oL -----~-~-----�----�--� p 8,366.79 -~~-- Interest (20% per annum) -----~-=':!_022. 70 . ------------ ---�--- - - - - --��� ---�--� Compromise penalty 8,500.00 50 889.49 P84,356.64 Total Deficiency Withholding Tax on VAT Since petitioner paid the amount of P90,029.33 on March 7, 2012, it admitted its deficiency liability on this assessment, which comprised of the following :36 Basic Tax --~-J-~/_467.15 ��--� ------------- �-----~------� Surcharge 8,366.79 Interest 19,6_95.39_ 8,500.00 ----- - - - - - - - - - - - - - - - - - ~-------���--�� Compromise Penalty Total P90,029.33 Upon computation of the twenty-five percent (25�/o) surcharge and twenty percent (20�/o) deficiency and delinquency interests due on the basic deficiency withholding VAT of P33,467.15 pursuant to Sections 248(A)(3) and 249(B) and (C) of the NIRC of 1997, as amended, petitioner made an excess payment of P3,959.59, as computed below: t: 36 Exhibit "F", Docket, pp. 891 and 898-901.

CTA Case No. 8439 Page 33 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION . = Payments made to Patrick Brett P278.892.91 !:~~ ~~~c~~;;~~~;-~;0~-=- ---~-~-~~ ---~---P 8,500.00 p 33,~7.15 25% Surcharge I 8,366.79 c-- ... -~0%_De.fi<:~11.9'.l'!t~resL~- .. --��----� ���-�---~--- ��-----+-�- 1~--- ---- from Jan. 10, 2007 to Feb. 7. 2012 r-------t----_(~}31-467._!~-~ 20% x 1854/365 days)_ _ _ _... --~--4-- 3c::.J3,c=:.9-=-98=�-=-96=+--------j from Feb. 7, 2012 to March 7. 2012 -~---3Q~~(~3e~;;:~~~;\~~~~e;~~~~~~~:~~;~-2~~!S~--7, 2012_t 53 81 =l 1. I on basic deficiency Withholding on VAT and surcharge -----�- ___C.Cfl3,4~J.15 +_e~~~66.22)_><__2_Q% x.19/_~~-c@y_sJL _______J__~-~64.76 on deficiency interest due for Jan. 10, 2007 to Feb. 7, 2012 ���---'---�--(P33L99f!:~~)<_20% x_~Wl6_?_~y_s)______ -�-�-----+----_240.26 . 52,602.58 Total Amount Due p 86,069.73 Less: I Payment on March 7, 2012 .. ~;~;: I~~harge . ---�-���� ��-� �����-------- - ---1 P3!:;:~:~! 20% Interest 1 39,695.38 I. rA;~~L~~o~~fQ::e-~~~a~ty________ �---~--�����----~ -������---~_L--~~8,~00.00 (~3:~;~~~!~- II. DEFICIENCY FRINGE BENEFITS TAX- P1,376,360.30 Invoking Section 33 of the NIRC of 1997, as amended, respondent assessed petitioner for basic deficiency FBT in the amount of P672,597.59 on the income payments made by the latter to BPI Leasing in the amount of P2,858,539. 75 (as company share on the employees car plan). Respondent computed the deficiency FBT assessment as follows: 37 FBT - Agency Share - BPI Leasing P1,429,269.88 p �72,597.5938 Gross-Up Value 2,101,867.46 Fringe Benefits tax due (32%) ---�---~--~- Add: Interest (20% per annum) --~--�_8},762.71 Compromise penalty 703,762.71 Total deficiency FBT 20,000.00 P1,376,360.30 (. 37 Exhibit "15", BIR records, p. 697. 38 Respondent computed the amount P672,597.59 instead of P672,597.58.

CTA Case No. 8439 Page 34 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION Petitioner likewise conceded to the assessment on FBT by paying on March 2, 2012 the amount of P1,481,031.42, which consisted of the following :39 Basic Tax ~ 672,597.59 Interest 788,433.83 Compromise Penalty 20,000.00 Total Pl,o4,81,031.42 Nevertheless, pursuant to Sections 248(A)(3) and 249(B) and (C) of the NIRC of 1997, as amended, petitioner is still liable to pay the amount of P90,021.24, representing 25�/o surcharge and 20�/o deficiency and delinquency interests, computed as follows: FBT - Agency Share - BPI Leasing P1,429,269.88 Gross-Up Value Fringe Benefitst(:)X due (32%) P2,101,867.46 --- - - ---- --- p 672,597.59 Add: Compromise penalty 25% Surcharge 20,000.00 20% Deficiency Interest from Jan. 15 2007 to Feb. 7 2012 168 149.40 (P672 597.59 x 20% x 1849/365 days) from Feb. 7 2012 to March 2 2012 681,442.71 (P672 597.59 X 20% X 24/365 days) 8,845.12 20% Delinquency Interest from Feb. 7, 2012 to March 2 2012 on basic deficiency Withholding on VAT and surcharge 11 056.40 [_(P672 597.59 + P168 149.40) X 20% X 24/365 days) 8 961.44 898,455.07 on deficiency interest due for Jan. 15 2007 to February 7 2012 P1_L571,052.66 (P681,442. 71 X 20% X 24/365 days) p 672,597.59 1,481,031.42 Total Amount Due 788,433.83 p 90,021.24 Less: Payment made on March 2, 2012 20,QOO.OO Basic Tax Interest Compromise Penalty Amount Still Due III. DEFICIENCY FINAL WITHHOLDING TAX- P1,807,254.37 Citing Section 33 of the NIRC of 1997, as amended, respondent assessed petitioner for basic deficiency FWTc 39 Exhibit "F", Docket, pp. 891-893.

CTA Case No. 8439 Page 35 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION amounting to P788,517.77, which is thirty-five percent (35�/o) of income payments made to Saatchi & Saatchi - London, a non-resident foreign corporation not engaged in trade or business in the Philippines, amounting to P2,252,907.91. Below is the computation of the deficiency FWT assessment of P1,807,254.37: 40 Payable to Saatchi & Saatchi- London P1,046,867 .91 JV No. 06-L0070 1,206,040.00 JV No. 06-J0045 Total P2,252,907.91 Withholding tax due (final) - 35% p 788,517.77 Add: Surcharge (25%) Interest (20% per annum) p 197,129.44 Compromise penalty 801,607.16 Total deficiency withholding tax - Final 2o,ooo.oo I 1,o18,736.6o P1,807,254.37 The Court finds Section 33 of the NIRC of 1997, as amended, inapplicable as the said NIRC provision governs the imposition of tax on Special Treatment of Fringe Benefit. Upon examination of the factual circumstances of this case, the Court finds nothing which will make it fall within the purview of the cited provision. As pointed out in the Petition for Review, the amount pertains to negotiator's fee paid by petitioner in consideration of the services of Saatchi London to refer advertisers in England to petitioner for their promotional and marketing needs in the Philippines, and to enter and conclude negotiations with such advertisers for the engagement of petitioner. Petitioner did not withhold taxes on the negotiator's fees because it is an income derived for services performed outside the Philippines by Saatchi London, a non-resident foreign corporation. On this position, petitioner relied on Section 23(F) of the NIRC of 1997, as amended, which provides that "a foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. ''.C 40 Exhibit "15", BIR records, pp. 697-698.

CTA Case No. 8439 Page 36 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION To further support its claim, petitioner cited Commissioner of Internal Revenue vs. Baier-Nicke/41 , where the Supreme Court ruled that "source of income" relates to the property, activity or service that produced the income. With respect to rendition of labor or personal service that produced the income, it is the place where the labor or service was performed that determines the source of the income. The Supreme Court explained that: "The important factor therefore which determines the source of income of personal services is not the residence of the payor, or the place where the contract for service is entered into, or the place of payment, but the place where the services were actually rendered." Petitioner likewise argued that the taxing power of the State does not extend beyond its territorial limits. In other words, respondent cannot tax income considered outside the territorial limits of the Philippines. Citing the case of Philippine American Life Insurance Company, Inc., eta/. vs. Han. Court of Tax Appeals, et a/. 42, respondent pointed out that the Court of Appeals ruled that a non-resident foreign corporation is taxed on compensation derived from sources within the Philippines even if the services are performed abroad. Respondent added that while it is true that a non-resident foreign corporation has no properties here in the Philippines, in entering into a management contract with a domestic corporation here in the Philippines, the non-resident foreign corporation's income from said contract is well within the ambit of Section 37(a)(7) of the 1980 Tax Code. According to respondent, in our jurisprudence, the test of taxability is the "source" and the "source" of an income is that activity which produced the income. Respondent asserted that what is important to ( 41 G.R. No. 153793, August 29, 2006. 42 CA-G.R. SP No. 31283, April 25, 1995.

CTA Case No. 8439 Page 37 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION consider is that there is an income earned and the necessary tax must be imposed. The Court does not agree with petitioner. Petitioner failed to present any evidence to prove the nature of the transaction and the place where it was actually rendered. In the report, the Court-commissioned Independent Certified Public Accountant (CPA) even indicated that petitioner merely explained that the amounts paid to Saatchi London were for services performed outside the Philippines, but was not able to show any document to support such explanation. 43 Thus, the deficiency final withholding tax assessment shall stand. Petitioner is liable to pay basic deficiency FWT for the taxable year 2006 in the amount of P788,517.77. IV. DEFICIENCY WITHHOLDING TAX ON COMPENSATION - P5,145,539.84 Upon comparison of petitioner's claimed salaries and wages in the amount of P153,551,500.50 with those reflected in its Alphalist in the amount of P145,723,156.54, respondent found that the discrepancy of P7,828,343.96 pertained to salaries and wages not subjected to withholding tax, as computed below :44 Total Compensation and Benefits P156,163,985.58 Less: 2006 Profit sharing and bonuses payable in 2007 Total 12,623 288.08 Add: 2005 Profit sharing and bonuses oavable in 2006 Total Compensation subject to withholding tax P143,540,697 .50 Amount per Alpbalist 10,010 803.00 Amount not subjected to withholdingtax Pl53,551,5_0Q.SO 145,723,156.54 -~---�- p 7,828,34~.96 Invoking Sections 78, 79, and 80 of the NIRC of 1997, as amended, respondent assessed petitioner for deficiency( 43 Par. 22, Part 1 of 3, Exhibit "GG", p. 7. 44 Exhibit "15", BIR records, p. 699.

