CIR vs BPI

G.R. No. 147375, June 26, 2006

DOCTRINAL DIGEST:
Domestic corporate taxpayers, including banks, are levied a 20% final withholding tax on bank deposits
under Section 24(e)(1)2 in relation to Section 50(a)3 of Presidential Decree No. 1158, otherwise known as
the National Internal Revenue Code of 1977 ("Tax Code"). Banks are also liable for a tax on gross receipts
derived from sources within the Philippines under Section 1194 of the Tax Code, which provides, thus:

Sec. 119. Tax on banks and non-bank financial intermediaries. - There shall be collected a tax on gross
receipts derived from sources within the Philippines by all banks and non-bank financial intermediaries in
accordance with the following schedule:

(a) On interest, commissions and discounts from lending activities as well as income from financial leasing,
on the basis of remaining maturities of instruments from which such receipts are derived.

Short-term maturity - not in excess of two (2) years . . . . . . . . 5%

Medium-term maturity - over two (2)

years but not exceeding four (4) years . . . . . . . . . . . . . . . . . . . 3%

Long term maturity '

(i) Over four (4) years but

not exceeding seven (7) years . . . . . . . . . . . . . . . . . . . . . 1%

(ii) Over seven (7) years . . . . . . . . . . . . . . . . . . . . . . . . . . 0%

(b) On dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0%

(c) On royalties, rentals of property, real or personal,

profits from exchange and all other items treated as gross
income under Section 28 of this Code . . . . . . . . . . . . . . . . . . . . . . . . . 5%

Provided, however, That in case the maturity period referred to in paragraph (a) is shortened thru
pretermination, then the maturity period shall be reckoned to end as of the date of pretermination for
purposes of classifying the transaction as short, medium or long term and the correct rate of tax shall be
applied accordingly.

Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on
persons performing similar banking activities.

As a domestic corporation, the interest earned by respondent Bank of the Philippine Islands (BPI) from
deposits and similar arrangements are subjected to a final withholding tax of 20%. Consequently, the
interest income it receives on amounts that it lends out are always net of the 20% withheld tax. As a bank,
BPI is furthermore liable for a 5% gross receipts tax on all its income.
For the four (4) quarters of the year 1996, BPI computed its 5% gross receipts tax payments by including
in its tax base the 20% final tax on interest income that had been withheld and remitted directly to the
Bureau of Internal Revenue (BIR).

On 30 January 1996, the CTA rendered a decision in Asian Bank Corporation v. Commissioner of Internal
Revenue,5 holding that the 20% final tax withheld on a bank's interest income did not form part of its
taxable gross receipts for the purpose of computing gross receipts tax.

BPI wrote the BIR a letter dated 15 July 1998 citing the CTA Decision in Asian Bank and requesting a refund
of alleged overpayment of taxes representing 5% gross receipts taxes paid on the 20% final tax withheld
at source.

Inaction by the BIR on this request prompted BPI to file a Petition for Review against the Commissioner of
Internal Revenue (Commissioner) with the CTA on 19 January 1999. Conceding its claim for the first three
quarters of the year as having been barred by prescription, BPI only claimed alleged overpaid taxes for
the final quarter of 1996.

Following its own doctrine in Asian Bank, the CTA rendered a Decision,6 holding that the 20% final tax
withheld did not form part of the respondent's taxable gross receipts and that gross receipts taxes paid
thereon are refundable. However, it found that only P13,843,455.62 in withheld final taxes were
substantiated by BPI; it awarded a refund of the 5% gross receipts tax paid thereon in the amount of
P692,172.78.

On appeal, the Court of Appeals promulgated a Decision7 affirming the CTA. It cited this Court's decision
in Commissioner of Internal Revenue v. Tours Specialists, Inc.,8 in which we held that the "gross receipts
subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do
not belong to them and do not redound to the taxpayer's benefit" in concluding that "it would be unjust
and confiscatory to include the withheld 20% final tax in the tax base for purposes of computing the gross
receipts tax since the amount corresponding to said 20% final tax was not received by the taxpayer and
the latter derived no benefit therefrom."9

The Court of Appeals also held that Section 4(e) of Revenue Regulations No. 12-80 mandates the
deduction of the final tax paid on interest income in computing the tax base for the gross receipts tax.
Section 4(e) provides, thus:

Gross receipts tax on banks, non-bank financial intermediaries, financing companies, and other non-bank
financial intermediaries, not performing quasi-banking activities. - The rates of taxes to be imposed on
the gross receipts of such financial institutions shall be based on all items of income actually received.
Mere accrual shall not be considered, but once payment is received on such accrual or in case of
prepayment, then the amount actually received shall be included in the tax base of such financial
institutions, as provided hereunder. (Emphasis supplied.)

