PHILIPPINE NATIONAL BANK v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY SPECIAL FIRST DIVISION PHILIPPINE NATIONAL BANK, CTA CASE NO. 8268 Petitioner, Members: -versus- UY, Chairperson and FABON-VICTORINO, 11. COMMISSIONER OF INTERNAL Promulgated: REVENUE, Respondent. MAY 0g o16'; 1�.s l. ~"' 57 x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x AMENDED DECISION UY,J.: Before this Court is petitioner's Motion for Reconsideration (With Motion to Reopen Trial), filed on January 20, 2014, with respondent's Comment [To Petitioner's Motion for Reconsideration (with Motion to Reopen Trial) dated 20 January 2014], filed on February 28, 2014, and petitioner's Reply (to Respondent's Comment dated 28 February 2014), filed on March 18, 2014. On May 2, 2014, the Court granted the Motion to Reopen Trial and held in abeyance the resolution of the Motion for Reconsideration. 1 Thereafter, petitioner presented its witness, the Independent Certified Public Accountant (ICPA), Mr. Fredieric B. Landicho,2 and submitted its Supplemental Formal Offer of Evidence3 ~ 1 Resolution, docket, pp. 3725 to 3733. 2 Docket, pp. 3825 to 3826. 3 Docket, pp. 3830 to 3842.

AMENDED DECISION erA Case No. 8268 On February 29, 2016, petitioner's Motion for Reconsideration was submitted for resolution after taking into consideration respondent's Manifestation4 posted on January 12, 2016 and petitioner's Supplemental Memorandum5, filed on February 24, 2016.6 To recall, the Petition for Review filed by petitioner on April 13, 2011 seeking the refund/issuance of tax credit certificate (TCC) in the amount of P209,333,247.65 allegedly representing its excess CWT for taxable year 2008 was denied due to insufficiency of evidence. Hence, petitioner filed the instant Motion for Reconsideration seeking reconsideration of the Court's Decision promulgated on December 10, 2013 (assailed Decision), the dispositive portion of which reads as follows: "WHEREFORE, premises considered, the instant Petition for Review is hereby DENIED due to insufficiency of evidence. SO ORDERED."7 Petitioner anchors its arguments on the following grounds: 1. Petitioner has submitted sufficient and substantial evidence to prove that the income from which the Creditable Withholding Tax (CWT) being claimed were withheld was included as part of the total revenue reported by petitioner in the Audited Financial Statements (AFS) and Annual Income Tax Return (ITR) for the taxable year 2008; 2. Petitioner's proof of its entitlement to a tax refund was consistent with jurisprudential standards for tax refunds, including previous decisions of this Court on exactly the same issues and involving the same petitioner; ~ 4 Docket, pp. 3887 to 3888. 5 Docket, pp. 3900 to 3920. 6 Docket, p. 3921. 7 Docket, p. 3662.

AMENDED DECISION CTA Case No. 8268 3. It is sufficiently shown on petitioner's return that the income payments subjected to withholding tax was declared as part of the gross income; 4. 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 the tax withheld therefrom; and 5. Claims for refund of excess or unutilized CWT are in the nature of civil cases and necessitate only preponderance of evidence. On the other hand, respondent counters as follows: 1. The Court is correct when it points out that petitioner failed to comply with the second and third requisites for a valid claim for refund; 2. CTA Case No. 7444 is not on all fours with the present petition; 3. The absence of any entry in the reflected "Creditable Tax Withheld" column is to the effect, or at the very least, may be taken to mean, that no part of the gross income reported was ever subjected to CWT; 4. Petitioner should not be allowed to reopen trial or move for new trial. According to respondent, the additional verification procedures and documents contemplated by petitioner are not newly discovered evidence that warrants time to be heard by this Court; and 5. Tax refunds, as in the instant case, are in the nature of a claim for exemption and the law is not only construed in strictissimi juris against the taxpayer, but also the pieces of evidence presented entitling a taxpayer to an exemption is strictissimi scrutinized and must be duly proven.8~ 8 Docket, pp. 3698 to 3704.

