Philippine National Bank vs. Commissioner of Internal Revenue

BIR Form No. 2307 is not the exclusive evidence required to prove non-utilization of creditable withholding taxes by the payee; any competent evidence establishing that the withheld taxes were not used to settle the payee's tax liabilities suffices. The probative value of BIR Form No. 2307 is limited to establishing the fact of withholding, and where other evidence already proves both the fact of withholding and the payee's non-utilization, presentation of the form becomes a superfluity.

Gotesco Tyan Ming Development, Inc. (Gotesco), a Filipino corporation engaged in the real estate business, entered into a syndicated loan agreement with Philippine National Bank (PNB) and three other banks on April 7, 1995, secured by a mortgage trust indenture over a six-hectare property known as the Ever Ortigas Commercial Complex, with PNB's Trust Banking Group acting as trustee. Because Gotesco was primarily engaged in the real estate business, the foreclosed property was classified as an ordinary asset, making the applicable creditable withholding tax rate 5% of the bid price under Section 2.57.2(J)(B) of Revenue Regulations No. 2-98, as amended by RR No. 6-01, rather than the 6% rate applicable to the sale of real property classified as capital asset.

Gotesco Tyan Ming Development, Inc., a Filipino corporation engaged in the real estate business, entered into a syndicated loan agreement on April 7, 1995 with PNB and three other banks. To secure the loan, Gotesco mortgaged a six-hectare property known as the Ever Ortigas Commercial Complex under a mortgage trust indenture agreement in favor of PNB, through its Trust Banking Group, as trustee. Gotesco subsequently defaulted, prompting PNB to foreclose the mortgaged property through a notarial foreclosure sale on July 30, 1999. A certificate of sale was issued in favor of PNB on August 4, 1999, subject to Gotesco's right to redeem the property within one year from inscription of the certificate of sale with the Register of Deeds of Pasig City on November 9, 1999.

On October 20, 2000, Gotesco filed a civil case before the RTC of Pasig, Branch 168, for annulment of the foreclosure proceedings, specific performance, and damages, with a prayer for a TRO and/or preliminary injunction. The RTC issued a TRO on November 9, 2000, enjoining PNB from consolidating ownership, followed by a writ of preliminary injunction on December 21, 2000. PNB elevated the matter to the Court of Appeals via a Petition for Certiorari, which ruled in PNB's favor and set aside the writ. Gotesco's motion for reconsideration was denied on December 22, 2003, and the CA ruling became final and executory.

As PNB prepared for consolidation of ownership, it paid the BIR Php 18,615,000 as documentary stamp tax on October 31, 2003, and withheld and remitted creditable withholding taxes equivalent to 6% of the bid price of Php 1,240,000,469.82, amounting to Php 74,400,028.49, on October 31 and November 11, 2003. Pending issuance of the Certificate Authorizing Registration, the BIR imposed interests, penalties, and surcharges totaling Php 77,172,555.28 on capital gains tax and DST. To facilitate release of the CAR, PNB paid the full assessed amount on April 5, 2005.

On October 27, 2005, PNB filed an administrative claim for refund of excess withholding taxes with the BIR, asserting that it had erroneously applied the 6% rate instead of the correct 5% rate under Section 2.57.2(J)(B) of RR No. 2-98, as amended by RR No. 6-01, since Gotesco was engaged in the real estate business and the property was an ordinary asset. The correct 5% withholding tax should have been Php 62,000,023.49, yielding an excess of Php 12,400,004.71. A day later, PNB filed its petition for review before the CTA, docketed as CTA Case No. 7355. On March 22, 2007, PNB filed a separate claim for refund of the surcharges, penalties, and interests, with a corresponding petition docketed as CTA Case No. 7588. The two cases were consolidated, and the CIR was declared in default on September 21, 2007 for failure to attend the pre-trial conference despite several resettings.

