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SUMMARY OF SAN MIGUEL CORPORATION TAX CASE
Antecedent Facts
1) As per practice SMC made periodic deposits with the BIR before specific
and ad valorem taxes on beer products became actually due.
2) On April 9, 1986, SMC informed BIR that the deposits for specific and
ad valorem taxes for the period October 1, 1985 to January 31, 1986 were
computed based on volume of fermented beer removed and did not include
water used after the fermentation process unlike the previous method of
computation which was based on total volume bottled or canned (Exhibit
VIII for the Defense and Annex G of the Ombudsman's File). SMC informed
the BIR that because of the change in computation, SMC had incurred a
net short deposit in the amount of P141,100,000.00. On the basis of what
had been disclosed, SMC requested that it be allowed to pay the net short
deposit in four monthly installments without penalties and after application
of its excess deposit for ad valorem tax (See Exhibit "8").
This request was repeated in its May 5, 1986 letter (Exhibit "9").
3) On May 5, 1986, the BIR, through Commissioner Bienvenido A. Tan, Jr.,
granted SMC's request on condition that should the bureau's computation
of SMC's liability be different SMC would pay the difference (Exhibit
"10" and Annex G-1 of the Ombudsman File).
4) There followed an examination by Jesus Bundag, Senior Revenue Enforcement
Officer, supervised by Precilo Puno, Supervisor and Technical Assistant
to the Head Excise Tax Division, who recommended two sets of assessments
in the amounts of P250,872,959.12 and P212,698,934.18 (Exhibit "15").
5) Based on the twin recommendations of Puno, Aquilino Larin, head of
the Excise Tax Division Issued a Pre-Assessment Notice in the amount of
P255,378,174.01 (Exhibit "16").
6) SMC protested the assessment on June 9, 1987 (Exhibit "17").
7) The BIR, on July 13, 1987, assessed SMC the amounts of P33,817,613.21
and P308,798,604.00 as deficiency specific and ad valorem taxes respectively
(Exhibit "A").
8) The assessment was seasonably protested by SMC in a letter dated 10
August 1987 asserting that: (a) specific taxes have already been paid,
thus no balance remained unpaid to be charged of penalties and surcharges,
and (b) no deficiency in ad valorem taxes can be collected because the
SMC method of computing for the ad valorem taxes is the correct interpretation
of the law which excludes from the base amount the ad valorem tax to be
paid and the price differential (Exhibit "B").
9) On August 21, 1987, Jesus Bundag submitted his report on the protest
of SMC. In his report (Exhibit "12"), Bundag recommended that
the SMC assessment be revised to P302,051,048.93. This recommendation
was endorsed by Larin. Thus, on October 8, 1987, Commissioner Tan assessed
the amount of P302,051,048.93 (Exhibit "C").
10) On October 27, 1987, SMC requested that the assessment be referred
to the Legal Department for study. On the same date, Tan endorsed the
SMC matter to Atty. Maza of Legal for study (Exhibit "19").
11) On November 2, 1987, SMC again formally protested the assessment of
P302,051,048.93 (Exhibit "D").
12) The resulting studies by different offices of the Legal Department
- (Gatdula, Mansequiao) and Mr. Larin of the Excise Tax Division resulted
in a Memorandum dated June 1, 1988 (Exhibit V for the Defense) from Mrs.
Clemeno, Head of Research, Ruling and Legislative Division finding "the
specific tax assessment not warranted and the ad valorem tax assessment
unjust and unreasonable recommending an assessment of P21,805,409.11.
13) On August 31, 1988, SMC again sent a letter of protest but offered
the amount of P10,000,000.00 to close the case in a spirit of goodwill
and to avoid protracted litigation which will be costly to both parties.
In said letter, SMC stated that the offer should not be construed as an
admission of liability (Exhibit "E").
14) This offer was again the subject of internal study and discussion
resulting in the Memorandum of Mrs. Clemeno dated September 26, 1988 (Exhibit
IV for the Defense) wherein she maintained her same legal findings as
that stated in Exhibit V and recommending a compromise figure of P22,000,000.00.
