November 21, 1996

MEMORANDUM FOR:
The Commissioner
This refers to the protest filed by Messrs. A.M. Sison, Jr. and Associates, on
behalf of NICOLAS KIWI PHILIPPINES, INC. against the deficiency tax
assessments covering the fiscal years ended June 30, 1988 and June 30, 1987
itemized as follows: LibLex

A. Fiscal Year Ended 6-30-88

Assessment Nos. Kind of Tax Amount
Inclusive of Increments
FAS 1-88-90-002059 Deficiency Income Tax P1,760,409.51
FAS 1-88-90-002060 Deficiency Withholding Tax 862,525.16
FAS 1-88-90-002061 Deficiency Sales Tax 5,510,196.63
FAS 1-88-90-002062 Deficiency Value Added Tax 1,017,416.71
––––––––––––
TOTAL P9,150,548.01
===========
B. Fiscal Year Ended 6-30-87
FAS 1-87-90-002057 Deficiency Income Tax P5,303.56
FAS 1-87-90-002058 Deficiency Expanded
Withholding Tax 20,691.59
–––––––––
TOTAL P25,995.12
==========
FACTS AND BASES OF THE ASSESSMENTS:

Records show that Letter of Authority No. 0020319 NA dated October 29,
1988 was issued to the examiners of the Intelligence and Investigation Office for
the examination of all the internal revenue tax liabilities of herein taxpayer
covering the fiscal years ended June 30, 1987 and 1988.

On the basis of said L/A, the said examiners submitted on September 10,
1990 their report of investigation wherein they recommended the issuance of the
following assessments:
Fiscal Year ended June 30, 1988
Deficiency Income Tax
Deficiency basic Income Tax P1,003,634.50
25% surcharge 250,908.63
Copyright 1994-2017 CD Technologies Asia, Inc. Taxation 2016 1
 ––––––––––––
Sub-total P1,254,543.13
20% Interest (10-17-88 to 9-15-91) 480,836.38
Compromise penalty 25,000.00
––––––––––––
Total amount due & collectible P1,760,409.51
===========
Deficiency Withholding Tax
Deficiency basic withholding tax P498,888.87
25% Surcharge 124,722.28
–––––––––––
Sub-total P623,611.09
20% Interest (various dates to 9-15-90) 210,914.07
Compromise penalty 28,000.00
–––––––––––
Total amount due & collectible P862,525.16
==========
Deficiency Sales Tax
Deficiency basic Sales Tax P2,886,280.27
25% surcharge 716,570.07
–––––––––––
Sub-total 3,602,850.34
20% interest (fr. 1-20-88 to 9-15-90) 1,902,346.29
Compromise penalty 28,000.00
–––––––––––
Total amount due & collectible P5,510,196.63
==========
Deficiency Value Added Tax
Deficiency basic value added tax P557,514.71
25% surcharge 139,378.68
––––––––––
Sub-total 696,893.39
20% interest (fr. 5-20-88 to 9-15-90) 300,523.33
Compromise penalty 20,000.00
––––––––––
Total amount due & collectible P1,017,416.71
==========
Fiscal Year Ended June 30, 1987
Deficiency income tax
Deficiency basic income tax P2,186.20
25% surcharge 526.55

Copyright 1994-2017 CD Technologies Asia, Inc. Taxation 2016 2

 –––––––––
Sub-total 2,712.75
20% interest 1,570.78
Compromise penalty 1,000.00
–––––––––
Total amount due & collectible P5,303.53
========
Deficiency Expanded Withholding Tax
Deficiency basic Expanded Withholding Tax P10,166.78
25% Surcharge 2,541.70
––––––––––
Sub-total P12,708.48
20% interest fr. 7-10-87 to 7-31-90 7,783.11
Compromise penalty 200.00
––––––––––
Total amount due and collectible P20,691.59
=========
(pls. see Assessment Notices on pp. 400-404 for FY ended 6-30-88: pp. 407-409
for FY ended 6-30-87).

