September 6, 1999 REVENUE REGULATIONS NO.

12-99 SUBJECT: Implementing the Provisions of the National Internal Revenue Code of 1997 Governing the Rules on Assessment of National Internal Revenue Taxes, Civil Penalties and Interest and the xtra!"udi#ial $ettlement of a Taxpa%er&s Criminal 'iolation of the Code Through Pa%ment of a $uggested Compromise Penalt% TO: All Internal Revenue (ffi#ers and (thers Con#erned $ CTI(N 1) $#ope) * Pursuant to the provisions of $e#tion +,,, in relation to $e#tion +,- of the National Internal Revenue Code of 1997, these Regulations are here.% promulgated to implement the provisions of $e#tions /, 7, +0,, ++1, +,7, +,1 and +,9 on assessment of national internal revenue taxes, fees and #harges and to provide the rules governing the extra! "udi#ial settlement of a taxpa%er&s #riminal violation of the said Code or an% of its implementing Regulations through pa%ment of a suggested #ompromise penalt%) $ CTI(N +) General Prin#iples) * +)1 The sur#harge and2or interest herein pres#ri.ed shall appl% to all taxes, fees and #harges imposed under the Code 3hi#h shall .e #olle#ted at the same time, in the same manner, and as part of the tax) #dasia +)+ In #ase the tax due from the taxpa%er is paid on a partial or installment .asis, the interest on the defi#ien#% tax or on the delin4uen#% tax lia.ilit% of the taxpa%er shall .e imposed from due date of the tax until full pa%ment thereof) The interest shall .e #omputed .ased on the diminishing .alan#e of the tax, in#lusive of interests) $ CTI(N 5) 6ue Pro#ess Re4uirement in the Issuan#e of a 6efi#ien#% Tax Assessment) * 5)1 7ode of pro#edures in the issuan#e of a defi#ien#% tax assessment8 5)1)1 Noti#e for informal #onferen#e) * The Revenue (ffi#er 3ho audited the taxpa%er&s re#ords shall, among others, state in his report 3hether or not the taxpa%er agrees 3ith his findings that the taxpa%er is lia.le for defi#ien#% tax or taxes) If the taxpa%er is not amena.le, .ased on the said (ffi#er&s su.mitted report of investigation, the taxpa%er shall .e informed, in 3riting, .% the Revenue 6istri#t (ffi#e or .% the $pe#ial Investigation 6ivision, as the #ase ma% .e 9in the #ase Revenue Regional (ffi#es: or .% the Chief of 6ivision #on#erned 9in the #ase of the ;IR National (ffi#e: of the dis#repan#% or dis#repan#ies in the taxpa%er&s pa%ment of his internal revenue taxes, for the purpose of <Informal Conferen#e,< in order to afford the taxpa%er 3ith an opportunit% to present his side of the #ase) If the taxpa%er fails to respond 3ithin fifteen 91-: da%s from date of re#eipt of the noti#e for informal #onferen#e, he shall .e #onsidered in default, in 3hi#h #ase, the Revenue 6istri#t (ffi#er or the Chief of the $pe#ial Investigation 6ivision of the Revenue Regional (ffi#e, or the Chief of 6ivision in the National (ffi#e, as the #ase ma% .e, shall endorse the #ase 3ith the least possi.le dela% to the Assessment 6ivision of the Revenue Regional (ffi#e or to the Commissioner or his dul% authori=ed representative, as the #ase ma% .e, for appropriate revie3 and issuan#e of a defi#ien#% tax assessment, if 3arranted) 5)1)+ Preliminar% Assessment Noti#e 9PAN:) * If after revie3 and evaluation .% the Assessment 6ivision or .% the Commissioner or his dul% authori=ed representative, as the #ase ma% .e, it is determined that there exists suffi#ient .asis to assess the taxpa%er for an% defi#ien#% tax or taxes, the said (ffi#e shall issue to the taxpa%er, at least .% registered mail, a Preliminar% Assessment Noti#e 9PAN: for the proposed assessment, sho3ing in detail, the fa#ts and the la3, rules and regulations, or "urispruden#e on 3hi#h the proposed assessment is .ased

9see illustration in ANN > A hereof:) If the taxpa%er fails to respond 3ithin fifteen 91-: da%s from date of re#eipt of the PAN, he shall .e #onsidered in default, in 3hi#h #ase, a formal letter of demand and assessment noti#e shall .e #aused to .e issued .% the said (ffi#e, #alling for pa%ment of the taxpa%er&s defi#ien#% tax lia.ilit%, in#lusive of the appli#a.le penalties) ?i.?ex 5)1)5 x#eptions to Prior Noti#e of the Assessment) * The noti#e for informal #onferen#e and the preliminar% assessment noti#e shall not .e re4uired in an% of the follo3ing #ases, in 3hi#h #ase, issuan#e of the formal assessment noti#e for the pa%ment of the taxpa%er&s defi#ien#% tax lia.ilit% shall .e suffi#ient8 9i: @hen the finding for an% defi#ien#% tax is the result of mathemati#al error in the #omputation of the tax appearing on the fa#e of the tax return filed .% the taxpa%erA or 9ii: @hen a dis#repan#% has .een determined .et3een the tax 3ithheld and the amount a#tuall% remitted .% the 3ithholding agentA or 9iii: @hen a taxpa%er 3ho opted to #laim a refund or tax #redit of ex#ess #redita.le 3ithholding tax for a taxa.le period 3as determined to have #arried over and automati#all% applied the same amount #laimed against the estimated tax lia.ilities for the taxa.le 4uarter or 4uarters of the su##eeding taxa.le %earA or 9iv: @hen the ex#ise tax due on ex#isa.le arti#les has not .een paidA or 9v: @hen an arti#le lo#all% pur#hased or imported .