TAX EVASION CASE INTENTIONALLY NOT FILED BY KIM HENARES
BIR’s
KIM HENARES INTENTIONALLY FAILED TO EITHER COLLECT DUE AND DEMANDABLE TAX
DEFICIT OF GOLDEN DONUTS, INC. (GDI) OR SUE IT FOR FRAUD FOR UNDER-DECLARING
REVENUE ON THE TAX RETURN.
Golden Donuts, Inc.
(GDI), the exclusive
Philippine Franchisee of the global brand “Dunkin’
Donuts”, flagrantly perpetrated fraudulent acts or criminal tax violations
that culminated to deficiency tax assessment amounting to P1,564,426,808.08, including increments, for year 2007, discovered
and documented by Othello Dalanon in his official capacity as former BIR
Examiner.
Dalanon
personally reported GDI’s omissions to Commissioner
Henares and recommended to her the criminal prosecution for tax evasion
under the much-vaunted “Run After Tax Evaders” program of the Bureau; but she
intentionally did not pursue fraud case against the company because its
secretary – Marixi Prieto who also
happens to be the chairperson of the
Philippine Daily Inquirer – is President
Aquino’s friend, according to BIR Deputy Commissioner Estela Sales.
Ms.
Prieto talked to Henares and BIR Regional Director (now Assistant Commissioner
of Internal Revenue) Nestor Valeroso, on different occasion, who both gave
leniency to GDI.
The
aforesaid deficiency tax assessment obtained finality because GDI failed to
file a VALID PROTEST against the Formal Letter of Demand and Assessment Notice
(FAN).
However,
Henares intentionally did not collect it, purportedly because representatives
of GDI complained to her that Dalanon’s assessment was faulty. Thus, she
ordered two (2) re-investigations.
There
is no LAW that authorizes the Commissioner to order two (2) re-investigations
of a FINAL, EXECUTORY and DEMANDABLE assessment.
Once
the deficiency tax assessment obtained finality, the right of the government to
collect the deficiency tax becomes absolute; thus, precludes the taxpayer from
questioning the correctness of the assessment and from raising any
justification or defense that would pave the way for a re-investigation.
She
also claims that the authority to decide and declare finality of a certain
assessment is a function vested by law upon the Commissioner of Internal
Revenue.
Her
assertion does not find basis in LAW.
It
is the LAW that determines finality of a certain assessment as clearly provided
under Revenue Regulations (RR) No. 12-99 as amended by RR No. 18-2013 which the
Commissioner herself promulgated, in relation to Section 228 of the 1997
National Internal Revenue Code (1997 Tax Code), as amended.
Her
claim that Dalanon’s assessment was faulty is WRONG.
In
fact, she was not able to dispute Dalanon’s assessment. What is very clear is
that, while she bullies small taxpayers, constantly pesters Congressman Manny
Pacquiao, and actively prosecutes those are not allies of the current
administration; she fears, coddles and lawyers for Dunkin’ Donuts local seller
– a bigtime tax evader!!!
Just
to reiterate. The P1.56 billion tax deficit of Dunkin’ Donuts franchisee has
become DUE and DEMANDABLE, thus, it already legally belongs to the FILIPINO
people whom PRESIDENT AQUINO considers as his “BOSSES?”, and therefore, Henares
is duty-bound to enforce collection thereof – but she refused to.
GDI’s OMISSIONS
1.
GDI has two (2) sets of books of
accounts – one was
the duly-registered hardbound computer-generated books of accounts which were
the bases of Dalanon’s assessment; and the other was the unregistered
not-permanently-bound “manually-posted from original books of accounts”,
records which GDI claims as the bases of its Trial Balance for Financial
Statements and Income Tax Return purposes;
2.
It supplied false information on the
tax return – the
duly-registered books of accounts reflected a net income amounting to P135.2 million while the tax return
showed a net loss of P44.9
million;
3.
It substantially under-declared sales
on the tax return in two (2) instances:
3.1
Sales
per duly-registered books was P1.928
billion while the amount reflected on the tax return was P1.031 billion – a substantial
discrepancy (under-declaration) amounting to P897 million;
The SUPREME COURT ruled in the case of Paper Industries Corporation of
the Philippines vs Court of Appeals,
et al., 250 SCRA 434 that “where the
books of accounts reflected a sales or receipts higher than that reflected on
the return, the books of accounts should prevail. This is so,
because the books of accounts are kept by the taxpayer and are prepared
under its control and supervision; and they reflected what may be deemed
to be admissions against interest.” The representations made by GDI in
the CD and duly-registered books submitted and presented by it to the Bureau
for audit and examination amounted to admissions against interest which it
cannot disown and change at its convenience of pleasure. Emphasis supplied.
3.2
Other
independent relevant documents, such as, but not limited to: Franchise
Agreement between Dunkin’ Donuts of America, Inc. and GDI; Technical Service
Agreement between GDI and its affiliate-Antares Management, Inc. (AMI); BIR
returns, etc., further revealed that GDI’s sales topped P2.366 billion but recorded per
duly-registered books was only P1.928
billion – a substantial unrecorded and consequently undeclared sales
amounting to P438 million.
The information contained in the
aforesaid documents were utilized in further determining GDI’s sales on the
basis of the provisions of Section 5(A) of the 1997 Tax Code.
The method of validation used by
Othello Dalanon was already upheld by the COURT
OF TAX APPEALS in the case of Asia Coal Corporation vs Commissioner of Internal Revenue (CTA Case No. 6803, February
13, 2008), that “the respondent may
utilize any kind of document, x x x to determine the correct sales of the
petitioner…”
All
the above enumerations are fraudulent acts or criminal tax violations covered
by the RATE (Run After Tax Evaders) Program of the Bureau; but Henares
intentionally did not pursue tax evasion case against the company.
Henares, in her position paper submitted to the Office of
the Ombudsman in connection with the formal complaint filed against her by
Othello Dalanon, failed to dispute the above-enumerated irregularities
perpetrated by GDI.
THE DEFICIENCY TAX
ASSESSMENT OBTAINED FINALITY
The
deficiency tax assessment against GDI amounting to P1.56 billion, including
increments, for year 2007, obtained finality because GDI’s letter of protest
against the Formal Letter of Demand and Assessment Notice (FAN) was INVALID.
The
alleged letter of protest of GDI merely states “protest against PAN adopted in toto”. It does not state the facts, the applicable law, rules and regulations, or
jurisprudence on which its protest was based. It is neither a request for
reconsideration or reinvestigation.
The
rules on protesting an assessment is found in Section 3 subsection 3.1.5 of RR
No. 12-99, as amended, that reads:
“Disputed Assessment. – The taxpayer
or his duly authorized representative may protest administratively against the
aforesaid formal letter of demand and assessment notice within thirty (30) days
from date of receipt thereof.”
“The taxpayer shall state the FACTS,
the applicable LAW, RULES and REGULATIONS or JURISPRUDENCE on which his protest
is based, otherwise, his protest shall be considered VOID and WITHOUT FORCE AND
EFFECT.”
“If the taxpayer fails to file a VALID
PROTEST against the formal letter of demand and assessment notice within thirty
(30) days from date of receipt thereof, the assessment shall become FINAL,
EXECUTORY and DEMANDABLE.”
The
said Regulations must be taken in relation to Section 228 of the 1997 Tax Code,
as amended, which reads:
“Protesting an assessment. – 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. x x x otherwise, the assessment shall become FINAL.”
