Pharmally must pay P5.1 billion in taxes

With surcharge, interest, and undeclared and underdeclared payable taxes all thrown in, the potential tax liabilities of Pharmally Pharmaceutical Corporation could reach a tremendous P5.12 billion for the year 2020 alone.

This is according to a team of certified public accountants and tax lawyers tapped by the Right to Know, Right Now! Coalition to conduct a tax audit of Pharmally, based on official documents filed with the Bureau of Internal Revenue (BIR), the Securities and Exchange Commission (SEC), and the Senate blue ribbon committee.

In its income tax return (ITR) for 2020, Pharmally had claimed a tax credit of P96.09 million and listed an overpayment of P589,163.

The company secured 11 supply contracts worth P7.9 billion with the Procurement Service-Department of Budget and Management between April and June 2020. It got two more contracts worth P1.1 million from the Philippine National Railways, and another P37.87 million from the Department of Health-Main, also in 2020.

Pharmally registered with the SEC on September 4, 2019, with a paid-up capital of only PhP625,000. It closed the year with a net income of only P25,549.18, according to its audited financial statements (AFS) filed on June 8, 2020.

Senior certified public accountants and tax lawyers tapped by the Coalition say that the BIR must now investigate Pharmally for two big reasons:

“Overdeclared cost of goods by 50 percent”
“Possible tax deficiency of 30 percent.”

Both counts, they say, are “prima facie evidence” of apparent tax evasion by Pharmally.

BIR must investigate

By all indications, the Coalition’s tax audit reveals Pharmally to have declared by “various manipulative accounting methods” gross sales by the billions of pesos, but had unaccounted source/s of funds, even as it also understated and did not declare or pay the right taxes defined in law.

This tax audit was based on documents that BIR has so far submitted to the Senate, as of October 31. According to the auditors, a “presumption of completeness” could result only from a full investigation by BIR into Pharmally’s tax liabilities.

This effort should require the BIR to comb through its database and get more documents from other parties related to, or had transactions with, Pharmally in 2020.

The Coalition’s tax audit team raises the following “discrepancies,” based on Pharmally’s documents with BIR and SEC:

Unaccounted income from receivables
Undeclared income from unaccounted cost of goods sold
Unaccounted source of cash
Underdeclaration of expanded withholding tax on income payments
Underdeclaration of withholding tax on compensation
Underdeclaration of documentary stamp tax
Non-payment of donor’s tax

The tax audit team computed Pharmally’s potential tax liabilities for 2020, with surcharge and interest imputed, at these amounts:

Income Tax – P3,463,447,293.66
Value Added Tax – P1,438,329,039.57
Expanded Withholding Tax – P116,165,355.58
Documentary Stamp Tax – P87,188,852.86
Donor’s Tax – P15,899,231.31

The grand total: P5,122,414,621.59.

According to the team, this amount includes “legal increments” defined in the National Internal Revenue Code of 1997, as amended (NITR or Tax Code), which imposes a 50% surcharge under Section 24(B), and a 12% interest under Section 249.

Income tax

The Coalition’s audit team cited this legal basis for computing Pharmally’s potential income tax liability, plus surcharge and interest, at P3.46 billion:

Section 27 and 32 of the NIRC of 1997, as amended:

Discrepancy was considered as undeclared source of income as cited in the case of Perez vs. CTA (Court of Tax Appeals) and CIR L- 9193, for it has been held that unreflected sources of funds not accounted for in the taxpayer’s tax returns led to the inference that part of his income had not been reported, subject to income tax rate pursuant to Section 27 of the Tax Code in relation with Section 32 of the same code, as amended.

They note that in the Annual Financial Statement (AFS) for 2020 submitted to the SEC, and in its Income Tax Return (ITR) for 2020 submitted to the BIR, Pharmally had “Unaccounted Source Of Cash” of P7,227,252,622 as well as “Unaccounted Source of Cash-Purchase of Merchandise Inventory.” In short, Pharmally had “No Source of Financing per AFS/ITR and too small established capital.”

