In Mitsubishi Corporation-Manila Branch v. Commissioner of Internal Revenue, the Supreme Court ruled that the Bureau of Internal Revenue (BIR) must refund erroneously paid taxes to Mitsubishi. This decision clarifies that a tax assumption agreement between the Philippines and Japan, where the Philippine government agreed to shoulder the taxes of Japanese contractors, is distinct from a tax exemption. The ruling ensures that international agreements are honored and that companies are not unfairly burdened with taxes that the government has committed to pay.

Philippine Promise: Shouldering Taxes or Granting Exemptions?

The core of this case revolves around an Exchange of Notes between the governments of Japan and the Philippines. Japan extended a loan to the Philippines for the Calaca II Coal-Fired Thermal Power Plant Project. In this agreement, the Philippine government committed to assume all taxes imposed on Japanese contractors involved in the project. The question arose whether this commitment constituted a tax exemption, which would require Senate concurrence, or a tax assumption, where the government simply takes over the tax obligations.

The Supreme Court emphasized the distinction between a tax assumption and a tax exemption. The Court underscored the validity of the Exchange of Notes as an executive agreement, binding even without Senate concurrence. Abaya v. Ebdane supports this stance:

Significantly, an exchange of notes is considered a form of an executive agreement, which becomes binding through executive action without the need of a vote by the Senate or Congress.

According to the Court, the Philippine government, through its executing agencies, particularly assumed “all fiscal levies or taxes imposed in the Republic of the Philippines on Japanese firms and nationals operating as suppliers, contractors or consultants on and/or in connection with any income that may accrue from the supply of products of Japan and services of Japanese nationals to be provided under the [OECF] Loan.” This assumption was a concession to Japanese suppliers and contractors in consideration of the OECF Loan, which funded the Project.

To further clarify the nature of tax assumption, the Court cited Black’s Law Dictionary:

To “assume” means “[t]o take on, become bound as another is bound, or put oneself in place of another as to an obligation or liability.”

This means the tax liability remains, but the responsibility for payment shifts. In contrast, an exemption is a freedom from a duty or liability altogether. Therefore, the constitutional requirements for tax exemptions do not apply to tax assumption agreements.

The National Power Corporation (NPC), the executing agency, entered into a contract with Mitsubishi Corporation, stipulating that NPC would pay all taxes directly imposable under the contract. Despite this, Mitsubishi paid income tax and branch profit remittance tax (BPRT) on the OECF-funded portion of the project. The Court found that these payments were erroneously collected because the Philippine government had already assumed the obligation.

The Court also addressed Revenue Memorandum Circular (RMC) No. 42-99, which directed Japanese contractors to seek refunds from the government executing agencies (in this case, NPC), not the BIR. The Supreme Court clarified that RMC No. 42-99 cannot override the provisions of the National Internal Revenue Code (NIRC). The NIRC explicitly grants the Commissioner of Internal Revenue the authority to refund taxes erroneously collected:

SEC. 204. Authority of the Commissioner to Compromise, Abate, and Refund or Credit Taxes. The Commissioner may –

(C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority.

The Court emphasized that administrative issuances must remain consistent with the law they seek to implement and cannot override statutory mandates. As a result, Mitsubishi correctly filed its claim for a tax refund with the BIR under Sections 204 and 229 of the NIRC.

The ruling clarified that the BIR is not without recourse. The BIR can still collect the subject taxes from the NPC, the proper party that assumed Mitsubishi’s tax liability. This ensures that the government honors its commitments while maintaining its revenue collection process.

Ultimately, the Supreme Court’s decision reinforces the principle that international agreements must be respected. It also clarifies the distinction between tax assumption and tax exemption, providing a clearer framework for handling tax obligations in projects involving foreign loans and contractors. By upholding the BIR’s responsibility to refund erroneously collected taxes, the Court ensures fairness and consistency in tax administration.

FAQs

What was the key issue in this case?	The key issue was whether Mitsubishi was entitled to a refund of income tax and branch profit remittance tax it had paid, given the tax assumption agreement between the Philippines and Japan.
What is a tax assumption agreement?	A tax assumption agreement is where one party (in this case, the Philippine government) agrees to take on the tax obligations of another party (Japanese contractors). It shifts the responsibility for payment but does not eliminate the tax liability.
How does a tax assumption differ from a tax exemption?	A tax assumption involves one party taking over another’s tax obligations, whereas a tax exemption is a freedom from the tax obligation altogether. A tax exemption often requires legislative approval, while a tax assumption can be executed through an executive agreement.
What is an executive agreement?	An executive agreement is an agreement between countries that is binding through executive action, without needing legislative approval. An exchange of notes is a type of executive agreement often used for routine agreements.
Why did Mitsubishi file a claim for a tax refund?	Mitsubishi filed for a refund because, under the Exchange of Notes, the Philippine government had agreed to assume its tax liabilities related to the OECF-funded project. Thus, Mitsubishi argued it erroneously paid these taxes.
What was the BIR’s argument against the refund?	The BIR argued that Mitsubishi should seek the refund from the NPC, the government executing agency, as per Revenue Memorandum Circular No. 42-99, instead of directly from the BIR.
What did the Supreme Court decide?	The Supreme Court ruled in favor of Mitsubishi, stating that the BIR must refund the erroneously paid taxes. The Court held that RMC No. 42-99 could not override the provisions of the NIRC, which grants the BIR the authority to issue refunds.
What is the implication of this ruling?	The ruling clarifies the distinction between tax assumption and tax exemption, reinforces the validity of executive agreements, and affirms the BIR’s responsibility to refund erroneously collected taxes. It also ensures that international agreements are honored.
Can the BIR recover the refunded taxes?	Yes, the Supreme Court clarified that the BIR can collect the taxes from the NPC, which was the proper party that assumed Mitsubishi’s tax liability under the Exchange of Notes and the contract.

This case sets a clear precedent for how tax obligations are handled in projects involving international agreements. It reinforces the importance of honoring commitments made in such agreements and ensures that companies can rely on these arrangements when conducting business in the Philippines.

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: Mitsubishi Corporation-Manila Branch v. CIR, G.R. No. 175772, June 05, 2017