A close perusal of the report of investigation of the investigating examiners

shows that the aforementioned assessments were principally based on the
following findings:

A. 1988 Deficiency Tax Assessments:

1. Deficiency Income Tax — P1,760,409.51

— This was brought about by the disallowance of the following

items:

a. inventories written off in the amount of P1,804,580.00

disallowed due to insufficiency of documentary evidence
as it was allegedly not supported with a report or
certification from the BIR District Office;

b. income tax credits carried over from FY ended June 30,

1987 in the amount of P372,028.00 — disallowed on the
ground that this amount was already absorbed by the
findings of the tax audit of that taxable period.

2. Deficiency Withholding Tax — P862,575.16

Copyright 1994-2017 CD Technologies Asia, Inc. Taxation 2016 3

 Re: Withholding Tax on compensation

— amount shown per alpha list does not tally with the gross
amount appearing in the general ledger showing a
discrepancy of P2,297,004.01;

— reconciliation of total tax withheld per alpha list and per

return shows an underremittance of P131,878.57;

Re: Expanded withholding tax

— discrepancies were found on the following:

a. professional fees were subjected to 5% withholding tax

instead of 10%;

b management & technical consultants; fee were not

subjected to withholding tax;

c. various income payments.

Re: Final withholding tax

— royalty expense of P62,492.00 was subjected to a final

withholding tax of P4,322.01 only instead of P15,623.00.

3. Deficiency Sales Tax — P5,510,196.63

In the verification of its allowable sales tax credits, some adjustments or

corrections were made, thus reducing the allowable tax credits to be applied
against its sales tax liabilities for the semester, to wit:

a. Advance sales tax on importations. — some amounts claimed

were overstated while some were found to be import duties
which are not creditable;

b. Sales tax credits on local purchases. — included in the deferred

sales tax credit (DSTC) for local purchase of raw and
packaging materials were the 4% contractors tax and the 1.5%
subsequent sales taxes which were not creditable under then
Section 166 of the Tax Code as amended;

c. Reduction of the DSTC pursuant to Section 5(c), Revenue

Regulations No. 11-86, by the following:
1. Sales tax credits on raw and packaging materials
Copyright 1994-2017 CD Technologies Asia, Inc. Taxation 2016 4
 inventories written off:
2. Sales tax credits on samples:
3. Sales tax credits on promotions. LLjur

4. Deficiency Value-Added-Tax — P1,017,416.71

a. The taxpayer claimed what it called "Unused Deferred Sales

Tax Credits" on inventories of:
1. importation of goods for sale P299,351.00
2. importation of raw materials
for sale 194,301.63
3. 8% transitional input tax
on physician samples 43,540.97
––––––––––
P537,190.97
in its Value Added Tax return filed for the quarter covering the months
of January through April 1988.

Pursuant to Section 26(b) of Revenue Regulations No. 5-87, the

unused deferred tax credit as of December 31, 1987 shall be allowed
as transitional input tax in the amount appearing in the books of
accounts and corroborated by the amount reflected in the sales tax
return as of December 31, 1987.

Verification of the taxpayer's records and its two (2) sales tax
return filed for the quarter ended December 31, 1987 however showed
a zero balance or no excess sales tax credit. Hence, the disallowance.

b. Input tax on exempt sales — P18,406.39

— Sales made to AFPCES, exempt from VAT under a

special law, is not creditable pursuant to Section 12 of
Revenue Regulations 5-87.

B. 1987 Deficiency Tax Assessments — P25,991.59

1. Deficiency income tax — P5,303.63

— brought about by the reversal of a prior year provision

for employees retirement.

2. Withholding tax — P20,691.59

— withholding taxes on real property rentals and

Copyright 1994-2017 CD Technologies Asia, Inc. Taxation 2016 5

 professional fees were found to be understated.

(pls. see memo report fr. FY 6-30-88 on pp. 361-365; also pp. 1000-1002 — re:
memo report fr. FY 6-30-87).

The aforesaid assessments were all timely protested by the taxpayer, thru
counsel, for being devoid of legal and factual basis.