15) On November 25, 1988, Larin sent a First Indorsement (Exhibit "20")
to Atty. Maza recommending assessment of P29,807,387.08 representing deficiency
ad valorem tax of P8,001,877.92 and specific tax of P21,805,409.11. Attached
to Larin's Indorsement was the computation of Bundag (Exhibit "20-C").
16) Then followed the Memorandum to the Commissioner dated December 20.1988
of Mr. Juanito Urbi, Chief Prosecution Division with the concurrence of
Atty. Maza, Assistant Commissioner, Legal Service recommending acceptance
of P10,000,000.00 offer of SMC on the ground that:
"the specific tax deficiency assessment was without legal basis"
and
"the ad valorem deficiency assessment suffered from a reasonable
doubt as to the correctness thereof insofar as a tax on a tax is concerned
and that the deduction by SMC of the price differential was in order."
17) Acting on the recommendation of Urbi and Maza, Commissioner Tan informed
SMC that the BIR was accepting the offer to pay P10,000,000.00 (Exhibit
"F").
18) The matter was investigated by the Office of the Ombudsman and in
the proper counter affidavits the five accused Avendano, de la Cruz of
SMC, Urbi, Maza and Tan of the BIR raised several issues. Most important
of which were:
prescription
lack of due process
authority of the Commissioner of Internal Revenue to compromise
validity of the BIR processes in this matter - i.e. no tax on tax, correct
price differential, payment of specific tax
19) In their sworn reply dated July 5, 1993 Agapito Rosales and Christopher
S. Soquilon of the FFIB alleged "manifestly a desperate attempt to
justify an illegal scheme", resorting to strange, convoluted interpretation
of Sec. 124", and, "the records are replete with sufficient
evidences to show the malfeasance and conspiracy in this case", recommended
the filing of the corresponding information against Tan, Urbi, Maza, Avendano
and De la Cruz.
20) On September 1, 1993 Agapito Rosales and Christopher Soquilon declared
under oath: "We believe that Clemeno was not a party to such conspiracy."
21) In a resolution dated November 26, 1993, Jose S. Santos as Chair and
Virgilio Gongon and Christopher Garvida as members of the Bureau concluded
on page 5 "that all the respondents participated in the orchestration
of said anomalous compromise" and on page 12 "the surrounding
facts in this case are clear and undebateable".
22) The case was then filed with the Sandiganbayan and after arraignment
where all accused pleaded not guilty.
23) On January 31, 1995 (Exhibit I for the Defense), Robert F. Kallos,
in an order dated January 31, 1995 approved by Jose D. Ferrer and Aniano
A. Desierto ruled that the recommendation of Urbi and Maza to the Commissioner
of Internal Revenue was the result of their study as was that of Millard
M. Mansequiao (who had prepared the Clemeno opinion) which Clemeno adopted.
24) On February 24, 1995, Aniano Desierto acting for the Ombudsman (Exhibit
II for the Defense) concluded that Maza and Urbi made their conclusions
after study (Exhibit II-A for the Defense). That there was no connivance
between Tan and his subordinates (Exhibit II-B) and that there was no
conspiracy (Exhibit II-C for the Defense). On this basis the Special Prosecutor
recommended dismissal of the cases against Maza, Urbi, Avendano and De
la Cruz.
25) On July 31, 1995 on the basis of the two above documents, Robert Kallos,
Special Prosecutor Officer III moved to drop / exclude Juanito Urbi, Jaime
Maza, Nazario Avendano and Jaime De la Cruz from the information.
26) This was approved by Aniano A. Desierto, Special Prosecutor.
27) Acting on the Motion of Mr. Kallos dated July 31, 1995, the same dropped
Jaime Maza, Juanito Urbi, Nazario Avendano and Jaime De la Cruz from the
information and left the present accused to stand alone to answer the
charge that was originally filed.
28) The BIR process took 32 months to finish.
29) There was a finding by the Office of the Ombudsman that there was
no conspiracy and no bribery, financial interest or benefit.
30) The guilt of the accused must therefore be based on a finding of bad
faith and manifest partiality.
31) This case was brought up before the Blue Ribbon Committee of the Senate
after Tan had left the BIR and Jose Ong was the incumbent Commissioner
of the BIR.
