CTA denies BIR appeal over Fortune Tobacco’s P2.6-B case

THE Court of Tax Appeals (CTA) denied the Bureau of Internal Revenue’s (BIR) appeal to set aside an earlier ruling that cancelled a P2.6-billion tax deficiency assessment against Fortune Tobacco Corp. (FTC).
In a Nov. 14 resolution, the CTA Special First Division affirmed the earlier decision of the First Division to cancel the BIR’s P2.6 billion deficiency tax assessment against Fortune Tobacco arising from “improperly accumulated earning tax” (IAET) in 2009, as well as review the case.
The resolution, penned by Associate Justice Cielito N. Mindaro-Grulla, dismissed the BIR’s motion for reconsideration due to lack of merit.
The BIR had argued the FTC should not be allowed to file an appeal on the final decision on the tax assessment because the company had presented a new argument — the existence of a syndicated loan agreement — before the court to justify its tax exemption that was not raised during the administrative level claims.
“Even on the assumption that the syndicated loan agreement was not presented before the administrative level… the Court En Banc ruled that the failure to submit documents in support of the taxpayer’s administrative claim is not fatal to the judicial claim, as judicial claims are litigated de novo and decided based on what has been presented and formally offered by parties during the trial,” the CTA said.
According to the Tax Code, corporations are subject to IAET if “for the purpose of avoiding the income tax with respect to its shareholders” by allowing the earnings and profits to accumulate instead of being divided or distributed.
In its Aug. 15 decision, the CTA cancelled the alleged tax deficiency of FTC, despite not being included among those exempted from IAET under the Tax Code, as the corporation proved “reasonable needs” to accumulate its earnings due to the Syndicated Loan Agreement it entered with seven local banks.
In the loan agreement, FTC is required to maintain a certain financial ratio while paying P20-billion loan in five years.
“Thus, if the failure to pay dividends is due to some other causes, such as the use of undistributed earnings and profits for the reasonable needs of the business, particularly compliance with the covenants of the syndicated loan agreement in this case, such purpose would not generally make the accumulated or undistributed earnings subject to the tax,” the CTA said.
In its motion for reconsideration, the BIR contended that FTC accumulated P14.3 billion that gave the impression it did not need to observe the required financial ratios.
However, the CTA said that the appropriation was “merely ‘for standby capital’ and ‘to enable the Corporation to pursue its anticipated investments.’” — V.M. N. Villegas