The present Petition for Review filed by the Commissioner seeks to annul the adverse Decisions of the
CTA and the Court of Appeals and raises the sole issue of whether the 20% final tax withheld on a bank's
passive income should be included in the computation of the gross receipts tax.

In assailing the findings of the lower courts, the Commissioner makes the following arguments: (1) the
term "gross receipts" must be applied in its ordinary meaning; (2) there is no provision in the Tax Code or
any special laws that excludes the 20% final tax in computing the tax base of the 5% gross receipts tax; (3)
Revenue Regulations No. 12-80, Section 4(e), is inapplicable in the instant case; and (4) income need not
actually be received to form part of the taxable gross receipts. Additionally, petitioner points out that the
CTA Asian Bank case cited by petitioner BPI has already been superseded by the CTA decisions in Standard
Chartered Bank v. Commissioner of Internal Revenue and Far East Bank and Trust Company v.
Commissioner of Internal Revenue, both promulgated on 16 November 2001.

The issues raised by the Commissioner have already been ruled upon in his favor by this Court in China
Banking Corporation v. Court of Appeals and reiterated in Commissioner of Internal Revenue v. Solidbank
Corporation11 and more recently in Commissioner of Internal Revenue v. Bank of Commerce.12
Consequently, the petition must be granted.

The Tax Code does not provide a definition of the term "gross receipts."13 Accordingly, the term is
properly understood in its plain and ordinary meaning14 and must be taken to comprise of the entire
receipts without any deduction.15 We, thus, made the following disquisition in Bank of Commerce:16

The word "gross" must be used in its plain and ordinary meaning. It is defined as "whole, entire, total,
without deduction." A common definition is "without deduction." "Gross" is also defined as "taking in the
whole; having no deduction or abatement; whole, total as opposed to a sum consisting of separate or
specified parts." Gross is the antithesis of net. Indeed, in China Banking Corporation v. Court of Appeals,
the Court defined the term in this wise:

As commonly understood, the term "gross receipts" means the entire receipts without any deduction.
Deducting any amount from the gross receipts changes the result, and the meaning, to net receipts. Any
deduction from gross receipts is inconsistent with a law that mandates a tax on gross receipts, unless the
law itself makes an exception. As explained by the Supreme Court of Pennsylvania in Commonwealth of
Pennsylvania v. Koppers Company, Inc.,'

Highly refined and technical tax concepts have been developed by the accountant and legal technician
primarily because of the impact of federal income tax legislation. However, this in no way should affect
or control the normal usage of words in the construction of our statutes; and we see nothing that would
require us not to include the proceeds here in question in the gross receipts allocation unless statutorily
such inclusion is prohibited. Under the ordinary basic methods of handling accounts, the term gross
receipts, in the absence of any statutory definition of the term, must be taken to include the whole total
gross receipts without any deductions, x x x. [Citations omitted] (Emphasis supplied)"

Likewise, in Laclede Gas Co. v. City of St. Louis, the Supreme Court of Missouri held:

The word "gross" appearing in the term "gross receipts," as used in the ordinance, must have been and
was there used as the direct antithesis of the word "net." In its usual and ordinary meaning "gross
receipts" of a business is the whole and entire amount of the receipts without deduction, x x x. On the
contrary, "net receipts" usually are the receipts which remain after deductions are made from the gross
amount thereof of the expenses and cost of doing business, including fixed charges and depreciation.
Gross receipts become net receipts after certain proper deductions are made from the gross. And in the
use of the words "gross receipts," the instant ordinance, of course, precluded plaintiff from first deducting
its costs and expenses of doing business, etc., in arriving at the higher base figure upon which it must pay
the 5% tax under this ordinance. (Emphasis supplied)cralawlibrary
Absent a statutory definition, the term "gross receipts" is understood in its plain and ordinary meaning.
Words in a statute are taken in their usual and familiar signification, with due regard to their general and
popular use. The Supreme Court of Hawaii held in Bishop Trust Company v. Burns that'