DISCUSSION/EVALUATION :

Re: 1988 Deficiency Tax Assessments — P9,150,548.01

A. Deficiency income tax — P1,760,409.51

1. Disallowance of Inventory written off — P1,804,589.00

A breakdown of above-item shows the following:

Charges against reserve for
inventory losses appearing in
the reconciliation of net income
per ITR P1,043,623.00

Inventory losses charged

directly to expenses 760,966.00
–––––––––––
P1,804,589.00
It is alleged by our examiners that the causes of these write-off were
obsolescence, losses or destruction etc. or shortages found in physical count but
were merely supported by self-serving documents but without a certification or
report from the local BIR District office. In sum, said expense was
unsubstantiated.

This finding was however refuted by the taxpayer's counsel. As argued, the
questioned inventory losses were incurred from the normal business operation of
the taxpayer and not from write-off as alleged, hence there is no need of a
certification from the BIR District Office.

The issue to be resolved therefore is not whether the said expense was
supported by the required certification but whether said inventory losses were
incurred in the normal business operation of herein taxpayer.

Testimonial evidences adduced in the hearing and documentary evidences

submitted in support thereof point to only one direction, and that is, the finding of
the investigating examiners was unfounded and devoid of legal and factual basis.

Copyright 1994-2017 CD Technologies Asia, Inc. Taxation 2016 6

 As argued, the inventory losses actually consisted of the following:
1. Losses from the sale of excess or obsolete raw materials;
2. Losses from production of initial batches of new products
which were introduced in 1987 and 1988, namely kleensol
disinfectant and sterilix pharmaceutical solution;
3. Production losses from reprocessing of stocks returned for
reconditioning.
These arguments were properly ventilated in a conference hearing called for
the purpose on November 26, 1991. Documentary evidences in support of the
testimonial evidence that the questioned inventory losses were actually incurred
out of the normal business operation of the company and not from write-off were
presented to this Office and were likewise shown to the investigating examiners
for their examination, comment and evaluation. The documents presented range
from summary/schedules, official receipts evidencing proceeds on sale of raw
materials; journal vouchers showing actual stock losses incurred in the initial
production batch of Kleensol; delivery receipts showing delivery of materials to
consumer production; delivery receipts of stocks from warehouse to quality
control for reconditioning etc. which were eventually marked in the conference
hearing as Exhibits I; IA to C: II-I to II-6; III-I to III-9; IV-I to IV-13 for the
taxpayer (pls. see copies of exhibits on pp. 1174-1211; also TSN on pp. 488-520)
These documentary evidences presented were not rebutted by the investigating
examiners.

Moreover, deduction of these kind of losses are also supported by court

decisions (Bacolod-Murcia Milling Co., Inc. vs. CIR, CTA Case No. 1402,
10-31-69; Mao Sugar Central Co., Inc. vs. Commissioner of Internal Revenue,
CTA Case No. 1434, 9-12-67; Talisay Silay Milling Co., Inc. vs. CIR, CTA Cases
No. 1399 and 1406, 12-29-69). cdphil

As it was actually ascertained/established that the alleged inventory losses

occurred from the normal business operation of the taxpayer and not from
write-off as alleged based on testimonial evidence and documentary evidence
presented, we can properly allow the deduction of this expense under Section
29(d)(2) of the Tax Code.

2. Income tax credits carried over from FY 6-30-87

As previously mentioned, this was disallowed based on the theory that this
amount was already absorbed or deducted against the examiner's findings for the
taxable year ended June 30, 1987.

The overpaid income tax in the amount of P372,028.00 of the immediately

Copyright 1994-2017 CD Technologies Asia, Inc. Taxation 2016 7

preceding taxable year (1987) is clearly creditable pursuant to Section 69 of the
Tax Code. This section in substance states that the taxpayer has the option to have
the overpayment be refunded or deducted as tax credit from its tax liability of the
succeeding taxable quarters of the following year.

Moreover, the investigating examiners virtually acknowledged that such

overpayment is creditable when they allowed and applied the same against their
assessment for the taxable year 1987. Since their assessment for deficiency income
tax for the FY 1987 is disputable, as discussed in the later part of this
memorandum, the aforementioned amount of P372,028.00 should have been
allowed as a tax credit against the 1988 income tax liability of herein taxpayer.

