G.R. No. 163653

EN BANC

G.R. No. 163653 (COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. FILINVEST DEVELOPMENT CORPORATION, respondent)

G.R. No. 167689 (COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. FILINVEST DEVELOPMENT CORPORATION, respondent)

Promulgated:

July 19, 2011

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CONCURRING OPINION

I concur that the property-for-shares exchange between Filinvest Development Corporation (FDC) and Filinvest Alabang, Inc. (FAI), on one hand, and Filinvest Land, Inc. (FLI), on the other, was tax-free under Section 34(C)(2) of the National Internal Revenue Code (NIRC) of 1993.

Section 34(C)(2) of the NIRC of 1993 provided:

Sec. 34. Determination of amount of and recognition of gain or loss.

x x x x

(2) Exception. No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation (a) a corporation which is a party to a merger or consolidation exchanges property solely for stock in a corporation which is a party to the merger or consolidation, (b) a shareholder exchanges stock in a corporation which is a party to the merger or consolidation solely for the stock of another corporation also a party to the merger or consolidation, or (c) a security holder of a corporation which is a party to the merger or consolidation exchanges his securities in such corporation solely for stock or securities in another corporation, a party to the merger or consolidation. No gain or loss shall be also be recognized if property is transferred to a corporation by a person in exchange for stock in such a corporation of which as a result of such exchange said person, alone or with others, not exceeding four persons, gains control of said corporation. Provided, That stocks issued for services shall not be considered as issued in return for property. (Emphasis ours.)

Control was defined as ownership of stocks in a corporation possessing at least fifty-one per cent of the total voting power of all classes of stock entitled to vote.[1]

When FDC and FAI transferred real property to FLI, they respectively acquired, in return, 61.03% and 9.96% of the outstanding capital stock of FLI. Together, FDC and FAI held 70.99% of the outstanding capital stock of FLI after the exchange, thus, gaining control of FLI.

There is no basis for the argument of the Commissioner of Internal Revenue (CIR) that the foregoing property-for-shares exchange was not tax-free because as a result of the same, the shareholding of FDC in FLI actually decreased from 67.42% to 61.03%. Even with such decrease, the shareholding of FDC in FLI after the exchange was still beyond 51%, hence, FDC still had control of FLI within the meaning of Section 34(C)(2) of the NIRC of 1993. Control by FDC over FLI after the exchange is even more evident when the shareholdings of FDC in FLI are combined with that of FAI. It is also significant to note that FDC owns 80% of FAI.

Section 34(C)(2) of the NIRC of 1993 is clear. Therefore, no statutory construction or interpretation is needed. Neither can conditions or limitations be introduced where none is provided for. Rewriting the law is a forbidden ground that only Congress may tread upon. The Court may not construe a statute that is free from doubt. Where the law speaks in clear and categorical language, there is no room for interpretation. There is only room for application. The Court has no choice but to see to it that its mandate is obeyed.[2]

I likewise agree that any increase in the value of the shareholdings of FDC in Filinvest Asia Corporation (FAC) is not yet taxable income for it remains unrealized until said shareholdings are sold or disposed of. Income in tax law is an amount of money coming to a person within a specified time, whether as payment for services, interest, or profit from investment. [3] It means cash or its equivalent. It is gain derived and severed from capital, from labor, or from both combined.[4] Income should be reported at the time of the actual gain. For income tax purposes, income is an actual gain or an actual increase of wealth.[5] In this case, FDC will only enjoy actual gain if it is able to sell its shareholdings in FAC at a price higher than the cost of acquiring the same. In fact, as along as FDC holds on to its shareholdings in FAC, FDC is at risk of suffering loss should the value of its shareholdings in FAC decrease in the future.

Although I am also in accord with the majority opinion that the CIR may not impute interest income on the cash advances FDC extended to its affiliates, I have a different basis for my vote.

Section 43 of the NIRC of 1993 grants the CIR specific authority over controlled taxpayers, viz:

Sec. 43. Allocation of income and deductions. In any case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the Commissioner of Internal Revenue is authorized to distribute, apportion or allocate gross income or deductions between or among such organizations, trades or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organizations, trades or businesses.

