GOLDEN DONUTS, INC.THE EXCLUSIVE PHILIPPINE FRANCHISEE OF THE GLOBAL BRAND

“DUNKIN’ DONUTS”

2007 DEFICIENCY TAX ASSESSMENT(Final, Executory and Demandable)

PHP 1.56 BILLIONINCLUDING SURCHARGES AND INTERESTS

TAX AUDIT REPORT

SUBMITTED and DOCUMENTED BY

Othello E. Dalanonin his official capacity as former BIR tax examiner

INTRODUCTION

GOLDEN DONUTS, INC. (GDI), a domestic corporation, is the exclusive Philippine Franchisee of DUNKIN’ DONUTS OF AMERICA, INC. (DDA).

It is the largest and leading coffee and donut shop chain in the country which sells various doughnuts, along with coffee, hot chocolates, shakes, and the likes.

It belongs to the TOP 10,000 PRIVATE CORPORATIONS as determined by the BIR and adopts a Computer Assisted Accounting System (CAAS) with duly-registered hardbound computer-generated books of accounts.

It has 45 stockholders. Its Chairman of the Board was LEOPOLDO L. PRIETO (deceased) and the Officers are:

Walter C. Spakowski PresidentMarixi R. Prieto SecretaryMiguel H. Prieto TreasurerPedro E. Paraiso Chief Financial OfficerErnesto S. Co VP & General ManagerJocelyn V. Santos VP Finance & Administration

CASE BACKGROUND

In 2008, I conducted tax audit of the 2007 financial records of GDI where I discovered the following irregularities, to wit:

GDI has two (2) sets of books of accounts.

It declared false information in the tax return.

It substantially under-declared revenues in the tax return.

It substantially under-remitted VAT.

It failed to dutifully comply with the withholding tax laws.

The above-enumerated irregularities resulted to DEFICIENCY TAX ASSESSMENT

amounting to P1.56 BILLION

including surcharges and interests computed up to date of assessment.

I personally reported these irregularities to BIR Commissioner Henares and recommended to her the criminal prosecution for tax evasion under the RATE (Run After Tax Evaders) program of the Bureau.

Despite documentary evidence to prove such irregularities, CIR Henares did not pursue tax evasion case against GDI, because Ms. MARIXI PRIETO, GDI’s secretary and also the Chairperson of Philippine Daily Inquirer (PDI), talked to her and BIR Regional Director Nestor Valeroso, who both extended LENIENCY to the taxpayer in view of Ms. Prieto’s closeness to PRESIDENT AQUINO according to DCIR Estela Sales.

And despite finality of the said assessment and the Bureau’s constant goal of raising revenues for the state, CIR Henares intentionally failed to collect it.

Instead she focuses on strictly enforcing tax laws against low income earners such as the Marginal Income Earners like: sari-sari store, fishermen, tricycle drivers, etc., rather than enforcing collection of deficiency taxes of big and large taxpayers who are better able to pay like GDI.

The CIR, in a telecast interview by GMA 7 on Feb. 28, 2014, and subsequent media releases, claimed that my assessment was flawed.

If my assessment was faulty, what is the correct assessment for the commissioner?

How much was collected for the government’s coffer?

Less than P4M?

Why did commissioner Henares not give my assessment a chance to stand in a judicial scrutiny before publicly declaring it as inaccurate?

Is she not LAWYERING for GDI who might be the real tax evader?

While she “actively runs” after other alleged tax cheats, she coddles GDI…a tax evader?

CIR Kim Henares also claimed that she ordered “two reinvestigations” of the case.

Is there a law that authorizes her to order a re-audit of a due and demandable tax assessment?

IS THIS NOT A SELECTIVE “RE-AUDIT” POLICY?

In the case of Congressman Manny Pacquiao’s tax liabilities, why did Henares not order “two reinvestigations”? Who knows her new team of examiners might find it justifiable to reduce CMP’s tax deficit by concluding that the previous examiner’s audit findings were flawed?

DETAILS OF THE IRREGULARITIES and ASSESSMENT

GDI HAS TWO (2) SETS OF BOOKS OF ACCOUNTS.

1. The duly-registered hardbound computer-generated books of accounts which are the bases of my audit findings; and

2. The “manually-posted from original books of accounts” which GDI claimed as the bases of its Trial Balance for Financial Statements and Income Tax Returns purposes.

