The Supreme Court ruled that the 20% final withholding tax on a bank’s passive income is part of its gross receipts for computing the Gross Receipts Tax (GRT). This decision clarifies that banks must include the withheld tax amount when calculating their GRT, rejecting claims for refunds based on the exclusion of this amount. This interpretation ensures consistent application of tax laws across the banking sector and prevents potential revenue losses for the government.

China Bank’s Taxing Question: Should Withheld Taxes Count as Gross Receipts?

China Banking Corporation contested the Commissioner of Internal Revenue’s assessment, arguing that the 20% final tax withheld on its passive income should not be included in the computation of the GRT. The bank relied on a previous Court of Tax Appeals (CTA) decision, Asian Bank Corporation v. Commissioner of Internal Revenue, which supported this exclusion. However, the Commissioner maintained that “gross receipts” should be understood in its plain and ordinary meaning, encompassing the entire amount received without deductions. This disagreement led to a legal battle that ultimately reached the Supreme Court, where the core issue was whether the final withholding tax forms part of the bank’s gross receipts for GRT purposes.

The Supreme Court sided with the Commissioner, emphasizing that the term “gross receipts” must be understood in its ordinary meaning, referring to the entire amount received without any deductions. Citing several precedents, including China Banking Corporation v. Court of Appeals, the Court reiterated that interest earned by banks, even if subject to final tax and excluded from taxable gross income, forms part of its gross receipts for GRT purposes. The Court found that the legislative intent, as reflected in successive enactments of the gross receipts tax, supports the inclusion of the final withholding tax in the computation of the GRT.

The Court also addressed the bank’s reliance on Section 4(e) of Revenue Regulations (RR) No. 12-80, which the bank argued allowed for the exclusion of the withheld tax. The Supreme Court clarified that RR No. 12-80 had been superseded by RR No. 17-84. Section 7(c) of RR No. 17-84 explicitly includes all interest income in computing the GRT for financial institutions. The Court highlighted the inconsistency between the two regulations, noting that RR No. 17-84, which requires interest income to form part of the bank’s taxable gross receipts, should prevail.

Section 7. Nature and Treatment of Interest on Deposits and Yield on Deposit Substitutes. –(c) 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.

Furthermore, the Court emphasized that the exclusion sought by the bank constitutes a tax exemption, which is highly disfavored in law. Tax exemptions are to be construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. The Court found that the bank failed to point to any specific provision of law allowing the deduction, exemption, or exclusion from its taxable gross receipts of the amount withheld as final tax. The principle of strictissimi juris demands that any ambiguity in tax exemption laws be resolved in favor of the government, ensuring that tax laws are applied uniformly and consistently.

The implications of this ruling are significant for banks and other financial institutions in the Philippines. It reinforces the principle that “gross receipts” should be interpreted in its plain and ordinary meaning, encompassing the entire amount received without deductions. This interpretation ensures a broader tax base, potentially leading to increased government revenues. The decision also clarifies the regulatory framework, affirming the applicability of RR No. 17-84 and rejecting reliance on the outdated RR No. 12-80. By upholding the inclusion of the final withholding tax in the computation of the GRT, the Supreme Court has provided much-needed clarity and consistency in the application of tax laws to the banking sector.

FAQs

What was the key issue in this case?	The key issue was whether the 20% final tax withheld on a bank’s passive income should be included in the computation of its Gross Receipts Tax (GRT).
What did the Supreme Court rule?	The Supreme Court ruled that the 20% final withholding tax on a bank’s passive income is indeed part of its gross receipts for computing the GRT, thus affirming the tax assessment.
Why did China Bank claim a refund?	China Bank claimed a refund based on a previous CTA decision and the argument that the withheld tax should not be included in gross receipts, leading to an overpayment of GRT.
What is Revenue Regulation No. 12-80?	Revenue Regulation No. 12-80 was an earlier regulation that China Bank relied on; it was later superseded by Revenue Regulation No. 17-84.
What is Revenue Regulation No. 17-84?	Revenue Regulation No. 17-84 includes all interest income in computing the GRT for financial institutions, superseding the earlier regulation.
What does “gross receipts” mean in this context?	In this context, “gross receipts” refers to the total amount received without any deductions, aligning with its plain and ordinary meaning.
What is the principle of strictissimi juris?	The principle of strictissimi juris means that tax exemptions are to be construed strictly against the taxpayer and liberally in favor of the taxing authority.
What are the implications of this ruling for banks?	The ruling means banks must include the 20% final withholding tax in their gross receipts when computing GRT, which could increase their tax liability.

This Supreme Court decision in China Banking Corporation v. Commissioner of Internal Revenue provides essential clarification on the computation of the Gross Receipts Tax for financial institutions in the Philippines. By affirming the inclusion of the 20% final withholding tax in gross receipts, the Court has ensured greater consistency and predictability in tax assessments within the banking sector.

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: China Banking Corporation v. CIR, G.R. No. 175108, February 27, 2013