TAX Week 11 Digests

7/28/2019 TAX Week 11 Digests

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TAXATION1LAFORTEZAWEEK11:

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vi. Allocation of income and deductions

YUTIVO SONS HARDWARE CO. v CTA

(Jan 28, 1961)

DOCTRINE: Yutivo & SM are one entity (SM just a branch) because Yutivo financed thebusiness of SM.

NATURE: Petition for review on certiorari

PONENTE: Gutierrez David, J.FACTS:

Yutivo Sons Hardware Co. (hereafter referred to as Yutivo) is a domestic corporation,organized under the laws of the Philippines, with principal office at 404 Da smarias St.,Manila. Incorporated in 1916, it was engaged, prior to the last world war, in theimportation and sale of hardware supplies and equipment. After the liberation, itresumed its business and until June of 1946 bought a number of cars and trucks fromGeneral Motors Overseas Corporation (hereafter referred to as GM for short), anAmerican corporation licensed to do business in the Philippines. As importer, GM paidsales tax prescribed by sections 184, 185 and 186 of the Tax Code on the basis of itsselling price to Yutivo. Said tax being collected only once on original sales, Yutivo paid nofurther sales tax on its sales to the public.

After the incorporation of SM and until the withdrawal of GM from the Philippines in themiddle of 1947, the cars and tracks purchased by Yutivo from GM were sold by Yutivo toSM which, in turn, sold them to the public in the Visayas and Mindanao.

When GM left they appointed Yutivo as importer for the Visayas and Mindanao, andYutivo continued its previous arrangement of selling exclusively to SM. In the same waythat GM used to pay sales taxes based on i ts sales to Yutivo, the latter, as importer, paidsales tax prescribed on the basis of its selling price to SM, and since such sales tax, asalready stated, is collected only once on original sales, SM paid no sales tax on its sales tothe public.

On November 7, 1950, after several months of investigation by revenue officers startedin July, 1948, the Collector of Internal Revenue made an assessment upon Yutivo anddemanded from the latter P1,804,769.85 as deficiency sales tax plus surcharge. CIR

claimed that the taxable sales were the retail sales by SM to the public and not thesales at wholesale made by, Yutivo to the latter inasmuch as SM and Yutivo were

one and the same corporation, the former being the subsidiary of the latter.

(The contention in simpler words: Before GM imported cars sold it to Yutivo who thensold it to SM to be sold for retail. GM paid the sales tax as the importer, Yutivo and SMdidnt pay as sales tax is only paid once. GM then stopped operations in the Phil and

assigned Yutivo as importer. Yutivo was paying sales tax as importer, selling wholesaleexclusively to SM. CIR comes in and says that they should be paying sales tax on theRetail price, as Yutivo and SM are one entity.)

ISSUES/HELD:

1. WON SM/Yutivo committed tax evasion through fraud? (Fundamentals pa to, sorecap lang) No. They werent able to prove fraud because (1) GM was stillimporter when SM was organized (2) transactions between SM and Yutivo out

in the open and (3) there was good faith in interpreting the Code which saidsales tax are collected once only on every original sale. Taxpayer has legal

right to decrease tax within means law permits.2. WON SM and Yutivo had separate juridical personalities? Yes (Important to

our topic. I think.)

RATIO/RULING:

However, the Court agreed that SM was actually owned and controlled by petitioner asto make it a mere subsidiary or branch of the latter created for the purpose of selling

the vehicles at retail and maintaining stores for spare parts as well as service repairshops.

1) The founders of the corporation are closely related to each other either byblood or affinity, and most of its stockholders are members of the Yu (Yutivoor Young) family.

2) It is, likewise, admitted that SM was organized by the leading stockholders ofYutivo headed by Yu Khe Thai.

3) Subscription of shares to SM were credited from Yutivo, and no moneyactually passed hands.

4) The shareholders in SM are mere nominal stockholders holding the sharesfor and in behalf of Yutivo, so even conceding that the original subscriberswere stockholdersbona fide, Yutivo was at all times in control of the majority of the stock of SM

and that the latter was a mere subsidiary of the former.5) SM is under the management and control of Yutivo by virtue of a

management contract between the two. The companies have the samecontrolling majority of Board of Directors, principal officers and share acommon comptroller.

6) The cash assets of SM were actually handled by Yutivo. All receipts of cash bySM were transferred directly to Yutivo in Manila. Likewise, all expensesincurred by SM were referred to Yutivo which prepares disbursementvouchers and payments. The payment was made out of the cash deposits ofSM. These transactions were made without need of further requests. Allpayments were made on Yutivo stationery, without a copy furnished to SM.All detailed records for SM are kept by Yutivo.

7) The accounting system of Yutivo shows that i t maintained a high degree ofcontrol over SMs accounts. All transactions between Yutivo and SM areeffected by debit/credit entries against the reciprocal account maintained intheir respective books.

8) The management fees due from SM to Yutivo were taken up as expenses ofSM and credited to the account of Yutivo. If the two were separate entities,the fees should have been income of Yutivo. But these fees were recorded asreserve for Bonus and were thus a liability, not an incime account. This

reserve for bonus was then distributed directly to the employees anddirectors of Yutivo, showing that the management fees were paid directly toYutivo officers and employees.

Briefly stated, Yutivo financed principally, if not wholly, the business of SM andactually extended all the credit to the latter not only in the form of starting capital butalso in the form of credits extended for the cars and vehicles allegedly sold by Yutivoto SM as well as advances or loans for the expenses of the latter when the capital had


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been exhausted. Thus, the increases in the capital stock were made in advances or"Guarantee" payments by Yutivo and credited in favor of SM. The funds of SM were allmerged in the cash fund of Yutivo. At all times Yutivo thru officers and directors commonto it and SM, exercised full control over the cash funds, policies, expenditures andobligations of the latter.

SM being merely an instrumentality of Yutivo, the sales tax should be paid on the Retailsale to the public.

DISPOSITION: IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals

under review is hereby modified in that petitioner shall be ordered to pay to respondentthe sum of P820,549.91, plus 25% surcharge thereon for late payment.

So ordered without costs.

VOTE: EN BANC. Bengzon, Labrador, Concepcion, Reyes, J.B.L., Barrera and Paredes, JJ.,concur.

Padilla, J., took no part.

ADDITIONAL NOTES: Thank you Miggy! Just updated his digest.

-Steph

vii. Networth method

Perez v CTA

May 30, 1958

Nature: Appeal by certiorari to review CTA decision

Ponente: Reyes, J.B.L.

1. Perez was ordered to pay P41,547.77 as deficiency income tax and surchargesfor 1947 to 1950. Amount was arrived at on the basis of Perez increase in net

worth.2. The CIR resorted to summary distraint to enforce the liability.3. CTA affirmed CIR decision.

MAIN ISSUE: WON Perez is liable to pay deficiency income tax and surcharges for 1947to 1950. HELD: YES

WON CIR was barred from resorting to summary distraint and levy to enforce liability.HELD: YES

1. Summary distraint and levy to collect deficiency income taxes assessed againstappellant for 1947, 1948 and 1949 was invalid.