% an exempt person, su#h as, .ut not limited to, vehi#les, #apital e4uipment, ma#hineries and spare parts, has .een sold, traded or transferred to non!exempt persons) 5)1), Bormal ?etter of 6emand and Assessment Noti#e) * The formal letter of demand and assessment noti#e shall .e issued .% the Commissioner or his dul% authori=ed representative) The letter of demand #alling for pa%ment of the taxpa%er&s defi#ien#% tax or taxes shall state the fa#ts, the la3, rules and regulations, or "urispruden#e on 3hi#h the assessment is .ased, other3ise, the formal letter of demand and assessment noti#e shall .e void 9see illustration in ANN > ; hereof:) The same shall .e sent to the taxpa%er onl% .% registered mail or .% personal deliver%) If sent .% personal deliver%, the taxpa%er or his dul% authori=ed representative shall a#Cno3ledge re#eipt thereof in the dupli#ate #op% of the letter of demand, sho3ing the follo3ing8 9a: Dis nameA 9.: signatureA 9#: designation and authorit% to a#t for and in .ehalf of the taxpa%er, if a#Cno3ledged re#eived .% a person other than the taxpa%er himselfA and 9d: date of re#eipt thereof) 5)1)6isputed Assessment) * The taxpa%er or his dul% authori=ed representative ma% protest administrativel% against the aforesaid formal letter of demand and assessment noti#e 3ithin thirt% 950: da%s from date of re#eipt thereof) If there are several issues involved in the formal letter of demand and assessment noti#e .ut the taxpa%er onl% disputes or protests against the validit% of some of the issues raised, the taxpa%er shall .e re4uired to pa% the defi#ien#% tax or taxes attri.uta.le to the undisputed issues, in 3hi#h #ase, a #olle#tion letter shall .e issued to the taxpa%er #alling for pa%ment of the said defi#ien#% tax, in#lusive of the appli#a.le sur#harge and2or interest) No a#tion shall .e taCen on the taxpa%er&s disputed issues until the taxpa%er has paid the defi#ien#% tax or taxes attri.uta.le to the said undisputed issues) The pres#riptive period for assessment or #olle#tion of the tax or taxes attri.uta.le to the disputed issues shall .e suspended) ll#d The taxpa%er shall state the fa#ts, the appli#a.le la3, rules and regulations, or "urispruden#e on 3hi#h his protest is .ased, other3ise, his protest shall .e #onsidered void and 3ithout for#e and effe#t) If there are several issues involved in the disputed assessment and the taxpa%er fails to state the fa#ts, the appli#a.le la3, rules and regulations, or "urispruden#e in support of his protest against some of the several issues on 3hi#h the assessment is .ased, the same shall .e #onsidered undisputed issue or issues, in 3hi#h #ase, the taxpa%er shall .e re4uired to pa% the

#orresponding defi#ien#% tax or taxes attri.uta.le thereto) The taxpa%er shall su.mit the re4uired do#uments in support of his protest 3ithin sixt% 9/0: da%s from date of filing of his letter of protest, other3ise, the assessment shall .e#ome final, exe#utor% and demanda.le) The phrase <su.mit the re4uired do#uments< in#ludes su.mission or presentation of the pertinent do#uments for s#rutin% and evaluation .% the Revenue (ffi#er #ondu#ting the audit) The said Revenue (ffi#er shall state this fa#t in his report of investigation) If the taxpa%er fails to file a valid protest against the formal letter of demand and assessment noti#e 3ithin thirt% 950: da%s from date of re#eipt thereof, the assessment shall .e#ome final, exe#utor% and demanda.le) If the protest is denied, in 3hole or in part, .% the Commissioner, the taxpa%er ma% appeal to the Court of Tax Appeals 3ithin thirt% 950: da%s from date of re#eipt of the said de#ision, other3ise, the assessment shall .e#ome final, exe#utor% and demanda.le) In general, if the protest is denied, in 3hole or in part, .% the Commissioner or his dul% authori=ed representative, the taxpa%er ma% appeal to the Court of Tax Appeals 3ithin thirt% 950: da%s from date of re#eipt of the said de#ision, other3ise, the assessment shall .e#ome final, exe#utor% and demanda.le8 Provided, ho3ever, that if the taxpa%er elevates his protest to the Commissioner 3ithin thirt% 950: da%s from date of re#eipt of the final de#ision of the Commissioner&s dul% authori=ed representative, the latter&s de#ision shall not .e #onsidered final, exe#utor% and demanda.le, in 3hi#h #ase, the protest shall .e de#ided .% the Commissioner) #dtai If the Commissioner or his dul% authori=ed representative fails to a#t on the taxpa%er&s protest 3ithin one hundred eight% 9110: da%s from date of su.mission, .