In Commissioner of Internal Revenue v. Bank of Commerce, the Supreme Court ruled that the 20% final withholding tax on banks’ interest income is part of their taxable gross receipts for computing the 5% gross receipts tax (GRT). This means banks must include this tax when calculating their GRT, impacting their tax obligations. The decision clarifies the scope of “gross receipts” and prevents banks from excluding the final withholding tax to reduce their tax liabilities.
The Bank’s Taxing Question: Should Withheld Taxes Be Included in Gross Receipts?
The Bank of Commerce questioned whether the 20% final withholding tax (FWT) on its investment income should be included when calculating its 5% gross receipts tax (GRT). The bank argued that since it never actually received the FWT (as it went directly to the government), it should not be considered part of its gross receipts for GRT purposes. This case reached the Supreme Court after conflicting rulings from the Court of Tax Appeals (CTA) and the Court of Appeals (CA). The Supreme Court needed to clarify if the FWT should be considered part of the bank’s gross receipts.
The Court emphasized that the term “gross receipts” should be interpreted in its plain and ordinary meaning, which is the entire receipts without any deduction. Section 121 of the Tax Code expressly includes interest income of banks as part of taxable gross receipts. Building on this principle, the Court stated there is no legal basis to deduct the 20% final tax from the bank’s interest income when computing the 5% gross receipts tax. The Court cited China Banking Corporation v. Court of Appeals, which previously clarified that the word “gross” means “whole, entire, total, without deduction.”
The Court rejected the CA’s reasoning that subjecting the final withholding tax to the 5% GRT would result in double taxation. In CIR v. Solidbank Corporation, the Court established that the FWT and GRT are distinct taxes.
The subject matter of the FWT is the passive income generated from interest on deposits, whereas the subject matter of the GRT is the privilege of engaging in the business of banking. Moreover, the two taxes apply to different tax periods. Therefore, including interest income subject to FWT in computing the GRT is not double taxation. The final withholding tax is considered constructively received by the bank even if it goes directly to the government. Constructive receipt occurs when the lending bank has control over the funds even if physical possession is with another party. From this perspective, prior to the withholding, there is a constructive receipt by the lending bank of the amount withheld.
The Court refuted the Bank of Commerce’s reliance on Revenue Regulation No. 12-80, which the bank used to support excluding the final tax from gross receipts. The Court clarified that the regulation authorized determining gross receipts based on the taxpayer’s accounting method under the Tax Code. However, it does not exclude accrued interest income but simply postpones its inclusion until actual payment. Moreover, Revenue Regulations No. 17-84 further clarifies that interest earned on Philippine bank deposits is part of the tax base for the gross receipts tax. Thus, even with the withholding, the amount still belongs to the bank and is used to satisfy its tax liability.
FAQs
| What was the key issue in this case? | The central issue was whether the 20% final withholding tax on banks’ interest income should be included in the calculation of their 5% gross receipts tax. |
| What did the Supreme Court decide? | The Supreme Court ruled that the 20% final withholding tax is indeed part of the taxable gross receipts for computing the 5% gross receipts tax. |
| What does “gross receipts” mean in this context? | “Gross receipts” refers to the entire amount received without any deductions, as understood in its plain and ordinary meaning. |
| Is there a law that allows deducting the 20% final tax from gross receipts? | No, there is no law that allows such a deduction for computing the 5% gross receipts tax, according to the Court. |
| What is the difference between the Final Withholding Tax and the Gross Receipts Tax? | The Final Withholding Tax (FWT) is an income tax on passive income from interest on deposits, while the Gross Receipts Tax (GRT) is a tax on the privilege of engaging in the banking business. |
| Does including the FWT in GRT calculation constitute double taxation? | The Court held that including the FWT in GRT calculation does not constitute double taxation because the taxes are different in nature and purpose. |
| Why did the Court overturn the Court of Appeals’ decision? | The Court overturned the CA’s decision because it incorrectly relied on outdated regulations and misapplied the concept of constructive receipt. |
| What is the practical implication of this ruling for banks? | Banks must include the 20% final withholding tax in their taxable gross receipts when calculating their 5% gross receipts tax, affecting their overall tax liability. |
This ruling reinforces the principle that “gross receipts” must be understood in its broadest sense for taxation purposes. It ensures banks cannot reduce their tax obligations by excluding amounts, such as final withholding taxes, that are intrinsically linked to their earnings. The Supreme Court’s decision emphasizes the need for consistent interpretation and application of tax laws.
For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.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. Bank of Commerce, G.R. NO. 149636, June 08, 2005
Leave a Reply