2. Sec. 51(d) of NIRC provides for a 3 year prescriptive period limiting the right ofthe govt to enforce collection of income taxes by summary proceedings of

distraint and levy, though it can proceed to recover through a civil action.3. Appeal by Perez vested jurisdiction on the CTA to review and determine his tax

liability for the period.

WON CIR erred in applying the net worth method of determining taxable income.HELD: No.

1. Method is based upon the general theory that money and other assets inexcess of liabilities of a taxpayer (after an accurate and proper adjustment ofnon-deductible items) not accounted for by his income tax returns, leads tothe inference that part of his income has not been reported.

2. Method stems from Section 41 of the IRC of 1939 of the US.3. Section 38 of NIRC also authorizes the application of the net worth method.

DISPOSITIVE: Affirmed CTA ruling with modification that summary distraint toenforce taxpayers liability for 1947-50 is improper and void.

-Zoilo

Collector of Internal Revenue v. Reyes Justin

viii. Tax Evasion v. Tax Avoidance

Commissioner of Internal Revenue v. Benigno Toda, ibid. Miggy

(NOTE: hard copies of the digest were already distributed to the class)

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b. Final adjustment return (Sec. 76, NIRC)

COMMISSIONER OF INTERNAL REVENUE v BANK OF THE PHILIPPINE ISLANDS

(7 July 2009)

Doctrine:

Hence, the controlling factor for the operation of the irrevocability rule is that thetaxpayer chose an option; and once it had already done so, it could no longer makeanother one. Consequently, after the taxpayer opts to carry-over its excess tax creditto the following taxable period, the question of whether or not it actually gets to applysaid tax credit is irrelevant. Section 76 of the NIRC of 1997 is explicit in stating thatonce the option to carry over has been made, no application for tax refund or

issuance of a tax credit certificate shall be allowed therefor.

The phrase for that taxable period (in section 76) merely identifies the excessincome tax, subject of the option, by referring to the taxable period when it wasacquired by the taxpayer.

Nature: Petition for review on certiorari of the decision and resolution of the CAPonente: Chico-Nazario, J.

Facts:

On 15 April 1999, BPI filed with the Bureau of Internal Revenue (BIR) its final adjustedCorporate Annual Income Tax Return (ITR) for the taxable year ending on 31December 1998, showing a taxable income of P1,773,236,745.00 and a total tax due of

P602,900,493.00.


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For the same taxable year 1998, BPI already made income tax payments for the firstthree quarters, which amounted to P563,547,470.46.[2] The bank also received incomein 1998 from various third persons, which, were already subjected to expandedwithholding taxes amounting to P7,685,887.90. BPI additionally acquired foreign taxcredit when it paid the United States government taxes in the amount of $151,467.00, orthe equivalent of P6,190,014.46, on the operations of formers New York Branch. Finally,

respondent BPI had carried over excess tax credit from the prior year, 1997, amountingto P59,424,222.00.

Crediting the aforementioned amounts against the total tax due from it at the end of1998, BPI computed an overpayment to the BIR of income taxes in the amount ofP33,947,101.00

BPI opted to carry over its 1998 excess tax credit, in the amount of P33,947,101.00, tothe succeeding taxable year ending 31 December 1999.[3] For 1999, however,respondent BPI ended up with (1) a net loss in the amount of P615,742,102.00; (2) itsstill unapplied excess tax credit carried over from 1998, in the amount ofP33,947,101.00; and (3) more excess tax credit, acquired in 1999, in the sum ofP12,975,750.00. So in 1999, the total excess tax credits of BPI increased toP46,922,851.00, which it once more opted to carry over to the following taxable year.

For the taxable year ending 31 December 2000, respondent BPI declared in its Corporate

Annual ITR: (1) zero taxable income; (2) excess tax credit carried over from 1998 and1999, amounting to P46,922,851.00; and (3) even more excess tax credit, gained in 2000,in the amount of P25,207,939.00. This time, BPI failed to indicate in its ITR its choice ofwhether to carry over its excess tax credits or to claim the refund of or issuance of a taxcredit certificate for the amounts thereof.

On 3 April 2001, BPI filed with petitioner Commissioner of Internal Revenue (CIR) anadministrative claim for refund in the amount of P33,947,101.00, representing its excesscreditable income tax for 1998.

The CIR failed to act on the claim for tax refund of BPI. Hence, BPI filed a Petition forReview before the CTA. The CTA promulgated its Decision in CTA Case No. 6276 on 12March 2003, ruling therein that since BPI had opted to carry over its 1998 excess taxcredit to 1999 and 2000, it was barred from filing a claim for the refund of the same.

The CTA relied on the irrevocability rule laid down in Section 76 of the National InternalRevenue Code (NIRC) of 1997, which states that once the taxpayer opts to carry over andapply its excess income tax to succeeding taxable years, its option shall be irrevocable forthat taxable period and no application for tax refund or issuance of a tax credit shall beallowed for the same.

BPI filed a Motion for Reconsideration of the foregoing Decision, but the CTA denied thesame in a Resolution dated 3 June 2003.

BPI filed an appeal with the Court of Appeals, docketed as CA-G.R. SP No. 77655. On 29April 2005, the Court of Appeals rendered its Decision, reversing that of the CTA andholding that BPI was entitled to a refund of the excess income tax it paid for 1998.

The Court of Appeals conceded that BPI indeed opted to carry over its excess taxcredit in 1998 to 1999 by placing an x markon the corresponding box of its 1998ITR. Nonetheless, there was no actual carrying over of the excess tax credit, given thatBPI suffered a net loss in 1999, and was not liable for any income tax for said taxableperiod, against which the 1998 excess tax credit could have been applied.

The Court of Appeals added that even if Section 76 was to be construed strictly andliterally, the irrevocability rule would still not bar BPI from seeking a tax refund of its1998 excess tax credit despite previously opting to carry over the same. The phrase

for that taxable period qualified the irrevocability of the option of BIR to carry overits 1998 excess tax credit to only the 1999 taxable period; such that, when the 1999taxable period expired, the irrevocability of the option of BPI to carry over its excesstax credit from 1998 also expired.

The Court of Appeals further reasoned that the government would be unjustlyenriched should the appellate court hold that the irrevocability rule barred the claimfor refund of a taxpayer, who previously opted to carry-over its excess tax credit, butwas not able to use the same because it suffered a net loss in the succeeding year.

Finally, the appellate court cited BPI-Family Savings Bank, Inc. v. Court of Appealswherein this Court held that if a taxpayer suffered a net loss in a year, thus, incurringno tax liability to which the tax credit from the previous year could be applied, there

was no reason for the BIR to withhold the tax refund which rightfully belonged to thetaxpayer.

In a Resolution dated 20 April 2007, the Court of Appeals denied the Motion forReconsideration of the CIR.

Issue:

WON THE IRREVOCABILITY RULE UNDER SECTION 76 OF THE TAX CODE BARSPETITIONER FROM ASKING FOR A TAX REFUND.

Held & Ratio:

Yes.

The Court of Appeals erred in relying on BPI-Family, missing significant details thatrendered said case inapplicable to the one at bar. The prevailing tax law then was theNIRC of 1985, Section 79[10] of which (had no irrevocability rule)1.

