CTA Case No. 5405 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEAL S QUEZON CITY CHINA BANKING CORPORATION. C.T.~. CASl NO. 5405 Pet.l.t.l.ortar, Promulguted. - versus - SEP 30 1998 TH E COMMIS SI ONE R OF INTERNAL /<. REV ENU E . Respoitdent. X DECISION Th is case involvGs a cL.-dm foi� t�efund in t 11 e a 111 o u n t of P1,140,623.82 J'epr ese n ting alleged overpaid gross receipts tax paid for� tl1e second quar�ter of 1994. Petitionet is d universal bai1ki119 i11sLiL d.lOII d L 1 y orgar tJ.zed and Lxisting .1.n acco t�dance W.l.L it the ldW"-' ot the Phi l ippines. On July 20, 1991J, p c. L.t t ion e t' t il l' aggregate amount of Pl2 , 354,933.00 as gross receipts for� its iII C OJTJe derived trom interest on loans invest ments, comrnissiot1s, setv.icc c.,�,cJ LCOllecLiun cllatgeb, foreign exc h a n ge profit and ot h er operating earnings tor t h e s e c o n d q u a r� t e t o f 1 9 9 4 . On Januar�y 30, 1996 , this Court rendered d Oeclsion i11 CTA Case No. 4720 entitled Asian Bank Corporation vs. Commissioner of Internal Revenue wherein it was he l d t h at the 20"'o i inal wi thhold.ing Ln. ort u bdnk' s interest incon1e sho u ld not for m part ot its taxable gross receipts.

DECISION -- C.T.A. CASE NO. 5405 - 2- Tl1us, on tile basis of this decioion, the petitioner�, on July 19, 1996, filed a written claim for refund or tax credit with the respondent in the arT1ount of P1,140,623.82 r�epresenting the 5% gross receipts tax on the 20% fina.L i-Jithholding tax. Likewise, on the very same day, petitioner filed the instant petition for to beat the two-year� prescriptive period provided for under Section 230 of the Tax Code. In l1er Answer�, respondent gave her usual defenses such a s : the c 1 a i111 tot refund is undergCJl!19 administrative investigation; that the gross receipts tax were collected and paid pursuant to law and pertinent BIR regulations etc. It was in her Memorandum that respondent challenged this Cour�t's decision in the case of Asian Bank vs. Commissioner of Internal Revenue, CTA Case No. 4720 which served as the basis of petitioner�' s claim for r�efund. Respondent opines that this Court's rulinq Hl the Asian ~1hlch t:�xcluded the 20% final withholding tax from the bank's gross receipts, is erroneous because t h e t c nn " g r o s s t" e c e i p t s " contemplates all items of income of the petitioner regardless of or not the same were allocated tor a specific purpose. According to respondent, the term g II t"OSS receipts'' means ~~hole, entir�e receipts as opposed to "net r�eceipts".

DECISION - C.T.A. CASE NO. 5405 - 3- The issues that prusented to this Cout't fo t� r e s o 1 u t i o n a r� e : 1. Whether or not the gross receipts for purpose of computing the GRT shall be computed net of the 20% final withholding tax; and ') Whether� or not petitioner� is entitled to the L� diTIOUnt of P1,140,623.82 repr�esenting alleged gross receipts tax paid for the second quarter of 1994. That petitioner is liable for gross receipts tax is not disputed. Tl1e question that is now left for� our d e t e r� nLL n a t i o n i s the basis of the said issue has already been settled in the case cited by petitioner, Asian Bank Corporation vs. Commissioner of Internal Revenue, sup rd. In said case, this Court held: ''We agree \-�Jith the petitioner that tf1e ;~o% final withholding tax on it's interest income should not form part of its taxable gross receipts. Revenue Regulations No. 12-80 dated Nov. 7, 1980 on Taxation of Certain income Derived from Banking Activities provides that the rates of tax to be imposed on the gross teceipts of such financial institution; shall be based on all items ot income actually received, thus: SEC. 4. XXX XXX XXX (e) 6 ross r� e c e i p ts t:ax on bi>'nl\s ,, non .... bank financial in termeo'i aries,, financing companies,, ,;.;�nd o t:her non .... bi.>�n/i financii.d in tennedi �'-' ri es not per forming quasi� banking act:ivit:ies. The t�ates of