Clearly, what the law demands is a
VALID administrative protest against the formal letter of demand and assessment
notice which required the taxpayer to comply with the following:
(a)
The
protest must be through a REQUEST FOR RECONSIDERATION or REINVESTIGATION;
(b)
The
protest must be in the form and manner as prescribed under RR No. 12-99, as
amended, which provides that said protest must state the FACTS, the LAW, RULES
and REGULATIONS, or JURISPRUDENCE on which the protest is based; and
(c)
Must
be filed within thirty (30) days from receipt of the assessment.
The
COURT OF TAX APPEALS in the case of Allied
Banking Corporation vs Commissioner
of Internal Revenue (CTA Case No. 4581, March 25, 1992), cited that, “[f]ailure to comply with any or all of these
requirements results in the assessment against the taxpayer becoming final and
unappealable.”
The
letter of protest should not just state “protest against PAN adopted in toto” because the administrative
protest required to be filed as an answer to the formal letter of demand and
assessment notice is distinct and not the same as the protest filed against the
Preliminary Assessment Notice (PAN).
The
COURT OF TAX APPEALS emphasized in
the case of Security Bank Corporation vs
Commissioner of Internal Revenue (CTA Case No. 6564, November 8, 2006)
and further accentuated in the case of Bank of the Philippine Islands vs Commissioner of Internal Revenue (CTA
Case No. 7397, April 9, 2008) that:
“[A] protest to the preliminary
assessment notice is not the same as the protest required to be filed as an
answer to the final assessment notice. In fact, the preliminary assessment
notice may or may not even be protested to by the taxpayer, and the fact of
non-protest shall not in any way make the preliminary assessment notice final
and unappealable. What is clear from Section 319-A of the Tax Code of 1977, as
amended, is that failure on the part of the taxpayer to protest or reply to a
preliminary assessment notice paves the way for the issuance of a final
assessment notice. However, evident under said Section (now Section 228 of the
1997 Tax Code) is that failure on the part of the taxpayer to file a VALID
administrative protest through a REQUEST FOR RECONSIDERATION or REINVESTIGATION
on the final assessment notice, shall result in the finality of the said FAN.
The
SUPREME COURT in the case of Allied
Banking Corporation vs Commissioner
of Internal Revenue (G.R. No. 175097, February 5, 2010) heightened that:
“It is the Formal Letter of Demand and
Assessment Notice that must be administratively protested or disputed within 30
days, and not the PAN.”
GDI,
in its INVALID letter of protest against the FAN, likewise claimed that the
assessments are null and void ab initio because
it was allegedly issued in rampant violation of the due process requirements
prescribed under Section 228 of the Tax Code as implemented by RR No. 12-99.
GDI’s
claim is not true. Records will show that the due process requirements were
promptly observed. There were at least five (5) notices served to GDI either
thru personal delivery or by mail before the formal letter of demand and
assessment notice (FAN) was issued. In fact, it even contested the PAN as
clearly admitted in GDI’s invalid letter of protest against the FAN.
The
COURT OF TAX APPEALS in the case Bank
of the Philippine Islands vs Commissioner
of Internal Revenue (CTA Case No. 7397, April 9, 2008), has had the
occasion to say:
“[W]hen the petitioner received the
final assessment notice and duly protested the same, petitioner’s right to due
process was properly protected and observed.”
OTHER
FACTS TO SHOW PRIMA FACIE EVIDENCE OF
ACTUAL FRAUD
1.
The
scheme of the taxpayer to evade payment of correct taxes is very clear. It
substantially under-declared its Sales with the end view of evading payment of
correct taxes.
Computation of percentage ratio of
under-declaration of sales:
1.1
Based
on sales per CD and duly-registered books –
Sales per CD and
duly-registered books
|
P 1,928,770,398.68
|
Add: Discrepancy
in reconciliation of Central W’hse accts
|
53,378,730.98
|
Total sales per
CD and duly-registered books
|
1,982,149,129.66
|
Less: Sales
reflected per Annual Income Tax Return (AITR)
|
1,031,528,917.00
|
Undeclared sales
based on CD and duly-registered books
|
950,620,212.66
|
Divide by total
sales per CD and duly-registered books
|
1,982,149,129.66
|
Percentage ratio
of under-declaration
|
47.96%
|
1.2
Based
on franchise fee –
Franchise fee per CD, duly-registered books
and FS
|
P 23,668,908.00
|
Divide by franchise fee rate
|
1%
|
Grossed-up sales (or should be sales based
on franchise fee)
|
2,366,890,800.00
|
Less: Sales reflected per AITR
|
1,031,528,917.00
|
Undeclared sales
|
1,335,361,883.00
|
Divide by grossed-up sales/should be sales
based on franchise fee
|
2,366,890,800.00
|
Percentage ratio of under-declaration
|
56.42%
|
1.3
Based
on management fee –
Management fee per CD, duly-registered
books and FS
|
P 47,337,817.00
|
Divide by management fee rate
|
2%
|
Grossed-up sales (or should be sales based
on mgt. fee)
|
2,366,890,850.00
|
Less: Sales reflected per AITR
|
1,031,528,917.00
|
Undeclared sales
|
1,335,361,933.00
|
Divide by grossed-up sales/should be sales
based on management fee
|
2,366,890,850.00
|
Percentage ratio of under-declaration
|
56.42%
|
1.4
Based
on VAT on franchise fee paid to DBI (BIRF No. 1600) –
VAT payments on purchase of services from
non-resident
|
P 2,840,123.69
|
Divide by VAT rate
|
12%
|
Franchise fee based on VAT payments
|
23,667,697.42
|
Divide by franchise fee rate
|
1%
|
Grossed-up sales/should be sales based on
VAT on franchise fee
|
2,366,769,741.67
|
Less: Sales reflected per AITR
|
1,031,528,917.00
|
Undeclared sales
|
1,335,240,824.67
|
Divide by grossed-up sales/should be sales
based VAT on FF
|
2,366,769,741.67
|
Percentage ratio of under-declaration
|
56.42%
|
Is it not that omission or substantial
understatement or under-declaration of sales a fraudulent act or criminal tax
violation?
2.
GDI
keeps two (2) sets of books of accounts.
2.1
The
duly-registered hardbound computer-generated books of accounts registered with
the BIR on January 15, 2008, which were the bases of the audit findings; and
2.2
The
unregistered not-permanently-bound “manually-posted from original books of
accounts” records which GDI claims as the basis of its trial balance for
financial statements and income tax return purposes.
To these, a third set of books of
accounts may be added: Records of RDO No. 41, Mandaluyong City, showed that GDI
registered another set of bound books of accounts (General Journal and General
Ledger) on May 30, 2007.
Is it not that keeping two (2) set of
books of accounts a fraudulent act or criminal tax violation?
3.
GDI’s
duly-registered books of accounts reflected a net income of P135.2 million for
year 2007. Its AITR for the same period reflected a net loss of P44.9 million
as well as that of the prior years, as follows:
Year Net Loss
2002 P62,919,525.00
2003
44,902,187.00
2004
46,995,142.00
2005
67,077,226.00
2006
57,254,963.00
Notwithstanding the continuous
incurrence of losses, it was able to acquire and accumulate properties and
presented under Property, Plant and Equipment in its Financial Statements, as
follows:
Year Acquisitions
2005 P16,819,089.00
2006
20,755,205.00
2007
34,654,371.00
2008
47,019,061.00
How can it afford such gargantuan
amount of acquisitions if it has really been continuously incurring losses? Is
this not indicative of under-declaration of sales, as a business has a very
least prospect to exist if it is continuously incurring losses?