1 Sec. 79. Final Adjustment Return. - Every corpora tion liable to tax under Section 24 shall file a finaladjustment return covering the total net income for the preceding calendar or fiscal year. If the sumof the quarterly tax payments made during the said taxable year is not equal to the total tax due onthe entire taxable net income of that year the corporation shall either:(a) Pay the excess tax still due; or(b) Be refunded the excess amount paid, as the case may be.In case the corporation is entitled to a refund of the excess estimated quarterly income taxes-paid,

the refundable amount shown on its final adjustment return may be credited against the estimatedquarterly income tax liabilities for the taxable quarters of the succeeding taxable year. (Emphasesours.)


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By virtue of the afore-quoted provision, the taxpayer with excess income tax was giventhe option to either (1) refund the amount; or (2) credit the same to its tax liability forsucceeding taxable periods.

Section 79 of the NIRC of 1985 was reproduced as Section 76 of the NIRC of 1997,[11]with the addition of one important sentence, which laid down the irrevocability rule.

X x x

In case the corporation is entitled to a refund of the excess estimated quarterly incometaxes paid, the refundable amount shown on its final adjustment return may be creditedagainst the estimated quarterly income tax liabilities for the taxable quarters of thesucceeding taxable years. Once the option to carry-over and apply the excessquarterly income tax against income tax due for the taxable quarters of the

succeeding taxable years has been made, such option shall be considered

irrevocable for that taxable period and no application for tax refund or issuance of

a tax credit certificate shall be allowed therefor.

When BPI-Family was decided by this Court, it did not yet have the irrevocability rule toconsider. Hence, BPI-Family cannot be cited as a precedent for this case.

The factual background of Philam Asset Management, Inc. v. Commissioner of Internal

Revenue,[12] cited by the CIR, is closer to the instant Petition. Both involve tax creditsacquired and claims for refund filed more than a decade after those in BPI-Family, towhich Section 76 of the NIRC of 1997 already apply.

The Court, in Philam, recognized the two options offered by Section 76 of the NIRC of1997 to a taxable corporation whose total quarterly income tax payments in a giventaxable year exceeds its total income tax due. These options are: (1) filing for a taxrefund or (2) availing of a tax credit. The Court further explained:

The first option is relatively simple. Any tax on income that is paid in excess of theamount due the government may be refunded, provided that a taxpayer properly appliesfor the refund.

The second option works by applying the refundable amount, as shown on the [FinalAdjustment Return (FAR)] of a given taxable year, against the estimated quarterlyincome tax liabilities of the succeeding taxable year.

These two options under Section 76 are alternative in nature. The choice of oneprecludes the other. Indeed, in Philippine Bank of Communications v. Commissioner ofInternal Revenue, the Court ruled that a corporation must signify its intention -- whetherto request a tax refund or claim a tax credit -- by marking the corresponding option boxprovided in the FAR. While a taxpayer is required to mark its choice in the formprovided by the BIR, this requirement is only for the purpose of facilitating tax collection.

One cannot get a tax refund and a tax credit at the same time for the same excess incometaxes paid. x x x

The Court categorically declared in Philam that: Section 76 remains clear andunequivocal. Once the carry-over option is taken, actually or constructively, it

becomes irrevocable. It mentioned no exception or qualification to theirrevocability rule.

Hence, the controlling factor for the operation of the irrevocability rule is that thetaxpayer chose an option; and once it had already done so, it could no longer makeanother one. Consequently, after the taxpayer opts to carry-over its excess tax creditto the following taxable period, the question of whether or not it actually gets to applysaid tax credit is irrelevant. Section 76 of the NIRC of 1997 is explicit in stating thatonce the option to carry over has been made, no application for tax refund or

issuance of a tax credit certificate shall be allowed therefor.

The phrase for that taxable period (in section 76) merely identifies the excessincome tax, subject of the option, by referring to the taxable period when it wasacquired by the taxpayer. In the present case, the excess income tax credit, which BPIopted to carry over, was acquired by the said bank during the taxable year 1998. Theoption of BPI to carry over its 1998 excess income tax credit is irrevocable; it cannotlater on opt to apply for a refund of the very same 1998 excess income tax credit.

The Court similarly disagrees in the declaration of the Court of Appeals that to denythe claim for refund of BPI, because of the irrevocability rule, would be tantamount tounjust enrichment on the part of the government. The Court addressed the very sameargument in Philam, where it elucidated that there would be no unjust enrichment in

the event of denial of the claim for refund under such circumstances, because therewould be no forfeiture of any amount in favor of the government. The amount beingclaimed as a refund would remain in the account of the taxpayer until utilized insucceeding taxable years,[14] as provided in Section 76 of the NIRC of 1997. It isworthy to note that unlike the option for refund of excess income tax, whichprescribes after two years from the filing of the FAR, there is no prescriptive periodfor the carrying over of the same. Therefore, the excess income tax credit of BPI,which it acquired in 1998 and opted to carry over, may be re peatedly carried over tosucceeding taxable years, i.e., to 1999, 2000, 2001, and so on and so forth, untilactually applied or credited to a tax liability of BPI.

Finally, while the Court, in Philam, was firm in its position that the choice of option asregards the excess income tax shall be irre vocable, it was less rigid in thedetermination of which option the taxpayer actually chose. It did not limit itself to theindication by the taxpayer of its option in the ITR.

Thus, failure of the taxpayer to make an appropriate marking of its op tion in the ITRdoes not automatically mean that the taxpayer has opted for a tax credit. The Courtratiocinated in G.R. No. 156637[15] of Philam:

One cannot get a tax refund and a tax credit at the same time for the same excessincome taxes paid. Failure to signify ones intention in the FAR does not meanoutright barring of a valid request for a refund, should one still choose this

option later on

x x x x

When circumstances show that a choice has been made by the taxpayer to carry overthe excess income tax as credit, it should be respected; but when indubitable


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circumstances clearly show that another choice a tax refund is in order, it should begranted.

In the Petition at bar, BPI was unable to discharge the burden of proof necessary for thegrant of a refund. BPI expressly indicated in its ITR for 1998 that it was carrying over,instead of refunding, the excess income tax it paid during the said taxable year. BPIconsistently reported the said amount in its ITRs for 1999 and 2000 as credit to beapplied to any tax liability the bank may incur; only, no such opportunity arose because itsuffered a net loss in 1999 and incurred zero tax liability in 2000.

BPI itself never denied that its original intention was to carry over the excess income taxcredit it acquired in 1998, and only chose to refund the said amount when it was unableto apply the same to any tax liability in the succeeding taxable years. There can be nodoubt that BPI opted to carry over its excess income tax credit from 1 998; it onlysubsequently changed its mind which it was barred from doing by the irrevocabilityrule.

Dispositive:

Petition for Review of the Commissioner for Internal Revenue is GRANTED.

Vote:Ynares-Santiago, Velasco, Nachura, Peralta, JJ., concur.

-Wiggy

Commissioner of Internal Revenue v. PL Management International Philippines -

Sandra

xxx

g. Return of corporations contemplating dissolution/reorganization

BPI v. Commissioner of Internal Revenue Jan

(NOTE: Hard copies of the digest will be distributed to the class)

DD. WITHHOLDING TAX

Withholding of creditable tax

FILSYN v. CA

(July 11, 1989)FILIPINAS SYNTHETIC FIBER CORPORATION, petitioner, vs. COURT OF APPEALS, COURT

OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

DOCTRINE:- Under the accrual basis method of accounting, income is reportable when all the

events have occurred that fix the taxpayer's right to receive the income, and theamount can be determined with reasonable accuracy. Thus, it is the right to receiveincome, and not the actual receipt, that determines when to include the amount ingross income.