AMENDED DECISION CTA Case No. 8268 The Court finds petitioner's Motion for Reconsideration partly meritorious. In the recent case of Commissioner of Internal Revenue vs. Team [Philippines] Operations Corporation [formerly Mirant (Phils.) Operations Corporation]/ the Supreme Court reiterated the three essential conditions for the grant of a claim for refund of creditable withholding income tax, to wit: (1) the claim is filed with the Commissioner of Internal Revenue within the two-year period from the date of payment of the tax; (2) it is shown on the return of the recipient that the income payment received was declared as part of the gross income; and (3) 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 the tax withheld therefrom. As regards the first condition, both the administrative and judicial claims were timely filed. The Court already ruled in the assailed Decision that "petitioner's administrative claim filed on January 14, 2011 and the amendment thereto, which was filed on March 29, 2011, as well as the judicial claim filed via Petition for Review on April 13, 2011, were all made within the two-year prescriptive period provided by law"10� The Court likewise found that "the amount of P5,391,883.48, xxx, shall be disallowed outright for petitioner's failure to meet the second and third requisites"11 � Thus, "out of the total claimed creditable withholding taxes of P209,333,247.65, only the amount of P203,941,364.17 (P209,333,247.65 less P5,391,883.48) appears to be a valid claim"12� However, the Court could not verify whether the income payments from which the cwr of P203,941,364.17 were withheld, were included as part of petitioner's total revenue reported in the AFS and Annual ITR for taxable year 2008. Thus, the Petition for Review was denied. Now, in support of petitioner's Motion for Reconsideration and cwr, in order to prove its entitlement to refund of excess petitioner presented additional documentary and testimonial evidence such as the Trial Balance for the year 200813, Reconciliation of Income per f\ 9 G.R. No. 179260, April 2, 2014, citing Banco Filipino Savings and Mortgage Bank v. Court of Appeal~ 548 Phil. 32, 36-37 (2007). 10 Decision, docket, p. 3658. 11 Decision, docket, p. 3659. 12 Decision, docket, p. 3660. 13 Exhibits GGG-1 to GGG-24.

AMENDED DECISION CTA Case No. 8268 Audited Financial Statements against Income per Income Tax Return14, testimony of the new Court-commissioned !CPA, Atty. Fredieric B. Landicho 15 and Supplemental ICPA Report16 dated March , 27, 2015, among others. After careful evaluation of the additional evidence presented, this Court finds that petitioner's income upon which the taxes were withheld were properly reported and formed part of its gross income declared in the Annual ITR for taxable year 2008. The income payments appearing in each CWT certificates (BIR Form No. 2307)17 were checked against the relevant documents such as Transaction Tickets/Input Sheets and Deeds of Sale18� Said income payments appearing in the documents were individually traced to the specific General Ledger19 of the relevant income account to ascertain whether the same were properly posted. The ending balances of the General Ledger of income accounts from which the taxes were withheld correspond with the amounts reported in the Trial Balance20� Thereafter, the income accounts in the Adjusted Trial Balance were compared against the amounts reported in the AFS. Upon comparison, minimal discrepancies appeared due to rounding off, to wit: Revenue Amount per Amount per Difference Interest Income on: Adjusted Trial Audited Financial Loans and Receivables Trading and Investments Securities Balance Statements Interbank Loans Receivable Deposits with Banks and Others p 6 188 697 927.75 p 6 188,698 000.00 p (72.25) 4 078 628 437.54 4 078,628 000.00 437.54 - - - 999 921,206.23 999 921 000.00 206.23 Subtotal 11,267.247,571.52 11,267.247. 000.00 571.52 Non-interest Income 1,766 373 107.08 1 766 373 000.00 107.08 Service Charges Fees, and Commissions 2 049 682 822.31 2 049 683 000.00 (177.69) Foreign Exchange (937 826 582.63) (937,827 000.00) Trading and Investment SecurityGains (losses) 1 537 824 602.80 1 537,825 000.00 417.37 Miscellaneous Income (397.20) 14 Exhibits LLL-1 to LLL-2. ~ 15 Exhibit MMM, docket, pp. 3811 to 3824. 16 Exhibit EEE. 17 Exhibits FF-1 to FF-2647. 18 Exhibits FFF-1a to FF-2647a. 19 Exhibits FFF-1 to FFF-945 (GL of Interest Income) and Exhibit W (GL of PLASE and Rental). 20 Exhibits GGG-1 to GGG-24.

