TL;DR

The Supreme Court ruled that the 20% final withholding tax (FWT) on a bank’s passive income forms part of the taxable gross receipts for computing the 5% gross receipts tax (GRT). This means banks cannot deduct the FWT from their gross receipts before calculating the GRT. Practically, this decision increases the tax liability of banks, as the GRT is computed on a larger base that includes the FWT. The court emphasized that “gross receipts” means the entire receipts without any deduction, aligning with the plain and ordinary meaning of the term. The ruling aims to prevent tax avoidance and ensure consistent application of tax laws across the banking sector, reinforcing the principle that tax exemptions are narrowly construed against the taxpayer.

Taxing the Withheld: When Does the Government’s Share Become Part of the Bank’s Burden?

This consolidated case, Commissioner of Internal Revenue vs. Citytrust Investment Phils., Inc. and Asianbank Corporation vs. Commissioner of Internal Revenue, grapples with a crucial question in Philippine tax law: Does the 20% final withholding tax (FWT) on a bank’s passive income constitute part of the taxable gross receipts for computing the 5% gross receipts tax (GRT)? The Commissioner of Internal Revenue argued that it does, while Citytrust and Asianbank Corporation contended that it does not, seeking tax refunds based on their exclusion of the FWT from their gross receipts.

To understand the court’s decision, it’s essential to grasp the interplay between the FWT and GRT. Section 27(D) of the National Internal Revenue Code of 1997 (Tax Code) imposes a 20% FWT on certain passive incomes of banks. Simultaneously, Section 121 of the Tax Code levies a 5% GRT on banks’ gross receipts derived from sources within the Philippines. The central point of contention is whether the FWT, which is withheld at source and remitted directly to the government, should be included in the gross receipts used to calculate the GRT.

Citytrust, inspired by a Court of Tax Appeals (CTA) ruling in Asian Bank Corporation v. Commissioner of Internal Revenue, filed a claim for a tax refund, arguing that its reported total gross receipts included the 20% FWT on its passive income. Similarly, Asianbank filed a claim for refund based on the same premise. Both relied on the argument that monies or receipts that do not redound to the benefit of the taxpayer should not be part of its gross receipts. However, the Court of Appeals (CA) decisions were split, leading to the consolidated petitions before the Supreme Court.

The Supreme Court sided with the Commissioner, asserting that “gross receipts” should be understood in its plain and ordinary meaning: the entire receipts without any deduction. The court emphasized that the Tax Code provides no specific definition excluding the FWT, and thus, the term must encompass all receipts before any deductions are made. Prior jurisprudence, such as China Banking Corporation v. Court of Appeals, supports this interpretation, defining gross receipts as “the entire receipts without any deduction.”

The banks argued that Section 4(e) of Revenue Regulations No. 12-80, which states that the rates of taxes on the gross receipts of financial institutions shall be based only on all items of income actually received, supports their position. They claimed that since the 20% FWT is withheld at source, it is not actually received and should be excluded. The court rejected this argument, clarifying that Section 4(e) merely distinguishes between actual receipt and accrual, depending on the taxpayer’s accounting method, and does not inherently exclude accrued income.

Furthermore, the court pointed out that Revenue Regulations No. 12-80 had been superseded by Revenue Regulations No. 17-84, which includes all interest income in computing the GRT, regardless of whether it is actually received or merely accrued. This implied repeal further solidifies the position that the FWT should be included in the taxable gross receipts. The court also referenced the concept of constructive receipt, explaining that when the depositary bank withholds the final tax, there is a constructive receipt by the lending bank of the amount withheld. This constructive receipt signifies that the interest income actually received by the lending bank includes both the net interest and the amount withheld as final tax.

The Supreme Court also addressed the issue of double taxation, dismissing the banks’ argument that imposing both the 20% FWT and 5% GRT constitutes double taxation. It clarified that the GRT is a percentage tax, while the FWT is an income tax, and since they are different kinds of taxes, there is no double taxation. Finally, the court distinguished the case from Manila Jockey Club, where a portion of wager funds was earmarked by law for other persons, emphasizing that amounts withheld form part of gross receipts because these are in constructive possession and not subject to any reservation.

FAQs

In conclusion, the Supreme Court’s decision reinforces the principle that the term “gross receipts” should be interpreted in its plain and ordinary meaning, encompassing all receipts without deduction. This ruling clarifies the tax obligations of banks, preventing potential tax avoidance and ensuring consistent application of tax laws within the banking sector.

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: Commissioner of Internal Revenue vs. Citytrust Investment Phils., Inc., G.R. NO. 139786, September 27, 2006