Rizal Commercial Banking Corporation vs. Commissioner of Internal Revenue

DECISION

This case involves a claim for refund or issuance of tax credit certificate in the total amount of P218,741 ,106.34 allegedly representing erroneously withheld final taxes on interest income derived by petitioner from its investments in long-term fixed rate treasury bonds covering the period from the fourth quarter of 1998 to the fourth quarter of2000. Petitioner is a corporation duly organized and existing under and by virtue of the Philippine Law, with principal office located at No. 333 Sen. Gil Puyat Avenue, Makati City. It is duly registered with the Securities and Exchange Commission and authorized by the Bangko Sentral ng Pilipinas to engage in general banking operations (par. 1, Stipulation of Facts).

In the course of its regular business operations, petitioner invests in government securities, consisting of bonds and other evidences of debt of the Philippine Government, earning interest income therefrom.

During the period beginning January 1, 1998 to December 31, 2000, petitioner realized interest income from its investments in long term fixed rate treasury bonds in the total amount of P1,231,885,087.40' which were subjected by the Bureau of Treasury to 20% final withholding taxes in the aggregate amount of P246,132,527.51°. However, petitioner did not include the amounts representing payments of 20% final withholding taxes on investments prior to October 26, 1998 because its right to claim for the refund thereof had allegedly prescribed’. Thus, the total amount subject of this claim is only P218,741,106.34 covering the period beginning from the fourth quarter of 1998 to the last quarter of 2000, detailed as follows:

(A) Fourth Quarter of 1998

Interest

Particulars Interest (Gross) Taxes Withheld (Net of Tax) PIBDO51D114 23,823,697.57 4,764,739.51 19,058,958.06 T/B730300800 15,000.00 2,250.00 12,750.00 PIBD1007E030 3,468,750.00 693,750.00 2,775,000.00 PIBD0703E044 768,750.00 153,750.00 615,000.00 T/B830808100 60,000.00 9,000.00 51,000.00 PIBDO500F016 14,287,500.00 2,857 ,500.00 11,430,000.00 PIBD0503F 184 1,848,000.00 369,600.00 1,478,400.00 Total 44,271,697.57 8,850,589.51 35,421,108.06

(B) First Quarter of 1999

Interest

Particulars Interest (Gross) Taxes Withheld (Net of Tax) PIBDO500G024 14,500,000.00 2,900,000.00 11,600,000.00 PIBD1007A025 7,839,375.00 1,567,875.00 6,271,500.00 T/B810605900 100,000.00 15,000.00 85,000.00 PIBDO501B081 14,458 687.50 2,891,737.50 11,566,950.00 ' Exhibit B-8.

? Exhibit B-4; TSN, September 11, 2001, pages 19-21. > TSN, August 9, 2001, pages 13 & 14.

(C) Second Quarter of 1999

T/B820706000 440,600.00 66,090.00 374,510.00 T/B800505700 20,200.00 3,030.00 17,170.00 PIBD0501B090 17,842,500.00 3,568,500.00 14,274,000.00 PIBD0703B029 511,987.50 102,397.50 409,590.00 PIBDO704C080 14,493.34 2,898.67 11,594.67 PIBD10061010 48,000.00 9,600.00 38,400.00 Total 55, 775,843.34 11,127,128.67 44,648,714.67

Interest

Particulars Interest (Gross) Taxes Withheld (Net of Tax) PIBD0501D114 18,511,197.57 3,702,239.51 14,808,958.06 PIBD0705J124 918,750.00 183,750.00 735,000.00 T/B730300800 15,000.00 2,250.00 12,750.00 PIBD1007K042 2,650,068.75 530,013.75 2,120,055.00 PIBD0703E044 768,750.00 153,750.00 615,000.00 PIBD1007E030 3,468,750.00 693,750.00 2,775,000.00 T/B830808100 60,000.00 9,000.00 51,000.00 T/B750020A04 268,750.00 40,312.50 228,437.50 PIBD0503L200 8,465,625.00 1,693,125.00 6,772,500.00 PIBDO500F016 14,287 ,500.00 2,857 ,500.00 11,430,000.00 PIBD0503F 184 1,848,000.00 369,600.00 1,478,400.00 Total 51,262,391.32 10,235,290.76 41,027,100.56