• Is it not that keeping two (2) sets of books of accounts a fraudulent act or criminal tax violation?

GDI DECLARED FALSE INFORMATION IN THE TAX RETURN.

GDI’s CD and duly-registered hardbound computer-generated books of accounts reflected a NET TAXABLE INCOME amounting to P135.2 million while its Annual Income Tax Return (AITR) reflected a NET LOSS amounting to P44.9 million.

Is it not that declaring false information in the tax return a fraudulent act or criminal tax violation?

GDI UNDER-DECLARED SALES IN THE TAX RETURN.

Undeclared sales amounting to P897 million.

Is it not that substantial under-declaration of sales in the AITR a fraudulent act or criminal tax violation?

Sales per CD & duly-registered hardbound books P 1,928,770,398.68

Less: Sales reflected in the AITR 1,031,528,917.00

UNDECLARED SALES P 897,241,481.68

According to SUPREME COURT, the books of accounts prevail over the return when they reflect higher sales, because they are kept and prepared under control and supervision by the taxpayer, and thus, are admissions against interest. (PICOP vs. C.A., et al., 250 SCRA 434).

The representations made by GDI in the CD and duly-registered books (hardbound computer-generated) submitted and presented by it to the Bureau for audit and examination amounted to admissions against interest which it cannot disown and change at its convenience of pleasure.

GDI’s CONTENTIONS

It claimed that the CD and duly-registered hardbound computer-generated books of accounts which it submitted and presented to the Bureau for audit, contained more than 2,500 errors in 84 accounts “double take-ups”, and should not be the bases of the audit findings.

It alleged that its sales was only P1.031 billion as per its “manually-posted from original books of accounts” which it claimed as the bases of its Trial Balance for Financial Statements and ITR purposes, as follows:

SHOP: Central Warehouse (trading sales) P 746,312,672.00

SHOP: Owned Outlets (donuts sales) 285,216,244.74

TOTAL SALES P 1,031,528,916.74

MY ARGUMENTS

• GDI’s CD and duly-registered hardbound computer-generated books of accounts already contained GDI’s external auditors’ adjustments. It means that said financial records were already audited by GDI’s external auditors.

• The discrepancies or differences of sales accounts between the CD and duly-registered books on one hand and the AITR on the other were not reflected by GDI’s external auditors as adjusting or correcting entries in the said financial records.

• With the more than 2,500 errors posted in 84 accounts, as claimed by GDI, to contain in the said financial records, it is believed to be unfeasible and amazing that GDI which belongs to the high profile business in the Philippine industries, and with its highly competent accounting and auditing employees, supervisors, and tax managers, the external auditors, and the reputable public auditors that GDI hired to conduct quarterly reviews of its financial records would not notice such remarkable and significant errors.

• The SUPREME COURT ruled in the case of Paper Industries Corporation of the Philippines versus Court of Appeals, et al., 250 SCRA 434 that “where the books of accounts reflected a Sales or Receipts higher than that reflected in the return, the books of accounts should prevail. This is so, because the books of accounts are kept by the taxpayer and are prepared under its control and supervision. And they reflected what may be deemed to be admissions against interest.”

oIs it not that BIR should even take legal action against GDI’s external auditors for certifying false financial statements?

• The 84 accounts which GDI claimed to contain errors were all nominal accounts (income and expense accounts). GDI did not claim that the real accounts (balance sheet accounts) reflected in the said financial records contained errors. So, let us determine Sales using a real account reflected in the same financial records which is associated with Sales account.

• VAT Payable account is a real account or balance sheet account. Under the VAT principle, this account is concomitant to Sales or Revenue account. Thus, Sales can be determined using this account, as follows:

VAT Payable credit total per CD & duly-registered books P 227,263,254.33

Divide by VAT rate 12%

Sales with VAT components 1,892,860,452.75

Add: Sales per General Journal without VAT components 34,511,326.02

Total sales based on VAT payable account 1,928,371,778.77

Less: Sales per CD & duly-registered books 1,928,770,398.68

Discrepancy (not material) (P 398,619.91)

It may be noted that even if Sales account is computed back based on VAT payable account reflected in GDI’s financial records, it would point out that Sales per CD and duly-registered books was P1.928 billion. This is just one of the several mathematical computations that would prove that GDI’s CD and the duly-registered books of accounts speak the truth, contrary to GDI’s claim that the same contained errors.

