Facts:
Paper
Industries Corporation of the Philippines (PICOP) is a Philippine corporation
registered with the Board of Investments (BOI) as a preferred pioneer
enterprise with respect to its integrated pulp and paper mill, and as a
preferred non-pioneer enterprise with respect to its integrated plywood and
veneer mills. Petitioner received from
the Commissioner of Internal Revenue (CIR) two (2) letters of assessment and
demand (a) one for deficiency transaction tax and for documentary and science
stamp tax; and (b) the other for deficiency income tax for 1977, for an
aggregate amount of PhP88,763,255.00.
PICOP
protested the assessment of deficiency transaction tax , the documentary and
science stamp taxes, and the deficiency income tax assessment. CIR did not
formally act upon these protests, but issued a warrant of distraint on personal
property and a warrant of levy on real property against PICOP, to enforce
collection of the contested assessments, thereby denying PICOP's protests. Thereupon, PICOP went before (CTA) appealing
the assessments.
On
15 August 1989, CTA rendered a decision, modifying the CIR’s findings and
holding PICOP liable for the reduced aggregate amount of P20,133,762.33. Both
parties went to the Supreme Court, which referred the case to the Court of
Appeals (CA).
CA
denied the appeal of the CIR and modified the judgment against PICOP holding it
liable for transaction tax and absolved it from payment of documentary and
science stamp tax and compromise penalty.
It also held PICOP liable for deficiency of income tax.
Issues:
1.
Whether PICOP is liable for
transaction tax
2.
Whether PICOP is liable for
documentary and science stamp tax
3.
Whether PICOP is liable for
deficiency income tax
Held:
1.
YES. PICOP reiterates that it is exempt from the payment of the
transaction tax by virtue of its tax exemption under R.A. No. 5186, as amended,
known as the Investment Incentives Act, which in the form it existed in
1977-1978, read in relevant part as follows:
"SECTION 8. Incentives to a Pioneer Enterprise. — In addition to
the incentives provided in the preceding section, pioneer enterprises shall be
granted the following incentive benefits:
(a) Tax Exemption. Exemption from all taxes under the National Internal
Revenue Code, except income tax, from the date of investment is included in the
Investment Priorities Plan x x x”. The Supreme Court holds that that PICOP's
tax exemption under R.A. No. 5186, as amended, does not include exemption from
the thirty-five percent (35%) transaction tax. In the first place, the
thirty-five percent (35%) transaction tax is an income tax, a tax on the
interest income of the lenders or creditors as held by the Supreme Court in the
case of Western Minolco Corporation v. Commissioner of Internal Revenue. The
35% transaction tax is an income tax on interest earnings to the lenders or
placers. The latter are actually the taxpayers. Therefore, the tax cannot be a
tax imposed upon the petitioner. In other words, the petitioner who borrowed
funds from several financial institutions by issuing commercial papers merely
withheld the 35% transaction tax before paying to the financial institutions
the interest earned by them and later remitted the same to the respondent CIR.
The tax could have been collected by a different procedure but the statute
chose this method. Whatever collecting procedure is adopted does not change the
nature of the tax. It is thus clear that
the transaction tax is an income tax and as such, in any event, falls outside
the scope of the tax exemption granted to registered pioneer enterprises by
Section 8 of R.A. No. 5186, as amended. PICOP was the withholding agent,
obliged to withhold thirty-five percent (35%) of the interest payable to its
lenders and to remit the amounts so withheld to the Bureau of Internal Revenue
("BIR"). As a withholding, agent, PICOP is made personally liable for
the thirty-five percent (35%) transaction tax 10 and if it did not actually
withhold thirty-five percent (35%) of the interest monies it had paid to its
lenders, PICOP had only itself to blame.
2.
NO. The CIR assessed documentary and science stamp taxes, amounting
to PhP300,000.00, on the issuance of PICOP's debenture bonds. Tax exemptions are, to be sure, to be
"strictly construed," that is, they are not to be extended beyond the
ordinary and reasonable intendment of the language actually used by the
legislative authority in granting the exemption. The issuance of debenture
bonds is certainly conceptually distinct from pulping and paper manufacturing
operations. But no one contends that issuance of bonds was a principal or
regular business activity of PICOP; only banks or other financial institutions
are in the regular business of raising money by issuing bonds or other
instruments to the general public. The actual dedication of the proceeds of the
bonds to the carrying out of PICOP's registered operations constituted a
sufficient nexus with such registered operations so as to exempt PICOP from
taxes ordinarily imposed upon or in connection with issuance of such bonds. The
Supreme Court agrees with the Court of Appeals on this matter that the CTA and
the CIR had erred in rejecting PICOP's claim for exemption from stamp taxes.
3.
YES. PICOP did not deny the existence of discrepancy in their
Income Tax Return and Books of Account owing to their procedure of recording
its export sales (reckoned in U.S. dollars) on the basis of a fixed rate, day
to day and month to month, regardless of the actual exchange rate and without
waiting when the actual proceeds are received. In other words, PICOP recorded
its export sales at a pre-determined fixed exchange rate. That pre-determined
rate was decided upon at the beginning of the year and continued to be used
throughout the year. Because of this,
the CIR has made out at least a prima facie case that PICOP had understated its
sales and overstated its cost of sales as set out in its Income Tax Return. For
the CIR has a right to assume that PICOP's Books of Accounts speak the truth in
this case since, as already noted, they embody what must appear to be admissions
against PICOP's own interest.
Dispositive:
WHEREFORE, for all the foregoing, the Decision of the Court
of Appeals is hereby MODIFIED and Picop is hereby ORDERED to pay the CIR the
aggregate amount of P43,794,252.51 itemized as follows:
(1) Thirty-five
percent (35%) transaction tax P 3,578,543.51
(2) Total Deficiency Income Tax Due
P 40,215,709.00
Aggregate Amount Due and Payable P 43,794,252.51
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