4.
In
2008, it appropriated Retained Earnings amounting to P100 million for future
renovation of facilities and expansion of production center and outlets.
How can the Board of Directors of the
corporation have the audacity to appropriate such huge amount of Retained
Earnings for future expansion of its center and outlets if the corporation is
really continuously incurring losses without infusing additional capital?
GDI’s
financial records (the CD and the duly-registered books of accounts) and other
independent relevant documents, such as but not limited to: License Agreement between
GDI and DBI; Technical Service Agreement between GDI and its affiliate-Antares
Management Inc. (AMI); VAT payments on purchases of services from non-resident
(BIRF No. 1600); Monthly Remittance Returns of Final Taxes Withheld at Source
(BIRF No. 1601F); etc., submitted by it to the Bureau for audit and examination
evidently revealed existence of actual fraud.
2007
DEFICIENCY TAX ASSESSMENT
Income tax liability
Net
taxable income per AITR
|
P 0.00
|
Add:
Discrepancies/Disallowances:
|
|
Understatement of Gross Income-
|
|
Recorded per reg. books but not
declared per AITR
|
376,602,840.43
|
Unrecorded and undeclared
|
384,741,670.34
|
Purchases not subjected to EWT
|
772,225,727.77
|
VAT (input tax) credit included in
Cost of Sales
|
91,361,028.70
|
Net
taxable income per investigation
|
1,624,931,267.24
|
|
|
Income
tax due thereon
|
568,725,943.53
|
Add:
50% surcharge for substantial understatement of gross income
|
284,362,971.77
|
20% interest per annum from 4.16.08
to 7.31.10*
|
260,982,016.31
|
Total
deficiency income tax and increments due
|
P 1,114,070,931.61
|
Value-added Tax (VAT)
liability
Sales
per CD and duly-registered books of accounts
|
P 1,928,770,398.68
|
Add:
Difference in recon of A/R-Franchise vs Sales Accts
|
53,378,730.98
|
Unrecorded & Undeclared Sales
|
384,741,670.34
|
Royalty income
|
133,190,903.90
|
Franchise income
|
9,847,488.63
|
Other non-operating income
|
3,247,797.81
|
Total
sales and other income subject to VAT per investigation
|
2,513,176,990.34
|
|
|
Output
tax thereon
|
301,581,238.84
|
Less:
Output tax per VAT returns
|
141,297,488.71
|
Understatement
of VAT (output tax) payable
|
160,283,750.13
|
Add:
Input tax attributable to accrued expenses payable-beg
|
1,531,629.37
|
Unsupported (over-claimed) VAT input
tax credit
|
27,032,432.06
|
Deficiency
VAT
|
188,847,811.56
|
Add:
50% surcharge for substantial understatement of VAT
|
94,423,905.78
|
20% interest per annum from 1.26.08
to 7.31.10*
|
95,055,398.49
|
Total
deficiency VAT and increments due
|
P 378,325,115.83
|
Expanded withholding tax
(EWT) liability
EWT on income payments made to suppliers of
goods
|
P 7,722,257.28
|
EWT on rentals
|
510,288.50
|
Total expanded withholding tax
|
8,232,545.78
|
Add: 20% interest per annum from 1.16.08 to
7.31.10*
|
4,189,451.07
|
Penalty for late remittance (RMO 1-90)
|
25,000.00
|
Total deficiency EWT and increments due
|
P 12,446,996.85
|
Final Tax (FT) liability
Final tax on cash dividends
|
P 481,396.81
|
Add: 25% surcharge for late remittance
|
120,349.20
|
20% interest per annum from 1.16.08 to 7.31.10*
|
244,977.49
|
Penalty for late remittance
|
16,000.00
|
Total
|
862,723.50
|
Add: Penalty for late remittance of FT on
goodwill paid to Panda:
|
|
(Basic Tax remitted is P342,478.57)
|
|
25% surcharge for late remittance
|
85,619.64
|
20% interest per annum from 2.10.07 to 8.10.07
|
34,247.86
|
Penalty for late remittance (RMO 1-90)
|
16,000.00
|
Total deficiency final tax on cash
dividends and increments due
|
P 998,591.00
|
Fringe benefit tax (FBT)
liability
Fringe benefit tax
|
P 253,102.50
|
Add: 25% surcharge for late remittance
|
63,275.63
|
20% interest per annum from 1.26.08 to 7.31.10*
|
127,394.93
|
Penalty for late remittance (RMO 1-90)
|
16,000.00
|
Total deficiency FBT and increments due
|
P 459,773.05
|
SUMMARY
Income tax liability
|
P 1,114,070,931.61
|
Value-added tax (VAT) liability
|
378,325,115.83
|
Expanded withholding tax (EWT) liability
|
12,446,996.85
|
Final tax (FT) liability
|
998,591.00
|
Fringe benefit tax (FBT) liability
|
459,773.05
|
Grand Total
|
P
1,506,301,408.34
|
*Interests
were adjusted up to time of assessment which shall be further adjusted up to
time of payment.
DETAILS
OF THE CASE
Prefatory
GDI,
a domestic corporation with business office located at GDI Building, Sheridan
corner Reliance Streets, Mandaluyong City, is the exclusive Philippine
Franchisee of DUNKIN’ DONUTS OF AMERICA, INC. (DDA), now DUNKIN’ BRANDS, INC.
(DBI). As such, it grants sub-franchise rights to various domestic entities
nationwide. It has six hundred forty-two (642) outlets all over the country.
Fifty-four (54) of which are directly owned by the corporation while the
remaining five hundred eighty-eight (588) are owned by the thirty-five (35)
sub-franchisees under GDI’s supervision.
It
maintains a Central Warehouse (Commissary) wherefrom all of its sub-franchisees
purchase on a Cash-On-Delivery basis, all products, ingredients, commodity,
supplies, and merchandise.
It
is a VAT-registered entity and belongs to the Top 10,000 Private Corporations.
It continues to grow with almost a thousand employees servicing the Filipinos
with affordable products like doughnuts, sandwiches, hot chocolates, coffee,
shakes and the likes.
The
corporation has forty-five (45) stockholders. Its major stockholder and
Chairman of the Board is Mr. Leopoldo L. Prieto. The officers of the
corporation are as follows:
Walter C. Spakowski President
Marixi R. Prieto Secretary
Miguel
H. Prieto Treasurer
Pedro E. Paraiso Chief Financial Officer
Ernesto S. Co VP & General
Manager
Jocelyn V. Santos VP Finance &
Administration
It
adopts a Computer Assisted Accounting System with duly-registered Hardbound
Computer-Generated Books of Accounts (hereinafter referred as duly-registered books). The CD submitted
by the corporation to the Bureau for audit, and the duly-registered books as
validated by Revenue Officer Othello E. Dalanon, reflected a NET TAXABLE INCOME
of P135,272,757.01 while the Annual Income Tax Return (AITR) reflected a NET
LOSS of P44,907,842.00, summarized as follows:
Particulars
|
Per
duly-registered books
|
Per
AITR
|
S a l e s
|
P 1,928,770,398.68
|
P 1,031,528,917.00
|
Less: Cost of Sales
|
1,447,422,137.23
|
873,404,765.00
|
Gross Income
|
481,348,261.45
|
158,124,152.00
|
Less: Gen/Admin and operating expenses
|
348,224,850.69
|
207,301,714.00
|
Net income from operation
|
133,123,410.76
|
( 49,177,562.00)
|
Add: Non-operating and other income (net)
|
2,149,347.15
|
4,269,719.00
|
Net taxable income
|
P
135,272,757.91
|
(P 44,907,843.00)
|
On
the basis of the above information alone, it can readily be deduced that GDI
deliberately under-declared its income in the Annual Income Tax Return.
