The Supreme Court ruled that banks undergoing liquidation by the Philippine Deposit Insurance Corporation (PDIC) do not need to secure a tax clearance from the Bureau of Internal Revenue (BIR) before the liquidation process can proceed. Requiring a tax clearance would disrupt the legally mandated order of creditor preferences, potentially harming other creditors. This decision ensures that the liquidation of banks adheres to the established rules of concurrence and preference of credit under the Civil Code, thus protecting the rights of all creditors.

Liquidation vs. Dissolution: Why Banks Don’t Need BIR Tax Clearances

This case revolves around the liquidation of Rural Bank of Tuba (Benguet), Inc. (RBTI), which was ordered closed by the Monetary Board of the Bangko Sentral ng Pilipinas (BSP). The PDIC, acting as the receiver and liquidator, initiated proceedings to liquidate the bank’s assets. The BIR intervened, insisting that PDIC must first obtain a tax clearance under Section 52(C) of the Tax Code of 1997 before the liquidation could proceed. This requirement, typically applied to corporations dissolving or reorganizing, sparked a legal battle over whether it should also apply to banks undergoing liquidation under the supervision of the BSP.

The central legal question was whether Section 52(C) of the Tax Code of 1997, which mandates a tax clearance for corporations contemplating dissolution or reorganization, applies to banks ordered to be liquidated by the Monetary Board of the BSP. PDIC argued that the liquidation of banks is governed by the New Central Bank Act, which does not include a tax clearance requirement, and that Section 52(C) is intended for corporations under the supervision of the Securities and Exchange Commission (SEC). The BIR countered that all corporations, including banks, are subject to tax regulations and that the tax clearance ensures the collection of income taxes.

The Supreme Court sided with the PDIC, clarifying that Section 52(C) of the Tax Code of 1997 is not applicable to banks ordered placed under liquidation by the Monetary Board. The Court emphasized that a tax clearance is not a prerequisite to the approval of the project of distribution of the assets of a bank under liquidation by the PDIC. This decision rested on several key reasons, each reinforcing the distinct nature of bank liquidation proceedings.

First, the Court highlighted that Section 52(C) primarily regulates the relationship between the SEC and the BIR, specifically concerning corporations undergoing dissolution or reorganization. This regulation ensures that dissolving corporations settle their tax liabilities before the SEC formally approves their dissolution. Banks under liquidation by the PDIC, however, constitute a special case governed by Section 30 of the New Central Bank Act, which provides specific rules and procedures for bank liquidation. The New Central Bank Act does not mandate a tax clearance from the BIR, indicating a different legislative intent for bank liquidations.

Section 52(C) of the Tax Code of 1997 and the BIR-SEC Regulations No. 1 regulate the relations only as between the SEC and the BIR, making a certificate of tax clearance a prior requirement before the SEC could approve the dissolution of a corporation.

Building on this principle, the Court distinguished between the dissolution of a corporation by the SEC and the receivership and liquidation of a bank by the BSP. The Court refused to simply replace references to the “SEC” with the “BSP” in the tax clearance requirement. Such an action, the Court noted, would amount to judicial legislation, improperly inserting requirements into the law where none exist.

Second, the Court pointed out that the BIR’s interest in the liquidation of a closed bank is adequately satisfied by the filing of a final tax return. This return allows the BIR to determine the tax liabilities of the bank under liquidation. Requiring a tax clearance as a condition for approving the distribution of assets would be unreasonable, especially given the timeline of liquidation proceedings under Section 30 of the New Central Bank Act.

[T]he alleged purpose of the BIR in requiring the liquidator PDIC to secure a tax clearance is to enable it to determine the tax liabilities of the closed bank… what the BIR should have requested from the RTC… is not an order for PDIC… to secure a tax clearance; but, rather, for it to submit the final return of RBBI.

The Court explained that the PDIC, as the receiver and liquidator, has a duty to file a final tax return on behalf of the closed bank. This filing allows the BIR to determine if the bank has any outstanding tax liabilities. The Court illustrated the impracticality of requiring a tax clearance before asset distribution, highlighting a “chicken-and-egg dilemma.” A tax clearance is issued only when all tax liabilities are paid, but the PDIC cannot pay these liabilities until the asset distribution is approved, which requires the tax clearance in the first place.

Third, the Supreme Court emphasized that it is not the Court’s role to fill perceived gaps in existing laws or regulations regarding the interactions between the BIR, BSP, and PDIC. Addressing any perceived need for additional regulations is the responsibility of the legislature and the executive branch. The Court recognized the separation of powers and the importance of allowing the appropriate branches of government to address policy issues through legislation and regulation.

Moreover, the Court argued that insisting on a tax clearance before asset distribution contradicts both the letter and the intent of the law regarding the liquidation of banks by the PDIC. Section 30 of the New Central Bank Act mandates that the debts and liabilities of a bank under liquidation must be paid according to the rules on concurrence and preference of credit under the Civil Code.

convert the assets of the institution to money, dispose of the same to creditors and other parties, for the purpose of paying the debts of such institution in accordance with the rules on concurrence and preference of credit under the Civil Code of the Philippines.

These rules provide specific priorities for different types of claims. If a tax clearance were required beforehand, tax liabilities would be given absolute preference, overriding the Civil Code’s established order of preference. This would compel the PDIC to settle all tax liabilities before addressing other debts, even those with higher priority under the Civil Code. The Court firmly rejected this interpretation, reaffirming its duty to uphold the law and prevent any violation of established legal principles.

FAQs

What was the key issue in this case?	The key issue was whether a bank under liquidation by the PDIC must secure a tax clearance from the BIR before the liquidation process can proceed, as required by Section 52(C) of the Tax Code for corporations undergoing dissolution.
What did the Supreme Court decide?	The Supreme Court ruled that Section 52(C) of the Tax Code does not apply to banks under liquidation by the PDIC, and a tax clearance is not required before the distribution of assets.
Why did the Court make this decision?	The Court reasoned that bank liquidations are governed by the New Central Bank Act, which doesn’t require a tax clearance, and that imposing such a requirement would disrupt the order of creditor preferences under the Civil Code.
What is the New Central Bank Act?	The New Central Bank Act (Republic Act No. 7653) outlines the procedures for the receivership and liquidation of banks, giving the Monetary Board of the BSP the authority to order the closure and liquidation of banks.
What is the role of the PDIC in bank liquidations?	The PDIC acts as the receiver and liquidator of banks ordered closed by the Monetary Board, managing the liquidation process and distributing assets to creditors.
What is a tax clearance, and why did the BIR want it?	A tax clearance is a certification from the BIR that a corporation has no outstanding tax liabilities. The BIR wanted it to ensure that the bank’s tax liabilities were settled before assets were distributed.
What is the order of preference of credits under the Civil Code?	The Civil Code establishes a hierarchy for paying debts and liabilities, giving certain creditors priority over others, including specific movable or immovable property and other real and personal properties.
What does this ruling mean for creditors of closed banks?	This ruling protects the rights of all creditors by ensuring that the liquidation process follows the legally mandated order of preference, preventing the BIR from receiving absolute preference over other creditors.

In conclusion, this Supreme Court decision clarifies the legal framework for bank liquidations, ensuring that the process adheres to established laws and protects the rights of creditors. By exempting banks under liquidation from the tax clearance requirement, the Court has streamlined the process and prevented potential disruptions to the equitable distribution of assets.

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 DEPOSIT INSURANCE CORPORATION VS. BUREAU OF INTERNAL REVENUE, G.R. No. 172892, June 13, 2013