AMENDED DECISION Subtotal 4,416,053,949.56 4,416,054,000.00 (50.44) CTA Case No. 8268 521.08 Page 6 of 10 P15,683,301,521.08 P15,683,301,000.00 p TOTAL As per Reconciliation of Income per Audited Financial Statements against Income per Income Tax Return21, it shows that the income payments upon which the taxes were withheld were properly reported and formed part of the gross income declared in its ITR for the taxable year 2008, We quote: Income per AFS Interest Income SeiVice Charges, Foreign Trading l!t Miscellaneous Total 11 267,247 571.52 Fees and Exchange Investment Income 15 683 301 521.08 ECDU Income oer AES 2 049 682 822.31 Securities Gains 2._38_2 596.508 .Q1 Commissions 801 504 461.BB 1 537 824 602.80 3.085 553 842.85 RBU Income per AFS 8 884 651 063.51 1 248 178,360.43 (937 826 582.63} 2 124 282.19 12 597 747 678.23 Add (deduct) reconciling 1 766 373 107.08 items: (272 839 903.55) (130 893 121.84) 1 535,700 320.61 Accretion of Interest Income 30 221 712.61 from Impaired Loans (272 ""'o on"'.551 (806 933 460.79) Interest Income Subject to 1 736 151 394.47 975 338 456.88 Final Tax (6 911 817.54) 172 818 423.40 (6 911 817.54) Tax-Exempt Interest Income (2 446 644 445.68) (2 446 644 445.68) Classified as "Other Income" (1 213 806 932.54) (1 213 806 932.54) per ITR, "Service Charges and Commissions" per AFS (172 818 423.40) - Revaluation on Mark to forward (272 839 903.55) Trading Loss classified as "Trading & Investment 806 933 460.79 (806 933 460.79) - Gains" per AFS, 1 316 477 144.41 1 316 477 144.41 "Miscellaneous" per ITR (426 550 311.74) (426 550 311.74) Mark to Market 533 656.72 533 656.72 Non-Taxable Other Income (e.g. Dividends) (3.fifi7.3fi::l_1 Qo;,761 (172.818.423.401 Rnfi. o.,..,. .u:.".79 118 585 316.68 118 585 316.68 5,217 287 867.75 1 563 332 971.07 (2.931.157 293.241 Advance Rental on Deposits - 374 o.,.n '7"'" "'" Realized Gain on SCR 9 666 590 384.99 Collections 1 910 631,089.29 Total Income per 2008 ITR Further, as found by the !CPA in his Report, not all the income payments per CWT certificates were traced to the General Ledger, and it cannot be ascertained whether the same were reported in petitioner's ITR. The findings of the !CPA are summarized as follows: Findings CWT Income Payments a) Summary of Creditable Withholding Taxes p 112,518,775.02 3,155 458,618.86 Supported with Original CWTs, Transaction Tickets/Input Sheets and ~ Deed of Sale dated 2008; With Income reported in 2008 (Annex A ofthe !CPA Report) 21 Exhibits LLL- 1 to LLL-2.

AMENDED DECISION CTA Case No. 8268 b) Summary of Creditable Withholding Taxes Supported with Original CWTs, Transaction Tickets/Input Sheets and Deed of Sale dated 2008; With Loss or No Income recognized in 2008 (Annex B ofthe !CPA Report) 15,875 294.96 264,588 249.33 c) Summary of Creditable Withholding Taxes Supported with Original CWT and Deed ! of Sale dated 2008 with Transaction Tickets/Input Sheets dated outside 2008; With UPASE balances closed to PLASE prior to 2008 which were not claimed in other years (Annex C ofthe /CPA Report) 4,206 511.32 701108,522.00 d) Summary of Creditable Withholding Taxes Supported with Original CWTs and Transaction Tickets/ Input Sheets dated 2008 with income partly traced to 2008 General Ledger (Annex D of the /CPA Report) d.1 - Traced to General Ledger22 514,367.09 24,317,369.85 d.2 - Not traced to General Ledger 468,561.12 21,658,640.12 e) Summary of Creditable Withholding Taxes Supported with Original CWTs and Deed of Sale dated 2008 and Transaction Tickets/Input Sheets dated 2008; With Income not traceable to 2008 General Ledger (Annex E ofthe /CPA Report) 6,195,150.82 109,686,375.74 f) Summary of Creditable Withholding Taxes Supported with Original CWTs and Deed of Sale dated 2008 but Transaction Tickets/Input Sheets are dated outside 2008; With Income reported outside 2008 which were not claimed in other years (Annex F of the /CPA Report) 49,548,669.03 618,249,255.26 g) Summary of Creditable Withholding Taxes Supported with Original CWTs dated 2008 but Deed of Sale and Transaction Tickets/Input Sheets are dated Outside 2008; with Income reported outside 2008 which were not claimed in other years (Annex G ofthe /CPA Report) 840,855.00 14,014,250.00 h) Summary of Creditable Withholding Taxes Supported with Original CWTs dated 2008 but without Transaction Tickets/Input Sheets or Deed of Sale; Original CWT dated outside 2008; And 12,874,824.90 ~ 246,198,002.56 22 Out of the total withholding taxes of P982,928.21, only the amount of P514,367.09 was traced to the General Ledger [P982,928.21- 514,367.09 = P468,561.12].

