China Banking Corporation vs. Commissioner of Internal Revenub

DECISION -

C.T.A. CASE NO. 3171 - 2 - After the dates of the issuance of said promissory notes/ commercial papers, petitioner paid to the Bureau of Internal Revenue the required 35% transacti on tax in the amount of P1,179,942.11 due o n the total reported interests thereof amounting to P3,371,264.88 corresponding to their respective full terms.

Prior, however, to their maturity dates, the money market placeme nts for which the promissory notes were issued were withdrawn in full and the said promissory notes were preterminated likewise on different d a tes so that the total interests paid thereon amou nted only to P2,536,319.19 and the transaction tax due therefrom should only be P887,711.72.

Thus, the remittance of the 35% transaction ax on the interests thereon resulted, according to the petitioner, to a n ov rpayment in the amoun of P292,230.99.

Hence, this claim for refund. The resolution of this case hinges on the issue of: whether or not transaction tax is a business tax or an income tax.

If it js a business tax, then herein petitioner may be entitled to its claim for refund, otherwise, the is s ue is whether or not it has personality in bringing the present suit for be i ng a mere withholding agen t and not the taxpayer.

DEC!SION - C. T.A. CASE NO. 3171 - 3 - Th e issue of transaction tax ha s a lready been resolved by this Court more than a decade ago and has been affirmed in toto by the Supreme Court.

In the case of Western Minolco Corporation vs.

Commi ssioner of lnternal Revenue, L-61632 Aug. 16, 1983, 124 SCRA 121, the High Court said thusly: As correctly ruled by the respondent Court of Tax Appeals, Accordingly, we need not and do not think it necessary to di sc uss further the nature of the tr nsaction tax more than to say that the incipient scheme in the issuance of Letter of Instructions No. 340 on November 24, 1975 (O.G .

Dec.15, 1975), i.e., t o achieve operational simplicity and effective administration in capturing the interest-income 'windfal l ' from money market operations as a new source of revenue, has lost none of its animating principle in parturition of amendatory Presidential Decree No.

1154, now Section 210(b) of the Tax Code. The tax thus imposed is actually a tax on interest earnings of the lenders or placers who are actually . the taxpayers in whose income is .!..!!'.EO sed.

Thus, 'the bo rrovle r withholds the tax of 35% from the interest he would have to pay the lender so that he (borrower) can pay the 35% of the interes t to the Government.' (President Marcos, Times Journal, June 17, 1977 cited in Respondent's Memorandum, p. 6) x x x.

Suffice it to state that the broad concensus of fiscal and monetary authorities is t hat "even if nominally, t he borrower is made to pay the tax, actually, the tax is on the interest earning of the 1 ()V.::h

DECISION -

C.T.A. CASE NO . 3171 - 4 - immediate and all prior lenders/placers of the money.

'x x x." (Rollo, pp. 36-37) The 35% transact ion tax is .an income tax on interest earnings to the lenders or p l acers.

The !at t~r are actually the tax ayers.

Therefore, the tax cannot be a !__ax imposed upon the petitione r . In other words, the petitioner who borrowed funds fr om seve ral financial institutions by is s uing commercial papers merely withheld the 35% transaction ta x before paying to the financial institutions the interest earned by them a nd later remitted the same to the respondent Commissioner of Internal Re venue.

The tax could have be e n collected by a diff erent procedure but the statute c hose this method.

Whatever collec tin g pro cedure is adopted does not change the nature of the tax.

(und ersco ring supplied;

see also Mari nduque Mining and Industrial Corp. vs. Efren I.

Plana, Commissioner of Internal Revenue , CTA Case No.

3019, March 27, 1981) The petit ioner of the above mentioned case e ven furt h er argued that th e 35% transac tion tax is a business tax because it is imposed under Title V, entitled "Taxes on Business " a nd classified specially under Chapter II, entitled "Tax on Busine ss ".

However, the High Court ruled that: The location of the 35% tax in the Tax Code does not necessarily de~ermine it s nature .

Again, we agree with the Solicitor General that the legislative b ody must have realized later that the subject tax was inappropriately included among the taxes on business because, Sectio n 210 of th e Tax Code has been repea led by Presidential Dec ree No. 1739 which now imposes a tax of 20% on intere s ts from deposit s and yields from deposit substitutes suc h as commerci a l 1 n r. · ~ J ·'

DECISION -

C.T.A. CASE NO . 3171 - 5 - papers issued in the primary market as principa l instrument and provides for them in Section 24 (cc) under Chapter III, Tax on Corporations, Title II - Income Tax .

(ibid) Based on the above juri sprudence, this cas e s hould have been dismiss ed for lack of legal interest on the part of the Petitioner to bring an actio n to claim for refund. HOWEVER, the impending death of the Petitioner 's cause was saved by the recent case of Commissioner of Internal Revenue vs.