Note. This explains also presentation in slides nos. 37 and 38.

Unrecorded and undeclared sales amounting to P438 million.

GDI is the exclusive Philippine Franchisee of DDA. The Franchise Agreement between said parties states, among others, that the former shall remit to the latter a Franchise Fee equivalent to 1% of ALL SALES OF EACH SHOP, whether operated directly by GDI or sublicensed to others. GDI shall be responsible for the remittance of all fees due DDA.

For year 2007, the Franchisee Fee incurred and recorded per CD and duly-registered books and claimed by GDI as expense, being included in the Cost of Sales account, was P23,668,908.00.

On the basis of these information, I computed the unrecorded and undeclared sales, as follows:

• Is it not that substantial non recording of sales in the registered books and consequent non declaration of the same in AITR constitute fraudulent acts or criminal tax violations?

Franchise Fee per CD, duly-registered books, and FS P 23,668,908.00

Divide by franchise fee rate per GDI and DDA agreement 1%

GDI’s grossed-up sales (or should be sales) 2,366,890,800.00

Less: Sales recorded per CD and duly-registered books 1,928,770,398.68

UNRECORDED and UNDECLARED SALES P 438,120,401.32

GDI’s CONTENTIONS

• The Franchise Fee amounting to P23.668 million is equivalent to 1% of its “system-wide sales” which allegedly refers to sales generated by its company-owned sales outlets and those of the sub-franchisees, excluding central warehouse’s sales.

• That its central warehouse’s sales of products to the sub-franchisees are not subject to the 1% Franchise Fee.

BEFORE I PRESENT MY ARGUMENTS, LET US FIRST DETERMINE THE

SHOPS WHICH GDI DIRECTLY AND INDIRECTLY OPERATES.

DIRECTLY OWNED SHOPS INDIRECTLY OWNED SHOPS

GDI

SHOP: CENTRAL WHSE

SHOP: OWNED OUTLETS

SUB-FRANCHISEES’ SHOPS

1. GDI maintains a Shop-Central Warehouse (Commissary) wherefrom all its Sub-Franchisees purchase on COD basis all products, ingredients, supplies, commodity, merchandise, etc.;

2. GDI has its owned shops-sales outlets; and3. The Sub-Franchisees’ shops under GDI’s supervision.

GDI’s VERSION

GDI’S VERSION

DIRECTLY OWNED SHOPS

GDI

SHOP: CENTRAL WHSE

SHOP: OWNED OUTLETS

INDIRECTLY OWNED SHOPS

SUB-FRANCHISEES’ SHOPS

CUSTOMERS CUSTOMERS

GDI SAID FRANCHISE FEE OF P23.668M = 1% OF “SYSTEM-WIDE SALES”

GDI SAID CW’s SALES TO SF ARE NOT COVERED BY 1% FRANCHISE FEE

Following GDI’s version, let us reconcile Sales account. However, considering that the financial statements of the sub-franchisees were not available to determine with certainty the amount of sales of the sub-franchisees, the following information were utilized to determine the sub-franchisees’ net sales for year 2007, as follows:

a. The sub-franchise agreements between GDI and its sub-franchisees state, among others, that GDI shall receive a continuing royalty equivalent to 6.6% of the sub-franchisees’ net sales of the preceding month.

b. The royalty received by GDI for year 2007 per CD, duly-registered books, and schedule of royalty submitted by GDI to the Bureau for audit was P133,190,903.90. This amount was properly reflected in the ITR.

On the basis of these information, GDI’s sub-franchisees’ net sales for year 2007 can be approximately determined as follows:

Thus, we may now reconcile GDI’s facts and contentions, as follows:

Let us further reconcile GDI’s contentions on a monthly basis.

The following data were taken from GDI’s CD and duly-registered books of accounts, to wit:

• DATE• Franchise Fee• Royalty Income• SALES – ALL PRODUCTS• Central Warehouse• Owned Outlets• 2007• Col. 1• Col. 2• Col. 3• Col. 4• January• 1,724,667.96• 7,421,176.65• 57,248,319.95• 22,583,523.83• February• 1,686,532.69• 7,286,726.73• 52,501,006.84• 21,767,600.01• March• 1,848,303.45• 7,976,470.11• 55,277,706.99• 23,968,236.66• April• 1,

It may be noted that there are abrupt increases that occurred in the month of December, 2007 under columns 3 and 4 (highlighted in green ink). These are the two (2) items of the 84 accounts which GDI claimed to contain errors (“double take-ups”) which allegedly occurred in the month of December, 2007, but I did not subscribe to it because it can be proven that these entries were correct as discussed earlier. (slides 23, 24 and 25).

