Metropolitan Bank & Trust Company vs. Commissioner of Internal Revenue

The two-year prescriptive period to file a judicial claim for refund of a final withholding tax is reckoned from the date the tax was paid, not from the filing of the taxpayer’s annual income tax return, because a final withholding tax constitutes the full and final payment of the tax due and is not subject to adjustment. A judicial claim filed beyond that two-year window is barred, and the longer prescriptive period for solutio indebiti under the Civil Code does not apply to tax refunds.

Solidbank Corporation extended a US$123,780,000 foreign currency denominated loan to Luzon Hydro Corporation (LHC) on June 5, 1997. Under the Agreement, LHC was obligated to pay all internal revenue taxes on the loan, including the filing of returns and remittance of withheld taxes to the BIR. Metrobank acquired Solidbank and its rights under the Agreement on September 1, 2000. LHC made loan payments to Metrobank in March and October 2001, from which it withheld and remitted the 10% final tax on interest to the BIR. Metrobank separately and mistakenly included the same amounts in its own monthly remittance returns for those months, resulting in a double remittance. Metrobank later sought a refund of the duplicate payment.

• The Loan Agreement: Solidbank Corporation extended a foreign currency denominated loan to Luzon Hydro Corporation (LHC) in the principal amount of US$123,780,000.00 under an Agreement dated June 5, 1997. The Agreement obliged LHC to shoulder all internal revenue taxes on the loan, to file the corresponding returns, and to remit withheld taxes to the BIR.
• Acquisition by Metrobank: On September 1, 2000, Metrobank acquired Solidbank and assumed all its rights and obligations under the Agreement.
• Payments by LHC: On March 2, 2001 and October 31, 2001, LHC paid Metrobank US$1,538,122.17 and US$1,333,268.31, respectively. For each payment, LHC withheld the 10% final tax on the interest portions (US$63,106.40 in March 2001 and US$43,072.29 in October 2001) and remitted those amounts to the BIR in the same months.
• Double Remittance: Metrobank separately and mistakenly included those same interest payments and the corresponding 10% final taxes in its own Monthly Remittance Returns of Final Income Taxes Withheld for March 2001 and October 2001. The March 2001 final tax was remitted by Metrobank to the BIR on April 25, 2001, resulting in a double payment.
• Administrative and Judicial Claims: Metrobank filed an administrative claim for refund with the CIR on December 27, 2002. Receiving no action, it filed a judicial claim via petition for review with the CTA on September 10, 2003.
• CIR’s Defenses: The CIR argued that the claim must be subject to administrative investigation, that Metrobank must prove double payment, that the claim must be filed within the prescriptive period, that the burden of proof rests on the taxpayer, and that claims for refund are construed strictly against the taxpayer.

• Reckoning of Prescriptive Period: Metrobank argued that the two-year prescriptive period should be reckoned from the filing of its Final Adjustment Return or Annual Income Tax Return for taxable year 2001, in April 2002, because only at that point could its right to a refund be ascertained. It relied on ACCRA Investments Corporation v. Court of Appeals, CIR v. TMX Sales, Inc., CIR v. Philippine American Life Insurance, Co., and CIR v. CDCP Mining Corporation, which applied that rule to corporate income taxes.
• Solutio Indebiti: Metrobank invoked the principle of solutio indebiti under Article 1145 of the New Civil Code, contending that the longer six-year prescriptive period for quasi-contracts should govern its claim for refund of erroneously paid taxes.

• Nature of Final Withholding Tax: The CIR countered that the cases cited by Metrobank involved corporate income taxes, where quarterly payments are mere installments subject to year-end adjustment. The tax in question is a final withholding tax, which under Section 2.57(A) of Revenue Regulations No. 02-98 constitutes the full and final payment of the income tax due and is not subject to any adjustment; therefore, the prescriptive period must be counted from the date of payment.
• Prescription: The CIR maintained that Metrobank’s judicial claim filed on September 10, 2003, exceeded the two-year period from the April 25, 2001 payment, and the claim had consequently prescribed.

• Prescription of Claim: Whether the CTA En Banc correctly held that Metrobank’s claim for refund of the March 2001 final withholding tax had prescribed.

