CASES
1. Commissioner of Internal Revenue VS Mitsubishi Metal Corporation
Facts:
Atlas Consolidated Mining and Development Corporation entered into a Loan and Sales
Contract with Mitsubishi Metal Corporation, a Japanese corporation licensed to engage in
business in the Philippines, for purposes of the projected expansion of the productive capacity
of the former’s mines in Toledo Cebu.
Under the contract, Mitsubishi agreed to extend a loan to Atlas amounting to $20M, for the
installation of a new concentrator for copper production. Atlas, in turn undertook to sell to
Mitsubishi all copper concentrates produced from said machine for a period of 15 years. It was
contemplated that $9M of said loan was to be used for the purchase of the concentrator
machinery from Japan.
Mitsubishi thereafter applied for a loan with the Export Import Bank of Japan obviously for
purposed of its obligation under said contract. Its loan application was approved on May 26,
1970 in the sum Y4.320B at about the same time as the approval of its loan for Y2.880B from a
consortium of Japanese banks. The total amount of both loans is equivalent to $20M at the
then prevailing exchange rate. The records in the BIR show that the approval of the loan by
Eximbank to Mitsubishi was subject to the condition that Mitsubishi would use the amount as a
loan to Atlas and as a consideration for importing copper concentrates from Atlas, and that
Mitsubishi had to pay back the total amount of loan by Sept. 30 1981.
Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the
former to the latter totaling P13.143M for the years 1974 and 1975.
The corresponding 15% tax thereon in the amount of P1,971,595.01 was withheld pursuant to
Section 24 (b) (1) and Section 53 (b) (2) of the National Internal Revenue Code, as amended by
Presidential Decree No. 131, and duly remitted to the Government.
On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum of
P1,971,595.01 be applied against their existing and future tax liabilities.
Parenthetically, it was later noted by respondent Court of Tax Appeals in its decision that on
August 27, 1976, Mitsubishi executed a waiver and disclaimer of its interest in the claim for tax
credit in favor of Atlas.
The petition was grounded on the claim that Mitsubishi was a mere agent of Eximbank, which is
a financing institution owned, controlled and financed by the Japanese Government. Such
governmental status of Eximbank, if it may be so called, is the basis for private repondents'
claim for exemption from paying the tax on the interest payments on the loan as earlier stated.
It was further claimed that the interest payments on the loan from the consortium of Japanese
banks were likewise exempt because said loan supposedly came from or were financed by
Eximbank.
The provision of the National Internal Revenue Code relied upon is Section 29 (b) (7) (A), which
excludes from gross income:
(A) Income received from their investments in the Philippines in loans, stocks, bonds or other
domestic securities, or from interest on their deposits in banks in the Philippines by (1) foreign
governments, (2) financing institutions owned, controlled, or enjoying refinancing from them,
and (3) international or regional financing institutions established by governments.
ISSUE:
(1) W/N private respondents are entitled to such tax credit
(2) W/N Mitsubishi acted only as a conduit for Atlas for it to obtain a loan from
Eximbank
RULING:
(1) No. They are not entitled to the tax credit because Mitsubishi and Atlas were not one of
the companies contemplated in Sec. 29(b)(7)(A) which states, (A) Income received from
their investments in the Philippines in loans, stocks, bonds or other domestic securities,
or from interest on their deposits in banks in the Philippines by (1) foreign governments,
(2) financing institutions owned, controlled, or enjoying refinancing from them, and (3)
international or regional financing institutions established by governments. Both Atlas
and Mitsubishi were not financing institutions financed by a particular government,
therefore, they are not entitled to tax credit from income derived from interest earned.
It is too settled a rule in this jurisdiction, as to dispense with the need for citations, that
laws granting exemption from tax are construed strictissimi juris against the taxpayer
and liberally in favor of the taxing power. Taxation is the rule and exemption is the
exception. The burden of proof rests upon the party claiming exemption to prove that it
is in fact covered by the exemption so claimed, which onus petitioners have failed to
discharge. Significantly, private respondents are not even among the entities which,
under Section 29 (b) (7) (A) of the tax code, are entitled to exemption and which should
indispensably be the party in interest in this case.
(2) Mitsubishi was a mere conduit of Atlas, the latter used the former to avail the tax credit
from such interest and then later on, such tax credit was waived and a disclaimer was
filed in favor of Atlas. From this action, it became clear to the court that the provision of
the law was used as a cloak to escape the tax imposed, therefore, in order to prevent
bad precedent in the future, the Court reversed the decision of the CTA.