Is
it not that deliberate under-declaration of income (substantial
under-declaration) constitutes fraudulent act or criminal tax violation?
Details discrepancies
Income tax aspect
1. Understatement
of gross income (recorded but undeclared) amounting to P376,602,840.43 which
arose from substantial under-declaration of sales.
Factual basis:
Sales per CD and
duly-registered books
|
P 1,928,770,398.68
|
Add: Discrepancy
in recon of Central Warehouse accounts (S-1)
|
53,378,730.98
|
Total sales per CD
and duly-registered books
|
1,982,149,129.66
|
Less: Cost of
sales per CD and duly-registered books
|
1,447,422,137.23
|
Gross income per
CD and duly-registered books
|
534,726,992.43
|
Less: Gross
income reflected per Annual Income Tax Return
|
158,124,152.00
|
Understatement of
gross income (recorded but undeclared)
|
P
376,602,840.43
|
S-1 Reconciliation of Central
Warehouse accounts –
Accounts
Receivable – Franchise total debit transactions
|
P 1,764,792,639.41
|
Multiply by VAT
factor
|
25/28
|
Net of VAT
|
1,575,707,713.76
|
Less: Franchise
Operation Current net credit
|
115,238,517.84
|
Should be
Sales-Central Warehouse
|
1,460,469,195.92
|
Sales-Central
Warehouse per CD and duly-registered books
|
1,407,090,464.94
|
Discrepancy in reconciliation
|
P 53,378,730.98
|
Legal basis:
It may be noted in the above
computation that the amount of P376,602,840.43, though taken up per CD and
duly-registered books, was not included in the computation of taxable income in
the Annual Income Ta Return in gross violation of Section 31, in relation to
Section 32(A) of Republic Act No. 8424 otherwise known as the 1997 National
Internal Revenue Code (1997 NIRC), as amended.
The SUPREME COURT ruled in the case of Paper Industries Corporation
of the Philippines versus Court of
Appeals, et al., 250 SCRA 434 that “where
the books of accounts reflected a Sales or Receipts higher than that reflected
in the return, the books of accounts should prevail. This is so, because the
books of accounts are kept by the taxpayer and are prepared under its control
and supervision, and they reflected what may be deemed to be admission against
interest”.
GDI’s protest and contentions:
It claimed that the information or
entries contained in the CD and duly-registered books are erroneous. It averred
that the same contained more than 2,500 errors posted in 84 accounts and should
not be the basis of the audit. It claimed that there were “double take-ups”.
Revenue Officer Dalanon’s arguments:
The CD and the duly-registered books,
as duly validated by him, already contained GDI’s external auditors’
adjustments. The discrepancies or differences in Sales accounts between GDI’s
CD and duly-registered books on one hand and the AITR on the other were not
reflected by its external auditors as adjusting or correcting entries in the
said CD and duly-registered books.
With the more than 2,500 erroneous
entries posted in 84 accounts, as GDI averred, to contain in the CD and
duly-registered books, it is believed to be unfeasible and amazing that GDI
which belongs to the high profile business in the Philippine industries and
with its highly competent accounting and auditing employees, supervisors, and
tax managers, the external auditors, and the reputable independent public
auditors that it (GDI) hired to conduct quarterly reviews of its financial
records would not notice such remarkable and significant errors.
The SUPREME COURT already ruled in the case of Paper Industries
Corporation of the Philippines versus Court
of Appeals, et al., 250 SCRA 434 that “where
the books of accounts reflected a Sales or Receipts higher than that reflected
in the return, the books of accounts should prevail. This is so, because the
books of accounts are kept by the taxpayer and are prepared under its control
and supervision, and they reflected what may be deemed to be admissions against
interest”. The representations made by GDI in the CD and
duly-registered books submitted and presented by it to the Bureau for audit and
examination amounted to admissions against interest which it cannot disown and
change at its convenience of pleasure. Emphasis supplied.
Revenue Officer Dalanon presented
another mathematical computation based on VAT Payable account reflected in the
CD and duly-registered books to validate the afore-cited undeclared gross
income as follows:
Total credit of
VAT Payable account per CD & duly-registered books
|
P 227,263,254.33
|
|
Add: VAT not
taken up on Sales recorded in General Journal:
|
|
|
Net sales without VAT per general
journal
|
34,511,326.03
|
|
Multiply by VAT rate
|
12%
|
4,141,359.12
|
Total
|
231,404,613.45
|
|
Divide by VAT
rate
|
12%
|
|
Sales as
reconstructed based on VAT Payable account
|
1,928,371,778.75
|
|
Add: Difference
in recon of Central Warehouse accounts
|
53,378,730.98
|
|
Total sales based
on CD & duly-registered books, as reconstructed
|
1,981,750,509.73
|
|
Less: Cost of
sales per CD & duly-registered books
|
1,447,422,137.23
|
|
Gross income
based on reconstructed sales
|
534,328,372.50
|
|
Less: Gross
income per AITR
|
158,124,152.00
|
|
Undeclared gross
income (taken up per books, not reflected per AITR)
|
P
376,204,220.50
|
There were such other mathematical
computations presented by Revenue Officer Dalanon to show GDI’s inconsistent
declarations.
2. Understatement
of gross income (unrecorded and undeclared) amounting to P384,741,670.34 that
arose from substantial unrecorded and undeclared sales.
Factual basis:
GDI is the exclusive Philippine
Franchisee of DBI. The License Agreement between said parties states, among
other things, that the former shall pay the latter a Franchise Fee equivalent
to 1% of the former’s net sales. In the said Agreement, the term “net sales” is
defined as ALL SALES, exclusive of sales taxes and services charges.
For year 2007, the franchise fee paid
by GDI to DBI amounted to P23,668,908.00. Said amount was included as part of
GDI’s overhead in the Cost of Sales account in the Income Statement and claimed
as deduction from its Net Sales per AITR. The franchise fee account per CD and
duly-registered books showed exactly the same amount as afore-cited.
On the basis of the foregoing, there
are other undeclared Sales amounting to P438,120,401.31 that resulted to the
aforesaid unrecorded and undeclared gross income, computed as follows:
Franchise fee per
CD, duly-registered books and FS
|
P 23,668,908.00
|
Divide by
franchise fee rate
|
1%
|
Grossed-up sales/or should be total sales
|
2,366,890,800.00
|
Less: Cost of sales per CD and duly-registered
books
|
1,447,422,137.23
|
Should be total gross income
|
919,468,662.77
|
Less: Gross income reflected per AITR
|
58,124,152.00
|
Total understatement of gross income
|
761,344,510.77
|
Less: Recorded but undeclared gross income
(#1)
|
376,602,840.43
|
Unrecorded and undeclared gross income
|
P
384,741,670.34
|
To validate the above discrepancy,
Revenue Officer Dalanon presented herein-below another mathematical computation
based on information taken from other independent relevant document, such as
but not limited to, Technical Serevice and Assistance Agreement between GDI and
its affiliate-Antares Management, Inc. (AMI).