- The liability to withhold tax at source on income payments to non-residentforeign corporations arises upon accrual of the amounts of remmittance due tothe foreign creditors.

NATURE: Petitions for Review on Certiorari under Rule 45 of the Revised Rules ofCourt seeking to set aside the Decisions of the Court of AppealsPONENTE: PURISIMA, J.:

FACTS:

1.

The Filipinas Synthetic Fiber Corporation, a domestic corporation received onDecember 27, 1979 a letter of demand from the Commissioner of InternalRevenue assessing it for deficiency withholding tax at source in the total amountof P829,748.77, inclusive of interest and compromise penalties, for the periodfrom the fourth quarter of 1974 to the fourth quarter of 1975.

2. The bulk of the deficiency withholding tax assessment, however, consisted ofinterest and compromise penalties for alleged late payment of withholding

taxes due on interest loans, royalties and guarantee fees paid by thepetitioner to non-resident corporations.

3. The assessment was seasonably protested by the petitioner through its auditor,SGV and Company.

4. Respondent denied the protest in a letter dated 14 May 1985 on the followingground:- "For Philippine internal revenue tax purposes, the liability to withhold and

pay income tax withheld at source from certain payments due to a foreigncorporation is at the time of accrual and not at the time of actual paymentor remittance thereof."

- Since the taxpayer failed to pay the withholding tax on interest, royalties,and guarantee fee at the time of their accrual and in the books of thecorporation the aforesaid assessment is therefore legal and proper.

5. Petitioner brought a Petition for Review before the Court of Tax Appeals. TheCTA rendered judgment ordering petitioner to pay respondent the amount ofP306,165.35 as deficiency withholding tax at source for the fourth quarter of1974 to the third quarter of 1975 plus 10% surcharge and 14% annual interestfrom November 29, 1979 to July 31, 1980, plus 20% interest from August 1,1980 until fully paid but not to exceed that which corresponds to a period ofthree (3) years pursuant to P .D. No. 1705.

ISSUES: Whether the liability to withhold tax at source on income payments to non-resident foreign corporations arises upon remittance of the amounts due to theforeign creditors or upon accrual thereof

HELD/RATIO/RULING: UPON ACCRUALPETITIONER:- The withholding taxes on the said interest income and royalties were paid to the

government when the subject interest and royalties were actually remittedabroad.

- Stated otherwise, whatever amount has accrued in the books, the withholding taxdue thereon is ultimately paid to the government upon remittance abroad of theamount accrued.

COURT:


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- The provisions of law2 are silent as to when does the duty to withhold the taxesarise. And to determine the same, an inquiry as to the nature of accrual method ofaccounting, the procedure used by the herein petitioner, and to the modus vivendiof withholding tax at source come to the fore.

- The method of withholding tax at source is a procedure of collecting income taxsanctioned by the National Internal Revenue Code. Section 53 (c) [see FN1] that thewithholding agent is explicitly made personally liable for the income tax withheldunder Section 54.

- In Phil. Guaranty Co., Inc. vs. Commissioner of Internal Revenue, 4 the Court, hasheld that the law sets no condition for the personal liability of the withholding agentto attach. The reason is to compel the withholding agent to withhold the tax underall circumstances.

- Thus, the withholding agent is constituted the agent both the government and thetaxpayer. With respect to the collection and/or withholding of the tax, he is theGovernment's agent. In regard to the filing of the necessary income tax return andthe payment of the tax to the Government, he is the agent of the taxpayer.

2Sec. 53: Withholding Tax at source . . .

(b) Non-resident aliens and foreign corporations Every individual, corporation, partnership, orassociation, in whatever capacity acting, including a lessee or mortgagor of real or personalproperty, trustee acting in any trust capacity, executor, administrator, receiver, conservator,

fiduciary, employer, and every officer or employee of the Government of the Republic of thePhilippines having the control, receipt, custody, disposal, or payment of interest, dividends, rents,royalties, salaries, wages, premiums, annuities, compensation, remunerations, emoluments, or otherfixed or determinable annual, periodical, or casual gains, profits, and income, and capital gains, ofany non-resident alien not engaged in trade or business within the Philippines, shall (except in thecase provided in sub-section (a) (1) of this Section) deduct and withhold from the annual,periodical, or casual gains, profits, and income, and capital gains, a tax equal to 30 per cent thereof.(c) Every person required to deduct and withhold any tax under this section shall make returnthereof, . . . for the payment of the tax, shall pay the amount withheld to the officer of theGovernment of the Philippines authorized to receive it. Every such person is made personally liablefor such tax, and is indemnified against the claims and demands of any person for the amount of anypayments made in accordance with the provision of this section.

xxx xxx xxx(2) Non-resident foreign corporations In the case of foreign corporations subject to taxunder this Title, not engaged in trade or business within the Philippines, there shall be deducted and

withheld at the source in the same manner and upon the same items as is provided in subsection (b)(1) of this section, as well as on remunerations for technical services or otherwise, a tax equal tothirty-five (35) per cent thereof. This tax shall be returned and paid in and subject to the sameconditions as provided in Section 54.

Section 54: Returns and payments of taxes withheld at source (a) Quarterly return and payment of taxes withheld Taxes deducted and withheld underSection 53 shall be covered by a return and paid to the Commissioner of Internal Revenue or hiscollection agent in the province, city, or municipality where the withholding agent has his legalresidence or principal place of business, or where the withholding agent is a corporation, where theprincipal office is located. The taxes deducted and withheld by the withholding agent shall be heldas a special fund in trust for the Government until paid to the collecting officers. The Commissionerof Internal Revenue may, with the approval of the Secretary of Finance, require these withholdingagents to pay or deposit the taxes deducted and withheld at more frequent intervals whennecessary to protect the interest of the Government. The return shall be filed and the payment made

within 25 days from the close of each calendar quarter . . .

- The withholding agent, therefore, is no ordinary government agent especiallybecause under Section 53 (c) he is held personally liable for the tax he is dutybound to withhold; whereas, the Commissioner of Internal Revenue and hisdeputies are not made liable to law.

- On the other hand, "under the accrual basis method of accounting, income isreportable when all the events have occurred that fix the taxpayer's right toreceive the income, and the amount can be determined with reasonable accuracy.

- Thus, it is the right to receive income, and not the actual receipt, that determineswhen to include the amount in gross income."

-

The following are the requisites of accrual method of accounting,(1) that the right to receive the amount must be valid, unconditional andenforceable, i.e., not contingent upon future time;

(2) the amount must be reasonably susceptible of accurate estimate; and(3) there must be a reasonable expectation that the amount will be paid in due

course." 6

- In the case at bar, there was a definite liability, a clear and imminent certaintythat at the maturity of the loan contracts, the foreign corporation was going toearn income in an ascertained amount, so much so that petitioner alreadydeducted as business expense the said amount as interests due to the foreigncorporation. This is allowed under the law, petitioner having adopted the "accrualmethod" of accounting in reporting its incomes." Petitioner cannot now claim that there is no duty to withhold and remit income

taxes as yet because the loan contract was not yet due and demandable. Having "written-off" the amounts as business expense in its books, it had taken

advantage of the benefit provided in the law allowing for deductions from grossincome.