2. Marubeni VS CIR
The dividends received by Marubeni Corporation from Atlantic Gulf and Pacific Co. are not
income arising from the business activity in which Marubeni Corporation is engaged.
Accordingly, said dividends if remitted abroad are not considered branch profits subject to
Branch Profit Remittance Tax.
Facts:
Marubeni Corporation is a Japanese corporation licensed to engage in business in the
Philippines. When the profits on Marubeni’s investments in Atlantic Gulf and Pacific Co. of
Manila were declared, a 10% final dividend tax was withheld from it, and another 15% profit
remittance tax based on the remittable amount after the final 10% withholding tax were paid to
the Bureau of Internal Revenue. Marubeni Corp. now claims for a refund or tax credit for the
amount which it has allegedly overpaid the BIR.
ISSUE:
(1) Whether or not the dividends Marubeni Corporation received from Atlantic Gulf and Pacific
Co. are effectively connected with its conduct or business in the Philippines as to be considered
branch profits subject to 15% profit remittance tax imposed under Section 24(b)(2) of the
National Internal Revenue Code.
(2) Whether Marubeni Corporation is a resident or non-resident foreign corporation.
(3) At what rate should Marubeni be taxed?
RULING:
(1) NO. Pursuant to Section 24(b)(2) of the Tax Code, as amended, only profits remitted abroad
by a branch office to its head office which are effectively connected with its trade or business in
the Philippines are subject to the 15% profit remittance tax. The dividends received by
Marubeni Corporation from Atlantic Gulf and Pacific Co. are not income arising from the
business activity in which Marubeni Corporation is engaged. Accordingly, said dividends if
remitted abroad are not considered branch profits for purposes of the 15% profit remittance
tax imposed by Section 24(b)(2) of the Tax Code, as amended.
(2) Marubeni Corporation is a non-resident foreign corporation, with respect to the transaction.
Marubeni Corporation’s head office in Japan is a separate and distinct income taxpayer from
the branch in the Philippines. The investment on Atlantic Gulf and Pacific Co. was made for
purposes peculiarly germane to the conduct of the corporate affairs of Marubeni Corporation in
Japan, but certainly not of the branch in the Philippines.
(3) 15%. The applicable provision of the Tax Code is Section 24(b)(1)(iii) in conjunction with the
Philippine-Japan Tax Treaty of 1980. As a general rule, it is taxed 35% of its gross income from
all sources within the Philippines. However, a discounted rate of 15% is given to Marubeni
Corporation on dividends received from Atlantic Gulf and Pacific Co. on the condition that
Japan, its domicile state, extends in favor of Marubeni Corporation a tax credit of not less than
20% of the dividends received. This 15% tax rate imposed on the dividends received under
Section 24(b)(1)(iii) is easily within the maximum ceiling of 25% of the gross amount of the
dividends as decreed in Article 10(2)(b) of the Tax Treaty.
Note: Each tax has a different tax basis.Under the Philippine-Japan Tax Convention, the 25%
rate fixed is the maximum rate, as reflected in the phrase “shall not exceed.” This means that
any tax imposable by the contracting state concerned hould not exceed the 25% limitation and
said rate would apply only if the tax imposed by our laws exceeds the same.
3. CIR VS Procter and Gamble
NON-RESIDENT FOREIGN CORPORATION- DIVIDENDS
Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend
remittances to non-resident corporate stockholders of a Philippine corporation. This rate goes
down to 15% ONLY IF the country of domicile of the foreign stockholder corporation “shall
allow” such foreign corporation a tax credit for “taxes deemed paid in the Philippines,”
applicable against the tax payable to the domiciliary country by the foreign stockholder
corporation. However, such tax credit for “taxes deemed paid in the Philippines” MUST, as a
minimum, reach an amount equivalent to 20 percentage points
FACTS:
Procter and Gamble Philippines declared dividends payable to its parent company and sole
stockholder, P&G USA. Such dividends amounted to Php 24.1M. P&G Phil paid a 35% dividend
withholding tax to the BIR which amounted to Php 8.3M It subsequently filed a claim with the
Commissioner of Internal Revenue for a refund or tax credit, claiming that pursuant to Section
24(b)(1) of the National Internal Revenue Code, as amended by Presidential Decree No. 369,
the applicable rate of withholding tax on the dividends remitted was only 15%.
ISSUE:
Whether or not P&G Philippines is entitled to the refund or tax credit.
