Gross Receipts Tax on Interest Income Full Amount

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BIR REVENUE MEMORANDUM CIRCULAR NO. 69-2003: Gross Receipts Tax on Interest Income Full Amount

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Title Supreme Court: Gross Receipts Tax on Interest Income Full Amount

Law: Bir Revenue Memorandum Circular No. 69-2003

Decision Date: Oct 13, 2003

The Bureau of Internal Revenue clarifies that for the gross receipts tax, the entire interest income, including the final withholding tax, must be considered as part of a bank's gross receipts, as established by the Supreme Court's ruling on the China Banking Corporation case.

administrative law

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Nature of Gross Receipts Tax

Gross receipts tax applies to the entire receipts without deductions, exemptions, or exclusions unless explicitly stated by law.
The tax base includes all income components such as interest in full amount.

Definition and Treatment of Interest Income

Interest is the full amount paid by the borrower for the use of money lent, without deductions.
Revenue Regulations define interest as the amount paid on savings and time deposits, allowing no deductions.
The total interest income earned by a lending bank includes the gross amount before any withholding tax.

Example of Interest Income and Final Withholding Tax

If interest income is P100, the lending bank’s gross receipts include the full P100.
The depository bank withholds 20% final tax amounting to P20 and remits it to the government.
The lending bank physically receives P80 (net), but the full P100 is considered gross receipts for taxation.

Concept of Constructive Receipt

Receipt of interest income includes both physical and constructive receipt.
Constructive receipt occurs when the depository bank withholds the tax before remitting it to the government.
Both the net amount received and the withheld tax portion constitute the actual income of the lending bank.

Relation of Withholding Tax to Gross Receipts

The withholding tax amount is part of the gross receipts because it represents income earned, transferred to the government as tax payment.
The gross receipts tax is levied on the total interest income, not on the final withholding tax itself.

Legal Interpretation and Legislative Intent

The law would explicitly exclude any tax amount from gross receipts if intended by the legislature.
Since there is no such exclusion for the final withholding tax here, it remains part of gross receipts.

Conclusion and Effect of Supreme Court Decision

China Banking Corporation cannot exclude the amount withheld as final tax from its taxable gross receipts.
The Supreme Court denied CBC’s petition and granted the Commissioner of Internal Revenue’s petition.
Decisions from the Court of Tax Appeals and Court of Appeals overturning this BIR position were set aside.

Instruction to Revenue Officers

The directive enjoins all internal revenue officers to widely publicize this clarification.

END