Moreover, it had represented to the BIR that the amounts so deducted wereincurred as a business expense in the form of interest and royalties paid to theforeign corporations. It is estopped from claiming otherwise now.

DISPOSITION: WHEREFORE, the decisions of the Court of Appeals in CA GR. SP Nos.32922 and 32022 are hereby AFFIRMED in toto. No pronouncement as to costs.

VOTE: THIRD DIVISION; Melo, Vitug and Panganiban, JJ., concur.; Gonzaga-Reyes, J.,took no part - spouse connected with counsel for petitioner. (AWWWWW talo sihubby)

- Davidxxx


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4. Tax deemed paid on dividends

CIR vs P&G Philippine Manufacturing Corp

(Dec 2., 1991)Ponente: Feliciano

Doctrine: The withholding agent is the agent of both the Government and the taxpayer.With respect to the collection and/or withholding of tax, he is the Governments agent.With regard to the filing of the necessary income tax return and the payment of the tax tothe Government, he is the agent of the taxpayer.

Also see computation to find out the tax deemed paid.Facts:Procter and Gamble Philippines declared dividends payable to its parent company andsole stockholder, P&G USA, and deducted 35% withholding tax at source. It then filed aclaim with the Commissioner of Internal Revenue for a refund or tax credit, claiming thatpursuant to Section 24(b)(1) of the National Internal Revenue Code, as amended byPresidential Decree No. 369, the applicable rate of withholding tax on the dividendsremitted was only 15%.Issues and Ruling:

1. W/N P&G Philippines is entitled to the refund or tax credit.YES. The ordinary 35% tax rate applicable to dividend remittances to non-residentcorporate stockholders of a Philippine corporation goes down to 15% if the country of

domicile of the foreign stockholder corporation shall allow such for eign corporation atax credit for taxes deemed paid in the Philippines, applicable against the tax payableto the domiciliary country by the foreign stockholder corporation. Such tax credit fortaxes deemed paid in the Philippines must, as a minimum, r each an amount equivalentto 20 percentage points which represents the difference between the regular 35%dividend tax rate and the preferred 15% tax rate. Since the US Congress desires to avoidor reduce double taxation of the same income stream, it allows a tax credit of both (i) thePhilippine dividend tax actually withheld, and (ii) the tax credit for the Philippinecorporate income tax actually paid by P&G Philippines but deemed paid by P&G USA.

Moreover, under the Philippines-United States Convention With Respect to Taxes onIncome, the Philippines, by treaty commitment, reduced the regular rate of dividend tax

to a maximum of 20% of the gross amount of dividends paid to US parent corporations,and established a treaty obligation on the part of the United States that it shall allow toa US parent corporation receiving dividends from its Philippine subsidiary a [tax] credit

for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine[subsidiary].Notes:The law sets no condition for the personal liability of the withholding agent to attach.The reason is to compel the withholding agent to withhold the tax under allcircumstances. In effect, the responsibility for the collection of the tax as well as thepayment thereof is concentrated upon the person over whom the Government hasjurisdiction.The withholding agent is the agent of both the Government and the taxpayer. Withrespect to the collection and/or withholding of tax, he is the Governments agent. With

regard to the filing of the necessary income tax return and the payment of the tax to theGovernment, he is the agent of the taxpayer.The NIRC does not require that the US tax law deem the parent corporation to have paid

the 20 percentage points of dividend tax waived by the Philippines. It only requires thatthe US shall allow P&G-USA a deemed paid tax credit in an amount equivalent to the

20 percentage points waived by the Philippines. Section 24(b)(1) does not create a taxexemption nor does it provide a tax credit; it is a provision which specifies when aparticular (reduced) tax rate is legally applicable.An interpretation of a tax statute that produces a revenue flow for the government isnot, for that reason alone, necessarily the correct reading of the statute.Section 24(b)(1) of the NIRC seeks to promote the in-flow of foreign equity investmentin the Philippines by reducing the tax cost of earning profits here and therebyincreasing the net dividends remittable to the investor. The foreign investor, however,would not benefit from the reduction of the Philippine dividend tax rate unless its

home country gives it some relief from double taxation by allowing the investoradditional tax credits which would be applicable against the tax payable to such homecountry. Accordingly Section 24(b)(1) of the NIRC requires the home or domiciliarycountry to give the investor corporation a deemed paid tax credit at least equal in

amount to the 20 percentage points of dividend tax foregone by the Philippines, in theassumption that a positive incentive effect would thereby be felt by the investor.Computation of the court:SO the court first determined the amount of tax the Philippines would have waived ifput under the 15% regime. This was computed as:

P100.00 Pretax net corporate income earned by P&G-Phil.x 35% Regular Philippine corporate income tax rate

P35.00 Paid to the BIR by P&G-Phil. as Philippinecorporate income tax.

P100.00-35.00P65.00 Available for remittance as dividends to P&G-USA

P65.00 Dividends remittable to P&G-USAx 35% Regular Philippine dividend tax rate under Section 24 (b) (1), NIRCP22.75 Regular dividend tax

P65.00 Dividends remittable to P&G-USAx 15% Reduced dividend tax rate under Section 24 (b) (1), NIRCP9.75 Reduced dividend tax

P22.75 Regular dividend tax under Section 24 (b) (1), NIRC-9.75 Reduced dividend tax under Section 24 (b) (1), NIRCP13.00 Amount of dividend tax waived by Philippine===== government under Section 24 (b) (1), NIRC

Next the Court determined how much of it was to be credited by the US government:


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P65.00 Dividends remittable to P&G-USA- 9.75 Dividend tax withheld at the reduced (15%) rateP55.25 Dividends actually remitted to P&G-USA

P35.00 Philippine corporate income tax paid by P&G-Phil.to the BIR

Dividends actually

remitted by P&G-Phil.to P&G-USA P55.25 = x P35.00 = P29.75 10Amount of accumulated P65.00 ======profits earned byP&G-Phil. in excessof income tax

Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of15%) by P&G-Phil. to its US parent P&G-USA, a tax credit of P29.75 is allowed by Section902 US Tax Code for Philippine corporate income tax "deemed paid" by the parent butactually paid by the wholly-owned subsidiary.

Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by thePhilippine government), Section 902, US Tax Code, specifically and clearly complies withthe requirements of Section 24 (b) (1), NIRC.

-Kester

6. Withholding tax on dividends

Marubeni Corp. v. Commissioner of Internal Revenue - Mae

7. Withholding tax on royalties

Commissioner of Internal Revenue, petitioner, vs. SC Johnson and Sons, and Courtof Appeals, respondents.

