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DE MATA, Annamarie Junel G.

On various dates in 1996 and 1997, as recounted in the case of Commissioner of Internal
Revenue vs. Filinvest Development Corporation (FDC), respondent FDC, a holding company,
extended advances in favor of its affiliates: Filinvest Land, Filinvest Capital, and Filinvest
Alabang. These advances were duly evidenced by instructional letters as well as cash and journal
vouchers. FDC received assessment for income tax for imputed interests on the advances it
extended to its affiliates. FDC disputed this by saying that the CIR lacks the authority to impute
theoretical interest and that the rule is that interests cannot be demanded in the absence of a
stipulation to the effect. The Supreme Court ruled that the Commissioner’s power of
distribution, apportionment or allocation of gross income and deductions under Section 43 of
the 1993 NIRC (now Section 50 of the 1997 Tax Code) and Section 179 of Revenue Regulations
No. 2 does not include the power to impute “theoretical interests” to the controlled taxpayer’s
transactions. 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. Otherwise stated, there must be proof of the actual,
or at the very least, probable receipt or realization by the controlled taxpayer of the items of
gross income sought to be distributed, apportioned or allocated by the Commissioner. There is no
evidence of actual or possible showing that the advances extended to affiliates had resulted to
interests subsequently assessed by the Commissioner. The Commissioner had adduced no
evidence that the advances extended to affiliates were sourced from the borrowings made
by FDC from the commercial banks. The Court further argued that, for the CIR to exercise its
authority to attribute interest income on the cash advances FDC extended to its affiliates under
Section 43 of the NIRC of 1993, there must be an express stipulation in writing that such interest
was due on the transaction in accordance with Article 1956 of the Civil Code.
Contrary to the ruling of the Supreme Court, however, as Justice Leonardo de Castro
believes, CIR need not establish that the cash advances extended by FDC to its affiliates were
sourced from the loans obtained by FDC from commercial banks. The source of the cash
advances is irrelevant. What the CIR is seeking to tax herein is the interest income FDC should
have earned from the cash advances it extended to its affiliates; the theory being that FDC would
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have imposed and collected said interest had it been dealing at arm’s length with an uncontrolled
company. Also, it is not necessary for the CIR to present proof of actual or probable receipt by
FDC of interest income from the cash advances it extended to its affiliates. Section 43 of the
NIRC of 1993 should be appreciated as an exception to the general rules on income taxation as it
addresses a very specific situation: controlled taxpayers dealing with each other not at arm’s
length. To exercise his authority under said provision, it is already sufficient for the CIR to
establish that the income reported by the controlled taxpayer from the transaction amongst
themselves fall below the arm’s length standard; in which case, the CIR may already impute such
arm’s length income on the transaction, and accordingly distribute, apportion, or allocate the
same among the controlled taxpayers who participated in said transaction.
Regarding the ruling on the need for stipulation in writing, it should be pointed out that
Section 43 of the NIRC prevails over Article 1956 of the Civil Code (Lex specialis derogat
generali). As already held in several decided cases of the Supreme Court, general legislation
must give way to special legislation on the same subject, as generally the same is so interpreted
as to embrace only cases in which the special provisions are not applicable. In other words,
where two statutes are of equal theoretical application to a particular case, the one specially
designed therefore should prevail, that is, Section 43 in this case, which provides:

Sec. 43. Allocation of income and deductions. – In any case of two or more organizations, trades or businesses
(whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or
indirectly by the same interests, the Commissioner of Internal Revenue is authorized to distribute, apportion or
allocate gross income or deductions between or among such organizations, trades or businesses, if he determines
that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to
reflect the income of any such organizations, trades or businesses.
Nevertheless, despite this provision, the Commissioner of Internal Revenue, consistent
with the ruling, may not impute interest income on the cash advances FDC extended to its
affiliates not because of the absence of stipulation, but due to the simple reason that Revenue
Memorandum Order (RMO) No. 63-99, which sets down the guidelines for the determination of
taxable income on inter-company loans or advances, applying what is now Section 50 of the
NIRC of 1997, was issued only on July 19, 1999. Under this, “where one member of a group of
controlled entities makes a loan or advances directly or indirectly, or otherwise becomes a
creditor of another member of such group, and charges no interest, or charges interest at a rate
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which is not equal to an arm’s-length rate as defined in subparagraph (2) of this paragraph, the
Commissioner may make appropriate allocations to reflect an arm’s length interest rate for
the use of such loan or advance.” This applies to all forms of bona fide indebtedness and
includes the following:
(1) Loans or advances of money or other consideration (whether or not evidence by a written
instrument);
(2) Indebtedness arising in the ordinary course of business out of sales, leases, or the rendition
of services by or between members of the group, or any other similar extension;
(3) But does not apply to alleged indebtedness which was in fact a contribution of capital or a
distribution by a corporation with respect to its shares.
Given this coverage, the instant case would have fell under the first point. However, as
already discussed, the RMO was issued only on July 19, 1999. FDC extended the case advances
to its affiliates in 1996 and 1997, when there was yet no clear regulation as to the tax treatment
of loans and advances among taxpayers that would have accordingly guided the concerned
taxpayers and the Bureau of Internal Revenue (BIR) officials. Hence, RMO No. 63-99 cannot be
applied to the instant case pursuant to Section 246 of the NIRC of 1997 which reads:

SEC. 246. Non-Retroactivity of Rulings. – Any revocation, modification, or reversal of any of the rules and
regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars promulgated by
the Commissioner shall not be given retroactive application if the revocation, modification, or reversal will be
prejudicial to the taxpayers.
Considering this, it is proper that the Supreme Court in Commissioner of Internal
Revenue vs. Filinvest Development Corporation (G.R. No. 163653) ruled that CIR may not
impute interest income on the cash advances FDC extended to its affiliates. The basis, however,
should not be those enumerated in the case: (1) there was no evidence that the cash advances
extended by FDC to its affiliates were sourced from the loans obtained by FDC from commercial
banks and for which FDC claimed deductions of interest expense from its gross income; (2) there
was no proof of actual or probable receipt or realization by FDC of interest income from the cash
advances; and (3) there was no express stipulation in writing that interest would be due on the
cash advances as required under Article 1956 of the Civil Code. Instead, the basis should be the
non-retroactivity of Revenue Memorandum No. 63-99. Had this RMO been in effect in 1996 to
1997, the case would have been ruled differently.
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