tax

Zamora vs. Collector of Internal

Revenue

May 31, 1963 PAREDES, J. Mica Maurinne M. Adao

This is a consolidation of 4 cases. This only covered issues under depreciation. Thus, this will not include the issues not related to

deductions in the last 2 cases

Summary: Mariano Zamora owner of the Bay View Hotel

was assessed for deficiency tax by the CIR because of disallowed deductions of promotion expense and depreciation. On the promotion expense, CTA found that the trip was a business and medical trip thus only half of the expenses incurred for that trip was allowed to be deducted. SC affirmed. On the depreciation, Zamora insisted on applying 3.5 depreciation rate as opposed to the 2.5 depreciation rate used by the CTA. The 3.5 % was based on a book on Hotel Management, while the 2.5 % was based on Bulletin F, a publication of the US Federal Internal Revenue Service, which was made after a study of the lives of the properties. SC ruled that the 2.5% depreciation rate was correctly used.

Doctrine: (implied) Normally, an average hotel building is

estimated to have a useful life of 50 years, but inasmuch as the useful life of the building for business purposes depends to a large extent on the suitability of the structure to its use and location, its architectural quality, the rate of change in population, the shifting of land values, as well as the extent and maintenance and rehabilitation, useful life can be adjusted. (In this case it was adjusted to 40 years)

FACTS:

Mariano Zamora, owner of the Bay View Hotel and Farmacia Zamora, filed his income tax returns the years 1951 and 1952. The CIR found that he failed to file his return of the capital gains derived from the sale of certain real properties and claimed deductions which were not allowable. The collector required him to pay the sums of P43,758.50 and P7,625.00, as

deficiency income tax for the years 1951 and 1952, respectively.

On appeal by Zamora, the CTA modified the decision appealed from and ordered him to pay the reduced total sum of P30,258.00 (P22,980.00 and P7,278.00, as deficiency income tax for the years 1951 and 1952, respectively).

Having failed to obtain a reconsideration of the decision, Mariano Zamora appealed (L-15290), alleging that the CTA erred, among others, —

(1) In dissallowing P10,478.50, as promotion expenses incurred by his wife for the promotion of the Bay View Hotel and Farmacia

Zamora (which is ½ of P20,957.00, supposed business expenses):

(2) In disallowing 3-½% per annum as the rate of depreciation of the

Bay View Hotel Building;

The CIR (L-15280) also appealed, claiming that the CTA erred in giving credence to the uncorroborated testimony of Mariano Zamora that he bought the said real property in question during the Japanese occupation, partly in Philippine currency and partly in Japanese war notes, and

ISSUES and RULING

1. Should the entire P20,957 be allowed as deduction as part of the promotion expenses? NO

2. [Relevant] What rate of depreciation should be applied for the Bay view Hotel Building? 2.5 % or 3.5%? 2.5%

RATIO

1. The trip was found out to be for medical and business purposes. No documents to substantiate the business expenses for submitted so it is fair to assume that half of the expenses were for business and half for personal or medical purpose.

It is alleged by Mariano Zamora claimed that the amount of P20,957.00 was spent by Mrs. Esperanza A. Zamora (wife of Mariano), during her travel to Japan and the United States to purchase machinery for a new Tiki-Tiki plant, and to observe hotel management in modern hotels. Thus, the entire amount must be deductible as promotion expense.

The CTA, however, found that for said trip Mrs. Zamora obtained only the sum of P5,000.00 from the Central Bank and that in her application for dollar allocation, she stated that she was going abroad on a combined medical and business trip, which facts were not denied by Mariano

Zamora. The alleged expenses were not supported by receipts. Mrs. Zamora could not even remember how much money she had when she left abroad in 1951, and how the alleged amount of P20,957.00 was spent.

Section 30, of the Tax Code, provides that in computing net income, there shall be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year, in carrying on any trade or business . Since promotion expenses constitute one of the deductions in conducting a business, same must testify these requirements. Claim for the deduction of promotion expenses or entertainment expenses must also be substantiated or supported by record showing in detail the amount and nature of the expenses incurred

Considering, as heretofore stated, that the application of Mrs. Zamora for dollar allocation shows that she went abroad on a combined medical and business trip, not all of her expenses came under the category of ordinary and necessary expenses; part thereof constituted her personal expenses. There having been no means by which to ascertain which expense was incurred by her in connection with the business of Mariano Zamora and which was incurred for her personal benefit, the CIR and the CTA are correct in their decisions, to consider 50% of the said amount of P20,957 as business expenses and the other 50%, as her personal expenses.

[RELEVANT]

2. Rate of 2.5 % as rate of depreciation was correctly used. Mariano Zamora claimed a depreciation deduction of 3-½%, as opposed to 2-½% applied by CTA, contending that (1) the Ermita District, where the Bay View Hotel is located, is now becoming a commercial district; (2) the hotel has no room for improvement; and (3) the changing modes in architecture, styles of furniture and decorative designs, "must meet the taste of a fickle public".

It is a fact, however, that the CTA, in estimating the reasonable rate of depreciation allowance for hotels made of concrete and steel at 2-½%, the three factors just mentioned had been taken into account already.