Re: Deficiency Withholding Tax — P862,575.16

The revenue examiners arrived at the deficiency withholding tax on

compensation by comparing the total compensation paid per alpha list in the
amount of P14,163,360.43 which is lesser than the ledger balance of
P16,460,364.44. The difference of P2,297,004.00 was therefore subjected to a
deficiency withholding tax.

Taxpayer, thru counsel, argued that the procedure used by the examiners in
comparing the amount of compensation payment per alpha list and the general
ledger is not entirely correct or accurate simply because the amount shown in the
general ledger included accruals of certain employees' benefits such as sick leave
and vacation leave pay, commissions and other benefits the withholding taxes of
which were paid on later dates. Hence, it is more of a question involving timing
difference. It is further argued that the amount in the general ledger also includes
general allocation of expenses by affiliate which herein taxpayer did not pay and
deduct for income tax purposes.

Again, in the conference hearing held on December 11, 1991, the above
issue was threshed out and the taxpayer, thru counsel, was able to refute the above
findings of the investigating examiners.

In the said hearing, the taxpayer was able to explain fully the alleged
discrepancy by testimonial evidence and supporting documents, notably a
reconciliatory schedule/worksheet showing in detail the commission income and
unused sick leave and vacation pay and other payments like 13th month pay etc.
that accrued in 1988 but were actually paid only in 1989. The taxpayer likewise
submitted supporting documents like numerous journal vouchers showing the cost
allocation of expenses by Regional Head Office, commissions & benefits earned
and accrued in 1988 by certain employees which were duly recorded in its 1988
ledger but were in fact actually paid to said employees in 1989. These
documentary evidences were eventually marked as evidence in its favor, to prove
Copyright 1994-2017 CD Technologies Asia, Inc. Taxation 2016 8
that the amounts listed in the reconciliatory statement were not fictitious but were
in fact supported by competent documentary evidence. (pls. see exhibits 5 to 5-12
on pp. 1161-1173; also Exhibits 8 to 8-6 on pp. 1139-1145).

As to the alleged underremittance of P131,878.57 as withholding tax per

reconciliation of total tax withheld from employees per alpha list and total tax
remitted per return, records show that this amount was arrived at as follows:
Total withheld per alpha list P2,053,855.30
Total remitted per return 1,921,976.73
––––––––––
P131,878.59
=========
Taxpayer maintains that the correct withholding tax per alpha list is
P1,919,984.31 only. This consists of the withholding tax of rank and file
employees in the amount of P517,924.85 and the withholding tax of confidential
employees in the amount of P1,402,059.46, thus showing that herein taxpayer
even made an overremittance of its withholding tax in the amount of P1,992.42
arrived at as follows:
Withholding tax per return P1,921,976.73
Total withholding per alpha list 1,919,984.31
––––––––––
P1,992.42
=========
Verification would show however that herein taxpayer failed to substantiate
its stand. Hence we believe that we can sustain the same.

As regards the deficiency expanded withholding tax and the final

withholding tax on royalty, herein taxpayer failed to prove its case. Accordingly,
we can properly reiterate these assessments.

Re: Deficiency Sales Tax — P5,510,196.63

The examiners assessed the taxpayer a deficiency sales tax for the first
fiscal semester (July to December 1987) of the taxable year with a basic tax of
P2,866,280.27 (at 10% for medicines and 20% for ordinary articles), or a total of
P5,510,196.63 inclusive of 25% surcharge, compromise penalty and interest (pls.
see "schedule B" on p. 349).

In disputing the above-mentioned assessment, herein taxpayer took

exception of the computation of the 1988 deficiency sales tax wherein the revenue
examiners forwarded to the first quarter of 1988, sales tax credit of P537,965.54
only instead of P2,317,585.50 as shown in the manufacturer sales tax return for the

Copyright 1994-2017 CD Technologies Asia, Inc. Taxation 2016 9

first quarter of 1988. (pls. see manufacturer's quarterly sales tax return for the first
quarter of FY June 30, 1988 showing a beginning balance of P2,317,585.50 as
available sales tax credit on p. 427). It is also alleged, based on the foregoing, that
herein taxpayer was unjustly deprived of the deduction of sales tax credit in the
amount of P1,779,619.96 (P2,317,585.50 — P537,965.54) It is further argued that
since the BIR did not issue any deficiency sales tax assessment for the taxable year
ended June 30, 1987 within the three (3) year prescriptive period provided by law,
the available tax credit of P2,317,585.50 above mentioned should have been
allowed in full. Otherwise the statutory provision on prescription will be rendered
nugatory.