CTA Case No. 8439 Page 38 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION withholding tax on compensation for the taxable year 2006 in the amount of P5,145,539.84, computed as follows: 45 Salaries & Wages - Direct Charges P113,466,338.50 _?_~Laries_�t~Wages :_OPE'5______ __________ _ __3__9_!071,3~9.00 ~--- Profit sharing, bonus o.thers-2005 (N.ote---1--5---d-�-�F- S-- )---~--- 10,010,803.00 r--~-------- --�----~ Total Compensation subject to WHT P153,551 500.50 __L~~~_a_mount per al_[)_b~~-------- _-~-- 145,723,156.54 Amount not subiected to withholdinq tax p 7 828 343.96 _\JI{i~~_b_Qicj_Lr19_tax due (32%)_______ __ __ ~--------�------ p 2,505,070.07 Amount withheld per alpha list p 37 221 406.99 34,124.54 p 2 539 194.61 Amount remitted per 1601C 37,187,282.45 -~-----~- Amount unremitted 2 606 345.24 1 - - - - - - - - - - - - - - -� �-�----�---~---~~---- ~------- --��- -- - - - - - - - - - - - - - - - - - - - P5,145,539.84 46 Basic deficiency withholding tax - compensation Add: _!l'l_~e_r:_~_~l_(~QOjo jJ~_annum )_ _______~ ________________ 1-- p 2,581,345.24 - 1----~ Compromise penalty 25,000.00 Total deficiency withholding tax- compensation In disputing the alleged deficiency, petitioner invoked Section 2.83.6 of Revenue Regulations (RR) No. 02-98, which respondent failed to consider. Petitioner explained that the said Revenue Regulation requires withholding of tax on compensation only upon actual or constructive payment of compensation to the employee, and that respondent once again disregarded the fact that petitioner is using the accrual basis of accounting. This would mean that not all amounts claimed as expense in 2006 were necessarily paid during the same year. According to petitioner, the amount assessed for failure to withhold arose from the profit sharing incentives and Directors' bonuses accruing in 2006, but was actually paid out in 2007. The same would be the instance where incentives and bonuses, which already accrued in 2005, were only paid in 2006. Hence, there would be an expected difference between the amounts claimed as compensation expense and the amounts declared in the alphalist attached to the withholding tax on compensation returns.{ 45 Exhibit "15", BIR records, p. 695. 46 Respondent computed the amount P5,145,539.84 instead of P5,145,539.85.

CTA Case No. 8439 Page 39 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION In assessing petitioner for alleged deficiency withholding tax on compensation, respondent insisted that petitioner as withholding agent has the legal duty to collect the tax for the government. Respondent likewise asserted that what is being sought to be collected from petitioner are penalties for failure to withhold the tax. Respondent emphasized that the Tax Code only makes the agent personally liable for the tax arising from the breach of its legal duty to withhold as distinguished from its duty to pay tax since the government's cause of action against the withholding agent is not for the collection of income tax, but for the enforcement of the withholding provision of Section 53 of the Tax Code, compliance with which is imposed on the withholding agent and not upon the taxpayer. 47 It must be noted that Section 53 of the Tax Code pertains to Extension of Time to File Returns which is not involved in this issue. But since the main bases for the assessment are Sections 78, 79, and 80 of the NIRC of 1997, as amended, the Court shall proceed in resolving the issue. The cited legal bases for this assessment are implemented by RR No. 02-98, wherein the following pertinent provisions govern: "SECTION 2. 78. Withholding Tax on Compensation. - The withholding of tax on compensation income is a method of collecting the income tax at source upon receipt of the income. It applies to all employed individuals whether citizens or aliens, deriving income from compensation for services rendered in the Philippines. The employer is constituted as the withholding agent." (Emphasis supplied) The term "receipt" may either be actual or constructive receipt pursuant to Section 2.83.6 of RR No. 02-98 ..( 47 Answer, Docket, p. 131.

CTA Case No. 8439 Page 40 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION Relative thereto, Section 2. 79 of RR No. 02-98 states that: "SECTION 2. 79. Income Tax Collected at Source on Compensation Income. (A) Requirement of Withholding. - Every employer must withhold from compensations paid, an amount computed in accordance with these regulations. xxx" (Emphasis supplied) While the foregoing provisions of Sections 2. 78 and 2. 79 of RR No. 02-98, as amended, require the withholding of tax upon payment of the compensation and not upon accrual thereof; however, no sufficient evidence was presented by petitioner to explain that the noted discrepancy arose from mere accruals. Petitioner should have presented documentary evidence to show that there was valid accrual, and that the accrued compensation was actually paid and the related withholding tax was remitted in 2007. Hence, the Court finds no reason to disturb the findings of respondent. However, the tax rate to be used should be the effective rate computed based on the total withholding tax on compensation divided by the total amount of taxable compensation reported during the taxable year 2006, as shown below: Total withholding tax on compensation p 37,221,406.99 Total taxable compensation 25.5425479�/o P145,723,156.54 Therefore, petitioner's basic deficiency withholding tax on compensation for the taxable year 2006 amounts to P2,033,683.04, computed as follows: Salaries & Wages - Direct Charges P113,466,338.50 Salaries & Wages - OPEX 30,074,359.00 Pr()fit Sharing, Bonus, Others-2005 (Note 15d FS) 10,010,803.00 1 Total Compensation Subject to Withholding 153,551,500.50 1 I(

CTA Case No. 8439 Page 41 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION Less: Amount Per Alphalist 145,723,156.54 p 1,999,558.50 Amount Not Subjected to Withholding Tax 7,828,343.96 34 124.54 Withholding_ Tax Due_(25.5425479%l Amount Withheld Per Alphalist p 37,221,406.99 Amount Remitted Per 1601C 37,187,282.45 Amount Unremitted Basic Deficiency Withholding Tax - P2,033,683.04 Compensation On March 2, 2012, petitioner paid the basic deficiency WTC in the amount of P34,124.54 plus interest of P40,001.54, totaling �>74,126.0848� However, pursuant to Sections 248(A)(3) and 249(B) and (C) of the NIRC of 1997, as amended, petitioner is still liable to pay the amount of P4,472.54 representing surcharge and 20�/o deficiency and delinquency interests, computed as follows: Amount withheld per alphalist P37 221 406.99 Amount remitted per 1601C 37 187 282.45 Basic deficiency withholding tax- compensation Add: 25% Surcharge P34 124.54 20% Deficiency Interest p 8 531.13 from Jan. 20, 2007 to Feb. 7, 2012 (P34 124.54 X 20% X 1849/365 days) 34,479.81 from Feb. 7 2012 to March 2 2012 448.76 (P34,124.54 X 20% X 24/365 days) 560.95 20% Delinquency Interest from Feb. 7 2012 to March 2 2012 on basic deficiency w/holding tax on compensation and - -- - 44,474.08 surcharge [(P34 124.54+P8 531.13}x 20% X 24/365 d~s] 453.43 1'78,598.~2 on deficiency interest due for Jan. 20, 2007 to Feb 7, 2012 (P34,479.81 X 20% X 24/365) ------ --- - p - 34,124.54 Total Amount Due 4Q,001.54 74,126.08 Less: Payment on March 2, 2012 - --- ..,~,472.54 ( Basic Tax -- Interest Amount Still Due 48 Exhibit "F", Docket, pp. 891 and 902-903.

CTA Case No. 8439 Page 42 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION Considering the said payment, petitioner's basic deficiency WTC for the taxable year 2006 only amounts to P1,999,558.50. V. DEFICIENCY EXPANDED WITHHOLDING TAX- P7,809,604.21 Respondent's reconciliation between petitioner's claimed expenses for purchases of services subject to 2�/o EWT versus the amount subjected to the same rate per alphalist showed a difference of P3,943,512.01. Respondent's verification also revealed that a tax amounting to P3,781,391.69 withheld from talents, suppliers, and BPI Leasing were not remitted. As a result, respondent assessed petitioner for the corresponding deficiency EWT pursuant to Section 57(B) of the NIRC of 1997, as amended. Below is the computation of the deficiency EWT assessment of P7,809,604.21 :49 Amount per 2% withholding tax - per alphalist 1'474,288,493.64 Amount subjected to withholding tax per 1601 E 473,624,055.03 Amount not subjected to 2% withholding_ Rentals of Personal Property Subject to 2% (BPI p 664 438.61 Leasing) Total amount not subjected to 2% withholding 3 279 073.40 Withholding tax due (2%) Unremitted tax withheld from talents & suppliers p 3,943,512.01 p 78,~70.24 BPI Leasing - amount withheld & unremitted Basic deficiency withholding_tax - expanded p 3,747,081.07 - ------ Add: Interest(20% perannum) 34,310.()2 Compromise Penalty 3,Z8~,391.69 Total deficiency withholding tax- Expanded p 3,860,261.93 - p 3,924,342.28 25,000.00 f---- 3,949,342.28 P7,8()9,604.21 Since petitioner paid the assessed amount of P78,870.24 plus interest of P93,547.99 in the total amount of P172,418.23 on March 7, 201250, it effectively admitted the deficiency. However, the settlement was done after the FDDA was issued. Section 2.58.5 of RR No. 02-98 states that:t_ 49 Exhibit "15", BIR records, p. 698. 50 Exhibit "F", Docket, pp. 891 and 912-915.

