Case Summary (G.R. No. 178697)
Key Dates
- November 24, 1998: Letter of Authority (LOA No. 000019734) issued covering “period 1997 and unverified prior years.”
- December 6, 1999: Preliminary assessment issued; protested by Sony.
- February 2, 2000: Sony’s formal protest filed.
- October 24, 2000: Petition for review filed with CTA-FD.
- October 26, 2004: CTA-FD Decision partially granting Sony’s petition.
- May 17, 2007: CTA-EB Decision affirming CTA-FD.
- July 5, 2007: CTA-EB Resolution denying CIR’s motion for reconsideration.
- November 17, 2010: Supreme Court Decision.
Applicable Law
- 1987 Philippine Constitution
- National Internal Revenue Code of 1997 (Tax Code): Sections 6, 13, 106, 110, 249(C)(3)
- Revenue Regulations No. 6-85 (as amended by RR No. 12-94)
- Revenue Regulations No. 2-98
- Revenue Memorandum Order No. 43-90 (prohibiting LOAs covering “unverified prior years”)
Factual Background
Acting under LOA No. 000019734, CIR’s examiners audited Sony’s tax records allegedly for 1997 and “unverified prior years.” They computed deficiency assessments for:
• VAT of ₱11,141,014.41
• Expanded Withholding Tax (EWT) of ₱1,992,462.72
• VAT on royalties and various penalties totaling over ₱3 million
Sony protested, submitted supporting documents, and after 180 days without final action, filed a petition with the CTA-FD.
LOA Scope and Deficiency VAT Assessment
Section 13 of the Tax Code requires a LOA to specify the taxable period. The phrase “and unverified prior years” contravened RMO No. 43-90, which limits a LOA to one taxable year unless additional periods are specifically listed. Assessments based on fiscal records extending into January-March 1998 exceeded the LOA’s lawful coverage and were void.
Legitimacy of Input VAT on Advertising Expense
Sony claimed input VAT credit for advertising expenses because it paid duly rendered VAT-invoiced services. CIR argued that Singapore-based Sony International Singapore’s subsidy precluded an actual expense. The Court held that:
• Section 110 of the Tax Code allows VAT-invoiced expenses as credits regardless of external funding.
• The subsidy was not payment for goods or services but financial assistance, thus cannot negate Sony’s incurrence of advertising expenses.
EWT on Commission Expense
CIR contended that Sony’s broker-dealer commissions should be subject to a 10% withholding rate under RR No. 2-98. The CTA and Supreme Court ruled:
• Revenue Regulations No. 6-85 (in force during 1997) prescribed a 5% rate for commissions to brokers and agents.
• RR No. 2-98 and subsequent amendments cannot be applied retroactively to the audit period.
EWT on Rental Deposit
Sony’s rental deposit of ₱10,523,821.99 incurred January-March 1998 fell outside the LOA’s coverage. Consequently, any withholding assessment on that deposit was invalid.
Final Withholding Tax on Royalties
Royalties under Sony’s Manufacturing License Agreement with Sony-Japan accrued semi-annually, becoming payable within two months after June 30 and December 31. Thus:
• Royalties for the period
Case Syllabus (G.R. No. 178697)
Citation
- G.R. No. 178697; 649 Phil. 519 (Second Division, November 17, 2010)
- Decision by Justice Mendoza; concurred in by Carpio (Chairperson), Leonardo-De Castro, Peralta, and Abad, JJ.
Parties
- Petitioner: Commissioner of Internal Revenue (CIR)
- Respondent: Sony Philippines, Inc. (Sony)
Facts of the Case
- On November 24, 1998, CIR issued Letter of Authority (LOA) No. 000019734 covering “the period 1997 and unverified prior years.”
- December 6, 1999: Preliminary assessment for 1997 deficiency taxes and penalties; Sony protested.
- CIR issued final assessment notices detailing:
• Deficiency VAT: Basic P7,958,700.00 plus penalties and compromise for a total of P11,141,014.41
• Deficiency EWT: Basic P1,416,976.90 plus penalties for a total of P1,992,462.72
• Deficiency VAT on royalties: Penalties P462,758.14
• Late remittance of final withholding tax: Penalties P2,288,473.78
• Late remittance of income payments: Penalties P10,923.60
• Grand total assessed: P15,895,632.65 - Sony filed a protest on February 2, 2000, submitted supporting documents on February 16, 2000, and, after 180 days lapsed, petitioned the Court of Tax Appeals (CTA) on October 24, 2000.
CTA First Division Decision (October 26, 2004)
- Disallowed deficiency VAT assessment: Input VAT credit from subsidized advertising expense valid.
- Upheld deficiency EWT assessments on:
• Motor vehicle and professional fees to partnerships
• Commissions paid to sales agents at 5% under RR No. 6-85 - Disallowed EWT on rental deposit of P10,523,821.99: Beyond LOA coverage.
- Upheld penalties for late remittance of:
• VAT on royalties (Dec 1997)
• Final