(D)Third Quarter of 1999

Interest

Particulars Interest(Gross) Taxes Withheld (Net of Tax)

PIBDO500G024 9,425 ,000.00 1,885,000.00 7,540,000.00 PIBD1007A025 7,839,375.00 1,567 ,875.00 6,271,500.00 T/B810605900 100,000.00 15,000.00 85,000.00 PBIDO501B081 12,246,187.50 2,449,237.50 9,796,950.00 T/B820706000 440,600.00 66,090.00 374,510.00 T/B800505700 20,200.00 3,030.00 17,170.00 PIBD0501B090 17,842,500.00 3,568, 500.00 14,274,000.00 PBIDO703B029 511,987.50 102,397.50 409,590.00 PBIDO704C080 14,493.34 2,898.67 11,594.67 PIBD0504C217 35,000.00 70,000.00 280,000.00 PIBD 10061010 48,000.00 9.600.00 38,400.00 TOTAL 48,838,343.34 9,739,628.67 39,098,714.67

(E) Fourth Quarter of 1999

Particulars

PIBD0501D114

PIBD0705J124

T/B730300800

PIBD1008K077

PIBD1007K042

PIBD1007E030

PIBD0703E044

T/B830808100

T/B750020A04

PIBD0503L200

PIBDO500F016

PIBDO503F 184

Interest (Gross)

18,511,197.57 918,750.00 15,000.00 4,500,000.00 1,272,993.75 3,468,750.00 768,750.00 60,000.00 268,750.00 2,821,875.00 17,089,437.50 1,848,000.00 TOTAL 51,543,503.82

(F) First Quarter of 2000

Particulars Interest (Gross)

PiID0504F011

PIBD0703G051

PIBDO500G024

PIBD1007A025

T/B810605900

PIBD0501B081

T/B820706000

T/B800505700

PIBD0501B0S0

PIBD0502B150

PIBDO703B029

PIBD10091103

PIBDO7061160

PIBDO704C080

PIB10091A118

PIBD05031197

PIBD0504C217

PIBD10061010

TOTAL

32,972,500.01 3,035,812.50 9,425,000.00 7,839,375.00 100,000.00 12,246, 187.50 440,600.00 20,200.00 26,617,500.00 9,375,000.00 4,355, 737.50 1,500,000.00 8,938,500.00 6,764 493.34 38,721,325.00 6,000,000.00 350,000.00 48,000.00 168,750,230.85

Taxes Withheld

3,702,239.51 183,750.00 2,230.00 900,000.00 254,598.75 693,750.00 153,750.00 9,000.00 40,312.50 564,375.00 3,417,887.50 369,600.00 10,291,513.26

Taxes Withheld

6,594,500.01 607,162.50 1,885,000.00 1,567,875.00 15,000.00 2,449,237 .50 66,090.00 3,030.00 5,323,500.00 1,875,000.00 871,147.50 300,000.00 1,787,700.00 1,352,898.67 7,744,265.00 1,200,400.00 70,000.00 9,600.00 33,722,006.18

Interest

(Net of Tax)

14,808,958.06 735,000.00 12,750.00 3,600,000.00 1,018,395.00 2,775,000.00 615,000.00 51,000.00 228,437.50 2,257,500.00 13,671,550.00 1,478,400.00 41,251,990.56

Interest

(Net of Tax)

26,378,000.00 2,428,650.00 7,940,000.00 6,271,500.00 85,000.00 9,796,950.00 374,510.00 17,170.00 21,294,000.00 7,500,000.00 3,484,590.00 1,200,000.00 7,150,800.00 5,411,594.67 30,977,060.00 4,800,000.00 280,000.00 38,400.00 135,028,224.67

(G) Second Quarter of 2000

Particulars

PIBDO706J177

PIIDO504F011

PIBD0504J238

PIBDO0703J067

PIBD0501D114

PIBDO500J058

PIBDO705J124

PIBDO704J092

PIBDO705D102

T/B730300800

PIBD0504K243

PIBDO706K184

PIBD1008K077

PIBD1007K042

PIBD1007E030

PIBDO703E044

T/B830808100

T/B750020A04

PIBDO504L253

PIBD0706L192

PIBDO703L073

PIBDO503L200

PIBDO500L073

PIBDO500F016

PIBDO503F 184

TOTAL

Interest (Gross)