CTA Case No. 8439 Page 43 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION "SECTION 2.58.5. Requirement for Deductibility. - Any income payment which is otherwise deductible under the Code shall be allowed as a deduction from the payor's gross income only if it is shown that the income tax required to be withheld has been paid to the Bureau in accordance with Sees. 57 and 58 of the Code. A deduction will also be allowed in the following cases where no withholding of tax was made: (A) The payee reported the income and the withholding agent/taxpayer pays the tax, including the interest incident to the failure to withhold the tax, and surcharges, if applicable, at the time of the original audit and investigation; (B) The recipient/payee failed to report the income on the due date thereof, but the withholding agent/taxpayer pays the tax, including the interest incident to the failure to withhold the tax and surcharges, if applicable, at the time of the original audit and investigation; (C) The withholding agent erroneously underwithheld the tax but pays the difference between the correct amount and the amount of tax withheld, including the interest, incident to such error, and surcharges, if applicable, at the time of the original audit and investigation." (Emphasis supplied) In view of the fact that the payment was made after the issuance of the FDDA, which is already far beyond the time of original audit and investigation, the related expense shall still be disallowed for income tax purposes. Of the remaining deficiency EWT, petitioner only disputed the unremitted tax withheld from talents and(

CTA Case No. 8439 Page 44 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION suppliers amounting to P3,747,081.0751, while the amount of P34,310.62 was already included in the prior settlement of deficiency taxes as evidenced by petitioner's letter to the BIR dated March 13, 2012, accompanied by Electronic Filing and Payment System (EFPS) payment confirmation slip and BIR Form No. 0605 52 � Petitioner pointed out that of the P3,747,081.07, P3,629,363.06 was remitted by its client-advertiser, Smart Communication, Inc. (SMART), in the name of the media- supplier. Petitioner's witness, Mr. Felipe Barcelon, Jr., testified that as exceptions to the rule, a few client-advertisers of petitioner such as SMART correctly withheld the 2�/o tax on petitioner's commission exclusive of payments to media- suppliers. Such clients separately withheld applicable taxes on payments to media-suppliers. Accordingly, they issued separate CWT Certificates in the name of petitioner, and to each media-supplier paid. Mr. Barcelon further stated that a certification was issued by the Tax Department Head of SMART, Ms. Rina R. Manuel, certifying that, in connection with advertising services rendered by petitioner, SMART had already withheld and paid taxes in 2006 for amounts paid to media-suppliers in the total amount of P3,629,363.0653 � As such, petitioner did not withhold taxes on the amounts it paid to media-suppliers because it was previously subjected to taxes by the client-advertisers as shown in the CWT Certificates issued directly by the said client-advertisers in the names of such media-suppliers. Petitioner likewise asserted that its records and books would show that it did not withhold any tax from the said talents and suppliers because the client-advertisers already withheld from the corresponding payments. Petitioner presented a Certification from SMART's Tax Department( 51 Memorandum, Docket, p. 1565. 52 Exhibit "F", Docket, pp. 891 and 904-905. 53 Exhibit "G", Docket, pp. 920-922.

CTA Case No. 8439 Page 45 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hen. Commissioner of Internal Revenue DECISION Head� as proof that all income payments made to media- suppliers through petitioner were detailed. However, the Court finds this Certification insufficient for being self-serving. The Monthly Remittance Return of Creditable Income Taxes Withheld (Expanded) [BIR Form No. 1601-E] would be sufficient to prove the remittance of taxes withheld from income payments by SMART, but which petitioner failed to furnish for those listed in the said Certification. Thus, the basic deficiency EWT assessment of P3,747,081.07 representing unremitted tax withheld shall be upheld. As regards petitioner's payment of the basic deficiency EWT of P78,870.24 plus interest of P93,547.99, in the total amount of P172,418.23 on March 7, 2012, the same does not represent full payment of the deficiency taxes due. Pursuant to Sections 248(A)(3) and 249(8) and (C) of the NIRC of 1997, as amended, petitioner is still liable to pay the amount of P10,538.31, computed as follows: Basic deficiency EWT p 78 870.24 Add: 25% Surcharge P19 717.56 20% Deficiency Interest 79 691.36 from Jan. 20, 2007 to Feb. 7, 2012 1 253.28 (P78,870.24 X 20% X 1844/365 days) from Feb. 7 2012 to March 7 2012 2 157.77 (P78,870.24 X 20% X 29/365 days) 1,266.33 104,086.30 20% Delinquency Interest from Feb. 7 2012 to March 7 2012 on basic deficiency EWT and surcharge . f' 182,956.54 [(P78,870.24+P19 717.56) X 20% X 29/365 days] on deficiency interest due for Jan. 20, 2007 to Feb. 7, 2012 - - (P79,691.36 X 20% X 29/365) P?8,8_70.?4 _ Total Amount Due Less: Payment on March 7, 2012 93,547.99 172,418.23 !----�----�- Basic Tax L.. P1Q(538.31 Interest Amount Still Due The same holds true with regard to petitioner's payment of the basic deficiency EWT of P34,310.62.(

CTA Case No. 8439 Page 46 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION Petitioner is still liable to pay the amount of P4,496.95, as computed below: BPI Leasing- amount withheld & unremitted P34 310.62 Add: 25% Surcharge p 8,577.66 20% Deficiency Interest from Jan. 20 2007 to Feb. 7I 2012 34r_667.83 (P34 310.62 x 20% x 1844/365 days) 451.21 from Feb. 7 2012 to March 2 2012 (P34 310.62 X 20% X 24/365 days) 564.01 20% Delinquency Interest from Feb. 7, 2012 to March 2 2012 ----- - -- -- on basic deficiency EWT and surcharge [(P34 310.62+P8 577.66) X 20% X 24/365 days] 455.91 44,716.62 on deficiency interest due forJan. 2Q, 2007 to Feb. 7, 2012 _ (P34,667.83 X 20% X 24/365) -- Total Amount Due P79,027.24 Less: Payment on March 2, 2012 P34,310.62 74,530.29 Basic Tax 40,219.67 P4,496.95 Interest Amount Still Due VI. DEFICIENCY INCOME TAX- P93,332,881.91 Respondent computed the deficiency income tax assessment as follows: 54 =n l~~t;:~:~~;eturn m~=--=-=~ :-T~ _- ~-=-- J P _17,940,582.00 --- E:!:;;!fn1~~:u~:tu~ .--=-~~~~~f.:::r---=---~--==== - Difference (unreported income) I I 686,770.85 --+-~:::: ~:~-~:~~~~~~e(~~ificat~- - 2307 -- _l_Pii;:i~~~~~:~~-)236.733.706~4-:------- Total Unreported Revenue P237.420.477.34 Taxable Income-Gross Profit (237,420,477.34 x .4049) GPM I I 96,131,551.27 - - - I ~~~~::i~:;;;i;;~:: ~=--===-=~-=t~m=-=-==--1= 102,050.00 96,233,601.27 I Non Deductible Interest expense I I P 46.203.00 _ _____j"/" ' ____ ln~C>rn~~~lllents_Dg_t~ljQj~_g:-~cJ_tQYYHT _ 1 _____________J________ Compensation LP 7,828,34:3.9ELL___________ __________t_ _____________ ---------------------- -�------- - - - - - ----- -- 54 Exhibit "15", BIR records, p. 695.

CTA Case No. 8439 Page 47 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hen. Commissioner of Internal Revenue DECISION Purchases of Services (2%) 3,943,512.01 11,771,855.97 11,818,058.97 ~-- �-----�------ ~ _ __ _Ta~~~_}ncom~~e-iny_~~~igation __ P 125,992,242.24 Income Tax Due (35�/o) P 44,097,284.79 - - - - - --- . - - - � - - � - - - - - - - � - - � - � .. ---�---~------~-----�-��- -�� -------�-�- Payment per return r-~~~;i1e:a~;;~~~t~:~;iod-----�-���-��� ---------+P-1.512.318.00 ~_f_?_2~!L~?.:.c:.o:....:Co-JI------ DisallowedS~_e9itable Jax- ~30?_________ 19,062.73 1,531,380.73 6,260,141.2755 ADedficdie-n.c-_y_ln-c-o�m�-e--T-a-x P37,837,143.52 Surcharge (50%) p 18.918,571.76 36,577,166.64 Interes!__(2,0.<Y<J R~("ilnnum) 1 ss,495,73?~~ .. ______________.L_________________j__ _"f~_!_al Defi~ten~_y_Inc~rne Tax____ -------------���- _____________j P93,332,881.91 The Court shall delve into the propriety of the income imputed, as well as the expense deductions and tax credits disallowed by respondent, namely: A. Unreported revenues P236 733,706.79 1. Arising from the difference in sales based on 686,770.85 ?237,420,477.34 creditable withholding taxes (CWT) - BIR 102 050.00 Form No. 2307 as compared with the sales 46,203.00 � reflected in the schedules of sales submitted as VAT return attachments p 7,828 343.96 11,771,855.97 3,943,512.01 1,512,318.00 2. Arising from the difference in sales per 19,062.73 reinvestigation vis-a-vis the sales and non- operating & taxable other income per income tax return B. Unreported interest income c. Disallowed interest expense D. Disallowed income payments not subjected to withholding tax Compensation Purchases of services (2%) E. Tax credits carried over to next period F. Disallowed Creditable Tax - 2307 A. Unreported revenues in the amounts of P236,733,706.49 and P686,770.85, totaling P237,420,477.34 A.l. Unreported revenues- P236,733,706.49C 55 Respondent computed the amount P6,260,141.27 instead of P6,260,171.27.

CTA Case No. 8439 Page 48 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION Since the unreported revenue in the amount of P236, 733,706.49 is also one of the assessment items under the deficiency VAT assessment, the resolution of this issue shall extend to the deficiency VAT assessment on the said amount. Petitioner was assessed for underdeclaration of income amounting to P236, 733,706.49, which allegedly arose from sales based on CWT Certificates - BIR Form No. 2307 in the amount of P364,292, 707.10 as compared with the amount of P127,559,000.61 reflected in the schedules of sales submitted as VAT Return attachments. 56 Petitioner explained that when it billed the client- advertisers of the total amount (100�/o), it consisted of its commission (15�/o) and media and production cost (85�/o), in accordance with the industry practice. The amount received for media and production cost was mere pass-through cost held in trust for payment of media-suppliers. Thus, petitioner's gross sales pertained only to the portion (15�/o) of the total amounts paid or remitted by the advertisers to petitioner. Further, the fees paid by petitioner to the media- suppliers were not claimed by petitioner as part of its cost. It is petitioner's stand that VAT is payable only on the total amount of money it received as payment for services rendered and advance payments actually or constructively received for the services performed or to be performed for its client-advertisers. In other words, petitioner is liable to pay VAT only on amounts received as commission and not on amounts received in trust for media-suppliers. According to petitioner, holding it liable for VAT on amounts received in trust for media-suppliers and not on the payment of services it rendered is excessive and oppressive. The talents, production and media-suppliers was rendered(' 56 Exhibit "15", BIR records, pp. 701-702.

CTA Case No. 8439 Page 49 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION directly to the advertisers and not to petitioner, which merely acted as conduit of the client-advertisers in the transaction. Petitioner cited BIR Ruling [DA-473-07] dated August 31, 2007, wherein the BIR explained: "The gross receipts in the foregoing transaction refers to the commission or fee for services rendered which does not include money received from the advertisers as such amounts are earmarked for payment for media and production suppliers, amount of which are subsequently liquidated and accounted for. (BIR Ruling No. DA-316-2003 dated September 29, 2003) Such being the case, considering that Lowe, Inc. merely holds the payment for media and production suppliers for and in behalf of its clients (the advertisers), the same should not be included in its gross receipts for purposes of value-added tax and income tax. It is only the commission/service fee at an average rate of 10�/o based on the total advertising costs and expenses paid to media and production suppliers that should be recognized as revenue for Lowe, Inc. includible in its gross receipts." In his judicial affidavit57 , petitioner's witness Mr. Felipe Barcelon, Jr. testified as follows: Q6: The Petition which you verified states that ACE is an advertising agency. What does ACE do as an advertising agency? A: ACE renders services for the companies and individuals who want to promote their ideas, products and services to the public through advertisements. These companies or individuals are known in the advertising ( 57 Exhibit "I", Docket, pp. 409-423.

