TAXATION 2 1

Tax Remedies – Issuance of Letter of Authority (Sec. 13 in rel. to Sec. 6(A), NIRC)

CIR v. SONY PHILIPPINES, INC.

Plaintiff-Appellant: COMMISSIONER OF INTERNAL REVENUE

Doctrine: There must be a grant of authority before any revenue officer can conduct an examination or
assessment. Equally important is that the revenue officer so authorized must not go beyond the authority
given. In the absence of such an authority, the assessment or examination is a nullity.

CASE SUMMARY
Trigger Word(s): Letter of Authority na may "unverified prior years" bawal
FACTS: CIR issued Letter of Authority 19734 authorizing certain revenue officers to examine Sony's
books of accounts and other accounting records regarding revenue taxes for "the period 1997 and
unverified prior years." CIR then imposed deficiency VAT of P11M+ on Sony PH, which the latter
protested. The imposition was based on records from January to March 1998 or using the fiscal year
which ended on March 31, 1998. Sony PH also filed a petition for review with the CTA. The CTA Division
cancelled the deficiency VAT assessment. CTA En Banc affirmed. In its petition for review before the SC,
CIR insists that LOA 19734, although it states "the period 1997 and unverified prior years," should be
understood to mean the fiscal year ending in March 31, 1998.

ISSUE: W/N the LOA was void and therefore the deficiency VAT assessment was correctly
cancelled – YES

HELD: Based on Secs. 6 and 13 of the Tax Code (See Doctrine). Further,Sec. C of Revenue
Memorandum Order No. 43-90 provides that: A Letter of Authority should cover a taxable period not
exceeding one taxable year. The practice of issuing L/As covering audit of "unverified prior years is
hereby prohibited. If the audit of a taxpayer shall include more than one taxable period, the other
periods or years shall be specifically indicated in the L/A.

IN THIS CASE, the LOA covered "the period 1997 and unverified prior years". Thus, CIR through its
revenue officers went beyond the scope of their authority because the deficiency VAT assessment they
arrived at was based on records from January to March 1998 or using the fiscal year which ended on
March 31, 1998. If CIR wanted the investigation to include 1998, it should have included it in the LOA or
issued another LOA. The subject LOA also violated Revenue Memorandum Order No. 43-90. On this
alone, the deficiency VAT assessment should have been disallowed.

FACTS
● On November 24, 1998, CIR issued Letter of Authority (LOA 19734) authorizing certain revenue
officers to examine Sony's books of accounts and other accounting records regarding revenue
taxes for "the period 1997 and unverified prior years." 
● Thereafter, a preliminary assessment for 1997 deficiency taxes and penalties was issued by the
CIR which Sony protested. CIR then issued a final assessment of notices, imposing the following
deficiency taxes and penalties:
○ Deficiency VAT: P 11,141,014.41
○ Deficiency Expanded Withholding Tax (EWT): P 1,992,462.72
○ Deficiency of VAT on Royalty Payments
■ Penalties Due: P 462,758.14
○ Late Remittance of Final Withholding Tax
■ Penalties Due: P 2,288,473.78
○ Late Remittance of Income Payments
■ Penalties Due: P 10,923.60
○ Grand Total: P 15,895,632.65
● Sony then sought for re-evaluation assessment by filing a protests on February 2, 2000. Sony
submitted relevant supporting documents for the same on February 16.

Orjalo | A2022
May 2, 2021
TAXATION 2 2
Tax Remedies – Issuance of Letter of Authority (Sec. 13 in rel. to Sec. 6(A), NIRC)

● Within 30 days after the lapse of 180 days from submission of the supporting documents, Sony
filed a petition for review before the CTA.
● CTA-First Division in sum partly granted Sony’s petition by cancelling the deficiency VAT
assessment but upheld a modified deficiency EWT assessment as well as the penalties. CTA
Division denied CIR's MR.
● CTA En Banc also denied CIR's petition for review.
● CIR is now before the SC and raised the following in its petition for review:
○ CTA-EB erred in ruling that Sony is not liable for deficiency VAT
○ RE: EWT –
■ CTA erred in ruling that the commission expense in the amount of P2,894,797
should be subjected to a withholding tax of 5% (instead of 10%)
■ CTA erred in ruling that the assessment with respect to the 5% withholding tax
on rental deposit is not proper
○ CTA erred in ruling that the FWT on royalties covering the period January to March 1998
was filed on time
○ CTA insists that LOA 19734, although it states "the period 1997 and unverified
prior years," should be understood to mean the fiscal year ending in March 31,
1998.

ISSUES + HELD
ISSUE #1: W/N LOA 19734 was void – YES
 Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the authority given to the
appropriate revenue officer assigned to perform assessment functions. It empowers or enables
said revenue officer to examine the books of account and other accounting records of a taxpayer
for the purpose of collecting the correct amount of tax.
 Sec. 6 of the Tax Code provides:
o (A)Examination of Returns and Determination of tax Due. – After a return has been filed
as required under the provisions of this Code, the Commissioner or his duly authorized
representative may authorize the examination of any taxpayer and the assessment of the
correct amount of tax: Provided, however, That failure to file a return shall not prevent the
Commissioner from authorizing the examination of any taxpayer. x x x

 Clearly, there must be a grant of authority before any revenue officer can conduct an
examination or assessment. Equally important is that the revenue officer so authorized must
not go beyond the authority given. In the absence of such an authority, the assessment or
examination is a nullity.

 Sec. C of Revenue Memorandum Order No. 43-90 provides that:

o A Letter of Authority should cover a taxable period not exceeding one taxable year. The
practice of issuing L/As covering audit of "unverified prior years is hereby
prohibited. If the audit of a taxpayer shall include more than one taxable period, the
other periods or years shall be specifically indicated in the L/A.