% the taxpa%er, of the re4uired do#uments in support of his protest, the taxpa%er ma% appeal to the Court of Tax Appeals 3ithin thirt% 950: da%s from the lapse of the said 110!da% period, other3ise, the assessment shall .e#ome final, exe#utor% and demanda.le) 5)1)/ Administrative 6e#ision on a 6isputed Assessment) * The de#ision of the Commissioner or his dul% authori=ed representative shall 9a: state the fa#ts, the appli#a.le la3, rules and regulations, or "urispruden#e on 3hi#h su#h de#ision is .ased, other3ise, the de#ision shall .e void 9see illustration in ANN > C hereof:, in 3hi#h #ase, the same shall not .e #onsidered a de#ision on a disputed assessmentA and 9.: that the same is his final de#ision) 5)1)7 Constru#tive $ervi#e) * If the noti#e to the taxpa%er herein re4uired is served .% registered mail, and no response is re#eived from the taxpa%er 3ithin the pres#ri.ed period from date of the posting thereof in the mail, the same shall .e #onsidered a#tuall% or #onstru#tivel% re#eived .% the taxpa%er) If the same is personall% served on the taxpa%er or his dul% authori=ed representative 3ho, ho3ever, refused to a#Cno3ledge re#eipt thereof, the same shall .e #onstru#tivel% served on the taxpa%er) Constru#tive servi#e thereof shall .e #onsidered effe#ted .% leaving the same in the premises of the taxpa%er and this fa#t of #onstru#tive servi#e is attested to, 3itnessed and signed .% at least t3o 9+: revenue offi#ers other than the revenue offi#er 3ho #onstru#tivel% served the same) The revenue offi#er 3ho #onstru#tivel% served the same shall maCe a 3ritten report of this matter 3hi#h shall form part of the do#Cet of this #ase 9see illustration in ANN > 6 hereof:) $ CTI(N ,) Civil Penalties) * ,)1 T3ent%!Bive Per#ent 9+-E: $ur#harge) * There shall .e imposed, in addition to the .asi# tax re4uired to .e paid, a penalt% e4uivalent to t3ent%!five per#ent 9+-E: thereof, in an% the follo3ing #ases8 ,)1)1 Bailure to file an% return and pa% the tax due thereon as re4uired under the provisions of this Code or rules and regulations on the date pres#ri.edA or ,)1)+ Fnless other3ise authori=ed .% the Commissioner, filing a return 3ith an internal

revenue offi#er other than those 3ith 3hom the return is re4uired to .e filedA or ,)1)5 Bailure to pa% the defi#ien#% tax 3ithin the time pres#ri.ed for its pa%ment in the noti#e of assessmentA or ,)1), Bailure to pa% the full or part of the amount of tax sho3n on an% return re4uired to .e filed under the provisions of this Code or rules and regulations, or the full amount of tax due for 3hi#h no return is re4uired to .e filed, on or .efore the date pres#ri.ed for its pa%ment) #dasia ,)+ Bift% Per#ent 9-0E: $ur#harge8 ,)+)1 In #ase of 3illful negle#t to file the return 3ithin the period pres#ri.ed .% the Code, or in #ase a false or fraudulent return is 3illfull% made, the penalt% to .e imposed shall .e fift% per#ent 9-0E: of the tax or of the defi#ien#% tax, in #ase an% pa%ment has .een made on the .asis of su#h return .efore the dis#over% of the falsit% or fraud8 Provided, That a su.stantial underde#laration of taxa.le sales, re#eipts or in#ome, or a su.stantial overstatement of dedu#tions, as determined .% the Commissioner or his dul% authori=ed representative, shall #onstitute prima fa#ie eviden#e of a false or fraudulent return8 Provided, further, That failure to report sales, re#eipts or in#ome in an amount ex#eeding thirt% per#ent 950E: of that de#lared per return, and a #laim of dedu#tions in an amount ex#eeding thirt% per#ent 950E: of a#tual dedu#tions, shall render the taxpa%er lia.le for su.stantial underde#laration of sales, re#eipts or in#ome or for overstatement of dedu#tions, as mentioned herein8 Provided, further, that the term <3illful negle#t to file the return 3ithin the period pres#ri.ed .% the Code< shall not appl% in #ase the taxpa%er, 3ithout noti#e from the Commissioner or his authori=ed representative, voluntaril% files the said return, in 3hi#h #ase, onl% +-E sur#harge shall .e imposed for late filing and late pa%ment of the tax in lieu of the a.ove -0E sur#harge) Conversel%, the -0E sur#harge shall .e imposed in #ase the taxpa%er files the return onl% after prior noti#e in 3riting from the Commissioner or his dul% authori=ed representative) ,)+)+ $e#tion / 9A: of the Code provides that an% tax return filed .% a taxpa%er <ma% .e modified, #hanged or amended< .% the taxpa%er <3ithin three 95: %ears from date of su#h filing< provided, ho3ever, that <no noti#e for audit or investigation of su#h return, statement or de#laration has, in the meantime, .een a#tuall% served upon the taxpa%er)< Thus, if upon investigation, it is determined that the taxpa%er&s originall% filed tax return is false or fraudulent, su#h taxpa%er shall remain lia.le to the -0E #ivil penalt% regardless that the taxpa%er has filed his amended tax return, if the said amended tax return, ho3ever, has .een filed onl% after issuan#e of the ?etter of Authorit% for the investigation of the taxpa%er&s tax return or su#h amendment has .een made in the #ourse of the said investigation) $ CTI(N -) 7ode of Pro#edures in Computing for the Tax and2or Appli#a.le $ur#harge) * $ho3n hereunder are illustrative #ases for the #omputation and assessment of the tax, in#lusive of sur#harge 9if appli#a.le: and interest8 -)1 ?ate filing and late pa%ment of the tax) * Illustration8 In#ome tax return for the #alendar %ear 1991 3as due for filing on April 1-, 1999 .ut the taxpa%er voluntaril% filed his tax return, 3ithout noti#e from the ;IR, onl% on Gune 50, 1999) The tax due per return amounts to P100,000) In this #ase, the taxpa%er shall .e lia.le for delin4uen#% penalties #onsisting of +-E sur#harge, plus +0E interest per annum, #omputed from due date of the tax until date of pa%ment, #omputed as follo3s8 Calendar Hear 1991 In#ome tax due per return P100,000)00 Add8 +-E sur#harge for late filing and late pa%ment 9P100,000)00 times +-E: P+-,000)00 +0E int) p)a) from ,!1-!99 to /!50!99 9P100,000)00 times )0,1--+,: P,,1--)+, P+9,1--)+, **** *****