x x x It is fundamental that in construing or interpreting a statute, in order to ascertain the intent of the
legislature, the language used therein is to be taken in the generally accepted and usual sense. Courts will
presume that the words in a statute were used to express their meaning in common usage. This principle
is equally applicable to a tax statute. [Citations omitted] (Emphasis supplied)cralawlibrary

Additionally, we held in Solidbank, to wit:17 "[W]e note that US cases have persuasive effect in our
jurisdiction, because Philippine income tax law is patterned after its US counterpart.

"' [G]ross receipts' with respect to any period means the sum of: (a) The total amount received or accrued
during such period from the sale, exchange, or other disposition of x x x other property of a kind which
would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or
property held by the taxpayer primarily for sale to customers in the ordinary course of its trade or
business, and (b) The gross income, attributable to a trade or business, regularly carried on by the
taxpayer, received or accrued during such period x x x."

"x x x [B]y gross earnings from operations x x x was intended all operations x x x including incidental,
subordinate, and subsidiary operations, as well as principal operations."

"When we speak of the 'gross earnings' of a person or corporation, we mean the entire earnings or
receipts of such person or corporation from the business or operations to which we refer."

From these cases, "gross receipts"] refer to the total, as opposed to the net, income. These are therefore
the total receipts before any deduction for the expenses of management. Webster's New International
Dictionary, in fact, defines gross as "whole or entire."

The legislative intent to apply the term in its ordinary meaning may also be surmised from a historical
perspective of the levy on gross receipts. From the time the gross receipts tax on banks was first imposed
in 1946 under R.A. No. 39 and throughout its successive reenactments,18 the legislature has not
established a definition of the term "gross receipts." Absent a statutory definition of the term, the BIR had
consistently applied it in its ordinary meaning, i.e., without deduction. On the presumption that the
legislature is familiar with the contemporaneous interpretation of a statute given by the administrative
agency tasked to enforce the statute, subsequent legislative reenactments of the subject levy sans a
definition of the term "gross receipts" reflect that the BIR's application of the term carries out the
legislative purpose.19

Furthermore, Section 119 (a)20 of the Tax Code expressly includes interest income as part of the base
income from which the gross receipts tax on banks is computed. This express inclusion of interest income
in taxable gross receipts creates a presumption that the entire amount of the interest income, without
any deduction, is subject to the gross receipts tax.21

The exclusion of the 20% final tax on passive income from the taxpayer's tax base is effectively a tax
exemption, the application of which is highly disfavored.22 The rule is that whoever claims an exemption
must justify this right by the clearest grant of organic or statute law.23 Like the other banks who have
asserted a right tantamount
to exception under these circumstances, BPI has failed to present a clear statutory basis for its claim to
take away the interest income withheld from the purview of the levy on gross tax receipts.

Bereft of a clear statutory basis on which to hinge its claim, BPI's view, as adopted by the Court of Appeals,
is that Section 4(e) of Revenue Regulations No. 12-80 establishes the exclusion of the 20% final tax
withheld from the bank's taxable gross receipts.

However, we agree with the Commissioner that BPI's asserted right under Section 4(e) of Revenue
Regulations No. 12-80 presents a misconstruction of the provision. While, indeed, the provision states
that "[t]he rates of taxes to be imposed on the gross receipts of such financial institutions shall be based
on all items of income actually received," it goes on to distinguish actual receipt from accrual, i.e., that
"[m]ere accrual shall not be considered, but once payment is received on such accrual or in case of
prepayment, then the amount actually received shall be included in the tax base of such financial
institutions x x x."

