Commissioner of Internal Revenue v. PLDT Clark Telecom, Inc.

SPECIAL SEVENTH DIVISION [CA-G.R. SP No. 76994. January 19, 2004.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . PLDT CLARK TELECOM, INC. (formerly Clark Telecommunications Company, Inc.) , respondent . D E C I S I O N CRUZ , J p : PLDT Clark Telecom, Inc. (or "respondent"), formerly Clark Telecommunications Company, Inc., is duly registered with the Clark Development Corporation (or "CDC") as a Clark Special Economic Zone (or "CSEZ") enterprise. It is engaged in providing basic and enhanced telecommunications services within CSEZ and between CSEZ and other cities, provinces and municipalities in the Philippines and other countries or territories. As a CSEZ-registered enterprise, respondent is entitled to a preferential tax rate of 5% of gross income earned in lieu of all taxes pursuant to Exec. Order No. 80, in relation to Rep. Act No. 7227, otherwise known as the Bases Conversion and Development Act of 1992. On September 21, 2000, respondent filed a claim with the Bureau of Internal Revenue (or "BIR") Commissioner or ("petitioner") for refund of the sum of P10,655,784.88, representing overpaid or erroneously paid withholding tax on interest income earned from Philippine currency bank deposits with Equitable-Philippine Commercial International Bank (or "EPCIB") for the years 1997 to 2000. As the BIR did not act on the claim for refund even as the two-year prescriptive period for enforcement thereof was about to lapse, respondent filed a petition for review with the Court of Tax Appeals (or "CTA"). It was alleged in the petition that from September 1998 to June 2000, respondent earned interest income from its Philippine currency bank deposits and placements with EPCIB in the total amount of P24,441,407.00, of which the latter withheld a 20% final tax. Respondent claimed that being a CSEZ-registered enterprise enjoying preferential tax privileges, only 5% of its interest income should have been withheld and remitted by EPCIB to the BIR. In particular, respondent averred that the taxes withheld by EPCIB at the regular rate of 20% aggregated P4,888,281.40, whereas the taxes due on its interest income should only be P1,222,070.35 on the basis of the 5% preferential tax rate. Thus, respondent claimed, it is entitled to a tax refund or credit in the amount of P3,666,211.05. In answer, petitioner interposed the defenses that respondent's claim for tax refund or credit is subject to administrative investigation or examination by the BIR; that respondent failed to demonstrate that the tax in question was erroneously or illegally collected; that taxes paid and collected are presumed to have been paid in accordance with law and regulations and, hence, not refundable; that in an action for tax refund or credit, the burden of proof is on the taxpayer to establish its right thereto; that petitioner must show compliance with the provisions of Secs. 204(c) and 229 of the Tax Code, as amended; and that tax exemptions are highly disfavored in law such that he who claims tax exemption must be able to justify his claim or right and that the exemption cannot be established by mere implication but must be clearly expressed. On December 16, 2002, the CTA rendered a decision granting respondent's claim for tax refund or credit, viz. : "WHEREFORE, in view of all the foregoing, the court finds the instant petition meritorious and in accordance with law. Accordingly, respondent is hereby ORDERED to REFUND, or in the alternative, ISSUE A TAX CREDIT CERTIFICATE in favor of the petitioner in the amount of P3,666,211.05 representing overpaid final withholding tax on interest income earned by the latter on Philippine currency bank deposits and placements for the period September 1998 to June 2000. cSTCDA SO ORDERED." In arriving at its decision, the CTA relied on Sec. 6 (f) of Revenue Regulations (or "RR") No. 1-95 dated January 24, 1995 and BIR Ruling No. 149-99 dated September 17, 1999 which pertinently read: "Section 6. Taxes and Fiscal Obligations . xxx xxx xxx f. Interest from any Philippine currency bank deposits and yield or any other monetary benefit from deposit substitutes, and from trust fund and similar arrangements received by a registered enterprise engaged in business within the Secured Area shall be subject to the preferential tax rate. . . ." (RR No. 1-95) xxx xxx xxx "It is clear from the above-cited section that enterprises registered within the secured area of Subic and Clark Special Economic Zones are liable to the preferential tax treatment of 5% of the gross income earned which shall be in lieu of local and national taxes pursuant to Section 12(c) of RA 7227, they are therefore exempt from the final tax of 20% and 7.5% respectively imposed on the amount of interest from currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties from sources within the Philippines and the interest income they will derive from a depository bank under the expanded foreign currency deposit system as prescribed under Section 27(D)(1) of the Tax Code of 1997." (BIR Ruling