We find merit in the taxpayer's position. It is the observation of this Office

that the above finding was arrived at just to beat the prescriptive period.

As for the fiscal year ended June 30, 1988, to simplify the issues involved,
the same are hereby itemized as follows:

1. whether or not the advance sales tax on importations were

overstated as alleged and whether some amounts claimed as tax
credits are import duties which are not creditable;

2. whether or not the 4% contractors tax and 1.5% subsequent

sales taxes, included in the deferred sales tax credits for local
purchases of raw and packaging materials are creditable under
then Section 166 of the Tax Code;

3. The propriety of the reduction of deferred sales tax credits of

the following, pursuant to the provisions of Section 5(c),
Revenue Regulations No. 11-86;
a. Sales tax credits on raw and packaging materials
inventories written off;
b. Sales tax credits on samples;
c. Sales tax credits on promotional give-aways.
cda

As to the advance sales taxes on importations which were alleged to be

overstated and on some amounts which were found to be import duties hence not
creditable, the taxpayer in a conference hearing held on December 22, 1991
disputed these above findings of the investigating examiners by presenting to this
Office, a litany of documentary evidences to the effect that all that were claimed as
advance sales taxes were duly supported by necessary documents and records,
such as schedule of Advance Sales Tax/Value Added Tax paid for the year ended
June 30, 1988 showing in detail the date, Central Bank pay order/receipts and
amount of taxes paid by the taxpayer on its recorded importations in 1988; Central
Bank/Bureau of Customs receipts and the corresponding import entry and revenue
Copyright 1994-2017 CD Technologies Asia, Inc. Taxation 2016 10
tax declarations.

Moreover, it was also established that customs duties were properly

recorded as customs duties which formed part of the cost of materials and were
never claimed as advance sales tax. (pls. see Exhibits 9, 10; 10-1 to 10-13 on pp.
1122-1138).

As to the issue of the creditability of 4% contractors tax and 1.5%

subsequent sales tax, it was by virtue of the provision of Section 199(a) of the Tax
Code then in force that herein taxpayer claimed as tax credit the 4% contractor's
and 1.5% subsequent sales tax. Said section of the Tax Code provides that any
percentage or specific tax paid under Titles IV, V and VII of the Tax Code on raw
materials, part or accessory of the finished product sold shall be allowed as tax
credit against the sales tax due on the finished products.

Contractors tax and subsequent sales tax are percentage taxes paid on the
raw materials, part or accessory of the finished products sold by herein taxpayer.
They were incurred in contracting out services which are necessary in the
production of goods and for materials locally purchased which necessarily formed
part of the product manufactured and sold. The 4% contractor's tax and the 1.5%
subsequent sales tax are therefore creditable against the sales taxes due from
herein taxpayer pursuant to the aforementioned provision of the Tax Code.

The issue of the creditability of the taxes imputed on inventory losses

mentioned above, has its bearing on the issue of the deductibility of said inventory
losses for income tax purposes. The controversies regarding this matter were
already taken up in the previous discussion involving the deficiency income tax for
FY ended June 30, 1988. As it was clearly established that the questioned
inventory losses were incurred out of the normal business operation of herein
taxpayer, the corresponding taxes imputed on such inventory losses are creditable
from sales tax pursuant to the provision of Section 166 of the Tax Code and in line
with the doctrine of deductibility of such inventory losses for income tax purposes.

As to the sales tax on raw materials imputed on samples and/or promotional

give aways, we can validly allow the creditability of the same in line with our BIR
VAT Ruling No. 104 (a)-000-00-129-89 wherein it was held that input tax on
purchases of goods given away as prizes to promote sales are deductible from
output tax.