5,591,725.00 36,106,250.01 2,493,750.00 1,859,375.00 18,511,197.57 1,475,000.00 16,996,875.00 13,568,750.00 2,050,000.00 15,000.00 7,482,675.00 1,462,500.00 4,500,000.00 1,272,993.75 3,468, 750.00 4,612,500.00 60,000.00 268,750.00 3,425,312.50 4,148,450.00 10,500,000.00 8,465,625.00 3,075,000.00 17,089,437.50 1,848,000.00 170,347,916.33

(H) Third Quarter of 2000

Particulars

PIIDO504F011

PIBDO0505A261

PIBD0703G051

PIBDO500G024

PIBD0707A209

PIBDO706A130

PIBD1007A025

PIBDO705G118

PIBD0504G222

T/B810605900

PIBD0501B081

Interest (Gross)

36,392,375.01 31,783,125.00 3,035,812.50 9,425,000.00 13,557 ,500.00 2,475,000.00 9,802,750.00 3,000,000.00 6,812,500.00 100,000.00 2,289,937.50

Taxes Withheld

1,118,345.00 7,221,250.01 496, “50.00 371,875.00 3, 702,239.51 295,000.00 3,399,375.00 2,713,750.00 410,000.00 2,250.00 1,496,535.00 292,500.00 900,000.00 254,598.75 693,750.00 922,500.00 9,000.00 40,312.50 685,062.50 829 &30.00 2,100,000.00 1,693,125.00 615,000.00 3,417,887.50 369,600.00 34,052,395.77

Taxes Withheld

7,278,475.01 6,356,625.00 607,162.50 1,885, 400.00 2,711,500.00 495,000.00 1,960,550.00 600,000.00 1,362,500.00 15,000.00 457,987.50

Interest

(Net of Tax)

4,473,380.00 28,885,000.00 1,995,000.00 1,487,500.00 14,808,958.06 1,180,000.00 13,597,500.00 10,855,000.00 1,640,000.00 12,750.00 5,986, 140.00 1,170,000.00 3,600,000.00 1,018,395.00 2,775,000.00 3,690,000.00 51,000.00 228,437.50 2,740,250.00 3,318,760.00 8,400,000.00 6,772,500.00 2,460,000.00 13,671,550.00 1,478,400.00 136,295,520.56

Interest

(Net of Tax)

29,113,900.00 25,426,500.00 2,428,650.00 7,540,000.00 10,846,000.00 1,980,000.00 7,842,200.00 2,400,000.00 5,450,000.00 85,000.00 1,831,950.00

PIBD1010B153

T/B820706000

T/B800505700

PIBD0505B279

PIBD0501B090

PIBD0502B150

PIBD0703B029

PIBD1010C0161

PIBD10091103

PIBD0505C287

PIBDO7061160

PIBDO704C080

PIBD0707C225

PIBD05031197

PIBD0Q504C217

PIB10091A118

PIBD0503C175

PIBD10061010

TOTAL

15,487,500.00 440,600.00 20,200.00 18,225,000.00 15,685, 312.50 18,337,812.50 8,199,487.50 3,656,250.00 1,500,000.00 16, 142,625.00 8,556,000.00 10,139,493.34 350,000.00 15,500,000.00 20,331,500.00 29,293,450.00 650,000.00 48,000.00 301 237,230.85

(1) Fourth Quarter of 2000

Particulars

PID1010CA170

PIBDO706J177

PIBD0505D295

PIID0504F011

PIBDO707D233

PIBD0504J238

PIBD0703J067

PIBD0501D174

PIBDO500J058

PIBD1010D188

PIBD0705J124

PIBD0704J092

PIBD0705D102

T/B730300800

PIBD0504K243

PIBD0O505E301

PIBDO707E241

PIBDO706K184

PIBD1008K077

PIBD1007K042

PIIDO505HO016

Interest (Gross)

