Philippines vs Belle Corporation, October 2006, Tax Court, CTA CASE No. 6156

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In this case, the tax authorities had issued an assessment to Belle Corporation pursuant to Section 43 (now Section 50) of the National Internal Revenue Code.

The tax authorities alleges that Belle’s granting of advances to its affiliates is tantamount to granting loan or credit which is subject to DST under Section 180 of the Tax Code. Furthermore, the CIR argues that the letters of instruction and cash vouchers, which are written documents to advance money from one company to another, are loan transactions by their very nature even though they do not strictly conform to the supposed documentation of a loan. The advances covered by inter-office memo made by BELLE to its affiliates should be treated as loans extended to the latter, and the inter-office memo is in the nature of a promissory note within the purview of Section 180 of the Tax Code.

Judgement of the Tax Court

The Court decided predominantly in favour of the tax authorities.

Excerpts from the case:

In the instant case, the subject transaction from which deficiency income tax was assessed involves cash advances made by BELLE to its affiliates/subsidiaries. Examination of the records would show that BELLE, using its own credit line, borrows money from banks, and subsequently advances the same to its affiliates/subsidiaries without charging any interest. For the foregoing “dubious” transaction, CIR imputed BELLE an “imaginary” interest income for the advances extended by the latter to its subsidiaries. As a result thereof, BELLE was assessed deficiency income tax for the undeclared “imaginary” interest income, which the CIR previously imputed. Section 43 empowers the CIR to rectify abnormalities and distortions in income brought about by common control through the adoption of standards considered fair, reasonable or at arm’s length. Admittedly the purpose of the law is to place a controlled taxpayer on tax parity with an uncontrolled taxpayer by determining, according to the standard of an uncontrolled taxpayer, the true net income from the property and business of a controlled taxpayer. If this has not been done then the taxable net income are hereby understated, the statute grants the CIR authority to intervene by making distributions, apportionments or allocations of gross income among the controlled taxpayers to determine the true net income of each controlled taxpayer (Section 179[b], Revenue Regulations No.2).

After considering the evidence, testimonial as well as documentary, the Court En Bane cannot allow BELLE to claim the entire advances as exempt from the coverage of RMO 63-99. Instead, We rule to reduce the same, by the aggregate amount of P 106,321,219.19. This amount represents the unsubstantiated portion, which the CIR could validly impute interest income in applying RMO 63-99. Although the total unsubstantiated advances was P 1,663,002,793.32, We cannot declare the whole amount as being covered under RMO 63-99 since not all of the unsubstantiated advances were subjects of the assessment notice (Exhibits “7Tr’ to “TTT-c” vis-a-vis BIR Records No. 1009 to 1016), to wit:

The foregoing advances are subject to a 16.2% interest, which is the prevailing rate per annum in 1997 using 365 days as time basis. Thus, the aggregate ” undeclared” interest income of BELLE for the aforesaid unsubstantiated advances amounts to P 5,485,066.44.


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