Procter & Gamble Philippine Manufac t uring Corporation, (December 2, 1991, 204 SCRA 377) wherein the Supre me Court e n bane reconsidered Its Second Division's decision that the withholding agent (P&G Phil.) has no capacity to bring suit on behalf of its principal (P&G USA) which is the proper party in interest in its c laim for refund. Said the Court, through its eminent Justice Feliciano. XXX XXX "2. The question of the P&G - Phil. to bring the claim has substantive dimensions as as wil l be seen bel ow , a lso rel te to fairness.

XXX capacity of for refund well which, ultimately Under Section 306 of the NIRC , a claim for r efund or tax credit filed with the Commissioner of Internal Revenue is essential for maintenance of a suit for re covery of taxes allegedly erroneously or illegally assessed or collected: 1 " r - :

_,

DECISION -

C.T .A . CASE NO. 3171 - 6 - "Sec.

306.

Recovery of tax erroneously or illegally collected. - No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner of Internal Revenue;

but such suit or proceeding may be maintained, whether or not uch tax, penal y, or sum has been paid under protest or duress. In any case, no su c h s uit or proceedi ng shall be b eg un af er he expiration of two years fr o m the date of payment of the tax or penal y egard ess of ny supervening cau s e that may ar'se fter payment: xxx."

(Italics suppli e d) Section 309(3) of the NIRC, in turn, provides: "Section 0 .

Authority of Comnissioner to T k e Compromises and to Refund TaxP.s. - Th e Commi ssioner may: XXX XXX XXX ( 3 ) ere or ref und taxes err o n eo usly or illegally received, xxx.

No credit or r efund of taxes or penalties shall be allorved unless the taxpayer files in writing with the Commissioner a claim f or c redit or refund w~thin two (2) years after the payment of the tax or penalty."

(As a me nded by P.O.

No.

69) (Emphasis supplied) Since the claim for refund was f'le by P&G-Phil., the que s tion which arises is:

i s P&G - Phil.

a "taxpayer" under Sec.ition ' 309 ( 3) of th e NIRC?

The term '' taxp yer" is defined in our NIRC as referring to " any person subject to tax imposed by the Title [on Tax on Income]."

It thus become s important to note that under Section 53(c) of the NIRC, the withholding agent who is "required to deduct and 1 () ~ D.ECISION - C. T .A. CASE NO. 3171 - 7 - withhold a ny tax" is made "personally liabl e for s uch tax" and indeed is i nde mnified against a ny claims and demands which the stockholder might wis h to make in questioning the amount of payme n ts ~Efecte d by the withholding a gent in acco rd a nc e with the prov isions of the NIRC.

The vri thholding agent, P&G-Phil. , is directly and inde pendently liable for t h e correc t amount of the tax that should be withheld from the dividend remittances. The withho ldi ng agent is, moreover, subject to and liable for deficiency assess ments, surcharges and penalties should th e nmount of the tax withheld be finally found to be less than the amount that should have been withheld under law . A "person liable for tax" ha s been held to be a "person subject to tax" and properly considered a "taxpa yer."

The terms "liable for tax" and "subject to tax" both connote legal obligation or duty to pay a tax.

It is very difficult, indeed conceptually impossible, to consider a person who is statutorily made "liable for tax" as not "sub ject to tax."

By any reasonable standard, such a pe rson should be regarded as a party in interest, or as a perso n having suffic ient legal interest, to bring a suit for refund of taxes he believe~ were illegaly collected from him.

In Philippine Guaranty Company, Inc.

v. Commissioner of Internal Revenue, this Court pointed out that a withholding agent is in fact he agen both of the government and of t~e t axpayer , and that the withholding agent is not an ordinary government agent:

"The law sets no condition for the personal liability of the withholding agent to attach.

The reason is to compel the rithhold · n g agent to withhold the tax under all circumstances. In effect, the responsibility for the collection of the tax as well as the payment thereof is con~entrate~ upon the person over whom the Governme nt has jurisdiction .

Thus, the _,

DECISION -

C.T.A. CASE NO. 3171 - 8 - withholding agent is constituted the agent of both the Government and the tp!Xpayer.

With respec t to the col lection and/or withholdi ng of the tax, he is the Government's agent.

In regard to the filing of the necessary income tax return and the payment of the tax to the Government, he is the agent of the taxpayer.

The rvi thholding agent, therefore, is no ordinary governmen t agent especially becau s e under Section 53(c) he i s held personally liable tor the tax he is duty bound to rV"ithhold;

whereas the Commissione r and his deputies are not made liable by law."