Total amount due 9ex#luding suggested #ompromise for late filing and late pa%ment of the tax: P1+9,1--)+, IIIIIIIII (nl% one +-E sur#harge shall .e imposed for late filing of the return and late pa%ment of the tax) -)+ The tax return is filed on time .ut filed through an internal revenue offi#er other than 3ith 3hom the return is re4uired to .e filed) * Illustration8 The taxpa%er&s 1991 in#ome tax return is re4uired to .e filed through the authori=ed agent .anC under the "urisdi#tion of R6( ast 7aCati) ;ut, 3ithout prior authori=ation from the ;IR, the taxpa%er filed his tax return and paid the tax through the authori=ed agent .anC under the "urisdi#tion of R6( 6avao Cit%) Tax due and paid per return is P100,000)00) Calendar Hear 1991 In#ome tax due per return P100,000)00 Add8 +-E sur#harge P+-,000)00 ***** Total amount due P1+-,000)00 ?ess8 Amount paid P100,000)00 ***** Amount still due P+-,000)00 IIIIIIIII -)5 ?ate filing and late pa%ment due to taxpa%er&s 3illful negle#t) * Illustration8 The taxpa%er did not file his in#ome tax return for the #alendar %ear 1997 3hi#h 3as due for filing on April 1-, 1991) De 3as notified .% the ;IR of his failure to file the tax return, for 3hi#h reason, he filed his tax return and paid the tax, onl% after the said noti#e, on Gune 50, 1999) The tax due per return is P100,000)00) Calendar Hear 1997 In#ome tax due per return P100,000)00 Add8 -0E sur#harge for 3illful negle#t to file the return and late pa%ment of the tax 9P100,000 times -0E: P-0,000)00 +0E int) p)a) fr) ,!1-!91 to /!50!99 9P100,000)00 times )+,1--+,: P+,,1--)+, P7,,1--)+, ***** ***** Total amount due 9ex#luding suggested #ompromise for late filing and late pa%ment of the tax: P17,,1--)+, IIIIIIIII -), Penalt% or penalties for defi#ien#% tax) * As a rule, no sur#harge is imposed on defi#ien#% tax and on the .asi# tax) Do3ever, if the amount due in#lusive of penalties is not paid on or .efore the due date stated on the demand letter, the #orresponding sur#harge shall .e imposed) Illustration No) 18 Taxpa%er filed on time his in#ome tax return for #alendar %ear 1997 and paid P100,000)00 on April 1-, 1991) Fpon pre!audit of his return, it 3as dis#losed that he erroneousl% #omputed the tax due) The #orre#t amount of tax due is P1+0,000)00) The taxpa%er is assessed for defi#ien#% in#ome tax in a letter of demand and assessment noti#e issued on Gune 50, 1999) ??pr Calendar Hear 1997 Tax due per pre!audit P1+0,000)00 ?ess8 Amount assessed and paid per tax return filed P100,000)00

***** 6efi#ien#% in#ome tax P+0,000)00 Add8 +0E int) p)a) from ,!1-!91 to /!50!99 9P+0,000)00 times )+,1--+,: P,,151)0***** Amount still due P+,,151)0IIIIIIIII Illustration No) +8 A;C C(RP(RATI(N filed its in#ome tax return for #alendar %ear 1997 and paid on time its in#ome tax sho3n thereunder, amounting to P100,000) $aid taxpa%er 3as investigated) Fpon verifi#ation of its a##ounting re#ords, it 3as dis#losed that its dedu#tion, from gross in#ome, of representation expenses in the amount of P+00,000)00 did not meet all the statutor% re4uisites for dedu#ti.ilit%) The #orporation 3as dul% notified of the said dis#repan#% through a Preliminar% Assessment Noti#e) ;ased on the 5-E in#ome tax rate on #orporations appli#a.le in the %ear 1997, the in#ome tax due after investigation amounts to P170,000)00) After dedu#tion of in#ome tax paid per return filed, the .asi# defi#ien#% in#ome tax amounts to P70,000, ex#luding penalties) Bailing to protest on time against the preliminar% assessment noti#e, a formal letter of demand and assessment noti#e 3as issued on 7a% 51, 1999, re4uiring pa%ment of the assessment not later than Gune 50, 1999) Calendar Hear 1997 In#ome tax due per investigation P170,000)00 ?ess8 In#ome tax paid per return P100,000)00 ***** 6efi#ien#% in#ome tax P70,000)00 Add8 +0E int) p)a) fr) ,!1-!91 to /!50!99 9P70,000 times )+,1--+,: P1/,901)/7 ***** Total amount still due P1/,901)/7 IIIIIIIII Illustration No) 58 >HJ C(RP(RATI(N filed its in#ome tax return for #alendar %ear 1997 3ith a net taxa.le in#ome of P-00,000)00) At the appli#a.le in#ome tax rate of 5-E for the %ear 1997, its in#ome tax amounted to P17-,000)00) Do3ever, upon investigation, it 3as dis#losed that its in#ome tax return 3as false or fraudulent .e#ause it did not report a taxa.le in#ome