ING Bank N.V. vs. Commissioner of Internal Revenue

The obligation of an employer to withhold tax on compensation arises at the time the compensation is paid, accrued, or recorded as an expense in the employer’s books, whichever comes first, notwithstanding that actual distribution to employees occurs in a subsequent taxable year; consequently, expenses claimed as deductions are subject to the withholding tax requirement under Section 29(j) of the 1977 National Internal Revenue Code (now Section 34(K) of the 1997 Code).

ING Bank N.V., Manila Branch, is the Philippine branch of a foreign banking corporation incorporated in the Netherlands and authorized by the Bangko Sentral ng Pilipinas to operate as a branch with full banking authority. In December 1999, the Bureau of Internal Revenue (BIR) issued a Final Assessment Notice against ING Bank covering various deficiency taxes for taxable years 1996 and 1997, including documentary stamp taxes on special savings accounts, onshore taxes on foreign currency deposit system interest income, and withholding taxes on accrued bonuses recorded as expenses but distributed to employees in subsequent years.

The Assessment and Protest:
On January 3, 2000, ING Bank received a Final Assessment Notice dated December 3, 1999, covering deficiency assessments for taxable years 1996 and 1997, including: (a) deficiency income tax; (b) deficiency withholding tax on compensation; (c) deficiency onshore tax; (d) deficiency branch profit remittance tax; and (e) deficiency documentary stamp tax. ING Bank paid certain minor assessments (compromise penalty, 1997 documentary stamp tax, and 1997 final tax) on February 2, 2000, but formally protested the remaining assessments on the same day.

The Accrued Bonuses:
For taxable years 1996 and 1997, ING Bank recorded as expenses accrued bonuses payable to officers and employees in the amounts of ₱3,879,407.85 (1996) and ₱9,004,402.63 (1997). These bonuses were actually distributed to employees in the succeeding taxable years (1997 and 1998) when the final amounts were determined. ING Bank did not withhold taxes on these amounts in the years of accrual, claiming that the obligation to withhold arises only upon actual distribution. An independent CPA commissioned by the CTA found that only portions of the accrued amounts (₱3,479,332.84 for 1996 and ₱7,970,283.92 for 1997) were supported by documents showing valid reimbursements of representation, travel, and entertainment expenses; the unsubstantiated balances remained subject to withholding tax.

Availment of Tax Amnesty:
While the Petition for Review was pending before the Supreme Court, ING Bank availed of the tax amnesty program under Republic Act No. 9480 (the 2007 Tax Amnesty Act). On December 14, 2007, it filed a Notice of Availment, a Statement of Assets, Liabilities and Net Worth (SALN) as of December 31, 2005, a Tax Amnesty Return (BIR Form No. 2116), and paid the amnesty tax of ₱500,000.00. ING Bank sought to apply the amnesty to its liabilities for deficiency documentary stamp taxes on special savings accounts for 1996 and 1997 and deficiency onshore tax for 1996.

Validity of Tax Amnesty Availment:
Petitioner maintained that it qualified for the tax amnesty under Section 5 of Republic Act No. 9480 and was not disqualified under Section 8 thereof. It argued that BIR Revenue Memorandum Circular No. 19-2008, which excluded from amnesty coverage "issues and cases which were ruled by any court (even without finality) in favor of the BIR," was invalid as it contravened the plain language of the statute. Petitioner asserted that the law only excludes "tax cases subject of final and executory judgment by the courts," and that full compliance with the statutory requirements (submission of documents and payment of amnesty tax) conferred absolute entitlement to the immunities and privileges under Section 6 of the law.

Withholding Tax on Accrued Bonuses:
Petitioner argued that liability for withholding tax on compensation does not arise until the compensation is actually distributed to the employee. It cited Section 72 of the 1977 National Internal Revenue Code and BIR Ruling No. 555-88, which states that withholding tax on bonuses should be deducted upon distribution. Since the bonuses were not distributed in 1996 and 1997 but only in the succeeding years when the amounts were finally determined, petitioner claimed no withholding obligation existed during the taxable years in question. It further contended that the accrued bonuses represented reimbursements for representation, travel, and entertainment expenses, not compensation.