Section 4(e) recognizes that income could be recognized by the taxpayer either at the time of its actual
receipt or its accrual,24 depending on the accounting method used by the taxpayer,25 but establishes the
rule that, for purposes of gross receipts tax, interest income is taxable upon actual receipt of the income,
as opposed to the time of its accrual. Section 4(e) does not exclude accrued interest income from gross
receipts but merely postpones its inclusion until actual payment of the interest to the lending bank, thus
mandating that "[m]ere accrual shall not be considered, but once payment is received on such accrual or
in case of prepayment, then the amount actually received shall be included in the tax base of such financial
institutions x x x."26

Even if Section 4(e) had been properly construed, it still cannot be the basis for deducting the income tax
withheld since Section 4(e) has been superseded by Section 7 of Revenue Regulations No. 17-84, which
states, thus:

SECTION 7. Nature and Treatment of Interest on Deposits and Yield on Deposit Substitutes. '

(a) The interest earned on Philippine Currency bank deposits and yield from deposit substitutes subjected
to the withholding taxes in accordance with these regulations need not be included in the gross income
in computing the depositor's/investor's income tax liability in accordance with the provision of Section
29(b), (c) and (d) of the National Internal Revenue Code, as amended.

(b) Only interest paid or accrued on bank deposits, or yield from deposit substitutes declared for purposes
of imposing the withholding taxes in accordance with these regulations shall be allowed as interest
expense deductible for purposes of computing taxable net income of the payor.

(c) If the recipient of the above-mentioned items of income are financial institutions, the same shall be
included as part of the tax base upon which the gross receipt tax is imposed. (Emphasis supplied.)

The provision categorically provides that if the recipient of interest subjected to withholding taxes is a
financial institution, the interest shall be included as part of the tax base upon which the gross receipts
tax is imposed.
The implied repeal of Section 4(e) is undeniable. Section 4(e) imposes the gross receipts tax only on all
items of income actually received, as opposed to their mere accrual, while Section 7 of Revenue
Regulations No. 17-84 includes all interest income (whether actual or accrued) in computing the gross
receipts tax.27 Section 4(e) of Revenue Regulations No. 12-80 was superseded by the later rule, because
Section 4(e) thereof is not restated in Revenue Regulations No. 17-84.28 Clearly, then, the current revenue
regulations requires interest income, whether actually received or merely accrued, to form part of the
bank's taxable gross receipts.29

The Commissioner correctly controverts the conclusion made by the Court of Appeals that it would be
"unjust and confiscatory to include the withheld 20% final tax in the tax base for purposes of computing
the gross receipts tax since the amount corresponding to said 20% final tax was not received by the
taxpayer and the latter derived no benefit therefrom."30

Receipt of income may be actual or constructive. We have held that the withholding process results in the
taxpayer's constructive receipt of the income withheld, to wit:

By analogy, we apply to the receipt of income the rules on actual and constructive possession provided in
Articles 531 and 532 of our Civil Code.

Under Article 531:

"Possession is acquired by the material occupation of a thing or the exercise of a right, or by the fact that
it is subject to the action of our will, or by the proper acts and legal formalities established for acquiring
such right."

Article 532 states:

"Possession may be acquired by the same person who is to enjoy it, by his legal representative, by his
agent, or by any person without any power whatever; but in the last case, the possession shall not be
considered as acquired until the person in whose name the act of possession was executed has ratified
the same, without prejudice to the juridical consequences of negotiorum gestio in a proper case."

The last means of acquiring possession under Article 531 refers to juridical acts'the acquisition of
possession by sufficient title to which the law gives the force of acts of possession. Respondent argues
that only items of income actually received should be included in its gross receipts. It claims that since the
amount had already been withheld at source, it did not have actual receipt thereof.

We clarify. Article 531 of the Civil Code clearly provides that the acquisition of the right of possession is
through the proper acts and legal formalities established therefor. The withholding process is one such
act. There may not be actual receipt of the income withheld; however, as provided for in Article 532,
possession by any person without any power whatsoever shall be considered as acquired when ratified
by the person in whose name the act of possession is executed.

In our withholding tax system, possession is acquired by the payor as the withholding agent of the
government, because the taxpayer ratifies the very act of possession for the government. There is thus
constructive receipt. The processes of bookkeeping and accounting for interest on deposits and yield on
deposit substitutes that are subjected to FWT are indeed' for legal purposes' tantamount to delivery,
receipt or remittance.31 (Emphasis supplied.)
Thus, BPI constructively received income by virtue of its acquiescence to the extinguishment of its 20%
final tax liability when the withholding agents remitted BPI's income to the government. Consequently, it
received the amounts corresponding to the 20% final tax and benefited therefrom.