GDI contracted the technical services
of AMI. The said Agreement between said parties states, among other things,
that the former shall pay the latter a management fee equivalent to 2% of the
former’s net sales of its shops, whether directly operated by it or
sub-franchised to others.
For year 2007, Management Fee
(Technical Service and Assistance Fee) expense claimed by GDI as deduction from
gross income per AITR amounted to P47,337,817.00.
On the basis of the foregoing, the
unrecorded and undeclared gross income computed in the preceding presentation
is corroborated as follows:
Management fee
per CD, duly-registered books and FS
|
P 47,337,817.00
|
Divide by
management fee rate
|
2%
|
Grossed-up sales/or should be total sales
|
2,366,890,850.00
|
Less: Cost of sales per CD and
duly-registered books
|
1,447,422,137.23
|
Should be total gross income
|
919,468,712.77
|
Less: Gross income reflected per AITR
|
158,124,152.00
|
Total understatement of gross income
|
761,344,560.77
|
Less: Recorded but undeclared gross income
(#1)
|
376,741,840.43
|
Unrecorded and undeclared gross income
|
P
384,741,720.34
|
Legal basis:
The conditions contained in the
aforesaid Agreements were utilized in determining the correct sales on the
basis of the provisions of Section 5(A) of the 1997 NIRC, as amended, which
reads – “in determining the correctness
of any return x x x the Commissioner is authorized to examine any book, paper,
record, or other data which may be relevant or material to such inquiry”.
The method of validation used by
Revenue Officer Dalanon was already upheld by the COURT OF TAX APPEALS in the case of Asia Coal Corporation vs Commissioner of Internal Revenue (CTA
Case No. 6803, February 13, 2008) that “the
respondent may utilize any kind of document, x x x to determine the correct
sales of the petitioner…”
GDI’s protest and contentions:
GDI contended that the franchise fee
amounting to P23,668,908.00 is equivalent to 1% of the “system-wide sales’ of
its company-owned shops/outlets and those of its sub-franchisees. That the term
“system-wide sales” allegedly refers to GDI’s sales of its directly owned shops
and shops owned by its sub-franchisees excluding Central Warehouse
(Commissary). It averred that is Central Warehouse’s (Commissary’s) sales to
its sub-franchisees are not subject to the 1% franchise fee; and that its own
sales are as follows:
Shop-Central warehouse (trading sales)
|
P 746,312,672.00
|
Shop-Outlets (donuts sales)
|
285,216,244.74
|
Total sales
|
P 1,031,528,916.74
|
Revenue Officer Dalanon’s arguments:
1.
There
was no specific condition in the License Agreement between GDI and DBI that only
“donuts sales” (i.e., shops/outlets’s sales) shall be subject to 1% franchise
fee and that “trading sales” (i.e., central warehouse’s sales) are not. The
Agreement clearly provides that the Franchise Fee shall be 1% of NET SALES
OF ALL SHOPS (whether operated by GDI or sublicensed to others) exclusive
of sales taxes and service charges.
Is it not that GDI’s central warehouse
(commissary) a shop which it also operates? Is it not, that purchases of GDI’s
sub-franchisees from central warehouse, sales of GDI?
2.
The
amount of P23,668,908.00 representing Franchise Fee paid to DBI, which is the
basis in computing for the unrecorded and undeclared income as presented above,
was actually declared as incurred by GDI in its ordinary course of trade or
business during the year covered by the audit. It was in fact claimed as
deduction from Net Sales because it was included as part of the Overhead in the
Cost of Sales account as apparently stated in the Notes to FS No. 21.2;
Furthermore, the base amount can be validated as included in the Cost of Sales
account as shown in the documents submitted by GDI in connection with its
protest on Purchases (income payments to suppliers of goods) not subjected to
EWT.
3.
While
it is apparently stated in the License Agreement that the basis of the
Franchise Fee is ALL SALES (whether directly or indirectly owned by GDI), GDI
is not liable to pay DBI the Franchise Fee corresponding to 1% of the former’s
Sub-Franchisees’ sales. GDI is only responsible for the remittance of the
franchise fee paid by its Sub-Franchisees as stated in Notes to Financial
Statements No. 21.2. Therefore, the Grossed-Up Sales computed and presented in
the audit findings pertains to GDI alone. It does not include the Sales of
GDI’s Sub-Franchisees.
4.
Why
did GDI claim the whole amount of P2,840,123.69 representing VAT (input tax) on
Franchise Fee paid to DBI as tax credit against the Output Tax? The fact that
GDI claimed said amount as tax credit against its Output Tax indicates that the
Franchise Fee amounting to P23,668,980.00 pertains to 1% of GDI’s Sales alone.
Let us compute GDI’s Sales based on
VAT it paid for its purchase of services from non-resident (BIR Form No. 1600).
VAT payments on purchase of services from
non-resident
|
P 2,840,123.69
|
Divide by VAT rate
|
12%
|
Franchise fee based on VAT payments
|
23,667,697.42
|
Divide by franchise fee rate
|
1%
|
Grossed-up sales/or should be sales based
on VAT on franchise fee
|
P
2,366,769,741.67
|
This further corroborates that GDI had
actually under-declared its sales for year 2007 with the end view of evading
payment of correct taxes.
5.
There
are such other mathematical computations duly supported by pieces of
documentary evidence to validate Revenue Officer Dalanon’s firm stance that GDI
under-declared its sales for year 2007, such as:
i.
Assuming
arguendo that GDI’s Central
Warehouse’s sales to it sub-franchisees do not form part of the NET SALES upon
which the 1% franchise fee shall be based; and that only its directly and
indirectly owned shops/outlets’ sales are subject to the said franchise fee;
let us reconcile GDI’s facts and contentions.
Considering that GDI’s
sub-franchisees’ financial statements for year 2007 were not available at the
time of the audit/investigation to exactly determine with certainty its actual
sales, this leaves RO Dalanon to the determination of GDI’s sub-franchisees’
net sales on the basis of the available information contain the financial
records submitted and presented by GDI to the BIR for audit, such as but not
limited to: Franchise Agreements between
GDI and its Sub-Franchisees; Schedule of Royalty Income received by GDI from
its Sub-Franchisees; Technical Service Agreement between GDI and its
affiliate-AMI; and Monthly Remittance Returns of Final Taxes Withheld at source
on Franchise Fee.
The Franchise Agreements between GDI
and its Sub-Franchisees state, among other things, that the former shall
receive from the latter a Royalty Fee equivalent to 6.6% based on the latter’s
SALES of the preceding month.
For year 2007, the Royalty Fee
(Income) received by GDI from its Sub-Franchisees amounted to P133,190,903.00.
A random work-back computation of GDI’s Sub-Franchisees sales at the rate of
6.6% would result to P2,018,043,998.79 presented as follows:
Royalty income per AITR and schedule
submitted by GDI
|
P 133,190,903.92
|
Divide by royalty fee rate per
sub-franchise agreements
|
6.6%
|
GDI’s sub-franchisees’ net sales
|
P 2,018,043,998.79
|
On the basis of these data alone, let
us reconcile GDI’s owned owned outlets’ sales without first delving into a more
detailed analysis/scrutiny of its accounts and information contained in other
independent relevant documents submitted by GDI itself to the BIR for audit.