No. 149-99) Petitioner filed a motion for reconsideration of the CTA decision on the grounds that respondent was not able to substantiate its claim for refund as it failed to submit sufficient proof showing the alleged overpayment of taxes on interest income; and that respondent was not able to establish payment of the tax sought to be refunded. On April 15, 2003, the CTA promulgated a resolution denying petitioner's motion for reconsideration. It explained that while a certificate or statement of taxes withheld issued by the payor to the payee is the best evidence of the withholding of taxes, the following documents presented by respondent in support of its claim adequately established such fact: (i) PCI Bank (Clark and Ayala branches) savings account passbook under the name of respondent; (ii) schedule of overpaid withholding tax on interest income on placements; (iii) confirmation of sale without recourse; (iv) investment savings agreement between petitioner and EPCIB; and (v) EPCIB's transmittal sheets of quarterly remittance return of final income taxes withheld on interest on peso deposit and interest on FCDU. The CTA ratiocinated that those documents, taken together, provide the details necessary to ascertain the amount of interest income earned by respondent, tax withheld, tax rate and other pertinent information. As for the fact of payment, the CTA found that EPCIB's transmittal sheets of quarterly remittance return, etc. established the remittance to the BIR of the taxes withheld on respondent's interest income. According to the CTA, such documents cannot be considered self-serving as they were not prepared by respondent but "by the bank confirming the fact that the taxes withheld from respondent's interest income were brought forward to the coffers of the government." Aggrieved, petitioner appealed to this Court via the instant petition for review arguing that the CTA erred in holding that respondent's interest income arising from Philippine currency bank deposits and other placements with EPCIB are subject to final withholding tax of 5% instead of the regular rate of 20%. Petitioner points out that the interest income of respondent is not related to its registered activity and, therefore, subject to the regular internal revenue tax and cannot be the subject of preferential tax treatment. Petitioner further asserts that the preferential tax rate may only be applied to income derived from respondent's registered or related business activity within the area specified by law. Petitioner likewise posits that RR No. 1-95 and BIR Ruling No. 149-99, upon which the CTA's decision is based, are erroneous interpretations of Rep. Act No. 7227 and, thus, cannot give rise to vested rights in favor of respondent. Moreover, according to petitioner, these erroneous interpretations of the law have already been corrected by the BIR with its issuance of RR No. 20-2002 dated October 14, 2002 clarifying the tax treatment of income earned from registered activities by enterprises registered under the Bases Conversion and Development Act of 1992 and Philippine Economic Zone Act of 1995. Petitioner asserts that RR No. 20-2002 effectively subjected income derived from an unregistered activity of a registered ecozone enterprise to the regular internal revenue taxes and repealed Sec. 6 (f) of RR No. 1-95. Commenting on the petition, respondent maintains that the CTA properly granted its claim for refund since its interest income from bank deposits is subject to the 5% preferential tax rate pursuant to Rep. Act No. 7227, Exec. Order No. 80, Sec. 43 of the Rules and Regulations Implementing the Provisions Relative to the Subic Special Economic and Freeport Zone and the Subic Bay Metropolitan Authority under Rep. Act No. 7227, Sec. 6 (f) of RR No. 1-95 and BIR Ruling No. 149-99. Respondent likewise asserts that its investment in bank savings account deposits and other money market placements is incidental to its purpose and, therefore, the income derived therefrom should be considered as ordinary business income subject to the preferential 5% tax rate. Respondent further points out that under the 2nd paragraph of Sec. 12 (c) of Rep. Act No. 7227, any ambiguity in the law should be construed in favor of the tax exemption privileges of enterprises within the economic zones. Moreover, respondent adds, petitioner cannot question for the first time on appeal the validity of its rulings and regulations. The petition is impressed with merit. Sec. 6 (f) of RR No. 1-95 and BIR Ruling 149-99, upon which the CTA based its challenged decision, has already been superseded by RR No. 20-2002 dated October 14, 2002 which, in part, reads: "SECTION 1. Tax Treatment. Income derived by an enterprise registered with the Subic Bay Metropolitan Authority (SBMA), the Clark Development Authority (CDA), or the Philippine Economic Zone Authority (PEZA) from its registered activity/ies shall be subject to such tax treatment as may be specified in its terms of registration . . . . Nonetheless, whatever the tax treatment of said enterprises with respect to its