PHILIPPINE NATIONAL BANK, PETITIONER, VS. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Philippine National Bank versus Commissioner of Internal Revenue

The Case

This is a claim for refund of taxes erroneously paid, brought by Philippine National Bank against the Commissioner of Internal Revenue. The bank, acting as withholding agent, withheld and remitted creditable withholding taxes on a foreclosure sale at the wrong rate, and it now asks to recover the excess. The case matters because it settles a recurring evidentiary question in tax refund litigation: what must a withholding agent prove to recover excess creditable withholding taxes, and whether the Certificate of Creditable Tax Withheld at Source, known as BIR Form Number 2307, is the only competent proof of the facts a refund claimant must establish.

Procedural History

The bank first filed an administrative claim for refund with the Bureau of Internal Revenue, and then a petition for review before the Court of Tax Appeals. A second claim, for the surcharges, penalties and interests, was likewise brought to the tax court, and the two cases were consolidated. The tax court's Special First Division ordered the Commissioner to refund the surcharges, penalties and interests, but denied the claim for excess creditable withholding taxes for insufficiency of evidence, even while agreeing that the correct rate was five percent and not six percent. The bank moved for reconsideration and attached the borrower's income tax return, but the motion was denied. The bank then appealed to the Court of Tax Appeals En Banc, which affirmed the denial. After its motion for reconsideration was denied, the bank elevated the matter to the Supreme Court by petition for review on certiorari under Rule 45.

Facts

Gotesco Tyan Ming Development, Incorporated, a corporation engaged in the real estate business, obtained a syndicated loan from the bank and three other banks, securing it with a mortgage over a six hectare commercial complex. Gotesco defaulted, and the bank foreclosed the property through a notarial sale in July 1999. A certificate of sale was issued in favor of the bank, subject to the debtor's right of redemption, and the certificate was inscribed with the Register of Deeds in November 1999.

Gotesco then sued to annul the foreclosure and obtained a temporary restraining order and later a writ of preliminary injunction from the trial court. The bank went to the Court of Appeals, which set aside the injunction, and that ruling became final. Preparing to consolidate its ownership, the bank paid documentary stamp tax and withheld and remitted withholding taxes equivalent to six percent of the bid price, amounting to more than seventy four million pesos. To secure the certificate authorizing registration, the bank also paid surcharges, interests and penalties of more than seventy seven million pesos.

Believing that the six percent rate was wrong, the bank claimed that the correct creditable withholding tax rate on the sale of an ordinary asset was five percent, since Gotesco was primarily engaged in real estate. The difference came to twelve million four hundred thousand and four pesos and seventy one centavos, which the bank sought to recover. The tax court agreed on the rate but denied the refund, holding that the bank had not shown that Gotesco did not use the withheld taxes to settle its own liabilities. On reconsideration, the bank submitted Gotesco's income tax return and schedule of prepaid tax, but the tax court still denied the claim, saying the bank should have presented the BIR Form Number 2307 issued to Gotesco.

Issues

• Whether or not the bank is entitled to the refund of creditable withholding taxes erroneously paid to the Bureau of Internal Revenue.
• Whether or not BIR Form Number 2307 is indispensable, or may be dispensed with, to prove that the claimed creditable withholding tax was not utilized by the taxpayer.

Applicable Provisions

Section 2.58.3 of Revenue Regulations Number 2-98, as amended, provides:

That the fact of withholding is established by a copy of a statement duly issued by the payor (withholding agent) to the payee showing the amount paid and the amount of tax withheld therefrom.

This provision fixes the office of BIR Form Number 2307: it proves only the fact of withholding, and nothing more.

Ruling

The Court granted the petition. On the first issue, it held that the bank presented sufficient evidence of entitlement to the refund. The Court reasoned that Gotesco's audited financial statements for the year 2003 still carried the foreclosed complex in its property and equipment account, showing that Gotesco refused to recognize the foreclosure sale, and therefore refused to recognize, claim, or use the creditable withholding tax due on that sale. Gotesco's income tax return and schedule of prepaid tax itemized its tax credits at six million fourteen thousand four hundred thirty three pesos, drawn from rental payments of tenants, not from the foreclosure sale. Its former accountant testified that the amount subject of the refund was never included in those tax credits. The withholding tax remittance returns likewise showed that the seventy four million pesos was withheld and paid by the bank.

On the second issue, the Court held that BIR Form Number 2307 is not the only evidence of non-utilization. Its probative value is confined to establishing the fact of withholding, and there is nothing in it that establishes either utilization or non-utilization. Since the bank had already presented the withholding tax remittance returns containing the same key information, requiring the certificate would be a superfluity of little or no value. The Court declared that there is no basis in law or jurisprudence to say that BIR Form Number 2307 is the only evidence that may be adduced to prove non-use.

Doctrine

First, a claim for refund of excess and unutilized creditable withholding tax requires proof of three things: that the tax was withheld and remitted, that the withholding and remittance were erroneous, and that the taxpayer did not use the claimed tax credit to settle its liabilities.

Second, BIR Form Number 2307 is not indispensable. Under Section 2.58.3 of Revenue Regulations Number 2-98, its probative value is limited to establishing the fact of withholding, and it proves neither utilization nor non-utilization. It may be supplanted by other competent evidence, such as withholding tax remittance returns, audited financial statements, income tax returns, schedules of prepaid tax, and testimony.

Disposition

The Court granted the petition, reversed the challenged rulings of the Court of Tax Appeals En Banc, and ordered the Commissioner of Internal Revenue to refund to the bank the excess creditable withholding taxes erroneously paid.

Remember This

Memorize this line: BIR Form Number 2307 proves only the fact of withholding, never utilization or non-utilization, and is therefore not the exclusive evidence of a refund claimant's case. Examiners use this case in tax refund litigation and in evidence, testing whether a candidate knows the three elements of a creditable withholding tax refund and whether the certificate is indispensable.