In a significant ruling concerning tax refunds for entities with special franchise agreements, the Supreme Court of the Philippines has held that Philippine Airlines (PAL) is entitled to a refund of taxes withheld from its interest income, regardless of whether PAL can prove that the withholding agents (banks) actually remitted those taxes to the Bureau of Internal Revenue (BIR). The Court emphasized that PAL’s franchise, Presidential Decree No. 1590, exempts it from paying taxes on interest income, and the responsibility for remitting withheld taxes lies with the withholding agent, not the tax-exempt entity. This decision clarifies the obligations of tax-exempt entities and withholding agents, providing a precedent for similar cases.

Above the Clouds: Untangling PAL’s Tax Exemption and the Remittance Riddle

The case arose from PAL’s claim for a refund of final taxes withheld on its interest income from deposits with several banks. PAL argued that as a franchise holder under Presidential Decree No. 1590, it was exempt from paying taxes on interest income. The Commissioner of Internal Revenue (CIR) denied the refund, arguing that PAL failed to prove the banks had remitted the withheld taxes to the BIR. The Court of Tax Appeals (CTA) partially granted PAL’s claim, ordering a refund for taxes withheld by one bank (JPMorgan) but denying the claim for taxes withheld by other banks (Chinabank, PBCom, and Standard Chartered) due to insufficient proof of remittance. This discrepancy led to consolidated petitions before the Supreme Court.

At the heart of the legal debate was whether PAL, in seeking a tax refund, needed to prove the actual remittance of withheld taxes by its banks to the BIR. The CIR contended that PAL should provide documentary evidence at the BIR administrative level, limiting subsequent CTA review to evidence already presented. PAL countered that the certificates of final tax withheld were sufficient proof, placing the remittance burden on the banks as withholding agents, not on PAL, given its tax-exempt status under its franchise.

The Supreme Court addressed the issue of whether evidence not presented in the administrative claim for refund in the Bureau of Internal Revenue can be presented in the Court of Tax Appeals, the court firmly stated that the Court of Tax Appeals is not limited by the evidence presented in the administrative claim in the Bureau of Internal Revenue. The claimant may present new and additional evidence to the Court of Tax Appeals to support its case for tax refund.

The CIR argued that the CTA’s judicial review should be limited to the evidence presented during the administrative claim. The Supreme Court disagreed, emphasizing that the CTA is a court of record where cases are litigated de novo, meaning anew. This allows taxpayers to present new evidence to support their claims, ensuring a fair and comprehensive review. “Cases filed in the Court of Tax Appeals are litigated de novo. Thus, respondent ‘should prove every minute aspect of its case by presenting, formally offering and submitting . . . to the Court of Tax Appeals [all evidence] . . . required for the successful prosecution of [its] administrative claim.’” The Court noted that if the CIR had doubts, it could have requested further documentation during the administrative process.

Regarding the issue of whether Philippine Airlines, Inc. was able to prove remittance of its final taxes withheld to the Bureau of Internal Revenue, the Supreme Court upheld the CTA’s finding that PAL had only conclusively demonstrated remittance for one bank. However, regarding whether proof of remittance is necessary for Philippine Airlines, Inc. to claim a refund under its charter, Presidential Decree No. 1590, the Court decided that proof of remittance is not the responsibility of the taxpayer.

The court then addressed the core question of whether PAL needed to prove the banks’ remittance of taxes to be entitled to a refund. The Supreme Court emphasized that under its franchise, Presidential Decree No. 1590, PAL is exempt from taxes other than the basic corporate income tax or the 2% franchise tax. Section 13 of Presidential Decree No. 1590 is clear and unequivocal in exempting PAL from all taxes other than the basic corporate income tax or the 2% franchise tax. This exemption extends to taxes on interest income earned from bank deposits.

The court noted, “The tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges of any kind, nature, or description, imposed, levied, established, assessed, or collected by any municipal, city, provincial, or national authority or government agency, now or in the future.” Given this explicit exemption, any tax withheld from PAL’s interest income was considered an overpayment, entitling PAL to a refund or tax credit.

Building on this principle, the Court underscored that taxes on interest income are subject to final withholding tax, making the withholding agent (the bank) primarily liable for remitting the tax to the BIR. The withholding agent, as the payor, is responsible for the tax, and any deficiencies are collected from them. Section 57 of the National Internal Revenue Code states that income tax is withheld and remitted to the BIR is the responsibility of the payor and not the payee.

The court stated: “Under the final withholding tax system the amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income. The liability for payment of the tax rests primarily on the payor as a withholding agent.” Thus, PAL was not obliged to prove the remittance of taxes withheld by the banks. The certificates of final taxes withheld, issued by the banks, served as sufficient evidence that taxes were indeed withheld. Such certificates, declared under penalty of perjury, could be taken at face value unless proven otherwise.

In justifying this position, the Supreme Court cited Commissioner of Internal Revenue v. Philippine National Bank, where it held that “proof of actual remittance by the respondent is not needed in order to prove withholding and remittance of taxes to petitioner.” The court further reasoned that requiring PAL to prove actual remittance would be an unreasonable burden, as it would necessitate demanding access to the banks’ records or the government’s ledgers. The Supreme Court noted that the Commissioner did not contest the withholding of these amounts and only raised that they were not proven to be remitted, this Court finds that PAL sufficiently proved that it is entitled to its claim for refund.

The court reiterated that while tax exemptions are strictly construed against the taxpayer, the government should not use technicalities to retain funds it is not entitled to. “Substantial justice, equity and fair play are on the side of petitioner. Technicalities and legalisms, however exalted, should not be misused by the government to keep money not belonging to it.”

FAQs

What was the main issue in the case?	The central issue was whether Philippine Airlines (PAL) needed to prove that banks remitted withheld taxes to the BIR to claim a tax refund, given PAL’s tax-exempt status under its franchise.
What did the Supreme Court decide?	The Supreme Court ruled that PAL did not need to prove the banks’ remittance of withheld taxes to claim a refund. The responsibility for remitting the taxes rested with the banks as withholding agents.
What is Presidential Decree No. 1590?	Presidential Decree No. 1590 is PAL’s franchise, which grants the airline tax exemptions, including exemption from taxes on interest income from bank deposits.
What is a final withholding tax?	A final withholding tax is a tax where the amount withheld by the payor is considered a full and final payment of the income tax due from the payee. The payee does not need to file an income tax return for that income.
What are Certificates of Final Tax Withheld?	Certificates of Final Tax Withheld are documents issued by withholding agents (like banks) to income earners, showing the amount of tax withheld from their income. These serve as proof of withholding.
Can new evidence be presented in the Court of Tax Appeals?	Yes, the Supreme Court affirmed that the Court of Tax Appeals is a court of record, allowing parties to present new evidence not previously submitted at the administrative level.
What is the responsibility of the withholding agent?	The withholding agent (e.g., the bank) is responsible for withholding the correct amount of tax from the payee’s income and remitting it to the Bureau of Internal Revenue (BIR).
Why was PAL entitled to a refund?	PAL was entitled to a refund because its franchise exempts it from paying taxes on interest income, making any tax withheld an overpayment. Since it is tax exempt, it has the right to ask for a refund.

In conclusion, this decision provides clarity on the responsibilities of withholding agents versus tax-exempt entities, preventing the government from unjustly retaining funds. It underscores the importance of honoring franchise agreements and ensuring fairness in tax refund claims. The court emphasized that it would have been near impossible for the taxpayer to demand to see the records of the payor bank or the ledgers of the government.

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 Airlines, Inc. (PAL) v. Commissioner of Internal Revenue, G.R. Nos. 206079-80, January 17, 2018