Mitsubishi Corporation - Manila Branch vs. Commissioner of Internal Revenue

Taxes erroneously paid pursuant to a valid tax assumption clause in an executive agreement are refundable from the Bureau of Internal Revenue under Sections 204 and 229 of the NIRC, and administrative issuances cannot redirect the refund remedy to the executing government agency where the statute vests refund authority exclusively in the Commissioner of Internal Revenue.

On June 11, 1987, the Philippine and Japanese Governments executed an Exchange of Notes whereby Japan extended a ¥40.4 billion loan through the Overseas Economic Cooperation Fund (OECF) for the Calaca II Coal-Fired Thermal Power Plant Project. Paragraph 5(2) of the Exchange of Notes obligated the Philippine Government, through its executing agencies, to assume all fiscal levies and taxes imposed on Japanese firms operating as suppliers or contractors for the project. Pursuant thereto, the National Power Corporation (NPC), as executing agency, contracted with Mitsubishi Corporation (petitioner's head office) for engineering and construction works, with the foreign currency portion funded by OECF loans. Article VIII(B)(1) of the contract embodied NPC's undertaking to pay all taxes directly imposable under the contract.

• Nature: Petitioner Mitsubishi Corporation - Manila Branch sought recovery of ₱44,288,712.00 in income tax and ₱8,324,100.00 in branch profit remittance tax (BPRT) paid for the fiscal year ending March 31, 1998, pertaining to the OECF-funded portion of the Calaca II Project.

• The Exchange of Notes: The June 11, 1987 Exchange of Notes between the Philippine and Japanese Governments included Paragraph 5(2), whereby the Philippine Government undertook to "assume all fiscal levies or taxes imposed in the Republic of the Philippines on Japanese firms and nationals operating as suppliers, contractors or consultants on and/or in connection with any income that may accrue from the supply of products of Japan and services of Japanese nationals."

• The Contract: On June 21, 1991, NPC entered into a contract with Mitsubishi Corporation (petitioner's head office) for the engineering, supply, construction, and commissioning of project components. Article VIII(B)(1) explicitly required NPC to "pay any and all forms of taxes which are directly imposable under the Contract including VAT."

• Project Completion and Tax Payments: Petitioner completed the project on December 2, 1995, with final acceptance by NPC on January 31, 1998. On July 15, 1998, petitioner filed its Income Tax Return including ₱44,288,712.00 as income from the OECF-funded portion, and remitted ₱8,324,100.00 as BPRT.

• BIR Ruling: Petitioner relied on BIR Ruling No. DA-407-98 dated September 7, 1998, which interpreted the Exchange of Notes as a tax assumption (not a tax exemption), concluding that Mitsubishi had no liability for income tax and other fiscal levies on the foreign currency portion of the project.

• Administrative and Judicial Claims: On June 30, 2000, petitioner filed an administrative claim for refund with the CIR. On July 13, 2000, petitioner filed a judicial claim with the CTA to preserve its rights under Section 229 of the NIRC.

• Tax Assumption vs. Exemption: Petitioner maintained that the Exchange of Notes created a tax assumption, not a tax exemption, and thus did not require Senate concurrence under Article VII, Section 21 of the Constitution. The obligation to pay taxes remained but was transferred to the Philippine Government through NPC.

• Erroneous Payment: Petitioner argued that because NPC had contractually assumed the tax liability, petitioner's direct payment of taxes to the BIR constituted erroneous or illegal collection under Sections 204 and 229 of the NIRC, entitling petitioner to a refund from the CIR.

• Non-Applicability of RMC No. 42-99: Petitioner contended that Revenue Memorandum Circular No. 42-99, which directed taxpayers to recover refunds from executing agencies rather than the BIR, could not be applied retroactively to petitioner, who filed its income tax return in July 1998 and its refund claim in June 2000, prior to the circular's issuance.

• Lack of Tax Exemption: Respondent countered that the Exchange of Notes could not validly grant tax exemption without Senate concurrence as required by the Constitution, and that the provision in question did not constitute a valid tax assumption.

• Proper Remedy Under RMC No. 42-99: Respondent argued that RMC No. 42-99, which was already in effect when petitioner filed its administrative claim in June 2000, specifically directed Japanese contractors who had previously paid taxes directly to the BIR to recover the amounts from the government executing agencies (NPC), not from the CIR.

• No Erroneous Collection: Respondent maintained that absent a valid tax exemption, the taxes were legally due from petitioner as the taxpayer, and therefore the collection could not be deemed erroneous to justify a refund under the NIRC.

• Validity of Tax Assumption: Whether the tax assumption provision in the Exchange of Notes is valid and enforceable without Senate concurrence, and whether it creates a basis for refund of taxes paid by the contractor.

