Court stops BIR restrictions on bank tax deductions

The Makati City Regional Trial Court has stopped the Bureau of Internal Revenue (BIR) from implementing Revenue Regulations No. 4-2011 that imposes restrictions on bank tax deductions.

In a six-page order, Makati RTC Judge Honorio E. Guano Jr. had said the injunction should remain in force until the petition filed by the Bankers Association of the Philippines (BAP) was resolved.

“The respondents (BIR) and any and all their representatives, agents or persons acting on their behalf are hereby enjoined from enforcing, carrying out or implementing in any way or manner RR No. 04-2011 including the issuance of PAN (preliminary assessment notice) and FAN (final assessment notice), as the case may be, based on the subject revenue regulations, pending litigation, unless sooner dissolved,” the Makati court said in its ruling.

The court said it was convinced that if no injunction was issued, the BIR would proceed in issuing PANs and FANs which, petitioners said, could lead to a distraint and levy of their properties.

“Should there be distraint and levy, the banks will be deprived possession of there properties, effectively crippling their business operations,” BAP said in their petition.

The court has said petitioner banks are able to prove that implementation of the questioned revenue regulation “violates the petitioners’ rights insofar as it imposes a manner of allocation of deductible expense which is, as argued by the petitioners, contrary to settled practice and provisions of the tax code; that such implementation will require petitioners to dispute the tax assessments every time it is issued.”

“Damage is said to be ‘irreparable’ when it is continuous and repeated due to its constant and frequent recurrence, no fair and reasonable redress can be had therefore insofar as the affected parties’ goodwill and business reputation are concerned … Without any injunctive relief, the carrying out of Revenue Regulations No. 04-2011 potentially poses damage to the property, goodwill and reputation of the petitioners. When reputation or goodwill is damaged or prejudiced, such damage is quite impossible to reverse,” the court said.

The objective of RR 4-2011 is to set the rules on income and expenses allocations of banks among their various operations, which are governed by different income tax rules.

RR 4-2011 provides that a bank may deduct only those costs and expenses attributable to the operation of the regular banking unit (RBU) to arrive at its taxable income. Any cost or expense related to or incurred in the operation of the foreign currency deposit unit (FCDU)/expanded FCDU or offshore banking unit is not allowed as deduction from the RBU’s taxable income.

Criminal liability

Failure to comply with the revenue regulation will subject officers of the banks and other financial institutions to criminal liability.

The banks filed a petition before the court to nullify RR 4-2011 after the BIR started issuing PANs on several banks.

In their petition, the banks said issuing the regulation is not among the instances that the National Internal Revenue Code (NIRC) allowed the delegation of power to issue financial related policies to the Department of Finance (DOF) and the BIR.

“RR 4-2011 is therefore an illegal exercise of quasi-legislative or legislative power. By issuing RR 4-2011, the DOF usurped power that  properly belongs to the legislature. Section 50 of the NIRC, which empowers the BIR commissioner to allocate expenses in nonarm’s length transactions, does not authorize the DOF to issue rules prescribing a uniform method of allocation, especially within one organization, trade or business,” petitioners said.

Petitioners added that it also violated a provision of the NIRC which gave the taxpayers the freedom to choose the accounting method in computing taxable income and the same revenue regulation limited the rights of petitioners to claim deductions which was otherwise allowed under the law.

They further pointed out that it violated their right to due process because it was issued without public consultation.

The court added that with the implementation of RR 4-2011, a bank may incur deficiency in tax payments which might put into question its financial stability, ability or willingness to comply with Philippine laws.

“The success of banks and financial institutions in their business is relative to the trust and confidence reposed by the public and its perception,” the court said.

“This court is unaware of any possible damage that the government may sustain if an injunctive relief is issued pending litigation,” it added.

Petitioners’ counsel Francis Lim, meanwhile, welcomed the court’s order.

“The preliminary injunction is a welcome news to the petitioning banks. It provides them relief from the indiscriminate issuance of assessments by the BIR pending the main case to declare null and void RR 4-2011. I fervently hope that our tax authorities will respect the court’s order,” Lim said in a text message.

Petitioner banks include Asia United Bank; BDO Unibank Inc.; Bank of America; Bank of Commerce; BDO Private Bank Inc.; Citibank, N.A., Philippine branch; China Banking Corp.; Chinatrust (Phils.) Commercial Bank Corp.; Deutsche Bank AG, Manila Branch; East West Banking Corp.; ING Bank N.V., Manila branch; Philippine Bank of Communications; Philippine National Bank; Philippine Veterans Bank; PNB Savings Bank; Rizal Commercial Banking Corp.; Security Bank Corp.; Standard Chartered Bank, Philippine branch, and United Coconut Planters Bank. RC