CASE DIGEST: Mitsubishi vs. CIR (G.R. No. 175772; June 5, 2017)


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 PHIL GOV, 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 PHIL GOV entered into Loan No. PH-P76 for said amount. Due to need for more funds for the Project, they later on executed Loan No. PH-P141 for 5.5 billion yen.

Meanwhile, the National Power Corporation (NPC), as the executing government agency, entered into a contract (Contract) with Mitsubishi Corporation (MC; i.e., 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, 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.

MC 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.

6 months later, MC MC filed with the BIR its ITR for the fiscal year that ended on March 31, 1998. It included in its tax due the amount of 44.28 million pesos 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 ₱8,324,100.00 as branch profit remittance tax (BPRT) to its head office in Japan out of its income for the fiscal year that ended on March 31, 1998.

On June 30, 2000, MC filed with the CIR an administrative claim for refund of 52.6 million pesos, representing the erroneously paid amounts of ₱44,28M as income tax and ₱8,32M as BPRT. To suspend the running of the 2-year period to file a judicial claim for refund, MC filed on July 13, 2000 a petition for review before the CTA. MC anchored its claim for refund on BIR Ruling No. DA-407-98 dated September 7, 1998, 21 which says that the PHIL GOV assumed all taxes. Hence, there is no tax exemption to speak of. So, there is no violation of the constitutional mandate against the grants of tax exemption without the concurrence of the majority of the members of Congress.

MC won in the CTA Div. However, the CTA EB reversed the CTA Div's decision saying that MC is not entitled to a refund of the taxes it paid to the CIR for three reasons. First, there is no law exempting MC. There is no "error" in the payment; hence, there can be no tax refund. Second, the Exchange of Notes is invalid as a treaty because it grants tax exemption without the concurrence of Congress. Third and finally, RMC No. 42-99 mandates that the remedy of MC is not refund but a claim against NPC.

MC motioned for reconsideration. Denied. 
ISSUE: Is MC entitled to tax refund despite the fact that there is no tax exemption granted by law and despite the further fact that the Exchange of Notes may be interpreted as granting tax exemption, thereby making it unconstitutional to such extent?

Yes, MC is entitled to tax refund.

Sections 204 (C) of the NIRC grants the CIR the authority to credit or refund taxes which are erroneously collected by the government.

In this case, it is fairly apparent that the subject taxes in the amount of ₱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.

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 "[f]reedom 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." Thus, contrary to the CTA En Bane's opinion, the constitutional provisions on tax exemptions would not apply.

Moreover, the CIR has already recognized the tax assumption under the Exchance of Notes through RMC No. 42-99.

ISSUE: If MC is entitled to refund, should it claim from the BIR or from NPC?

MC should claim refund from BIR.

Sections 204 and 229 of the NIRC provide that claims for refund of erroneously collected taxes must be filed with the CIR. Even if RMC No. 42-99 has interpreted the Contract so that it directs MC to claim the refund from NPC, this cannot prevail over provisions of tax laws.

SUMMARY: MC correctly filed its claim for tax refund under Sections 204 and 229 of the NIRC to recover the erroneously paid taxes amounting to ₱44,288,712.00 as income tax and ₱8,324,100.00 as BPRT from the BIR. To reiterate, MC's entitlement to the refund is based on the tax assumption provision in the Exchange of Notes. Given that this is a case of tax assumption and not an exemption, the BIR is, therefore, not without recourse; it can properly collect the subject taxes from the NPC as the proper party that assumed petitioner's tax liability.