RULING:
YES. P&G Philippines is entitled.Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate
will be applied to dividend remittances to non-resident corporate stockholders of a Philippine
corporation. This rate goes down to 15% ONLY IF he country of domicile of the foreign
stockholder corporation “shall allow” such foreign corporation a tax credit for “taxes deemed
paid in the Philippines,” applicable against the tax payable to the domiciliary country by the
foreign stockholder corporation. However, such tax credit for “taxes deemed paid in the
Philippines” MUST, as a minimum, reach an amount equivalent to 20 percentage points which
represents the difference between the regular 35% dividend tax rate and the reduced 15% tax
rate. Thus, the test is if USA “shall allow” P&G USA a tax credit for ”taxes deemed paid in the
Philippines” applicable against the US taxes of P&G USA, and such tax credit must reach at least
20 percentage points. Requirements were met.
NOTES: Breakdown:
a) Deemed paid requirement: US Internal Revenue Code, Sec 902: a domestic corporation
(owning 10% of remitting foreign corporation) shall be deemed to have paid a proportionate
extent of taxes paid by such foreign corporation upon its remittance of dividends to domestic
corporation.
b) 20 percentage points requirement: (computation is as follows)
P 100.00 -- corporate income earned by P&G Phils
x 35% -- Philippine income tax rate
P 35.00 -- paid by P&G Phil as corporate income tax
P 100.00
- 35.00
65. 00 -- available for remittance
P 65. 00
x 35% -- Regular Philippine dividend tax rate
P 22.75 -- regular dividend tax
P 65.0o
x 15% -- Reduced dividend tax rate
P 9.75 -- reduced dividend tax
P 65.00 -- dividends remittable
- 9.75 -- dividend tax withheld at reduced rate
P 55.25 -- dividends actually remitted to P&G USA
Dividends actuallyremitted by P&G Phil = P 55.25
---------------------------------- ------------- x P35 = P29.75
Amount of accumulated P 65.00profits earned
P35 is the income tax paid.
P29.75 is the tax credit allowed by Sec 902 of US Tax Code for Phil corporate income tax
‘deemed paid’ by the parent company. Since P29.75 is much higher than P13, Sec 902 US Tax
Code complies with the requirements of sec 24 NIRC. (I did not understand why these were
divided and multiplied. Point is, requirements were met)
Reason behind the law:
Since the US Congress desires to avoid or reduce double taxation of the same income stream, it
allows a tax credit of both (i) the Philippine dividend tax actually withheld, and (ii) the tax credit
for the Philippine corporate income tax actually paid by P&G Philippines but “deemed paid” by
P&G USA.
Moreover, under the Philippines-United States Convention “With Respect to Taxes on Income,”
the Philippines, by treaty commitment, reduced the regular rate of dividend tax to a maximum
of 20% of he gross amount of dividends paid to US parent corporations, and established a
treaty obligation on the part of the United States that it “shall allow” to a US parent corporation
receiving dividends from its Philippine subsidiary “a [tax] credit for the appropriate amount of
taxes paid or accrued to the Philippines by the Philippine [subsidiary].
Note:The NIRC does not require that the US tax law deem the parent corporation to have paid
the 20 percentage points of dividend tax waived by the Philippines. It only requires that the US
“shall allow” P&G-USA a “deemed paid” tax credit in an amount equivalent to the 20
percentage points waived by the Philippines. Section 24(b)(1) does not create a tax exemption
nor does it provide a tax credit; it is a provision which specifies when a particular (reduced) tax
rate is legally applicable.
Section 24(b)(1) of the NIRC seeks to promote the in-flow of foreign equity investment in the
Philippines by reducing the tax cost of earning profits here and thereby increasing the net
dividends remittable to the investor. The foreign investor, however, would not benefit from the
reduction of the Philippine dividend tax rate unless its home country gives it some relief from
double taxation by allowing the investor additional tax credits which would be applicable
against the tax payable to such home country. Accordingly Section 24(b)(1) of the NIRC requires
the home or domiciliary country to give the investor corporation a “deemed paid” tax credit at
least equal in amount to the 20 percentage points of dividend tax foregone by the Philippines, in
the assumption that a positive incentive effect would thereby be felt by the investor.
4. Wander VS CIR
FACTS:
Private respondents Wander Philippines, Inc. (wander) is a domestic corporation organized under
Philippine laws. It is wholly-owned subsidiary of the Glaro S.A. Ltd. (Glaro), a Swiss
corporation not engaged in trade for business in the Philippines.
