April 16, 2020

HON. FLORANTE R. ANINAG

The Regional Director
Bureau of Internal Revenue
Revenue Region No. 16
Cagayan de Oro City

Attention: Chief, Assessment Division

Revenue Region No. 16

PROTEST LETTER WITH REQUEST FOR RECONSIDERATION

Sir:

This is in reference to Preliminary Assessment Notice dated February 20, 2020, informing us of
internal revenue tax deficiencies comprising of Income Tax, Value Added Tax, Expanded Withholding Tax,
and Compromise Penalties amounting to PhP17,054,398.14, PhP16,359,153.86, PhP5,180,987.15 and
PhP25,000.00 respectively, in relation to the result of audit and investigation conducted by Revenue Officer
Hashim M. Dimal, pursuant to Letter of Authority No. 101-2019-00000161/eLA201200016992 dated July 8,
2019 for taxable year 2018.

TOYOTA ILIGAN CITY, INC. (TICI) protests the above cited tax deficiencies, with request for
reconsideration, citing the following facts, laws, jurisprudence, rules and regulations, to wit:

1) Income Tax deficiency amounting to PhP17,054,398.14 is without factual and legal basis.

The above mentioned IT deficiency is largely the result of disallowance of purchases, computation
as provided by your Office PAN as shown below:

Purchases Per Relief Data PhP 608,593,130.58

Less: Purchases Per Summary List of Purchases 472,379,807.18
Alleged Discrepancy PhP 136,213,323.40
Divide by: Cost of Sale Ration 91%
Alleged Undeclared Sales arising from Undeclared
Purchases PhP 149,684,970.77

The PhP136,213,323.40, which was the difference between the Summary List of Sales allegedly
submitted by Supplies (AITEID) and the Purchases declared by TICI in its Summary List of Purchases, was
incorrectly treated as undeclared sales. TICI contends that your Office allegation and manner of
computation for undeclared Sales has no legal or factual basis considering that TICI has no unaccounted
Purchases for the taxable year 2018.

There are three (3) essential elements on the imposition of income tax are: (1) there must be gain
or profit, (2) that the gain or profit is realized or received, actually or constructively, and (3) it is not
exempted by law or treaty from income tax. Income tax is assessed on income received from any property,
activity or service. Such being the case, in the imposition or assessment of income tax, it is not when there
is an undeclared disbursement, but only when there was an income , and such income was received or
realized by the taxpayer.

In this tax assessment, said three (3) elements are not present. Your Office merely imposed
income tax on TICI simply because there was an "undeclared disbursement", nothing more.
 Furthermore, it must be emphasized that for income tax purposes, a taxpayer is free to deduct from
its gross income a lesser amount, or not claim any deduction at all. What is prohibited by the income tax
law is to claim a deduction beyond the amount authorized therein. Hence, even granting that there is an
undeclared disbursement, the same is not prohibited by law.

Thus, in simply relying on the fact that there is an undeclared disbursement, your Office imposition
or assessment of the subject income tax does not hold ground. Such being the case, the subject deficiency
income tax assessment should be cancelled.

And in line with the various expenses disallowed due to failure to substantiate, TICI respectfully
contests such findings. All income payments which comprises TICI’s Direct Cost, Selling Expenses and
Administrative Expenses are all duly audited by our internal and external auditors and it was attested that
said expenses/costs are complete and accurate and is duly supported by official receipts/sales invoices
and/or other adequate accounting records.

In line with this, TICI sites a provision with the Tax Code that the deductions from its gross income
for the taxable year 2018 were duly substantiated with sufficient evidence in accordance with Section 34(A)
(1 )(b) of the National Internal Revenue Code of 1997, to wit:

"(b) Substantiation Requirements - no deduction from gross income shall be allowed under Subsection (A)
hereof unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate
records: (i) the amount of the expense being deducted, and (ii) the direct connection or relation of the expense being
deducted to the development, management, operation and/or conduct of the trade, business or profession of the
taxpayer."

It further asserts that based on the afore-quoted provision of law, the legislature did not intend to
limit the manner of substantiating deductions through official receipts or invoices but also by means of
other adequate records.

And to bolster our stance, TICI would like to cite the case of Paper Industries Corporation vs.
Commissioner of Internal Revenue, where the Court of Tax Appeals, sitting as a Division, set the basic
principles governing deductions, to wit:

“1. The taxpayer seeking a deduction must point to some specific provision of the statute in which that
deduction is authorized;
2. He must be able to prove that he is entitled to the deduction which the law allows; and
3. Adequate records should be kept to support deductions.”