In addition, say the CPA-tax lawyers, Pharmally had “Undeclared Income From Unaccounted Cost of Goods Sold” worth about P13.54 million, based on comparative entries in its AFS and ITR.

The audit team says that with surcharge and interest brought in, Pharmally’s “Total Deficiency Income Tax” amounts to P3,463,447,293.66.

Value-added tax

The vatable receipts per VAT returns of Pharmally amounted to P7,485,401,046, according to the auditors. The 12% Output Tax per returns for this total was placed at P898,248,125.52, and the Input Tax per returns, at P466,977,210.

The auditors say that the Input Tax should be disallowed. Placing Pharmally’s “deficiency VAT” at P898,248,125.52, with a 50% surcharge and 12% interest, they computed Pharmally’s “Total Deficiency Value Added Tax” at P1,438,329,039.57.

They cite as legal basis Section 248(B) of the NIRC of 1997, as amended, for the surcharge, and Section 249 of the NIRC of 1997, as amended, for the interest.

Expanded withholding tax

By the team’s “Reconciliation Of Withholding Tax On Income Payments,” Pharmally’s potential tax due amounts to P72.62 million. It consists of:

Purchase of Merchandise Inventory worth P7.22 billion that carries a 1% tax
Purchase of Capital Goods, P13.97 million, with 1% tax
Professional fees, P1.2 million, with 10% tax
Commissions, P921,026, with 5% tax
Recreation and Amusement, P589,333, with 2% tax
Brokerage, P571,150, with 2% tax;
Travel and Transportation, P565,918, with 2% tax
Dues and Subscription, P188,486, with 2% tax
Supplies, P187,632.00, with 1% tax
Insurance, P119,751, with 2% tax

The Coalition’s auditors cite as legal basis for their computation Section 2.57.2 of Revenue Regulations No. 2-98, as amended, which states that “there shall be withheld a creditable income tax at the rates herein specified for each class of payee…from the income payments to persons residing in the Philippines.”

The audit team computed Pharmally’s “Total Expanded Withholding Tax Due” at P116,165,355.58 for the year 2020 alone.

Withholding tax on compensation

The auditors say that, based on its AFS for 2020, Pharmally paid a total of P2,697,116 in “Salaries, Wages, and Benefits” per alphalist of personnel. A 32% basic tax due, plus surcharge and interest, should have been imposed on this amount, or P863,077.12, and paid to the BIR.

They cite as legal basis for this computation Section 79(A) of the Tax Code and implemented under Sec. 2.78 of the Revenue Regulation 2-98.

With surcharge and interest, the audit team placed Pharmally’s “Total Tax Due on Withholding Tax on Compensation” at P1,384,848.62, for the year 2020.

Documentary stamp tax

Based on what Pharmally declared as its “Amount Finance to Purchase Merchandise” of P7.23 billion, and “Advances during the year” of P3,076,314, the auditors say that Pharmally still owes the government documentary stamp tax of P54,227,467.02 in 2020.

But this amount rises to P87,188,852.86, with surcharge and interest brought in. The auditors cited as legal basis for this estimate Section 173 of the Tax Code of 1997, as amended.

Donor’s tax

In both its Annual Finance Statement and Income Tax Return for 2020, Pharmally reported that it made donations of P33,131,341 in the year 2020. According to the auditors, the donor’s tax due from this amount is P9,939,40.

With surcharge and interest rolled in, however, the auditors say that Pharmally’s total tax due from its donations should be P15,899,231.31. They cite as legal basis for this Section 98 of the Tax Code of 1997, as amended.

Pharmally’s executives had failed to name the donees or recipients of these donations. The auditors say that if the donees were government agencies, then the donations need not be taxed.

To be clear, though, the CPA-tax lawyers say that donations are never a done deal unless the donor and the donee have had an exchange of official receipts or legal instruments certifying to the amount, kind, and date the donations were given and received. – Rappler.com

This piece is republished with permission from the Right to Know, Right Now! (R2KRN) Coalition.

The R2KRN Coalition is a network of advocates campaigning for the passage of the Freedom of Information law and the promotion of FOI practice in the country.