amounting to another P-00,000)00) (n its net in#ome of P1,000,000)00, per investigation, the in#ome tax due is P5-0,000)00) 6edu#ting its pa%ment per return filed, the defi#ien#%, ex#luding penalties, amounted to P17-,000)00) It 3as dul% informed of this finding through a Preliminar% Assessment Noti#e) Bailing to protest on time against the preliminar% assessment noti#e, a formal letter of demand and assessment noti#e 3as issued on 7a% 51, 1999 #alling for pa%ment of the defi#ien#% in#ome tax on or .efore Gune 50, 1999) ll#d In this #ase, said #orporation is lia.le for the #ivil penalties of -0E sur#harge for having filed a false or fraudulent return, plus +0E interest per annum on the defi#ien#%, #omputed as follo3s8 Calendar Hear 1997 In#ome tax due per investigation P5-0,000)00 ?ess8 In#ome tax paid per return P17-,000)00 ***** 6efi#ien#% in#ome tax P17-,000)00 Add8 -0E sur#harge for filing a fraudulent or false return 9P17-,000)00 times -0E: P17,-00)00 +0E int) p)a) fr) ,!1-!91 to /!50!99 9P17-,000)00 times )+,1--+,: P,+,+71)/7 P1+9,771)/7 ***** ***** Total amount due P50,,771)/7 IIIIIIIII

-)?ate pa%ment of a defi#ien#% tax assessed) * In general, the defi#ien#% tax assessed shall .e paid .% the taxpa%er 3ithin the time pres#ri.ed in the noti#e and demand, other3ise, su#h taxpa%er shall .e lia.le for the #ivil penalties in#ident to late pa%ment) Illustration8 ;ased on the a.ove Illustration No) 5, $#enario ,, assuming that the #alendar %ear 1997 defi#ien#% in#ome tax assessment against >HJ C(RP(RATI(N, in the amount of P50,,771)/7, is not paid .% Gune 50, 1999, the deadline for pa%ment of the assessment, and assuming further that this assessment has alread% .e#ome final and #olle#ti.le) In this #ase, su#h #orporation shall .e #onsidered late in pa%ment of the said assessment) Assuming, further, that the #orporation pa%s its tax assessment onl% .% Gul% 51, 1999, the #ivil penalties for late pa%ment shall .e #omputed as follo3s8 Calendar Hear 1997 Total defi#ien#% in#ome tax assessed on 7a% 51, 1999 P50,,771)/7 Add8 +-E sur#harge for late pa%ment 9P50,,771)/7 times +-E: P7/,19+)9+ +0E interest p)a) from 7!1!99 to 7!51!99 9P50,,771)/7 times )01////7: P-,079)-, P11,+7+),/ ***** ***** Total amount due 9ex#luding suggested #ompromise penalt% for late pa%ment: P51/,0,,)15 IIIIIIIII -)/ Computation of +0E interest per annum in #ase of partial or installment pa%ment of a tax lia.ilit%) * Illustration No) 18 In #ase extended pa%ment of the tax is dul% authori=ed) * 6 B C(RP(RATI(N, due to finan#ial in#apa#it%, re4uested that it .e allo3ed to pa% its in#ome tax lia.ilit% per return for #alendar %ear 1991, in the amount of P1,000,000)00, in four 9,: monthl% installments, starting April 1-, 1999) Its re4uest has .een dul% approved pursuant to $e#) -5 of the Tax Code) In this #ase, no +-E sur#harge shall .e imposed for late pa%ment of the tax sin#e its deadline for pa%ment has .een dul% extended) Do3ever, +0E interest per annum for the extended pa%ment shall .e imposed, #omputed .ased on the diminishing .alan#e of the <unpaid amount<, pursuant to the provisions of $e#tion +,9 96: of the Code) No +-E sur#harge on extended pa%ment shall .e imposed provided, ho3ever, that the taxpa%er&s re4uest for extension of the period 3ithin 3hi#h to pa% is made on or .efore the deadline pres#ri.ed for pa%ment of the tax due) Conversel%, if su#h re4uest is made after the deadline pres#ri.ed for pa%ment, the taxpa%er shall alread% .e treated late in pa%ment, in 3hi#h #ase, the +-E sur#harge shall .e imposed, even if pa%ment of the delin4uen#% .e allo3ed in partial amorti=ation) #dasia xample8 Calendar Hear 1991 In#ome tax due per return P1,000,000)00 ?ess8 1st installment of the tax on or .efore ,!1-!99 P+-0,000)00 ****** ;alan#e as of ,!1-!99 P7-0,000)00 Add8 +0E int) p)a) from ,!1-!99 to -!1-!99 9P7-0,000)00 times )01////7: P1+,-00)05 ****** Amount due on -!1-!99 P7/+,-00)05 ?ess8 +nd installment on -!1-!99 9P+-0,000)00 plus P1+,-00)05 interest: P+/+,-00)05

****** ;alan#e as of -!1-!99 P-00,000)00 Add8 +0E int) p)a) from -!1-!99 to /!1-!99 9P-00,000)00 times )01////7: P1,555)5****** Amount due on /!1-!99 P-01,555)5?ess8 5rd installment on /!1-!99 9P+-0,000)00 plus P1,555)5- interest: P+-1,555)5****** ;alan#e as of /!1-!99 P+-0,000)00 Add8 +0E int) p)a) from /!1-!99 to 7!1-!99 9P+-0,000)00 times )01////7: P,,1//)/1 ****** ,th and final installment on 7!1-!99 P+-,,1//)/1 IIIIIIIIIII Illustration No) +8 Computation of tax delin4uen#% in #ase of partial pa%ment of the tax due 3ithout prior ;IR authori=ation for extended pa%ment) * xample8 GDI C(RP(RATI(N did not file its final ad"ustment in#ome tax return for the #alendar %ear 1991 3hi#h 3as due on April 1-, 1999) The ;IR informed the #orporation of its failure to file its said tax return and re4uired that it file the same, in#lusive of the +-E sur#harge and +0E interest per annum penalties in#ident to the said omission) (n 7a% 1-, 1999 it advised that its in#ome tax due for the said %ear amounts to P1,000,000)00 .ut, ho3ever, due to its adverse finan#ial #ondition at the moment, it 3ill .e una.le to pa% the entire amount, in#lusive of the delin4uen#% penalties) Den#e, on 7a% 1-, 1999, it made a partial pa%ment of P,00,000)00) Assuming that the ;IR demanded pa%ment of the unpaid .alan#e of its tax o.ligation pa%a.le .