CTA Case No. 8439 Page 50 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION industry as "client-advertisers" or simply "advertisers". Q7: What are the services that ACE performs for the said client-advertisers? A: ACE conceptualizes and creates advertisements for client-advertisers, and acts as their agent in the production and placement of the said advertisements in television, radio, print and other media. Production and placement of the advertisements involve the selection and hiring of the necessary talents, models, directors, production houses, graphic designers, audio-recording studios, printers, photographers, videographers, television stations, radio stations, broadsheets, etc. They are collectively known in the advertising industry as "media suppliers", "advertising services suppliers" or simply "suppliers". ACE selects and hires these media suppliers on behalf of its client-advertisers. QS: How is ACE compensated for its services? A: In consideration for services rendered, ACE receives compensation or income in the form of a commission or agency service fee or "ASF". The said commission or ASF is usually in the amount equivalent to fifteen percent (15�/o) of the total amount billed to the client-advertiser. Q9: You said that only 15�/o of the total amount billed is usually received by ACE as its commission or ASF. What is the other 85�/o for?C

CTA Case No. 8439 Page 51 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION A: The other 85�/o is the total cost of production and placement billed by media suppliers. QlO: How does ACE bill its clients for the total cost of production and placement and ASF? A: As a peculiar yet normal practice in the advertising industry, advertising agencies such as ACE usually bill their clients for the total cost of production and placement (85�/o) plus commission or ASF (15�/o). This is because client-advertisers prefer to make a single payment for an advertisement, and not have to worry about paying each and every media supplier directly. The responsibility to pay media suppliers is given to advertising agencies like ACE which receive the amounts for total cost of production and placement in trust for the said media suppliers, and pays such media suppliers on behalf of client-advertisers. To illustrate the peculiar billing process of the advertising industry, Mr. Barcelon presented one invoice of petitioner issued to its client-advertiser, General Mills Foods, Inc., and explained it in the following manner: Qll: I am showing to you an Invoice No. 178937A of ACE dated 13 July 2006, a faithful reproduction of which was earlier marked as Exhibit "8"58 (copy attached), can you please look at this Invoice and tell us what relation this Invoice has to ACE and the peculiar way of billing clients that you just mentioned? A: This is an invoice of ACE for a television advertisement entitled "Gusto Ko Maging (7V30s/15s)" for client-advertiser General Mills Foods, Inc. ("General Mills") for its product "Flavored Hotcake". This shows the peculiar way of billing clients that I mentioned earlier, that is,< 58 Docket, p. 836.

CTA Case No. 8439 Page 52 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION the invoice separately shows the amount payable to media suppliers and ACE's commission or ASF, as follows: 1) Musical score p 65,000.00 Cutting Edge Productions, Inc. 0350 p 7,800.00 2) Plus: 12% VAT p 35,714.29 Cutting Edge Productions, Inc. 0350 3) Mock-Up p 4,285.71 p 112,800.00 Red Eye, Inc. 235 p 17,776.07 4) Plus: 12% VAT p 2,133.33 P132,709.20 Red Eye, Inc. 235 A.S.F. (17.65% of 1,3) VAT: 12% of ASF of 1,3 Total Q12: Earlier, you said that the commission or ASF is 15�/o, but this particular Invoice shows the ASF to be 17.65�/o. Why is this so? A: The usual ASF is fifteen percent (15�/o) of the gross amount or the total amount billed, i.e. the total amounts payable to media suppliers and the said ASF (P132,709.20). To be able to obtain this equivalent 15�/o of the gross amount, we multiply the amount paid for the media suppliers by 17.65�/o. You will note that the ASF of P17,776.07 is more or less 15�/o of the total paid to the media suppliers, exclusive of VAT (P100,714.29). Q13:This particular Invoice shows amounts across Musical Scores and Mock-up with VAT, totaling Php112,800.00. What are the said amounts for? A: They are services and supplies which are provided by the media suppliers Cutting Edge Productions, Inc. ("Cutting Edge") and Red Eye, Inc. ("Red Eye") and are paid directly by ACE to Cutting Edge and Red Eye from the gross amounts paid by client General Mills.(

CTA Case No. 8439 Page 53 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION Q14: What are the amounts corresponding to VAT on the said services and supplies? A: These are Value Added Taxes applicable on the said compensation for services and supplies provided by the media suppliers and which are passed-on to the client- advertisers. QlS: In this particular instance or work, what was the basis of ACE for charging the said amounts and VAT for services provided by Cutting Edge and Red Eye? A: The said amounts are based on the invoices of Cutting Edge and Red Eye themselves. They were pre-approved by client advertiser based on cost estimates. Q16: I am showing you certain Invoices of Cutting Edge dated 29 June 2006 and Red Eye dated 07 July 2006, faithful reproductions of which were earlier marked as Exhibits "B-1" and "B-2"59 (copies attached) what relation do these Invoices have to the said invoices which support the amounts indicated in the Invoice of ACE? A: Those are the Invoices of Cutting Edge and Red Eye which indicate the amounts due to them and which were sent to General Mills together with the Invoice of ACE. Q17:What is this VAT on the ASF indicated in this particular Invoice? A: That is the Value Added Tax liability of ACE for this particular services which ACE passed-on to the client-advertiser and which ACE pays to the BIR.<' 59 Docket, pp. 837-838.

CTA Case No. 8439 Page 54 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION To further strengthen Mr. Barcelon's statements on this peculiarity in the billing process in the advertising industry, he presented The Standards of the Trade Practices and Conduct in the Advertising Industry of the ADBOARD. As explained in his judicial affidavit: Q18:You mentioned that this billing practice is peculiar but normal in the advertising industry. What is your basis for saying this? A: This practice is part of The Standards of Trade Practices and Conduct in the Advertising Industry of the ADBOARD ("ADBOARD Standards") which is the basic guidebook for trade practices and the conduct of business in Philippine advertising. Q19: What is this AD BOARD? A: ADBOARD means Advertising Board, which is a self-regulating Board of advertising agencies, advertisers, media suppliers and the consumers of which ACE is a member. Q20: I am showing you this document entitled Standards of Trade Practices and Conduct in the Advertising Industry of the ADBOARD, 2006 Fourth Revision, faithful reproductions of the relevant portions of which were earlier marked as Exhibit "C"60 (copy attached). What relation, if any, does this document have to the ADBOARD Standards that you just mentioned? A: That is the same ADBOARD Standards which I cited that contained the billing practice of advertising agencies like ACE~ 60 Docket, pp. 839-855.

CTA Case No. 8439 Page 55 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION Q21: Where is it in this AD BOARD Standards which provide for this normal billing practice of advertising agencies? A: That is in Chapter VI, Section 3.10 which provides: "The compensation standard for Advertising Agency commission shall be set at 15�/o of gross billings from Media and Advertising Services Suppliers, and/or 17.65�/o of net billings from agreed items except in cases wherein an alternative compensation method is specified in the Advertiser and Advertising Agency agreement." (Page 18 of Annex "D"; previously marked as Exhibit "C-1"61 ) In relation to Chapter IV, page 7: Glossary of Terms which states: The term "Gross Billing" is defined in the ADBOARD Standards as: " ... the bills or invoices or statements of account covering the full cost of specific order delivered or services rendered, inclusive of agency commission." (Page 7 of Annex "D"; previously marked as Exhibit "C-2"62 ) Q22:The ADBOARD Standards provision you cited provides, in addition to the normal billing method that you cited, an "alternative compensation method". Does ACE use such alternative compensation method with its client- advertisers? A: Yes. ACE also has contracts with client- advertisers for less than 15�/o commission or ASF of the total amount billed for services rendered. C 61 Docket, p. 855. 62 Docket, p. 848.

CTA Case No. 8439 Page 56 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION In addition, some client-advertisers have advertising service agreements with ACE where ACE is paid a fixed monthly fee or ASF, regardless of whether or not ACE actually renders services. Under this arrangement, ACE bills the client-advertiser monthly and bills the client-advertiser separately for any advertisement produced. In such instance, the ACE Invoice for the advertisement produced reflects only the total amount payable to media suppliers for production and placement, together with the supporting invoices of media suppliers. Q23: I am showing you an Invoice of ACE no. 06- B0044 dated May 15, 2006, a faithful reproduction of which was earlier marked as Exhibit "0"63 (copy attached), together with supporting invoices of media suppliers, faithful reproductions of which were previously marked as Exhibits "D-1" to "D-2"64 (copies attached), can you please look at these invoices and inform us what relation these invoices have to the alternative billing method that you just described? A: This invoice of ACE for a project refers to that instance where ACE billed the client monthly so the invoice includes only the amount payable to media suppliers, as supported by these other invoices that you showed me. Now with regard to the payment of the client- advertisers to petitioner and its manner of recording in its books, Mr. Barcelon further testified that: Q24: How do client-advertisers pay ACE?' 63 Docket, p. 856. 64 Docket, pp. 858-859.

CTA Case No. 8439 Page 57 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION A: Regardless of the billing arrangement, most client-advertisers pay ACE the total amount billed, including those for payment of the media suppliers, net of the creditable expanded withholding tax of 2�/o on the total amount, which they remit to the BIR. Q25: How do you know that clients of ACE withhold the said 2�/o tax? A: Because we actually receive from them only the net amounts and they provide us with the Certificates of Creditable Tax Withheld at Source [ BIR Form No. 2307] ("CWT Certificates") issued by the client-advertisers in the name of ACE. (Emphasis supplied) XXX XXX XXX Q30: How does ACE record amounts payable to media suppliers in its books? A: The amounts paid or payable to media suppliers are not recognized in ACE's books as income because they are merely held in trust for media suppliers and therefore do not form part of ACE's gross receipts. Neither are they booked as expenses when they are paid to the media suppliers. The amounts payable to media suppliers are instead recorded in the books of ACE as liabilities inclusive of the 12�/o VAT as applicable. The afore-quoted testimony shows that even if 85�/o of petitioner's billings were attributable to or on account of media-suppliers and was only billed by petitioner on its behalf, the paying client-advertiser had remitted 100�/o of the bill to petitioner together with the corresponding CWT Certificates, which were also named under petitioner. 4.