Wander filed it's witholding tax return for 1975 and 1976 and remitted to its parent company
Glaro dividends from which 35% withholding tax was withheld and paid to the BIR.
In 1977, Wander filed with the Appellate Division of the Internal Revenue a claim for
reimbursement, contending that it is liable only to 15% withholding tax in accordance with sec.
24 (b) (1) of the Tax code, as amended by PD nos. 369 and 778, and not on the basis of 35%
which was withheld ad paid to and collected by the government. petitioner failed to act on the
said claim for refund, hence Wander filed a petition with Court of Tax Appeals who in turn
ordered to grant a refund and/or tax credit. CIR's petition for reconsideration was denied hence
the instant petition to the Supreme Court.
ISSUE:
Whether or not Wander is entitled to the preferential rate of 15% withholding tax on dividends
declared and to remitted to its parent corporation.
RULING:
Section 24 (b) (1) of the Tax code, as amended by PD 369 and 778, the law involved in this case,
reads:
sec. 1. The first paragraph of subsection (b) of section 24 of the NIRC, as amended is hreby
further amended to read as follows:
(b) Tax on foreign corporations - (1) Non resident corporation -- A foreign corporation not
engaged in trade or business in the Philippines, including a foreign life insurance company not
engaged in life insurance business in the Philippines, shall pay a tax equal to 35% of the gross
income received during its taxable year from all sources within the Philippines, as interest
(except interest on a foreign loans which shall be subject to 15% tax), dividends, premiums,
annuities, compensation, remuneration for technical services or otherwise emolument, or other
fixed determinable annual, periodical ot casual gains, profits and income, and capital gains: xxx
Provided, still further that on dividends received from a domestic corporation liable to tax under
this chapter, the tax shall be 15% of the dividends received, which shall be collected and paid as
provided in sec 53 (d) of this code, subject to the condition that the country in which the non-
resident foreign corporation is domiciled shall allow a credit against tax due from the non-
resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20%
which represents the difference between the regular tax (35%) on corporation and the tax (15%)
dividends as provided in this section: xxx."
From the above-quoted provision, the dividends received from a domestic corporation liable to
tax, the tax shall be 15% of the dividends received, subject to the condition that the country in
which the non-resident foreign corporation is domiciled shall allow a credit against the tax due
from the non-resident foreign corporation taxes deemed to have been paid in the Philippines
equivakent to 20% which represents the difference betqween the regular tax (35%) on
corpoorations and the tax (15%) on dividends.
While it may be true that claims for refund construed strictly against the claimant, nevertheless,
the fact that Switzerland did not impose any tax on the dividends received by Glaro from the
Philippines should be considered as a full satisfaction if the given condition. For, as aptly stated
by respondent Court, to deny private respondent the privilege to withhold only 15% tax provided
for under PD No. 369 amending section 24 (b) (1) of the Tax Code, would run counter to the
very spirit and intent of said law and definitely will adversely affect foreign corporations interest
here and discourage them for investing capital in our country.
5. Cynamid Philippines, Inc VS CA
FACTS:
Petitioner disputes the decision1 of the Court of Appeals which affirmed the decision2 of the
Court of Tax Appeals, ordering petitioner to pay respondent Commissioner of Internal Revenue
the amount of P3M.7 as 25% surtax on improper accumulation of profits for 1981, plus 10%
surcharge and 20% annual interest from January 30, 1985 to January 30, 1987, under Sec. 25 of
the National Internal Revenue Code.
Petitioner, Cyanamid Philippines, Inc., a corporation organized under Philippine laws, is a
wholly owned subsidiary of American Cyanamid Co. based in Maine, USA. It is engaged in the
manufacture of pharmaceutical products and chemicals, a wholesaler of imported finished goods,
and an importer/indentor.
On February 7, 1985, the CIR sent an assessment letter to petitioner and demanded the payment
of deficiency income tax of one hundred nineteen thousand eight hundred seventeen
(P119,817.00) pesos for taxable year 1981.
On March 4, 1985, petitioner protested the assessments particularly, (1) the 25% Surtax
Assessment of P3,774,867.50; (2) 1981 Deficiency Income Assessment of P119,817.00; and
1981 Deficiency Percentage Assessment of P8,846.72.
Petitioner, through its external accountant, Sycip, Gorres, Velayo & Co., claimed, among others,
that the surtax for the undue accumulation of earnings was not proper because the said profits
were retained to increase petitioner's working capital and it would be used for reasonable
business needs of the company. Petitioner contended that it availed of the tax amnesty under
Executive Order No. 41, hence enjoyed amnesty from civil and criminal prosecution granted by
the law.
