G.R. No. 48004 - Doronila vs. De Arroyo

Under the National Internal Revenue Code (Tax Code), banks’ “passive” income (e.g., interest earnings) is subject to a 20% final withholding tax (FWT), withheld at source by the payor and remitted directly to the government.
Separately, banks pay a 5% gross receipts tax (GRT) on all gross receipts, including amounts constituting passive income, under Section 119 of the Tax Code.

For calendar year 1995, Solidbank Corporation filed quarterly GRT returns reporting total gross receipts of ₱1,474,691,693.44 and paid ₱73,734,584.60 in GRT. Solidbank alleged ₱350,807,875.15 of this represented interest income already subject to 20% FWT.
Relying on CTA Case No. 4720 (Asian Bank Corp. vs. CIR, Jan. 30, 1996), which excluded interest subject to 20% FWT from the GRT base, Solidbank sought a refund or tax credit certificate of ₱3,508,078.75 (5% of the 20% FWT amount).
The Court of Tax Appeals granted a reduced refund of ₱1,555,749.65. The Court of Appeals affirmed the CTA in toto on July 18, 2000, and denied reconsideration on May 8, 2001. CIR petitioned to the Supreme Court under Rule 45.

Whether the 20% final withholding tax on a bank’s interest income forms part of its taxable gross receipts for purposes of computing the 5% gross receipts tax.