% Gune 1-, 1999, the unpaid .alan#e of the #orporation&s delin4uent in#ome tax shall .e #omputed as follo3s8 Calendar Hear 1991 In#ome tax due per return P1,000,000)00 Add8 +-E sur#harge for late filing and late pa%ment P+-0,000)00 +0E interest per annum from ,!1-!99 to -!1-!99 9P1,000,000)00 times )01////7: P1/,///)70 P+//,///)70 ***** ***** Amount due as of -!1-!99 P1,+//,///)70 ?ess8 Partial pa%ment on -!1-!99 P,00,000)00 ***** ;alan#e as of -!1-!99 P1//,///)70 Add8 +0E interest per annum from -!1-!99 to /!1-!99 9P1//,///)70 times )01////7: P1,,,,,),7 ***** Amount still due 9ex#lusive of the suggested #ompromise penalt% for late filing and late pa%ment P111,111)17 IIIIIIIII If the said taxpa%er fails to pa% the amount of P111,111)17 .% Gune 1-, 1999, no further +-E sur#harge for late pa%ment of the tax shall .e imposed) Instead, onl% the +0E interest per annum shall .e imposed against the taxpa%er against the taxpa%er, #omputed from due date thereof 9i)e), Gune 1-, 1999: until paid) If said taxpa%er pa%s the same on partial pa%ment .asis, the +0E interest per annum shall .e #omputed on the diminishing .alan#e thereof, pursuant to the pro#edures in the pre#eding Illustration No) 1, $e#tion /)/ hereof)

$ CTI(N /) $uggested Compromise Penalt% in xtra!"udi#ial $ettlement of a Taxpa%er&s Criminal 'iolation) * $e#tion +0, of the Tax Code of 1997 provides that <All #riminal violations ma% .e #ompromised ex#ept8 9a: those alread% filed in #ourt, or 9.: those involving fraud)< This means that, in general, the taxpa%er&s #riminal lia.ilit% arising from his violation of the pertinent provision of the Code ma% .e settled extra!"udi#iall% instead of the ;IR instituting against the taxpa%er a #riminal a#tion in Court) A #ompromise in extra!"udi#ial settlement of the taxpa%er&s #riminal lia.ilit% for his violation is #onsensual in #hara#ter, hen#e, ma% not .e imposed on the taxpa%er 3ithout his #onsent) Den#e, the ;IR ma% onl% suggest settlement of the taxpa%er&s lia.ilit% through a #ompromise) pr?? The extra!"udi#ial settlement of the taxpa%er&s #riminal lia.ilit% and the amount of the suggested #ompromise penalt% shall #onform 3ith the s#hedule of #ompromise penalties provided under Revenue 7emorandum (rder No) 1!90 or as hereafter revised) $ CTI(N 7) Repealing Clause) * An% revenue issuan#e 3hi#h is in#onsistent here3ith shall .e #onsidered repealed, amended, or modified a##ordingl%) $ CTI(N 1) ffe#tivit%) * 1)1 General Rule) * In general, the provisions of these Regulations shall .e effe#tive .eginning Ganuar% 1, 1991 pursuant to the provisions of $e#tion 1 of R)A) No) 1,+,, other3ise Cno3n as the National Internal Revenue Code of 1997) 1)+ Computation of $ur#harge and Interest on 6efi#ien#% Tax Assessment) * An% defi#ien#% tax assessment issued .eginning Ganuar% 1, 1991 shall .e governed .% the rules pres#ri.ed in these Regulations) #da 1)5 (ther Provisions) * An% provision of these Regulations not other3ise spe#ifi#all% provided in the National Internal Revenue Code of 1997 shall taCe effe#t fifteen 91-: da%s after pu.li#ation in an% ne3spaper of general #ir#ulation) 9$G6): 6GAR6( ;) $PIRITF $e#retar% of Binan#e Re#ommending Approval8 9$G6): ; TD(' N ?) RFA?( Commissioner of Internal Revenue

ANNEX A re!"m"#$r% A&&e&&me#t N't"(e A;C Corporation 1+5 7aCati Avenue 7aCati Cit% TIN8 000!000!000!000 Gentlemen8 Please .e informed that after investigation there has .een found due from %ou defi#ien#% in#ome tax for #alendar %ear 1997, as sho3n hereunder8 Assessment No) KKKKKKK Taxa.le in#ome per return P1,000,000)00 Add8 6is#repan#ies per investigation 1) Fnde#lared rental in#ome P+00,000)00 +) Non!dedu#ti.le interest expenses 500,000)00 5) Fndo#umented representation expenses 1-0,000)00 ,) Non!dedu#ti.le .ad de.t expense +-0,000)00 900,000)00 ***** ***** Taxa.le in#ome per investigation P1,900,000)00 ***** In#ome tax due thereon 95-E: P//-,000)00 ?ess8 In#ome tax paid per return 5-0,000)00 ***** ;alan#e P51-,000)00 Add8 -0E sur#harge for filing of fraudulent return P1-7,-00)00 +0E interest per annum from ,!1-!9/ to 5!1-!91 /5,000)00 ++0,-00)00L ***** T(TA? A7(FNT 6F P-5-,-00)00L LPlease note that the interest and the total amount due 3ill have to .e ad"usted if paid .e%ond 5! 1-!91 The #omplete details #overing the aforementioned dis#repan#ies esta.lished during the investigation of this #ase are sho3n in the a##ompan%ing ANN > A!1 of this letter of demand) #dasia The -0E sur#harge has .een imposed pursuant to the provisions of $e#tion +,19;: of the National Internal Revenue Code, as amended .