Case Summary (G.R. No. 175772)
Petitioner
Mitsubishi Corporation–Manila Branch, contractor for engineering, supply, construction, installation, testing, and commissioning of a steam generator and related works under an OECF-funded project.
Respondent
Commissioner of Internal Revenue, head of the BIR, responsible for assessing, collecting, and refunding national internal revenue taxes.
Key Dates
• June 11, 1987: Exchange of Notes between Japan and the Philippines.
• September 25, 1987 and December 20, 1994: Loan Agreements No. PH-P76 and PH-P141.
• June 21, 1991: Contract signed between NPC and Mitsubishi Corp.
• January 31, 1998: Project finally accepted.
• July 15, 1998: Income Tax and BPRT returns filed; taxes remitted.
• June 30, 2000: Administrative refund claim filed with CIR.
• July 13, 2000: Petition for review before CTA Division docketed.
• December 17, 2003: CTA Division granted refund.
• May 24, 2006 and December 4, 2006: CTA En Banc reversed and denied reconsideration.
• June 5, 2017: Supreme Court decision.
Applicable Law
• 1987 Philippine Constitution, Article VII, Section 21 (treaty concurrence).
• National Internal Revenue Code (NIRC) Sections 204(C) and 229 (authority to refund erroneously collected taxes).
• Revenue Memorandum Circular No. 42-99 and Revenue Memorandum Order No. 24-2005.
Background and Loan Structure
An Exchange of Notes obligated the Philippine Government to “assume all fiscal levies or taxes” imposed on Japanese contractors in connection with any income accruing from supplies or services under the OECF loan. Under Loan Agreements No. PH-P76 and PH-P141, OECF funded the foreign currency portion of the Contract between NPC and Mitsubishi Corporation.
Contractual Tax Assumption
Article VIII(B)(1) of the NPC–Mitsubishi Contract reiterated that NPC “shall pay any and all forms of taxes … including VAT” directly imposable under the Contract. This mirrored the Exchange of Notes’ tax-assumption clause and created an obligation on NPC to bear all related fiscal levies.
Payment of Taxes and Refund Claim
Despite the assumption clause, petitioner reported and paid P44,288,712.00 in income tax and P8,324,100.00 in branch profit remittance tax (BPRT) for the fiscal year ending March 31, 1998. On June 30, 2000, it filed an administrative claim for refund of P52,612,812.00 under Sections 204 and 229 of the NIRC and lodged a parallel CTA petition to preserve its judicial remedy.
CTA Division Ruling
On December 17, 2003, the CTA Division granted the refund, holding that petitioner’s payments were “erroneous” because NPC, by virtue of the Exchange of Notes and Contract, should have shouldered the tax liabilities. It rejected retroactive application of RMC No. 42-99, which directed contractors to seek recovery from executing agencies.
CTA En Banc Ruling
The CTA En Banc reversed on May 24, 2006, reasoning that:
- Petitioner failed to prove “erroneous” payment in the absence of a statutory tax exemption;
- The Exchange of Notes did not constitute a treaty with Senate concurrence and therefore could not grant exemption;
- RMC No. 42-99 was effective when the administrative claim was filed and prescribed NPC as the proper refund source.
Issues Before the Supreme Court
(a) Whether petitioner is entitled to a refund of the taxes it paid; and
(b) From which government entity the refund should be claimed.
Supreme Court Ruling – Erroneous Collection and Refund Authority
The Supreme Court granted the petition, reinstating the CTA Division’s refund order. It held that:
• The Exchange of Notes is an executive agreement—binding without Senate concurrence—that obligates the Republic to assume tax liabilities.
• The term “assume” denotes the transfer of an existing liability to another party, distinct from an exemption; hence, constitutional provisions on tax exemptions do not apply.
• Under NIRC Sections 204(C) and 229, the CIR has exclusive authority to credit or refund erroneously collected taxes upon written claim. Petitioner’s tax payments were clear
Case Syllabus (G.R. No. 175772)
Facts
- On June 11, 1987, the Governments of Japan and the Philippines executed an Exchange of Notes obliging the Philippine Government to “assume all fiscal levies or taxes imposed in the Republic of the Philippines on Japanese firms and nationals operating as suppliers, contractors or consultants” under OECF-funded projects.
- Loan Agreement No. PH-P76 (September 25, 1987) provided ₤40,400,000,000 JPY; Loan Agreement No. PH-P141 (December 20, 1994) provided an additional ₤5,513,000,000 JPY for the Calaca II Power Plant Project.
- On June 21, 1991, National Power Corporation (NPC) contracted Mitsubishi Corporation (head office) for engineering, supply, construction and commissioning of Project components; the foreign‐currency portion was funded by the OECF loans.
- Article VIII(B)(1) of the NPC‐Mitsubishi Contract expressly bound NPC to “pay any and all forms of taxes which are directly imposable under the Contract including VAT.”
- Project completion was certified on January 31, 1998; however, petitioner filed its ITR for the fiscal year ending March 31, 1998 on July 15, 1998, declaring P44,288,712 income tax due (OECF-funded portion) and remitted P8,324,100 as Branch Profit Remittance Tax (BPRT).
- On June 30, 2000, petitioner filed an administrative claim for refund of P52,612,812 (combined income tax and BPRT), then filed a petition with the CTA Division on July 13, 2000 under NIRC §229 to suspend the two-year prescriptive period.
- Petitioner anchored its claim on BIR Ruling No. DA-407-98 (September 7, 1998), which interpreted the Exchange of Notes to mean that taxes were to be assumed by the Philippine Government, not exempted but paid on petitioner’s behalf.
Procedural History
- CTA Division (Dec. 17, 2003): Granted refund; held petiti