Dear Atty. Gab,

Musta Atty! I hope this email finds you well. My name is Eduardo Gonzales, and I manage a small community bank, Rizal Rural Bank, here in Batangas. We’re currently preparing our tax filings for the last quarter, and there’s a point of confusion regarding the Gross Receipts Tax (GRT) that I was hoping you could clarify.

Our accountant calculated the GRT based on our total income, including the passive interest income we earned from some government securities and time deposits. However, he also included the 20% final withholding tax (FWT) that was automatically deducted from that passive income before we even received it. So, if we earned P100,000 in interest, and P20,000 was withheld as FWT, he included the full P100,000 in the base amount for calculating the 5% GRT.

I recently attended a small bankers’ forum where a manager from another bank mentioned they exclude the FWT amount from their GRT base. He argued that since the bank never actually ‘received’ the withheld tax, it shouldn’t be part of the ‘gross receipts’. This makes a significant difference in our tax payments, especially over the year.

I’m now quite confused about the correct interpretation. Does the term ‘gross receipts’ for GRT purposes truly include amounts that were withheld at the source as final tax? It feels counterintuitive to pay tax on money we never physically possessed. Could you please shed some light on the proper legal basis for calculating GRT on passive income subject to FWT for banks like ours? Any guidance would be greatly appreciated.

Thank you for your time and expertise.

Respectfully,
Eduardo Gonzales

Dear Mr. Gonzales,

Thank you for reaching out. Musta Atty! I understand your confusion regarding the calculation of Gross Receipts Tax (GRT), particularly concerning the inclusion of the 20% final withholding tax (FWT) on your bank’s passive income. It’s a common point of inquiry for financial institutions.

In essence, Philippine jurisprudence and tax regulations have established that the term “gross receipts” for GRT purposes generally encompasses the total amount of income earned or received, before any deductions, including taxes withheld at the source like the FWT. The principle is that the FWT is considered part of the income earned by the bank, even if it’s remitted directly to the government by the payor. Therefore, your accountant’s approach of including the full passive income amount (before FWT deduction) in the GRT base is typically aligned with the prevailing interpretation.

Understanding “Gross Receipts” in Philippine Taxation

The core of the issue lies in the definition and interpretation of ”gross receipts” as used in the context of the GRT imposed on banks and other financial institutions under the National Internal Revenue Code (NIRC). While it might seem logical to exclude amounts not physically received, tax law often operates on specific definitions established by statute, regulations, and judicial interpretation.

The prevailing view, consistently upheld by the courts, is that “gross receipts” should be understood in its plain and ordinary meaning, signifying the total amount received or earned without any deductions. Allowing the exclusion of the FWT would effectively change the tax base from gross receipts to net receipts, which requires explicit legal authorization.

The word “gross” must be used in its plain and ordinary meaning. It is defined as “whole, entire, total, without deduction.” A common definition is “without deduction.” x x x Gross is the antithesis of net. … As commonly understood, the term “gross receipts” means the entire receipts without any deduction. Deducting any amount from the gross receipts changes the result, and the meaning, to net receipts. Any deduction from gross receipts is inconsistent with a law that mandates a tax on gross receipts, unless the law itself makes an exception.

This interpretation emphasizes that unless the law specifically allows for a deduction from gross receipts, the tax base remains the entire amount earned. The FWT, although remitted directly to the Bureau of Internal Revenue (BIR) by the entity paying the interest, is fundamentally a tax on the income earned by your bank. It represents a portion of your bank’s income used to satisfy its tax obligation on that passive income.

Furthermore, specific Bureau of Internal Revenue (BIR) regulations address the treatment of interest income for financial institutions concerning the GRT. Revenue Regulations No. 17-84, which has been recognized as superseding earlier regulations on the matter, provides clarity.

Section 7 (c) of Revenue Regulations No. 17-84 includes all interest income in computing the GRT… If the recipient of the above-mentioned items of income are financial institutions, the same shall be included as part of the tax base upon which the gross receipt tax is imposed.

This regulation explicitly mandates the inclusion of interest income subject to withholding tax (like the FWT on passive income) in the GRT base for financial institutions. It doesn’t distinguish between the amount physically received and the amount withheld; it refers to the interest income itself, which inherently includes the portion designated for tax payment.

The argument that the withheld amount wasn’t ‘actually received’ relies on an interpretation that tax courts and the Supreme Court have generally rejected in this context. The courts have reasoned that the absence of a specific legal provision allowing the deduction of the FWT from the gross receipts means it must be included. Tax exemptions or deductions are not presumed; they must be granted by clear and unmistakable terms in the law.

A governing principle in taxation states that tax exemptions are to be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority and should be granted only by clear and unmistakable terms.

Therefore, seeking to exclude the FWT amount from your gross receipts would be tantamount to claiming a deduction or exclusion that lacks explicit legal basis. The tax is imposed on the total economic benefit derived, which is the gross interest income before the FWT is applied.

Practical Advice for Your Situation

• Confirm Prevailing Regulations: Ensure your accounting practices align with Revenue Regulations No. 17-84, which mandates including the full interest income (including the FWT portion) in the GRT base.
• Review Past Returns: Check your previous GRT filings. If you previously excluded the FWT, consult with a tax advisor about potential implications or corrections needed. Consistency is key, but correcting past errors is also important.
• Accurate Record-Keeping: Maintain meticulous records clearly showing the gross amount of passive income earned and the corresponding FWT withheld for each transaction. This documentation is crucial during BIR audits.
• Consult Your Accountant: Discuss this clarification with your accountant. Ensure they are aware of the jurisprudence and regulations confirming the inclusion of FWT in the GRT base.
• Budgeting for GRT: Factor the GRT liability based on the total gross receipts, including the FWT portion, into your bank’s financial planning and budgeting.
• Seek BIR Clarification if Needed: If there remains significant doubt or conflicting interpretations within the industry specific to rural banks, consider seeking a clarificatory ruling from the BIR, although current jurisprudence is quite settled.
• Understand the ‘Why’: Remember the rationale: GRT is a tax on the privilege of doing business, measured by gross receipts. The FWT is part of the income earned through that business activity, even if used immediately to pay a different tax.

While the perspective from the other bank manager is understandable from a cash-flow standpoint, the established legal interpretation focuses on the total economic benefit earned, which includes the tax withheld. Adhering to the correct calculation method is crucial for compliance.

Hope this helps!

Sincerely,
Atty. Gabriel Ablola

For more specific legal assistance related to your situation, please contact me through gaboogle.com or via email at connect@gaboogle.com.

Disclaimer: This correspondence is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please schedule a formal consultation.