Assuming arguendo that there were “double take-ups” in the said period, let us just reconcile the data or entries for the period from January to September alone (or for the first three (3) quarters of 2007) based on GDI’s contentions that the 1% Franchise Fee applies to its “system-wide sales” which allegedly pertains to the sales of the company-owned outlets and those of the sub-franchisees’, excluding central warehouse’s sales.

If GDI’s facts and contentions were true, the reconciliations presented above would

not result to any discrepancies at all.

GDI cannot even reconcile its own facts and contentions.

MY VERSION

MY VERSION

DIRECTLY OWNED SHOPS

GDI

SHOP: CENTRAL WHSE

SHOP: OWNED OUTLETS

CUSTOMERS

INDIRECTLY OWNED SHOPS

SUB-FRANCHISEES’ SHOPS

CUSTOMERS

MY version - FRANCHISE FEE OF P23.668M = 1% OF GDI’s SALES ALONE

Other arguments to disprove GDI’s contentions

• No specific condition in the License Agreement between GDI and DDA that Central Warehouse’s sales to sub-franchisees are not subject to 1% Franchise Fee;• Is it not that GDI’s central warehouse (commissary) a shop which it also operates?• Is it not the purchases of GDI’s sub-franchisees from central warehouse, sales of

GDI?• GDI is only responsible for the remittance of the franchise fee supposed to be

remitted by the sub-franchisees to DDA. That instead of the sub-franchisees remitting directly to DDA, the amount shall be coursed thru GDI which amount would not form part of GDI’s expense.

• The amount of P23.668 million representing franchise fee is actually incurred and claimed by GDI as its own expense because it was included in the Cost of Sales account. The fact that GDI claimed said amount as its expense indicates that the same pertains to its sales alone.

• Why did GDI claim the whole amount of P2,840,123.69 representing 12% VAT on franchise fee as tax credit against its Output Tax? The fact that GDI claimed said amount as tax credit against its Output Tax indicates that the franchise fee amounting to P23.668 million pertains to 1% of GDI’s sales alone.

Thus, I expressed my firm stance and so hold that GDI’s sales topped P2.366 billion and of which P438 million was not recorded in its duly-registered books of accounts and consequently not declared in the AITR for year 2007.

All the abovementioned issues and other significant discrepancies enumerated in my memorandum and audit

reports culminated to the deficiency tax assessment amounting to P1.56 billion, including increments, already covered by Formal Letter of Demand (FLD) and Final Assessment Notices (FANs) all

bearing Demand No. 41-B072-07 and all dated October 29,2010, which became final, executory and demandable but BIR

Commissioner Henares intentionally failed to either collect it or sue GDI for tax evasion for under-declaring its revenues in the tax return. Instead, she publicly announced that the same was

flawed and that she ordered “two reinvestigations”.

MEDIA PUBLICATIONS/OTHERS The Manila Times series by Columnist Emeterio Sd. Perez (also an ex-sem); GMA 7 by Ms. Susan Enriquez; ABS-CBN thru Mr. David Oro; Interaksyon by Likha Cuevas-Miel; The Philippine Star by Camille Diola; Manila Standard Today by Jojo Robles; The Daily Tribune by Gerry Baldo (mentioned in privilege speech of Congressman Magtanggol Gunigundo of

Valenzuela City); Other newsprints and broadcast media; Small rally composed of former priests, nuns, seminarians and laymen held on April 15, 2014 at BIR-National

Office, Agham Road, Quezon City, published in Interaksyon by Likha Cuevas-Miel; Filed formal complaint before the Office of the Ombudsman vs. Kim Henares and Estela Sales; (Omb. already

in action); Sent letter to the President stamped received (with bar code) on March 17, 2014 but no action yet from OP; On-going meetings with NGOs.

I reverently appeal to the FILIPINO people to help request President BENIGNO SIMEON C. AQUINO III to direct BIR Commissioner Kim Henares

collect the deficiency tax of GOLDEN DONUTS, INC. amounting to P1,564,426,808.08

as the same already belong to the FILIPINO people.

THANK YOU

GOD BLESS THE PHILIPPINES