In a significant ruling, the Supreme Court held that the 20% final tax withheld on a bank’s passive income forms part of the bank’s gross income for computing its gross receipts tax liability. This decision overturned the Court of Tax Appeals (CTA) and the Court of Appeals’ previous rulings, aligning with the principle that ‘gross receipts’ means the entire receipts without any deduction. The implication is that banks must include the final tax withheld when calculating their gross receipts tax, impacting their overall tax obligations and potentially increasing their tax burden. This ruling clarifies the scope of gross receipts tax for banks, affecting how they manage and report their income.

Taxing the Untaxed? BPI’s Fight Over Gross Receipts and Final Taxes

This case revolves around the dispute between the Commissioner of Internal Revenue (CIR) and the Bank of the Philippine Islands (BPI) concerning the computation of the gross receipts tax (GRT) for banks. The core issue is whether the 20% final tax withheld on a bank’s passive income, such as interest earned on deposits, should be included in the bank’s gross income for purposes of computing its GRT liability. The CIR argued that ‘gross receipts’ should be interpreted in its ordinary meaning, encompassing the entire receipts without any deduction. BPI, on the other hand, contended that the 20% final tax, which they never actually received, should not be included in the GRT base, relying on previous CTA decisions and interpretations of revenue regulations.

The case began when BPI, after an unfavorable CTA decision in Asian Bank Corporation v. Commissioner of Internal Revenue, sought a refund for alleged overpayment of GRT, arguing that the 20% final tax withheld should not have been included in their gross receipts. When the BIR did not act on the request, BPI filed a Petition for Review with the CTA. The CTA initially ruled in favor of BPI, but the CIR appealed to the Court of Appeals (CA), which affirmed the CTA’s decision. The CA relied on the principle that gross receipts do not include monies or receipts entrusted to the taxpayer that do not belong to them or redound to their benefit.

However, the Supreme Court reversed the lower courts’ decisions, siding with the CIR. The Supreme Court emphasized that the term ‘gross receipts’ should be understood in its plain and ordinary meaning, which is the entire receipts without any deduction. The court also cited its previous rulings in China Banking Corporation v. Court of Appeals and Commissioner of Internal Revenue v. Solidbank Corporation, which established that the 20% final tax withheld forms part of the taxable gross receipts. The court highlighted that the Tax Code does not provide a specific definition of ‘gross receipts,’ thus requiring it to be interpreted according to its common usage.

Building on this principle, the Supreme Court addressed BPI’s argument that Section 4(e) of Revenue Regulations No. 12-80 supports the exclusion of the 20% final tax. The court clarified that this section merely distinguishes between actual receipt and accrual of income, mandating that interest income is taxable upon actual receipt, not at the time of accrual. Moreover, the court noted that Section 4(e) had been superseded by Section 7 of Revenue Regulations No. 17-84, which explicitly includes all interest income as part of the tax base upon which the gross receipts tax is imposed. This later regulation effectively requires all interest income, whether actually received or merely accrued, to form part of the bank’s taxable gross receipts.

Furthermore, the court addressed the argument that including the withheld 20% final tax in the gross receipts tax base would be unjust and confiscatory, as BPI did not actually receive the amount and derived no benefit from it. The Supreme Court noted that receipt of income may be actual or constructive. The withholding process results in the taxpayer’s constructive receipt of the income withheld. In this system, the payor acts as the withholding agent of the government, and the taxpayer ratifies this act, resulting in constructive receipt. Therefore, BPI constructively received income by acquiescing to the extinguishment of its 20% final tax liability when the withholding agents remitted BPI’s income to the government.

The Supreme Court distinguished this case from previous rulings, such as Commissioner of Internal Revenue v. Tours Specialists, Inc., where the court held that gross receipts do not include monies entrusted to the taxpayer that do not belong to them or redound to their benefit. In those cases, the taxable entities held the subject monies as mere trustees. In contrast, BPI is the actual owner of the funds. As the owner, BPI’s tax obligation to the government was extinguished upon the withholding agent’s remittance of the 20% final tax. This ownership is a crucial factor in determining whether interest income forms part of taxable gross receipts.

Finally, the Supreme Court dismissed BPI’s contention that including the 20% final tax in the gross receipts tax base would constitute double taxation. The court clarified that there is no double taxation if the law imposes two different taxes on the same income, business, or property. The final withholding tax (FWT) is imposed on the passive income generated in the form of interest on deposits, while the gross receipts tax (GRT) is imposed on the privilege of engaging in the business of banking. These are distinct taxes imposed on different subject matters.

In summary, the Supreme Court’s decision underscored the principle that ‘gross receipts’ should be interpreted in its ordinary meaning, encompassing the entire receipts without any deduction. The court clarified that banks must include the final tax withheld when calculating their gross receipts tax, impacting their overall tax obligations. This ruling aligns with established legal precedents and provides clarity on the scope of gross receipts tax for banks.

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 the bank’s gross receipts tax (GRT). The CIR argued for inclusion, while BPI argued for exclusion, claiming it was unjust and would amount to double taxation.
What did the Supreme Court decide?	The Supreme Court ruled in favor of the Commissioner of Internal Revenue (CIR), holding that the 20% final tax withheld on a bank’s passive income should indeed be included in the computation of the bank’s gross receipts tax base. This overturned the decisions of the lower courts.
Why did the Supreme Court rule that way?	The Court reasoned that the term ‘gross receipts’ should be interpreted in its plain and ordinary meaning, which is the entire receipts without any deduction. It also stated that the bank constructively received the income when the withholding agent remitted the tax to the government.
Does this ruling mean banks are being taxed twice on the same income?	While interest income is effectively taxed twice, the Court clarified that this does not constitute double taxation because the final withholding tax and the gross receipts tax are different taxes imposed on different subject matters (passive income vs. the privilege of doing business).
What is the significance of Revenue Regulations No. 12-80 and 17-84?	BPI argued that Section 4(e) of Revenue Regulations No. 12-80 supported their claim, but the Court clarified that this section was superseded by Section 7 of Revenue Regulations No. 17-84. The latter explicitly includes all interest income in computing the gross receipts tax base.
What does “constructive receipt” mean in this context?	“Constructive receipt” means that even though the bank did not physically receive the 20% final tax, it is considered to have received it because the withholding agent’s remittance of the tax extinguished the bank’s tax obligation to the government.
How does this ruling affect banks in the Philippines?	This ruling means that banks in the Philippines must include the 20% final tax withheld on their passive income when calculating their gross receipts tax liability. This may increase their overall tax burden.
Can banks claim a refund for overpaid taxes in previous years based on the earlier interpretations?	Based on this ruling, it is unlikely that banks will be successful in claiming refunds for overpaid taxes in previous years if they excluded the 20% final tax from their gross receipts tax base. The Supreme Court’s decision clarifies the correct interpretation of the law.

The Supreme Court’s decision in this case clarifies a long-standing debate on the computation of gross receipts tax for banks, ensuring that the tax base includes the 20% final tax withheld on passive income. This ruling aligns with the principle that ‘gross receipts’ means the entire receipts without any deduction, and it provides clarity on the tax obligations of banks 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: COMMISSIONER OF INTERNAL REVENUE VS. BANK OF THE PHILIPPINE ISLANDS, G.R. NO. 147375, June 26, 2006