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&reg.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&reg.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&reg.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

While KIM HENARES scares small taxpayers, constantly pesters MANNY PACQUIAO, and actively prosecutes those are not allies of the AQUINO administration; she fears, coddles and lawyers for DUNKIN’ DONUTS company – a BIGTIME TAX CHEAT!!! – whose secretary is MARIXI PRIETO who also happens to be the chairperson of Philippine Daily Inquirer (PDI) and friend of President Aquino, according to Deputy Commissioner Estela Sales.