The Supreme Court has clarified that while BIR Form 2307 is commonly used to prove withholding tax, it is not the only acceptable evidence. In refund claims, taxpayers can use other documents to demonstrate that the tax in question was not utilized to offset tax liabilities. This ruling provides flexibility for taxpayers seeking refunds and emphasizes substance over form in proving tax credit non-utilization, provided sufficient evidence is submitted that the creditable withholding tax was withheld and remitted to the BIR, and such was not utilized to offset the taxpayer’s liabilities.

PNB’s Pursuit: Can a Bank Recover Erroneously Paid Withholding Taxes?

Philippine National Bank (PNB) sought a refund for excess creditable withholding taxes paid to the Bureau of Internal Revenue (BIR). The dispute arose from a foreclosure sale involving GotescoTyan Ming Development, Inc. (Gotesco), where PNB, acting as the withholding agent, believed it had overpaid the withholding tax. The Court of Tax Appeals (CTA) initially denied PNB’s claim, stating that while PNB had proven the withholding and remittance of taxes, it failed to demonstrate that Gotesco did not utilize these taxes to settle its own tax liabilities. The CTA emphasized the need for Gotesco’s Income Tax Return (ITR) and BIR Form No. 2307 as evidence. This case highlights the complexities involved in claiming tax refunds and the importance of presenting sufficient evidence to substantiate such claims.

The central legal question revolved around the sufficiency of evidence required to prove non-utilization of the creditable withholding tax. The Supreme Court, in its analysis, addressed whether PNB had presented adequate evidence to support its claim for a refund. Building on established jurisprudence, the Court emphasized that the burden of proof lies with the taxpayer to demonstrate their entitlement to a tax refund. The court recognized PNB’s challenge in obtaining documents directly from Gotesco, especially since their interests were adverse due to the ongoing dispute over the foreclosure. The core issue was whether the absence of BIR Form No. 2307 was fatal to PNB’s claim, given the other evidence presented.

The Supreme Court delved into the evidentiary requirements for tax refund claims, particularly concerning creditable withholding taxes. It examined the relevant provisions of Revenue Regulation (RR) No. 2-98, as amended, which outlines the rules and procedures for withholding taxes. Section 2.58.3 of RR 2-98 states:

“That the fact of withholding is established by a copy of a statement duly issued by the payor (withholding agent) to the payee showing the amount paid and the amount of tax withheld therefrom.”

Building on this, the Court clarified that the primary purpose of BIR Form 2307 is to establish the fact of withholding, not necessarily the utilization or non-utilization of the tax credit. The Court highlighted that requiring the presentation of BIR Form No. 2307 as the sole means of proving non-utilization would be unduly restrictive and could lead to unjust outcomes. PNB presented several pieces of evidence to demonstrate that Gotesco did not utilize the claimed creditable withholding tax. These included Gotesco’s audited financial statements, which continued to list the foreclosed property as an asset, its income tax returns, and the judicial affidavit of its former accountant, the Withholding Tax Remittance Returns (BIR Form No. 1606) showing that the amount of P74,400,028.49 was withheld and paid by PNB in the year 2003.

Gotesco’s Audited Financial Statements for the year 2003, filed with the BIR in 2004, still included the foreclosed Ever Ortigas Commercial Complex in the Asset account “Property and Equipment.” Note 5 of these financial statements explained:

“Commercial complex and improvements pertain to the Ever Pasig Mall. As discussed in Notes 1 and 7, the land and the mall, which were used as collaterals for the Company’s bank loans, were foreclosed by the lender banks in 1999. However, the lender banks have not been able to consolidate the ownership and take possession of these properties pending decision of the case by the Court of Appeals. Accordingly, the properties are still carried in the books of the Company. As of April 21, 2004, the Company continues to operate the said mall. Based on the December 11, 2003 report of an independent appraiser, the fair market value of the land, improvements and machinery and equipment would amount to about P2.9 billion.”

