Commissioner of Internal Revenue v. Bank of Commerce
REITERATIONFacts
The Antecedents: Respondent Bank of Commerce derived passive income from investments in government securities and private commercial papers during 1994 and 1995. The bank paid a 5% gross receipts tax (GRT) on its income, including passive income amounting to P85,384,254.51, which had already been subjected to a 20% final withholding tax (FWT). Subsequently, relying on a Court of Tax Appeals (CTA) ruling in Asia Bank Corporation v. Commissioner of Internal Revenue, the bank filed an administrative claim for a refund of P853,842.54, asserting that the FWT should not be included in the computation of the GRT. Procedural History: The Commissioner of Internal Revenue did not act on the refund claim, prompting the Bank of Commerce to file a petition for review with the CTA to avoid prescription. The CTA, by a majority decision, partially granted the refund, ordering the Commissioner to refund P355,258.99, representing erroneously withheld taxes from interest income derived from investments in government securities. The Commissioner appealed this decision to the Court of Appeals (CA), arguing that the 20% FWT should be included in the computation of the GRT and that the CTA erred in applying the ruling in Collector of Internal Revenue v. Manila Jockey Club. The CA affirmed the CTA's ruling, holding that the FWT should not be construed as part of the bank's gross receipts and that subjecting it to GRT would result in double taxation. The Petition: The Commissioner of Internal Revenue filed a petition for review on certiorari under Rule 45 of the Rules of Court, assailing the CA's decision. The petitioner contends that the CA erred in holding that the 20% FWT on the bank's interest income does not form part of the taxable gross receipts for GRT computation. The petitioner argues that the reliance on Revenue Regulations No. 12-80 and the Manila Jockey Club ruling is misplaced, asserting that subsequent regulations and established jurisprudence indicate that such income, even if subject to FWT, should be included in gross receipts for GRT purposes. The petitioner further argues that there is no double taxation, as the FWT and GRT are distinct taxes imposed on different subject matters and for different purposes.
Issue(s)
Whether the 20% final withholding tax on a bank's passive income forms part of its taxable gross receipts for the purpose of computing the 5% gross receipts tax. Whether subjecting the passive income to both final withholding tax and gross receipts tax constitutes double taxation.
Ruling
The petition is GRANTED. The decision of the Court of Appeals is SET ASIDE and REVERSED. The CTA is ORDERED to DISMISS the petition of respondent Bank of Commerce.
Ratio Decidendi
On whether the 20% final withholding tax forms part of taxable gross receipts: The Court held that the 20% final withholding tax on a bank's passive income, such as interest income, forms part of the bank's gross receipts for the purpose of computing the 5% gross receipts tax. The term "gross receipts" is understood in its plain and ordinary meaning as the "whole, entire, total, without deduction." The Tax Code expressly subjects interest income of banks to the gross receipts tax, creating a presumption that the entire amount of interest income, without any deduction, is subject to the GRT. There is no law that allows the deduction of the 20% final tax from the respondent bank's interest income for the computation of the 5% gross receipts tax. Furthermore, the concept of withholding tax implies that the amount withheld comes from the income earned by the taxpayer, and thus forms part of the taxpayer's gross receipts. The Court clarified that "actual receipt" of interest income is not limited to physical receipt but includes constructive receipt, which occurs when the depository bank withholds the final tax for the lending bank's liability. The interest income actually received, both physically and constructively, is the net interest plus the amount withheld as final tax. On whether subjecting the passive income to both final withholding tax and gross receipts tax constitutes double taxation: The Court ruled that there is no double taxation. Double taxation means taxing the same person twice by the same jurisdiction for the same thing. In this case, the two taxes are imposed on different subject matters: the FWT is on passive income (interest), while the GRT is on the privilege of engaging in the business of banking. The FWT is an income tax, while the GRT is a percentage tax. Although both are national in scope and for revenue generation, they affect different taxing periods. The FWT is withheld as soon as income is earned, while the GRT is paid after every taxable quarter. Therefore, subjecting interest income to a 20% FWT and including it in the computation of the 5% GRT is not double taxation.
Main Doctrine
The 20% final withholding tax on a bank's passive income, such as interest income, forms part of the bank's gross receipts for the purpose of computing the 5% gross receipts tax. Subjecting such income to both final withholding tax and gross receipts tax does not constitute double taxation.