Net sales claimed by GDI as its
“system-wide sales” subj. to 1%
|
P 2,366,890,800.00
|
Les: GDI’s sub-franchisees’ nets sales
(preceding computation)
|
2,018,043,998.79
|
Would have been GDI’s owned shops’ sales,
excluding CW’s
|
348,846,801.21
|
Less: GDI’s company-owned shops’ sales as
claimed by it
|
285,216,244.74
|
DISCREPANCY (where is this amount? This was
not declared?)
|
P 63,630,556.47
|
It may be noted that the above
reconciliation would already reveal an under-declaration of sales amounting to
P63,630,556.47.
ii.
Delving
into a more detailed scrutiny of the data and information contained in GDI’s
financial records (CD and duly-registered books) and other independent relevant
documents would further reveal discrepancies which would prove GDI’s
inconsistent declarations and scheme in substantially under-declaring its sales
with the end view of evading payment of correct taxes.
The following data were taken from
GDI’s CD and duly-registered books:
Date
|
Franchise
Fee
|
Royalty
Fee
|
CW’s
sales
|
Own-Shops
sales
|
Jan.07
|
P 1,724,667.96
|
P 7,421,176.65
|
P
57,248,319.95
|
P
22,583,523.83
|
Feb.07
|
1,686,532.69
|
7,286,726.73
|
52,501,006.84
|
21,767,600.01
|
Mar.07
|
1,848,303.45
|
7,976,470.11
|
55,277,706.99
|
23,968,236.66
|
Apr.07
|
1,776,113.60
|
7,669,213.80
|
58,153,890.87
|
23,698,087.32
|
May.07
|
1,970,219.46
|
8,563,473.45
|
58,728,814.48
|
24,810,849.73
|
Jun.07
|
1,893,370.70
|
8,628,963.14
|
58,501,372.76
|
23,139,025.61
|
Jul.07
|
2,003,418.71
|
9,175,610.88
|
63,572,834.81
|
23,806,223.09
|
Aug.07
|
2,110,619.13
|
9,703,008.94
|
70,658,181.05
|
24,916,641.70
|
Sep.07
|
2,056,332.90
|
9,511,646.07
|
63,043,467.16
|
23,692,482.60
|
Oct.07
|
2,103,622.20
|
9,682,043.36
|
68,578,021.70
|
24,405,163.12
|
Nov.07
|
1,919,289.59
|
8,936,445.63
|
64,878,372.65
|
20,854,621.93
|
Dec.07
|
2,576,418.05
|
38,636,125.14
|
735,948,475.68
|
264,037,478.14
|
Totals
|
P 23,668,908.44
|
P133,190,903.90
|
1,407,090,464.94
|
521,679,933.74
|
Franchise
Fee-
GDI contended that the franchise fee
amounting to P23,668,908.00 is equivalent to 1% of its “system-wide sales”
which means, sales of its company-owned shops/outlets and those of its
Sub-Franchisees’ excluding Central Warehouse’s sales.
Royalty
Income-
Royalty income is 6.6% based on
sub-franchisees’ sales for the preceding month (e.g. royalty income for Feb.07
is based on sub-franchisees’ sales for Jan.07; royalty income for Mar.07 is
based on Feb.07 sales, and onwards).
Sales
accounts (Central Warehouse and Company-owned outlets)-
GDI claimed that sales for the month
of Dec.07 purportedly contained errors. It contended that the same contained
“double take-ups”, and that its Central Warehouse’s sales and Company-owned
outlets’ sales for the period amounted to P75,170,682.74 and P27,573,789.14,
respectively.
While it may be noted in the CD and
duly-registered books, as reproduced above, that there were abrupt and
significant increases that occurred in the month of Dec.07, the same should not
be concluded that there were indeed “double take-ups” and thus presume the
correctness of GDI’s declarations in the AITR and VAT returns.
Assuming arguendo that there were “double take-ups” that occurred in the
month of Dec.07 as GDI averred, and the aforesaid franchise fee pertains to 1%
of its “system-wide sales” as it further claimed, let us reconcile its
company-owned outlets’ sales for the period from January to September 2007
alone, because the entries for these periods were not claimed by GDI to contain
errors, and that Royalty Income is based on the preceding month’s sales of the
sub-franchisees, e.g., royalty for Feb.07 is based on sub-franchisees’ sales for
the month of Jan.07 and onwards.
Franchise fee (Jan-Sep.07) per CD &
duly-reg. books
|
P 17,069,578.60
|
|
Divide by franchise fee rate
|
1%
|
|
Grossed-up sales (Jan-Sep.07)
claimed by GDI as “system-wide”
|
1,706,957,860.00
|
|
Less: SF’s Grossed-up sales for Jan-Sep.07
based on Royalty
|
|
|
Royalty income (Feb-Oct.07)
|
78,197,156.48
|
|
Divide by royalty fee rate
|
6.6%
|
1,184,805,401.21
|
Should be GDI’s owned outlets’ sales from
Jan-Sep.07
|
522,152,458.79
|
|
Less: GDI’s owned outlets’ sales (Jan-Sep.07)
per CD & reg.books
|
212,382,670.55
|
|
Undeclared company-owned outlets’ sales for
Jan-Sep.07 alone
|
P 309,769,788.24
|
It may be noted that for January to
September 2007 alone, GDI actually under-declared its company-owned outlets’
sales amounting to P309,769,788.24.
Given that sales for Dec.07
purportedly contained errors (i.e., double take-ups) as GDI averred, let us
thrash out and reconcile GDI’s company-owned outlets’ sales for the last
quarter of 2007 based on data reflected per GDI’s VAT return for the period.
Sales & other income per 4th
Qtr VAT returnss
|
P
324,582,285.90
|
|
Less: CW’s sales (Oct-Dec.07)
|
208,627,077.25
|
|
Royalty income 4th Qtr
|
57,254,614.13
|
|
Franchise income 4th Qtr
|
5,131,288.88
|
|
Other income 4th Qtr
|
1,059,023.10
|
272,072,003.36
|
GDI’s owned shops’ sales reflected in 4th
Qtr VAT return
|
52,510,282.54
|
|
Less: GDI’s owned shops’ sales claimed by
it as the correct amount
|
|
|
Total sales for 2007 as GDI claimed
|
285,216,244.74
|
|
Own-shops’ sales (jan-sep.07) per
CD®.books
|
212,382,670.55
|
72,833,574.19
|
DISCREPANCY (where is this?)
|
|
(P 20,323,291.65)
|
GDI would want to demonstrate that its
sales for the last quarter of 2007 amounted to only P52,510,282.54 when its own
data and contention would reveal that its sales for the period was already
P72,822,574.19.
GDI cannot even reconcile its own
facts and contentions.
iii.
Below
is another mathematical computation based on another independent relevant documents
– Final Tax Remittance Returns (BIR Form No. 160F), to prove GDI’s inconsistent
declarations in the AITR and VAT returns.
Income payments made to non-resident
foreign corporations are subject to Final Withholding Tax. Thus, the Franchise
Fee paid by GDI to DBI was subjected to Final Withholding Tax at the rate of
10% pursuant to Philippines-China Tax Treaty.