The majority opinion acknowledged that the situation sought to be addressed by Section 43 of the NIRC of 1993 seemingly exists considering FDC and its affiliates are controlled taxpayers; and FDC extended substantial sums of money as cash advances to its affiliates as financial assistance for the operational and capital expenditures of the latter. The majority opinion further conceded that the power of the CIR to distribute, apportion, or allocate gross income or deductions between or among controlled taxpayers may be exercised whether or not fraud inheres in the transaction/s under scrutiny; and for as long as the controlled taxpayers taxable income is not reflective of that which it would have realized had it been dealing at arms length with an uncontrolled taxpayer, the CIR can make the necessary rectifications in order to prevent evasion of taxes.

Nonetheless, the majority opinion held that the CIR cannot impute interest income on the cash advances extended by FDC to its affiliates because: (1) there was no evidence that the cash advances extended by FDC to its affiliates were sourced from the loans obtained by FDC from commercial banks and for which FDC claimed deductions of interest expense from its gross income; (2) there was no proof of actual or probable receipt or realization by FDC of interest income from the cash advances; and (3) there was no express stipulation in writing that interest would be due on the cash advances as required under Article 1956 of the Civil Code.

I believe, however, that the CIR need not establish that the cash advances extended by FDC to its affiliates were sourced from the loans obtained by FDC from commercial banks. The source of the cash advances is irrelevant. What the CIR is seeking to tax herein is the interest income FDC should have earned from the cash advances it extended to its affiliates; the theory being that FDC would have imposed and collected said interest had it been dealing at arms length with an uncontrolled company.

It is just as unnecessary for the CIR to present proof of actual or probable receipt by FDC of interest income from the cash advances it extended to its affiliates. Section 43 of the NIRC of 1993 should be appreciated as an exception to the general rules on income taxation as it addresses a very specific situation: controlled taxpayers dealing with each other not at arms length. To exercise his authority under said provision, it is already sufficient for the CIR to establish that the income reported by the controlled taxpayer from the transaction amongst themselves fall below the arms length standard; in which case, the CIR may already impute such arms length income on the transaction, and accordingly distribute, apportion, or allocate the same among the controlled taxpayers who participated in said transaction. To require the CIR to still submit proof of the actual or probable income received by the controlled taxpayers from the transaction, and limit the income which the CIR may distribute, apportion, or allocate to that which was thus proved, would not only severely limit the authority of the CIR under Section 43 of the NIRC of 1993, but would also render the arms length standard useless and superfluous.

Even more alarming is the statement in the majority opinion that for the CIR to exercise its authority to attribute interest income on the cash advances FDC extended to its affiliates under Section 43 of the NIRC of 1993, there must be an express stipulation in writing that such interest was due on the transaction in accordance with Article 1956 of the Civil Code. Section 43 of the NIRC of 1993 prevails over Article 1956 of the Civil Code. Lex specialis derogat generali. General legislation must give way to special legislation on the same subject, and generally is so interpreted as to embrace only cases in which the special provisions are not applicable. In other words, where two statutes are of equal theoretical application to a particular case, the one specially designed therefore should prevail.[6]

As for loans and advances among controlled taxpayers, tax evasion may be committed by (1) charging interest thereon but not at arms length rate; or (2) not charging any interest at all. Expectedly, in the latter case, there would be no express stipulation in writing that interest is due on the loans or advances. Are we saying that the CIR may impute arms length interest in the former case, but is totally powerless to impute any interest in the latter case? This will render the latter a completely effective means of tax evasion. Controlled taxpayers can just do away with any written stipulation of interest on the loans or advances altogether, and even when such absence of interest is contrary to the arms length standard, the CIR will be unable to exercise its authority under Section 43 of the NIRC of 1993.

I submit that the CIR cannot impute any interest income on the cash advances FDC extended to its affiliates for the simple reason that Revenue Memorandum Order (RMO) No. 63-99, which sets down the guidelines for the determination of taxable income on inter-company loans or advances, applying what is now Section 50 of the NIRC of 1997, was issued only on July 19, 1999. Pertinent provisions of RMO No. 63-99 reads:

2. Coverage:

This paper applies to all forms of bona fide indebtedness and includes:

2.1 Loans or advances of money or other consideration (whether or not evidence by a written instrument);

2.2 Indebtedness arising in the ordinary course of business out of sales, leases, or the rendition of services by or between members of the group, or any other similar extension;

2.3 But does not apply to alleged indebtedness which was in fact a contribution of capital or a distribution by a corporation with respect to its shares.

x x x x

4. Determination of Taxable Income on Inter-company Loans or Advances:

4.1 In general. Where one member of a group of controlled entities makes a loan or advances directly or indirectly, or otherwise becomes a creditor of another member of such group, and charges no interest, or charges interest at a rate which is not equal to an arms-length rate as defined in subparagraph (2) of this paragraph, the Commissioner may make appropriate allocations to reflect an arms length interest rate for the use of such loan or advance.

