This Supreme Court decision clarifies that the 20% final withholding tax (FWT) on a bank’s passive income is indeed part of the taxable gross receipts for calculating the 5% gross receipts tax (GRT). This means banks cannot deduct the FWT amount when computing their GRT, impacting their overall tax liabilities and financial planning. The ruling ensures a consistent interpretation of “gross receipts” as the entire amount received without any deductions, aligning with the legislative intent and established tax regulations.

Passive Income or Gross Receipts? Unpacking the Bank Tax Dispute

This consolidated case, Commissioner of Internal Revenue vs. Citytrust Investment Phils., Inc. and Asianbank Corporation vs. Commissioner of Internal Revenue, revolves around 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). The Commissioner of Internal Revenue argued for inclusion, while Citytrust and Asianbank contended that it should be excluded because the FWT is withheld at source and not actually received by the banks. This dispute highlights the interpretation of “gross receipts” under the National Internal Revenue Code and its implications for the banking industry.

The core of the legal discussion rests on defining “gross receipts.” The Supreme Court has consistently defined it as “the entire receipts without any deduction.” This definition aligns with the plain and ordinary meaning of “gross,” which is “whole, entire, total, without deduction.” This interpretation negates any deductions from gross receipts unless explicitly provided by law. Any reduction would alter the meaning to net receipts. This stance is supported by a historical perspective of the gross receipts tax on banks, dating back to its initial imposition in 1946.

Citytrust and Asianbank leaned on Section 4(e) of Revenue Regulations No. 12-80, which stated that the rates of taxes on financial institutions’ gross receipts should be based only on items of income actually received. However, the court clarified that this regulation merely distinguishes between actual receipt and accrual, depending on the taxpayer’s accounting method. It doesn’t exclude accrued interest income but postpones its inclusion until actual payment. Furthermore, Revenue Regulations No. 17-84 superseded No. 12-80, including all interest income in computing the GRT. Thus, all interest income is part of the tax base upon which the gross receipt tax is imposed.

The concept of constructive receipt is also crucial. The court explained that actual receipt isn’t limited to physical receipt but includes constructive receipt. When a depositary bank withholds the final tax to pay the lending bank’s tax liability, the lending bank constructively receives the amount withheld. From this constructively received amount, the depositary bank deducts the FWT and remits it to the government. The interest income actually received includes both the net interest and the amount withheld as final tax. This concept aligns with the withholding tax system, where the tax withheld comes from the taxpayer’s income and forms part of their gross receipts.

Furthermore, the court addressed the issue of double taxation. Double taxation occurs when the same thing or activity is taxed twice for the same tax period, purpose, and kind. In this case, the court found no double taxation because the GRT and FWT are different kinds of taxes. The GRT is a percentage tax, while the FWT is an income tax. They fall under different titles of the Tax Code and have distinct characteristics. A percentage tax is measured by a percentage of the gross selling price or gross value, while an income tax is imposed on net or gross income realized in a taxable year.

The taxpayers also invoked the case of Manila Jockey Club, arguing that amounts earmarked for other persons should not be included in gross receipts. However, the court distinguished earmarking from withholding. Earmarked amounts are reserved for someone other than the taxpayer by law or regulation, whereas withheld amounts are in constructive possession and not subject to any reservation. The withholding agent merely acts as a conduit in the collection process. Thus, Manila Jockey Club doesn’t apply because the interest income withheld becomes the property of the financial institutions upon constructive possession. The government becomes the owner when the financial institutions pay the FWT to extinguish their obligation.

In conclusion, the Supreme Court emphasized that tax exemptions are disfavored and must be construed strictissimi juris against the taxpayer. Tax exemptions should be granted only by clear and unmistakable terms. Therefore, the court ruled in favor of the Commissioner of Internal Revenue, affirming that the 20% FWT is part of the taxable gross receipts for computing the 5% GRT.

FAQs

What was the key issue in this case?	The key 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 is the definition of ‘gross receipts’ according to the Supreme Court?	The Supreme Court defines “gross receipts” as the entire receipts without any deduction. This aligns with the plain and ordinary meaning of “gross,” which is “whole, entire, total, without deduction.”
What is constructive receipt?	Constructive receipt refers to income that is not physically received but is credited to one’s account or otherwise made available so that it can be drawn upon at any time. In this context, the bank is deemed to have constructively received the FWT even though it was directly remitted to the government.
Did the court find double taxation in this case?	No, the court found no double taxation because the GRT and FWT are different kinds of taxes. The GRT is a percentage tax, while the FWT is an income tax, and they fall under different titles of the Tax Code.
What was the relevance of Revenue Regulations No. 12-80 in this case?	Citytrust and Asianbank relied on Section 4(e) of Revenue Regulations No. 12-80, which stated that gross receipts should be based only on items of income actually received. However, the court clarified that Revenue Regulations No. 17-84 superseded No. 12-80 and includes all interest income in computing the GRT.
How did the court distinguish this case from the Manila Jockey Club case?	The court distinguished earmarking from withholding. Earmarked amounts are reserved for someone other than the taxpayer, whereas withheld amounts are in constructive possession and not subject to any reservation.
What is the implication of this ruling for banks?	This ruling means banks must include the 20% FWT on their passive income when computing their 5% GRT. This can impact their overall tax liabilities and financial planning.
What is the significance of the principle of strictissimi juris in this case?	The court emphasized that tax exemptions are disfavored and must be construed strictissimi juris against the taxpayer. Tax exemptions should be granted only by clear and unmistakable terms.

In conclusion, this case reinforces the principle that “gross receipts” should be interpreted in its plain and ordinary meaning, encompassing the entire amount received without any deductions. This ruling ensures consistent tax application and emphasizes the importance of adhering to tax regulations in financial computations.

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., G.R. NO. 139786, September 27, 2006