(June 25, 1999)

NOTES:

Kind of tax: tax on royaltiesNATURE: Petition for review a decision of the CAPONENTE: Peralta; 3rd Division

FACTS:

1. SC. JOHNSON AND SON, INC., a domestic corporation organized and operating underthe Philippine laws, entered into a license agreement with SC Johnson and Son,United States of America (USA), a non-resident foreign corporation was granted the

right to use the trademark, patents and technology owned by the latter includingthe right to manufacture, package and distribute the products. License Agreementwas duly registered with the Technology Transfer Board of the Bureau of Patents,Trade Marks and Technology Transfer under Certificate of Registration No. 8064.

2. SC. JOHNSON AND SON, INC was obliged to pay SC Johnson and Son, USA royaltiesbased on a percentage of net sales and subjected the same to 25% withholdingtax on royalty payments which [respondent] paid from July 1992 to May 1993.

3. Respondent filed with the International Tax Affairs Division (ITAD) of the BIR aclaim for refund of overpaid withholding tax on royalties arguing that Since the

agreement was approved by the Technology Transfer Board, the preferential taxrate of 10% should apply hence royalties paid by the [respondent] to SC Johnsonand Son, USA is only subject to 10% withholding tax pursuant to the most-favorednation clause of the RP-US Tax Treaty.

4. The Commissioner did not act on said claim for refund. Respondent filed apetition for review before the CTA to claim a refund of the overpaid withholdingtax on royalty payments. CTA decided for Respondent and ordered CIR to issue atax credit certificate in the amount of P963,266.00 representing overpaidwithholding tax on royalty payments, beginning July, 1992 to May, 1993. CIR fileda petition for review with CA. CA upheld CTA.

CIR: contends that under RP-US Tax Treaty, which is known as the "most favorednation" clause, the lowest rate of the Philippine tax at 10% may be imposed onroyalties derived by a resident of the United States from sources within thePhilippines only if the circumstances of the resident of the United States aresimilar to those of the resident of West Germany. Since the RP-US Tax Treatycontains no "matching credit" provision as that provided in RP-West GermanyTax Treaty, the tax on royalties under the RP-US Tax Treaty is not paid undersimilar circumstances as those obtaining in the RP-West Germany Tax Treaty.Also petitioner argues that since S.C. Johnson's invocation of the "most favorednation" clause is in the nature of a claim for exemption from the application of theregular tax rate of 25% for royalties, the provisions of the treaty must beconstrued strictly against it.

Respondent (SC Johnson and Sons): countered that the "most favored nation"clause under the RP-US Tax Treaty refers to royalties paid under similarcircumstances as those royalties subject to tax in other treaties; that the phrase

"paid under similar circumstances" does not refer to payment of the tax but to thesubject matter of the tax, that is, royalties, because the "most favored nation"clause is intended to allow the taxpayer in one state to avail of more liberalprovisions contained in another tax treaty wherein the country of residence ofsuch taxpayer is also a party thereto, subject to the basic condition that thesubject matter of taxation in that other tax treaty is the same as that in theoriginal tax treaty under which the taxpayer is liable; thus, the RP-US Tax Treatyspeaks of "royalties of the same kind paid under similar circumstances".

ISSUES:(1) WON SC Johnson can refund.

HELD: NO


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RATIO:

The tax rates on royalties and the circumstances of payment thereof are the same for allthe recipients of such royalties and there is no disparity based on nationality in thecircumstances of such payment. On the other hand, a cursory reading of the various taxtreaties will show that there is no similarity in the provisions on relief from or avoidanceof double taxation as this is a matter of negotiation between the contracting parties. Thisdissimilarity is true particularly in the treaties between the Philippines and the UnitedStates and between the Philippines and West Germany.

The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippineshas entered into for the avoidance of double taxation. The purpose of these internationalagreements is to reconcile the national fiscal legislations of the contracting parties inorder to help the taxpayer avoid simultaneous taxation in two differentjurisdictions. More precisely, the tax conventions are drafted with a view towards theelimination of international juridical double taxation, which is defined as the impositionof comparable taxes in two or more states on the same taxpayer in respect of the samesubject matter and for identical periods. The apparent rationale for doing away withdouble taxation is of encourage the free flow of goods and services and the movement ofcapital, technology and persons between countries, conditions deemed vital in creatingrobust and dynamic economies.

Double taxation usually takes place when a person is resident of a contracting state andderives income from, or owns capital in, the other contracting state and both statesimpose tax on that income or capital. In order to eliminate double taxation, a tax treatyresorts to several methods. First, it sets out the respective rights to tax of the state ofsource or situs and of the state of residence with regard to certain classes of income orcapital. In some cases, an exclusive right to tax is conferred on one of the contractingstates; however, for other items of income or capital, both states are given the right totax, although the amount of tax that may be imposed by the state of source is limited.

Double taxation usually takes place when a person is resident of a contracting state andderives income from, or owns capital in, the other contracting state and both statesimpose tax on that income or capital. In order to eliminate double taxation, a tax treaty

resorts to several methods. First, it sets out the respective rights to tax of the state ofsource or situs and of the state of residence with regard to certain classes of income orcapital. In some cases, an exclusive right to tax is conferred on one of the contractingstates; however, for other items of income or capital, both states are given the right totax, although the amount of tax that may be imposed by the state of source is limited. Onthe other hand, in the credit method, although the income or capital which is taxed in thestate of source is still taxable in the state of residence, the tax paid in the former iscredited against the tax levied in the latter. The basic difference between the twomethods is that in the exemption method, the focus is on the income or capital itself,whereas the credit method focuses upon the tax.

The phrase "royalties paid under similar circumstances" in the most favored nationclause of the US-RP Tax Treaty necessarily contemplated "circumstances that are tax-

related".

In the case at bar, the state of source is the Philippines because the royalties are paidfor the right to use property or rights, i.e. trademarks, patents and technology, locatedwithin the Philippines. The United States is the state of residence since the taxpayer,S. C. Johnson and Son, U. S. A., is based there. Under the RP-US Tax Treaty, the state ofresidence and the state of source are both permitted to tax the royalties, with arestraint on the tax that may be collected by the state of source.

the concessional tax rate of 10 percent provided for in the RP-Germany Tax Treatyshould apply only if the taxes imposed upon royalties in the RP-US Tax Treaty and in

the RP-Germany Tax Treaty are paid under similar circumstances. This would meanthat private respondent must prove that the RP-US Tax Treaty grants similar taxreliefs to residents of the United States in respect of the taxes imposable uponroyalties earned from sources within the Philippines as those allowed to their Germancounterparts under the RP-Germany Tax Treaty. The RP-US and the RP-West GermanyTax Treaties do not contain similar provisions on tax crediting.

If the rates of tax are lowered by the state of source, in this case, by the Philippines,there should be a concomitant commitment on the part of the state of residence togrant some form of tax relief, whether this be in the form of a tax credit orexemption. Otherwise, the tax which could have been collected by the Philippinegovernment will simply be collected by another state, defeating the object of the taxtreaty since the tax burden imposed upon the investor would remain unrelieved. If the

state of residence does not grant some form of tax relief to the investor, no benefitwould redound to the Philippines, i.e., increased investment resulting from a favorabletax regime, should it impose a lower tax rate on the royalty earnings of the investor,and it would be better to impose the regular rate rather than lose much-neededrevenues to another country.