DECISICH~ C.T.A. CASE NO. 5405 �- 4 - taxes to be imposed on the gross receipts of such financial institutions shall be based on all items of income actuall y received. Mere accrual shall not be considered, but once payment is received on such accrual or in cases of prepayment, then the amount actually received shall be included in the tax base of suc h financial institutions, as pr-ovided het'(?.Under. (Under�scoring supplied) From the foregoing, it is but logical to infer that the final tax, not having been received by the petitioner but instead went to the coffers of the government, should no longer for m part of its gross receipts for the purpose of computing the GRT. This conclusion is in a c c o r� d wi t h t h e i n t e r p r e t a t i o n o f t h e S u p r� em e Cour�t in the case entitled Collector of Int er n a l Re v e nu e vs . Manila Jockey Club, 108 Phil. 821, as quoted by this Court in disposing of a similar issue i n the case entitled Compania Maritima v s . Ac tin g Commi ss io n e r o f I n te r nal Revenue, CTA Case No. 1426 dated November 14, 1966, thus: In the second place, the highest t t i b u r 1a J. o f t l1 e 1 a n d i n t e r p t' e t e d t 11e t e r� m 11 g r o s s r� e c e i p t t> : t o n1e a r1 a 1 1 receipts of a taxpayer excluding those which have been especially earmarked by law or regulation for the government or some person other than the taxpayer. Thus, it was held: " xx XX � The Government could not have mear1t to tax as gross receipt of the Manila Jockey Club t h e ~% wh ich it directs same Club to turn over to the Board of Races. The latter being a Government institution, thet' e v,Juuld be double tdxation, which t>hould be avoided unless the statute ad mits of no other interpretatiorL In tile same

DECISION -- C.T.A. CASE NO. 5405 - 5 -- manner, the Government could not have intended to consider as gross receipt the portion of the funds which it directed the Club to give, or know the Club would give, to winning horses and Jockeys - admitted 5%. It is true that the law says that out of the tot a 1 wage t' fund ~3 12~% shall be set aside as the 'commission' of the track owners but the law itself takes official notice, and virtually approves or directs payment of the portion that goes to owners of horses as prizes and bonuses of jockeys, which portion is admittedly 5% out of the 12~% commission. As it did not at that time contemplate the applicatlon of 'gross receipts' revenue principle, the law in 111 a k i 11 g a d i s t t' I b u t i o n o f the total wager fur1ds, took no trouble of separating one i te1n fro1T1 the other; and for con v en i en c e , g I' o up e d three items under one common denomination. "Needless to say, gross receipts of the pr�opt'ietor ot the amusement place should not include any money which although delivered to the amusement place has been especially earmarked by law or regulation for some person other than the propr�ietor.'' (The Cumrnissior1et' of Internal Revenue vs. Manila Jockey Club, Inc., G.R. Nos. L-13890 & L-- 13887, June 30, 1960) It is to be noted that, under Section 260 of the Tax Code, a race- track is subject to an amusement tax of 20% of its gross receipts and the term 'gross receipts' embraces all the receipts of the proprietor,

DECISION �- C.T.A. CASE NO. 5405 - 6- le,;see, Ot' oper�ator of tire arrrusement place.'' Not,.Jitllstatlditrg the br�oad and all-embracing definition of the tenn "gross receipts" found in our� amusement tax law, our Supreme Court did not adopt a literal interpretation of the said term in the case of the Manila Jockey Club, I n c � , s u p t� a � " Having resolved the legal issue involved in this case, We now d 1,..;ell on the amount to which petitioner is entitled to refund on the basis of the evidence presented. Based on petitioner's computation of the refundable amount, tile gt'oss receipts ta;~ payments second quarter of 1994 were divided on the basis of the tax rates of 5% ( s h or t t e t' rn) ; 3% ( rn e diu m t e r rn) and 1% (long ter-m) depending on the matur-ity dates of the investment pursuant to Section 119 of the 1994 Tax Code (see Exhibit "F-1") A careful examination of the records of this case r�evual that it is only the GRT payments corresponding to the medium term maturity r-ate of 3% that wer-e supported by sufficient evidence. Petitioner computed its overpaid gross r-eceipts tax on medium ter�m investment as follo~.Js: Gr-oss receipts tax computed .P204,592.17 at gross 81,313.44 Less: gross r-eceipts tax P123,278.73 computed at net Refundable amount

