Philippine Airlines, Inc. vs. Commissioner of Internal Revenue

A tax-exempt payee claiming a refund of final withholding taxes need only prove that taxes were withheld from its income; proof of actual remittance by the withholding agent to the BIR is not required, because remittance is the statutory responsibility of the payor-withholding agent, not the payee, and the amount withheld is deemed the full and final payment of the payee's income tax liability on the particular income.

Philippine Airlines, Inc. (PAL) operates as a domestic air carrier under a legislative franchise granted by Presidential Decree No. 1590, which provides that PAL shall pay either the basic corporate income tax or a 2% franchise tax, whichever is lower, and that such payment shall be "in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges" imposed by any government authority, except real property tax. This exemption has been sustained and reaffirmed by the Supreme Court across several amendments to the National Internal Revenue Code, including those introduced by Republic Act No. 9334 and Republic Act No. 9337. The final withholding tax system, governed by Sections 57 and 58 of the National Internal Revenue Code and Revenue Regulations No. 02-98, imposes on the payor-withholding agent—not the payee—the responsibility for deducting, remitting, and reporting taxes withheld on specified passive incomes, including interest from currency bank deposits.

Sometime in 2002, Philippine Airlines, Inc. made US dollar and Philippine peso deposits and placements in four Philippine banks: China Banking Corporation (Chinabank), JP Morgan Chase Bank (JPMorgan), Philippine Bank of Communications (PBCom), and Standard Chartered Bank. PAL earned interest income from these deposits, and the banks—acting as withholding agents—deducted final withholding taxes therefrom. From Chinabank, PAL earned interest income net of withholding tax amounting to US$480,688.76 on its US dollar time deposit for 2002, with Chinabank deducting US$38,974.75 in withholding taxes, as certified in a Bank Certification dated October 24, 2003 signed by Chinabank's Senior Manager Wilfredo A. Quijencio. From JPMorgan, PAL earned ₱6,188,232.17 in interest on its peso deposit from September to December 2002, with JPMorgan deducting ₱1,237,646.43 in withholding tax. From PBCom, PAL earned interest income from various dollar placements across four quarters totaling US$272,589.06, with corresponding final taxes withheld of US$20,443.19, and from peso deposit accounts earning ₱2,551,115.83 with taxes withheld of ₱510,223.13. PBCom's Branch Manager Carmencita L. Tan issued certificates and a letter dated April 10, 2003 stating that the taxes withheld had been remitted to the BIR. From Standard Chartered, PAL earned US$86,107.55 in interest on its dollar time deposit from May to December 2002, with US$6,458.14 deducted as final withholding tax, as confirmed in a letter dated September 19, 2003 signed by Treasury Operations Officer Bienvenido Nieto.

Claiming exemption from final withholding taxes under its franchise, Presidential Decree No. 1590, PAL filed a written request for tax refund with the Commissioner of Internal Revenue on November 3, 2003, seeking refund of the withheld amounts totaling ₱1,747,869.59 and US$65,877.07. The Commissioner failed to act on the request. PAL thereupon elevated the case to the Court of Tax Appeals on February 24, 2004. In her Answer, the Commissioner contended that PAL's claim was subject to administrative investigation, was not properly documented, and was subject to the prescriptive periods under Sections 204(C) and 229 of the National Internal Revenue Code. PAL presented evidence to support its claim, including Certificates of Final Tax Withheld at Source from the various banks, while the Commissioner submitted the case for decision based on the pleadings without presenting contrary evidence.

The CTA Special First Division found that PAL was exempt from final withholding tax on interest on bank deposits but ruled that PAL failed to adequately substantiate its claim for the taxes withheld by Chinabank, PBCom, and Standard Chartered because it did not prove that those banks remitted the withheld amounts to the BIR. The documents PAL presented only showed the total amount of final taxes withheld for all branches of these banks, such that the amount attributable to PAL's interest income could not be ascertained with particularity. The Division found that PAL did prove JPMorgan's remittance through monthly remittance returns identified by PAL's witness and formally offered without objection. The CTA En Banc affirmed these findings, sustaining that PAL needed to prove remittance because the issue had been raised, and finding that PAL's documentary evidence relating to Chinabank, PBCom, and Standard Chartered lacked any indication that the remitted amounts pertained to taxes withheld from PAL's interest income specifically.

