CTA Case No. 3171 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY CHINA BANKING CORPORATION, C.T.A. Case No . 3 171 Petitioner, - versus - COMMISSIONER OF INTERNAL REVENUB , Respondent. DECI S I 0 N Thi s cas e is a claim for refund in the amo un t of ~292,230.99 allegedly "representing the excess remittan ce or overpayment of the 35% transactio n tax on the inte ests from preterm inated promissory notes"(see Prayer, Petition for Review, p.3) file d on Novembe r 27, 1980. Petitioner is a commercial banking corporation duly organized and existing in accordance with the . laws of the Philippines. J During the period between October 28, 1978 and September 12, 1980, in the ord inary course o f banking business, petitioner issued seve r al pro missory notes/commercial papers in the pri ma ry market as money market instruments a ga i nst place ments to fall due on their respective mat ur i ty dates. 1054

-- 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 amou nt 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 Prior, however, to their maturity dates, the money market placeme nts for which the promissory notes were issued were withdrawn in full and the said promissory not es were preterminated likewise on different d a tes so that the total interests paid thereon amou nted only to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 ent itled 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 ssio ner of lnternal Revenue, L-61632 Aug. 16, 1983, 124 SCRA 121, the High Co urt said thusly: As correctly ruled by the respondent Court of Tax Appeals, Accordingly, we need not and do not think it necessary to di scu ss 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

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% transa ct 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 instit utions 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 st atute 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 Intern al Revenue , CTA Case No. 3019, March 27, 1981) The petit ioner of the above mentioned case e ven furt h er ar gued that th e 35% tr ansac 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 . Ag ain, we agree with the Solicitor General that the legislative b ody must have realized later th at the subject tax was inappropriately included among the taxes on business becau se, Sectio n 210 of th e Tax Code has been repea led by Presidential Dec ree No. 1739 wh ich now imposes a tax of 2 0% 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 mar ket 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 sprude nce, this cas e s h ould 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 Corporat io n, (December 2, 1991, 204 SCRA 377) wherein the Sup re 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 Co urt, through its eminent Justice Feliciano. XXX XXX XXX "2. The question of the capacity of P&G - Phil. to bring the claim for refund has substantive dimensions as well which, as wil l be seen bel ow , a lso ultimately rel te to fairness. Under Section 306 of the NIRC , a claim for r efund or tax credit filed with the Commissioner of Internal Revenue is essent ial for maintenance of a suit for re covery of taxes allegedly erroneously or illegally assessed or collected:

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 suc h s uit or proceedi ng shall be b eg un af er he expiration of two years fr om 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 Com mi ssioner may: XXX XXX XXX ( 3 ) ere or ref und taxes erron 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 o r 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

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 g ent 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 he 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" has 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 sta tutorily made "liable for tax" as not "sub ject to tax." By any reasonable standard, such a pe rson should be regarded as a p arty in interest, or as a p erso n having suffic ient legal interest, to bring a suit for refund of taxes he believe~ were illegaly collected from him. In Philippine Guaranty Com pany, 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 constit uted 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 becaus e under Sect ion 53(c) he i s held personally liable tor the tax he is duty bound to rV"ithhold; whereas the Comm issio ne r and his deputies are not made liable by law." ( t lies s upplied) If, as pointed out i n Philippine Guar :1 n t y, t h e wit hh o lding age nt is also an ~e nt~-o~---t~h~e~- owner of the _________ ~i~~deEd~ with respect to the filing of -th.e ne cess ar income ta x ret u rn and with res_p~c:_;-~_!:2-___ac_!: ual ayment of th e ta x to _!:l1e___9overnment, s uch aut hority may be held to include the -au-th-o-ri t ile a claim for refund and ~~ bring an action for recovery of such ) claim. Th' s implied authori ty is 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 c kholder and herefore, a t all times, under t he effective contro l ot such parent - stockholder. In the c i rcu mstanc.es of this case, i se ems particu larly 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, ther e 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 n d to mi t the p o ceeds of the r e fund, or to apply t he tax credit to some Phi lippi ne tax ob lig a tion 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-P hil . is directly and

DE CISI ON - C.T . A. CAS E NO. 3 1 71 - 9 �- ~rso na l ly l i a b l e t o th e Go v e r nm e nt f or tl e t a x e s a nd a ny d e f i c i e n cy as ses s me nt s t o _!?e __~_! l~c ted 1 the Govern me nt is not J-esr_rt l_y___l i a b l e fsr a re fund s im pl y be c a us e i t did n o t de mand a wr i tte n co n fir mation 2.!__P&Q-- Ph il. 's_ .i!ll_Pl ~ ~d --~~th or i t fr o.!!!_ _the ~~y __b eg i n n ing. A so vereign governme nt sho u ld act honorably and fa irly at all __} m8__�__1 e v en vi .s~- vis ..J:..._a~p_aye r s . i'l e be . i P.VP. r~nd l'lt1 hol�l t h at 1 under t he irc umsta n c s of his ca s e, P&G- Phil . s prop~rly regardPd RS a ut ax p a yerH wit h i t h e meaning of Sectio n 30 9 , NIRC 1 and as i mpliertly aut h o ized to file the claim for ref11n a nd t he s uit o recover such claim. ( Un d rs(!ori n g sup p l ied) F 1rt h er more , Peti t ioner h as 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 nte re s t were earned and t he correspondi ng with h o ]dj n g ta xes were pa i d t o the Bureau of I n ter n a l Reve n ue. However , this Cour t notices that s e veral 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 mo u n t of Pl 1,8 90.37 . Co n si d eri n g , that t h e ins ant Pet i i o n for Re v iew was Ei ed on Nove mb er 27, 1 980 , 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 Sect ion 2 3 0) of t h e N a ti o n~l tnternal Revenu~ ode. The r ef un dable rtmo u nt is he r e by reco m e rt s f olln wst 1062

DEC!SION - C.T.A. CAS E NO. 3171 - 10 - Total Interest Reported P3,371,264.88 P1,179,942.1l 351 Transaction rax Remitted 2,536,319.19 887,711.72 ~ess : Actua l Interest Pai d 35% Transaction Tax Due p 834,945.69 292,230.99 11,890. 37 Differen ce Less: Amo unt Prescribed p 280,340 .62 Refundable Amount WHEREFORE , in all the foregoing , the Respondent is her eby ORDE RED to REFUND the amo unt of P280, 340.62 to h e 'tion er . SO ORDERED. Quezon City, Met o Mani l a, Novembe r 8, 1993 ~Q-~ ERNES TO D. ACOS TA Pre siding Judge WE CONCUR: ~iat~ ;~~=: _, '//R7:~~o-N�;'0.1)D'-EJ~~EY~I' / Associate Judge I / I I {_,

DECISION - C.T.A . CASE NO. 3171 - 11 - CERT I F I CAT 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. ~Q~~ ERNESTO D. ACOSTA Presid i ng Judge Court of Tax Appeals /amf