Commissioner of Internal Revenue vs. Solidbank Corporation

The 20% final withholding tax (FWT) on a bank's interest income, though withheld at source and not physically received by the bank, constitutes constructive receipt by the bank and forms part of its "gross receipts" subject to the 5% gross receipts tax (GRT). Subjecting the same income to both taxes does not constitute double taxation because the FWT is an income tax while the GRT is a percentage tax on the privilege of engaging in business, making them distinct taxes with different subject matters and purposes.

The dispute arises from the Philippine tax system's imposition of two distinct taxes on banks: (1) a 20% final withholding tax (FWT) on passive income (interest earnings) under Section 24(e)(1) of the Tax Code, withheld at source by payors; and (2) a 5% gross receipts tax (GRT) under Section 119 of the Tax Code, levied on the total gross receipts of banks. Solidbank Corporation claimed that including the portion of income already subjected to FWT in the computation of the GRT base resulted in overpayment and constituted unjust indirect duplicate taxation, seeking a refund for the GRT paid on the withheld amount.

• Solidbank Corporation (respondent), a domestic banking corporation, filed its Quarterly Percentage Tax Returns for calendar year 1995, reporting total gross receipts of ₱1,474,691,693.44 and paying a 5% Gross Receipts Tax (GRT) amounting to ₱73,734,584.60.
• Included in the reported gross receipts was ₱350,807,875.15 representing income from passive sources (interest), which had already been subjected to a 20% Final Withholding Tax (FWT) amounting to ₱70,161,575.03 withheld at source by the payor entities.
• Relying on the Court of Tax Appeals (CTA) decision in Asian Bank Corporation v. CIR (CTA Case No. 4720, January 30, 1996), which held that the 20% FWT should not form part of the GRT base, Solidbank filed a claim for refund with the Bureau of Internal Revenue (BIR) on June 19, 1997, for ₱3,508,078.75, representing the alleged overpaid GRT (5% of the ₱70.16M FWT).
• On the same day, to toll the two-year prescriptive period under Section 230 (now Section 229) of the Tax Code, Solidbank filed a Petition for Review with the CTA without awaiting the BIR's decision.
• The CTA ruled in favor of Solidbank, ordering a refund of ₱1,555,749.65 (the amount determined after verification), based on its prior ruling in Asian Bank that the 20% FWT on a bank's interest income should not form part of taxable gross receipts for GRT purposes.
• The Commissioner of Internal Revenue (petitioner) appealed to the Court of Appeals (CA).
• The CA affirmed the CTA decision, holding that the FWT was not "actually received" by the bank and thus should not be included in the GRT computation, interpreting the statute to avoid unjust results.
• The CIR filed a Petition for Review under Rule 45 with the Supreme Court.

• The 20% FWT, though not physically received, constitutes constructive receipt because it is remitted to the government for the bank's benefit in satisfaction of its income tax liability, thus forming part of gross receipts under Revenue Regulations (RR) No. 17-84, Section 7(c).
• The FWT and GRT are two distinct taxes: the FWT is an income tax on passive income under Title II of the Tax Code, while the GRT is a percentage tax on the business of banking under Title V; therefore, imposing both does not constitute double taxation.
• RR No. 17-84 superseded RR No. 12-80 (which required items to be "actually received" for GRT purposes), and the earlier regulation was impliedly repealed to the extent of the conflict.
• Citing China Banking Corporation v. CA, the amount withheld as FWT is deemed income constructively received and must be included in the GRT base.
• The principle in Manila Jockey Club v. CIR regarding earmarked funds does not apply because the withheld tax is not held in trust for the government but is the bank's own income used to pay its tax liability.

• The 20% FWT is not "actually received" by the bank as it is withheld at source and remitted directly to the government; therefore, under RR No. 12-80, Section 4(e), it cannot form part of the GRT base which taxes only "items of income actually received."
• The FWT is "earmarked" for the government, similar to the funds in Manila Jockey Club v. CIR, and thus does not redound to the bank's benefit or constitute taxable gross receipts.
• Including the FWT in the GRT base results in "indirect duplicate taxation" which is unjust and absurd, effectively taxing the same income twice (first by FWT, then by GRT on the same amount).
• The rulings of the CTA in Asian Bank Corporation and the affirming decision of the CA correctly interpreted the law to avoid unjust consequences and should be sustained.

• Procedural Issues: N/A.
• Substantive Issues:
  • Whether the 20% final withholding tax (FWT) on a bank's interest income forms part of the taxable gross receipts for computing the 5% gross receipts tax (GRT).
  • Whether subjecting the same income to both the 20% FWT and the 5% GRT constitutes prohibited double taxation (indirect duplicate taxation).