TICI contends that the documents adduced in support of the deductions for ordinary and necessary
expenses are more than sufficient to substantiate its claimed deductions. The cash vouchers submitted in
evidence were accompanied by other documents like certifications, receipts, delivery receipts, payroll, labor
acknowledge sheet, etc., showing beyond doubt that the deductions claimed by TICI are bona fide
business expenses incurred in the conduct of its trade or business. In addition to the aforesaid documents,
TICI avers that the expenses claimed as deductions were subjected to the applicable expanded withholding
taxes, as applicable, duly remitted to the Bureau of Internal Revenue.

2) Value Added Tax deficiency amounting to PhP16,359,153.86 is without factual and legal basis.

In the same vein, no deficiency VAT assessment should arise from the said alleged "undeclared
disbursement" of PhP136,213,323.40.

It must be remembered that the 10% VAT (now at 12%) is imposed on the seller of the goods,
pursuant to Section 105 of the NIRC of 1997, to wit:
 "SEC. 105. Persons Liable. - Any person who, in the course of trade or business, sells, barters, exchanges,
leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added
tax (VAT) imposed in Sections 1 06 to 1 08 of the Code.

XXX XXX xxx." (Emphases supplied)

Furthermore, the VAT is assessed on the "gross selling price or gross value in money of the goods
or properties sold" and is "to be paid by the seller or transferor. In this connection, the law defines " gross
selling price" as follows (Section 106(A), NIRC of 1997):

" ..the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in
consideration of the sale, barter or exchange of the goods or properties, excluding the value-added tax. The excise
tax, if any, on such goods or properties shall form part of the gross selling price”.

Thus, what is critical to be shown, in the imposition or assessment of VAT in the sale of goods or
properties, is that the taxpayer is paid or ought to be paid in an amount of money or its equivalent, in
consideration of such sale, and not when said taxpayer purchases or disburses an amount of money to
purchase goods or properties. Simply put, the VAT is imposed when one sells, not when one purchases.

Correspondingly, VAT should not be imposed on the supposed "undeclared disbursement"

amounting to PhP136,213,323.40. Vatable Disbursements are source of Input Tax which will be deducted
to the Output Tax. The Tax Code and pertinent VAT Revenue Regulations never mentions/imposed Output
Tax on Vatable Disbursements, but on Vatable Receipts.

3) Expanded Withholding Tax deficiency amounting to PhP5,180,987.15 is without factual and legal
basis.

As shown in the detailed computation on the PAN, the bulk of the Expanded Withholding Tax
deficiency is due to the imposition of One Percent (1%) Expanded Withholding Tax on income payments of
goods. However, said tax is only imposed on corporations that belongs to the Top 20,000 category of your
Office. And TICI is bereft of fact that it is included in the list of Top 20,000 Corporation or was ever informed
through writing of such inclusion (as of taxable year 2018).

Inclusion on the Top 20,000 Corporation is not automatic. Said corporation, before being obliged to
withhold as a result of being part of the Top 20,000 Corporation should be duly informed in writing,
pursuant to Revenue Regulation No. 17-2003, as amended, as provided below:

“A corporation shall not be considered a withholding agent for purposes of this Section, unless such
corporation has been determined and duly notified, in writing, by the Commissioner that it has been selected as one
of the top ten thousand (10,000) private corporations.”

Again, in our case, TICI was never informed in writing that it is included in the Top 20,000
Corporation of the BIR. Due process accorded to taxpayers is guaranteed in the Tax Code and in the
Constitution. And adherence to due process is an outmost importance. Being well informed (this case in
writing by the Commissioner) is due process.

If only it was informed, as a law abiding corporation of the country and always in consonance with
the programs of your Office, TICI would have automatically withheld said EWT. Besides, EWT is of no cost
of the TICI, since the amount that will be withheld will be automatically deducted to the income payments to
be given with the suppliers.

4. Assessment of Compromise Penalties is without legal basis.

The imposition of compromise penalties on the deficiency income tax in the amounts of
P25,000.00, should be cancelled. This must be so because compromise penalties are only amounts
suggested in settlement of criminal liability, and may not be imposed or exacted on the taxpayer in the
event that a taxpayer refuses to pay the same. In other words, compromise penalties imply mutual
agreement between the taxpayer, on one hand, and the Commissioner of Internal Revenue, on the other.
Thus, since in this tax assessment, TICI is not willing to pay the said amount, the same should not be
imposed.

And TICI respectfully contest that the Notes to Financial Statements were submitted with
incomplete informations and schedules and ITR/FS failed to supply correct information. Said stand is duly
supported by our Accounting Department who prepared the Financial Statements and our External Auditor
who audited the same, and had rendered an opinion that FS is free of material misstatements.
With the above discussion and explanations, citing facts, laws, jurisprudence, rules and
regulations, TICI humbly prats that its request for reconsideration be approved and the resulting tax
assessments be cancelled.

Rest assured, that TICI will always support programs initiated with your Office, and will continue to
pay our taxes which is legally and correctly due from us, diligently and on time.

Sincerely yours,

BETTY L. LU
President