TL;DR

The Supreme Court ruled that the 20% final withholding tax on interest income forms part of a bank’s gross receipts when computing the gross receipts tax (GRT). This means banks cannot exclude the withheld amount from their taxable base, reversing a previous tax court decision that allowed the exclusion. This decision impacts how banks calculate and pay their GRT, potentially increasing their tax liabilities, as it clarifies that ‘gross receipts’ includes the entire interest income before any deductions for final withholding taxes. The ruling emphasizes simplicity in tax collection and ensures a steady revenue stream for the government.

Taxing the Untaxed: Can the Government Include Withheld Taxes in Gross Income?

China Banking Corporation (CBC) disputed the Commissioner of Internal Revenue’s assessment that the 20% final withholding tax (FWT) on its interest income should be included in its taxable gross receipts. CBC argued that because it did not actually receive the FWT (it was directly remitted to the government), it should not be considered part of its gross income for purposes of computing the gross receipts tax (GRT). The Commissioner, however, contended that ‘gross receipts’ means the entire income or receipt, without any deduction.

The core legal question was whether the FWT on interest income should be considered part of a bank’s gross receipts for GRT purposes. The Court delved into the historical context of gross receipts taxation, tracing its origins to Republic Act No. 39 in 1946, which initially imposed a tax on the gross receipts of banks derived from various sources, including interest income. From 1946 until the Court of Tax Appeals’ decision in Asian Bank Corporation v. Commissioner of Internal Revenue in 1996, interest income was consistently considered part of taxable gross receipts, without any deduction for withholding taxes.

The Supreme Court overturned the Court of Tax Appeals’ ruling, asserting that the amount of interest income withheld for the 20% FWT forms part of a bank’s gross receipts in computing the GRT. The Court emphasized that the term ‘gross receipts’ generally means the entire receipts without any deduction. Deducting any amount from the gross receipts transforms it into net receipts, which is inconsistent with a law that mandates a tax on gross receipts unless the law itself provides an exception. This interpretation aligns with the common understanding of ‘gross receipts’ in business, which is the whole and entire amount of receipts without deduction.

In reaching its decision, the Court addressed CBC’s reliance on the case of Collector of Internal Revenue v. Manila Jockey Club, which CBC argued supported the exclusion of the FWT from gross receipts because the final tax is ‘earmarked by regulation’ for the government. The Court distinguished Manila Jockey Club, explaining that in that case, the receipts not owned by the Manila Jockey Club but merely held by it in trust did not form part of its gross receipts. In contrast, in the CBC case, the bank owns the interest income from which the FWT is derived. The government only becomes the owner of the money constituting the final tax when CBC pays the FWT to extinguish its tax obligation.

Furthermore, the Court addressed CBC’s argument based on Section 4(e) of Revenue Regulations No. 12-80, which stated that the GRT ‘shall be based on all items of income actually received.’ The Court clarified that this regulation merely provides an exception to the accrual method of accounting, making interest income taxable for GRT purposes only upon actual receipt, whether physical or constructive. When the depository bank withholds the final tax to pay the tax liability of the lending bank, there is a constructive receipt by the lending bank of the amount withheld.

Moreover, the Court underscored that CBC’s contention that it could deduct the FWT from its interest income effectively amounted to a claim of tax exemption. Tax exemptions are highly disfavored in law, and whoever claims an exemption must justify their right by the clearest grant of organic or statute law. CBC failed to point to any specific provision of law granting such a tax exemption. The Court also rejected the argument that including the FWT in gross receipts would constitute double taxation, explaining that the GRT is a business tax, while the FWT is an income tax, and there is no constitutional prohibition against imposing two different taxes on the same income.

In conclusion, the Supreme Court’s decision clarified that banks cannot exclude the amount of interest income withheld as final tax from their gross receipts when computing the GRT. This ruling reinforces the principle that ‘gross receipts’ means the entire receipts without any deduction unless explicitly provided by law. As a result of this ruling, the petition filed by CBC was denied, and the petition filed by the Commissioner of Internal Revenue was granted.

FAQs

This ruling provides clarity on the scope of gross receipts and reinforces the principle that tax exemptions must be clearly defined in the law. By affirming that the final withholding tax on interest income forms part of a bank’s gross receipts, the Supreme Court ensures a more comprehensive tax base and promotes simplicity in tax collection.

For inquiries regarding the application of this ruling to specific circumstances, please contact Atty. Gabriel Ablola through gaboogle.com or via email at connect@gaboogle.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: China Banking Corporation v. CA, G.R. No. 147938, June 10, 2003