AMENDED DECISION erA Case No. 8268 not Supported with Original CWTs (Annex H of the !CPA Report) i) Summary of Creditable Withholding Taxes 1,217,533.39 20,292,223.17 Supported with Original CWTs and Transaction Ticket/Input Sheets dated 441,855.80 14,728,526.22 2008 which were claimed twice 4,630,849.20 146,694 311.27 (Annex I of the !CPA Repp_rf) p 209,333,247.65 p 4,705,994,344.38 j) Summary of Creditable Withholding Taxes Supported with Original CWTs and Transaction Ticket/Input Sheets dated 2008 but pertains to Business Taxes (Annex J of the !CPA Report) k) Summary of Creditable Withholding Taxes With Income not traced since the General Ledger of the Income Account related to the transactions were not provided (Annex K of the !CPA Report) Total Creditable Withhol(iing Taxes -- Considering the above findings together with the submitted documents, schedules and reconciliation, this Court finds the Supplemental ICPA Report in order. Consequently, after excluding items d.2, e, h, i, j and k abovementioned, only the CWT in the amount of P183,504,472.42 which are duly supported by certificates and of which the related income payments of P4,146,736,265.30 were traced to General Ledger and thereafter reported in the Audited FS and Annual ITR for taxable year 2008 shall be refunded, to wit: Findings CWT Income Payments a) Summary of Creditable Withholding Taxes supported with Original CWTs, Transaction Tickets/Input Sheets and Deed of Sale dated 2008; With Income reported in 2008 (Annex A of the !CPA Report) p 112,518,775.02 p 3,155,458,618.86 b) Summary of Creditable Withholding Taxes supported with Original CWTs, Transaction Tickets/Input Sheets and Deed of Sale dated 2008; With Loss or No Income recognized in 2008 (Annex 8 of the !CPA Repp_rf) 15J875,294.96 264,588,249.33 c) Summary of Creditable Withholding Taxes supported with Original CWT and Deed of Sale dated 2008 with Transaction Tickets/Input Sheets dated outside 2008; With UPASE balances closed to PLASE prior to 2008 4,206,511.32 ~ 70,108,522.00

AMENDED DECISION CTA Case No. 8268 which were not claimed in other years I (Annex C of the !CPA Reporf) 514,367.09 24,317,369.85 d) Summary of Creditable Withholding I Taxes supported with Original CWTs and Transaction Tickets/ Input Sheets 49 548,669.03 618/249,255.26 dated 2008 with income partly traced to 2008 General Ledger 840,855.00 14,014,250.00 (Annex D of the !CPA Reporf) p 183,504,472.42 p 4,146,736,265.30 -Traced to General Ledger e) Summary of Creditable Withholding Taxes supported with Original CWTs and Deed of Sale dated 2008 but Transaction Tickets/Input Sheets are dated outside 2008; With Income reported outside 2008 which were not claimed in other years (Annex F of the !CPA Repo_rf) f) Summary of Creditable Withholding Taxes supported with Original CWTs dated 2008 but Deed of Sale and Transaction Tickets/Input Sheets are dated Outside 2008; with Income reported outside 2008 which were not claimed in other years (Annex G of the !CPA Reporf) Total WHEREFORE, premises considered, petitioner's Motion for Reconsideration is PARTIALLY GRANTED. Accordingly, respondent Commissioner of Internal Revenue is hereby ORDERED TO REFUND or TO ISSUE A TAX CREDIT CERTIFICATE in favor of petitioner Philippine National Bank the reduced amount of ONE HUNDRED EIGHTY-THREE MILLION FIVE HUNDRED FOUR THOUSAND FOUR HUNDRED SEVENTY-TWO AND 42/100 (P183,504,472.42), representing petitioner's excess creditable withholding taxes (CWT) for taxable year 2008. SO ORDERED. ... EAsRs:Lc~~s.tUicYe I CONCUR: . 'ABON-VICTORINO

AMENDED DECISION CTA Case No. 8268 ATTESTATION I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. ERLI~.UY Chairperson CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairperson's Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court. ~--k c.Qd--a-A~ SL fOANITO C. CASTANE6"A, JR. Acting Presiding Justice