For year 2007, the actual Final Tax
Withheld by GDI from the Franchise Fee it paid to DBI and remitted to the BIR
per BIR Form No. 1601F amounted to P2,456,311.94.
On the basis of actual remittance of
Final Tax contained in BIR Form No. 1601F, let us reconcile GDI’s owned
outlets’ sales for the period from January to September 2007 alone, considering
that entries for these periods were not claimed by GDI to contain errors, given
that the supposed “double take-ups” occurred in the month of December 2007; and
based on its own contention that the Franchise Fee it paid to DBI is equivalent
to 1% of the “system-wide sales” f GDI’s owned outlets and those of its
Sub-Franchisees’ excluding central warehouse’s.
Final tax remittance – Jan-Sep.07
|
P 1,749,576.90
|
|
Divide by FWT rate applied (Phils-China Tax
Treaty)
|
10%
|
|
Tax base (Franchise Fee)
|
17,495,769.00
|
|
Divide by FF rate per License Agreement
(DBI & GDI)
|
1%
|
|
Grossed-up sales claimed by GDI as
“system-wide sales”
|
1,749,576,900.00
|
|
Less: Grossed-up sales of GDI’s sub-F based
on royalty
|
|
|
Royalty income (Feb-Oct.07)
|
78,197,156.48
|
|
Divide by royalty fee rate
|
6.6%
|
1,184,805,401.21
|
Should be GDI’s owned outlets’ sales
excluding CW’s sales
|
564,771,498.70
|
|
Less: GDI’s owned outlets’ sales
(Jan-Sep.07) per CD®.books
|
212,382,670.55
|
|
DISCREPANCY (Undeclared owned outlets’
sales?)
|
P 352,388,828.24
|
It may be noted that the random
work-back computation presented above based on actual remittance of final tax
reflected in BIR Form No. 1601F for the period from Jan-Sep.07 alone would also
reveal that GDI under-declared its company-owned outlets’ sales amounting to
P352,388,828.24. This corroborates the discrepancy shown above.
Other mathematical computations and
reconciliations to prove the under-declaration of sales shall be provided if
warranted.
3. Purchases
amounting to P772,225,727.77 was not subjected to tax required to be withheld.
Factual basis:
Cost of sales per CD & duly-registered
books
|
P
1,447,422,137.23
|
|||
Less: Store labor cost
|
58,471,004.78
|
|
||
Throw away
|
5,556,510.82
|
|
||
VAT credit included in Cost of Sales
|
91,361,028.70
|
155,388,544.30
|
||
Total
|
1,292,033,592.93
|
|||
Add back: Throw away inadvertently deducted
in the previous computation
|
5,556,510.82
|
|||
Adjusted total
|
1,297,590,103.75
|
|||
Add(Deduct): Merchandise Inventory – end
|
127,322,114.17
|
|
||
Merchandise Inventory –
beg
|
(40,850,274.01)
|
86,471,840.16
|
||
Net purchases (domestic and importation) -
unadjusted
|
1,384,061,943.91
|
|||
Audit adjustments to reconcile with
purchases per CD&duly-registered book
|
|
|||
Net purchases (domestic and importation)
|
1,384,061,943.91
|
|
||
Merchandise purchases per CD®.books
|
1,371,684,175.71
|
12,377,768.20
|
||
Net purchases (domestic & importation)
per CD & duly-reg books per audit
|
1,371,684,175.71
|
|||
Less: Importation (other than capital goods
per VAT returns)
|
26,659,331.16
|
|||
Net purchases (domestic)
|
1,345,024,844.55
|
|||
Add: Other purchases charged to Gen/Admin
& operating expenses (adj)
|
29,099,414.61
|
|||
Purchases subject to expanded withholding
tax
|
1,374,124,259.16
|
|||
Less: Purchases subjected to EWT per BIRF
1601E
|
728,846,527.00
|
|
||
Purchases of capital goods -
|
|
|
||
Office equipment, furniture and fixtures
|
(14,237,264.24)
|
|
||
Equipment for transfer
|
(21,422,154.27)
|
|
||
Kitchen and Dining Equipment
|
( 3,970,117.59)
|
|
||
Store/office equipment
|
( 5,531,823.64)
|
|
||
Payments of prior year’s obligations-
|
|
|
||
A/P-Trade bal beg per CD & duly-reg books
|
(69,023,057.78)
|
|
||
Accrued exp payable beg per CD/reg books
|
(12,763,578.09)
|
601,898,531.39
|
||
Purchases not subjected to Expanded
Withholding Tax
|
P
772.225.727.77
|
|||
Legal basis:
For failure to withhold tax required
to be withheld under Revenue Regulations 02-98, as amended, in relation to
Section 57(B) of the 1997 NIRC, as amended, the amount of P772,225,727.77 was
disallowed pursuant to Section 34(K) of the same Code which reads:
“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
Internal Revenue in accordance with this Section, sections 58 and 81 of this
Code.”
To strengthen Revenue Officer
Dalanon’s stance for disallowing the afore-cited amount, quoted below are
Court’s decisions on deductibility of certain payments as follows:
“The purpose of this requirement is to
insure the collection of the income tax on these payments which constitute
income to the recipients thereof and, therefore, includible in their gross
income (NIRC, Annotated, 2000 ed., De Leon, p. 292). Thus, when one engaged in
trade or business makes payments that are deductible from his gross income for
tax purposes, it is not enough that he proves that such payments have been
made. He must also show proof that he withheld the ta and remitted it to the
BIR before he can deduct the same as business expense (NIRC, Annotated, De
Leon, Supra).” Systems and Encoding Corp. vs. Commissioner
of Internal Revenue, CTA Case No. 6999 dated December 16, 2008.
“The corporation is the government’s
withholding agent. Hence, it is duty-bound to withhold taxes upon income
payments subject to tax required to be withheld at the time such income
payments are paid or payable, whichever is earlier in order to be considered as
a deductible expense (Section 2.57.4 of
Revenue Regulations No. 2-98). Since the expense was not subjected to
withholding tax in the year it was accrued and claimed as expenses, the same
shall not be allowed as deduction from gross income.” TUTUBAN
PROPERTIES, INC. vs. CIR, CTA Case No. 6570, December 20, 2007.
4. VAT
input tax included in Cost of Sales account per CD 7 duly-registered books
amounting to P91,361,028.70.
The input tax per Summary List of
Purchases (SLP) and input tax submitted by GDI was only P85,276,481.48. This
amount was already applied as tax credit against output tax per VAT returns.
GDI likewise affirmed that its input tax was only the said amount. However, the
CD and the duly-registered books showed that an input tax amounting to
P91,361,028.70 formed part of its Cost of Sales.
While Section 110(A) of the 1997 NIRC,
as amended, in relation to RR No. 16-2005 allows input tax for conversion into
or to form part of finished goods, the amount of P91,361,028.70 was disallowed
in view of the affirmation of GDI that its input ta was only P85,276,481.48 and
declared that the same was already applied as tax credit against its output tax
per VAT returns.
5. Rentals
amounting to P10,205,770.03 was not subjected to EWT, hence, it was disallowed.
Revenue Officer Dalanon inadvertently
not included this amount as disallowed expense in his original audit report.
However, said amount was included as part of the disallowed items after review
and evaluation conducted by Revenue Officer Stanley Ong when he was yet with the
Assessment Division of the Regional Office in Quezon City. The inclusion of the
same was proper. It increased the assessment on income tax aspect and the
corresponding surcharge and interest.