• Prescription of Claim: The claim had prescribed. Under Sections 204 and 229 of the NIRC, both the administrative and judicial claims for refund of an erroneously paid tax must be filed within two years from the date of payment. Final withholding taxes, as defined in Section 2.57(A) of Revenue Regulations No. 02-98, are full and final payments of the income tax due on the particular income and are not subject to any adjustment. Thus, the two-year period commences from the date the tax was paid, not from the filing of an annual income tax return. Metrobank’s March 2001 final tax was remitted on April 25, 2001; the deadline to file a judicial claim was April 25, 2003. Although the administrative claim was timely filed on December 27, 2002, the judicial claim was filed only on September 10, 2003, beyond the two-year prescriptive window. The rule that prescriptive period for corporate income tax runs from the filing of the annual adjustment return applies only because quarterly payments are mere advance payments of the annual tax; that reasoning does not extend to final withholding taxes. Finally, the principle of solutio indebiti and its six-year prescriptive period under the Civil Code cannot apply to tax refund cases. A special law—the Tax Code—expressly governs the period for claiming refunds of erroneously paid taxes, and the first element of solutio indebiti (absence of a binding relation between payor and payee) is absent given the legal relationship between the taxpayer/withholding agent and the taxing authority.

• Prescriptive Period for Refund of Final Withholding Tax — The two-year prescriptive period for filing a judicial claim for refund of a final withholding tax runs from the date the tax was paid. A final withholding tax constitutes the full and final payment of the income tax due and is not subject to any adjustment; hence the period is reckoned from the moment the refund is ascertainable, i.e., the date of payment, not from the taxpayer’s discovery of the erroneous payment or from the filing of an annual return.
• Distinction between Corporate Income Tax and Final Withholding Tax for Prescription — Quarterly corporate income tax payments are treated as mere installments or advances of the annual tax due, such that the two-year prescriptive period for refund of overpayments is computed from the filing of the Final Adjustment Return or Annual Income Tax Return. This rule does not apply to final withholding taxes because they are not subject to year-end adjustment; the prescriptive period runs from date of payment.
• Inapplicability of Solutio Indebiti to Tax Refunds — The six-year prescriptive period for quasi-contracts under Article 1145 of the Civil Code does not govern claims for refund of erroneously paid taxes. The Tax Code, as a special law, prescribes its own mandatory period for tax refunds. Moreover, the first element of solutio indebiti—that payment is made absent any binding relation between payor and payee—is not satisfied because a legal relationship exists between the taxpayer/withholding agent and the taxing authority.

• "final withholding taxes are considered as full and final payment of the income tax due, and thus, are not subject to any adjustments. Thus, the two (2)-year prescriptive period commences to run from the time the refund is ascertained, i.e., the date such tax was paid, and not upon the discovery by the taxpayer of the erroneous or excessive payment of taxes."
• "there is a binding relation between petitioner as the taxing authority in this jurisdiction and respondent x x x which is bound under the law to act as a withholding agent x x x. Hence, the first element of solutio indebiti is lacking. Moreover, such legal precept is inapplicable to the present case since the Tax Code, a special law, explicitly provides for a mandatory period for claiming a refund for taxes erroneously paid."

• ACCRA Investments Corporation v. Court of Appeals, 281 Phil. 1060 (1991); CIR v. TMX Sales, Inc., 282 Phil. 199 (1992); CIR v. Philippine American Life Insurance, Co., 314 Phil. 349 (1995); CIR v. CDCP Mining Corporation, 362 Phil. 75 (1999) — Distinguished. These cases involved corporate income taxes, where quarterly payments are advance payments subject to year-end adjustment and the prescriptive period runs from the annual return. The present case involves a final withholding tax that is not subject to adjustment, so the date of payment controls.
• CIR v. Manila Electric Company, G.R. No. 181459, June 9, 2014, 725 SCRA 384 — Followed. The Court relied on this ruling to reject the application of the six-year solutio indebiti prescriptive period to tax refund claims and to confirm that the first element of solutio indebiti is absent in the taxpayer-government relationship.
• CIR v. Goodyear Philippines, Inc., G.R. No. 216130, August 3, 2016 — Cited to reiterate that both administrative and judicial claims for refund must be filed within the two-year prescriptive period, and that a taxpayer need not await final CIR action on the administrative claim before filing a judicial claim.

• Section 204(C), National Internal Revenue Code, as amended — No credit or refund shall be allowed unless the taxpayer files a written claim with the Commissioner within two years after payment of the tax. Applied to bar Metrobank’s refund because the judicial claim was filed beyond two years from payment.
• Section 229, National Internal Revenue Code, as amended — No suit for recovery of erroneously or illegally collected tax shall be filed after expiration of two years from the date of payment, regardless of any supervening cause. Applied to deem Metrobank’s judicial claim time-barred.
• Section 2.57(A), Revenue Regulations No. 02-98 — Under the final withholding tax system, the amount withheld constitutes full and final payment of the payee’s income tax on that income, and the payee is not required to file an income tax return for that particular income. Relied upon to support the rule that final withholding taxes are not subject to adjustment and that the prescriptive period runs from the date of payment, not from any later return.

Chief Justice Maria Lourdes P.A. Sereno, Associate Justice Teresita J. Leonardo-De Castro, Associate Justice Mariano C. Del Castillo, Associate Justice Alfredo Benjamin S. Caguioa.