Commissioner of Internal Revenue vs. Citytrust Investment Phils., Inc.

The 20% final withholding tax on a bank's passive income is included in the computation of its 5% gross receipts tax because "gross receipts" refers to the entire receipts without any deduction, and the withheld tax is constructively received by the bank as part of its income.

Banks are subject to two distinct taxes on their passive income (e.g., interest): a 20% Final Withholding Tax (FWT) under Section 27(D) of the Tax Code, and a 5% Gross Receipts Tax (GRT) under Section 121. The dispute centered on whether the FWT, which is withheld at the source and remitted directly to the government by the payor, should be included in the "gross receipts" upon which the 5% GRT is calculated.

• G.R. No. 139786 (Citytrust):

  • Filed with the CTA (CTA Case No. 5403).
  • CTA granted Citytrust's claim for refund of overpaid GRT.
  • CA affirmed the CTA decision.
  • Commissioner appealed to the SC.

• G.R. No. 140857 (Asianbank):

  • Filed with the CTA (CTA Case No. 5412).
  • CTA granted partial refund to Asianbank.
  • CA reversed the CTA decision, ruling for the Commissioner.
  • Asianbank appealed to the SC.

• Citytrust (G.R. No. 139786): A domestic corporation engaged in quasi-banking. In 1994, it paid 5% GRT on its reported total gross receipts, which included the 20% FWT on its passive income. Inspired by a prior CTA ruling (Asian Bank Corp. v. CIR), it filed a claim for refund of the GRT paid on the FWT portion.
• Asianbank (G.R. No. 140857): A domestic bank. For taxable quarters from 1994-1996, it paid 5% GRT on its total gross receipts. It later filed a claim for refund based on the same CTA ruling, arguing the FWT should not be part of the GRT base.

• Commissioner of Internal Revenue (in both cases):
  • No law excludes the 20% FWT from taxable gross receipts for GRT purposes.
  • Imposing both the 20% FWT and the 5% GRT (on income including the FWT) does not constitute double taxation because they are different types of taxes.
  • The ruling in Manila Jockey Club (relied upon by the banks) is inapplicable as it involved earmarking, not withholding.
  • "Actual receipt" for GRT purposes includes constructive receipt; the passive income need not be physically received to be part of gross receipts.

• Citytrust & Asianbank:
  • Section 4(e) of Revenue Regulations No. 12-80 states GRT is based on "all items of income actually received." Since the 20% FWT is withheld at source and never physically received, it should be excluded.
  • The SC's ruling in Manila Jockey Club supports their position that amounts not redounding to the taxpayer's benefit are not part of gross receipts.
  • Including the FWT in the GRT base results in double taxation on the same income.

• Procedural Issues: N/A
• Substantive Issues:
  • Whether the 20% FWT on a bank's passive income forms part of the "taxable gross receipts" for computing the 5% GRT.
  • Whether the imposition of both the 20% FWT and the 5% GRT on the same income constitutes double taxation.

• Procedural: N/A
• Substantive:
  1. Yes, the 20% FWT is part of taxable gross receipts. The SC ruled that "gross receipts" is understood in its plain and ordinary meaning—the entire receipts without any deduction. The FWT is constructively received by the bank as part of its income before being remitted to the government. The withholding agent acts merely as a conduit. The SC relied on its consistent rulings in China Banking Corp., Solidbank, Bank of Commerce, and Bank of the Philippine Islands.
  2. No, it does not constitute double taxation. Double taxation requires the same tax on the same income for the same purpose. Here, the 20% FWT is an income tax (Title II of the Tax Code), while the 5% GRT is a percentage tax (Title V). They are distinct in nature and purpose.

• Doctrine of Constructive Receipt — Income is considered received by the taxpayer when it is credited to their account or set apart for them and may be drawn upon at any time. The SC applied this to hold that the FWT, though not physically received, is constructively received by the bank as part of its interest income before the withholding agent remits it to the BIR.
• Principle Against Double Taxing — Double taxation in the objectionable sense occurs when the same property is taxed twice for the same purpose by the same authority during the same taxing period. The SC found this absent because the FWT (income tax) and GRT (percentage tax) are different impositions.
• Strict Construction of Tax Exemptions — Any claim for tax exemption or refund must be construed strictly against the taxpayer and liberally in favor of the taxing authority. The banks failed to show a clear legal basis for excluding the FWT from gross receipts.

• "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." (Citing China Banking Corporation v. Court of Appeals)
• "The concept of a withholding tax on income obviously and necessarily implies that the amount of the tax withheld comes from the income earned by the taxpayer. Since the amount of the tax withheld constitute income earned by the taxpayer, then that amount manifestly forms part of the taxpayer's gross receipts." (From Commissioner of Internal Revenue v. Bank of Commerce)
• "Earmarking is not the same as withholding. Amounts earmarked do not form part of gross receipts because these are by law or regulation reserved for some person other than the taxpayer... On the contrary, amounts withheld form part of gross receipts because these are in constructive possession and not subject to any reservation..." (Distinguishing Manila Jockey Club)

• Commissioner of Internal Revenue v. Solidbank Corporation — Controlling precedent that defined "gross receipts" as total receipts without deduction and distinguished withholding from earmarking.
• Commissioner of Internal Revenue v. Bank of Commerce — Established that "actual receipt" includes constructive receipt and that the FWT forms part of the bank's gross receipts.
• China Banking Corporation v. Court of Appeals — Affirmed the plain meaning of "gross receipts" and noted the legislative adoption of the BIR's consistent interpretation.
• Manila Jockey Club, Inc. v. Collector of Internal Revenue — Distinguished by the SC. This case involved earmarked funds (for prizes) that never became the property of the Jockey Club, unlike withheld taxes which are the property of the bank before remittance.

• Section 27(D) (formerly Sec. 24(e)(1)), National Internal Revenue Code of 1997 — Imposes a 20% final withholding tax on interest from bank deposits and similar passive incomes.
• Section 121 (formerly Sec. 119), National Internal Revenue Code of 1997 — Imposes a 5% gross receipts tax on banks and non-bank financial intermediaries on income from various sources, including interest.
• Section 4(e), Revenue Regulations No. 12-80 — Argued by banks; interpreted by the SC as merely distinguishing actual receipt from accrual, not excluding withheld taxes.
• Section 7(c), Revenue Regulations No. 17-84 — Superseded RR 12-80 and explicitly includes all interest income in the tax base for GRT if the recipient is a financial institution.