G.R. Nos. 240163 & 240168-69. December 01, 2021
DEPARTMENT OF FINANCE (DOF), REPRESENTED BY ITS SECRETARY AND THE BUREAU OF INTERNAL REVENUE (BIR) REPRESENTED BY ITS COMMISSIONER, PETITIONER, VS. ASIA UNITED BANK, BDO UNIBANK, INC., BANK OF AMERICA, BANK OF COMMERCE, BDO PRIVATE BANK, INC., CITIBANK, N.A., PHILIPPINES CHINA BANKING CORPORATION, CHINATRUST (PHILS.) COMMERCIAL BANK CORPORATION, DEUTSCHE BANK AG, MANILA BRANCH, EASTWEST BANKING CORPORATION, ING BANK N.V., MANILA BRANCH, PHILIPPINE BANK OF COMMUNICATIONS, PHILIPPINE NATIONAL BANK, PHILIPPINE VETERANS BANK, PNB SAVINGS BANK, RIZAL COMMERCIAL BANKING CORPORATION, SECURITY BANK CORPORATION, STANDARD CHARTERED BANK, PHILIPPINE BRANCH, UNITED COCONUT PLANTERS BANK, HONGKONG SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE BRANCHES, HSBC SAVINGS BANK (PHILIPPINES), INC., KOREA EXCHANGE BANK, MANILA BRANCH, JPMORGAN CHASE BANK, N.A., PHILIPPINE BRANCH, UNITED OVERSEAS BANK PHILIPPINES, LAND BANK OF THE PHILIPPINES, DEVELOPMENT BANK OF THE PHILIPPINES, BANK OF THE PHILIPPINE ISLANDS, BPI DIRECT SAVINGS BANK, METROPOLITAN BANK & TRUST COMPANY, UNIONBANK OF THE PHILIPPINES, AND BDO CAPITAL AND INVESTMENT CORPORATION, RESPONDENTS.

FACTS

On March 15, 2011, the Department of Finance (DOF), through the Secretary of Finance, issued Revenue Regulations No. (RR) 4-2011, prescribing rules for the “proper allocation of costs and expenses amongst income earnings of banks and other financial institutions for income tax reporting purposes.” The RR mandated that a bank may deduct only those costs and expenses attributable to its Regular Banking Unit (RBU) operations to arrive at taxable income subject to regular income tax. Costs or expenses related to its Foreign Currency Deposit Unit (FCDU)/Expanded Foreign Currency Deposit Unit (EFCDU) or Offshore Banking Unit (OBU) operations were not allowed as deductions from the RBU’s taxable income. The allocation method required specific identification of expenses to a particular unit, and for common expenses, allocation based on the percentage share of a unit’s gross income to the total gross income (including income subject to regular tax, final tax, and exempt income).
Multiple respondent banks filed petitions for declaratory relief with the Regional Trial Court (RTC) of Makati, assailing RR 4-2011. They argued, among other grounds, that the RR was issued without basis in the Tax Code, encroaching on legislative power; that it unduly expanded the allocation rules under Section 50 of the Tax Code; that it contravened Section 43 allowing taxpayers to use their chosen accounting method; that it unduly limited their right to claim deductions; and that it was issued without prior consultation.
The RTC granted the petitions, declared RR 4-2011 null and void for being issued beyond the authority of the Secretary of Finance and the Commissioner of Internal Revenue, and made permanent the preliminary injunctions it had issued. The DOF and BIR filed the present Petition for Review on Certiorari.

ISSUE

Whether Revenue Regulations No. 4-2011 is a valid exercise of the rule-making power of the Secretary of Finance and the Commissioner of Internal Revenue.

RULING

No. The Supreme Court affirmed the RTC’s decision, declaring RR 4-2011 null and void. The Court held that the regulation was issued in excess of the rule-making authority granted to the Secretary of Finance and the Commissioner of Internal Revenue under the National Internal Revenue Code (NIRC). The power to promulgate revenue regulations is limited to implementing the provisions of the Tax Code and cannot amend, expand, or limit its application. RR 4-2011 effectively amended the Tax Code by imposing a mandatory and exclusive method for allocating expenses between RBUs and FCDU/EFCDU/OBUs, thereby restricting the banks’ right to claim deductions for ordinary and necessary business expenses as expressly allowed under Section 34(A) of the NIRC. The regulation created a distinction not found in the law by treating banks with multiple units differently from other taxpayers with multiple income streams, imposing a burden not required by the statute. Since the Tax Code does not provide a specific allocation method for such expenses, the administrative issuance cannot supply that deficiency, as doing so would constitute an impermissible exercise of legislative power.