4,856,250.00 5,591,725.00 6,121,275.00 36,392,375.00 6,687 ,500.00 2,493,750.00 1,859,375.00 14,63€,197.57 1,475,000.00 6,937,500.00 22,509,375.00 16,804,375.00 5,248,000.00 15,000.00 3,152,456.25 7,950,000.00 2,081,250.00 1,462,500.00 4,500,000.00 129,243.75 6,534,257.82 3,097,500.00 66,090.00 3,030.00 3,645.7 90.00 3,137,062.50 3,667,562.50 1,639,897.50 731,250.00 300,000.00 3,228,525.00 1,711,200.00 2,027 ,898.67 70,000.00 3,100,000.00 4,066,300.00 5,858,690.00 130,000.00 9,600.00 60,219,406.18 ¢

Taxes Withheld

971,250.00 1,118,345.00 1,224,255.00 7,278,475.00 1,337,500.00 498,750.00 371,875.00 2,927 ,239.52 295,000.00 1,387,500.00 4,501,875.00 3,360,875.00 1,049,600.00 2,250.00 630,491.25 1,590,000.00 416,250.00 292,500.00 900,000.00 25,848.75 1,306,851.57 12,390,000.00 374,510.00 17,170.00 14,580,000.00 12,548,250.00 14,670,250.00 6,559,590.00 2,925,000.00 1,200,000.00 12,914,100.00 6,844,800.00 8,111,594.67 280,000.00 12,400,000.00 16,265,200.00 23,434,760.00 520,000.00 38,400.00 241,017,824.67

Interest

(Net of Tax)

3,885,000.00 4,473,380.00 4,897 ,020.00 29,113,900.00 5,350,000.00 1,995,000.00 1,487,500.00 11,708,958.05 1,180,000.00 5,550,000.00 18,007,500.00 13,443,500.00 4,198,400.00 12,750.00 2,521,965.00 6,360,000.00 1,665,000.00 1,170,000.00 3,600,000.00 103,395.00 5,227,406.25

PIBD1007E030 3,468,750.00 693,750.00 2,775,000.00 PIBDO0703E044 4,612,500.00 922,500.00 3,690,000.00 T/B830808100 60,000.00 9,000.00 51,000.00 PIBDO505F319 1,300,000.00 260,000.00 1,040,000.00 PIBD0504L253 600,312.50 120,062.50 480,250.00 PIBDO706L192 4,148,450.00 829,690.00 3,318,760.00 PIBD0503L200 8,465,625.00 1,693,125.00 6,772,500.00 PIBD0703L073 10,500,000.00 2,100,000.00 8,400,000.00 PIBDO500L073 4,035,937.50 807,187.50 3,228,750.00 PIBD1010F202 6,057,506.25 1,211,501.25 4,846,005.00 PIBDO503F 184 1,848,000.00 369,600.00 1,478,400.00 TOTAL 202,534,486.64 40,503,147.34 162,031,339.30 The total amount of taxes withheld for the period involved in this case is summarily computed hereunder:

Period Amount of Tax

Withheld

Fourth Quarter, 1998 8,850,589.51 First Quarter, 1999 11,127 ,128.67 Second Quarter, 1999 10,235,290.76 Third Quarter, 1999 9,739,628.67 Fourth Quarter, 1999 10,291,513.26 First Quarter, 2000 . 933,722,006.18 Second Quarter, 2000 34,052,395.77 Third Quarter, 2000 60,219,406.18 Fourth Quarter, 2000 40,503, 147.34 TOTAL 218,741,106.34 Petitioner posits that the aforesaid amount of P218,741,106.34 was erroneously withheld and remitted to the BIR because interest income from long-term treasury bonds is not subject to income tax, and consequently, to final withholding tax, pursuant to Section 32(B)(7)(g) of the Tax Code of 1997. Petitioner likewise cited BIR Ruling No. 166-99 dated October 25, 1999 and BIR Ruling No. 016-2000, dated January 7, 2000, both of which ruled that the interest income, yield or gain derived from bonds, debentures or other certificates of indebtedness with maturity of more than five years are excluded from gross income and are thus exempt from the 20% final withholding tax. Hence, the withholding of the above amount of P218,741 ,106.34 as final tax from petitioner's interest income derived from treasury bonds with maturity of more than five years is erroneous.