DLCISION C.T.A. CASE NO. 5405 - 7- T 11 e e v i d e t 1c e o f f e r' e d by t h e petitioner� howuver� slrOW' that the refundable GRT based on medium term irrvestmt.nts total P208,711.50, computed as follow~: Kind of Investment 20% Final Rate Amount Exh. Tax Paid of GRT Refundable 3-yr FRTN SER 11 with TFA- H-3-a P6, 925,605.61 3% P207,768.17 P881.0M per RMIC 194-1117 943.33 H-4-a 31,444.30 3% 3-yr FRTN SER 11 with TFA- P208,711.50 P6,957 ,049.91 P4M per me 11146 T 0 T AL We are inclined to the lesser dlllO U 11 t ot P123,278.73 dS computed by tlt8 petitioner it!:> claim for relund corresponding to GRT on rnedium t e nn itrvestmenL<:> Ls lintited to s.uid amount. WHEREFORE. in \dew 0 f the for� ego in g, judgment is J' end ere d or�der�ittg Ute r� e <> p o t rd t� n t to REFUND or� ISSUE a tax credit certificate in t h e r e d u c e J c..~ rn o u t 1 t 0 f P12J,778.73 r~f)rt.' vrLjrlg OVl'lfhtid GRT p aytttt' 11 t�> for second quarter ot 1994. The t'elrtaining amount claimed by p e t i t i o t1e r� i ; DE N I E D f o r� i n s u f f i c i e n c y o f e v i d e 11 c e . SO ORDERED. _/;J,~viA RAMON 0. DE~ A�.�oOClate J ~

DECISION - C.T.A. CASE NO. 5405 -8 WE CONCUR: ERN ES TO D. ACO STA Pr�esJ..ding Judge (Oissent1.ng) AMANCIO Q. SAGA A..,soc..J..ate Judge CERTIFICATION I hereby certify that tl1e abovu decision was reached ...iltcr due c..orrsultatlun witl1 the rnember �s ut the Cuur�t of Tax Appeols in accordancE- with Section 13, Article VIII ot the Constitution. G - (C. C4.-v~ ERNESTO D. ACOSTA Presid1ng Judge

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY CHINA BANKING CORPORATION, C.T.A . CASE NO. 5405 Petitioner , Promulgated: - versus - SEP 30 1998 COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - - DISSENTING OPINION With due respect to the Opinion of the Majority, I hereby express my dissent to the exclusion of the 20% final withholding tax on certain passive income as no longer forming part of the taxable base of the bank's gross receipts for purposes of the 5% gross receipts tax under Section 119 of the Tax Code, as bereft of any legal bases. It is true, however, that all passive gross income of corporations whic h are subject to the final withholding tax at source under Section 50(a) of the Tax Code, as amended by Executive Order No. 37 on July 31' 1986, should no longer form part of the gross income under Section 28(a) of the same Code. Inasmuch as the enumeration of gross income under the aforestated Section of the Tax Code is global in concept, the corporate income tax is computed on the basis of its taxable income

DISSENTING OPINION - C.T.A. CASE NO. 5405 - 2- consisting of pertinent items of gross income specified in the Tax Code less deductions, if any, authorized by such types of income by said Code or other special laws. There is no provision in the Tax Code or any special laws which excludes the 20% final income tax withholding under Section 50(a), as no longer forming part of the gross receipts for purpose of the 5% gro ss receipts tax. On the other hand, Section 8(c) of Revenue Regulations No. 12-80, dated November 7, 1980, as amended by Section 7(c) of Revenue Regulations No. 17-84, dated October 12, 1984 have the same provisions, thus: "If the recipient of the above-mentioned items of income are financial institutions, the same shall be included as part of the tax base upon which the gross receipts tax is imposed." (Underscoring supplied) Clearly, there is no doubt that the 20% final withholding tax is legally includible as part of the gross receipts for purposes of computing the gross receipts tax. The petitioner in the instant case cited the Asian Bank Corporation vs. Commissioner of Internal Revenue, CTA Case No. 4720, dated January 30, 1996, where this Court has upheld the petitioner's contention that the interest income included as part of such gross receipts should be computed minus the 20% final tax already withheld and deducted by various withholding agents for