Re: Deficiency Value Added Tax — P1,017,416.71

The issues involved in this assessment are:

1. whether or not the unused deferred sales tax credits in the

Copyright 1994-2017 CD Technologies Asia, Inc. Taxation 2016 11

 aggregate amount of P537,193.60 can be availed of by herein
taxpayer as transitional input tax credit pursuant to the
provision of Section (b) of Revenue Regulations No. 5-87
which implements Executive Order No. 273;

2. whether or not the input tax of P18,406.39 on sales made to

AFPCES is creditable pursuant to Section 12 of VAT
Regulations (RR 5-87).

The alleged VAT deficiency assessment arose from disallowances made by

the revenue examiners of herein taxpayer's unused deferred sales tax credit
(DSTC) relative to its materials inventory as of December 31, 1987, as follows:
Importation of goods for sale P299,351.00
Importation of raw materials
for sale 194,301.63
8% transitional input tax on
physician samples 43,540.97
––––––––––
P537,193.60
=========
Pursuant to section 26(b) of Revenue Regulations No. 5-87, the unused
deferred tax credit as of December 31, 1987 shall be allowed as transitional input
tax in the amount appearing in the taxpayer's books of accounts and corroborated
by the amount reflected in the sales tax return as of December 31, 1987.

Taxpayer does not argue as to what is provided by the above mentioned

regulation. But it strongly deny the revenue examiners' allegation that its records
showed a zero balance of materials sales tax for the quarter ending December 31,
1987. In compliance with Revenue Regulations No. 5-87, records would show
however that it has filed with the BIR the "List of Materials Inventory Unused
Deferred Sales Tax Credit as of December 31, 1987. Such inventory is supported
by accounting documents and records made available.

In a hearing conducted on this case, it was clearly established by

testimonial and documentary evidence submitted (pls. see TSN on pp. 598-601;
also Exhibits XII to XII-14 on pp. 1102-1116) that it has an existing balance of
unused deferred sales tax credit including the 8% transitional input tax, as
recorded and shown in its books and related documents/records, in the aggregate
amount of P537,193.60.

The disallowance of the unused deferred sales tax credit is therefore without
any basis considering that the taxpayer was able to establish the existence of such
unused deferred sales tax credit. (pls. see list of materials inventory with unused
Copyright 1994-2017 CD Technologies Asia, Inc. Taxation 2016 12
Deferred Sales Tax Credit and the corresponding 8% transitional input tax credit
as of December 31, 1987 on pp. 411 to 425. The transitional 8% input tax of
P43,540.97 on physician's samples should likewise be allowed in consonance with
BIR VAT Ruling No. 104 (2) 000-00-129-89, wherein input taxes on raw
materials inputted on prizes or give aways to promote sales were held as
deductible from output taxes.

As to the input tax of P18,406.39 on sales made to AFPCES, we can sustain

the disallowance thereof as sales made to the AFPCES are exempt from the 10%
value-added tax pursuant to Section 103(u) of the Tax Code, as amended by
Executive Order No. 273 (pls. see also BIR Ruling No. 195-88 dated May 5,
1988). cdt

Re: Deficiency Tax Assessment for FY ended 6-30-87

A. Deficiency income tax — P5,303.53

Subject taxpayer's income tax return for FY 1987 shows a creditable

amount of P372,028.00.

Upon investigation, the amount of P1,069,180 pertaining to the reversal of a

prior year's provision for employees' retirement was disallowed. Accordingly, the
creditable amount of P372,028.00 was deducted from the income tax due thereby
leaving a deficiency assessment of P5,303.53.

The sole issue involved in this assessment is whether or not the reversal of a
prior year's provision for employees retirement is deductible in 1987 for income
tax purposes.

Taxpayer's explanation is as follows:

As established, the company's retirement plan prior to 1987 was unfunded.

Thus, the entry made to set up the retirement fund was as follows:
Dr. Administrative expenses xxx
Cr. Provision for employees'
retirement plan xxxx
Not being funded at that time, the administrative expense account entry, in
the absence of actual payment for retirement pay, was not deducted for income tax
purposes.