Consequently, petitioner filed a letter-request with the Bureau of Internal Revenue for the refund of taxes alleged to be erroneously withheld from its interest income on long-term bonds on January 22, 2001 4. To beat the two-year prescriptive period, petitioner filed the instant petition two days after or on January 24, 2001. wit:

Respondent, for his part, raised the following Special and Affirmative Defenses, to a) Petitioner's alleged claim for refund is subject to administrative routinary investigation/examination by respondent's bure~u ; b) Petitioner must prove that its interest income were derived from long term treasury bonds issued by the Government of the Philippines with maturities of more than five (5) years; c) Taxes are presumed to have been collected in accordance with law; d) In a claim for refund/credit, the burden of proof is on the taxpayer to establish its right to refund and failure to sustain the burden is fatal to the claim for refimd/credit;

e) It is an elementary rule that claims for refund are construed in strictissimi juris against the taxpayer as they partake the nature of exemption from tax; and f) Petitioner must show compliance with the pro,·.:sions of Section 229 of the Tax Code of 1997.

To support its case, petitioner submitted the letter-request for refund (Exhibit A) and a certification from the Bureau of Treasury with attachments (Exhibit B, B-1 to B-8). Respondent, however, submitted the case for decision based on the pleadings. 5 The parties jointly stipulated that the issues to be resolved in this case are:

(1) Whether or not the gains or interest income dt;!rived by petitioner from its investment in long-term treasury bonds should be included in the gross income of the petitioner;

(2) Whether or not the long-term treasury bonds in which petitioner invested have a maturity of more than five(5) years;

(3) Whether or not the Bureau of Treasury withheld final taxes from the petitioner's interest income on its investment in the treasury bonds; and ( 4) Whether or not petitioner is entitled to a refund and/or issuance of tax credit certificate in the amount of P218,741 ,106.34 representing final taxes withheld on its interest income from treasury bonds with a maturity of over five (5) years.

The focal issue in this case is whether or not interest mcome derived from investments on long-term treasury bonds with maturity of more than five years is exempt from the 20% final withholding tax. To reach this point, it is necessary to deal first on the second and third issues.

Anent the issue of whether or not the treasury bonds invested by the petitioner have a maturity of more than five years, we deem it sufficient evidence the Statement of Taxes Withheld on Treasury Bonds Investments prepared by the Payments Division of the Bureau of Treasury, more particularly Exhibits B-6 and B-7 thereof. As to whether or not these treasury bonds were subjected to 20% final tax bY_ the Bureau of Treasury, a letter

certificate was issued by the Deputy Treasurer ofthe Philippines, dated January 15, 2001 6 with attachments, certifying to the fact that the total amount of P246, 132,527.51 was withheld from petitioner's interest income on its investments on treasury bonds for the period January 1, 1998 to December 31, 2000. Likewise, we consider this enough proof of the withholding by the Bureau of Treasury of the 20% final tax on the subject interest mcome.

Having dispensed with the preliminary issues, we will now delve on the first issue of whether or not the interest income derived by petitioner from its investment on long- term treasury bonds should be included in its gross inco117e. Petitioner maintains that the interest income it derived from its investments in long- term treasury bonds is exempt from income tax pursuant to Section 32(B)(7)(g) which partly provides, viz:

SEC. 32. Gross Income.-

XXX

XXX

XXX

(B) Exclusions from Gross Income. -The following items shall not be included in gross income and shall be exempt from taxation under this Title:

XXX

(7) Miscellaneous Items. -

XXX

XXX

XXX

XXX

~ ::xx

(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains realized from the sale or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years.

Corollary thereto, the BIR issued BIR Ruling No. 166-99 on October 25, 1999 which provided that interest income, yield or gain derived from bonds, debentures or

certificates of indebtedness as deposit substitutes, which are ordinarily subject to 20% .{ final tax under Section 27(D)(l) of the 1997 Tax Code, should exclude the interest income, yield or gain from the gross income if the bonds, debentures or the certificate of indebtedness have a maturity of more than five years. Conversely, only the income derived on these debt instruments with maturity of more than five years shall be excluded from the gross income.