CTA Case No. 8439 Page 58 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION Respondent opposed petitioner's averments, arguing that the BIR Form No. 2307 (Certificate of Creditable Tax Withheld at Source) submitted by petitioner showed that the payee was "ACE/SAATCHI & SAATCHI ADVERTISING, INC." Thus, respondent assessed petitioner since the income earner that appeared in the said certificates was the petitioner. Respondent explained that BIR Form No. 2307 (Certificate of Creditable Tax Withheld at Source) is a certificate to be accomplished and issued to recipients of income subject to expanded withholding tax paid by a payor/withholding agent including government money payments made by a government office, showing therein the monthly breakdown of the total income payments made and the total taxes withheld and remitted during the quarter/period. Accordingly, the payee named in the said BIR form is the recipient of the income or the income earner itself, which in this case is the petitioner. It is respondent's belief that bare allegations, unsubstantiated by evidence, are not equivalent to proof under our Rules of Court. It is a basic rule of evidence that the party making an allegation has the burden of proving it by preponderance of evidence. As such, respondent asserted that other than petitioner's own bare allegations, the latter offered no other proof to the effect that indeed the withholding of tax by the payor/withholding agent had included the portion corresponding to the media and production suppliers. Respondent further explained that since petitioner provides service for a fee, remuneration or consideration, then the service it rendered is subject to VAT. The Court finds merit in respondent's arguments. Petitioner presented the CWT Certificates representing the 2�/o tax withheld from 100�/o billed amount (composed of the 85�/o attributable to media-suppliers and 15�/o of ASF),{

CTA Case No. 8439 Page 59 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION which are under the name of "ACE/SAATCHI & SAATCHI ADVERTISING, INC.". Considering the foregoing, the CWT Certificates under the name of petitioner prove that the income recipient of the whole amount collected is petitioner. It is stated under Section 4.108-1 of Revenue Regulations No. 16-2005 dated September 1, 2005, implementing Section 108(A) of the NIRC of 1997, as amended, that the sale or exchange of services is subject to VAT equivalent to 12�/o of the gross receipts, excluding VAT. Further, Section 4.113-1 of the same Revenue Regulation, implementing Section 113(A)(2) of the NIRC of 1997, as amended, sets out that a VAT official receipt shall be issued by a VAT-registered person for every sale, barter or exchange of services. Thus, as a recipient of income from services, a taxpayer issues a VAT official receipt to its payor as the acceptable proof of the transaction and not the issued invoice. The Court has considered the testimonies of Independent CPA Ms. Ma. Milagros Padernal with regard to petitioner's process on the issuance of official receipts upon collection from client-advertisers, to wit: JUSTICE UY So, whenever the OR is issued by the petitioner, what is reflected in the OR? MS. PADERNAL When they collect from the advertisers, your Honors, Saatchi collects from the clients, they debit of course the cash and then there's a tax credit receivable for the withholding taxes that the client made and then correspondingly, the credit to accounts receivable for the billing invoice amount, your Honors.(

CTA Case No. 8439 Page 60 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION JUSTICE UY Does it mention who are the suppliers? Does the OR mention? Because the theory is, petitioner only collects commission and the other amounts collected are given to suppliers. MS. PADERNAL Eventually, your Honors. JUSTICE UY Is it reflected in the OR that they are collecting really for and on behalf of the suppliers? MS. PADERNAL Yes, your Honors. JUSTICE UY It's reflected there in the OR? MS. PADERNAL The billings as well as the collections are very specific as to the particular detail of that collection which includes the commission, the VAT as well as the pass-through cost to media and the corresponding VAT that they collected. JUSTICE UY Would this be more as official acknowledgment receipt or just an official receipts? MS. PADERNAL Just an official receipts, your Honors, because they are collecting already the invoices which net of the withholding taxes that the clients have made. JUSTICE UY Yes, because there are requirements if you are merely collecting for and on behalf of a supplier.('

CTA Case No. 8439 Page 61 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION MS. PADERNAL Yes, your Honors. JUSTICE UY So, they receiving it and they issue an official receipt? MS. PADERNAL Yes, your Honors. 65 In support of these statements, the Independent CPA included in the report Exhibits "Z" to "AA", which pertain to petitioner's Schedule of Collections, containing a record of CWT withheld by client-advertiser in 2006. Upon examination of the said schedule, indeed, there was a separate column for "Pass Through Cost". However, it must be noted that a schedule or mere summary of data is self-serving. Hence, it is not, in itself, sufficient to prove the said allegation, unless it is accompanied by the actual supporting documents; which petitioner failed to submit to the Court. Consequently, the Court cannot verify if the collections by petitioner have separate presentation as to that attributable to the media-supplier and to that pertaining to its commission in its OR for this Court to determine if 85�/o of the collection was not actually received as income by petitioner and to warrant the latter's protest that respondent made an erroneous assumption. Further, it must be noticed from the statements of the Independent CPA and the schedule of ORs presented by petitioner that only one (1) OR was issued for the collection of pass-through costs and commission. This document is not in compliance with Revenue Memorandum Circular (RMC) No. 04-96 issued on January 15, 1996, which clarifies issues affecting Media under Republic Act No. 7716,( 55 TSN for the hearing held on February 5, 2013, pp. 15-17.

CTA Case No. 8439 Page 62 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION otherwise known as the "Expanded VAT Law". Pertinent provisions of RMC No. 04-96 are quoted as follows: Q-4 What is the basis of computing VAT in the case of media? A-4 The basis for computing VAT payable on transactions of media shall be the gross receipts. To illustrate: Assume that an advertiser pays an advertising agency the amount of PlOO,OOO to create a commercial and run the same on print and/or broadcast media with the advertising agency getting 15�/o of such amount as commission/service fee. Assumption 1: (a) The advertising agency issues a VAT official receipt to the advertiser for P15,000 and a provisional receipt for the P85,000 as share of the Media. The VAT payable by the advertising agency shall be computed as follows: Commission/Service Fee (15% x P100,000) P15,000.00 Output VAT (1/11 of P15,000) Less: Applicable Input VAT Credits p 1,363.63 VAT Payable (xxx) p XXX (b) The print/broadcast media issues a VAT official receipt to the advertiser for P85,000. The VAT shall be computed as follows: Amount received for Advertising P85,000.00 Space, Radio/1V Spots/Airtime (85% X P100,000) p 7,727.27 Output VAT (1/11 of P85,000) Less: Applicable Input VAT Credits (xxx) VAT Payable (Emphasis Supplied) p XXX Based on the alleged manner of recording of its sale transactions, petitioner's case falls under Assumption 1 of~

CTA Case No. 8439 Page 63 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION the said RMC. Thus, petitioner should have issued two (2) types of receipt upon collection from the client-advertisers - one (1) VAT official receipt for the commission and one (1) provisional receipt for the pass-through cost. BIR Ruling No. DA-473-07, as correctly pointed out by petitioner, provides that the amounts received from advertisers, which are earmarked for payments of media and production suppliers, are not included as gross receipts for VAT and income tax purposes. In McCann-Erickson (Philippines), Inc. vs. Commissioner of Internal Revenue, et a/. 66, this Court held that: "xxx Since these customer credit balances of P12,006,245.00 do not pertain to advance payments for the services performed or to be performed by petitioner but are merely held in trust for payment to the media networks, the same do not fall within the definition of gross receipts under Section 102 of the 1995 Tax Code, to wit: 'The term "gross receipts" means the total amount of money or its equivalent representing the contract price, compensation or service fee, including the amount charged for materials supplied with the services and deposits and advance payments actually or constructively received during the taxable quarter for the service performed or to be performed for another person, excluding value-added tax.' xxx" Notwithstanding, it is incumbent upon petitioner to prove that it has not obtained benefit from the claimed pass- through costs, which petitioner failed to do.( 66 CTA Case No. 5966, March 13, 2003.

CTA Case No. 8439 Page 64 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION Petitioner did not record the income from the billings made to client-advertiser and did not recognize any cost from the billings made by the media-suppliers, based on the illustration of entries made by Mr. Barcelon, to wit: a) At the time of billing of client-advertiser: Accounts Receivable - Client-Advertiser 100�/o Liability to Media Suppliers 85�/o Commission Income 15�/o b) At the time of collection from client-advertiser: Cash XXX Tax Receivable - Media Supplier XXX Tax Receivable - ACE XXX Accounts Receivable - Advertiser XXX c) At the time of payment to media suppliers: Liability to Media Suppliers xxx Cash xxx Expanded Withholding Tax - Media Supplier xxx However, the foregoing remains only an illustration unless it can be established by petitioner that it was consistently followed in all transactions via general ledgers with supporting documents, but which petitioner failed to present. Neither did the Independent CPA mention any verification on the matter in her report. Thus, the Court finds no compelling evidence to disregard the deficiency income tax and deficiency VAT assessments on the unreported revenues amounting to P236, 733,706.49. As regards petitioner's arguments on the supposed failure of respondent to issue a specific regulation to be used considering the peculiarity in the billing process of the advertising industry, the same is not the issue stipulated bY.t:

CTA Case No. 8439 Page 65 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION the parties to be resolved by this Court. Nevertheless, Section 2.57.2(E)(4)(h) of RR No. 02-98 dated April 7, 1998, as amended by RR No. 17-2003 dated March 31, 2003, states: "Sec. 2.57.2. Income payment subject to creditable withholding tax and rates prescribed thereon. - Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines: XXX XXX XXX (E) Income payments to certain contractors- On gross payments to the following contractors, whether individual or corporate -Two percent (2�/o). XXX XXX XXX (4) Other contractors - (h) Advertising agencies, exclusive of gross payments to media;" (Emphasis supplied) As for the part of Mr. Barcelon's statement that the BIR gets paid twice due to this peculiarity, it was verified by the Independent CPA that from the schedule of collections in Exhibit "Z", a total of P11,166,214.66 creditable tax was actually withheld by the customers for the year ended December 31, 2006, to wit: 67 Particulars Amount Revenue collections - peso p 185,578,294.30 Pass-through collections - peso 608,262,995.46 Withholding tax rate p 793,841,289.76 Withholding tax at 2% 2% - t. p 15,876,825.80 67 Exhibit "GG", pp. 2-3. ----