The cases cited by BPI, Commissioner of Internal Revenue v. Tours Specialists, Inc.32 and Commissioner
of Internal Revenue v. Manila Jockey Club, Inc.,33 in which this Court held that "gross receipts subject to
tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong
to them and do not redound to the taxpayer's benefit,"34 only further substantiate the fact that BPI
benefited from the withheld amounts.

In Tours Specialists and Manila Jockey Club, the taxable entities held the subject monies not as income
earned but as mere trustees. As such, they held the money entrusted to them but which neither belonged
to them nor redounded to their benefit. On the other hand, BPI cannot be considered as a mere trustee;
it is the actual owner of the funds. As owner thereof, it was BPI's tax obligation to the government that
was extinguished upon the withholding agent's remittance of the 20% final tax. We elucidated on BPI's
ownership of the funds in China Banking, to wit:

Manila Jockey Club does not support CBC's contention but rather the Commissioner's proposition. The
Court ruled in Manila Jockey Club that receipts not owned by the Manila Jockey Club but merely held by
it in trust did not form part of Manila Jockey Club's gross receipts. Conversely, receipts owned by the
Manila Jockey Club would form part of its gross receipts.

In the instant case, CBC owns the interest income which is the source of payment of the final withholding
tax. The government subsequently becomes the owner of the money constituting the final tax when CBC
pays the final withholding tax to extinguish its obligation to the government. This is the consideration for
the transfer of ownership of the money from CBC to the government. Thus, the amount constituting the
final tax, being originally owned by CBC as part of its interest income, should form part of its taxable gross
receipts.

In Commissioner v. Tours Specialists, Inc., the Court excluded from gross receipts money entrusted by
foreign tour operators to Tours Specialists to pay the hotel accommodation of tourists booked in various
local hotels. The Court declared that Tours Specialists did not own such entrusted funds and thus the
funds were not subject to the 3% contractor's tax payable by Tours Specialists. The Court held:

x x x [G]ross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the
taxpayer which do not belong to them and do not redound to the taxpayer's benefit; and it is not necessary
that there must be a law or regulation which would exempt such monies and receipts within the meaning
of gross receipts under the Tax Code.

x x x [T]he room charges entrusted by the foreign travel agencies to the private respondent do not form
part of its gross receipts within the definition of the Tax Code. The said receipts never belonged to the
private respondent. The private respondent never benefited from their payment to the local hotels. x x x
[T]his arrangement was only to accommodate the foreign travel agencies.

Unless otherwise provided by law, ownership is essential in determining whether interest income forms
part of taxable gross receipts. Ownership is the circumstance that makes interest income part of the
taxable gross receipts of the taxpayer. When the taxpayer acquires ownership of money representing
interest, the money constitutes income or receipt of the taxpayer.

In contrast, the trustee or agent does not own the money received in trust and such money does not
constitute income or receipt for which the trustee or agent is taxable. This is a fundamental concept in
taxation. Thus, funds received by a money remittance agency for transfer and delivery to the beneficiary
do not constitute income or gross receipts of the money remittance agency. Similarly, a travel agency that
collects ticket fares for an airline does not include the ticket fare in its gross income or receipts. In these
cases, the money remittance agency or travel agency does not acquire ownership of the funds received.35
(Emphasis supplied.)

BPI argues that to include the 20% final tax withheld in its gross receipts tax base would be to tax twice
its passive income and would constitute double taxation. Granted that interest income is being taxed
twice, this, however, does not amount to double taxation. There is no double taxation if the law imposes
two different taxes on the same income, business or property.36 In Solidbank, we ruled, thus:

Double taxation means taxing the same property twice when it should be taxed only once; that is, "x x x
taxing the same person twice by the same jurisdiction for the same thing." It is obnoxious when the
taxpayer is taxed twice, when it should be but once. Otherwise described as "direct duplicate taxation,"
the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing
authority, within the same jurisdiction, during the same taxing period; and they must be of the same kind
or character.

