Case Summary (G.R. No. 148191)
Procedural History
The Court of Tax Appeals (CTA) granted Solidbank a partial refund (reduced amount P1,555,749.65) relying on earlier CTA reasoning in Asian Bank Corporation v. CIR. The Court of Appeals affirmed the CTA decision. The Commissioner of Internal Revenue appealed to the Supreme Court via Rule 45 petition challenging the exclusion of the 20% FWT from the GRT tax base.
Central Issue Presented
Whether the 20% final withholding tax on a bank’s interest income (passive income) forms part of the bank’s taxable gross receipts for purposes of computing the 5% gross receipts tax imposed under Section 119 of the Tax Code.
Legal Distinction Between the Two Taxes
The Court emphasizes that two distinct taxes are at issue: (1) the 20% FWT, an income tax on passive income imposed under the income tax provisions (Section 24(e)(1)), deducted and withheld at source; and (2) the 5% GRT, a percentage tax on gross receipts of banks under Section 119 (Title V of the Tax Code). These taxes differ in nature (income tax vs percentage tax), character (withholding vs non-withholding), and in the tax regimes that apply.
Withholding System and Constructive Receipt
The Court analyzes the withholding mechanism: in a withholding system the payor acts as the government’s collection agent while the payee remains the taxpayer. The decision treats amounts withheld as proceeds sourced from the taxpayer’s income and distinguishes actual receipt from constructive receipt. Applying Civil Code Articles 531 and 532, the Court reasons that the withholding act and the taxpayer’s ratification of that withholding effectuate constructive possession of the withheld amount by the taxpayer prior to its payment to the government. Consequently, withheld interest income is constructively received and therefore forms part of gross receipts unless a clear legal exclusion applies.
Applicability of Revenue Regulations: RR 17-84 Supersedes RR 12-80
The Court compares RR 12-80 (which stated GRT base is “all items of income actually received” and rejected mere accrual) and RR 17-84 (which explicitly provides that interest income, including interest on deposits and yield on deposit substitutes, shall be included as part of the tax base for GRT of financial institutions). The Court treats revenue regulations as having the force of law when properly promulgated, and finds that RR 17-84, by its Section 11 repealer clause and operative text, impliedly repealed the contrary portion of RR 12-80. RR 17-84 does not distinguish between actual and constructive receipt for purposes of including interest income in the GRT base; therefore, income constructively received pursuant to the withholding system is included.
Reconciling “Actual Receipt” Language in RR 12-80
The Court rejects respondent’s reliance on the word “actually” in RR 12-80 as excluding constructively received amounts. It explains that the accrual accounting reference in RR 12-80 pertains to accounting methods, not to the legal concept of constructive possession. Income that is accrued but not received is different from income constructively received by virtue of withholding and taxpayer ratification. The Court concludes RR 17-84 adopts a broader rule that interest income — even if subject to withholding — forms part of gross receipts for GRT computations.
Distinction from Manila Jockey Club (Earmarking)
The Court distinguishes the Manila Jockey Club case, which held that amounts specially earmarked by law for others (trust-like funds) are excluded from gross receipts. The Court explains that earmarking (trust funds not owned by the taxpayer) differs from withholding: withheld amounts are originally the taxpayer’s income and become government property only when paid to satisfy the taxpayer’s income tax obligation. Because ownership of withheld interest initially vested in the financial institution (constructive possession), the withheld portion is part of gross receipts; thus Manila Jockey Club is inapplicable.
Statutory Interpretation and Legislative Intent
The Court reiterates principles of tax construction under the 1987 Constitution: tax exemptions or refunds are strictly construed against taxpayers and require clear statutory authority. The Tax Code imposes two separate taxes (income and percentage tax), and the legislature’s enactments must be respected. The Court finds the Tax Code’s language clear in imposing the two taxes and declines to create, by interpretation, an exemption from GRT for amounts subject to FWT.
No Double Taxation
The Court addresses the double taxation argument and finds none. Double taxation in the objectionable se
...continue readingCase Syllabus (G.R. No. 148191)
Citation and Procedural Posture
- Supreme Court, First Division, G.R. No. 148191, November 25, 2003; Decision penned by Justice Panganiban.
- Petition for Review under Rule 45 seeking to annul the July 18, 2000 Decision and the May 8, 2001 Resolution of the Court of Appeals in CA-G.R. SP No. 54599.
- The assailed CA decretal portion affirmed in toto the decision and resolution of the Court of Tax Appeals (CTA).
- Relevant prior determinations:
- CTA (after trial) rendered an August 6, 1999 decision ordering refund to respondent Solidbank of a reduced amount of P1,555,749.65 as overpaid gross receipts tax for 1995 (with one CTA judge dissenting).
- The CA affirmed the CTA decision; the CA denied the Commissioner's motion for reconsideration.
- This Supreme Court appeal was submitted for decision with memoranda received in January 2002.
Parties and Relief Sought
- Petitioner: Commissioner of Internal Revenue (Bureau of Internal Revenue).
- Respondent: Solidbank Corporation.