CTA Case No. 8439 Page 66 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue ( 4,710,611.14}_ DECISION P11,166,214._66 Tax not withheld by clients Tax actually withheld by clients 4. Petitioner explained that as an industry practice, clients withhold the 2�/o tax on their total payments, which include not only the revenue component but also the pass through component. Petitioner explained that at the time of the filing of the 2006 Annual Income Tax Return, they did not have in their possession P3,374,692.27 worth of BIR Form No. 2307. Accordingly, only the amount of P7,791,522.39 (supported by BIR Form No. 2307) was reported in the 2006 Annual Income Tax Return. As can be gleaned from the foregoing, it is clear that petitioner also claimed as tax credits the pass-through component of the tax withheld by its client-advertisers. Thus, even if petitioner has remitted the corresponding withholding tax on the payments to the media-suppliers, on behalf of its client-advertisers, it was only offset when petitioner benefited from the tax credit that it claimed in its returns arising from the CWT Certificates issued by its client- advertisers. Accordingly, there was no double taxation despite such peculiar collection process. In fine, the deficiency income tax and deficiency VAT assessments on the unreported revenues of P236, 733,706.49 should be sustained. With respect to the alleged unreported revenues of P686, 770.85, petitioner averred that it was erroneous for respondent to simply assume that there was an unreported revenue arising from the difference amounting to P686,770.85 between sales per re-investigation which pertains to actual collections during the taxable year 2006 amounting to P225,107,397.85 and sales and non-operating and taxable income subjected to income tax based on the Annual ITR amounting to P222,420,627.00 and P2,310,185.00, respectively.(

CTA Case No. 8439 Page 67 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION Petitioner follows the accrual method of accounting where income is reported in the period earned, regardless of when it is received. As such, it was incorrect for respondent to compute sales based on actual collections. It must be pointed out that the resolution of this issue shall extend to the underdeclaration of income amounting to P236, 733,706.49 since the same was only based on actual collections. There is no question as to the usage of accrual method of accounting for income tax purposes as it has been expressly and impliedly recognized by the Tax Code and the Income Tax Regulations. 68 In this regard, petitioner specifically questions how respondent arrived at the amount of P225, 107,397.85 actual collections in 2006. Records indicate that the amount was computed as the total of sales declared per VAT Returns amounting to P241,248,985.3569 less decrease in AR-Trade amounting to P16,141,587.50, as shown below: Sales per Schedule- VATABLE (VAT-SLS) 1'201,379,194.35 1'225,107,397 .85 -ZERO RATED (VAT-SLS) 39,869,791.00 224,420,627.00 Total Sales per Schedule P241,248 985.35 p 686,770.85 Decrease in AR-Trade (Collection) 16,141,587.50 Sales per Income Tax Return (ITR) Non-Operating andTaxable Other Income P222,110 442.00 2,310,185.00 Difference (unreported income) I To reiterate, entities selling services are VATable on their gross receipts, or actual collections, for the period. Thus, the amounts declared in petitioner's VAT Returns are from actual collections. Contrary to the allegations of petitioner, respondent properly computed the should be income of petitioner based( 68 Solidbank Corporation vs. Commissioner of Internal Revenue, CTA Case No. 6096, March 10, 2003. 69 Exhibit "14", BIR records, pp. 684-685.

CTA Case No. 8439 Page 68 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION on the accrual method as it considered the effects of movement in the accounts receivable (AR) during the year. A decrease in AR-Trade shows that there was lower outstanding balance by the end of 2006 as compared with the beginning of 2006. It is implied that a larger portion from the beginning AR-Trade was collected during the year. The AR-Trade at the beginning of 2006 arose from sale transactions of the prior year, 2005. Thus, deducting the decrease in AR-Trade from the sales based on sales declared per VAT Returns properly arrives at the should be income of petitioner according to the accrual method of accounting or in the amount of P225,107,397.85; which is comprised of all income "earned but not yet collected" during 2006. However, the Court has to specifically highlight the manner as to how the decrease in AR-Trade amounting to P16,141,587.50 was derived by respondent. The Court finds no basis in the BIR Records or in any of the testimonies to uphold the computation of respondent. The amount does not tie up if we derive the decrease in AR-Trade from the audited balances70 in 2006 and 2005 as follows: Commission and fees receivable, 2006 -- Commission and fees receivable, 2005 Decrease in AR-Trade p 46,329,828.00 Add: Effect of allowance for doubtful accounts Actual decrease in AR-Trade 65,~67,998.00 Decrease in AR-Trade per BIR's computation Difference P18,938,17().00 657,401.00 Pl._9,595,571.00 .so ~~--~6,141,587 p 3,453,983.50 Based on the above computation, the Court cannot find any amount that would reconcile with the difference. As such, by following respondent's computation of the unreported income of P686,770.85 but using the actual decrease in AR-Trade of P19,595,571.00, there will be no unreported income on the part of petitioner. Therefore, the deficiency income tax assessment on the amount of P686,770.85 should be cancelled, as shown below:( 70 Exhibit "E", Docket, pp. 861-890.

CTA Case No. 8439 Page 69 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Han. Commissioner of Internal Revenue P241,248, 985.35 DECISION 19,595,571.00 Total Sales per Schedule P221,653,414.35 Less: Decrease in AR-Trade 224,420,627.00 Should Be Income per ITR Less: Sales per ITR (P2,767,212.65) Difference As for the underdeclaration of income amounting to f'236, 733,706.49, since there was no provided reconciliation from the actual collections to the accrued amount of income, the Court is compelled to assume that all of the collections pertained to the income earned in 2006. It was observed that respondent's imputation of 40.49�/o gross profit margin on the undeclared/unreported income amounting to P96,131,551.27, which was subjected to income tax at 35�/o, was obtained from the Total Gross Income under Item 19C in the Annual Income Tax Return 71 amounting to f'89,932,420.00 divided by the Sales/Revenues/Receipts/Fees of f'222, 110,442.00 under Item 15C. The Court finds this overstated. The computation of gross profit margin rate by respondent includes the Non- operating and Taxable Other Income72 . This should not be the case as this type of income is merely incidental to the operations of an entity and does not, in any way, affect the actual operations. Based on the Court's recomputation, the gross profit margin rate to be used should be 39.4498495�/o based on Gross Income from Operations (Item No. 17C) in the amount of P87,622,235.0073 divided by Sales/Revenues/Receipts/Fees amounting to f'222, 110,442.0074 � In sum, the deficiency income tax assessment on the unreported revenues in the amount of P686, 770.85 should be cancelled for lack of factual basis.( 71 Exhibit "LL", Docket, p. 1437. 72 Exhibit "LL", line 18B, Docket, p. 1437. 73 Exhibit "LL", line 17C, Docket, p. 1437. 74 Exhibit "LL", line 15C, Docket, p. 1437.

CTA Case No. 8439 Page 70 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION However, petitioner failed to overcome respondent's findings on the unreported revenues of P236, 733,706.49. As a result, petitioner shall be liable to pay the corresponding deficiency income tax and deficiency VAT. The deficiency income tax on the unreported revenues of P236, 733,706.49 shall be based on the recomputed gross profit of P93,391,090.83, as shown below: Total Unreported Revenues p 236,733 706.49 Taxable Gross Profit Rate p 87,622,235.00 39.44984946% Gross Income from Operations 222,110,442.00 P93,391,090.83 $a les/Revenues/R.eceipts/Fees Taxable Gross Profit B. Unreported interest income - P102,050.00 F. Disallowed creditable tax withheld - P19,062.73 Petitioner had admitted its deficiency income tax liability on the unreported interest income of P102,050.00 and disallowed creditable tax withheld of P19,062. 73 by paying on March 7, 2012 the amount of P147,145.18, broken down as follows: 75 Basic Tax P35,717.50 19,062.73\ p 54,780.23 Unreported interest income of P102,050.00 2?,390.12 multiplied by 35% 64,974.83 Disallowed Creditable Tax Withheld P147(145.18 Surcharge Interest Total Amount Paid on March 7, 2012 per BIR Form No. 0605 C. Disallowed interest expense - P46,203.00 Similarly, petitioner had admitted its deficiency liability relative to the disallowed interest expense of P46,203.00, aS{ 75 Exhibit "F", Docket, pp. 891 and 908-911.

CTA Case No. 8439 Page 71 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION it paid on March 2, 2012 the following basic deficiency income tax and interest in the amount of P35,127.11: 76 Basic Tax (P46,203.00 x 35%) p 16,171.05 Interest 18,956.06 Total Amount Paid on March 2, 2012 per BIR Form No. 0605 P35,1~7.1!_ D. Disallowed income payments not subjected to withholding tax- P11,771,855.97 1. Compensation not subjected to withholding tax - P7,828,343.96 Finding that petitioner's claimed salaries and wages in the amount of P153,551,500.50 were higher than those reflected in petitioner's Alphalist in the amount of P145,723,156.54, respondent disallowed the difference of P7,828,343.96; which was allegedly not subjected to withholding tax pursuant to Sections 78, 79, and 80 of the NIRC of 1997, as amended. 77 As earlier stated under the deficiency WTC assessment, petitioner failed to prove that it withheld and remitted the withholding tax due on the salaries and wages of P7,828,343.96. As a consequence, the same cannot be deducted by petitioner from its taxable gross income pursuant to Section 34(K) of the NIRC of 1997, as amended, which states: "(K) Additional Requirements for Deductibility of Certain Payments. - Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this Section, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of{ 76 Exhibit "F", Docket, pp. 891 and 906-907. 77 Exhibit "15", BIR records, p. 699.

CTA Case No. 8439 Page 72 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Han. Commissioner of Internal Revenue DECISION Internal Revenue in accordance with this Section, sections 58 and 81 of this Code." 2. Purchases of services in the amount of P3,943,512.01 not subjected to 2�/o EWT Based on the finding that petitioner failed to withhold and remit the 2�/o EWT on purchase of services in the amount of ~3,943,512.01 pursuant to Section 57(B) of the NIRC of 1997, as amended, respondent disallowed the said amount as deduction from petitioner's taxable gross income for the year 2006. As discussed earlier under the deficiency EWT assessment (see item V), petitioner paid the deficiency EWT liability on the income payments of �>3,943,512.01. However, since the settlement of the deficiency EWT was made after the issuance of the FDDA, the related expenses of �>3,943,512.01 shall still be disallowed as deductions from petitioner's taxable gross income, pursuant to Section 2.58.5 of RR No. 02-98. E. Tax credit carried over to next period- P1,512,318.00 Respondent disallowed petitioner's excess tax credits for the taxable year 2006 in the amount of �>1,512,318.00 but gave no explanation in the FDDA78 or in the Formal Letter of Demand79 . The Court could only surmise that the excess tax credits carried over to the succeeding year was disallowed in order to recapture the tax benefit realized by petitioner in carrying the said amount to the succeeding year. However, it was improper for respondent to disallow the said excess tax credits, because any tax benefit derived by petitioner from the carry-over of the said amount redounds to the succeeding year 2007. Since the tax benefitC 78 Exhibit "15", BIR records, pp. 694-702. 79 Exhibit "11", BIR records, pp. 630-636.

