The Supreme Court granted the petition of the Commissioner of Internal Revenue (CIR) and declared null and void two Amended Decisions of the Court of Tax Appeals (CTA) En Banc in a case involving the tax treatment of G&W Architects, Engineers and Project Development Consultants Co.'s build-to-own scheme. The Court reinstated the March 21, 2018 Decision of the CTA En Banc and remanded the case to the CTA First Division for the proper computation of the respondent's tax liabilities.
The Case
Petitioner Commissioner of Internal Revenue is the duly appointed Commissioner of the Bureau of Internal Revenue (BIR), the agency mandated by law to assess and collect all national government revenue taxes, fees, and charges. Respondent G&W Architects, Engineers and Project Development Consultants Co. is a partnership engaged in the general practice of architecture and construction, registered with BIR Revenue District Office No. 30 of Revenue Region No. 6-Manila.
G&W Architects adopts a build-to-own scheme in the construction of its projects, under which funds of condominium unit owners are pooled together to construct such units on their behalf. It obtained several confirmatory BIR rulings for its projects — DA-338-2007, DA-337-2007, DA-056-2003, and DA-455-2007 — covering Grand Hamptons Tower I, Grand Hamptons Tower II, Penhurst Parkplace, and the Kensington Condominium Project. The rulings declared the build-to-own scheme as tax-exempt as it did not constitute a taxable sale, exchange, or disposition of real property.
On September 29, 2009, G&W Architects received from the BIR letters of authority for the examination of its books of accounts for transfer taxes, namely expanded withholding taxes (EWT) and Documentary Stamp Tax (DST). The BIR Regional Director later requested the CIR to nullify the BIR rulings after finding that the build-to-own scheme was one of pre-selling/selling subject to EWT and DST. On June 28, 2010, the CIR issued Revenue Memorandum Circular No. 55-2010, declaring BIR Ruling Nos. DA-056-2003, DA-455-2007, and DA-337-2007 as void.
The CIR then issued Preliminary Assessment Notices dated June 8, 2010 and July 1, 2010, followed by Formal Assessment Notices dated January 25, 2011, June 10, 2011, and July 26, 2011, finding G&W Architects liable to pay EWT and DST on the transfer of condominium units in Penhurst Parkplace, Kensington Place, Grand Hampton I, and Grand Hampton II. G&W Architects protested and filed three petitions for review before the CTA, docketed as CTA Case Nos. 8358, 8426, and 8489, which were consolidated.
The CTA First Division, in its Decision dated November 3, 2015, ordered the cancellation of the deficiency EWT and DST. On appeal, the CTA En Banc, voting 6-3 in its Decision dated March 21, 2018, reversed and set aside the First Division's adjudication.
The Issue
The Court resolved whether G&W Architects could be held liable for the deficiency EWT arising from the transactions under its build-to-own scheme.
The Ruling
The Court held G&W Architects liable for the deficiency EWT. It explained that there was neither rhyme nor reason to hold G&W Architects's unsuspecting clients accountable for failure to withhold EWT, as they merely relied in good faith on its representation that the transactions were tax-exempt. Considering that G&W Architects ultimately realized the income on the transactions, the Court held it liable for the deficiency EWT.
The dispositive portion states: "ACCORDINGLY, the Petition for Review on Certiorari is GRANTED. The August 29, 2018 Amended Decision and the March 14, 2019 Amended Decision of the Court of Tax Appeals En Banc in CTA EB Case No. 1449 are DECLARED NULL and VOID. The March 21, 2018 Decision of the Court of Tax Appeals En Banc is REINSTATED."
The Court also ordered the case remanded to the Court of Tax Appeals First Division for the proper computation of the tax liabilities of respondent G&W Architects, Engineers and Project Development Consultants Company.
By the Numbers
- G.R. No. 246026
- Revenue Memorandum Circular No. 55-2010, issued June 28, 2010
- 111 condominium units in Penhurst Parkplace and 229 units in Kensington Place
- PHP 277,458,117.19 — total for Penhurst Parkplace and Kensington Place (EWT and DST)
- PHP 559,725,024.90 — total amount of deficiency taxes CANCELLED by the CTA First Division
- CTA Case Nos. 8358, 8426, and 8489; CTA EB Case No. 1449
- CTA First Division Decision: November 3, 2015; CTA En Banc Decision: March 21, 2018
The Court's Reasoning
The Court explained that the withholding tax system was devised to provide taxpayers a convenient manner to meet their probable income tax liability, to ensure the collection of income tax that can otherwise be lost or substantially reduced through failure to file returns, and to improve the government's cash flow. Through this system, the withholding agent retains a portion of the amount received by the income earner, which is credited to the total income tax payable in transactions covered by the EWT.
Citing Rizal Commercial Banking Corp. v. Commissioner of Internal Revenue, the Court reiterated that the withholding agent is merely a tax collector and not a taxpayer. The liability of the withholding agent is independent from that of the taxpayer; the withholding agent is liable only insofar as it failed to perform its duty to withhold the tax and remit the same to the government, while the liability for the tax remains with the taxpayer because the gain was realized and received by the latter.
Applying these principles, the Court found that G&W Architects's clients relied in good faith on its representation that the transactions were tax-exempt. To rule otherwise would allow the wrongdoer to escape liability from the consequence of its tax scheme and permit it to benefit from its own wrongdoing. Because G&W Architects ultimately realized the income on the transactions, the Court held it liable for the deficiency EWT. Given the declaration of nullity of the Second Amended Decision of the CTA En Banc, the Court could not rely upon the computation set forth therein and found it most appropriate to remand the case to the CTA First Division for the determination and computation of the respondent's tax liabilities.
Source: Commissioner of Internal Revenue v. G&W Architects, Engineers and Project Consultants Co., G.R. No. 246026, Third Division.
This report summarizes a public Supreme Court decision and is not legal advice.