 IN THIS CASE, the LOA covered "the period 1997 and unverified prior years".
o Thus, CIR through its revenue officers went beyond the scope of their authority because
the deficiency VAT assessment they arrived at was based on records from January to
March 1998 or using the fiscal year which ended on March 31, 1998.
 If CIR wanted the investigation to include 1998, it should have included it in the
LOA or issued another LOA.
o The subject LOA also violated Revenue Memorandum Order No. 43-90.
o On this alone, the deficiency VAT assessment should have been disallowed.

OTHER ISSUES:

Orjalo | A2022
May 2, 2021
TAXATION 2 3
Tax Remedies – Issuance of Letter of Authority (Sec. 13 in rel. to Sec. 6(A), NIRC)

ISSUE #2: W/N Sony's advertising expense could not be considered as an input VAT credit because the same
was eventually reimbursed by Sony International Singapore (SIS) – NO, it could still be considered as an
input VAT credit
 Sony’s deficiency VAT assessment stemmed from the CIR’s disallowance of the input VAT credits that
should have been realized from the advertising expense of the latter. It is evident under Section 110 of the
1997 Tax Code that an advertising expense duly covered by a VAT invoice is a legitimate business
expense.
o There is no denying that Sony incurred advertising expense. Where the money came from is
another matter all together but will definitely not change said fact.
ISSUE #3: W/N reimbursement from SIS was income for Sony PH, thus taxable – YES, but it is not subject to
10% VAT
 Sony itself admitted that the reimbursement from SIS was income when in tis protest before the CIR it said
that: "The fact that due to adverse economic conditions, Sony-Singapore has granted to our client a subsidy
equivalent to the latter’s advertising expenses will not affect the validity of the input taxes from such
expenses. Thus, at the most, this is an additional income of our client subject to income tax."
 However, the Court does not agree that the same subsidy should be subject to the 10% VAT. To begin with,
the said subsidy termed by the CIR as reimbursement was not even exclusively earmarked for Sony’s
advertising expense for it was but an assistance or aid in view of Sony’s dire or adverse economic
conditions, and was only "equivalent to the latter’s (Sony’s) advertising expenses."

 There must be a sale, barter or exchange of goods or properties before any VAT may be levied (Sec. 106).
Certainly, there was no such sale, barter or exchange in the subsidy given by SIS to Sony. It was but a dole
out by SIS and not in payment for goods or properties sold, bartered or exchanged by Sony.

 CIR v. CA: Services rendered for a fee even on reimbursement-on-cost basis only and without realizing
profit are also subject to VAT.
o However, this does not apply in this case. Sony did not render any service to SIS at all. The
services rendered by the advertising companies, paid for by Sony using SIS dole-out, were for
Sony and not SIS. SIS just gave assistance to Sony in the amount equivalent to the latter’s
advertising expense but never received any goods, properties or service from Sony.
ISSUE #4: W/N deficiency EWT assessment is subject to 10% rate instead of 5% - NO
 CIR based its argument on RR No. 2-98 dated April 17, 1998. CTA-Division (affirmed by the CTA-EB)
however based its ruling on Sec. 1(g) of RR No. 6-85.

 The Court agrees with the CTA-EB when it affirmed the CTA-First Division decision. Indeed, the applicable
rule is Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, which was the
applicable rule during the subject period of examination and assessment as specified in the LOA. Revenue
Regulations No. 2-98, cited by the CIR, was only adopted in April 1998 and, therefore, cannot be applied in
the present case. Besides, the withholding tax on brokers and agents was only increased to 10% much later
or by the end of July 2001 under Revenue Regulations No. 6-2001. Until then, the rate was only 5%.

ISSUE #5: On deficiency EWT assessment on the rental deposit:

ISSUE #6: W/N the FWT on royalties covering the period January to March 1998 was filed on time
 The CIR insists that under Section 3 of Revenue Regulations No. 5-82 and Sections 2.57.4 and 2.58(A)(2)
(a) of Revenue Regulations No. 2-98, Sony should also be made liable for the FWT on royalties from
January to March of 1998.

 The above revenue regulations provide the manner of withholding remittance as well as the payment of final
tax on royalty. Based on the same, Sony is required to deduct and withhold final taxes on royalty payments
when the royalty is paid or is payable. After which, the corresponding return and remittance must be made
within 10 days after the end of each month. The question now is when does the royalty become payable?

 Under Article X(5) of the MLA between Sony and Sony-Japan, Sony was to pay Sony-Japan royalty within
two (2) months after every semi-annual period which ends in June 30 and December 31.

Orjalo | A2022
May 2, 2021
TAXATION 2 4
Tax Remedies – Issuance of Letter of Authority (Sec. 13 in rel. to Sec. 6(A), NIRC)

o However, the CTA-First Division found that there was accrual of royalty by the end of December
1997 as well as by the end of June 1998. Given this, the FWTs should have been paid or remitted
by Sony to the CIR on January 10, 1998 and July 10, 1998.

 Thus, it was correct for the CTA-First Division and the CTA-EB in ruling that the FWT for the royalty from
January to March 1998 was seasonably filed. Although the royalty from January to March 1998 was well
within the semi-annual period ending June 30, which meant that the royalty may be payable until August
1998 pursuant to the MLA, the FWT for said royalty had to be paid on or before July 10, 1998 or 10 days
from its accrual at the end of June 1998. Thus, when Sony remitted the same on July 8, 1998, it was not yet
late.

RULING: Petition denied. Letter of Authority 19734 void.

Orjalo | A2022
May 2, 2021