DIGESTS
Remedies (under the NIRC of 1997)
Assessment - Special / Unique Cases
Effect(s) when in a refund judicial claim, the claimant failed to substantiate its “prior year’s excess credits”, and upon obtaining a not so favorable ruling from the court, has filed a motion to withdraw to avoid the adverse effect of the court’s ruling; Application of Section 228(c) of the NIRC of 1997.
The CTA First Division correctly held that respondent is entitled to a refundable excess tax credits of P2,083,878.07 after deducting the substantiated prior year’s excess credits (P288,076.04) and the substantiated CWT (P15,752,461.03) from the total tax due (P13,956,659.00).
However, as pointed out by petitioner, respondent erroneously carried over the amount of P16,194,108.00 as prior year’s excess credits, to which it is not entitled, to the succeeding taxable year 2003 as shown in respondent’s Annual ITR for the year 2003. The fact that respondent carried over the amount of P16,194,108.00 as prior year’s excess credits to the succeeding taxable year 2003 was even mentioned in the Decision dated 10 November 2008 of the CTA First Division. It should be stressed that the amount of P16,194,108.00 is the remaining portion of the claimed prior year’s excess credits in the amount of P30,150,767.00 after deducting the P13,956,659.00 tax due in respondent’s amended ITR for taxable year 2002. But the CTA First Division categorically ruled that respondent (petitioner therein) failed to substantiate its prior year’s excess credits of P30,150,767.00 except for the amount of P288,076.04, which can be applied against respondent’s income tax liability for taxable year 2002. The CTA First Division stated:
Petitioner [Cebu Holdings, Inc.] alleges that no amount of the creditable taxes withheld in taxable year 2002 was utilized since its prior year’s excess credits of P30,150,7[6]7.00 were more than enough to offset its income tax liability for taxable year 2002 in the amount of P13,956,659.00.
However, petitioner failed to substantiate its prior year’s excess credits of P30,150,7[6]7.00, save for the amount of P288,076.04, computed as follows:
x x x x
In sum, out of the reported prior year’s excess credits of P30,150,7[6]7.00, only the amount of P288,076.04 shall be applied against the income tax liability for taxable year 2002 in the amount of P13,956,659.00. The remaining income tax liability of P13,668,582.96 shall be offset against the substantiated creditable taxes withheld in taxable year 2002 in the amount of P15,752,461.03, leaving a refundable excess tax credits of only P2,083,878.07 x x x. (Emphasis supplied)
Such categorical pronouncement of the CTA First Division affects respondent’s claim for excess creditable income taxes which can be carried over to succeeding taxable years. Thus, when the CTA First Division denied respondent’s Motion for Partial Reconsideration of the Decision dated 10 November 2008, respondent filed an “Urgent Motion to Withdraw Petition for Review.” In its motion, respondent stated that “it shall no longer pursue its claim for tax credit certificate and, instead carry forward the said excess creditable income taxes to the succeeding taxable quarters of the succeeding taxable years until the same will have been fully utilized.” Clearly, respondent filed the motion in order to avoid the adverse effect of the ruling of the CTA First Division that respondent (petitioner therein) failed to substantiate almost all of its claimed prior year’s excess credits, especially since respondent already carried over and applied the amount of P16,194,108.00 as prior year’s excess creditable tax against the income tax due for the succeeding taxable year 2003. The CTA First Division denied for lack of merit respondent’s Urgent Motion to Withdraw Petition for Review.
It should be emphasized that respondent no longer appealed the 10 November 2008 Decision and the 12 March 2009 Resolution of the CTA First Division to the CTA En Banc. Neither did respondent appeal the CTA En Banc Decision dated 29 July 2009, which affirmed the 10 November 2008 Decision and the 12 March 2009 Resolution of the CTA First Division.
In the Decision dated 10 November 2008 of the CTA First Division, the substantiated prior year’s excess credits have already been fully applied against respondent’s income tax liability for taxable year 2002. Thus, respondent no longer has any remaining prior year’s excess creditable tax which can be carried over and applied against its income tax due for the succeeding taxable year 2003.
Clearly, respondent erred when it carried over the amount of P16,194,108.00 as prior year’s excess credits to the succeeding taxable year 2003, resulting in a tax overpayment of P7,653,926.00 as shown in its 2003 Amended ITR.
Considering that respondent’s prior year’s excess credits have already been fully applied against its 2002 income tax liability, the P16,194,108.00 unsubstantiated tax credits in taxable year 2002 could no longer be carried over and applied against its income tax liability for taxable year 2003. Thus, the amount of P16,194,108.00 as prior year’s excess credits should be deleted, making respondent liable for income tax in the amount of P8,540,182.00 for taxable year 2003.
