MITSUBISHI – MANILA vs CIR

Mitsubishi Corporation - Manila Branch Vs. Commissioner of Internal Revenue

G.R. No. 175722

June 5, 2017

Facts:

On June 11, 1987, the governments of Japan and the Philippines executed an Exchange of Notes, whereby the former agreed to extend a loan amounting to Forty Billion Four Hundred Million Japanese Yen (¥40,400,000,000) to the latter through the then Overseas Economic Cooperation Fund (OECF, now Japan Bank for International Cooperation) for the implementation of the Calaca II Coal-Fired Thermal Power Plant Project (Project). In Paragraph 5 (2) of the Exchange of Notes, the Philippine Government, by itself or through its executing agency, undertook to assume all taxes imposed by the Philippines on Japanese contractors engaged in the Project.

Consequently, the OECF and the Philippine Government entered into Loan Agreement No. PH-P768 dated September 25, 1987 for Forty Billion Four Hundred Million Japanese Yen (¥40,400,000,000). Due to the need for additional funding for the Project, they also executed Loan Agreement No. PH-P1419 dated December 20, 1994 for Five Billion Five Hundred Thirteen Million Japanese Yen (¥5,513,000,000). Meanwhile, on June 21, 1991, the National Power Corporation (NPC), as the executing government agency, entered into a contract with Mitsubishi Corporation (i.e., petitioner's 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 (Contract). The Contract's foreign currency portion was funded by the OECF loans. In line with the Exchange of Notes, Article VIII (B) (1) of the Contract indicated NPC's undertaking to pay any and all forms of taxes that are directly imposable under the Contract.

Petitioner completed the project on December 2, 1995, but it was only accepted by NPC on January 31, 1998 through a Certificate of Completion and Final Acceptance. On July 15, 1998, petitioner filed its Income Tax Return for the fiscal year that ended on March 31, 1998 with the Bureau of Internal Revenue (BIR). Petitioner included in its income tax due the amount of P 44,288,712.00, representing income from the OECF-funded portion of the Project. On the same day, petitioner also filed its Monthly Remittance Return of Income Taxes Withheld and remitted P 8,324,100.00 as BPRT for branch profits remitted to its head office in Japan out of its income for the fiscal year that ended on March 31, 1998.

In a Decision dated December 17, 2003, the CTA Division granted the petition and ordered the CIR to refund to petitioner the amounts it erroneously paid as income tax and BPRT. It held that based on the Exchange of Notes, the Philippine Government, through the NPC as its executing agency, bound itself to assume or shoulder petitioner's tax obligations. Therefore, petitioner's payments of income tax and BPRT to the CIR, when such payments should have been made by the NPC, undoubtedly constitute erroneous payments under Section 229 of the NIRC.

The CIR moved for reconsideration but was denied in a Resolution dated April 23, 2004; thus, the CIR elevated the matter to the CTA En Banc. In a Decision dated May 24, 2006, the CTA En Banc reversed the CTA Division's rulings and declared that petitioner is not entitled to a refund of the taxes it paid to the CIR. Petitioner sought reconsideration, but the CTA En Banc denied the motion in a Resolution dated December 4, 2006.

Issues:

Whether or not Mitsubishi Corporation – Manila Branch is entitled to a refund. Whether or not the Bureau of Internal Revenue should be the authorized government agency where the tax refund be claimed.

Held:

Yes, the petitioner is entitled to a refund. The CIR subsequently affirmed petitioner's non-liability for taxes and entitlement to tax refunds by issuing Revenue Memorandum Order (RMO) No. 24-200547 addressed to specified BIR offices. The RMO provides: Pursuant to the provisions of RMC No. 32-99 as amended by RMC No. 42-99, Japanese contractors and nationals engaged in OECF funded projects in the Philippines shall not be required to shoulder the fiscal levies or taxes associated with the project. Therefore, the concerned Japanese contractors are entitled to claim for the refund of all taxes paid and shouldered by them relative to the conduct of the Project. Also, considering that petitioner paid the subject taxes in the aggregate amount of P 52,612,812.00, which it was not required to pay, the BIR erroneously collected such amount.

On another issue, yes, the Bureau of Internal Revenue should be the authorized government agency where the tax refund be claimed. The Supreme Court held that in Sections 204 (C) of the NIRC grants the CIR the authority to credit or refund taxes which are erroneously collected by the government. The authority of the CIR to refund erroneously collected taxes is likewise reflected in Section 229 of the NIRC.

In this case, it is fairly apparent that the subject taxes in the amount of P 52,612,812.00 was erroneously collected from petitioner, 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.

Hence, the petition is GRANTED. The Decision dated May 24, 2006 and the Resolution dated December 4, 2006 of the Court of Tax Appeals (CTA) En Banc are REVERSED and SET ASIDE. The Decision dated December 17, 2003 of the CTA is REINSTATED.