% R)A) No) 1,+,, 3hi#h tooC effe#t on Ganuar% 1, 1991, in vie3 of %our failure to report for in#ome tax purposes %our aforementioned rental in#ome) $u#h omission renders %our in#ome tax return filed for the taxa.le #alendar %ear 1997 as a false or fraudulent return) The +0E interest per annum has .een imposed pursuant to the provisions of $e#tion +,99;: of the said Code) Pursuant to the provisions of $e#tion ++1 of the National Internal Revenue Code of 1997 and its implementing Revenue Regulations, %ou are here.% given the opportunit% to present in 3riting %our side of the #ase 3ithin fifteen 91-: da%s from re#eipt hereof) If 3e fail to hear from %ou 3ithin the said period, %ou shall .e #onsidered in default, in 3hi#h #ase, a formal letter of demand and assessment noti#e shall .e issued .% this (ffi#e #alling for pa%ment of %our aforesaid defi#ien#% in#ome tax, in#lusive of the aforementioned #ivil penalt% and interest) @e hope that %ou 3ill give this matter %our preferential attention) 'er% trul% %ours,

ANNEX A-1 A;C C(RP(RATI(N 1+5 7aCati Avenue 7aCati Cit% TIN8 000!000!000!000 6 TAI?$ (B 6I$CR PANCI $ Assessment No) KKKKKKKK 1) Fnde#lared rental in#ome 9P+00,000)00:) * 'erifi#ation dis#losed that %ou derived this rental in#ome from the lease of %our .uilding to >HJ C(RP(RATI(N during the tax %ear 1997 .ut the same, 3ithout an% legal "ustifi#ation, 3as neither re#orded in %our .ooCs of a##ounts nor de#lared in %our in#ome tax return, there.% resulting to the understatement of %our reported taxa.le in#ome for the said tax %ear) +) Non!dedu#ti.le interest expense 9P500,000)00:) * 'erifi#ation dis#losed that this interest expense, #laimed as dedu#tion from %our gross in#ome for the tax %ear 1997, 3as a#tuall% in#urred in #onne#tion 3ith %our loan from 7r) GFAN CA$TR() It 3as, ho3ever, further dis#losed that 7r) Castro o3ns and #ontrols /0E of %our outstanding #apital sto#C) Den#e, this interest expense is not a valid dedu#tion from %our gross in#ome, pursuant to $e#tion 5,9;:9+:, in relation to $e#tion 5/9;:9+: of the National Internal Revenue Code 3hi#h provides that no dedu#tion shall .e allo3ed in respe#t of interest expense in#urred .et3een an individual and a #orporation more than fift% per#ent 9-0E: in value of the outstanding sto#C of 3hi#h is o3ned, dire#tl% or indire#tl%, .% or for su#h individual) ?ex?i. 5) Fndo#umented representation expenses 9P-0,000)00:) * 'erifi#ation dis#losed that this item of dedu#tion from %our gross in#ome for the tax %ear 1997 is in fa#t unsu.stantiated 3ith an% do#umentar% eviden#e, hen#e, disallo3ed in audit) ,) Non!dedu#ti.le .ad de.t expense 9P+-0,000)00:) * 'erifi#ation dis#losed that this item of dedu#tion from %our gross in#ome for the tax %ear 1997 3as, in fa#t, a mere provision for estimated un#olle#ti.le a##ounts from %our #ustomers as of the end of the said %ear) Fnder $e#tion 5,9 : of the said Code, a mere provision for estimated un#olle#ti.le a##ounts is not allo3a.le dedu#tion from gross in#ome) In general, for .ad de.ts to .e dedu#ti.le, the follo3ing statutor% re4uisites must have .een #omplied 3ith8 ,)1 That, the de.ts due from %our de.tor or de.tors must have .een as#ertained a#tuall% 3orthless as of the end of the taxa.le %earA and ,)+ That, the same have .een a#tuall% #harged or 3ritten!off in %our .ooCs of a##ounts as of the end of the said taxa.le %ear) ,)5 That, the said a##ounts re#eiva.le have a#tuall% .een #harged off or 3ritten!off the .ooCs of a##ounts as of the end of the taxa.le %ear) The re#ords of this #ase dis#losed that %ou have not introdu#ed an% eviden#e to overthro3 the validit% of our said findings) It is re4uested that %our aforesaid defi#ien#% in#ome tax lia.ilit% .e paid immediatel% upon re#eipt hereof, in#lusive of penalties in#ident to delin4uen#%) This is our final de#ision) If %ou disagree, %ou ma% appeal this final de#ision 3ith the Court of Tax Appeals 3ithin thirt% 950: da%s from date of re#eipt hereof, other3ise our said defi#ien#% in#ome tax assessment shall .e#ome final, exe#utor% and demanda.le) 'er% trul% %ours,

ANNEX B )OR*AL LETTER O) +E*AN+ A;C Corporation 1+5 7aCati Avenue 7aCati Cit% TIN8 000!000!000!000 Gentlemen8 Please .e informed that after investigation there has .een found due from %ou defi#ien#% in#ome tax for #alendar %ear 1997, as sho3n hereunder8 Assessment No) KKKKKKK Taxa.le in#ome per return P1,000,000)00 Add8 6is#repan#ies per investigation 1) Fnde#lared rental in#ome P+00,000)00 +) Non!dedu#ti.le interest expenses 500,000)00 5) Fndo#umented representation expenses 1-0,000)00 ,) Non!dedu#ti.le .ad de.t expense +-0,000)00 900,000)00 ***** ***** Taxa.le in#ome per investigation P1,900,000)00 ***** In#ome tax due thereon 95-E: P//-,000)00 ?ess8 In#ome tax paid per return 5-0,000)00 ***** ;alan#e P51-,000)00 Add8 -0E sur#harge for filing of fraudulent return P1-7,-00)00 +0E interest per annum from ,!1-!9/ to 5!1-!91 /5,000)00 ++0,-00)00L ***** T(TA? A7(FNT 6F P-5-,-00)00L LPlease note that the interest and the total amount due 3ill have to .e ad"usted if paid .e%ond 5! 