Respondent argues that the alleged deficiency income tax for taxable year 2003 has no bearing on the case which merely involves a claim for a tax credit certificate for taxable year 2002.
We cannot subscribe to respondent’s reasoning. The ruling of the CTA First Division and the CTA En Banc clearly affects respondent’s income tax liability for taxable year 2003 precisely because respondent carried over the amount of P16,194,108.00 as prior year’s excess credits, to which it is not entitled. Respondent is once again trying to evade the adverse effect of the ruling of the CTA First Division that respondent (petitioner therein) failed to substantiate almost all of its claimed prior year’s excess credits, especially since respondent already carried over and applied the amount of P16,194,108.00 as prior year’s excess creditable tax against the income tax due for the succeeding taxable year 2003. To reiterate, the CTA First Division already ruled that respondent (petitioner therein) failed to substantiate its prior year’s excess credits of P30,150,767.00 except for the amount of P288,076.04, which can be applied against respondent’s income tax liability for taxable year 2002. Thus, since respondent’s prior year’s excess credits have already been fully applied against its 2002 income tax liability, the P16,194,108.00 unsubstantiated tax credits in taxable year 2002 could no longer be carried over and applied against its income tax liability for taxable year 2003.
Nevertheless, it is incumbent upon petitioner to issue a final assessment notice and demand letter for the payment of respondent’s deficiency tax liability for taxable year 2003 [pursuant to Section 228(c) of the NIRC of 1997].
In this case, no pre-assessment notice is required since respondent taxpayer carried over to taxable year 2003 the prior year’s excess credits which have already been fully applied against its income tax liability for taxable year 2002.
WHEREFORE, the petition is PARTIALLY GRANTED. We AFFIRM with MODIFICATION the 29 July 2009 Decision and the 9 October 2009 Resolution of the Court of Tax Appeals En Banc in C.T.A. EB No. 478. Petitioner Commissioner of Internal Revenue is ordered to: (a) issue a tax credit certificate to respondent Cebu Holdings, Inc. in the amount of P2,083,878.07, representing excess creditable taxes for taxable year 2002; and (b) issue a final assessment notice and demand letter for the payment of respondent’s deficiency tax liability in the amount of P8,540,182.00 for taxable year 2003.
SO ORDERED.
——————————————
Imposition of tax of dividends under Section 28(B)(1) of the 1997 NIRC, in relation to Section 28(B)(5)(b) thereof, and Article 11(2)(b) of the RP-US Tax Treaty.
The tax treatment of dividends earned by a foreign corporation, not engaged in trade of business in the Philippines, from Philippine sources is provided under Section 28(B)(1) of the Tax Code.
However, the ordinary 35% tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation, goes down to 15% if the country of domicile of the foreign stockholder corporation “shall allow” such foreign corporation a tax credit for “taxes deemed paid in the Philippines,” applicable against the tax payable to the domiciliary country by the foreign stockholder corporation, [pursuant to Section 28(B)(5)(b) of the Tax Code].
As it is recognized, the application of the provisions of the NIRC must be subject to the provisions of tax treaties entered into by the Philippines with foreign countries. It remains only to note that under the Philippines-US Convention “With Respect to Taxes on Income,” the Philippines, by a treaty commitment, reduced the regular rate of dividend tax to a maximum of 20% of the gross amount of dividends paid to US parent corporations. Thus, the RP-US Tax Treaty which applies on income derived or which accrued beginning January 1, 1983 provides:
Article 11
DIVIDENDS
x x x x
(2) The rate of tax imposed by one of the Contracting States on dividends derived from sources within that Contracting State by a resident of the other Contracting State shall not exceed —
(a) 25 percent of the gross amount of the dividend; or
(b) When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of the paying corporation’s taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10 percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation. (Italics supplied)
The foregoing RP-US Tax Treaty, at the same time, created a treaty obligation on the part of the US that it “shall allow” to a US parent corporation receiving dividends from its Philippine subsidiary a tax credit for the appropriate amount of taxes paid or accrued to the Philippines by the said Philippine subsidiary. The US allowed a “deemed paid” tax credit to US corporations on dividends received from foreign corporation. Thus, Section 902 of the US Internal Revenue Code, as amended, provides:
SEC. 902 — CREDIT FOR CORPORATE STOCKHOLDERS IN FOREIGN CORPORATION.
(A) Treatment of Taxes Paid by Foreign Corporation — For purposes of this subject, a domestic corporation which owns at least 10 percent of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall —
(1) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in subsection (c) (1) (a)] of a year for which such foreign corporation is not a less developed country corporation, be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any possession of the United States on or with respect to such accumulated profits, which the amount of such dividends (determined without regard to Section 78) bears to the amount of such accumulated profits in excess of such income, war profits, and excess profits taxes (other than those deemed paid); and
(2) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in subsection (c) (1) (b)] of a year for which such foreign corporation is a less developed country corporation, be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any possession of the United States on or with respect to such accumulated profits, which the amount of such dividends bears to the amount of such accumulated profits.
