Case Summary (G.R. No. 134120)
Issue Presented
Whether the 20% final withholding tax on a bank’s passive income (interest income), withheld at source, should be included as part of the bank’s gross income when computing its 5% gross receipts tax (GRT) liability.
Background of Tax Provisions
Under Section 24(e)(1) of the Tax Code, domestic corporations, including banks, are subject to a 20% final withholding tax (FWT) on interest income from deposits and similar arrangements. Section 119 imposes a 5% GRT on banks’ gross receipts from various income sources, including interest from lending activities.
BPI reported its gross receipts tax for 1996 by including the 20% FWT withheld on its interest income in the tax base, leading to an assessment of overpaid GRT in the amount related to that 20% FWT portion. BPI sought refund based on prior Court of Tax Appeals (CTA) and Court of Appeals (CA) decisions holding that the withheld tax should be excluded from gross receipts for GRT purposes.
Lower Courts’ Rulings
- The CTA and CA ruled against the BIR, holding that the 20% final tax withheld does not form part of the bank’s taxable gross receipts for computing the 5% GRT.
- The CA invoked the principle that taxable gross receipts exclude monies that do not belong to the taxpayer and provide no benefit, referencing prior decisions such as Commissioner v. Tours Specialists and Manila Jockey Club.
- Revenue Regulations No. 12-80 Section 4(e) was interpreted by the CA to mandate exclusion of the 20% FWT from the gross receipts tax base.
Petitioner’s Arguments (Commissioner of Internal Revenue)
- "Gross receipts" should be construed in its plain and ordinary meaning, encompassing the entire amount without deductions.
- There is no express provision in the Tax Code or special laws excluding the 20% FWT from the GRT base.
- Section 4(e) of Revenue Regulations No. 12-80 is inapplicable or superseded.
- Receipt of income for gross receipts tax purposes need not be actual receipt but includes constructive receipt.
- The CTA decision relied on by BPI had been superseded by later rulings favoring the government.
Supreme Court’s Analysis on "Gross Receipts"
- The Tax Code does not define “gross receipts,” necessitating reliance on the ordinary meaning of the term as “entire receipts without any deduction.”
- The Court emphasized precedents including China Banking Corporation v. Court of Appeals and Commissioner v. Bank of Commerce, which establish that “gross” means whole or total before deductions.
- US and Philippine jurisprudence were cited for the principle that gross receipts should include all income relevant to business operations.
- Legislative history showed consistent imposition of GRT without excluding interest income.
- The Court noted that exclusion of the 20% FWT would amount to a tax exemption, which must be clearly granted by law—something BPI failed to prove.
Interpretation of Revenue Regulations
- Section 4(e) of Revenue Regulations No. 12-80 states that GRT is imposed on income “actually received” rather than accrued, but does not exclude interest income withheld or treated as paid.
- This provision has been superseded by Section 7 of Revenue Regulations No. 17-84, which explicitly includes interest income subjected to withholding tax in the gross receipts tax base of financial institutions.
- Therefore, even accrued or withheld interest income must be included when computing GRT.
Constructive Receipt Doctrine
- The Court ruled there is constructive receipt of income by the bank when the withholding agent remits the 20% FWT to the government.
- Articles 531 and 532 of the Civil Code support that possession and receipt can be juridical acts—meaning constructive receipt suffices.
- The withheld tax extinguishes the bank’s tax obligation, which is a benefit, proving ownership and taxable interest income.
- Distinguishing the instant case from Trustees and Agents: BPI owns the funds withheld, unlike mere trustees holding funds for others, thus the withheld amount is part of gross receipts.
On the Allegation of Double Taxation
- Double taxation is defined as taxing the same property twice by the same taxing authority for the same purpose in the same period.
- The Court explained that FWT is an income tax applied on interest income, while GRT is an excise tax on the privilege of doing banking business.
- Different tax bases, tax character, and periods distinguish the two taxes.
- Hence, imposing both taxes on the same interest income does not constitute impermissible double taxation.
Conclusion and Ruling
- The inclusion of the 20% FWT amounts in the computation of taxable gross receipts for the GRT is consistent with the l
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Case Syllabus (G.R. No. 134120)
Case Background and Issue
- The principal legal question is whether the 20% final tax withheld at source on a bank’s passive income (interest) is included as part of the bank's gross income for calculating its 5% gross receipts tax liability.
- Both the Court of Tax Appeals (CTA) and the Court of Appeals ruled that the 20% final tax withheld is not part of the bank's taxable gross receipts.
- The Supreme Court reversed these rulings based on precedent in China Banking Corporation v. Court of Appeals, affirming inclusion of withheld tax in gross receipts tax computation.
Relevant Tax Laws and Provisions
- Under Section 24(e)(1) and Section 50(a) of the 1977 National Internal Revenue Code (Tax Code), a 20% final withholding tax is imposed on interest from deposits and similar income for domestic corporations, including banks.
- Section 119 of the Tax Code imposes a gross receipts tax on banks’ income derived from Philippine sources, specifying a 5% tax on interest from lending and similar activities.
- Revenue Regulations No. 12-80, Section 4(e), states gross receipts tax applies on income actually received, excluding mere accruals.
- Revenue Regulations No. 17-84, Section 7, supersedes Section 4(e) and clarifies interest income subject to withholding tax shall be included in the gross receipts tax base for financial institutions.
Facts of the Case
- BPI paid withholding tax of 20% on its interest income and also paid a 5% gross receipts tax including the amount corresponding to the withheld tax.
- BPI sought a refund of overpaid gross receipts tax arguing the withheld 20% final tax should not be in the gross receipts tax base.
- The CTA granted partial refund; the Court of Appeals affirmed, holding BPI did not actually receive the withheld 20% and therefore it should be excluded.
- Commissioner of Internal Revenue elevated the case to the Supreme Court contesting these lower court decisions.
Legal Contentions of the Parties
- Commissioner argued:
- “Gross receipts” must be given its ordinary, plain meaning: entire receipts without deductions.
- No law or regulation exempts the withheld 20% from gross receipts for purposes of the 5% tax.
- Section 4(e) Revenue Regulations No. 12-80 is inapplicable or superseded.
- Income need not be actually received to be included; constructive receipt applies.
- Cited China Banking case and related jurisprudence supporting inclusion of withheld tax.
- BPI argued:
- Withheld 20% tax was not physically received; it should be excluded from taxable gross receipts.
- Inclusion would amount to unjust, confiscatory double taxation.
- Section 4(e) allows exclusion until actual receipt.
Definition and Interpretation of “Gross Receipts”
- The Tax Code does not define “gross receipts,” thus it must be interpreted in its ordinary meaning as the whole or entire amount without deduction.
- The Court referenced multiple precedents and foreign authorities establishing:
- “Gross” is synonymous with “whole,” “entire,” and “without deduction.”
- Deductions would con