DISSENTING OPINION - C.T.A. CASE NO. 5405 - 3- the reason that the amount did not go to its funds, hence, was not actually received by them. And the Court approved the petitioner's citation of Section 4 (e) of Revenue Regulations No. 12-80, dated November 7, 1980, thus: "Gross receipts tax on banks, non-bank financial intermediaries, financing companies, and other non-bank financial intermediaries not performing quasi-banking activities. The rates of taxes to be imposed on the gross receipts of such financial institutions shall be based on all items of income actually received. Mere accrual shall not be considered, but once payment is received on such accrual or in cases of overpayment then the amount actually received shall be included in the tax base of such financial institutions, as provided hereunder." This Court concluded that from the aforestated provisions it can logically be inferred that the amount representing the final tax, not having been received by the petitioner but instead went to the coffers of the government, should no longer form part of its gross receipts for purposes of computing the gross receipts tax. Such conclusion in law is legally objectionable for two (2) reasons, to wit: 1) Section 4(e) of Revenue Regulations No. 12-80 is not a computation determinative of the amount of gross receipts as basis of the gross receipts tax under Section 119 of the Tax Code. Said revenue regulations merely authorize the determination of the amount of gross receipts on the basis of the method of accounting being used by the taxpayer under Section 37 of the Tax Code. Such accounting

DISSENTI NG OPINION - C.T.A. CASE NO. 5405 - 4- met h ods for tax purposes comprise a set of rules for determining when and how to report income and deductions ( Consolidated Mine s , Inc. vs. CTA, L- 18843, August 29, 1974 ). The two principal accounting methods expressly and impliedly recognized by the Tax Code and the Income Tax Regulations are: (a) Cash receipts and disburse me n t method or cas h basis. Income earned by the taxpayer is not included in gross income until received and expenses are not ded ucted until paid within the taxable year; and (b) Accr ual basis. Income is included in gross income when earned, whether received or not, and expenses are allowed as deductions when incurred although not yet paid within the year. 2) That the non-inclusion of the 20% final withholding income tax from t he gross interest inco me for purposes of the gross receipts tax operates as an exemption from tax. Being an exemption from tax, the same must be construed strictly not against the government but against the one who asserts the claim of exemption. Tax exemption can only be given effect when the grant is clear and categorical inas much as taxation is the rule and exemption is the exception, Section 26, Tax Code. The holding therefore in the Asia n Bank Corporation to the effect that the non-inclusion of the 20% final wit h holding income tax from the gross receipts can logically be inferred from the wordings of said Section 4(e) of Revenue Regulations No. 12-80, is misplaced. Tax statutes are to receive a reasonable construction with a view to carrying out their purpose a n d intent ( 51 Am Jur 361 ). It should not be construed as to per mit t h e taxpayer to easily evade t h e payme n t of t h e tax ( Cabon Steel Co. vs. Lewelyn. 251 U.S. 501 ). Thus, the good faith of the taxpayer is not sufficient justification for exemption from the payment of surcharges imposed by law ( Commissioner vs. Royal Interocean Line s and CTA. L- 26506, July 30, 1970 ). A tax statute should be construed to avoid the possibilities of tax evasion ( Lorenzo vs. Posadas, 64 Phils. 353 ) .

DISSENTING OPINION - C.T.A. CASE NO. 5405 - 5- The High Court's decision in the case of Commissioner of Internal Revenue vs. The Manila Jockey Club, Inc. 108 Phils. 821' June 30, 1960, which was reaffirmed by the said Court in the case of Visayan- Cebu Terminal Co., Inc. vs. Commissioner of Internal Revenue, 13 SCRA 357, February 27, 1965 cannot be considered as precedent cases, hence, inapplicable to the two cases decided by this Honorable Court in the cases of Campania Maritima vs. Acting Commissioner of Internal Revenue, CTA Case No. 1426 dated November 14, 1966 and Asian Bank Corporation vs. Commissioner of Internal Revenue, CTA Case No. 4720 dated January 30, 1996, for the following reasons: 1) In the Manila Jockey Club, Inc. case, the Club was authorized to operate horse races in which betting was made through the sale of tickets to the public. The total amount of bets called "wager fund" were distributed pursua n t to Executive Order No. 320 and Republic Act No. 309, as follows: 87~% as dividends to holders of winning tickets 12~% as "commissions" of the Manila Jockey Club, of whic h ~% was assigned to the Board on Races and 5% was distributed as prizes for owners of winning horses and authorized bonus for jockeys. According to the above-mentioned distribution of the "wager fund", the then Collector of Internal Revenue assessed the Club on the whole amount of its "commission"