First, the taxes herein are imposed on two different subject matters. The subject matter of the FWT [Final
Withholding Tax] is the passive income generated in the form of interest on deposits and yield on deposit
substitutes, while the subject matter of the GRT [Gross Receipts Tax] is the privilege of engaging in the
business of banking.

A tax based on receipts is a tax on business rather than on the property; hence, it is an excise rather than
a property tax. It is not an income tax, unlike the FWT. In fact, we have already held that one can be taxed
for engaging in business and further taxed differently for the income derived therefrom. Akin to our ruling
in Velilla v. Posadas, these two taxes are entirely distinct and are assessed under different provisions.

Second, although both taxes are national in scope because they are imposed by the same taxing authority
the national government under the Tax Code and operate within the same Philippine jurisdiction for the
same purpose of raising revenues, the taxing periods they affect are different. The FWT is deducted and
withheld as soon as the income is earned, and is paid after every calendar quarter in which it is earned.
On the other hand, the GRT is neither deducted nor withheld, but is paid only after every taxable quarter
in which it is earned.

Third, these two taxes are of different kinds or characters. The FWT is an income tax subject to
withholding, while the GRT is a percentage tax not subject to withholding.

In short, there is no double taxation, because there is no taxing twice, by the same taxing authority, within
the same jurisdiction, for the same purpose, in different taxing periods, some of the property in the
territory. Subjecting interest income to a 20% FWT and including it in the computation of the 5% GRT is
clearly not double taxation.37
Clearly, therefore, despite the fact that that interest income is taxed twice, there is no double taxation
present in this case.

An interpretation of the tax laws and relevant jurisprudence shows that the tax on interest income of
banks withheld at source is included in the computation of their gross receipts tax base.

WHEREFORE, the Petition is GRANTED. The assailed Decisions of the Court of Appeals and the Court of
Tax Appeals are REVERSED AND SET ASIDE. Petitioner Commissioner of Internal Revenue's denial of
respondent Bank of Philippine Islands' claim for refund is SUSTAINED. No costs.

DOCTRINE: Claims for tax refunds are in the nature of tax exemptions which result in loss of revenue for
the government, thus are not presumed. He who claims that he is entitled to a tax refund must not only
claim that the transaction subject of tax is clearly and unequivocally not subject to tax - the amount of the
claim must still be proven in the normal course, in accordance with the prescribed rules on evidence.

BOX 1: (Fortune Tobacco files a claim for refund with the BIR)
Text Box: Fortune Tobacco Corp files a claim for tax credit or refund, for the amount of
219,566,450.00, for erroneously or illegally collected specific taxes for certain brands of cigarette
(Champion M-100s, Camel Filter Kings, Winston Filter Kings, and Winston Lights) that they
manufactured/produced.

BOX 2: (Without waiting for the decision of the CIR, Fortune Tobacco files a petition for its claim with
the CTA)

Textbox: Without waiting for the decision of the CIR, Fortune Tobacco files a petition for its claim
for refund with the CTA
Fortune: “Your honor, we have with us a summary of the excise taxes paid and an Excite Tax
Refund Computation Summary as evidence of our claim.”

BOX 3: (CIR argues in CTA that Fortune failed to prove by evidence that they are entitled to a tax refund)

CIR: “Your honor, the evidence provided by Fortune are insufficient to show that they are entitled
to a tax refund.”

BOX 4: (CTA)

CTA: “The CIR is correct. Fortune, your evidence is not enough to prove that you are entitled to a
tax refund.”

Box 5: (Supreme Court)

Supreme Court: “We affirm the CTA decision. The document evidencing the summary of excise taxes paid
by Fortune is not sufficient evidence as it does not state the amounts of excise taxes paid for the specific
brands in issue. Likewise, petitioner's Excise Tax Refund Computation Summary is not supported by
documents which would verify the contents of the same.”

Box 6:
DOCTRINE: Claims for tax refunds are in the nature of tax exemptions which result in loss of revenue for
the government, thus are not presumed. He who claims that he is entitled to a tax refund must not only
claim that the transaction subject of tax is clearly and unequivocally not subject to tax - the amount of the
claim must still be proven in the normal course, in accordance with the prescribed rules on evidence.