Disqualification from Tax Amnesty:
Respondent countered that petitioner was disqualified from availing of the tax amnesty because the Court of Tax Appeals (both Second Division and En Banc) had already ruled in favor of the BIR regarding the tax deficiencies prior to the availment. Respondent relied on BIR Revenue Memorandum Circular No. 19-2008, which excludes cases ruled upon by any court "even without finality." Additionally, respondent argued that the Commissioner of Internal Revenue retains discretion to evaluate amnesty applications and that petitioner could not presume automatic grant of the application.

Withholding Tax Liability:
Respondent argued that petitioner claimed the bonuses as deductible expenses in 1996 and 1997 without withholding the corresponding taxes, thereby violating Section 29(j) of the 1977 National Internal Revenue Code (now Section 34(K) of the 1997 Code), which requires that taxes withheld be paid to the BIR before an expense may be allowed as a deduction. Respondent distinguished BIR Ruling No. 555-88 on its facts, noting that in the present case, the bonuses were determined during the year but merely distributed later, unlike the ruling where bonuses were determined only after audit in the succeeding year.

Tax Amnesty Coverage:
Whether a taxpayer with pending tax appeals may avail of the tax amnesty under Republic Act No. 9480, notwithstanding a BIR Revenue Memorandum Circular excluding cases where the court has ruled in favor of the BIR prior to finality.

Withholding Tax Obligation:
Whether an employer is liable for deficiency withholding tax on bonuses accrued and recorded as expenses in one taxable year but actually distributed to employees in a subsequent year.

Tax Amnesty Coverage:
Taxpayers with pending tax cases may avail themselves of the tax amnesty program under Republic Act No. 9480. The provision in BIR Revenue Memorandum Circular No. 19-2008 excepting "issues and cases which were ruled by any court (even without finality) in favor of the BIR prior to amnesty availment of the taxpayer" is illegal, invalid, and null and void for being contrary to the plain language of Section 8 of Republic Act No. 9480, which only excludes "tax cases subject of final and executory judgment by the courts." Compliance with the requirements of Republic Act No. 9480 (filing of notice, SALN, and tax amnesty return, and payment of the amnesty tax) entitles the taxpayer to the immunities and privileges under Section 6 of the law, including immunity from payment of taxes and appurtenant penalties for taxable year 2005 and prior years. The Commissioner of Internal Revenue has no discretion to disregard the provisions of the tax amnesty law or to introduce additional exceptions.

Withholding Tax Obligation:
The obligation of the payor/employer to deduct and withhold the related withholding tax arises at the time the income was paid or accrued or recorded as an expense in the payor’s/employer’s books, whichever comes first. Section 72 of the 1977 National Internal Revenue Code (withholding on wages) must be read in harmony with Section 29(j) (requirement for deductibility of expenses), such that an expense is allowed as a deduction only if the tax required to be withheld therefrom has been paid to the Bureau of Internal Revenue. Under the accrual method of accounting, expenses are deductible in the year they are accrued (when the obligation to pay is fixed, the amount determinable with reasonable accuracy, and the liability knowable), regardless of actual payment. By recording the bonuses as deductible expenses in 1996 and 1997, ING Bank constructively paid such compensation, and its withholding obligation arose in those years. The unsubstantiated portions of the accrued bonuses (₱400,075.01 for 1996 and ₱1,034,119.43 for 1997) are subject to deficiency withholding tax.

Tax Amnesty Scope and Statutory Construction — A tax amnesty partakes of an absolute waiver by the Government of its right to collect taxes otherwise due. Republic Act No. 9480 provides a general grant of tax amnesty subject only to the specific exceptions enumerated in Section 8 thereof. Administrative regulations cannot expand the scope of statutory exceptions beyond what Congress intended; thus, only tax cases with final and executory judgments are excluded from the amnesty, not pending appeals or non-final decisions.

Withholding Tax Obligation and Constructive Payment — The obligation to withhold tax on compensation arises upon the accrual or recordation of the expense, not merely upon actual distribution to the employee. Constructive payment occurs when compensation is credited to the account of or set apart for an employee so that it may be drawn upon at any time without substantial limitation, even if not yet actually reduced to possession.