DISSENTING OPINION - C.T.A. CASE NO. 5405 - 6- of 12~% . But since the Club had already paid the amusement tax based on its 7% share of the "commission", the amount assessable pertains only to the 5~% for the period from November 1946 to October 1950. On various instances, the Club protested the proposed assessments and was sustained by the opinions of the Secretary of Justice rendered on three different occasions (Opinion No. 345, series of 1941; Opinion No. 249, series of 1952 and Opinion No. 340, series of 1955). Notwithstanding the opinions of the Secretary of Justice to the effect that the amount corresponding to the 5~% was held only by the Club in trust for the owners of winning horses and authorized bonuses of jockeys, the then Collector of Internal Revenue demanded payment of amusement taxes for the period November 1946 to October 1950. Said demand letter was timely appealed to the Court of Appeals wherein a unanimous judgment was obtained reversing the Collector's stand on the matter. In the High Court, the position of the Secretary of Justice was sustained thereby upholding the Court of Tax Appeals' decision. Accordingly, gross receipts of the proprietor of the amusement place should not include any money which, although delivered to the amusement place was "especially earmarked" by law or legal rule or regulations for some persons other than the proprietor. Undeniably, they are

DISSENTING OPINION - C.T.A. CASE NO. 5405 - 7- money received by the racing club but they are moneys earmarked by law or regulations for winning horse owners and jockeys and never for a minute become the property of the race track. The same is true in the case of the ~% which the law directs the club to deliver to the Board on Races. The High Court therefore agrees with the stand of the Court of Tax Appeals that such funds representing 5~% of the 12~% "commissions" of the race track do not form part of the gross receipts, hence not subject to the amusement tax of 20%. The above-mentioned decision of the High Court was also applied in the case of Visayan Cebu Terminal Co., Inc. vs. Commissioner of Internal Revenue, 13 SCRA 357, Nos. L-19530 and L-19444, February 27, 1965. The legal issue involved in this case is the interpretation of the management contract entered into by and between the Bureau of Customs and Vi sayan Cebu Terminal Co., Inc. whereby the latter as contractor was appointed the sole manager of the Arrastre Service at the Port of Cebu city. In the said Management Contract, it was further agreed and understood that in consideration of the rights and privileges granted the Contractor for the management of the Arrastre Service, the Bureau of Customs shall receive twenty eight (28%) percent of the total monthly gross income derived from whatever source in connection with the operations of the Arrastre Service, payable within

DISSENTING OPINION - C.T.A. CASE NO. 5405 - 8- ten (10) days of the succeeding month. The main legal issue involved in this case is whether or not the gross receipts corresponding to the 28% of the total gross income of the Service Contractor delivered to the Bureau of Customs within ten (10) days of the following month should form part of the gross receipts subject to 3% contractor's tax under Section 191 of the Tax Code. The Court of Tax Appeals ruled in favor of the petitioner, holding the view that the said 28% payment by the Arrastre Contractor based on its monthly gross income should not form part of the gross receipts subject to 3% contractors tax and that paragraph 23 of the said Management Contract can legally be construed as a "regulation". As the learned trial court has aptly observed: "x x x the government could not have intended to consider as gross receipts the 28% that went to one of its institutions, the Bureau of Customs, and thereby collect percentage tax on it from petitioner. To hold petitioner liable for the payment of percentage tax is unquestionably unjust and not contemplated by Section 191 of the Tax Code." All the above-mentioned decisions of the High Court made specific reference to gross receipts which are especially "earmarked by law or legal rule or regulation" as not forming part of the taxable gross receipts for purposes of the gross receipts tax under the Tax Code.

