Wednesday, February 03, 2016

CIR vs. Filinvest Development Corporation

FACTS: Filinvest Development Corporation (FDC) extended advances in favor of its affiliates and supported the same with instructional letters and cash and journal vouchers. The Bureau of Internal Revenue (BIR) assessed Filinvest for deficiency income tax by unilaterally imputing an “arm's length” interest rate on its advances to affiliates. Filinvest dispute 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 stipulation to that effect.

ISSUE: Whether or not CIR can unilaterally impute theoretical interest on the advances made by Filinvest to its affiliates

RULING: No. Despite the seemingly broad power of the CIR to distribute, apportion and allocate gross income under Section 50 of the Tax Code, the same does not include the power to impute theoretical interests even with regard to controlled taxpayers' transactions. This is true even if the CIR is able to prove that interest expense (on FDC's own loans) was in fact claimed by FDC.

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