- Relief sought by respondent below: refund or issuance of a tax credit certificate for alleged overpaid gross receipts tax for calendar year 1995, on the theory that certain gross receipts were already subjected to the 20% final withholding tax (FWT) and therefore should not have been included in the base for the 5% gross receipts tax (GRT).
- Relief sought by petitioner before the Supreme Court: annulment/reversal of the CA decision that excluded withheld amounts from gross receipts subject to the GRT.
Facts — Returns, Withholding, and Refund Claim
- For calendar year 1995, Solidbank timely filed Quarterly Percentage Tax Returns reflecting total gross receipts subject to the 5% GRT of P1,474,691,693.44 and corresponding gross receipts tax payments totaling P73,734,584.60, broken down by quarter:
- January–March 1994: Gross receipts P188,406,061.95; GRT P9,420,303.10
- April–June 1994: Gross receipts P370,913,832.70; GRT P18,545,691.63
- July–September 1994: Gross receipts P481,501,838.98; GRT P24,075,091.95
- October–December 1994: Gross receipts P433,869,959.81; GRT P21,693,497.98
- Total: P1,474,691,693.44; Total GRT paid: P73,734,584.60
- Solidbank alleged that P350,807,875.15 of those gross receipts were passive income (interest and similar yields) already subjected to the 20% FWT.
- Computation asserted by respondent for alleged overpayment:
- Gross receipts from passive income: P350,807,875.15
- 20% Final Tax Withheld at Source: P70,161,575.03
- Multiply that FWT amount by the 5% GRT rate → Overpaid GRT claimed: P3,508,078.75
- Timeline of respondent’s administrative and judicial steps:
- After CTA decision in Asian Bank Corporation v. Commissioner of Internal Revenue (Jan. 30, 1996) (which the CTA had held excluded the 20% FWT for interest from gross receipts for GRT computation), Solidbank filed with the BIR on June 19, 1997 a letter-request for refund / tax credit certificate in the aggregate amount claimed.
- On the same day Solidbank filed a petition for review with the CTA to toll the two-year prescriptive period under Section 230 (now 229) of the Tax Code.
- CTA granted a partial refund (reduced amount P1,555,749.65); CA affirmed CTA; Commissioner appealed to Supreme Court.
Issue Presented
- Whether or not the 20% final withholding tax on a bank’s interest income forms part of the taxable gross receipts in computing the 5% gross receipts tax.
Holding (Supreme Court Ruling)
- Petition is meritorious. The Supreme Court reversed and set aside the assailed CA decision and resolution.
- The Court held that the amount of interest income withheld as the 20% FWT forms part of gross receipts in computing the gross receipts tax (GRT) on banks.
- Disposition: Petition granted; CA decisions reversed and set aside; no costs.
Core Legal Framework — Definitions and Statutory Provisions
- Two distinct taxes involved:
- 5% Gross Receipts Tax (GRT):
- Imposed by Section 119 of the Tax Code (now A121) under Title V: Other Percentage Taxes.
- Applies to gross receipts derived from sources within the Philippines by banks and non-bank financial intermediaries.
- Rate and schedule provided by Section 119, including a 5% rate on certain items (e.g., short-term interest, royalties, rentals, and items treated as gross income under Section 28).
- GRT is a percentage tax; it is not subject to withholding; taxpayers file quarterly returns and pay within the statutory period.
- 20% Final Withholding Tax (FWT):
- Falls under Section 24(e)(1) (now A27(D)(1)) of Title II: Tax on Income.
- A tax on passive income (interest on deposits and yield on deposit substitutes) deducted and withheld at source by the payor/withholding agent pursuant to Section 50 and remitted pursuant to Section 51.
- An income tax; under a withholding system the payor acts as agent of the government to collect the payee’s tax obligation.
- 5% Gross Receipts Tax (GRT):
- Tax characterization:
- Percentage tax: measured by percentage of gross receipts or gross value in money; not subject to withholding.
- Income tax: imposed on net or gross income realized in a taxable year; subject to withholding.
Constructive Receipt Doctrine and Its Application
- Both parties agreed there is no actual receipt by the bank of amounts withheld; the dispute centered on whether there is constructive receipt.
- The Court applied civil law analogies (Articles 531 and 532 of the Civil Code) to receipt of income:
- Article 531: possession acquired by material occupation, exercise of right, or by juridical acts and legal formalities established for acquiring such right.
- Article 532: possession may be acquired through an agent and is considered acquired when ratified by the person in whose name the act was executed.
- The Court reasoned:
- The withholding process is a juridical act and a proper legal formality for acquisition of possession; the payor-withholding agent obtains possession as agent for the government but the act is ratified by the taxpayer in whose name possession is executed.
- Bookkeeping and accounting for interest and yields subjected to FWT legally amount to delivery, receipt, or remittance.
- Therefore, although there is no physical receipt, there is constructive receipt; income so constructively received (including the portion withheld) is part of the tax base for GRT.
Revenue Regulations — RR 17-84 Superseding RR 12-80
- Two relevant revenue regulations:
- RR No. 12-80 (Nov. 7, 1980): Section 4(e) provided that GRT rates be based on all items of income actually received; mere accrual not to be con