• Certificates as Prima Facie Evidence: PAL argued that the Certificates of Final Taxes Withheld issued by the Agent Banks are prima facie evidence of actual remittance, and since they were uncontroverted, they are sufficient proof of remittance. PAL contended that the rule on creditable taxes withheld in CIR vs. Asian Transmission Corporation and other CTA En Banc cases should apply to final taxes withheld, as they are of the same nature.
• Unequivocal Tax Exemption: PAL insisted that it is unequivocally exempt from final withholding taxes under its franchise (PD 1590), and consequently, for as long as it duly establishes that taxes were withheld from its income, it must be refunded. Proof of actual remittance is not necessary.
• Remittance Is the Banks' Responsibility: PAL maintained that it need not establish remittance because this function is vested with the Agent Banks as payors and withholding agents of the Commissioner. The failure of the Agent Banks to remit should not prejudice PAL, as PAL has no control or responsibility over the remittance.
• CTA Not Limited to Administrative Evidence: PAL asserted that the CTA is a court of record required to conduct a trial de novo, and thus should not be barred from considering new evidence not submitted in the administrative claim. Even if PAL were so limited, the Commissioner had the burden to prove that PAL did not submit complete supporting documents, which she failed to do.
• Burden on Commissioner: PAL argued that the Commissioner could have retrieved the monthly remittance returns from BIR records, as she has access to all tax returns. PAL maintained that the Commissioner's denial was not a specific denial and should be deemed an admission, and that denying the refund on technical grounds is contrary to substantial justice, equity, and fair play.

• Failure to Prove Remittance: The Commissioner argued that PAL needed to prove, but did not prove, that the withheld taxes were remitted to the BIR. PAL only showed the total amounts remitted by branches of Chinabank, PBCom, and Standard Chartered, with no indication that the remitted amounts were the taxes withheld from PAL's interest income. PAL must first prove that the money remitted is attributable to it because tax refunds are strictly construed against the taxpayer.
• Limitation to Administrative Evidence: The Commissioner insisted that PAL's claim must fail for insufficiency of evidence because it failed to present several documentary items before the BIR during the administrative level. Even if evidence was presented in the CTA, it should not be considered because trial de novo in the CTA must be limited to the evidence shown in the administrative claim. The CTA's judicial review is allegedly limited to whether the Commissioner rightfully ruled on the claim based on the administrative evidence, and the ruling may only be set aside for gross abuse of discretion, fraud, or error of law. In allowing new evidence, the CTA adopted an entirely new proceeding rather than conducting judicial review.

• Scope of CTA Review: Whether evidence not presented in the administrative claim for refund before the BIR can be presented and considered in the Court of Tax Appeals.
• Sufficiency of Proof of Remittance: Whether PAL was able to prove the remittance of its final taxes withheld to the BIR by Chinabank, PBCom, and Standard Chartered.
• Necessity of Proof of Remittance: Whether proof of remittance is necessary for PAL to claim a refund of final withholding taxes under its charter, Presidential Decree No. 1590.

• Scope of CTA Review: Yes. The CTA is not limited by the evidence presented in the administrative claim before the BIR; the claimant may present new and additional evidence to the CTA to support its case for tax refund, as the CTA is a court of record conducting trial de novo.
• Sufficiency of Proof of Remittance: No. The factual findings of the CTA Special First Division and En Banc—that PAL failed to prove that Chinabank, PBCom, and Standard Chartered remitted the withheld taxes attributable to PAL's interest income—were sustained, as they are accorded respect and are deemed final and conclusive, no exception to the rule having been shown.
• Necessity of Proof of Remittance: No. Proof of remittance is not necessary for a tax-exempt payee to claim a refund of final withholding taxes. PAL need only prove that taxes were withheld from its interest income, because the withholding agent is statutorily responsible for remittance, and the amount withheld constitutes full and final payment of the payee's tax liability.