The same legal bases as cited in
number 3 above.
Value-added Tax (VAT)
aspect
1. Understatement
of VAT amounting to P160,283,750.13
Factual basis:
Sales per CD and duly-registered books
|
P
1,928,770,398.68
|
|
Add: Difference in recon of Central
Warehouse accounts
|
53,378,730.98
|
|
Total per CD and duly-registered books
|
1,982,149,129.66
|
|
Add: Unrecorded and undeclared sales:
|
|
|
Grossed-p sales based on Franchise Fee
|
2,366,890,800.00
|
|
Less: Total per CD & duly-registered books
|
1,982,149,129.66
|
384,741,670.34
|
Total sales per audit
|
2,366,890,800.00
|
|
Add: Other income subject to VAT:
|
|
|
Royalty income
|
133,190,903.90
|
|
Franchise income
|
9,847,488.63
|
|
Other non-operating income
|
3,247,797.81
|
146,286,190.34
|
Total amount subject to VAT
|
2,513,176,990.34
|
|
Less: Sales subjected to VAT per VAT
returns
|
1,177,479,072.58
|
|
Undeclared sales
|
1,335,697,917.76
|
|
Multiply by VAT rate
|
12%
|
|
Understatement of VAT (output tax) payable
|
P 160,283,750.13
|
Legal basis:
The undeclared sales as earlier
computed was subjected to VAT pursuant to Section 108(A) of R.A. No. 8424, as
amended by R.A. No. 9337 in relation to RR No. 16-2005, as amended.
GDI’s protest and contentions:
It contested the above computed
discrepancy. It submitted a reconciliation which only showed a discrepancy
amounting to P58,519.78.
Revenue Officer Dalanon’s arguments:
He asserted his firm stance that the
understatement was P160,283,750.13 because all the data in determining the
aforesaid discrepancy were taken from GDI’s financial records (CD and the
duly-registered books) and other independent relevant documents subject by it
for audit.
2. Disallowed
input tax amounting to P1,531,629.37 attributable to Accrued Expenses Payable
beginning.
Scrutiny of GDI’s records, particularly
the Check Register, showed that it claims VAT (input tax) credit on its
payments of Accrued Expenses Payable which do not conform with the provisions
of the VAT law.
It is worth to mention at this point
the fundamental taxation principle that Input Tax is concomitant to an Expense
or Purchase Account as Output Tax is concomitant to Sales or Revenue Account.
Therefore, input tax amounting to P1,531,629.37 equivalent to 12% of the
beginning balance of Accrued Expenses Payable per CD and the duly-registered
books was disallowed.
For a clear view of the scheme adopted
by GDI, below are journal entries taken from the Check Register, as follows:
Dr.
Accrued expenses payable P41,593.87
Dr.
VAT credit 4,991.26
Cr.
Withholding tax at source ( 415.94)
Cr.
Security Bank – S/A (46,169.94)
Accrued expenses payable beg per CD and
duly-registered books
|
P 12,763,578.09
|
Multiply by VAT rate
|
12%
|
Disallowed input tax attributable to
accrued expenses payable beginning
|
P
1,531,629.37
|
3. Unsupported
(over-claimed) VAT (input tax) credit amounting to P27,032,432.06.
Audit revealed that VAT (input tax)
credit claimed per VAT returns was overstated by an amount of P27,032,432.06
computed as follows:
VAT credit (input tax) per VAT returns
|
P 116,680,666.66
|
|
Less: VAT Credit (input tax) on -
|
|
|
Domestic purchases per SLP
|
85,276,481.48
|
|
Services by non-resident
|
2,840,123.69
|
88,116,605.17
|
Total
|
28,564,061.49
|
|
Less: Input tax attributable to accrued
expenses payable beginning
|
1,531,629.37
|
|
Unsupported (over-claimed) VAT (input tax)
credit
|
P 27,031,432.12
|
This amount was disallowed because GDI
failed to substantiate it with documentary evidence in order to be allowed as
tax credit against output tax as required under Section 110(A) of R.A. No. 8424
as amended by R.A. No. 9337 in relation to RR No. 16-2005, as amended.
Expanded withholding tax
(EWT) aspect
1. EWT
on income payments to suppliers of goods – P7,722,257.28
This amount represents 1% EWT on
income payments to suppliers of goods, as computed in Number 3 under Income Tax
aspect, pursuant to Section 57(B) of the 1997 NIRC, as amended, in relation to
RR No. 02-98, as amended.
2. EWT
on rentals – P510,288.50
This amount represents 5% EWT on rentals
which was not subjected to tax required to be withheld under RR No. 02-98, as
amended, in relation to Section 57(B) of R.A. No. 8424, as amended.
Rentals per CD and duly-registered books
|
P 41,913,127.23
|
Less: Rentals subjected to EWT per BIR Form
No. 1601E
|
31,707,357.20
|
Rentals not subjected to EWT
|
10,205,770.03
|
Multiply by EWT rate
|
5%
|
EWT on Rentals
|
P 510,288.50
|
Final Tax (FT) aspect
1. Final
tax on cash dividends amounting to P481,396.81 (uncontested)
This amount represents 10% Final Tax
on cash dividends pursuant to Section 24(B)(2) of the 1997 NIRC, as amended, in
relation to RR No. 02-98, as amended.
Cash dividends per CD and duly-registered
books
|
P 6,138,024.00
|
|
Less: Cash dividends issued to domestic corporations:
|
|
|
Marilex Realty Development Corporation
|
880,632.17
|
|
Spare Enterprises, Inc
|
220,974.99
|
|
PAMM, Inc
|
111,217.33
|
|
Metro Bakers, Inc
|
111,231.45
|
1,324,055.94
|
Cash dividends subject to final tax
|
4,813,968.06
|
|
Multiply by FT rate
|
10%
|
|
Final tax due on cash dividends
|
P 481,396.81
|
2.
Fringe Benefit Tax (FBT) amounting to
P253,102.50 (uncontested)
Audit revealed that GDI purchased
service vehicles for use of its employees holding supervisory positions.
However, these were not subjected to the FBT required under RR No. 02-98, as
amended, in relation to Section 57(B) of the 1997 NIRC, as amended, computed as
follows:
Name
of employees
|
Cora
B. Lugtu
|
R.R.
Ledesma
|
Ma.
C.M. Prieto
|
Kind
of unit
|
Honda
Jazz 1.3 I-DSI
|
Toyota
Altis 1.8EA/T
|
Innova
Gas A/T
|
Monthly
amortization
|
P 16,856.00
|
P 21,592.00
|
P 16,190.00
|
Multiply
by number of amortization
|
36
|
36
|
36
|
Amortized
amount
|
606,816.00
|
777,312.00
|
582,840.00
|
Divide
by (estimated DP is 20%)
|
80%
|
80%
|
80%
|
Acquisition
cost
|
758,520.00
|
971,640.00
|
728,550.00
|
Divide
by estimated useful life
|
5
|
5
|
5
|
Monetary
value
|
151,704.00
|
194,328.00
|
145,710.00
|
Divide
by
|
68%
|
68%
|
68%
|
Grossed-up
monetary value
|
223,094.12
|
285,776.47
|
214,279.41
|
Multiply
by normal tax rate
|
35%
|
35%
|
35%
|
Fringe
Benefit Tax
|
P
78,082.94
|
P
100,021.76
|
P
74,997.79
|
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