CIR (petitioner) vs.

SOLIDBANK CORPORATION (respondent)

Panganiban, J. November 23, 2003 GR No. 148191
Doctrine Concept of withholding tax – In a withholding tax system, the payee is the taxpayer or the person on whom the tax is imposed
while the payor is a separate entity and acts as no more than an agent of the government for the collection of the tax in order to
ensure its payment.
Summary Solidbank filed a request for a tax refund or credit alleging overpayment in its gross receipts tax for 1995. It argued that that the 20%
FWT on a bank’s interest income should not form part of the gross receipts for the purposes of computing the GRT. The CTA and
CA ordered petitioner to refund the overpaid GRT.

HELD: The 20% FWT forms part of the taxable gross receipts in computing the GRT. The earnings of banks from deposits are
subject to 20% FWT which is withheld at the the source. Thus, not actually and physically received by the banks because it is
directly paid to the government by the entities from which the banks derived their income. In addition, the banks are also subject to
the 5% GRT which is imposed on their gross receipts, including the passive income. Since the 20% is constructively received and
forms part of their gross receipts or earnings, it follow that it is also subject to the 5% GRT. After all, the amount withheld is paid to
the government on their behalf, in satisfaction of their withholding taxes. That they do not actually receive the amount does not alter
the fact that it is remitted for their benefit in satisfaction of their tax obligations.

Stated otherwise, the fact is that if there were no withholding tax systems in place, the 20% passive income would actually be paid to
the banks and then remitted by them to the government in payment of their income tax. The institution of the withholding tax system
does not alter the fact that the 20% constitutes part of their actual earning, except that it is paid directly to the government.
Facts  Solidbank filed its Quarterly Percentage Tax Returns reflecting the gross receipts (pertaining to 5% gross receipts tax rate
or GRT) in the amount of P1,474,691.44 with corresponding gross receipts tax payments in the sum of P73,734,584.60
 Respondent alleges that the gross receipts included P350,807,875.15 representing the gross receipts from passive income
which was already subjected to the 20% withholding tax. Further, it claims that CTA already ruled in Asia Bank
Corporation vs CIR, that the 20% FWT on a bank’s interest income should not form part of its taxable gross receipts for
purposes of computing the gross receipts tax.
 Therefore, it filed with the BIR a letter request for the refund or issuance of a tax credit certificate in the amount of
P3,508,078.75 representing the allegedly overpaid gross receipts tax for the year 1995. It also filed on the same day, a
petition for review with the CTA in order to toll the running of the 2-year prescriptive period to judicially claim the refund.
 CTA – ordered petitioner to refund the reduced amount of P1,555,749.65 as overpaid GRT for 1995. It held that the 20%
FWT on a bank’s interest income should not form part of its taxable gross receipts for purposes of computing the gross
receipts.
 CA – 20% FWT on bank’s interest income did not form part of the taxable gross receipts in computing the 5% GRT
because the FWT was not actually received by the bank but was directly remitted to the government.
Ratio/Issues
I. WHETHER THE 20% FWT FORMS PART OF THE TAXABLE GROSS RECEIPTS – YES

A. The FWT and the GRT: two different taxes

CIR: although the 20% FWT on respondent’s interest income was not actually received by respondent because it was remitted
directly to the government, the fact that the amount redounded to the benefit of the bank makes it part of the taxable gross income
receipts in computing the 5% GRT.
(1) The Court agrees!
(2) The 5% GRT is imposed by Sec 119 (now Sec 121) of the Tax Code. It is included under “Title V. Other Percentage Taxes”
and is not subject to withholding. Banks and non-bank financial intermediaries are liable to file quarterly returns on the
amount of the gross receipts and pay corresponding taxes within 20 days.
(3) The 2% FWT, on the other hand, falls under Sec 24 under “Title II. Tax on Income”. It is a tax on passive income, deducted
and withheld at the source by the payor-corporation and/or person as withholding agent.
(4) Two types of taxes are thus, involved:
a. Percentage tax – national lax measured by a certain percentage of the gross selling price or gross value in money of
goods sold, bartered or imported; or of the gross receipts or earnings derived by any person engaged in the sale of
services. Not subject to withholding tax
b. Income tax – national tax imposed on the net or the gross income realized under the taxable year. Subject to withholding
tax.
(5) In a withholding tax system, the payee is the taxpayer or the person on whom the tax is imposed while the payor is a
separate entity and acts as no more than an agent of the government for the collection of the tax in order to ensure its
payment. The amount that is used to settle the tax liability is deemed sourced from the proceeds constitutive of the tax base.
These proceeds are either actual or constructive.
(6) Both parties agree that there is no actual receipt by the bank of the amount withheld. What needs to be determined is whether
there is constructive receipt.