The CIR addressed SGV and refused to allow the cancellation of the assessment notices and
rendered its resolution. CIR said that the assessments in this case issued on January 30, 1985
despite your client’s availment of the tax amnesty under EO No. 41, as amended still subsists.
Petitioner appealed to the CTA. During the pendency of the case, both parties agreed to
compromise the 1981 deficiency income tax assessment and pay only the reduced amount, as
compromise settlement.
Petitioner claims that CIR’s assessment had no legal bases for the following reasons:
(a) petitioner accumulated its earnings and profits for reasonable business requirements to meet
working capital needs and retirement of indebtedness;
(b) petitioner is a wholly owned subsidiary of American Cyanamid Company, a corporation
organized under the laws of the State of Maine, in the United States of America, whose shares of
stock are listed and traded in New York Stock Exchange.
This being the case, no individual shareholder income taxes by petitioner's accumulation of
earnings and profits, instead of distribution of the same.
CTA denies their petition on the following grounds:
⁃ Petitioner contends that it did not declare dividends for the year 1981 in order to use the
accumulated earnings as working capital reserve to meet its "reasonable business needs". The
law permits a stock corporation to set aside a portion of its retained earnings for specified
purposes (citing Section 43, paragraph 2 of the Corporation Code of the Philippines). In the case
at bar, however, petitioner's purpose for accumulating its earnings does not fall within the ambit
of any of these specified purposes.
⁃ More compelling is the finding that there was no need for petitioner to set aside a portion
of its retained earnings as working capital reserve as it claims since it had considerable liquid
funds. A thorough review of petitioner's financial statement (particularly the Balance Sheet, p.
127, BIR Records) reveals that the corporation had considerable liquid funds consisting of cash
accounts receivable, inventory and even its sales for the period is adequate to meet the normal
needs of the business.
⁃ We further reject petitioner's argument that "the accumulated earnings tax does not apply
to a publicly-held corporation" citing American jurisprudence to support its position. The
reference finds no application in the case at bar because under Section 25 of the NIRC as
amended by Section 5 of P.D. No. 1379 [1739] (dated September 17, 1980), the exceptions to the
accumulated earnings tax are expressly enumerated, to wit: Bank, non-bank financial
intermediaries, corporations organized primarily, and authorized by the Central Bank of the
Philippines to hold shares of stock of banks, insurance companies, or personal holding
companies, whether domestic or foreign. The law on the matter is clear and specific. Hence,
there is no need to resort to applicable cases decided by the American Federal Courts for
guidance and enlightenment as to whether the provision of Section 25 of the NIRC should apply
to petitioner.
Equally clear and specific are the provisions of E.O. 41 particularly with respect to its effectivity
and coverage . ..
. . . Said availment does not result in cancellation of assessments issued before August 21, 1986
as petitioner seeks to do in the case at bar. Therefore, the assessments in this case, issued on
January 30, 1985 despite petitioner's availment of the tax amnesty under E.O. 41 as amended,
still subsist.
Petitoner appealed to the CA, and the CA affirms the decision of the CTA.
The case was raised to the SC.
ISSUE:
WHETHER OR NOT PETITIONER IS LIABLE FOR THE ACCUMULATED EARNINGS
TAX FOR THE YEAR 1981
RULING:
YES.
The provision discouraged tax avoidance through corporate surplus accumulation. When
corporations do not declare dividends, income taxes are not paid on the undeclared dividends
received by the shareholders. The tax on improper accumulation of surplus is essentially a
penalty tax designed to compel corporations to distribute earnings so that the said earnings by
shareholders could, in turn, be taxed.
A review of American taxation history on accumulated earnings tax will show that the
application of the accumulated earnings tax to publicly held corporations has been problematic.
Initially, the Tax Court and the Court of Claims held that the accumulated earnings tax applies to
publicly held corporations. Then, the Ninth Circuit Court of Appeals ruled in Golconda that the
accumulated earnings tax could only apply to closely held corporations. Despite Golconda, the
Internal Revenue Service asserted that the tax could be imposed on widely held corporations
including those not controlled by a few shareholders or groups of shareholders. The Service
indicated it would not follow the Ninth Circuit regarding publicly held corporations.11 In 1984,
American legislation nullified the Ninth Circuit's Golconda ruling and made it clear that the
accumulated earnings tax is not limited to closely held corporations.12 Clearly, Golconda is no
longer a reliable precedent.