CTA Case No. 8439 Page 73 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION will be in the succeeding year, at most, petitioner may only be assessed in the said succeeding year. In fine, petitioner is liable to pay basic deficiency income tax for the taxable year 2006 in the amount of P35,346,571.63, computed as follows: Taxable Income per return p 17,940,582.00 Add: Adjustmen~--~--- _________ --~ Salesper Creditable Certificate-2307 P364,292 707.10 Sales per S__S_h~~~~-C?h~) ___ --~-~--~-----~- 127,559,000.61 ---- -~~--- Unreported Sales P236,733,706.49 __rvl~!iJ?Jy_gy_ G!()~~__Profit Rate -- 39.44984946% -~-----~-----~- . ------~--~--------~- ------- Unreported Taxable Gross Profit on Unreported ~ales of P236,733,706.49 ------------- ------------------ ---- -------- ---- 93,391,090.83 102 050.00 - . ---- --� -�--- - Unreported Interest Income __QL~JIQY'{__ed C::_c>sLC1 r_1_9_~~fJ~Il_~es_~----~------ ----- Non Deductible Interest Expense 46,203.00 Income Payments not subjected to withholding - - - - - - -f---- ___C::()~ p_~r_l~C1~!9 n ------ __P__ ]2�_~_~1 343. 96 11 771,855.97 Purchases of Services (2%) 3 943,512.01 .I.!!!.CI!?I~-~!1-~Q~~p~_~_r~:inve�Ji_g_!ltiQ__n______ ~ __ _____ __ _____ P123,251,781.80 ]l"l__CQI"Tl_e_T9~DlJ~0?0fo)_ _______________~------- __ ______ . _______ --- p 43,138,123.63 -- Less: Payment per return Total Tax Credit Claimed p 7,791,552.00 ---- ---- ----------- f - - - - - - --. -----~---------------------- -�--------~ -~---- Disallowed Creditable Tax - 2307 19,062.73 7,772,489.27 __E~asic -~fi_g_ency_ ~r:t~()~e_IC1~U~--~----- ____________________ -------- __f 35,365,634.36 �---~--------~-- ---~- Less: _Ta~ ~9_iq_QQ ___ -----~---~-~---------------- _______ .. ---� ����----� ---------------- ------ Non-Deductible Interest Expense (P46,203.00 X 35%) p 16 171.05 Unreported Interest Income -~-- _____(~JQ~,_9_5Q._QQ_X 350[<>)~ _________ ~--- ________ ------- 35,717.50 ___19,Q~~_,Z3 Disallowed Creditable Tax - 2307 - -- _______Z_Q,951.28 --�-------------------�--�-�--�---�----------~---~---~-----~ p 35,294,683.08 Basic Deficiency Income Tax Still Due With reference to petitioner's settlement of the basic deficiency income tax due of ~16,171.05 on the ~46,203.00 non-deductible interest expense, pursuant to Sections 248(A)(3) and 249(B) and (C) of the NIRC of 1997, as amended, petitioner is still liable to pay the amount of ~1,356.39, computed as follows:(

CTA Case No. 8439 Page 74 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION Basic Deficiency Income Tax P16 171.05 Add: 25% Surcharge p 4,042.76 20,312.45 P36 483.50 ---- 35 127.11 20% Deficiency Interest P1,356.39 from April 15 2007 to Feb. 7, 2012 ,----- -----~,1Z_l.05 x 20�/() x 17~}365 day&____________ t-- 15,586.23 from Feb. 7 2012 to March 2, 2012 r-- ~J6,!_Zl.05 x 20% x 24/365 daysl___ 212.66 265.83 20% Delinquency Interest from Feb. 7, 2012 to March 2 2012 t""!_il C>_Q__~~~<:_d~ficj~_9'_ nd _S_ll_r_<;:bi3E9~-- ______ _ _______ ___ ---------- -------- ____j(f_!6,171.05+P4,042.76) X 20% X 24/365 days] - - -- on deficiency interest due for Jan. 20, 2007 to Feb. 7, 2012 ---- _____ (~!~~86.23_x 2Q0/o )<:_~'41}_�2.__ _ 204.97 Total Amount Due Less: Payment on March_~1~0_11____ _____ _ _ __ _ ___ _________________ ---~--- t-- Basic Tax P16 171.05 Interest 18 956.06 Amount Still Due As regards petitioner's payment of the deficiency income tax due of P35,717.50 on the unreported interest income of P102,050.00 and deficiency income tax due of P19,062. 73 representing disallowed creditable withholding taxes, the Court finds that petitioner made an overpayment of P23,073.17 largely because of the 50�/o surcharge erroneously imposed by respondent, as shown below: Basic Deficiency Income Tax 1----- -O--n---u-n--r-e--p-o--rte-d--in-te-re-s- t i- nc-om-e-o-f - P1-0- 2,- 05-0.-00- - - - - - - - - - - - p 35,717.50 On disallowed creditable taxes withheld 19,062.73 c---Total Bc:l_s_ic;_Q_~fl<:!~nc;y_I_~_~f!l_E!_Tax __________________________ p 54,780.23 Add: _25% 2t!r-_c_h(3_r:g~ __________________________ P13,695.06 -- 20% Deficiency Interest -------- from ~__l"il__15L__200]J:Q�~!)-~ Z_,_]Q!? ____________________________ --~------~---- ---------�-��--- (P54 780.23 X 20% X 1759/365 days) 52 799.14 r---- _____ froll"l_ Fei:).__Z~_~Q_!_?_~()__!':'!i3!:.Ch_Z_L_?_Qg _________ 870.48 (P54,780.23 X 20% X 29/365 days) 20% Delinquency Interest from Feb. 7 2012 to March 7 2012 __ __ __ __o~ ~_s_i<:_ cl~ficje_l"l9' income tCI)(~!lcJS_ll_rfh~g~---- 1 088.10 -------- [(P54,780.23 + P13,695.06) X 20% X 29/365 days) _____g_~__ d_efi<:~_ll_cy_ int~!:_~_?_l:__cjl.l_e for__Ji3_rl_._!9L1Q07 ~Q_ Feb. 7, 2012 839.00 69 291.78 --- (P52 799.14 X 20% X 29/365 days) Total Amount Due - - - - - - - - - - - ---------- ----------- f------ - - - - - - - - - - - - - - - - - - - - ---------- - - - - - - - - - p 124,072.QL Less: _l'i3YI!l~nt_ _ _ _ ____ ________ --- ------- --- ----- ------- Basic Tax P54,780.23 _______ -~!:_<:_harg~_(!)_Q0(o) ____________________ ------------------~-- 27,390.12 (

CTA Case No. 8439 Page 75 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue 64,974.83 147,1~.18 DECISION (P23,073.17) _____lntere!)!__________ -----~-----~~-~� ���----�-~---~ -~~~------- Amount Still Due VII. DEFICIENCY VALUE-ADDED TAX- P295,715,499.85 Respondent computed the deficiency VAT assessment of P296,683,844.35 as follows: 80 Taxable Sales per Schedule p 201,379,194.35 236,733,706.49 -~ -~- 2_1~10,J85.00 Unreported revenue/sales 440 423 085.84 Non-Operating & Taxable Other Income 51,196 986.59 Total Transaction Subject to Output Tax 88/845 615.66 140 042 602.25 Output Tax for January (10%) P82 689 185.70 p 8 268,918.57 42 928,068.02 4 025 913.92 Output Tax for February- December (12%) 357 733 900.14 136 016 688.33 4,533,807.18 Output Tax Due (10/12%) 507 893.26 18 125 945.12 117 890 743.21 Output Tax-billed & collected from Agencies/Customers 58 945 371.60 119,847,729.54 _1?8,793/101.14 i Total Output Tax per re-investigation P296,683,844.35 Input Tax Claimed per Return Less: Disallowed Input Tax Output Tax Payable Less: Payments per return Deficiency VAT Add: Surcharge (50%) Interest (20% per annum) Total Deficiency VAT As can be gleaned from the above computation, the assessment arose from the following items: A. Unreported Revenues/Sales c----- - - ~--- ~-~~--- --~---~ ~-- ------- -� --~~ ~� -~---~~-- ---~~------ P236,7_33,706. 49 2,310,185.00 B. Non-Operating and Taxable Other Income c. Output Tax Billed and Collected from Agencies/Customers 88,845,615.66 507,893.26 D. Disallowed Input Tax The Court shall discuss each item. A. Unreported revenue/sales- P236,733,706.49.C 80 Exhibit "15", BIR records, pp. 694 to 695.

CTA Case No. 8439 Page 76 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION This assessment was based on the same finding under the deficiency income tax assessment (see discussion in item VI.A.1) that petitioner had unreported revenues/sales in the amount of P236,733,706.49 representing the discrepancy between the sales based on CWT Certificates - BIR Form No. 2307 in the amount of P364,292, 707.10 and the amount of P127,559,000.61 sales reflected in the schedules of sales submitted as VAT Return attachments. The Court finds the assessment in order. As stated earlier, petitioner had unreported sales collections in the amount of P236, 733,706.49, which shall be subjected to VAT. B. Non-Operating & Taxable Other Income - P2,310,185.00 Respondent imposed 12�/o VAT on the "Non-Operating & Taxable Other Income" declared by petitioner in its Annual ITR for the taxable year 2006 in the amount of P2,310,185.00, which comprised of the following: 81 Prompt payment discount p . 22,655.00 Interest Income - stock options 276,094.00 Miscellaneous Total Non-Operating & Taxable Other Income 2,011,436.00 P2,310,185.00 Petitioner did not refute or offer evidence to counter the findings of the BIR examiner. The Independent CPA also did not mention the said income in the report82 � Consequently, respondent's assessment should remain. The amount of P2,310,185.00 shall be considered to have been received by petitioner in the ordinary course of its trade or business and is subject to VAT pursuant to Section 105 in relation to Section 108(A) of the NIRC of 1997, as amended. C. Output Tax Billed and Collected from Agencies/Customers- P88,845,615.66C 81 Exhibits "LL", line 18B, Docket, p. 1437; Exhibit "LL-1", Section A, Schedule 4, Docket, p. 1438. 82 Exhibit "GG", p. 5.