B. Constructive receipt vs. actual receipt

(1) Under Art 531 of the Civil Code, the acquisition of the right of possession is through the proper acts and legal formalities
established. Furthermore, Art 532 states that possession by any person without any power whatsoever shall also be
considered as acquired when ratified by the person in whose name the act of possession is executed.
(2) The court held that the withholding process is one such act. In our withholding tax system, possession is acquired by the
payor as the withholding agent of the government because the taxpayer ratifies the very act of possession for the
government.
(3) Thus, there is constructive receipt. The process of bookkeeping and accounting for interest on deposits and yields on
 deposit substitutes that are subjected to FWT are, for legal purposes, tantamount to delivery, receipt, or remittance. There
being constructive receipt, the income is included as part of the tax base upon which the GRT is imposed.

C. RR 12-80 superseded by RR 17-84

(1) Section 4(e) of RR 12-80 provides that only items of income actually received, as opposed to their mere accrual, shall be
included in the tax base for computing the GRT while Section 7(c) of RR 17-84 makes no such distinction and provides that
all interests earned shall be included in the computation of the GRT.
(2) Sec 4(e) is impliedly repealed since the provision was not restated in RR 17-84.
(3) Accrual (referred in RR 12-80) should not be confused with the concept of constructive possession of receipt. Petitioner
correctly points out that income that is merely accrued (earned but not yet received) does not form part of the taxable gross
receipts; income that has been received, although constructively, is included.

D. Manila Jockey club case is inapplicable

(1) In CIR vs Manila Jockey Club, the court held that “gross receipts” shall not include money, which although delivered, has
been especially earmarked by law or regulation for some person other than the taxpayer.
(2) Earmarking is not the same as withholding. Amounts earmarked do not form part of the gross receipts because, although
delivered, these are by law or regulation reserved for some other person other than the taxpayer. On the other hand, amounts
withheld form part of the gross receipts because these are in constructive possession of the taxpayer and not subject to any
reservation; the withholding agent merely a conduit in the collection process. Thus, the interest income constructively
received shall still be included in the tax base for computing the GRT
(3) In the Manila Jockey Club case, the club had to deliver to the Board on Races, horse owners and jockeys the amounts that
never belonged to the race track. In this case, however, the interest income that had been withheld for the government
became the property of the financial institutions upon their constructive possession. The money belonged to the taxpayer.
(4) The government, subsequently, becomes the owner of the money when the financial institutions pay the FWT to extinguish
their obligation to the government. It is the ownership that determines whether interest income forms part of the taxable
gross receipts. Being originally owned by the financial institutions, the FWT should form part of their taxable gross receipts.
(5) Besides, the amounts withheld are in payment of an income tax liability and not of a percentage tax. The FWT is a tax on
passive income while GRT is on business. The withholding of one is not equivalent to the payment of the other.

E. Non-exemption of FWT from GRT: neither unjust not absurd

(1) Tax exemptions should be strictly construed. In this case, respondent has failed to show that its FWT on interest oncome is
exempt from the GRT.
(2) No exemptions are normally allowed when a GRT is imposed. It is precisely designed to maintain simplicity in the tax
collection effort of the government and to assure its steady source of revenue even during economic slump

F. No double taxation
(1) The two taxes involved are different from each other.
(2) Different subject matters. FWT is a passive income while GRT is for the privilege of engaging in the business of banking. A
tax based on receipts is a tax on business rather than on property. Hence, it is an excise tax. Besides, it has already been held
that one can be taxed for engaging in business and further tax for the income derived
(3) Taxing periods are different. The FWT is deducted and withheld as soon as the income is earned and paid after every
calendar quarter. GRT, on the other hand, is neither deducted nor withheld and is paid only after every taxable quarter in
which it is earned.
(4) Different kinds or character. The FWT is an income subject to withholding while the GRT is a percentage tax not subject to
withholding.
Held Petition is GRANTED. The assailed decision and resolution of the CA are hereby REVERSED and SET ASIDE

Prepared by: Yen Mercado [Tax | Cabreros]