The Supreme Court ruled that the 20% final withholding tax (FWT) on a bank’s passive income should be included as part of the taxable gross receipts when computing the 5% gross receipts tax (GRT). This means banks must consider the FWT as part of their income for GRT purposes, impacting their tax liabilities. This decision clarifies the definition of “gross receipts” in the context of banking taxation, ensuring a consistent application of tax laws.

Taxing Times: Decoding Gross Receipts and the Withholding Tax Tango

This consolidated case, Commissioner of Internal Revenue v. Citytrust Investment Phils., Inc. and Asianbank Corporation v. Commissioner of Internal Revenue, revolves around a key question: Does the 20% final withholding tax (FWT) on a bank’s passive income form part of the taxable gross receipts for the purpose of computing the 5% gross receipts tax (GRT)? To fully understand the implications of this question, it’s crucial to dive into the specific facts and the court’s reasoning. This issue has significant financial implications for banks and other financial institutions in the Philippines.

The cases originated from differing interpretations of tax regulations. Citytrust Investment Philippines, Inc. filed a claim for tax refund, arguing that the 20% FWT on its passive income should not be included in its total gross receipts for GRT calculation. They were inspired by a previous Court of Tax Appeals (CTA) ruling in the Asian Bank Corporation v. Commissioner of Internal Revenue case. Asianbank also sought a refund based on a similar premise, claiming overpayment of GRT.

The Commissioner of Internal Revenue contested these claims, asserting that there is no legal basis to exclude the 20% FWT from taxable gross receipts. The Commissioner also argued that including the FWT does not constitute double taxation. The Court of Appeals (CA) initially sided with Citytrust but later reversed its decision in the Asianbank case. This divergence in rulings prompted these petitions, leading to the Supreme Court’s intervention to resolve the conflicting interpretations.

At the heart of the dispute lies the definition of “gross receipts.” Section 121 of the National Internal Revenue Code (Tax Code) imposes a tax on gross receipts derived from sources within the Philippines by all banks and non-bank financial intermediaries. The term “gross receipts,” however, is not defined within the Tax Code. This lack of statutory definition opened the door for interpretations that led to the current controversy.

To understand the intricacies, consider the relevant provisions of the Tax Code. Section 27(D) outlines the rates of tax on certain passive incomes, including a 20% final tax. Section 121 then imposes a tax on gross receipts derived from sources within the Philippines by all banks and non-bank financial intermediaries. The core issue is whether the 20% FWT, which is withheld at source and not physically received by the banks, should still be considered part of the “gross receipts” for GRT purposes.

The Supreme Court, in its analysis, turned to established jurisprudence and statutory interpretation. The Court emphasized that, in the absence of a statutory definition, the term “gross receipts” should be understood in its plain and ordinary meaning. In several previous cases, including China Banking Corporation v. Court of Appeals and Commissioner of Internal Revenue v. Bank of Commerce, the Supreme Court had consistently defined “gross receipts” as the entire receipts without any deduction.

“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.” – China Banking Corporation v. Court of Appeals

The Court also addressed the argument that the 20% FWT is not actually received by the banks since it is withheld at source. The Court clarified that “actual receipt may either be physical receipt or constructive receipt.” When the depositary bank withholds the final tax to pay the tax liability of the lending bank, there is prior to the withholding a constructive receipt by the lending bank of the amount withheld. Therefore, the interest income actually received by the lending bank, both physically and constructively, is the net interest plus the amount withheld as final tax.

Building on this principle, the Supreme Court addressed the contention of double taxation. The Court stated that double taxation means taxing the same thing or activity twice for the same tax period, purpose, and character. In this case, the GRT is a percentage tax under Title V of the Tax Code, while the FWT is an income tax under Title II of the Code. Since these are two different kinds of taxes, there is no double taxation.

The taxpayers, Citytrust and Asianbank, also argued that Revenue Regulations No. 12-80 supports their position that only items of income actually received should be included in the tax base for computing the GRT. However, the Court noted that Revenue Regulations No. 12-80 had been superseded by Revenue Regulations No. 17-84. This later regulation includes all interest income in computing the GRT. This implied repeal of Section 4(e) of RR No. 12-80 further bolsters the argument for including the FWT in the taxable gross receipts.

The Supreme Court distinguished this case from Manila Jockey Club, which the taxpayers had cited in their defense. In that case, a percentage of the gross receipts was earmarked by law to be turned over to the Board on Races and distributed as prizes. The Manila Jockey Club itself derived no benefit from the earmarked percentage. The Court explained that this earmarking is different from withholding. Amounts earmarked do not form part of gross receipts because these are reserved for someone other than the taxpayer. On the contrary, amounts withheld form part of gross receipts because these are in constructive possession and not subject to any reservation.

The decision in Commissioner of Internal Revenue v. Citytrust Investment Phils., Inc. and Asianbank Corporation v. Commissioner of Internal Revenue provides clarity on the definition of “gross receipts” in the context of bank taxation. By ruling that the 20% FWT should be included as part of the taxable gross receipts for computing the 5% GRT, the Supreme Court has reinforced the principle that “gross receipts” means the entire receipts without any deduction. This decision has significant implications for financial institutions in the Philippines, impacting how they calculate and remit their GRT.

FAQs

What was the key issue in this case?	The central issue was whether the 20% final withholding tax (FWT) on a bank’s passive income should be included in the taxable gross receipts for computing the 5% gross receipts tax (GRT).
What did the Supreme Court rule?	The Supreme Court ruled that the 20% FWT should be included as part of the taxable gross receipts for the purpose of computing the 5% GRT. This clarified that the FWT is considered part of the bank’s income for GRT purposes.
What is the definition of “gross receipts” according to the Court?	According to the Court, “gross receipts” means the entire receipts without any deduction. This interpretation aligns with the plain and ordinary meaning of the term.
Does including the FWT in gross receipts constitute double taxation?	The Court held that it does not constitute double taxation because the GRT is a percentage tax, while the FWT is an income tax. These are two different kinds of taxes imposed under different sections of the Tax Code.
How does “constructive receipt” apply in this case?	The Court explained that when the depositary bank withholds the FWT, there is a constructive receipt by the lending bank of the amount withheld. This means the interest income actually received includes both the net interest and the amount withheld as final tax.
What was the basis for the taxpayers’ argument?	The taxpayers argued that only items of income actually received should be included in the tax base for computing the GRT, based on Revenue Regulations No. 12-80. However, the Court noted that this regulation had been superseded by Revenue Regulations No. 17-84.
How did the Court distinguish this case from Manila Jockey Club?	The Court distinguished the case by pointing out that Manila Jockey Club involved earmarking, where funds were legally reserved for other persons. In contrast, the withholding in this case involves amounts that are in constructive possession and not subject to any reservation.
What is the practical implication of this ruling for banks?	The practical implication is that banks must include the 20% FWT on their passive income as part of their taxable gross receipts when computing the 5% GRT. This impacts their tax liabilities and requires a thorough understanding of the tax regulations.

In conclusion, the Supreme Court’s decision settles the debate on whether the 20% FWT should be included in the computation of the 5% GRT. By clarifying the definition of “gross receipts” and distinguishing this case from previous rulings, the Court has provided a clear framework for financial institutions to follow. Understanding these nuances is crucial for accurate tax compliance and financial planning.

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. CITYTRUST INVESTMENT PHILS., INC. & ASIANBANK CORPORATION, G.R. NO. 139786 & 140857, September 27, 2006