DISSENTING OPINION - C.T.A. CASE NO. 5405 - 9- For this purpose, it is pertinent to define the word "earmark" as a mark put upon a thing to distinguish it from another. Originally and literally, a mark upon the ear, a mode of marking sheep and other animals. Property is said to be earmarked when it can be identified or distinguished from other property of the same nature. To set apart from others (Black's Law Dictionary, 6th Edition, p. 508). In the case of the Manila Jockey Club, Inc. Executive Order No. 320 and Republic Act No. 309 made the specific "earmarking" for distribution of the total wager fund to different persons other than the proprietor. The same is true in the case of Visayan Cebu Terminal Co., Inc. where the specific earmarking of the 28% of the total monthly gross income to be delivered to the Bureau of Customs by the Contractor was provided in paragraph 23 of the Management Contract. Such specific earmarking of the twenty (20%) percent final income tax as not includible in the gross receipts for purposes of the gross receipts tax was not provided by any law or legal rule or regulations, hence the non - applicability of the above-cited High Court decisions to the Asian Bank Corporation case. This legal observation is also in point in the case of Compania Maritima case where the non-inclusion of the 10% reserve from the total cash collection to avoid claim for refund on freight and

DISSENTING OPINION - C.T.A. CASE NO. 5405 - 10 - passengers tickets not taken is not provided by any law or legal rule or regulations. In the Asian Bank Corporation case, petitioner bank alleges that subjecting the gross receipts to the 20% final withholding income tax and later to the 5% gross receipts tax is not only oppressive and obnoxious but even a confiscatory form of double taxation. Double taxation has been defined "as the taxing of the same item or piece of property twice to the same person, or taxing it as the property of one person and again as the property of another, but this does not include the imposition of different taxes concurrently on the same property or income (e.g. federal and state income taxes), nor the taxation of the same piece of property to different persons when they hold different interests in it or when it represents different values in their hands, as when both the mortgagor and mortgagee of property are taxed in respect to their interests in it, or when a tax is laid upon the profits of the corporation and also upon the dividends paid to its stockholders" (Black's Law Dictionary, 6th Edition, p. 491). This acceptable form of double taxation is reflected in BIR Ruling No. 223 dated November 2, 1989, thus: "The 5% gross receipts tax under Section 120 of the Tax Code is collectible on all finance companies doing business in the Philippines from interests, discounts, and all other items treated as gross income under the

DISSENTING OPINION - C.T.A. CASE NO. 5405 - 11 - Tax Code. Accordingly, your income derived from investing the excess funds in short-term market placements through commercial banks constitutes income hence, subject to the 5% gross receipts tax under said Section. The fact that it has been subjected to the 20% final withholding income tax under Section 50(a) is immaterial. Besides, the withholding tax is imposed under Title II of the Tax Code while the finance tax is provided under Title V thereof." ( BIR Ruling No. 223, November 2, 1989) For as long as the basis for the claim for refund or tax credit certificate is based on the non - inclusion of the amount representing the final withholding income tax under Section 50(a) as part of the gross income subject to gross receipts tax, this dissenting opinion will stand. The fact that petitioner-claimant is able to establish by competent documentary and testimonial evidence is of no moment. For purposes of the amusement tax under Section 260 of the Tax Code, the term 'gross receipts' embraces 'all the receipts' of the proprietor, lessee, or operator of the amusement place. The words 'all the receipts' refer to the total amount of cash received which becomes part of the funds of the taxpayer and does not include any money which has been specially earmarked by any law or legal rule or regulation for some other person other than the proprietor, lessee or operator of the amusement place. Receipts means actually received (Philippine Long Distance Telephone Co. vs. Collector of Internal Revenue, G.R. No. L-3222, January 21, 1952) for itself and not for others, for otherwi se

DISSENTING OPINION - C.T.A. CASE NO. 5405 - 12 - they would not be receipts (Manila Jockey Club, Inc. vs. Collector of Internal Revenue, CTA Case No. 205, April 15, 1958; Jai Alai Corporation of the Philippines vs. Araneta, CTA Case No. 108, July 31, 1956 (Annotated, NIRC by Commissioner Jose Aranas, 1988 Edition, p. 687). IN VIEW OF ALL THE FOREGOING , I hereby recommend for the total denial of the amount claimed for lack of legal bases. ~~ Associate Judge