• Scope of CTA Review: Section 4 of the National Internal Revenue Code vests the Commissioner with power to decide tax refunds, subject to the exclusive appellate jurisdiction of the CTA. Republic Act No. 9282, amending Republic Act No. 1125, confirms the CTA's exclusive appellate jurisdiction over refund claims, including cases of inaction by the Commissioner. Section 8 of Republic Act No. 1125 designates the CTA as a court of record whose proceedings are not governed strictly by technical rules of evidence. Because cases filed in the CTA are litigated de novo, parties are expected to prove every aspect of their case anew and formally offer all evidence; no value is given to documentary evidence submitted to the BIR unless formally offered in the CTA. The Commissioner's inaction on PAL's administrative claim prompted the elevation to the tax court, and the CTA may consider all evidence formally offered, whether or not submitted at the administrative level. The ruling in Commissioner of Internal Revenue vs. Philippine National Bank was cited as support: the CTA is not precluded from accepting evidence not presented at the administrative level, as cases are litigated de novo.

• Sufficiency of Proof of Remittance: The issue of whether the taxes were remitted is a question of fact, not law, and thus not within the scope of review under Rule 45, which permits only questions of law. The factual findings of the CTA, as a highly specialized court, are accorded respect and are deemed final and conclusive, absent a showing of gross error, abuse, conflicting findings, or misapprehension of facts. The CTA found that PAL's documents relating to Chinabank, PBCom, and Standard Chartered only showed total amounts of final taxes withheld for all branches, without indicating that the remitted amounts pertained specifically to taxes withheld from PAL's interest income. Neither party demonstrated that any recognized exception to the rule on conclusiveness of CTA factual findings applied. The Court found no reason to disturb these findings.

• Necessity of Proof of Remittance: PAL is uncontestedly exempt from paying income tax on interest earned from bank deposits under Section 13 of Presidential Decree No. 1590, which provides that payment of either the basic corporate income tax or the 2% franchise tax shall be "in lieu of all other taxes." This exemption has been consistently affirmed by the Court notwithstanding amendments to the NIRC by Republic Acts Nos. 9334 and 9337. Section 14 of PD 1590 further provides that any excess payment over taxes due shall be refunded or credited. Because PAL is not liable for the tax on interest income, any payment made for that purpose is in excess of what is due and thus refundable. The tax on interest income from bank deposits is a final withholding tax under Sections 27(D)(1) and 57(A) of the NIRC and Revenue Regulations No. 02-98, which provide that the liability for payment rests primarily on the payor-withholding agent, not the payee. Sections 57 and 58 of the NIRC and the implementing regulations confirm that the withholding agent must file returns, furnish statements to payees, and remit the withheld taxes. Should the BIR find that taxes were not properly remitted, its action is against the withholding agent, not the taxpayer. The failure of the Agent Banks to remit does not affect or prejudice PAL. Taxes withheld by the withholding agent are deemed the full and final payment of the income tax due from the payee on the particular income. Certificates of Final Tax Withheld at Source, complete in relevant details and declared under penalties of perjury under Section 267 of the NIRC, are sufficient evidence to establish the fact of withholding; they are prima facie proof of actual payment by the payee to the government through the withholding agents. Once presented, the burden shifts to the Commissioner to establish that the certificates were incomplete, false, or irregularly issued—which she did not do. The Court extended the ruling in Commissioner of Internal Revenue vs. Philippine National Bank (which involved creditable withholding tax) to final withholding taxes, as the same principles apply: the payor-withholding agent is responsible for withholding and remitting; the payee has no control over remittance; and the certificates issued by withholding agents are prima facie proof of payment. Finally, under the principle of solutio indebiti (Article 2154, Civil Code), the BIR received something when there was no right to demand it and has the obligation to return it; technicalities should not be misused by the government to keep money not belonging to it.

• Tax Exemption of PAL Under PD 1590 — Section 13 of Presidential Decree No. 1590 provides that PAL shall pay either the basic corporate income tax or a 2% franchise tax, whichever is lower, and that such payment shall be "in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges" imposed by any authority, except real property tax. The Court applied this to hold that PAL is exempt from the final withholding tax on interest income from bank deposits, and any payment made for that tax is in excess of what is due and therefore refundable under Section 14 of the same decree.