1-!91 The #omplete details #overing the aforementioned dis#repan#ies esta.lished during the investigation of this #ase are sho3n in the a##ompan%ing $CD 6F? 1 of this letter of demand) The -0E sur#harge has .een imposed pursuant to the provisions of $e#tion +,19;: of the National Internal Revenue Code, as amended .% R)A) No) 1,+,, 3hi#h tooC effe#t on Ganuar% 1, 1991, in vie3 of %our failure to report for in#ome tax purposes %our aforementioned rental in#ome) $u#h omission renders %our in#ome tax return filed for the taxa.le #alendar %ear 1997 as a false or fraudulent return) #dll The +0E interest per annum has .een imposed pursuant to the provisions of $e#tion +,99;: of the said Code) In vie3 thereof, %ou are re4uested to pa% %our aforesaid defi#ien#% in#ome tax lia.ilit% through the dul% authori=ed agent .anC in 3hi#h %ou are enrolled 3ithin the time sho3n in the en#losed assessment noti#e) 'er% trul% %ours,

ANNEX C A;C Corporation 1+5 7aCati Avenue 7aCati Cit% TIN8 000!000!000!000 )INAL +ECISION ON +IS UTE+ ASSESS*ENT Gentlemen8 Referring to %our letter dated 7a% 1-, 1999, please .e informed that %our protest against our #alendar %ear 1997 defi#ien#% in#ome tax assessment in the amount of P-5-,-00)00, the su."e#t matter of our #overing letter of demand dated 7ar#h 1-, 1999, is here.% denied for la#C of fa#tual and legal .asis) The aforesaid assessment is premised on the follo3ing8 1) Fnde#lared rental in#ome 9P+00,000)00:) * 'erifi#ation dis#losed that %ou derived in#ome from the lease of %our .uilding to >HJ Corporation during the %ear 1997 .ut this 3as not re#orded in %our .ooCs of a##ounts and also not reported in %our in#ome tax return) +) Non!dedu#ti.le interest expense dedu#tion 9P500,000)00:) * 'erifi#ation dis#losed that this interest expenses 3as in#urred in #onne#tion 3ith %our loan from 7R) GFAN CA$TR() It 3as also dis#losed that 7r) Castro o3ns /0E of the outstanding sto#C of A;C Corporation) Den#e the said interest expense is non!dedu#ti.le in #omputing A;C Corporation&s taxa.le in#ome pursuant to $e#tion 5,9;:9+:9a:, in relation to $e#tion 5/9;:9+: of the NIRC, that interest paid on a loan transa#tion .et3een an individual and a #orporation more than fift% per#ent 9-0E: in value of the outstanding sto#C of 3hi#h is o3ned, dire#tl% or indire#tl%, .% or for su#h individual shall .e dedu#ti.le from gross in#ome for in#ome tax purposes) #dasia 5) Fndo#umented representation expenses 9P1-0,000)00:) * 'erifi#ation dis#losed that the vera#it% of this item of dedu#tion has not .een esta.lished, hen#e, disallo3ed as a dedu#tion from gross in#ome) ,) Non!dedu#ti.le .ad de.t expense 9P+-0,000)00:) * 'erifi#ation dis#losed that this 3as a mere provision for estimated #olle#ti.le a##ounts as of the end of the %ear 1997) Fnder $e#tion 5,9 :, NIRC, a mere provision for estimated un#olle#ti.le a##ounts is not dedu#ti.le from gross in#ome) To .e dedu#ti.le, t3o re4uisites must .e met8 ,)1 That, the de.ts due from %our de.tor2s 9a##ounts re#eiva.le: have .een as#ertained a#tuall% 3orthless as of the end of the taxa.le %earA and ,)+ That, the said a##ounts re#eiva.le have a#tuall% .een #harged off or 3ritten!off the .ooCs of a##ounts as of the end of the taxa.le %ear) The re#ords of this #ase dis#losed that %ou have not introdu#ed an% eviden#e to overthro3 the validit% of our said findings) d#tai It is re4uested that %our aforesaid defi#ien#% in#ome tax lia.ilit% .e paid immediatel% upon re#eipt hereof, in#lusive of penalties in#ident to delin4uen#%) This is our final de#ision) If %ou disagree, %ou ma% appeal this final de#ision 3ith the Court of Tax Appeals 3ithin thirt% 950: da%s from date of re#eipt hereof, other3ise our said defi#ien#% in#ome tax assessment shall .e#ome final, exe#utor% and demanda.le) 'er% trul% %ours,

ANNEX + CONSTRUCTIVE SERVICE O) NOTICE,S 7 7(RAN6F7 B(R8 The Commissioner2Regional 6ire#tor Thru Channel $F;G CT 8 Name of Taxpa%er8 KKKKKKKKKKKKKKKKKK Address8 KKKKKKKKKKKKKKKKKK T)I)N)8 KKKKKKKKKKKKKKKKKK Mind of Taxes8 KKKKKKKKKKKKKKKKKK Amount8 PKKKKKKKKKKKKKKKKK This is to report that I2@e personall% served on the su."e#t taxpa%er at the a.ove given address on KKKKKKKKKKKKKK, 1999, the formal letter of demand and assessment noti#e, dated KKKKKKKKKKKKKKK, 1999, #alling for pa%ment of his2its a.ove stated tax lia.ilit%) Do3ever, the taxpa%er refused to a#Cno3ledge re#eipt thereof) I2@e also tried to serve the same on KKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKK, the taxpa%er&s dul% authori=ed representative, .ut the latter liCe3ise refused to a#Cno3ledge re#eipt thereof) 6ue to the foregoing, the said formal letter of demand and assessment noti#e 3ere #onstru#tivel% delivered .% leaving the same #onspi#uousl% at the taxpa%er&s residen#e2pla#e of .usiness at KKKKKKKKKKKKKKKKKKKKK, on KKKKKKKKKKKK, 1999) KKKKKKKKKKKKKKKKKKKKKKK Revenue (ffi#er KKKKKKKKKKKKKKKKKKKKKKKKK KKKKKKKKKKKKKKKKKKKKKKKKK Name and $ignature of @itness Name and $ignature of @itness KKKKKKKKKKKKKKKKKKKKKKKKK KKKKKKKKKKKKKKKKKKKKKKKKK 6esignation 6esignation