This indicated Gotesco’s continued assertion of ownership over the property, and it reasoned that Gotesco would not claim the tax credit from the foreclosure sale since it was contesting the sale’s validity. Furthermore, PNB presented Gotesco’s 2003 ITR and Schedule of Prepaid Tax, itemizing withholding taxes claimed for 2003 amounting to P6,014,433, derived from rental payments, not the foreclosure sale. A judicial affidavit from Gotesco’s former accountant corroborated this, stating that the tax credits claimed did not include any portion of the amount subject to the refund claim. Gotesco was not even aware that PNB paid the 6% creditable withholding tax on its behalf, supporting the claim that it could not have utilized the amount.

Given the totality of the evidence, the Supreme Court concluded that PNB had sufficiently proven its entitlement to the refund. The Court emphasized that the absence of BIR Form No. 2307 should not be an insurmountable barrier when other credible evidence demonstrates non-utilization of the tax credit. This ruling provides a more flexible approach, allowing taxpayers to rely on various forms of evidence to substantiate their claims, thus promoting fairness and equity in tax administration. It also underscores the importance of maintaining accurate and comprehensive financial records, as these can serve as valuable evidence in tax disputes.

The Supreme Court’s decision highlights the principle that tax laws should be interpreted in a manner that achieves substantial justice. By allowing alternative forms of evidence to prove non-utilization of tax credits, the Court recognized the practical difficulties taxpayers may face in obtaining specific documents. This decision aligns with the broader goal of ensuring that taxpayers are not unjustly deprived of refunds they are rightfully entitled to. This ruling has significant implications for future tax refund cases, offering a more reasonable and equitable standard of proof.

FAQs

What was the key issue in this case?	The key issue was whether PNB provided sufficient evidence to prove that Gotesco did not utilize the excess creditable withholding taxes, despite not presenting BIR Form 2307. The court clarified that BIR Form 2307 is not the sole requirement to prove non-utilization.
Why did PNB claim a refund for withholding taxes?	PNB claimed a refund because it believed it erroneously withheld and remitted excess creditable withholding taxes to the BIR during a foreclosure sale involving Gotesco. The applicable withholding tax rate should have been five percent (5%) instead of six percent (6%).
What evidence did PNB present to support its claim?	PNB presented Gotesco’s audited financial statements, income tax returns, a schedule of prepaid taxes, a judicial affidavit from Gotesco’s former accountant, and withholding tax remittance returns. This evidence collectively aimed to show that Gotesco did not utilize the excess withholding taxes.
What is BIR Form 2307, and what is its purpose?	BIR Form 2307 is a Certificate of Creditable Tax Withheld at Source. Its primary purpose is to establish the fact of withholding, showing the amount paid and the amount of tax withheld.
Why did the CTA initially deny PNB’s claim?	The CTA initially denied PNB’s claim because PNB failed to present evidence proving that Gotesco did not utilize the withheld taxes to settle its own tax liabilities for the year 2003. The CTA specifically requested Gotesco’s 2003 Income Tax Return (ITR) and BIR Form No. 2307.
What was the Supreme Court’s ruling on the evidentiary requirements?	The Supreme Court ruled that BIR Form 2307 is not the only acceptable evidence to prove non-utilization of tax credits. Taxpayers can use other documents and testimonies to demonstrate non-utilization, provided they sufficiently establish the fact of withholding and remittance.
How does this ruling impact future tax refund claims?	This ruling provides a more flexible approach for taxpayers seeking tax refunds, allowing them to rely on various forms of evidence. This promotes fairness and equity in tax administration and alleviates the burden of solely relying on BIR Form 2307.
What was the final decision of the Supreme Court?	The Supreme Court granted PNB’s petition, reversing the CTA’s decision. The Court directed the Commissioner of Internal Revenue to refund PNB the amount of Php12,400,004.71, representing excess creditable withholding taxes.

In conclusion, the Supreme Court’s decision in the PNB vs. CIR case clarifies the evidentiary requirements for claiming tax refunds, particularly concerning creditable withholding taxes. By recognizing that BIR Form 2307 is not the sole evidence for proving non-utilization of tax credits, the Court has provided a more flexible and equitable framework for future tax refund claims.

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: Philippine National Bank vs. Commissioner of Internal Revenue, G.R. No. 206019, March 18, 2015