G.R. No. 175108 ; February 27, 2013
CHINA BANKING CORPORATION, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.

FACTS

For the four quarters of 1996, China Banking Corporation (petitioner) paid gross receipts tax (GRT) on its income, which included in its computation of taxable gross receipts the 20% final withholding tax on its passive interest income. Relying on a 1996 Court of Tax Appeals (CTA) decision in Asian Bank Corporation v. Commissioner of Internal Revenue, which ruled that such withheld tax should not form part of taxable gross receipts, petitioner filed a claim for refund for overpaid GRT with the Bureau of Internal Revenue and a corresponding Petition for Review with the CTA on April 20, 1998.
The CTA, while agreeing in principle with petitioner’s legal position, dismissed the claim for insufficiency of evidence, as petitioner allegedly failed to prove that the 20% final withholding tax was actually included in its 1996 taxable gross receipts. The Court of Appeals (CA) affirmed the dismissal but on a different legal ground. The CA cited the Supreme Court’s 2003 ruling in China Banking Corporation v. Court of Appeals, which held that the 20% final withholding tax on interest income does form part of a bank’s gross receipts for GRT computation, thereby rejecting the Asian Bank doctrine petitioner relied upon.

ISSUE

Whether the 20% final withholding tax on a bank’s passive interest income should be included in the computation of its taxable gross receipts for gross receipts tax purposes.

RULING

The Supreme Court ruled in the affirmative, denying the petition and affirming the CA. The Court held that the 20% final withholding tax on passive interest income forms part of the bank’s gross receipts subject to GRT. The legal logic is anchored on the nature of gross receipts and the applicable revenue regulations. Gross receipts, as defined, encompass the entire income received by a bank without any deduction. The amount of interest income withheld as final tax is still considered received by the bank; the withholding is merely a method of tax collection where the bank acts as an agent for the government. Consequently, the entire interest income, prior to any withholding, constitutes a receipt that forms part of the tax base.
The Court further clarified that Revenue Regulations No. 17-84, which was applicable, explicitly requires that all interest income, whether actually received or merely accrued, be included in gross receipts for GRT. The exclusion sought by petitioner constitutes a tax exemption, which is construed strictly against the taxpayer and liberally in favor of the state. No clear statutory provision authorizes such a deduction. Therefore, petitioner’s claim for refund, based on the erroneous exclusion of the withheld tax from its gross receipts, was correctly denied.