• Final Withholding Tax — Responsibility of the Withholding Agent — Under the final withholding tax system (Section 2.57(A), Revenue Regulations No. 02-98; Sections 57 and 58, NIRC), the amount of income tax withheld by the withholding agent constitutes full and final payment of the income tax due from the payee on the particular income. The liability for payment of the tax rests primarily on the payor as withholding agent. In case of failure to withhold or under-withholding, the deficiency tax shall be collected from the payor-withholding agent, not the payee. The Court applied this to hold that PAL, as payee, is not responsible for remittance and cannot be prejudiced by the banks' failure to remit.

• CTA as Court of Record; Trial De Novo — Under Section 8 of Republic Act No. 1125, the CTA is a court of record whose proceedings are not governed strictly by technical rules of evidence. Cases filed in the CTA are litigated de novo; parties must prove every aspect of their case anew and formally offer all evidence. No value is given to documentary evidence submitted to the BIR unless formally offered in the CTA. The Court applied this to hold that the CTA may consider evidence not presented at the administrative level.

• Certificates of Final Tax Withheld as Prima Facie Evidence — Certificates of Final Tax Withheld at Source, complete in relevant details (identifying the payor, the income payment, the amount of tax withheld, and the nature of the tax) and declared under penalties of perjury under Section 267 of the NIRC, are prima facie proof of actual payment by the payee to the government through the withholding agents. Once presented, the burden shifts to the Commissioner to prove they are incomplete, false, or irregularly issued. The Court applied this to hold that PAL's certificates sufficiently established the withholding of taxes.

• Solutio Indebiti in Tax Refunds — Under Article 2154 of the Civil Code, if something is received when there is no right to demand it, the obligation to return it arises. The Court applied this principle to hold that the BIR, having received taxes from PAL when PAL was exempt, is obligated to return them, and technicalities should not be misused by the government to retain money not belonging to it.

• "Proof of actual remittance is not a condition to claim for a refund of unutilized tax credits. Under Sections 57 and 58 of the 1997 National Internal Revenue Code, as amended, it is the payor-withholding agent, and not the payee-refund claimant such as respondent, who is vested with the responsibility of withholding and remitting income taxes." — This passage, quoted from CIR vs. Philippine National Bank, articulates the core ratio decidendi that proof of remittance is not a condition precedent to a tax refund claim by the payee, because remittance is the statutory responsibility of the withholding agent.

• "payors of withholding taxes are by themselves constituted as withholding agents of the BIR. The taxes they withhold are held in trust for the government. In the event that the withholding agents commit fraud against the government by not remitting the taxes so withheld, such act should not prejudice herein respondent who has been duly withheld taxes by the withholding agents acting under government authority." — This passage, also quoted from CIR vs. Philippine National Bank, defines the doctrinal basis for shielding the payee from the consequences of the withholding agent's failure to remit, and was applied by the Court to final withholding taxes.

• "Technicalities and legalisms, however exalted, should not be misused by the government to keep money not belonging to it, thereby enriching itself at the expense of its law-abiding citizens." — This passage articulates the equitable principle underlying the Court's disposition, grounding the refund obligation in solutio indebiti and the prohibition against unjust enrichment, even in the context of tax refunds where exemptions are strictly construed.

• "In requiring that it prove actual remittance, the court a quo and the Commissioner effectively put the burden on the payee to prove that both government and the banks complied with their legal obligation. It would have been near impossible for the taxpayer to demand to see the records of the payor bank or the ledgers of the government." — This passage explains the practical impossibility and unfairness of requiring the payee to prove remittance, reinforcing the holding that the burden of remittance and its proof lies with the withholding agent and the government.

• Commissioner of Internal Revenue vs. Philippine National Bank, 744 Phil. 299 (2014) — Controlling precedent. The Court relied on this case for the propositions that proof of actual remittance is not a condition for a refund claim, that the payor-withholding agent is responsible for remittance, and that certificates of tax withheld are prima facie proof of payment. Although that case involved creditable withholding tax, the Court extended its ruling to final withholding taxes on the ground that the same principles apply.

• Commissioner of Internal Revenue vs. Asian Transmission Corporation, 655 Phil. 186 (2011) — Followed. Cited by PAL and acknowledged by the Court for the principle that proof of actual remittance by the payee is not needed, and that the responsibility for remittance lies with the withholding agent.

