G.R. No. 181459 - Commissioner of Internal Revenue vs. Manila Electric Co.

Case Summary (G.R. No. 181459)

Factual Background

MERALCO obtained two foreign loan facilities secured from Norddeutsche Landesbank Girozentrale (NORD/LB) Singapore Branch, the first on July 6, 1998 for USD 120,000,000 and the second on September 4, 2000 for USD 100,000,000. Under the loan agreements MERALCO agreed to withhold and remit the ten percent (10%) final withholding tax on interest remitted to NORD/LB, and MERALCO did remit withholding tax for the period January 1999 to September 2003 amounting to P264,120,181.44. Sometime in 2001, MERALCO learned that NORD/LB Singapore Branch was a financing institution owned by German States and thereafter sought formal confirmation of NORD/LB’s tax-exempt status under the Tax Code.

Administrative Ruling and Refund Claim

On December 20, 2001 MERALCO filed a request for a ruling with the Commissioner. The BIR issued Ruling No. DA-342-2003 on October 7, 2003, declaring that interest payments made to NORD/LB Singapore Branch were exempt from the ten percent (10%) final withholding tax because NORD/LB was a financing institution owned and controlled by the foreign government of Germany. Relying on that Ruling, MERALCO filed a claim for refund or issuance of tax credit certificate on July 13, 2004 in the aggregate amount of P264,120,181.44. The Commissioner denied the claim by letter dated November 5, 2004 on the ground of prescription under the Tax Code.

Proceedings Before the Court of Tax Appeals — First Division

Aggrieved, MERALCO filed a Petition for Review with the Court of Tax Appeals on December 6, 2004. After trial on the merits the CTA-First Division rendered a Decision partially granting MERALCO’s petition. The First Division denied refund for the sum of P224,760,926.65 representing taxes allegedly erroneously paid for the period January 1999 to July 2002 on the ground that those claims had prescribed. The First Division granted refund in the amount of P39,359,254.79 representing erroneously paid and remitted final withholding taxes for the period December 2002 to September 2003 and ordered the refund or issuance of a tax credit certificate in that amount.

CTA En Banc Review and Ruling

Both the Commissioner and MERALCO filed petitions for review with the CTA En Banc, which consolidated the cases and required consolidated memoranda. The CTA En Banc, in a Decision dated October 15, 2007, denied both petitions and affirmed the First Division’s decision in toto. The CTA En Banc subsequently denied motions for reconsideration in a Resolution dated January 9, 2008.

Issue Presented on Appeal

The sole issue the Supreme Court considered was whether MERALCO was entitled to a tax refund or tax credit in respect of its payment of final withholding taxes on interest payments to NORD/LB for the period January 1999 to September 2003.

Parties’ Contentions

The Commissioner contended that MERALCO failed to establish by testimonial and documentary evidence that NORD/LB was owned and controlled by the Federal Republic of Germany and thus did not prove entitlement to exemption from the ten percent (10%) final withholding tax. MERALCO asserted that it had presented sufficient evidence, including the testimony of its Vice-President and Head of Tax and Tariff and a certification issued by the Embassy of the Federal Republic of Germany dated March 27, 2002, showing that NORD/LB was owned by the States of Lower Saxony, Saxony-Anhalt and Mecklenburg-Western Pomerania; MERALCO further relied on the parties’ Joint Stipulation of Facts in which the Commissioner admitted the issuance of the BIR Ruling.

Supreme Court’s Evaluation of Evidentiary Proof

The Court found that MERALCO had discharged the requisite burden of proof. The Embassy certification of March 27, 2002 expressly stated the ownership structure of NORD/LB and described its function as the regional bank and Girozentrale for the named German States. The Court treated that certification, issued by the Embassy in the regular performance of its official functions and not controverted at trial, as admissible proof of the facts stated therein. MERALCO’s witness, German F. Martinez, Jr., identified the certification at trial. The Court observed that the Commissioner presented no rebuttal evidence and that the totality of documentary and testimonial evidence supported MERALCO’s claim, citing the evidentiary principles applied by the CTA.

