Saturday, April 19, 2008 SC upholds collection of unpaid taxes from mining firm
THE Supreme Court (SC) has ordered Philex Mining Corp. to pay government P226 million in tax deficiencies out of a poor investment project undertaken in Benguet Province in 1971.
Philex originally owed the Bureau of Internal Revenue (BIR) P62.8 million, which accrued a 20-percent delinquency interest computed from February 10, 1995 after it backed out of its partnership with Baguio Gold Mining Corp. to manage and operate the firm's mining claim, known as Sto. Nino mine, in the towns of Atok and Tublay in the province.
In a decision penned by Associate Justice Consuelo Ynares-Santiago, the SC Third Division affirmed the decision of the Court of Appeals (CA) and Court of Tax Appeals (CTA) giving the BIR the go-signal to collect the sum of money from Philex.
The SC rejected petitioner Philex's assertion that the advances it made were in the nature of a loan because petitioner's investment for the development and exploitation of the Sto. Nino mine was actually a partnership agreement.
"Since the advanced amount partook of the nature of an investment, it could not be deducted as a bad debt from petitioner's gross income," the court ruled.
The high court said the CA and CTA correctly held that the "Power of Attorney" is the instrument that is material in determining the true nature of the business relationship between petitioner and Baguio Gold.
"Perusal of the agreement denominated as the 'Power of Attorney' indicates that the parties had intended to create a partnership and establish a common fund for the purpose. They also had a joint interest in the profits of the business as shown by a 50-50 sharing in the income of the mine," the court said.
Under a contract of partnership, two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves.
The SC also noted that there is a substantive equivalence in the respective contributions of the parties to the development and operation of the mine.
"The strongest indication that petitioner was a partner in the Sto. Nino mine is the fact that it would receive 50 percent of the net profits as 'compensation' under paragraph 12 of the agreement. The entirety of the parties' contractual stipulations simply leads to no other conclusion than that petitioner's 'compensation' is actually its share in the income of the joint venture," said the court.
Citing Article 1769 (4) of the Civil Code, the SC states that the "receipt by a person of a share in the profits of a business is prima facie evidence that he is a partner in the business."
Case records showed Philex entered into an agreement with Baguio Gold Mining Company.
Under the agreement, Baguio Gold shall make available to Philex up to P11 million within three years, in such amounts as may be required from time to time by Philex for use in the management of the Sto. Nino Mine.
The amount of P11 million shall be deemed, for internal audit purposes, as the owner's account in the Sto. Nino project, and any part of any income of Bagio Gold from the mine, which is left with the project, shall be added to such owner's account.
The agreement further stated that whenever Philex shall deem it necessary and convenient in connection with the management of the Sto. Nino Mine, it may transfer its own funds or property to the Sto. Nino project, subject to the following arrangements:
In the course of managing and operating the project, Philex made advances of cash and property. However, the mine suffered continuing losses over the years resulting in the petitioner's withdrawal as manager of the mine on January 28, 1982 and in the eventual cessation of mine operations on February 20, 1982.
Thereafter, on September 27, 1982, the parties executed a "Compromise with Dation en Pago," wherein Baguio Gold admitted an indebtedness to petitioner in the amount of P179 million and agreed to pay the same in three segments by first assigning Baguio Gold's tangible assets to petitioner, transferring to Baguio Gold's equitable title in its Philodrill assets, and finally settling the remaining liability through properties that Baguio Gold may acquire in the future.
On December 31, 1982, the parties executed an "Amendment to Compromise with Dation in Payment" where the parties determined that Baguio Gold's indebtedness to petitioner actually amounted to P259 million, which sum included liabilities of Baguio Gold to other creditors that petitioner had assumed as guarantor.
These liabilities pertained to long-term loans amounting to US$11 million contracted by Baguio Gold from the Bank of America NT & SA and Citibank N.A.
This time, Baguio Gold undertook to pay petitioner in two segments by first assigning its tangible assets for P127 million and then transferring its equitable title in its Philodrill assets for P16 million. The parties then ascertained that Baguio Gold had a remaining outstanding indebtedness to petitioner in the amount of P115 million.
Subsequently, petitioner wrote off in its 1982 books of account the remaining outstanding indebtedness of Baguio Gold by charging P112 million to allowances and reserves that were set up in 1981 and P2.8 million to the 1982 operations.
In its 1982 annual income tax return, petitioner deducted from its gross income the amount of P112 million as "loss on settlement of receivables from Baguio Gold against reserves and allowances."
However, the BIR disallowed the amount as deduction for bad debt and assessed petitioner a deficiency income tax of P62.8 million.
Petitioner protested before the BIR arguing that the deduction must be allowed since all requisites for a bad debt deduction were satisfied, such that there was a valid and existing debt; that the debt was ascertained to be worthless; and that it was charged off within the taxable year when it was determined to be worthless.
Philex said the debt arose out of a valid management contract it entered into with Baguio Gold.
The bad debt deduction represented advances made by petitioner that, pursuant to the management contract, formed part of Baguio Gold's "pecuniary obligations" to petitioner.
It also included payments made by petitioner as guarantor of Baguio Gold's long-term loans, which legally entitled petitioner to be subrogated to the rights of the original creditor.
Petitioner also asserted that due to Baguio Gold's irreversible losses, it became evident that it would not be able to recover the advances and payments it had made in behalf of Baguio Gold.
For a debt to be considered worthless, petitioner claimed that it was neither required to institute a judicial action for collection against the debtor nor to sell or dispose of collateral assets in satisfaction of the debt. It is enough that a taxpayer exerted diligent efforts to enforce collection and exhausted all reasonable means to collect.
On October 28, 1994, the BIR denied petitioner's protest for lack of legal and factual basis. It held that the alleged debt was not ascertained to be worthless since Baguio Gold still exists and had not filed a petition for bankruptcy; and that the deduction did not consist of a valid and subsisting debt considering that, under the management contract, petitioner was to be paid 50 percent of the project's net profit.
This prompted petitioner to file a case with the CTA, the appellate court, and eventually with the SC. (ECV/Sunnex)
