THE Supreme Court has ordered Philex Mining Corp. to pay
government some P226 million in tax deficiencies out of a poor investment
project undertaken in Benguet province in 1971.
Philex originally owed the Bureau of Internal Revenue some
P62.8 million. This piled up a 20-percent delinquency interest computed from
Feb. 10, 1995 after it backed out of its partnership with Baguio Gold Mining
Corp. to manage and operate the latter's mining claim, known as the Sto. Nino
mine located in Atok and Tublay, Benguet.
The SC's Third Division affirmed the ruling of the Court of
Appeals and Court of Tax Appeals which gave the Bureau of Internal Revenue the
go-signal to collect the money from Philex.
The SC also rejected Philex's assertion that the advances it
made for the Sto. Nino mine were in the nature of a loan because its investment
in the development and exploitation of the Sto. Nino mine was actually a
partnership agreement. "Since the advanced amount partook of the nature of an
investment, it could not be deducted as a bad debt from (Philex's) gross
income," the Court ruled.
The high court said the CA and CTA correctly held that the
power of attorney is the instrument that is material in determining the true
nature of the business relationship between Philex and Baguio Gold. The PA
showed that Philex and Baguio Gold intended to create a partnership and
establish a common fund, and also had a joint interest in the profits of the
business as shown by a 50-50 sharing in the income of the mine.
"The strongest indication that (Philex) was a partner in the
Sto Nino mine is the fact that it would receive 50 percent of the net profits as
'compensation' under paragraph 12 of the agreement," said the Court.
Based on the records of the case, Philex entered into an
agreement to manage and operate Baguio Gold's Sto. Nino mine with Baguio Gold
making available to Philex up to P11 million within three years for use in the
management of the mine. The P11 million, for internal audit purposes, is
considered as Baguio Gold's account in the Sto. Nino project to which any income
from the mine shall be added.
The agreement further stated that whenever Philex considers
it necessary and convenient in connection with the management of the Sto. Nino
mine, it may transfer its own funds or property to the Sto. Nino project.
When Philex withdrew as manager in January 1982 and the mine
shut down the next month, the two parties executed a compromise with Baguio Gold
admitting indebtedness of P179 million which it agreed to pay Philex in three
segments. In December 1982, the parties amended the compromise agreement anf
fixed Baguio Gold's indebtedness at P259 million, including long-term loans
amounting to $11 million from Bank of America and Citibank N.A.
Philex wrote off in its 1982 books Baguio Gold's remaining
debts by charging P112 million to allowances and reserves set up in 1981 and
P2.8 million to the 1982 operations. In its 1982 annual income tax return,
Philex deducted the P112 million from its gross income as "loss on settlement of
receivables from Baguio Gold against reserves and allowances."
This was disallowed by the BIR which assessed Philex a
deficiency income tax of P62.8 million.
On Oct. 28, 1994, the BIR denied Philex's protest for lack of legal and
factual basis, holding that the alleged debt was not ascertained to be worthless
since Baguio Gold continued to exist and had not filed a petition for
bankruptcy; and that the deduction did not consist of a valid and subsisting
debt considering that under the management contract Philex was to be paid 50
percent of the project's net profit. - Evangeline C. de Vera