CTA Case No. 8439 Page 77 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hen. Commissioner of Internal Revenue DECISION Respondent found that output tax amounting to P88,845,615.66 was not reported for VAT purposes, which was billed and collected by petitioner from various agencies/customers; hence, petitioner was assessed for deficiency VAT pursuant to Sections 106 and 108 of the NIRC of 1997, as amended, as computed below: 83 Total Output Tax Billed and Collected P236 733 706.49 p 1,972 780.89 p 116 859 104.26 Output tax imposed on unreported sales 19 727 808.87 26,040 707.71 January output tax (1/12)- 10% 28 013 488.60 February- December output tax (11/12)- 12%) 217 005,897.62 P88,845,615.66 Unreported Output Tax As stated earlier (see discussion in item VI.A.1), based on the Independent CPA's verification and the schedule of ORs presented by petitioner, only one OR was issued for the collection of pass-through costs and commission, including the 12�/o VAT. As a result, petitioner shall be liable for the unremitted VAT amounting to P88,845,615.66 pursuant to Section 108(A) in relation to Section 113(A)(2) of the NIRC of 1997, as amended. D. Disallowed Input Tax - P507,893.26 Respondent disallowed petitioner's claimed input taxes for both domestic purchases of goods and services in the amount of P507,893.26, pursuant to Sections 110 and 113(A) and (B) of the NIRC of 1997, as amended. For petitioner's failure to refute respondent's finding, the disallowance of the P507,893.26 input VAT shall be upheld. In fine, this Court upholds the deficiency VAT assessment. Petitioner is liable to pay basic deficiency VAT in the amount of P117,890,743.21, reduced by the amount of P123,110.42 which was paid by petitioner on March 7;~ 83 Exhibit "15", BIR records, p. 700.

CTA Case No. 8439 Page 78 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION 2012, leaving an amount of P117,767,632.79 basic deficiency VAT still due, computed as follows: Taxable Sales per Schedule P201 379 194.35 I Unreported revenue/sales 236 733 706.49 I Non-Operating and Taxable Other Income 2 310,185.00 ' Total Transaction Subject to Output Tax P440 423 085.84 Output Tax for January (10%) p 82 689,185.70 p 8 268 918.57 Output Tax for February- December (12%) 357 733,900.14 42,928 068.02 Output Tax Due (10/12%) p 51 196,986.59 Output Tax-billed and collected from Agencies/Customers 88 845,615.66 Total Output Tax per re-investigation P140,042 602.25 Input Tax Claimed per Return p 4 533 807.18 Less: Disallowed Input Tax 507,893.2f> 4,025,913.92 Output Tax Payable P136,016,688.33 Less: Payments per return 18,125,945.12 Deficiency VAT __ _P117,890,743.21 Less: Payment made on March 7, 2012 123,110.42 Deficiency VAT Still Due -- P117,7(;7_,_632.79 As regards the P123,110.42 deficiency VAT paid by petitioner on March 7, 2012, pursuant to Sections 248(A)(3) and 249(B) and (C) of the NIRC of 1997, as amended, petitioner is still liable to pay the amount of P15,184.07, computed as follows: Basic Deficiency VAT ----- p 123,110.42 Add: 25% Surcharge p 30,777.�1 161 205.34 20% Deficiency Interest p 284 315.76 from Jan. 25 2007 to Feb. 7 2012 124 054.83 (P123 110.42 X 20% X 1 839/365 days) 1956.28 269,131.69 from Feb. 7 2012 to March 7 2012 (P123 110.42 X 20% X 29/365 days) 2 445.34 P15,184.07 ~ 1 971.28 20% Delinquency Interest from Feb. 7, 2012 to March 7 2012 on basic deficiency VAT and surcharge P123,110.42 [(P123 110.42+P30,777.61) X 20% X 29/365 days] 146,021.27 on deficiency interest due for Jan. 25 2007 to Feb. 7 2012 (P 124 054.83 X 20% X 29/365 days) Total Amount Due Less: Payment on March 7 2012 Basic Tax Interest Amount Still Due

CTA Case No. 8439 Page 79 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION VIII. COMPROMISE PENALTIES Respondent imposed compromise penalties against petitioner in the amount of P123,500.00, broken down below: Tax Type -- ------------ a. Penalty for failure to file Summary of Compromise Alphabetical list of Withholding Taxes (SAWT), Penalty alpha list of income payments not subjected to withholding tax, Monthly Alphabetical List of p 25,000.00 Payees (MAP), list of regular suppliers b. Withholding on VAT .?,~QO.OO c. Fringe Benefits Tax 20,QQQ_.OO d. Withholding Tax - Final --� e. Withholding Tax - Compensation f. Withholding Tax - Expanded 20 000.00 25,000.00 Total 25,000.00 P123,500.00 Petitioner paid the compromise penalties under letters a, b and c in the respective amounts of P25,000.00, PS,SOO.OO and P20,000.00 on March 2 and 7, 2012. However, petitioner did not pay the remaining compromise penalties imposed under the assessments for final withholding tax, withholding tax on compensation and expanded withholding tax totaling P70,000.00 (under letters d, e and f), thus, petitioner did not agree to settle the same. It has been held that the imposition of compromise penalty without the conformity of the taxpayer is illegal and unauthorized.84 Consequently, the compromise penalties of P70,000.00 should be cancelled. Anent the 50�/o surcharge on the alleged deficiency income tax and VAT85, the Court finds no reason to warrant the imposition of the same, pursuant to Section 248(B) of the NIRC of 1997, as amended. WHEREFORE, premises considered, the Petition for Review is PARTIALLY GRANTED. Accordingly, thet: 8,., Commissioner of Internal Revenue vs. Lianga Bay Logging Co., Inc. and the Court of Tax Appeals, G.R. No. L-35266, January 21, 1991. 85 Exhibit "15", BIR records, pp. 694-695.

CTA Case No. 8439 Page 80 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION assessment pertaining to the imposition of compromise penalties for basic deficiency creditable withholding VAT, basic deficiency withholding tax - compensation, basic deficiency withholding tax - expanded, final withholding tax, and the fringe benefits tax due are hereby CANCELLED. However, petitioner is ORDERED TO PAY respondent the modified amount of P199,496,841.52 representing basic deficiency final withholding tax, withholding tax on compensation, expanded withholding tax, income tax, and value-added tax, inclusive of the 25�/o surcharge imposed under Section 248(A)(3) of the NIRC of 1997, as amended, and the amount of P99,036.74 representing 25�/o surcharge and 20�/o deficiency and delinquency interests on the partial deficiency tax payments of P2,368,539.33 or in the aggregate sum of P199,595,878.26, computed as follows: Tax Type Basic Tax 250/o Surcharae Total Amount ~i_nal '1/YJ~h-~o_ld_in_g_TCI?< __ . _______ 1'_ _ ___I?8,5I?J_?_ __!'____ l2_?1 _!29;:J4 p 985,647.21 2 499 448.13 Withholding Tax on Compensation 1 999 558.50 499,889.63 ~?<e.anded__~!~~_h_ol~ing__~ax ___________},_7~Z_,O~_Lqz_ _______ _____21�,770.~Z_ _ 4,683,851._3_1_ Income Tax 35,294,683.08 8 823,670.77 44 118 353.85 Va_lu_e-_ad~_e_d_Ta_x_�---�------�------- --�-�_____1_17,7~?,_�~_?:_7_9--+----2=9._,_,4_~_~,908.20 11_7,209,540.99 Subtotal P159,597,473.21 P39,899,368.31 P199,496,841.52 -- -�����----------�����-----�-----�----����---- ----�-----�---�--��� ��------------- �������-�-------------+----------��------��--�-- 25% Surcharge, 20% deficiency and delinquency interest on the partial deficiency tax payments made by petitioner on March 2 and 7, 2012 totaling P2,368,539.33 - � - - - - - - - - - - - - � -��----------�--------~------���- - - � � - - - - - - �-� - -- - - - - - - - - - - -�-- - - - - - - - - 1 - - - - - - - - - - - - - Amount Final Withholding on VAT P (3,959.59) Fringe Benefits Tax 90,021.24 f - � - - - - - -----�---� -����---------�-----!- -----------�-------- -- �---- -------�-----�- -~!thholdin9_!~~-----~()rl'l�~~sat_!c.>_rl____ .-� ��------- ____________ ��------- 1---�-----~_,_4_72.5~ Expanded Withholding Tax 15,035.26 Income Tax (21,716.78) f-----�--- - - - � - � - � - - - - - - - � - � - - - - - - -� ---�-�----- --�---�� ----��----1---- --�-�-�-----------------� !----------�---�-------~ Value-added Tax 15,184.07 �----�--��----------�-- ... �---�---���-��-!-- �----�--- ����-�-��-------�---- -- -------�------- ����------ --�-����--�����--�-------- Subtotal P 99,036.74 - - - - - - - - - - - - � - � � � - - - - � - - - - - - - � �-� - - - - - - - - - � - � - � � ------�-��-��� --�-- Total P199,595,878.26 In addition, petitioner is ORDERED TO PAY the following: a) Deficiency interest at the rate of 20�/o per annum on the basic deficiency final withholding tax, withholding tax on compensation, expanded withholding tax, income tax, and.(

CTA Case No. 8439 Page 81 of 81 Ace/ Saatchi & Saatchi Adveritising Inc. vs. The Hon. Commissioner of Internal Revenue DECISION value-added tax computed from the dates indicated below until full payment thereof pursuant to Section 249(B) of the NIRC of 1997, as amended; 20�/o Deficiency Interest Basic Tax ---~omput~d f r o m 1----------------------- --~---------�--------- - p 788,517.77 January 20, 2007 Final Withholding Tax Withholding Tax - Compensation 1,999,558.50 January 20, 2007 f - - - - - - - - - - - - - - - - - - - - - - - - ---~-- - - - - - 1--------------~- -----1- Expanded Withholding Tax 3,747,081.07 January 20, 2007 Income Tax 35,294,683.08 April 15, 2007 1 - - - f------~----~---~------------ ---- -�- Value-added Tax 117,767,632.79 January 25, 2007 b) Delinquency interest at the rate of 20�/o per annum on the total amount of P199,496,841.52 and on the 20�/o deficiency interest which have accrued as afore-stated in (a), computed from February 7, 2012 until full payment thereof pursuant to Section 249(C) of the NIRC of 1997, as amended. SO ORDERED. ~ N. M~~.. (;;~ WE CONCUR: CIELITO N. MINDARO-GRULLA Associate Justice Presiding Justice ERL~P.UY Associate Justice 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 the writer of the opinion of the Court's Division. Presiding Justice Chairperson, 1st Division