CIR vs. LA FLOR DEla ISABELA, 2019

COMMISSIONER OF INTERNAL v. LA FLOR DELA ISABELA, INC.
G.R. No. 211289, January 14, 2019

SECOND DIVISION
(Reyes, J. Jr., J.)
FACTS:
La Flor dela Isabela, Inc. (La Flor) filed monthly returns for the Expanded Withholding
Tax (EWT) and Withholding Tax on Compensation (WTC) for calendar year 2005.
On January 7, 2010, La Flor received four Formal Letters of Demand and Final
Assessment Notices (FAN): (1) for penalties for late filing and payment of WTC; (2) for
penalties for late filing and payment of EWT; (3) for deficiency assessment for EWT;
and (4) for deficiency assessment for WTC. They were all dated December 17, 2009,
and covered deficiency taxes for the taxable year 2005.
The Commissioner of Internal Revenue (CIR) issued a Final Decision on Disputed
Assessment (FDDA) against La Flor involving the alleged deficiency withholding taxes.
Aggrieved, La Flor filed a petition for review before the Court of Tax Appeals (CTA)
Division.
The CTA Division ruled in favor of La Flor and cancelled the assessments. The CTA En
Banc affirmed the decision of the CTA division.
The CIR, in its petition to the Supreme Court, forwards a novel theory that Section
203 is inapplicable in the present assessment of EWT and WTC deficiency against La
Flor. It argues that withholding taxes are not contemplated under the said provision
considering that they are not internal revenue taxes but are penalties imposed on the
withholding agent should it fail to remit the proper amount of tax withheld.
ISSUE:
Are withholding taxes internal revenue taxes covered by Section 203 of the National
Internal Revenue Code (NIRC)?
RULING:
Yes.
In Chamber of Real Estate and Builders’ Associations, Inc. v. Hon. Executive Secretary
Romulo,1the Court had succinctly explained that the method of withholding tax at
source is a procedure of collecting income tax which is sanctioned by our tax laws.
Under the current system, the payee is the taxpayer, the person on whom the tax is
imposed, while the payor, a separate entity, acts as the government’s agent for the
agent personally liable for the breach of its legal duty to withhold the tax and remit the
same to the government.
Nonetheless, the Court does not agree with the CIR that withholding tax assessments
are merely an imposition of penalty on the withholding agent, and thus, outside the
coverage of Section 203 of the NIRC.
The CIR cites National Development Company v. Commissioner of Internal Revenue2 as
basis that withholding taxes are only penalties imposed on the withholding agent:
In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for
its failure to withhold the same from the Japanese shipbuilders.
A careful analysis of the above-quoted decision, however, reveals that the Court did
not equate withholding tax assessments to the imposition of civil imposed on tax
deficiencies. The word “penalty” was used to underscore the dynamics in the
withholding tax system it is the income of the payee being subjected to tax and not of
the withholding agent. It was never meant to mean that withholding taxes do not fall
within the definition of internal revenue taxes, especially considering that income
taxes are the ones withheld by the withholding agent. Withholding taxes do not
cease to become income taxes just because it is collected and paid by the
withholding agent.
Thus, withholding tax assessments such as EWT and WTC clearly contemplate
deficiency internal revenue taxes. Their aim is to collect unpaid income taxes and not
merely to impose a penalty on the withholding agent for its failure to comply with its
statutory duty, and therefore, are within the application of Section 203 of the NIRC.
1 628 Phil. 508, 536 (2010)
Taxation Law: Income Tax: Withholding of Taxes: Concept of Withholding Taxes
9
the collection of the tax in order to ensure its payment. As a consequence of this system, two distinct
liabilities arise – one for the income earner/payee and another for the withholding agent, who is a mere
tax collector not a taxpayer. The agent is not liable for the tax as no wealth flowed into him. The Tax
Code only makes

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COMMISSIONER OF INTERNAL v. LA FLOR DELA ISABELA, INC.

G.R. No. 211289, January 14, 2019

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