The entitlement of the 10% rate by U.S. firms despite the absence of a matching credit(20% for royalties) would derogate from the design behind the most grant equality ofinternational treatment since the tax burden laid upon the income of the investor isnot the same in the two countries. The similarity in the circumstances of payment oftaxes is a condition for the enjoyment of most favored nation treatment precisely tounderscore the need for equality of treatment.

Respondent cannot be deemed entitled to the 10 percent rate granted under the RP-West Germany Tax Treaty for the reason that there is no payment of taxes on royaltiesunder similar circumstances in RP-US treaty.

We accordingly agree with petitioner that since the RP-US Tax Treaty does not give amatching tax credit of 20 percent for the taxes paid to the Philippines on royalties asallowed under the RP-West Germany Tax Treaty, private respondent cannot bedeemed entitled to the 10 percent rate granted under the latter treaty for the reasonthat there is no payment of taxes on royalties under similar circumstances.

It bears stress that tax refunds are in the nature of tax exemptions. As such they areregarded as in derogation of sovereign authority and to be construed strictissimi juris

against the person or entity claiming the exemption. The burden of proof is upon himwho claims the exemption in his favor and he must be able to justify his claim by the


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clearest grant of organic or s tatute law. Private respondent is claiming for a refund of thealleged overpayment of tax on royalties; however, there is nothing on record to support aclaim that the tax on royalties under the RP-US Tax Treaty is paid under similarcircumstances as the tax on royalties under the RP-West Germany Tax Treaty.

COURTS RULING: Petition Granted.

DISPOSITION: CA Decision Set Aside.VOTE: Vitug, Panganiban and Purisima concur.

-Ann

CIR v. CA & S.C. JOHNSON

(August 30, 1999)NATURE: Motion for Reconsideration for the decision rendered in June 25, 1999PONENTE: (written by the clerk of court)FACTS:

1. In The Commissioner of Internal Revenue vs. Court of Appeals and S.CJohnson & Son, Inc. (June 25, 1999) decision, SC held that the phrase "paidunder similar circumstances" in Article 13 (2) (b) (iii) of the RP-US Tax Treatyshould be interpreted as referring to the payment of taxes, and notroyalties. Such an interpretation is consistent with the purpose of the RP-US

Tax Treaty which is the avoidance of double taxation.2. As a consequence of such an interpretation, SC held that private respondent

S.C. Johnson & Son, Inc. (S.C. Johnson) is not entitled to the 10 percent rate

imposed on royalties under the RP-West Germany Tax Treaty because suchtreaty provides for a matching tax credit of 20 percent for the taxes paid to thePhilippines on royalties, whereas the RP-US Tax Treaty does not. Thus, there isno payment of taxes under similar circumstances.

ISSUES:

1. WON courts should NOT construe a statute which is clear and free from doubt.NO

2. WON preferential tax rate should be applied to private respondent, and is thusentitled to a refund of withholding tax. NO

3. WON the unilateral and inconsistent rulings of CIR should be the basis of aruling. NO (but is precisely the reason why SC should rule)

RATIO:

CONSTRUCTION OF ARTICLE 13 (2)Private Respondent: The Courts may NOT construe a statute which is clear and free fromdoubt.Supreme Court:

1. It is precisely because Article 13 (2) (b) (iii) of the RP-US Tax Treaty is subjectto varied interpretations, that this Court has rendered its June 25, 1999decision interpreting it. We interpreted the contested provision with a view toits purpose, which is the avoidance of double taxation. As we stated in ourdecision, it is the duty of the courts to look to the object to be accompaniedby the law, the evils to be remedied, or the purpose to be subserved, and

to give the law a reasonable or liberal interpretation which will besteffectuate its purpose.

2. This is also sanctioned by Article 31 of the Vienna Convention on the Law ofTreaties which stated that a treaty shall be interpreted in good faith inaccordance with the ordinary meaning to be given to the terms of thetreaty in their context and in the light of its object and purpose.

NOT BOUND WITH THE US INTERPRETATION OF THE RP-US TAX TREATYPrivate Respondents:

In support of private respondent's second ground, it cites the interpretations given to

the RP-US Tax Treaty by the Department of Treasury

In interpretation Article 13 of the RP-US Tax Treaty, the Technical Explanation ofthe US Department of Treasury states that:

Notwithstanding such 25 percent and 15 percent limitations, the Philippinetax cannot exceed the lowest rate of Philippine Tax that may be

imposed on royalties of the same kind under similar circumstances to a

resident of a third State.Thus, for example, because the Philippines agreed to limit its tax on filmroyalties to an amount not in excess of 10 percent of the gross amount ofsuch royalties in its income Tax Conventions with Sweden and Denmark,that limitation will apply to film royalties paid under similarcircumstances to United States residents.

The US Senate Foreign Relations Committee, in its report recommending theapproval of the RP-US Tax Treaty stated that:

Under the proposed treaty, the withholding tax imposed by the United Stateson royalties derived by a resident of the Philippines is limited to 15 percentof the gross amount of the royalty. The withholding tax on royalties imposedby the Philippines is generally limited to 25 percent of the gross amount ofthe royalties. However, if the royalties are paid by a corporation which usregistered with the Philippine Board of Investment and is engaged inpreferred areas or activity, the withholding tax is limited to 15 percent of thegross amount of the royalties. In no case is either the 25 percent of the 15percent limitation to exceed the lower withholding rate of the

Philippine tax which may imposed on similar types of royalties paid toresidents of a third State. Thus, U.S. residents will automatically receive

the benefits of any lower withholding rates on royalties established inPhilippine tax treaties with any third country

Supreme Court:

1. However, said reports do not clearly support private respondent'sinterpretation of the RP-US Tax Treaty, they merely reiterate the law aspresently worded. Also, assuming that they did support private respondent'sposition, the Court is not bound to adopt the interpretations given to a taxtreaty by the executive or legislative branch of the United States government.

2. After the RP-US Tax Treaty was ratified by the President and concurred in bytwo-thirds of all the members of the Senate, it becomes a part of the law ofthe land and the courts have the exclusive power to interpret the same. Infact, private respondents itself recognized the court's jurisdiction when it

stated in its motion for reconsideration that "when a treaty affect private


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rights, the courts have the power and the duty to construe the treaty and applyit in appropriate cases.

TAX CREDITS UNDER (2) TREATIES NOT PAID UNDER SAME CIRCUMSTANCESPrivate Respondents:

Private respondents also claims that the RP-US Tax Treaty, while not providing for amatching 20 percent tax credit as found in the RP-Germany Tax Treaty, does provide fora substantially similar provision for tax credit, i.e., a credit against the United

States tax for the appropriate amount of taxes actually paid or accrued to the

Philippine by a citizen or resident of the United States.

Supreme Court:

We have already disposed of this allegation in our decision wherein we held that the taxcredits under the two treaties are not paid under similar circumstance.

IMPERATIVE FOR COURT TO RULE UPON INCONSISTENT RULINGS OF CIRPrivate respondent: claims that petitioner initially interpreted the RP-US Tax Treatyprovision in question as referring to the payment of royalties under similarcircumstances. Then it reversed this decision and then reverted back again. Privaterespondent alleges that petitioners unilateral, erratic and inconsistent and constantlychanging interpretation cannot be sanctioned, as the same is tantamount to bad faithand, hence, a violation of the treaty."Supreme Court:

1. Petitioner's inconsistent rulings as to the interpretation of the RP-US TaxTreaty only made it more imperative for this Court to decide the matter withfinality, which it did in its June 25, 1999 decision.