Harmonious Construction of Tax Provisions — Statutory provisions must be interpreted to give effect to the whole statute, making every part effective, harmonious, and sensible. Section 72 (withholding on wages) and Section 29(j) (deductibility requirement) of the National Internal Revenue Code must be read together to establish that the withholding obligation arises when compensation is accrued or recorded as an expense.

Accrual Method of Accounting — Under the accrual method, income is recognized when the right to receive it becomes fixed, and expenses are recognized when the obligation to pay becomes fixed and determinable with reasonable accuracy (the all-events test), without regard to the time of actual payment.

• "Qualified taxpayers with pending tax cases may still avail themselves of the tax amnesty program under Republic Act No. 9480... Thus, the provision in BIR Revenue Memorandum Circular No. 19-2008 excepting '[i]ssues and cases which were ruled by any court (even without finality) in favor of the BIR prior to amnesty availment of the taxpayer' from the benefits of the law is illegal, invalid, and null and void."

• "The duty to withhold the tax on compensation arises upon its accrual."

• "Reading together the two provisions, we hold that the obligation of the payor/employer to deduct and withhold the related withholding tax arises at the time the income was paid or accrued or recorded as an expense in the payor's/employer's books, whichever comes first."

• "A tax amnesty 'partakes of an absolute... waiver by the Government of its right to collect what otherwise would be due it[.]'"

• "Compensation is constructively paid within the meaning of these regulations when it is credited to the account of or set apart for an employee so that it may be drawn upon by him at any time although not then actually reduced to possession."

CS Garment, Inc. v. Commissioner of Internal Revenue, G.R. No. 182399, March 12, 2014 — Controlling precedent declaring the exception in BIR Revenue Memorandum Circular No. 19-2008 invalid for going beyond the scope of Republic Act No. 9480; followed.

Philippine Banking Corporation (Now: Global Business Bank, Inc.) v. Commissioner of Internal Revenue, 597 Phil. 363 (2009) — Cited for the principle that compliance with tax amnesty requirements extinguishes tax liabilities and grants immunities; followed.

LG Electronics Philippines, Inc. v. Commissioner of Internal Revenue, G.R. No. 165451, December 3, 2014 — Confirmed that only final and executory judgments are excluded from the tax amnesty program under Section 8 of Republic Act No. 9480; followed.

Filipinas Synthetic Fiber Corporation v. Court of Appeals, 374 Phil. 835 (1999) — Applied to establish that the duty to withhold tax arises upon accrual of the income under the accrual method of accounting, not merely upon remittance or payment; followed.

Commissioner of Internal Revenue v. Isabela Cultural Corporation, 544 Phil. 488 (2007) — Cited for the definition of the accrual method of accounting and the all-events test; followed.

Section 8, Republic Act No. 9480 (2007 Tax Amnesty Act) — Excludes from tax amnesty coverage "tax cases subject of final and executory judgment by the courts."

Section 6, Republic Act No. 9480 — Grants immunities and privileges to qualified amnesty grantees, including immunity from payment of taxes and civil, criminal, or administrative penalties for taxable year 2005 and prior years.

Section 29(j), 1977 National Internal Revenue Code (now Section 34(K), 1997 National Internal Revenue Code) — Provides that any amount paid or payable which is otherwise deductible shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue.

Section 72, 1977 National Internal Revenue Code (now Section 79, 1997 National Internal Revenue Code) — Requires every employer making payment of wages to deduct and withhold upon such wages a tax determined in accordance with regulations.

Revenue Regulations No. 6-82 — Implements the withholding of tax on compensation; defines constructive receipt of compensation.

Revenue Regulations No. 8-90 — Amends Revenue Regulations No. 6-85 to require that income payments otherwise deductible under the Tax Code shall be allowed as deductions only if the tax required to be withheld has been paid to the Bureau of Internal Revenue.

Antonio T. Carpio (Chairperson), Arturo D. Brion, Mariano C. Del Castillo, Jose Catral Mendoza