For this reason, it was established on the part of the Philippines a deliberate undertaking to reduce the regular dividend tax rate of 35%.
This goes to show that the IGC, being a non-resident US corporation is qualified to avail of the aforesaid 15% preferential tax rate on the dividends it earned from the Philippines. It was proven that the country which it was domiciled shall grant similar tax relief/credit against the tax due upon the dividends earned from sources within the Philippines. Clearly, the IGC has made an overpayment of its tax due of FWT by using the 35% tax rate.
——————————————
A re-assessment of tax liabilities previously paid through Tax Credit Certificates (TCCs) by a transferee in good faith and for value is utterly confiscatory.
Any fraud or breach of law or rule relating to the issuance of the TCC by the Center to the transferor or the original grantee is the latter’s responsibility and liability. The transferee in good faith and for value may not be unjustly prejudiced by the fraud committed by the claimant or transferor in the procurement or issuance of the TCC from the Center. It is not only unjust but well-nigh violative of the constitutional right not to be deprived of one’s property without due process of law. Thus, a re-assessment of tax liabilities previously paid through TCCs by a transferee in good faith and for value is utterly confiscatory, more so when surcharges and interests are likewise assessed.
A transferee in good faith and for value of a TCC who has relied on the Center’s representation of the genuineness and validity of the TCC transferred to it may not be legally required to pay again the tax covered by the TCC which has been belatedly declared null and void, that is, after the TCCs have been fully utilized through settlement of internal revenue tax liabilities. Conversely, when the transferee is party to the fraud as when it did not obtain the TCC for value or was a party to or has knowledge of its fraudulent issuance, said transferee is liable for the taxes and for the fraud committed as provided for by law.
——————————————
When is the accrual of taxes in a foreclosure sale?
The key issue in this case is whether or not the three-month redemption period for juridical persons should be reckoned from the date of the auction sale.
The CIR argues that he has the more reasonable position: the redemption period should be reckoned from the date of the auction sale for, otherwise, the taxing authority would be left at the mercy of the executive judge who may unnecessarily delay the approval of the certificate of sale and thus prevent the early payment of taxes.
But the Supreme Court had occasion under its resolution in Administrative Matter 99-10-05-0 (Re: Procedure in Extrajudicial Foreclosure of Mortgage) to rule that the certificate of sale shall issue only upon approval of the executive judge who must, in the interest of fairness, first determine that the requirements for extrajudicial foreclosures have been strictly followed. For instance, in United Coconut Planters Bank v. Yap [432 Phil. 536 (2002)], this Court sustained a judge’s resolution requiring payment of notarial commission as a condition for the issuance of the certificate of sale to the highest bidder.
Here, the executive judge approved the issuance of the certificate of sale to UCPB on March 1, 2002. Consequently, the three-month redemption period ended only on June 1, 2002. Only on this date then did the deadline for payment of CWT and DST on the extrajudicial foreclosure sale become due.
Under Section 2.58 of RR No. 2-98, the CWT return and payment become due within 10 days after the end of each month, except for taxes withheld for the month of December of each year, which shall be filed on or before January 15 of the following year. On the other hand, under Section 5 of RR No. 06-01, the DST return and payment become due within five days after the close of the month when the taxable document was made, signed, accepted, or transferred.
The BIR confirmed and summarized the above provisions under RMC No. 58-2008 in this manner:
[I]f the property is an ordinary asset of the mortgagor, the creditable expanded withholding tax shall be due and paid within ten (10) days following the end of the month in which the redemption period expires. x x x Moreover, the payment of the documentary stamp tax and the filing of the return thereof shall have to be made within five (5) days from the end of the month when the redemption period expires.
UCPB had, therefore, until July 10, 2002 to pay the CWT and July 5, 2002 to pay the DST. Since it paid both taxes on July 5, 2002, it is not liable for deficiencies. Thus, the Court finds no reason to reverse the decision of the CTA.
Besides, on August 15, 2008, the BIR issued RMC No .58-2008 which clarified among others, the time within which to reckon the redemption period of real estate mortgages. It reads:
For purposes of reckoning the one-year redemption period in the case of individual mortgagors, or the three-month redemption period for juridical persons/mortgagors, the same shall be reckoned from the date of the confirmation of the auction sale which is the date when the certificate of sale is issued.
The CIR must have in the meantime conceded the unreasonableness of the previous position it had taken on this matter.
——————————————