The amendatory provision of Section 25 of the 1977 NIRC, which was PD 1739, enumerated the
corporations exempt from the imposition of improperly accumulated tax: (a) banks; (b) non-bank
financial intermediaries; (c) insurance companies; and (d) corporations organized primarily and
authorized by the Central Bank of the Philippines to hold shares of stocks of banks. Petitioner
does not fall among those exempt classes. Besides, the rule on enumeration is that the express
mention of one person, thing, act, or consequence is construed to exclude all others.13 Laws
granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in
favor of the taxing power.14 Taxation is the rule and exemption is the exception.15 The burden
of proof rests upon the party claiming exemption to prove that it is, in fact, covered by the
exemption so claimed,16 a burden which petitioner here has failed to discharge.
If the CIR determined that the corporation avoided the tax on shareholders by permitting
earnings or profits to accumulate, and the taxpayer contested such a determination, the burden of
proving the determination wrong, together with the corresponding burden of first going forward
with evidence, is on the taxpayer. This applies even if the corporation is not a mere holding or
investment company and does not have an unreasonable accumulation of earnings or profits
In order to determine whether profits are accumulated for the reasonable needs to avoid the
surtax upon shareholders, it must be shown that the controlling intention of the taxpayer is
manifest at the time of accumulation, not intentions declared subsequently, which are mere
afterthoughts.28 Furthermore, the accumulated profits must be used within a reasonable time
after the close of the taxable year. In the instant case, petitioner did not establish, by clear and
convincing evidence, that such accumulation of profit was for the immediate needs of the
business.
In Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue,29 we ruled:
To determine the "reasonable needs" of the business in order to justify an accumulation of
earnings, the Courts of the United States have invented the so-called "Immediacy Test" which
construed the words "reasonable needs of the business" to mean the immediate needs of the
business, and it was generally held that if the corporation did not prove an immediate need for
the accumulation of the earnings and profits, the accumulation was not for the reasonable needs
of the business, and the penalty tax would apply. (Mertens. Law of Federal Income Taxation,
Vol. 7, Chapter 39, p, 103).
OTHER ISSUES:
⁃ Formulas used
• Petitioner relies on the so-called "Bardahl" formula, which allowed retention, as
working capital reserve, sufficient amounts of liquid assets to carry the company through one
operating cycle. The "Bardahl"17 formula was developed to measure corporate liquidity. The
formula requires an examination of whether the taxpayer has sufficient liquid assets to pay all of
its current liabilities and any extraordinary expenses reasonably anticipated, plus enough to
operate the business during one operating cycle. Operating cycle is the period of time it takes to
convert cash into raw materials, raw materials into inventory, and inventory into sales,
including the time it takes to collect payment for the sales.
• Using this formula, petitioner contends, Cyanamid needed at least P33,763,624.00 pesos
as working capital. As of 1981, its liquid asset was only P25,776,991.00. Thus, petitioner asserts
that Cyanamid had a working capital deficit of P7,986,633.00.19 Therefore, the P9,540,926.00
accumulated income as of 1981 may be validly accumulated to increase the petitioner's working
capital for the succeeding year.
• We note, however, that the companies where the "Bardahl" formula was applied, had
operating cycles much shorter than that of petitioner. In Atlas Tool Co., Inc, vs. CIR,20 the
company's operating cycle was only 3.33 months or 27.75% of the year. In Cataphote Corp. of
Mississippi vs. United States,21 the corporation's operating cycle was only 56.87 days, or
15.58% of the year. In the case of Cyanamid, the operating cycle was 288.35 days, or 78.55% of
a year, reflecting that petitioner will need sufficient liquid funds, of at least three quarters of the
year, to cover the operating costs of the business.
• Other formulas are also used, e.g. the ratio of current assets to current liabilities and the
adoption of the industry standard.23 The ratio of current assets to current liabilities is used to
determine the sufficiency of working capital. Ideally, the working capital should equal the
current liabilities and there must be 2 units of current assets for every unit of current liability,
hence the so-called "2 to 1" rule. As of 1981 the working capital of Cyanamid was
P25,776,991.00, or more than twice its current liabilities. That current ratio of Cyanamid,
therefore, projects adequacy in working capital. Said working capital was expected to increase
further when more funds were generated from the succeeding year's sales. Available income
covered expenses or indebtedness for that year, and there appeared no reason to expect an
impending "working capital deficit" which could have necessitated an increase in working
capital, as rationalized by petitioner.