The CTA First Division, in its July 12, 2010 consolidated decision, granted the refund of surcharges, penalties, and interests in CTA Case No. 7588 but denied the refund of excess creditable withholding taxes in CTA Case No. 7355. While acknowledging that the correct rate was 5%, the First Division found that PNB failed to prove Gotesco did not utilize the withheld taxes to settle its own liabilities, advising PNB to present Gotesco's 2003 ITR. PNB complied by attaching Gotesco's 2003 ITR and Schedule of Prepaid Tax to its motion for reconsideration, but the First Division denied the MR on April 5, 2011, now requiring Gotesco's BIR Form No. 2307 as well. The CTA En Banc affirmed the denial on September 12, 2012, holding that the ITRs alone were insufficient and that the Unadjusted Schedule of Prepaid Tax had not been formally offered in evidence. PNB's MR was denied on February 12, 2013, leading to the instant petition.

• Sufficiency of Evidence: PNB maintained that it had presented sufficient evidence proving Gotesco's non-utilization of the withheld taxes, pointing to Gotesco's 2003 Audited Financial Statements, 2003 ITRs, Schedule of Prepaid Tax, the judicial affidavit of Gotesco's former accountant, and BIR Form No. 1606.
• Non-Exclusivity of BIR Form No. 2307: PNB argued that BIR Form No. 2307 is not the only evidence that may be adduced to prove non-utilization of creditable withholding taxes, and that the information contained in the form may be gathered from other documents already presented.
• Gotesco's Non-Recognition of Foreclosure: PNB contended that Gotesco's persistent refusal to recognize the validity of the foreclosure sale—evidenced by its continued inclusion of the foreclosed property in its 2003 Audited Financial Statements and its litigation challenging the foreclosure—constituted proof that Gotesco would not claim the creditable withholding tax as a tax credit.
• CTA First Division's Own Directive: PNB emphasized that the First Division had expressly stated that Gotesco's 2003 ITR was the only evidence needed to show non-utilization, and that PNB had complied with that directive only to face a new requirement for BIR Form No. 2307.

• Entitlement to Refund: Whether PNB is entitled to the refund of creditable withholding taxes erroneously paid to the BIR in the amount of Php 12,400,004.71.
• Evidentiary Value of BIR Form No. 2307: Whether BIR Form No. 2307 is the exclusive or indispensable evidence required to prove non-utilization of creditable withholding taxes by the payee.

• Entitlement to Refund: Yes. PNB sufficiently established the fact of withholding, the erroneous application of the 6% rate instead of the correct 5% rate, and Gotesco's non-utilization of the withheld taxes through evidence other than BIR Form No. 2307.
• Evidentiary Value of BIR Form No. 2307: No. BIR Form No. 2307 is not the exclusive evidence of non-utilization; its probative value is limited to establishing the fact of withholding, and other competent evidence may suffice to prove that the payee did not use the withheld taxes to settle its liabilities.

• Entitlement to Refund: The correct creditable withholding tax rate for the sale of real property classified as an ordinary asset by a corporation engaged in the real estate business is 5% under Section 2.57.2(J)(B) of RR No. 2-98, as amended by RR No. 6-01, not the 6% rate applied by PNB. The excess of Php 12,400,004.71 was therefore erroneously paid. To warrant a refund of creditable withholding taxes, the claimant must prove three elements: (1) the fact of withholding and remittance, (2) the erroneous character of the payment, and (3) non-utilization of the withheld taxes by the payee. PNB established the first element through BIR Form No. 1606, which showed that Php 74,400,028.49 was withheld and remitted. The second element was established by the admitted discrepancy between the 6% rate applied and the 5% rate prescribed. As to the third element, the Court found that PNB's evidence—Gotesco's 2003 Audited Financial Statements still carrying the foreclosed property as an asset, Gotesco's 2003 ITRs showing total tax credits of only Php 6,014,433, the Schedule of Prepaid Tax itemizing the sources of Gotesco's claimed credits as rental payments from tenants, and the judicial affidavit of Gotesco's former accountant confirming non-inclusion of the withheld amount—collectively proved that Gotesco did not utilize the creditable withholding tax subject of the refund. Gotesco's persistent refusal to recognize the foreclosure sale, evidenced by its continued assertion of ownership and ongoing litigation, made it logically inconceivable that Gotesco would claim the corresponding tax credit, as doing so would be inconsistent with its position that the foreclosure was invalid.