Application of Precedent and Administrative Ruling

The Court held that the Embassy certification constituted a compelling basis for treating NORD/LB as a financing institution owned or controlled by a foreign government within the meaning of Section 32(B)(7)(a) of the Tax Code. The Court found the reasoning in Miguel J. Ossorio Pension Foundation, Incorporated v. Court of Appeals persuasive by analogy, and it emphasized that the BIR itself had relied on the same certification in issuing BIR Ruling No. DA-342-2003. The Court further noted that the Commissioner had admitted the issuance of that Ruling in the parties’ Joint Stipulation of Facts, and that such judicial admission was binding in the absence of palpable mistake.

Prescription and Legal Basis for Denial of Part of the Claim

Despite finding MERALCO entitled to refund for a portion of the payments, the Court affirmed the CTA’s conclusion that the claim for P224,760,926.65 covering January 1999 to July 2002 was barred by prescription under Section 229 of the Tax Code. The Court explained that the two-year prescriptive period for filing an administrative claim for refund runs from the date of payment of the tax and is

Case Syllabus (G.R. No. 181459)

Parties and Procedural Posture

COMMISSIONER OF INTERNAL REVENUE filed a petition for review on certiorari under Rule 45 seeking to annul the Court of Tax Appeals' decisions denying its position.
MANILA ELECTRIC COMPANY (MERALCO) acted as respondent and claimant of tax refunds for alleged erroneous withholding taxes remitted to the BIR.
MERALCO filed an administrative claim for refund with the BIR on July 13, 2004 and thereafter filed a Petition for Review with the Court of Tax Appeals on December 6, 2004.
The Court of Tax Appeals First Division issued a decision partly granting MERALCO a refund for a discrete period and denying other amounts for prescription.
Both parties elevated their respective appeals to the Court of Tax Appeals En Banc, which denied both petitions in a Decision dated October 15, 2007 and denied motions for reconsideration in a Resolution dated January 9, 2008.
The instant matter arrived before the Supreme Court by petitioner’s Rule 45 petition challenging the CTA En Banc decisions.

Key Facts

MERALCO obtained a loan from Norddeutsche Landesbank Girozentrale (NORD/LB) Singapore Branch on July 6, 1998 for USD 120,000,000 with ING Barings South East Asia Limited as Arranger.
MERALCO executed another loan agreement with NORD/LB Singapore Branch on September 4, 2000 for USD 100,000,000 with Citicorp International Limited as Agent.
Under the loan agreements, MERALCO paid interest and withheld ten percent final withholding tax purportedly on behalf of NORD/LB, which MERALCO remitted to the BIR totaling P264,120,181.44 for January 1999 to September 2003.
In 2001 MERALCO discovered that NORD/LB Singapore Branch was a financing institution owned by the Federal Republic of Germany and requested a BIR ruling on December 20, 2001.
The BIR issued Ruling No. DA-342-2003 on October 7, 2003 declaring that interest payments to NORD/LB Singapore Branch were exempt from the ten percent final withholding tax.
MERALCO filed its refund claim on July 13, 2004 and the BIR denied the claim on November 5, 2004 as prescribed under the tax rules cited by the BIR.

Issue

The sole issue presented was whether MERALCO was entitled to a tax refund or tax credit for final withholding taxes it paid on interest to NORD/LB Singapore Branch for the period January 1999 to September 2003.

Contentions of the Parties

COMMISSIONER OF INTERNAL REVENUE contended that MERALCO failed to prove that NORD/LB was owned and controlled by the Federal Republic of Germany and therefore failed to establish an exemption from final withholding tax.
MERALCO asserted that it proved NORD/LB’s tax-exempt status through the testimony of its Vice-President and Head of Tax and Tariff and a certification from the Embassy of the Federal Republic of Germany dated March 27, 2002.
MERALCO also relied on the parties’ Joint Stipulation of Facts which admitted the BIR Ruling as documentary evidence.

Evidence and Findings

The Embassy certification dated March 27, 2002 stated that NORD/LB was owned forty percent by the State of Lower Saxony and ten percent each by Saxony-Anhalt and Mecklenburg-Western Pomerania, with