G.R. No. 107434 October 10, 1997
CITIBANK, N.A., petitioner, vs. COURT OF APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

FACTS

Citibank N.A., Philippine Branch, a foreign corporation doing business in the Philippines, had tenants who withheld and paid to the Bureau of Internal Revenue (BIR) a 5% tax on rental payments for 1979 and 1980, pursuant to the Expanded Withholding Tax Regulations. The total amounts withheld were P270,160.56 for 1979 and P298,829.29 for 1980. Citibank filed its corporate income tax returns for 1979 and 1980, showing net losses of P74,854,916.00 and P77,071,790.00, respectively. Consequently, it had no income tax liability for those years and did not utilize the withheld amounts as tax credits. On October 31, 1981, Citibank filed a claim for refund of the total P568,989.85 withheld. The Court of Tax Appeals granted the refund. The Commissioner of Internal Revenue appealed to the Court of Appeals, which reversed the CTA decision, ruling that the taxes were not illegally or erroneously collected since they were withheld in accordance with the law. Citibank elevated the case to the Supreme Court via a petition for review on certiorari.

ISSUE

The main issue is whether a lessor is entitled to a refund of the 5% creditable withholding tax on rental income after it is determined, based on its annual income tax return, that it had no income tax liability for the taxable year due to a net loss.

RULING

The Supreme Court granted the petition, reversed the Court of Appeals decision, and reinstated the decision of the Court of Tax Appeals. The Court held that the prescriptive period for claiming a refund of creditable withholding tax begins to run from the filing of the final adjusted income tax return, not from the date the tax was withheld. The legality or correctness of the withholding is determined at the end of the taxable year upon filing the final adjustment return. Since Citibank’s annual returns for 1979 and 1980 showed net losses and no tax due, the withheld taxes, which were in the nature of advance payments, became erroneously collected. The Court emphasized that the withholding tax system is a method of collecting income tax in advance; if the annual return shows no tax liability, the government has no right to retain the taxes withheld. The claim for refund was seasonably filed within two years from the filing of the final adjustment returns. The principle of solutio indebiti applies, as the BIR received payments which Citibank had no obligation to pay.