• Evidentiary Value of BIR Form No. 2307: Pursuant to Section 2.58.3 of RR No. 2-98, as amended, the fact of withholding is established by a copy of a statement duly issued by the payor to the payee showing the amount paid and the amount of tax withheld therefrom. BIR Form No. 2307 serves precisely this function—it is a statement showing the amount paid and the tax withheld. Nothing in the form establishes either utilization or non-utilization of the creditable withholding tax by the payee. The Court found that PNB had already presented BIR Form No. 1606, the Withholding Tax Remittance Return, which contained the same key information as BIR Form No. 2307: the name of the payor and payee, the description of the property, the taxable base, and the tax rate applied. Requiring PNB to additionally present BIR Form No. 2307 would thus be a superfluity. There is no basis in law or jurisprudence to hold that BIR Form No. 2307 is the only evidence admissible to prove non-utilization. The Court relied on Filinvest Development Corporation vs. CIR in affirming that the submission of BIR Form 2307 serves to prove the fact of withholding, not non-utilization.

• Non-Exclusivity of BIR Form No. 2307 in Refund Claims — In claims for refund of excess or unutilized creditable withholding tax, BIR Form No. 2307 is required to prove the fact of withholding, not to prove non-utilization by the payee. Non-utilization may be established by any competent evidence, including but not limited to the payee's audited financial statements, income tax returns, schedules of prepaid tax, and testimonial evidence. Where the fact of withholding is already established by other documents such as BIR Form No. 1606, requiring the additional submission of BIR Form No. 2307 is unnecessary.

• Requisites for Refund of Creditable Withholding Tax — To be entitled to a refund of excess or erroneously paid creditable withholding tax, the claimant must prove: (1) the fact of withholding and remittance of the tax to the BIR; (2) the erroneous character of the payment; and (3) that the payee did not utilize the withheld taxes to settle its own tax liabilities. All three elements must be duly established by competent evidence.

• "There is nothing in BIR Form No. 2307 which would establish either utilization or non-utilization, as the case may be, of the creditable withholding tax." — This passage defines the limited probative value of BIR Form No. 2307, clarifying that the form proves only the fact of withholding and cannot, by itself, establish whether the payee used the withheld taxes to offset its liabilities.

• "While perhaps it may be necessary to prove that the taxpayer did not use the claimed creditable withholding tax to pay for his/its tax liabilities, there is no basis in law or jurisprudence to say that BIR Form No. 2307 is the only evidence that may be adduced to prove such non-use." — This is the ratio decidendi on the evidentiary issue, rejecting the CTA's insistence on BIR Form No. 2307 as the exclusive proof of non-utilization.

• "To do such would run roughshod over Gotesco's firm stance that PNB's foreclosure on the mortgage was invalid and that it remained the owner of the subject property." — This passage articulates the logical inference drawn from Gotesco's conduct: a party that refuses to recognize a sale cannot consistently claim the tax credit arising from that same sale.

• Filinvest Development Corporation vs. CIR, G.R. No. 146941, August 9, 2007, 529 SCRA 605 — Cited as supporting authority for the proposition that the submission of BIR Form 2307 in claims for refund of excess creditable withholding tax serves to prove the fact of withholding, as contemplated under Section 2.58.3 of RR No. 2-98, as amended. The Court relied on this case to delineate the evidentiary function of BIR Form No. 2307.

• Section 2.57.2(J)(B), Revenue Regulations No. 2-98, as amended by RR No. 6-01 — Prescribes the creditable withholding tax rate of 5% on the sale of real property classified as an ordinary asset by a corporation engaged in the real estate business. Applied to determine that PNB should have withheld 5% of the bid price, not 6%, yielding a correct withholding of Php 62,000,023.49 and an excess of Php 12,400,004.71.

• Section 2.58.3, Revenue Regulations No. 2-98, as amended — Provides that the fact of withholding is established by a copy of a statement duly issued by the payor to the payee showing the amount paid and the amount of tax withheld therefrom. Applied to define the evidentiary purpose of BIR Form No. 2307 as proving only the fact of withholding, not non-utilization.

Peralta, Del Castillo, Villarama Jr., and Reyes, JJ.