On January 7, 2000, the BIR issued BIR Ruling No. 016-00 reiterating the previous ruling that if the maturity period of the bonds issued through the Bureau of Treasury will be more than five years, the gains that may be derived therefrom by the bondholders shall accordingly be exempt from the 20% final withholding tax. The BIR stated further that: "Since the law speaks of the exclusion from gross income of all gains derived from long- term investments, it follows that embraced thereunder are income, yield or interest, which are all synonymous with gains, whether discounted or at premium. Thus, the exemption applies to interest/coupon or profit from the principal of such long-term regular or SDT bonds complying with the statutory period." According to the petitioner, the "gains" on the bond transaction contemplated in Section 32(B)(7)(g) must necessarily include "interest" on the long-term bond since the provision also referred to "gains from retirement of bonds, debentures or certificate of indebtedness."

This is not a case of first impression. This matter had already been settled in the case of Nippon Life Insurance Company of the Philippines, Inc. versus Commissioner of Internal Revenue,7 wherein we categorically declared that: "We take the view that "gains" as the term is used therein in Section 32(B)(7)(g) of the Tax Code cannot include interest since it clearly refers to gains from the sale of bonds, debentures and other certificates of indebtedness.

Initially, it must be pointed out that whereas the term "gains" includes "interest" as a general rule, this rule cannot be applied to Section 32(B)(7)(g) of the Tax Code which particularly refers to "Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness.," in its title and "Gains realized from the sale or exchange or retirement of bonds, debentures and other certificate of indebtedness with a maturity of more than five (5) years in its body. Stated otherwise, Section 32(B)(7)(g) of the Tax Code specifically refers to gains from the sale of bonds, debentures and other certificates of indebtedness as contradistinguished from the term "gains" in its general sense, which is synonymous to income."

In this regard, Section 32(A) of the Tax Code defines "gross income" as follows:

Section 32. Gross Income.- (A) General Definition. - Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items: (1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions and similar items;

(2) Gross income derived from the conduct of trade or business or the exercise of profession; (3) Gains derived from dealings in property; ( 4) Interests;

(5) Rents;

( 6) Royalties;

(7) Dividends;

(8) Annuities;

(9) Prizes and winnings;

(1 0) Pensions; and

(11) Partner's distributive share from the net income of the general professional partnership.

From the aforequoted Section 32(A) of the Tax Code, it is clear that there is a distinction between "gains derived from dealings in property" and "interests", which are separately classified as items of gross income. "Gains realized from the sale or exchange or retirement of bonds, debentures and other certificate of indebtedness" would fall under the category of "gains derived from dealings in property". On the other hand, "interests" would include interest from bonds, debentures and other ,certificate of indebtedness. Gain realized from the sale or exchange or retirement of bonds, debentures and other certificate of indebtedness and interest from bonds, debentures and other certificate of indebtedness fall under separate and distinct income categories."

Petitioner further asserts that the existence of provisions in the 1997 Tax Code that refer specifically to the exemption of interest derived from certain long-term deposit or investment by citizens, resident aliens and non-resident aliens engaged in trade or business within the Philippines from income tax [Sections 24(B)(l) and 25(A)(2)] does not in any way negate the exemption provided for corporations, domestic or foreign, of its gains and interest income from the sale or exchange c; retirement of bonds, debentures or other certificates of indebtedness with a maturity of more than five (5) years. Quite the contrary, said provisions reinforce the interpretation that the 1997 Tax Code intended to give incentive as an encouragement for investments in long-term debt securities and for the development of a secondary market. We do not agree.

Sections 24(B)(1) and 25(A)(2) of the Tax Code expressly exempt interest derived from certain long-term deposit or investment (covered by Bangko Sentral ng Pilipinas certificates and with maturity of five years or more j 'oy citizens, resident aliens and nonresident aliens engaged in trade or business within the Philippines from income tax.

However, there is no such exemption from income tax granted to corporations, domestic or foreign on their interest income from investments or deposit of long-term bonds, debentures or other certificate of indebtedness. The pertinent provisions of Section 27 which governs the taxability of domestic corporations are hereunder quoted for easy reference:

SEC. 27. Rates of Income Tax on Domestic Corporations.- (A) In General. - Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation, as defined in Section 22(B) of this Code and taxable under this Title as a corporation, organized in, or existing under the laws of the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).

