CIR vs FILINVEST

FACTS: the owner of 80% of the outstanding shares of (FAI), FDC is owns 67.42% of the
outstanding shares of (FI). !n 2" #o$e%&er '""6, FDC and FAI entered into a Deed of
()*hange with FI where&+ the for%er &oth transferred in fa$or of the ,atter -ar*e,s of ,and
in e)*hange for shares of sto*. of FI.
/
As a resu,t of the e)*hange, FI0s ownershi-
stru*ture was *hanged to the e)tent that FDC0s ownershi- was redu*ed to 6'.0/%, and
FAI0s ownershi- was raised to "."6%. !n '/ 1anuar+ '""7, FI re2uested a ru,ing fro% t
(3I4) to the effe*t that no gain or ,oss shou,d &e re*ogni5ed in the aforesaid transfer of rea,
-ro-erties. A*ting on the re2uest, the 3I4 issued a 4u,ing finding that the e)*hange is
a%ong those *onte%-,ated under 6e*tion /4 (*) (2) of the o,d Code (#I4C) whi*h -ro$ides
that no ta)a&,e gain shou,d ha$e &een assessed fro% the su&7e*t Deed of ()*hange sin*e
FDC and FAI *o,,e*ti$e,+ gained further *ontro, of FI as a *onse2uen*e of the e)*hange.
!n $arious dates during the +ears '""6 and '""7 FDC a,so e)tended ad$an*es in fa$or of
its affi,iates, na%e,+, FAI, FI, D6CC and. FCI as e$iden*ed &+ instru*tiona, ,etters as we,,
as *ash and 7ourna, $ou*hers
!n / 1anuar+ 2000, FDC re*ei$ed fro% the 3I4 a For%a, #oti*e of De%and to -a+
defi*ien*+ in*o%e and do*u%entar+ sta%- ta)es. 8he defi*ien*+ ta)es were assessed on
the ta)a&,e gain su--osed,+ rea,i5ed &+ FDC fro% the Deed of ()*hange it e)e*uted with
FAI and FI, on the di,ution resu,ting fro% the 6hareho,ders0 Agree%ent FDC e)e*uted with
49: as we,, as the ;ar%0s<,ength; interest rate and do*u%entar+ sta%- ta)es i%-osa&,e on
the ad$an*es FDC e)tended to its affi,iates.In $iew of the fai,ure of (CI4) to reso,$e their
re2uest for re*onsideration=-rotest within the '80 da+ -eriod, FDC and FAI fi,ed on '7
!*to&er 2000 a -etition for re$iew with the C8A, the -etition a,,eged, a%ong other %atters,
that as -re$ious,+ o-ined in 3I4 4u,ing. !n 4 De*e%&er 2000, the CI4 fi,ed its answer,
*,ai%ing that the transfer of -ro-ert+ in 2uestion shou,d not &e *onsidered ta) free sin*e,
with the resu,tant di%inution of its shares in FI, FDC did not gain further *ontro, of said
*or-oration.
the C8A went on to render the De*ision dated '0 6e-te%&er 2002 whi*h, with the e)*e-tion
of the defi*ien*+ in*o%e ta) on the interest in*o%e FDC su--osed,+ rea,i5ed fro% the
ad$an*es it e)tended in fa$or of its affi,iates, *an*e,,ed the rest of defi*ien*+ in*o%e and
do*u%entar+ sta%- ta)es assessed against FDC and FAI for the +ears '""6 and '""7. 8he
CA affir%ed the C8A0s de*ision.
ISSUE:
'. Whether or not respondent is liable for the deficiency income tax on the interest
income FDC supposedly realized from the advances it extended in favor of its
affiliates.
2. Whether or not respondent is liable for the deficiency income tax on ta)a&,e gain
su--osed,+ rea,i5ed &+ FDC fro% the Deed of ()*hange it e)e*uted with FAI and FI
RULING:
'. #!. ($en if we were, therefore, to a**ord -re*i-itate *redu,it+ to the CI4>s &are
assertion that FDC had dedu*ted su&stantia, interest e)-ense fro% its gross in*o%e,
there wou,d sti,, &e no fa*tua, &asis for the i%-utation of theoreti*a, interests on the
su&7e*t ad$an*es and assess defi*ien*+ in*o%e ta)es thereon. ?ore so, when it is
&orne in %ind that, -ursuant to Arti*,e '"@6 of the Ci$i, Code of the :hi,i--ines, no
interest sha,, &e due un,ess it has &een e)-ress,+ sti-u,ated in writing. ?oreo$er,
said inter<offi*e %e%o e$iden*ing the ,endings or &orrowings whi*h is neither a for%
of -ro%issor+ note nor a *ertifi*ate of inde&tedness issued &+ the *or-oration<affi,iate
or a *ertifi*ate of o&,igation, whi*h are, %ore or ,ess, *ategori5ed as >se*urities>, is
not su&7e*t to do*u%entar+ sta%- ta) 4ather, the inter<offi*e %e%o is &eing
-re-ared for a**ounting -ur-oses on,+ in order to a$oid the *o<%ing,ing of funds of
the *or-orate affi,iates
2. #!. 8he -au*it+ of %erit in the CI4>s -osition is, howe$er, e$ident fro% the
*ategori*a, ,anguage of 6e*tion /4 (*) (2) of the '""/ #I4C whi*h -ro$ides that gain
or ,oss wi,, not &e re*ogni5ed in *ase the e)*hange of -ro-ert+ for sto*.s resu,ts in
the *ontro, of the transferee &+ the transferor, a,one or with other transferors not
e)*eeding four -ersons. 6in*e the ter% ;*ontro,; is *,ear,+ defined as ;ownershi- of
sto*.s in a *or-oration -ossessing at ,east fift+<one -er*ent of the tota, $oting -ower
of *,asses of sto*.s entit,ed to one $ote; under 6e*tion /4 (*) (6) A*B of the '""/
#I4C, the e)*hange of -ro-ert+ for sto*.s &etween FDC FAI and FI *,ear,+ 2ua,if+
as a ta)<free transa*tion under -aragra-h /4 (*) (2) of the sa%e -ro$ision.