CIR v. Solidbank Corp – “The 20% Final Witholding Tax (FWT) on the earnings of banks from passive income, withheld at source, is part of their Gross Receipts.”

Solidbank sought tax refund for alleged overpaid taxes. They contend that the 20%

FWT on earnings from their passive income should have been excluded from their gross receipts which was subjected to 5% tax. The CTA ruled in favor of Solidbank and ordered the CIR to refund the taxes. The CA affirmed the CTA and ruled that the 20% FWT should not have been included in the gross receipts of Solidbank because this 20% was not actually received by Solidbank but was instead remitted to the Government.

The Supreme Court reversed the ruling and said that the 20% FWT on passive income forms part of the Gross Receipt of banks. According to the Court, RR 17-84 includes all income in computing the gross receipts. The 20% FWT was constructively1 received by the taxpayer and is therefore considered as part of their gross income. Solidbank contends that RR 12-80 shoud govern. It states that only items actually received, and not merely accrued, should be considered as part of gross receipts. The Court refuted this contention and said that 12-80 has already been superseded by 17-84 which makes no distinction between income actually or constructively received. Moreover, the term “accrued” means “earned but not yet received” and refers to the method of accounting (accrual system) and is irrelevant in this case because payment has already been constructively received.

The SC also stated that the Manila Jockey ruling that gross receipts exclude amounts

received earmarked by law for some other taxpayer is not applicable in this case because earmarking is not the same as withholding. Amounts earmarked are not part of the gross receipts because although received, they are reserved by law to a person other than the taxpayer. Amounts withheld are part of the gross receipts because they are held by the withholding agent as payment by the taxpayer to the Government. (So bale earmark, 3rd person ang may ari nung pera, sa withholding, ang may ari ay si taxpayer tas pinapabayad niya kay agent para kay gov’t.)

Lastly, the SC said that there is no double taxation because (1) the taxes were on

different subject matters: the FWT is tax on the passive income generated from interest and yield deposits (tax on property) while the 5% Gross Receipts tax is tax on the privilege of engaging in the business of banking (tax on business); (2) The taxes are taxed on different periods, the FWT is deducted and withheld as soon as income is earned, and is paid every calendar quarter, while the 5% gross receipts tax is neither deducted or withheld but is paid every after the taxable quarter in which it is earned; (3) the taxes are of different characters, FWT is an income tax subject to withholding while the 5% gross receipts tax is a percentage tax - a national tax measured by a certain percentage of the gross selling price or gross value in money of goods sold, bartered or imported; or of the gross receipts or earnings derived by any person engaged in the sale of services. Percentage taxes are not subject to withholding.

(See 2nd Page for outline of ruling)

1 There is constructive possession according to the Civil Code, when among others, a person without any power acquires possession of a thing and the person (withholding agent in this case) in whose name such possession (bank) was executed ratifies the same

Super Summary: 20% FWT is included because:

1. Gross receipts include income which are either constructively or actually received. Withheld taxes are constructively received by the taxpayer.

2. The amounts cannot be considered as “earmarked” for another person because withheld taxes are part of the income of the taxpayer which the withholding agent collects for the government as payment by the taxpayer.

3. There is no double taxation. The FWT is a tax on income as opposed to the 5% Gross

Receipts tax which is a percentage tax on business.