4.1.1 If payments are made to parties under common control according to a legally enforceable contract, the contract may still be recognized as valid. However, for purposes of determining the true taxable income of the parties involved, the interest rate charged may be subjected to reallocation.

4.1.2 Section 50 does not apply only to taxable entities. Reallocation may also apply to tax-exempt organizations.

4.2 Arms Length interest rate.

4.2.1 In general. For purposes of this Order, the arms length interest rate shall be the rate of interest which was charged or would have been charged at the time the indebtedness arose in independent transaction with or between unrelated parties under similar circumstances. All relevant factors will be considered, including the amount and duration of the loan, the security involved, the credit standing of the borrower, and the interest rate prevailing at the situs of the lender or creditor for comparable loans.

4.2.2 For purposes of determining the arms length rate in domestic transactions, the interest rate to be used is the Bank Reference Rate (BRR) prescribed by the Bangko Sentral ng Pilipinas (BSP).

4.2.3. The fact that the interest rate actually charged on a loan or advance is expressly indicated on a written instrument does not preclude the application of Section 50 to such loan or advance.

5. Interest Period

5.1 The interest period shall commence at the date the indebtedness arises, except that with respect to indebtedness arising in the ordinary course of business out of sales, leases, or supply of goods and services which are generally considered as trade accounts receivables or payables, the interest period shall not commence if the taxpayer is able to establish that the normal trade practice in a given industry is to allow balances, in the case of similar transactions with unrelated parties, to remain outstanding for a longer period without charging interest.

5.2 For purposes of determining the period of time for which a balance is outstanding, payments of credits shall be applied against the earliest balance outstanding. The taxpayer may, in accordance with an agreement, apply such payments or credits in some other order in its books only after establishing that the arrangement is customary for parties in that particular business.

FDC extended the cash advances to its affiliates in 1996 and 1997, when there was yet no clear regulation as to the tax treatment of loans and advances among controlled taxpayers that would have accordingly guided the concerned taxpayers and the Bureau of Internal Revenue (BIR) officials. RMO No. 63-99 cannot be applied retroactively to FDC and its affiliates as Section 246 of the NIRC of 1997 expressly proscribes the same, to wit:

SEC. 246. Non-Retroactivity of Rulings. Any revocation, modification, or reversal of any of the rules and regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayers, except in the following cases:

(a) where the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the Bureau of Internal Revenue;

(b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or

Finally, I join the majority opinion in classifying the instructional letters, journals, and cash vouchers evidencing the advances FDC extended to its affiliates as loan agreements, upon which documentary stamp taxes (DST) may be imposed. Regardless of whether or not the CIR may impute interest on the cash advances, there is no dispute that said advances were in the nature of loans, which were extended by FDC to its affiliates as financial assistance for the latters operational and capital expenditures, and which were repaid by the affiliates to FDC within the duration of one week to three months.

For the foregoing reasons, I join the majority in (1) dismissing for lack of merit the Petition of the CIR in G.R. No. 163653 and affirming the Decision dated December 16, 2003 of the Court of Appeals in CA-G.R. SP No. 72992; and (2) partially granting the Petition of the CIR in G.R. No. 167869 and affirming the Decision dated January 26, 2005 of the Court of Appeals in CA-G.R. SP No. 74510 with the modification that Assessment Notice Nos. SP-DST-96-00020-2000 and SP-DST-97-00021-2000 for deficiency DST on the instructional letters, journals, and cash vouchers, evidencing the cash advances FDC extended to its affiliates, are declared valid.

TERESITA J. LEONARDO-DE CASTRO

Associate Justice

[1] Section 34, Definitions (c) of the NIRC of 1993.

[2] Commissioner of Internal Revenue v. American Express International, Inc. (Philippine Branch), 500 Phil. 586, 608 (2005).

[3] Commissioner of Internal Revenue v. Court of Appeals, 361 Phil. 103, 120 (1999).

[5] Baas, Jr. v. Court of Appeals, 382 Phil. 144, 159 (2000).

[6] Roque, Jr. v. Commission on Elections, G.R. No. 188456, September 10, 2009, 599 SCRA 69, 196.