32) In a letter to the Blue Ribbon Committee dated May 8, 1989 (Exhibit
4) Mr. Ong stated:
"The subsequent application thereof to the instant deficiency ad
valorem tax assessment is therefore unwarranted, arbitrary and unfair.
Accordingly, the abatement of the deficiency specific tax assessment of
P33,817,615.21 being without legal basis, is proper." (Exhibit 4-B)
33) Re the ad valorem tax Mr. Ong opined in favor of the imposition of
the said tax at the brewery paid before removal as in this case and computation
of the tax without including the said tax in the tax base --, i.e. one
does not tax a tax.
"The exclusion of ad valorem tax itself from the tax base for purposes
of computing the ad valorem tax is predicated upon the ground that the
law does not favor a tax on a tax, which would otherwise be the result.
Precisely, in order to avoid the pyramiding of the tax, such exclusion
is now expressly provided in Executive Orders Nos. 22 and 273, the clear
intent being to obviate a tax being subjected to another tax." (Exhibit
4, page 3)
34) Ong had nothing to gain in making these conclusions. He was not involved
in the case.
The decision raises several issues:
1) The tax assessment of P302,051,048.93 was not a final decision of the
Bureau that was compromised. It was a disputed assessment as defined in
the Villa case, properly protested and still subject to reinvestigation
and study.
That it was a matter of study and reinvestigation is shown by the different
opinions and figure of various BIR officials to wit:
Puno December 8, 1986 P250,872,959.12 )
P217,698,934.18 ) two alternative assessments
Larin May 29, 1987 P255,378,174.01
Larin October 8, 1987 P320,730,709.11
Bundag August 21, 1987 P302,051,042.50
Clemeno June 1, 1988 P21,856,925.29
Clemeno September 29, 1988 P22,000,000.00
Larin November 25, 1988 P29,807,387.08
Urbi December 20, 1988 P10,000,000.00
Ong May 8, 1989 P10,000,000.00 letter to the Blue Ribbon Committee
It is fair to ask then why was the lowest figure decided upon.
Because of the finding by Clemeno, Urbi and Maza that there was full payment
of the specific tax and that the ad valorem tax assessment was unjust
and unreasonable and therefore suffered from reasonable doubt.
2) The referral by Tan of the matter to Maza and other officers for study
was because of the protest and request of SMC and even without such request
as part of his duty as Commissioner of Internal Revenue to collect the
correct tax.
3) If the Ombudsman found and the Sandiganbayan approved that there was:
(1) no conspiracy
(2) no bribery or material benefit
(3) that the action of Clemeno, Urbi and Maza was a result of their study
of the case and in the exercise of their proper functions and therefore
Clemeno and therefore Clemeno was never included in the information and
Maza and Urbi dropped from the case why did the approval of a legal study
and conclusion become criminal?
4) Who had the authority to decide on tax matters? The BIR or the Ombudsman
and Sandiganbayan? Obviously the BIR under law and practice.
There is an exception of bad faith and manifest partiality to the discretion
rule which was not present in this case because of the long studies at
the BIR which the Ombudsman itself admits were the basis for the conclusions
and recommendations to the Commissioner of Internal Revenue.
It was not even Maza or Urbi who prepared the final recommendation but
Millard Mansequiao of the Law Division of the BIR who studied the legal
implications of the case recommended the same to Clemeno and then on to
Urbi and Maza and then Tan.
Can we tax a tax?
The Sandiganbayan found this argument invalid because Executive Order
No. 273 was issued on January 1, 1988 and this case started on July 22,
1994.
Executive Order No. 273 is but a culmination and expression of a long
standing BIR practice since:
1922 - Revenue Regulation No. 27
1939 - General Circular Nos. 431 and 440
1966 - Supreme Court
1978 - Ruling dated July 27, 1978
plus the agreement between SMC and Deputy Commissioner Toledo and Atty.
Floresa, the Head of Legal that computing the tax net of ad valorem tax
is correct.
We are filing a Motion for Reconsideration based on mistakes we feel the
Sandiganbayan made and hope that this will succeed in overturning the
conviction.
If it does not we will go to the Supreme Court by certiorari.
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