At the start of the fiscal year 1987, the provision for employees' retirement
plan account had a balance of P1,069,180.00 (please refer to Attachment A —
Provision on Retirement plan schedule, p. 622). It was in 1987 that client's
retirement fund became funded. Inadvertently, the prior retirement pay provision
Copyright 1994-2017 CD Technologies Asia, Inc. Taxation 2016 13
as presented before was reversed, in fact resulting in overstatement of income for
that year, thus:
Dr. Provision for employees'
retirement plan . . . P1,069,180.00
Cr. Administrative expense P1,069,180.00
To correct the situation, said amount was included as one of the items of
deduction and presented the same as a reconciling item in the income tax return.

The government was not deprived of any revenue by said accounting

treatment. (pls. see exhibits 13 to 13-5 on pp. 1096-1101).

It is submitted that the position of the taxpayer on this matter is well taken
and must be considered.

2. Deficiency expanded withholding tax — P20,691.59

As to the discrepancies on rental expenses, we find no merit on the

taxpayer's contention that the discrepancy represents accrued rentals and that there
is still no basis for withholding since the invoice had not been received at the close
of the fiscal year. It is already settled however that the obligation of a payor to
deduct and withhold arises at the time an income subject to withholding tax is
payable or paid (Sec 3, RR 6-85).

On the professional fees which the taxpayer averred to be payments to

general professional partnership, a close scrutiny of the records however show
otherwise. We can therefore, sustain this assessment for being unsubstantiated.

CONCLUSION AND RECOMMENDATION:

In view of the foregoing, it is respectfully recommended that:

1. The deficiency income tax for FY ended June 30, 1988 in the amount
of P1,760,409.51 covered by Assessment No. FAS-1-88-90-002059 be withdrawn
and cancelled for lack of legal and factual basis:

2. The deficiency withholding tax of P860,525.16 for FY ended June 30,

1988 covered by Assessment No. FAS 1-88-90-002060 be modified/revised based
on the following computation:
Deficiency basic expanded withholding tax P187,507.14
25% surcharge 46,876.78
20% interest (up to 9-15-90) 79,271.94
Compromise penalty 28,000.00
––––––––––
Total amount due & collectible P339,107.08
Copyright 1994-2017 CD Technologies Asia, Inc. Taxation 2016 14
 =========
3. The deficiency sales tax for FY ended June 30, 1988 covered by
Assessment No. FAS-1-88-90-002061 in the amount of P5,510,196.63 be
withdrawn and cancelled for lack of legal and factual basis.

4. The deficiency value-added-tax of P1,017,416.71 covered by

Assessment No. FAS-1-88-90-002062 be modified/revised based on the following
computation:
Output tax P3,886,911.62
Less: allowable, input tax
excess carried over P560,599.53
Importations 1,691,002.44 2,251,601.97
––––––––––
VAT payable (excess) 1,635,309.65
Less: VAT already paid 1,614,988.55
––––––––––
Deficiency VAT P20,321.10
Add: 25% surcharge 5,080.28
Interest (fr. 5-20-88 to 9-15-90) 10,953.08
Compromise penalty 8,500.00
–––––––––
Amount Due & Collectible P44,854.46
========
5. The deficiency income tax for FY ended June 30, 1987 in the amount
of P5,303.53 covered by Assessment No. FAS-1-87-90-002057 be withdrawn &
cancelled for lack of legal and factual basis.

6. The deficiency expanded withholding tax for FY ended June 30, 1987
in the amount of P20,691.59 covered by Assessment Notice No.
FAS-1-87-90-002058 is hereby reiterated. aisadc

Respectfully submitted:

(SGD.) RODULFO L. SALAZAR

Chief, Appellate Division

I CONCUR:

(SGD.) ALICIA P. CLEMENO

Copyright 1994-2017 CD Technologies Asia, Inc. Taxation 2016 15

 Assistant Commissioner
(Legal Service)

Recommendation-Approved:

(SGD.) LIWAYWAY
VINZONS-CHATO
Commissioner of Internal Revenue

Copyright 1994-2017 CD Technologies Asia, Inc. Taxation 2016 16