TOPIC: Tax Refunds and Credits

MITSUBISHI CORPORATION- Case flow:

MANILA BRANCH, PETITIONER, CIR – Claim for refund of erroneously paid income tax and branch profit remittance
VS. tax for FY 1998
COMMISSIONER OF INTERNAL
REVENUE, RESPONDENT. CTA Division – GRANTED the claim for refund

G.R. No. 175772, June 5, 2017; CTA En Banc – Reversed CTA Division’s ruling. Mitsubishi is not entitled to refund.
Perlas-Bernabe, J.
SC – CTA En Banc decision REVERSED and SET ASIDE. CTA Division decision
REINSTATED.
FACTS:
 The governments of Japan and the Philippines executed an Exchange of Notes , involving a loan of Forty Billion
Four Hundred Million Japanese Yen (¥40,400,000,000) and additional Five Billion Five Hundred Thirteen Million
Japanese Yen (¥5,513,000,000) to the latter through the then Overseas Economic Cooperation Fund (OECF) for
the implementation of the Calaca II Coal-Fired Thermal Power Plant Project.

 Under the Exchange of Notes, the Philippine Government undertook to assume all taxes imposed by the
Philippines on Japanese contractors engaged in the Project.

 Meanwhile, the National Power Corporation (NPC), as the executing government agency, entered into a contract
with Mitsubishi Corporation (head office in Japan) for the engineering, supply, construction, installation, testing,
and commissioning of a steam generator, auxiliaries, and associated civil works for the Project.

 The Contract's foreign currency portion was funded by the OECF loans. In line with the Exchange of Notes, the
Contract indicated NPC's undertaking to pay any and all forms of taxes that are directly imposable under the
Contract.

 Mitsubishi filed its Income Tax Return (ITR) for FY 1998 and included therein the income tax due on its income
from the OECF-funded portion of the project. Mitsubishi also filed its Monthly Remittance Return of Income
Taxes Withheld and remitted taxes for branch profits for FY 1998.

 Mitsubishi filed with the CIR an administrative claim for refund of P52,612,812.00, representing the erroneously
paid income tax and BPRT corresponding to the OECF-funded portion of the Project.

 To suspend the running of the two-year period to file a judicial claim for refund, Mitsubishi filed a petition for
review before the CTA contending that it has no liability for income tax and other taxes and fiscal levies since the
said taxes were assumed by the Philippine Government.

 The CTA Division granted the petition and held that based on the Exchange of Notes, the Philippine Government
bound itself to assume Mitsubishi’s tax obligations, therefore, Mitsubishi’s payments of taxes, when such should
have been made by NPC, constitute erroneous payment.

 The CIR elevated the case to the CTA En Banc which reversed the CTA Division’s ruling and declared that
Mitsubishi is not entitled to a refund because:
 Mitsubishi failed to establish that its tax payments were erroneous and CIR has no power to grant a
refund absent any tax exemption;
 The Exchange Notes cannot be read as a treaty validly granting tax exemption without the Senate’s
concurrence; and
 According to RMC No. 42-99, the proper remedy is to recover the taxes from NPC, not CIR.

ISSUE:
WON Mitsubishi is entitled to a refund
RULING: YES.

In this case, the subject taxes in the amount of P52,612,812.00 was erroneously collected from Mitsubishi,
considering that the obligation to pay the same had already been assumed by the Philippine Government by virtue of its
Exchange of Notes with the Japanese Government. Case law explains that an exchange of notes is considered as an
executive agreement, which is binding on the State even without Senate concurrence.

The Exchange of Notes provides for a tax assumption provision whereby the Philippine Government, through its
executing agencies (i.e., NPC in this case) particularly assumed "all fiscal levies or taxes imposed in the Republic of the
Philippines on Japanese firms and nationals operating as suppliers, contractors or consultants on and/or in connection
with any income that may accrue from the supply of products of Japan and services of Japanese nationals to be provided
under the [OECF] Loan." In line with this tax assumption provision, the Contract between NPC and Mitsubishi also
provides that NPC shall pay any and all forms of taxes that are directly imposable under the contract. Hence, it is the
Philippine Government, through the NPC, which should shoulder the payment of the taxes.

Therefore, considering that petitioner paid the subject taxes in the aggregate amount of P52,612,812.00, which it
was not required to pay, the BIR erroneously collected such amount. Accordingly, petitioner is entitled to its refund .
Given that this is a case of tax assumption and not an exemption, the BIR is not without recourse; it can properly collect
the subject taxes from the NPC as the proper party that assumed Mitsubishi's tax liability.

ISSUE:
Which government entity should the refund be claimed?

RULING: BIR.

Sections 204 and 229 of the NIRC provide that claims for refund of erroneously collected taxes must be filed with
the CIR. The NIRC vests upon the CIR, being the head of the BIR, the authority to credit or refund taxes which are
erroneously collected by the government . This specific statutory mandate cannot be overridden by adverse
interpretations made through mere administrative issuances, such as RMC No. 42-99. Courts will not tolerate
administrative issuances that override, instead of remaining consistent and in harmony with, the law they seek to
implement, as in this case. Thus, RMC No. 42-99, an administrative issuance directing petitioner to claim the refund from
NPC, cannot prevail over Sections 204 and 229 of the NIRC, which provide that claims for refund of erroneously collected
taxes must be filed with the CIR.

Additional notes:

 Exchange of notes - record of a routine agreement that has many similarities with the private law contract. The
agreement consists of the exchange of two documents, each of the parties being in the possession of the one
signed by the representative of the other. The signatories of the letters may be government Ministers, diplomats
or departmental heads. Significantly, an exchange of notes is considered a form of an executive agreement,
which becomes binding through executive action without the need of a vote by the Senate or Congress.

 Tax assumption provision – To “assume” means "[t]o take on, become bound as another is bound, or put oneself
in place of another as to an obligation or liability." This means that the obligation or liability remains, although
the same is merely passed on to a different person. In this light, the concept of an assumption is therefore
different from an exemption, the latter being the "freedom from a duty, liability or other requirement" or "[a]
privilege given to a judgment debtor by law, allowing the debtor to retain [a] certain property without liability."

 Revenue Memorandum Circular - an administrative ruling issued by the CIR to interpret tax laws

Legend: Prevailing party

Underline – shorter version for recits