Clearly, all the grounds raised by private respondent have already been effectively

disposed of in its questioned ruling.

DISPOSITION: Wherefore, the Motion for Reconsideration is denied.

-Jenin

xxx

8. Rev. Memo. Cir. 46-2002, tax on royalty payments to US entity adopts most

favored nation clause under RP-China Tax Treaty effective January 1, 2002

GOLDEN ARCHES V. CIR

CTA Case No. 686213 July 2007Golden Arches Development Corp. (formerly McGeorge Food Industries, Inc.), petitionerv.Commissioner of Internal Revenue, respondent.Casanova,J.

DOCTRINE:"The purpose of the most favored nation clause is to grantthe contractingstate treatment that is not less favorable than that which has been granted to the most

favored among the other countries

NATURE: Petition for ReviewFACTS:

By virtue of a merger agreement, petitioner Golden Arches took over theoperation of McDonalds restaurants in the Philippines

Golden Arches filed its monthly remittance returns for January to December 2002and January to June 2003 showing final taxes withheld at a rate of 15% of royaltypayments made to McDonalds pursuant to the provisions of the RP-US tax treaty

On January 1, 2002, the RP-China Tax Treaty took effect. Under Article 23 of thetreaty, the rate of final withholding tax on royalties paid beginning January 2002should be taxed at the concession rate at 10%.

Believing that it is entitled to the lower rate of 10% compliant with the "most-favored-nation"clause of the RP-US tax treaty, petitioner then filed on December23, 2003 a claim for refund or issuance of a tax credit certificate for the recoveryalleged over-remitted and overpaid final withholding tax on its royalty paymentsto McDonalds in the amounts of P19,283,004.00 and P9,548,274.04 for thetaxable periods2002 and January to June of 2003

Since the CIR failed to act on this application, Golden Arches filed the presentclaim with the CTA to toll the prescription period

Golden Arches contends that upon that based on the RP-US tax treaty, when thesubsequent RP-China Tax Treaty came into force, the most-favored nationclause in the former allowed royalties paid to a US resident to be taxed at thesame rate as the latter treaty provides

Hence by virtue of that clause, it should be taxed only at a rate of 10% and not the15% it originally withheld. Hence it is entitled to refunds or a tax credit for theperiod concerned

ISSUE:

1. W/N Golden Arches should apply the rate of 15% or 10% incomputing the FWT on royalties paid to McDonalds for the periods fromJanuary to December 2002 and January to June2003?

HELD/RATIO

1. YES

The RP-US tax treaty provides:Article 13Royalties


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1.) Royalties derived by a resident of one of the Contracting States fromsources within theother Contracting State may be taxed by bothContracting States.

2.) However, the tax imposed by that Contracting State shall not exceed;a.)In the case of the United States, 15 per cent of the gross amount of the royalties,

b.)In the case of the Philippines, the least of :

(i) 25 per cent of the gross amount of the royalties;(ii) 15 per cent of the gross amount of the royalties, where the royalties are paidby a corporation registered with the Philippine Board of Investments and

engaged in preferred areas of activities; and(iii) the lowest rate of Philippine tax that may be imposed on royalties of thesame kind paid under similar circumstances to a resident of a third State.

3.) The term "royalties" as used in this Art icle means payments of any kind received as aconsideration for the use of, or the right to use, any copyright of literary, artistic or scientific

work, including cinematographic film or films or tapes used for radio or television,

broadcasting, any patent, trade mark, design or model, plan, secret formula or process or

other like right or property, or for the information concerning industrial, commercial or

scientific experience. The term" royalties" also includes gains derived from the

sale, exchange or other disposition thereof."

On the other hand, the pertinent provision of the RP-China Tax Treaty provides:However, such royalties may also be taxed in the Contracting State in which theyarise and according to the laws of the State, but if the recipient is the beneficial owner of the

royalties, the tax so charged shall not exceed:a.15 per cent of the gross amount of royalties arising from the use of, the right touse, any copyright of literary, artistic or scientific work including cinematograph films or tapes

for television or broadcasting or

b.10 per cent of the gross amount of royalties arising from the use of, or the rightto use, any patent, trade mark, design or model, plan, secret formula or process, or from the useof, or the right to use, industrial, commercial, or scientific equipment, or for information

concerning industrial, commercial or scientific experience

Golden Arches presented Monthly Remittance Returns on Income taxesWithheld as Revenue Accounting Certificates to prove that it remitted the

withholding tax on the royalties paid

It also asserts that RMC 46-02 as well as DA-ITAD Ruling No. 105-03sustains its enitltement to a lower tax rate under the most-favored

nation clause of the RP-US Tax Treaty

Pursuant to Revenue Memorandum Circular No. 46-02, the following twinrequirements must be complied with before the reduced tax rate of

10%may be availed of by the taxpayer invoking the same, thus:

1.It is necessary that there be an agreement or a contract whereby theroyalties paid to the US must originate from the use of, or the right to use any patent, trade

mark, design or model, plan, secret formula or process, or from the use, or the right to use,

industrial, commercial or scientific experience; and

2. Th e co nt ra ct or ag re em en t is su bj ec t to th e ap pr ov al un de r Ph il ip pi ne

law, the same must be duly approved by the Philippine competent authority.

To prove compliance with the requirements under the aforementioned RMC,petitioner offered in evidence the following documents, to wit:

1.Certi f ication issued by the Intellectual Property Off ice covering IPO

Certificate of Registration No. 5-2002-00122 6 valid from September 1,1993 to December 31,2010; and2. Li ce ns e Ag re em en t an d it s Am en dm en ts en te re d in to by an d be tw ee n the

petitioner and McDonald's Corporation, duly authenticated by the Consulate General of theRepublic of the Philippines for the District of Columbia Since the Petitioner has proven compliance with the requirements of the

RMCs and the DA-ITAD ruling as to the substantiation requirements, the

question is now whether the most-favored nation clause actually grants the

petitioner a lower tax rate

The purpose of the tax treaties entered into by the Philippines is evidently toreduce or eliminate instances of double taxation. The texts of the treaties

uniformly provide that the reduced rates are only applicable if the taxes in

both the contracting country and the Philippines are paid under the similar

circumstances. This is so since only taxes paid under similar circumstancesmay be deemed to constitute double taxation, which the treaties aim to

reduce

In this case, the treaties provide similar methods of avoiding double taxation,namely the allowance of a credit of a foreign tax as against taxes actually paid

in the Philippines

The purpose of the most favored nation clause is to grant the contractingstate treatment that is not less favorable than that which has been granted to

the most favored among the other countries

This establishes the principle of equality of treatment among contractingstates

Thus, the provisions of the RP-China tax Treaty, particularly the reducedrates should be made applicable to Golden Arches. Thus a tax credit for the

overpaid taxes for 2002 and Jan-July 2003 should be issued in favor of the

petitioner.

DISPOSITION: Petition GRANTED. Tax Credit Certificates ordered ISSUED.Votes: Acosta, P.J., and Bautista,J., concur

- Raffy

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