Gross Receipts Tax: Final Withholding Tax Included in Bank's Tax Base

The Supreme Court has settled a recurring question for banks and non-bank financial institutions: does the 20% final withholding tax (FWT) on passive income form part of the taxable gross receipts for computing the 5% gross receipts tax (GRT)? In Commissioner of Internal Revenue v. Citytrust Investment Phils., Inc. and Asianbank Corporation v. Commissioner of Internal Revenue (G.R. Nos. 139786 and 140857, September 27, 2006), the Court ruled that it does. The decision clarifies how Means

The Court defined The Court noted that this regulation was superseded by Revenue Regulations No. 17-84. Section 7(c) of the later regulation expressly provides that interest income of financial institutions shall be included as part of the tax base for the gross receipts tax, whether actually received or merely accrued. The later regulation impliedly repealed the earlier one.

Practical Takeaways

• Banks must include the 20% FWT on passive income in their gross receipts base when computing the 5% GRT. The full interest income, before withholding, is the taxable base.
• Constructive receipt is sufficient. Income need not be physically received to form part of gross receipts; amounts withheld at source are constructively received by the taxpayer.
• Withholding is not earmarking. Funds withheld for tax purposes belong to the taxpayer before remittance, unlike funds earmarked by law for third parties.
• The GRT and FWT are separate taxes. Paying both does not constitute double taxation because they are different kinds of taxes imposed for different purposes.
• Tax exemptions are strictly construed. Banks cannot claim deductions from gross receipts unless the law clearly provides for them.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.