• Commissioner of Internal Revenue vs. Philippine Airlines, Inc., 535 Phil. 95 (2006) — Followed. Cited for the holding that Section 13 of PD 1590 is clear and unequivocal in exempting PAL from all taxes other than the basic corporate income tax or the 2% franchise tax.

• Commissioner of Internal Revenue vs. Philippine Airlines, Inc., G.R. Nos. 215705-07, February 22, 2017 — Followed. Cited for the reaffirmation that PAL's tax exemptions under PD 1590 subsist notwithstanding amendments to the NIRC by Republic Acts Nos. 9334 and 9337, and that no explicit repeal of PD 1590 was made.

• Banco Filipino Savings and Mortgage Bank vs. Court of Appeals — Followed. Cited for the principle that a certificate of tax withheld, emanating from the payor and complete in relevant details (payor, income payment, amount of tax withheld, nature of tax), is competent proof of the fact of withholding and aids courts in evaluating refund claims.

• Philippine Refining Company vs. Court of Appeals, 326 Phil. 680 (1996) — Followed. Cited for the doctrine that the factual findings of the CTA, as a highly specialized court, are binding on the Supreme Court absent a showing of gross error or abuse.

• Section 13, Presidential Decree No. 1590 — Provides that PAL shall pay either the basic corporate income tax or a 2% franchise tax, whichever is lower, and that such payment shall be "in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges." Applied to establish PAL's exemption from the final withholding tax on interest income from bank deposits.

• Section 14, Presidential Decree No. 1590 — Provides that any excess of total quarterly payments over actual annual franchise or income tax due shall either be refunded or credited against succeeding tax liabilities. Applied to establish PAL's entitlement to refund of erroneously paid taxes.

• Section 27(D)(1), National Internal Revenue Code — Imposes a final tax of 20% on interest on currency bank deposits received by domestic corporations, and 7.5% on interest income from the expanded foreign currency deposit system. Identified as the statutory basis for the final withholding tax on PAL's interest income.

• Section 57(A), National Internal Revenue Code — Authorizes the withholding of final tax on specified items of income, including interest on bank deposits under Section 27(D)(1). Applied to confirm that the tax on PAL's interest income is a final withholding tax.

• Section 58, National Internal Revenue Code — Requires every withholding agent to furnish each payee a written statement of income payments and taxes withheld, and to submit an annual information return to the Commissioner. Applied to confirm that remittance and reporting are the responsibility of the withholding agent, not the payee.

• Section 4, National Internal Revenue Code — Vests the Commissioner with power to decide tax refunds, subject to the exclusive appellate jurisdiction of the CTA. Applied to establish the jurisdictional framework for refund claims.

• Section 7, Republic Act No. 9282 — Grants the CTA exclusive appellate jurisdiction over decisions and inaction of the Commissioner in cases involving refunds of internal revenue taxes. Applied to confirm the CTA's jurisdiction over PAL's refund claim.

• Section 8, Republic Act No. 1125 — Designates the CTA as a court of record whose proceedings are not governed strictly by technical rules of evidence. Applied to hold that the CTA may consider evidence not presented at the administrative level.

• Section 2.57(A), Revenue Regulations No. 02-98 — Provides that under the final withholding tax system, the amount withheld constitutes full and final payment of the income tax due from the payee, and that the liability for payment rests primarily on the payor-withholding agent. Applied to establish that PAL is not responsible for remittance and that the withheld amounts are deemed PAL's full and final payment.

• Section 267, National Internal Revenue Code — Requires declarations, returns, and statements under the Code to contain a written statement that they are made under penalties of perjury. Applied to uphold the evidentiary weight of the Certificates of Final Tax Withheld at Source.

• Article 2154, Civil Code — Codifies the principle of solutio indebiti: if something is received when there is no right to demand it, the obligation to return it arises. Applied to support the refund of taxes erroneously collected from a tax-exempt entity.

Presbitero J. Velasco, Jr. (Chairperson), Lucas P. Bersamin, Samuel R. Martires, and Alexander G. Gesmundo concurred in the decision. No separate concurring opinions were noted.