XXX

XXX

XXX

(D) Rates ofTax on Certain Passive Income.-

(1) Interest from Deposit and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust Funds and Similar Arrangements, and Royalties. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on current bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements received by domestic corporations, and royalties, derived from sources within the Philippines: Provided, however, That interest income derived by a domestic corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-halfpercent (71/2%) of such interest income. Section 28(A) which provides for rates of · ·-:;orne tax on resident foreign corporations basically contains the same provision as Section 27(A) and Section 28(A)(7)(a) more or less embodied the same provision of Section 27(D)(l) above-cited. In other words, there is no law which exempt corporations, domestic or foreign, from

20% final tax on interest mcome from investments on bonds, debentures or other certificates of indebtedness with a maturity of more than five years. A tax cannot be imposed unless it is supported by the clear and express language of a statute; on the other hand, once the tax is unquestionably imposed, a claim of exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken.7a Moreover, it is our considered opinion that if Congress intended to exempt interest from bonds, debentures and other certificates of indebtednes" 'mder Section 32(B)(7)(g) of the Tax Code, it would have done so in clear and specific terms. This goes without saying then that BIR Ruling No. 166-99 and BIR Ruling No. 016-00, which were based on the mistaken beliefthat the term "gains" as used in Section 32(B)(7)(g) of the Tax Code includes interest, are erroneous. In fact, we already pronounced in the case ofNippon earlier cited, that: "Rulings issued by the Commissioner of Internal Revenue command respect and weight. However, such rulings are not conclusive upon the courts and will be ignored if found to be erroneous. Hence, in the case of Philippine Bank of Communications vs. Commissioner of Internal Revenue, G.R. No. 112024, January 28, 1999, our Supreme · Court, in disregarding a Revenue Memorandum Circular issued by the Commissioner of Internal Revenue, held:

It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of more specific and less general interpretations of tax laws) which are issued from time to time by the Commissioner of Internal Revenue. It is widely accepted that the interpretation placed upon a statute by the executive officers, whose duty is to enforce it, is entitled to great respect by the courts.

Nevertheless, such interpretation is not conclusive and will be ignored if judicially found to be erroneous. Thus, courts will not countenance administrative issuances that override, instead of remaining consistent with, the law they seek to apply and implement."

7" Davao Gulf Lumber Corporation vs. Commissioner oflnternal Revenue, 293 SCRA 76.

To recapitulate, there is a plain distinction between interest from bonds and gain from the sale of bonds. As we already held, it is only the "Gains realized from the sale or exchange or retirement of bonds, debentures or other certificate of indebtedness with maturity of more than five (5) years" that are excluded from gross income and thus exempt from income tax under Section 32(B)(7)(g) of the Tax Code. Such gains from sale or exchange or retirement of bonds, debentures or other certificate of indebtedness fall within the general category of "Gains derived from dealings in property". On the other hand, interest from bonds, debentures or other .certificate of indebtedness, fall within the general category of"Interests" under Section 32(A) ofthe Tax Code. The same ruling has been adopted and reiterated in the cases of Malayan Reinsurance Corporation (formerly Eastern General Reinsurance Corp.) versus Commissioner of Internal Revenue,8 Malayan Zurich Insurance Company, Inc. versus Commissioner of Internal Revenue,9 and First Nationwide Assurance Corporation versus Commissioner of In~ernal Revenue, 10 In view of the above discussion, the fourth and last issue is to be resolved against the petitioner. Petitioner is not entitled to a refund and/o.: issuance of tax credit certificate in the amount of P218,741 ,106.34 inasmuch as said interest income derived from its investments in long-term treasury bonds with a maturity of more than five years is not exempt from the 20% final withholding tax. 8 CTA Case No. 6252, July 24,2002.

9 CT A Case No. 6251, September 30, 2002. 1° CT A Case No. 6253, October 03, 2002.

IN THE LIGHT OF ALL THE FOREGOING, the instant petition for review is hereby DENIED for lack of merit.

I CONCUR:

~a-.

.. ~C?..~/-Q ­ 'fuANITO C. CASTANEDA,~.

Associate Judge

~ ~ .0~ ERNESTO D. ACOSTA

Presiding Judge

CERTIFICATION

I hereby certify that the above decision was reached after due consultation with the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution.

L-.-.c:~ ERNESTO D. ACOSTA

Presiding Judge