In Philippine National Bank vs. Commissioner of Internal Revenue, the Supreme Court affirmed that the 20% Final Withholding Tax (FWT) on a bank’s interest income is indeed part of the taxable gross receipts when computing the 5% Gross Receipts Tax (GRT). This ruling clarifies that banks must include the FWT in their gross receipts for tax purposes, aligning with the principle that GRT applies to all receipts without deductions unless explicitly provided by law. This decision reinforces the government’s ability to collect revenue consistently, even during economic downturns, by preventing exclusions that could alter the definition of gross receipts.

When is Income Truly Received? PNB’s GRT Case

Philippine National Bank (PNB) contested the inclusion of the 20% Final Withholding Tax (FWT) on its interest income in the computation of its Gross Receipts Tax (GRT). For the taxable quarters between June 30, 1994, and March 31, 1996, PNB filed quarterly percentage tax returns and paid the 5% GRT on its gross receipts, which included interest income already subjected to the 20% FWT. Subsequently, PNB amended these returns, excluding the 20% FWT, and sought a refund of P17,504,775.48, arguing that the FWT should not be part of the taxable gross receipts. The Court of Tax Appeals (CTA) initially sided with PNB, but the Court of Appeals reversed this decision, leading to the present appeal before the Supreme Court. The central legal question revolves around whether the 20% FWT on interest income should be considered part of the taxable gross receipts for GRT purposes.

The core of the dispute lies in the interpretation of what constitutes “gross receipts” for the purpose of computing the GRT. PNB argued that under Section 51(g) of the 1977 National Internal Revenue Code (Tax Code) and Section 7(a) of Revenue Regulations No. 12-80, taxes withheld are held in trust for the government and should not be considered part of the bank’s gross receipts. PNB also relied on the case of Comm. of Internal Revenue v. Manila Jockey Club, Inc., asserting that gross receipts should not include amounts earmarked for someone other than the proprietor. Furthermore, PNB emphasized the specialized jurisdiction of the CTA, suggesting its rulings should be respected and not easily disturbed.

However, the Commissioner of Internal Revenue countered that the Manila Jockey Club, Inc. case was inapplicable and cited China Banking Corporation v. Court of Appeals, which held that the 20% FWT on interest income should indeed form part of the bank’s taxable gross receipts. The Supreme Court, in its analysis, sided with the Commissioner, reinforcing a consistent stance it has taken in numerous similar cases. The court emphasized that Section 119 (now Section 121) of the Tax Code imposes the 5% GRT on all receipts without deductions, unless explicitly provided by law. This approach aligns with the policy of maintaining simplicity in tax collection and ensuring a stable source of state revenue, regardless of economic conditions.

Building on this principle, the Supreme Court addressed PNB’s argument that the FWT is merely a trust fund for the government. The court clarified that the nature of the FWT as a trust fund does not justify its exclusion from the computation of interest income subject to GRT. The concept of a withholding tax inherently implies that the tax withheld comes from the income earned by the taxpayer. As the amount withheld belongs to the taxpayer, they can transfer its ownership to the government to settle their tax liability. This transfer constitutes a payment that extinguishes the bank’s obligation to the government, highlighting that the bank can only pay with money it owns or is authorized to pay.

The Supreme Court also dismissed PNB’s reliance on Section 4(e) of Revenue Regulations No. 12-80, which stated that taxes withheld cannot be considered as actually received by the bank. The court noted that Revenue Regulations No. 12-80 had been superseded by Revenue Regulations No. 17-84, which includes all interest income in computing the GRT under Section 7(c). Moreover, the court referenced Commissioner of Internal Revenue v. Bank of Commerce, which clarified that actual receipt of interest is not limited to physical receipt but includes constructive receipt. When a depository bank withholds the final tax to pay the lending bank’s tax liability, the lending bank constructively receives the amount withheld before the withholding occurs.

This approach contrasts with the earmarking scenario in the Manila Jockey Club, Inc. case, where amounts were specifically reserved for someone other than the taxpayer. The Supreme Court distinguished between earmarking and withholding, explaining that earmarked amounts do not form part of gross receipts because they are reserved by law for another party. Conversely, withheld amounts are part of gross receipts because they are in the constructive possession of the income earner and not subject to any reservation. The withholding agent merely acts as a conduit in the collection process.

Finally, while acknowledging the CTA’s specialized jurisdiction, the Supreme Court clarified that CTA rulings are not immune to review. The court will generally not disturb CTA rulings on appeal unless the CTA commits gross error in its appreciation of facts. In this case, the CTA erroneously relied on Manila Jockey Club, Inc., leading to an unsustainable pronouncement that the 20% FWT on interest income should not form part of the taxable gross receipts subject to GRT. Therefore, the Supreme Court denied PNB’s petition, affirming the Court of Appeals’ decision and reinforcing the principle that the FWT on a bank’s interest income is included in the computation of the GRT.

FAQs

This case underscores the importance of adhering to tax laws and regulations regarding the computation of gross receipts for financial institutions. By clarifying that the FWT on interest income is part of the taxable base, the Supreme Court reinforces the government’s ability to collect taxes efficiently and consistently. This decision serves as a reminder for banks to accurately compute and remit their taxes, including all applicable components of their gross receipts.

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: PNB vs. CIR, G.R. No. 158175, October 18, 2007