• Procedural: N/A.
• Substantive:
  • Constructive Receipt and Gross Receipts: The Supreme Court held that the 20% FWT constitutes constructive receipt by the bank. Applying Articles 531 and 532 of the Civil Code by analogy, the Court ruled that possession of the income is acquired through legal formalities (the withholding process), and the bank ratifies this possession because the amount is remitted for its benefit to satisfy its tax obligation. Thus, the FWT forms part of "gross receipts" which are defined as total receipts without deductions.
  • Supersession of Regulations: RR No. 17-84, Section 7(c) supersedes RR No. 12-80, Section 4(e). The Court found an implied repeal because RR 17-84 covers the whole subject of interest income taxation and omits the "actually received" limitation found in the earlier regulation, thereby including all interest income (whether actually or constructively received) in the GRT base.
  • Distinction from Manila Jockey Club: The case was distinguished from Manila Jockey Club because the amounts therein were held in trust for third parties (horse owners/jockeys) and never became the property of the taxpayer. In contrast, the FWT is the bank's own income, originally owned by it, used to pay its own tax liability; it is not held in trust.
  • No Double Taxation: The Court ruled there is no direct duplicate taxation. The FWT is an income tax on passive income, while the GRT is a percentage tax (excise tax) on the privilege of engaging in the business of banking. They differ in subject matter (income vs. business privilege), character (income tax vs. percentage tax), and taxing event/period. The elements for direct duplicate taxation (same subject matter, purpose, taxing authority, jurisdiction, period, and kind of tax) are not present; thus, the argument of indirect duplicate taxation also fails as the taxes are entirely distinct.

• Constructive Receipt of Income — Income is constructively received when it is credited to the taxpayer's account or set apart for the taxpayer so that it may be drawn upon at any time, or when the taxpayer has control over its disposition. In this case, the Court applied the concept to mean that the amount of final withholding tax, though physically withheld by the payor, is constructively received by the bank because it is applied to satisfy the bank's tax liability, thereby giving the bank the benefit of the income.
• Double Taxation (Direct Duplicate Taxation) — Defined as taxing the same property twice when it should be taxed only once, requiring identity of subject matter, purpose, taxing authority, jurisdiction, taxing period, and kind or character of tax. The Court emphasized that indirect duplicate taxation is not necessarily obnoxious or prohibited unless it constitutes direct duplicate taxation.
• Strict Construction of Tax Exemptions and Refunds — Tax refunds are in the nature of tax exemptions; therefore, they are construed strictly against the taxpayer and liberally in favor of the taxing authority. The taxpayer claiming a refund must prove the exemption by clear and unmistakable terms, not by vague implication.
• Implied Repeal of Administrative Regulations — A later administrative regulation supersedes an earlier one when there is an irreconcilable conflict between them, or when the later regulation covers the whole subject matter of the earlier one and is clearly intended as a substitute, resulting in an implied repeal of the earlier regulation to the extent of the conflict.

• "Stated otherwise, the fact is that if there were no withholding tax system in place in this country, this 20 percent portion of the 'passive' income of banks would actually be paid to the banks and then remitted by them to the government in payment of their income tax. The institution of the withholding tax system does not alter the fact that the 20 percent portion of their 'passive' income constitutes part of their actual earnings, except that it is paid directly to the government on their behalf in satisfaction of the 20 percent final income tax due on their 'passive' incomes."
• "The 20% FWT is constructively received by the banks and forms part of their gross receipts or earnings... That they do not actually receive the amount does not alter the fact that it is remitted for their benefit in satisfaction of their tax obligations."
• "Double taxation means taxing the same property twice when it should be taxed only once; that is, '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."
• "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."
• "Tax refunds are in the nature of tax exemptions. Such exemptions are strictly construed against the taxpayer, being highly disfavored and almost said 'to be odious to the law.'"

• China Banking Corporation v. Court of Appeals — Followed as controlling precedent establishing that the final withholding tax on interest income forms part of gross receipts for gross receipts tax purposes.
• Manila Jockey Club v. Commissioner of Internal Revenue — Distinguished; the Court clarified that funds "earmarked" for third parties (not the taxpayer) do not form part of gross receipts, unlike the withholding tax which is the bank's own income applied to its own tax liability.
• Asian Bank Corporation v. Commissioner of Internal Revenue — Reversed/Overruled; the CTA decision relied upon by the lower courts was rejected by the Supreme Court.
• Commissioner of Internal Revenue v. Tours Specialists, Inc. — Cited for the general principle that gross receipts exclude monies held in trust for others, but distinguished because the FWT is not held in trust.
• Velilla v. Posadas — Cited to support the principle that two different taxes may be imposed on the same income or business if they are assessed under different provisions and have different natures.
• Afisco Insurance Corp. v. Court of Appeals — Cited for the definition and elements of direct duplicate taxation.

• Section 119 (now Section 121) of the National Internal Revenue Code — Imposes the 5% gross receipts tax on banks and non-bank financial intermediaries.
• Section 24(e)(1) (now Section 27(D)(1)) of the Tax Code — Imposes the 20% final withholding tax on interest income from deposits and deposit substitutes.
• Section 230 (now Section 229) of the Tax Code — Prescriptive period of two years for filing claims for refund of internal revenue taxes.
• Articles 531 and 532 of the Civil Code — Provisions on the acquisition of possession (actual and constructive) applied by analogy to determine constructive receipt of income.
• Section 28(4), Article VI of the 1987 Constitution — Requires a majority vote of all Members of Congress to pass a law granting any tax exemption, underscoring that exemptions cannot be granted by implication or administrative regulation.