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GR Nos. 163653 and 167689 dated July 19, 2011

GR Nos. 163653 and 167689 dated July 195 2011 Interest-free cash advances to affiliates 


►  In 1996 and 1997, respondent Filinvest Development Corporation (FDC) extended interest-free cash advances to its affiliates. The advances were evidenced by instructional letters as well as cash and journal vouchers.
►  Petitioner CIR assessed FDC for, among others, deficiency income tax on interest imputed on the said cash advances pursuant to Section 43 (now 50) of the Tax Code, as well as documentary stamp tax (DST) on loans imposed under Section 180 (now 179) of the Tax Code. FDC protested the deficiency tax assessments.
►  As the CIR failed to resolve the protest within the prescribed period, FDC filed a Petition for Review with the CTA. FDC argued that the CIR lacks the authority to impute theoretical interest on the cash advances, and that interest cannot be demanded in the absence of a stipulation in writing. The CTA upheld the income tax assessment on the imputed interest, explaining that the CIR was justified in assessing undeclared interest on the cash advances    3 \ to forestall tax evasion.      

Facts (cont'd):
*■   Both the CIR and FDC appealed the CTA decision to the CA. The CA dismissed the CIR's appeal but granted FDC's petition and cancelled the income tax assessment against FDC. The CIR appealed to the Supreme Court.
*■   Can CIR impute 'theoretical interest1 on FDC's interest-free cash advances to affiliates?
»■    No. The CIR has no authority to impute theoretical interest on FDC's cash advances to its affiliates absence of proof that interest was paid or was agreed upon in writing.

►•   While the CIR may distribute, apportion or allocate gross income and deductions between or among controlled taxpayers, Section 43 of the Tax Code in relation to Section 179 of RR No. 2 does not authorize the CIR to impute theoretical interest on such transactions

Ruling (cont'd):

►   There must be a proof of the actual or, at the very least, probable receipt or realization by the controlled taxpayer of the item of gross income sought to be distributed, apportioned or allocated by the CIR. The term 'gross income' understood to mean all income from whatever source derived. While it has been held that the phrase from whatever source derived' indicates a legislative policy to include all income not expressly exempted by law, the term 'income' has been variously interpreted to mean 'cash received or its equivalent', 'the amount of money coming to a person within a specific time', or 'something distinct from principal or capital'.

There is also no factual basis to impute theoretical interest on the cash advances and assess deficiency income tax thereon as Article 1956 of the Civil Code of the Philippines clearly provides that no interest shall be due unless expressly stipulated in writing. Since interest was not agreed upon in writing, no interest should be imputed to the cash advances extended by FDC to its affiliates.

GR Nos. 163653 and 167689 dated July 19, 2011
Interest-free cash advances to affiliates

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