registered activity/ies, income realized by such registered enterprises that is not related to its registered activity/ies shall be subject to the regular internal revenue taxes, such as the 20% final income tax on interest from Philippine Currency bank deposits and yield or any other monetary benefit from deposit substitutes, and from trust funds and similar arrangements, the 7.5% tax on foreign currency deposits and the 5%/10% capital gains tax or 1/2% stock transaction tax, as the case may be, on the sale of shares of stock. xxx xxx xxx SEC. 2. Repealing Clause. Section 6 (f) of Revenue Regulations No. 1-95 and the provisions of all other internal revenue issuances inconsistent herewith are hereby repealed, modified or amended accordingly . SEC. 3. Effectivity. Except for the second paragraph of Section 1 which is a mere reiteration of the law already enforced, these regulations shall take effect after fifteen (15) days following publication in the Official Gazette or any newspaper of general circulation in the Philippines." (Underscoring supplied) Respondent's claim for refund was filed before the effectivity of RR No. 20-2002. Nevertheless, this Court cannot be oblivious of the fact that Sec. 6 (f) of RR No. 1-95 is an erroneous interpretation of the tax privileges granted under Rep. Act No. 7227, in relation to Exec. Order No. 80, as it unduly extends the benefit of the 5% preferential tax rate to interest income of ecozone-registered enterprises from Philippine currency bank deposits, thereby violating the well-settled rule that administrative issuances seeking to carry into effect an act of Congress must be in harmony with the provisions of the law ( Republic vs. Court of Appeals , 324 SCRA 237). It should be noted that under Sec. 12 (c) of Rep. Act No. 7227, the 5% preferential tax rate is applied to the gross income of the ecozone-registered enterprise, viz. : "Section 12. . . . . (c) The provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed within the Subic Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone shall be remitted to the National Government, one percent (1%) each to the local government units affected by the declaration of the zone in proportion to their population area, and other factors. In addition, there is hereby established a development fund of one percent (1%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone to be utilized for the development of municipalities outside the City of Olongapo and the Municipality of Subic, and other municipalities contiguous to the base areas." Gross income, as referred to in the aforecited provision, has been defined under Sec. 2 (b) of RR No. 12-97 dated August 7, 1997, as follows: "Sec. 2. Definition of Terms . xxx xxx xxx b. 'Gross Income' shall refer to gross sales or gross revenues derived from the registered business activities within the ECOZONE , net of sales discounts, sales returns and allowances and minus costs of sales, cost of production or direct costs of services (depending on the nature of business) but before any deduction is made for administrative expenses or incidental losses during a given taxable period." (Underscoring supplied) Pursuant to Sec. 12 (c) of Rep. Act No. 7227 and Sec. 2 (f) of RR No. 12-97, interest income derived by ecozone-registered enterprises from Philippine currency bank deposits is not part of the gross income which is subject to preferential tax treatment under Rep. Act No. 7227 in relation to Exec. Order No. 80. Since Sec. 6 (f) of RR No. 1-95 and BIR Ruling No. 149-99 are wrong interpretations of the law, the same cannot give rise to vested rights in favor of those seeking tax privileges thereunder. Worth reiterating is the rule that the government can never be in estoppel, particularly on matters involving taxes. As held in Philippine Basketball Association vs. Court of Appeals (337 SCRA 358), "erroneous application and enforcement of the law by public officers do not preclude subsequent correct application of the statute" because "the Government is never estopped by mistake or error on the part of its agents." This is as it should be, especially considering that Sec. 6 (f) of RR No. 1-95, is in the nature of a law granting tax exemption which should be construed strictissimi juris against the taxpayer and liberally in favor of the taxing power ( Cyanamid Philippines, Inc. vs. Court of Appeals , 322 SCRA 639). All told, We take occasion to stress the fundamental principle that "[t]axes are the lifeblood of the nation through which the government agencies continue to operate and with which the State effects its functions for the welfare of its constituents" ( Dayrit vs. Cruz , 165 SCRA 571). Hence, any tax exemption should be granted by virtue of and within the limits prescribed by law. WHEREFORE , premises considered, the instant petition is GRANTED and the assailed decision and resolution of the Court of Tax Appeals REVERSED and SET ASIDE . Accordingly, the claim for tax refund or credit of respondent PLDT Clark Telecom, Inc. is hereby DENIED . SO ORDERED . Reyes and Magpale, * JJ . , concur.