( t lies s upplied) If, as pointed out i n Philippine Guar :1n t y, t he withh olding age nt is also an ~e nt~-o~---t~h~e~- owner of the ~i~~deEd~ with respect to the filing of the ne cessar income ta x return and with - .. _______ _ res _p~c:_;-~_!:2-_ __ ac_!:ual ayment of th e ta x to _!:l1e ___ 9overnment, s uch authority may be held to include the authori t ile a claim for refund and - - -- ~~ bring an action for recovery of such is claim.

Th' s implied authori ty especially war ranted where, as in the instant c se, he w'thholding age nt is the rvholly owned s ubsidiary ot the parent- sto ckholder and herefore, a t all times, under t he effective contro l ot such parent - stockholder. In the c i rcumstanc.es of this case, i se ems particularly uqreal to deny t he impl ed authority of P&G-Phil. t o claim a ref und and to commence an action for such f und.

We believe that, ev e n now, there is noth'ng tope e he BIR fr om requiring P&G - Phil.

show sam~ writte n or telexed confi~mation by

P&G - USA

of the subsidiary's a uthority to c l a im the refund or tax cred i a nd to mi t the p oceeds of the r e fund, or to apply t he tax credit to some Phi lippi ne tax oblig ation of,

P&G -

USA, before actual payment of the refund or issuance of a tax credit certificate.

~'D~-~-t_ .... _ ~P_r.ears to be vitiated by bas.J_£_ !JB f~ ~ rn_':.E_§. __ ~s __ P~ ~ i tione r __ · _s_ eosi tion that ~!:__t h oug h P&G-Phil .

is directly and 1 tl C1 )

DECISION -

C.T . A. CASE NO.

3 171 - 9 ·- ~rso na l ly l i ab l e t o th e Gove r nment f or tl e t a xe s a nd a ny de f i c i e ncy as ses s me nt s t o _!?e __ ~_! l~c ted 1 the Government is not J-esr_rt l_y_ _ _l i a b l e fsr a re fund s impl y be c ause i t did not de mand a wr i tte n co nfir mation 2.!__P&Q-- Phil. 's_ .i!ll_Pl ~ ~d --~~th or i t fr o.!!!_ _the ~~y __ beg i nn ing.

A so vereign governme nt sho u ld act honorably and fa irly at all __ } m8__§__1 e ven vi .s~- vis ..J:..._a~p_aye r s . i'l e be . i P.VP.

r~nd l'lt1 hol•l t hat 1 under t he irc umstanc s of his cas e, P&G- Phil .

s prop~rly regardPd RS a utax pa yerH wit h i t he meaning of Sectio n 30 9 , NIRC 1 and as i mpliertly aut ho ized to file the claim for ref11n a nd t he s uit o recover such claim. (Un d rs(!ori ng sup p l ied) F 1rthermore , Peti t ioner has proven by t he e v id e nces prese nted tl e vario us t ransa c tions upo n whi c h i nt e re s t were earned and t he correspondi ng withho ]dj ng taxes were pa i d t o the Bureau of I ntern a l Reve nue. However , this Cour t notices that s everal taxes were pa i d from Nove mbe r 6, 1 978 t o November 2 4 , 1 97 8 i n the tota l a mount of Pl 1,890.37 . Consi deri ng , that t he ins ant Pet i i on for Re view was Ei ed on Nove mber 27, 1980 , the c laim for refund i nv ol vjn g t h i s mount has already p r e sc ribed for ha ving bee n fil ed beyo nd the two-ye a r pe r iod r e qu ired 1nder Sec ion 292 ( now Section 2 30) of t he N a ti o n~l tnternal Revenu~ ode.

The r efun dable rtmo unt is he r e by reco m e rt s f ollnwst 1062 DEC!SION - C.T.A. CAS E NO. 3171 - 10 - Total Interest Reported 351 Transaction rax Remitted ~ess : Actual Interest Paid 35% Transaction Tax Due Difference Less: Amount Prescribed Refundable Amount P3,371,264.88 2,536,319.19 p 834,945.69 P1,179,942.1l 887,711.72 292,230.99 11,890. 37 p 280,340 .62

WHEREFORE , in all the foregoing , the Respondent is her eby

ORDE RED

to REFUND the amount P280, 340.62 to h e 'tion er .

WE CONCUR:

~iat~ ;~~=:

/7 ~-·;' 1)'- J~ I' '/R:~oN 0. DE ~EY~ / Associate Judge I

I /

I {_, ~Q-~ ERNESTO D. ACOSTA Pre siding Judge of _,

DECISION -

C.T.A . CASE NO. 3171 - 11 - C E R T I F I C A T I 0 N I hereby certify that the deci sion was reac hed after due consultation among the membe rs of the Court o Tax Appeals in accordance with Section 13 , Article VIII of the Constitution. /amf 1 1)~t.1 ~Q~~ ERNESTO D. ACOSTA Presid i ng Judge Court of Tax Appeals )