• Proper Party for Refund: Whether petitioner must seek refund from the CIR under Sections 204 and 229 of the NIRC, or from NPC pursuant to RMC No. 42-99.

• Tax Assumption as Valid Executive Agreement: The Exchange of Notes constitutes an executive agreement binding on the State without Senate concurrence. Paragraph 5(2) thereof created a valid tax assumption whereby the Philippine Government, through NPC, became bound to pay the taxes imposed on Japanese contractors. An "assumption" of tax liability, defined as taking on another's obligation, is distinct from a "tax exemption," which is freedom from duty; consequently, constitutional provisions requiring legislative concurrence for tax exemptions are inapplicable.

• Erroneous Collection Established: The subject taxes totaling ₱52,612,812.00 were erroneously collected from petitioner. The CIR had acknowledged through RMC No. 42-99 and RMO No. 24-2005 that Japanese contractors engaged in OECF-funded projects are not required to shoulder fiscal levies or taxes, and that executing agencies are mandated to assume such payments. Having paid taxes that were not its obligation to bear, petitioner is entitled to refund under Sections 204 and 229 of the NIRC.

• Administrative Circulars Cannot Override Statute: Item B(3) of RMC No. 42-99, which directs taxpayers to claim refunds from executing agencies rather than the CIR, cannot prevail over Sections 204 and 229 of the NIRC, which vest exclusive authority in the CIR to credit or refund erroneously collected taxes. Administrative interpretations that override, rather than harmonize with, the law they seek to implement must be disregarded. The BIR retains recourse to collect the subject taxes from NPC as the party that assumed the liability.

• Exchange of Notes as Executive Agreement — An exchange of notes is a record of routine agreement between governments that constitutes a form of executive agreement binding at international law. It becomes binding through executive action without Senate concurrence and is distinct from treaties requiring legislative approval under Article VII, Section 21 of the Constitution.

• Tax Assumption Distinguished from Tax Exemption — To "assume" a tax obligation means to take on or become bound as another is bound, placing oneself in the place of another regarding a liability; the obligation remains but is transferred to a different person. A "tax exemption," conversely, is freedom from a duty or liability. Constitutional restrictions on tax exemptions (requiring majority vote of Congress) do not apply to tax assumptions.

• Hierarchy of Legal Authority — Administrative rulings and memorandum circulars issued by executive officers to interpret tax laws are entitled to respect but are not conclusive. Courts will disregard administrative interpretations that are judicially found to be incorrect or that override, rather than remain consistent with, the statute they implement.

• "To 'assume' means '[t]o take on, become bound as another is bound, or put oneself in place of another as to an obligation or liability.' This means that the obligation or liability remains, although the same is merely passed on to a different person. In this light, the concept of an assumption is therefore different from an exemption, the latter being the '[f]reedom from a duty, liability or other requirement'..."

• "An exchange of notes is considered a form of an executive agreement, which becomes binding through executive action without the need of a vote by the Senate or Congress."

• "A revenue memorandum circular is an administrative ruling issued by the CIR to interpret tax laws... courts will not tolerate administrative issuances that override, instead of remaining consistent and in harmony with, the law they seek to implement."

• Abaya v. Ebdane, 544 Phil. 645 (2007) — Cited for the proposition that an exchange of notes is considered a form of executive agreement binding on the State without Senate concurrence.

• CBK Power Company Limited v. CIR, G.R. Nos. 193383-94, January 14, 2015 — Referenced regarding the authority of the Commissioner to credit or refund taxes under Section 204 of the NIRC.

• Philippine Bank of Communications v. CIR, 361 Phil. 916 (1999) — Cited for the rule that administrative interpretations of tax laws, while entitled to respect, are not conclusive and may be disregarded if judicially found incorrect.

• ING Bank N.V. v. CIR, G.R. No. 167679, April 20, 2016 — Referenced regarding the weight accorded to administrative interpretations of tax laws.

• Section 204(C), National Internal Revenue Code — Grants the Commissioner authority to credit or refund taxes erroneously or illegally received or penalties imposed without authority.

• Section 229, National Internal Revenue Code — Provides that no suit for recovery of tax erroneously or illegally assessed or collected may be maintained until a claim for refund or credit has been duly filed with the Commissioner.

• Article VII, Section 21, 1987 Constitution — Requires Senate concurrence for treaties and international agreements; distinguished from executive agreements which do not require such concurrence.

Maria Lourdes P.A. Sereno (Chairperson), Teresita J. Leonardo-De Castro, Mariano C. Del Castillo, Alfredo Benjamin S. Caguioa, and Estela M. Perlas-Bernabe (ponente).