According to the CTA, normally, an average hotel building is estimated to have a useful life of 50 years, but inasmuch as the useful life of the building for business purposes depends to a large extent on the suitability of the structure to its use and location, its architectural quality, the rate of change in population, the shifting of land values, as well as the extent and maintenance and rehabilitation. It is allowed a depreciation rate of 2-½% corresponding to a normal useful life of only 40 years. Consequently, the stand of the petitioners cannot be sustained.

As the lower court based its findings on Bulletin F, Zamora, argues that the same should have been first proved as a law, to be subject to judicial notice. Bulletin F, is a publication of the US Federal Internal Revenue Service, which was made after a study of the lives of the properties. In the words of the lower court: "It contains the list of depreciable assets, the estimated average useful lives thereof and the rates of depreciation allowable for each kind of property.

It is true that Bulletin F has no binding force, but it has a strong persuasive effect considering that the same has been the result of scientific studies and observation for a long period in the US after whose Income Tax Law ours is patterned.

Zamora also contends that his basis for applying the 3-½% rate is the testimony of its witness Mariano Katipunan, who cited a book entitled "Hotel Management — Principles and Practice" by Lucius Boomer, President, Hotel Waldorf Astoria Corporation. However, the Court agrees with the Solicitor General that it is absurd that while Zamora insist on rejecting Bulletin F, he would insist on using as authority, a book in Hotel management written by a man who knew more about hotels than about taxation.

As such, it is held that the 2-½% rate of depreciation of the Bay View Hotel building, is approximately correct.

ROXAS v. CTA

Bengzon, JP, J Jayson C. Aguilar (Edited digest of Noel Luciano)

SUMMARY: The Roxas brothers inherited, among others, the

Nasugbu farm lands. They established a partnership, Roxas y Compania to manage the inherited properties. The Government persuaded the brothers to sell the farm lands to the government for distribution to the actual famers who tilled the lands for generations. Since the government did not have any funds to pay the partnership, the partnership subdivided the land and sold it directly to the farmers under a payment scheme with RFC. The CIR assessed the Partnership and the brothers individually for deficiency income taxes after disallowing the deduction from gross income of various business expenses and contributions. The brothers contested the assessment. SC allowed some of the deductions but disallowed others.

DOCTRINE: Contributions made to the Manila Police

(considered a governmental institution) Trust Fund and to a group of civic spirited citizens (considered a charitable organization) for the benefit of needy families in the City of Manila were held to be deductible. But donations to a chapel

owned by a private university that distributes dividends to its stockholders are not deductible.

FACTS: Don Pedro Roxas and Dona Carmen Ayala transmitted

to their grandchildren by hereditary succession the following properties:

1. Agricultural lands – 19,000 hectares; Nasugbu, Batangas

2. Residential house and lot – Manila 3. Shares of stock in different corporations.

The 3 granchildren, Antonio, Eduardo, and Jose Roxas (The Brothers) formed a partnership called Roxas y Compania (the Partnership) to manage these properties.

As for the agricultural land:

1. The tenants who had been tilling the lands expressed their desire to purchase

2. The government persuaded the Brothers to sell 13,500 hectares of the Nasubu property to the Government for distribution to its actual occupants for a price of P2,079,048.47 plus P300,000 for survey and subdivision expenses

3. The government had no funds so a special agreement was made:

a. The Rehabilitation Finance Corp. (RFC) is to advance to Roxas y Cia the amount of P1.5M as loan with the lands as collateral

b. Roxas y Cia allowed the farmers to buy by installment and contracted with the RFC to pay its loan from the proceeds of the yearly amortizations paid by the farmers

4. From the installments, the partnership received a net gain of P42,480.83 in 1953 and P29,500.71 in 1955 a. 50% of said net gain was reported for income tax as

gain on sale of capital asset held for more than 1 year

As for the Residential house

b. Jose pays an annual rent of P8,000 to the partnership On June 1958, the Commissioner of Internal Revenue (CIR) demanded from the Partnership the payment of:

1. Real estate dealer’s tax for 1952 = P150 plus P10 compromise penalty for late payment

a. Basis: the fact that the Partnership received house rentals from Jose in the amount of P8,000

b. Sec. 194 Tax Code – Owner of real estate who derives a yearly rental income therefrom in P3,000 or more is considered a real estate dealer and is liable to pay tax

2. Dealers of securities tax for 1952 = P150 plus P10 compromise penalty for late payment

a. Basis: the fact that said partnership made profits from the purchase and sale of securities

The CIR also demanded deficiency income taxes against the Brothers for the 1953 and 1955

1. Deficiency income resulted from:

a. The inclusion as income of the Partnership’s unreported 50% net profits for 1953 and 1955 derived from the sale of the farm lands

b. And the disallowance of deductions from gross income of various business expenses and contributions claimed by the Partnership and the Brothers

2. The CIR considered the partnership as engaged in the business of real estate, hence, 100% of net profits are taxable

The Brothers protested the assessment. This was denied. They appealed to the CTA.

CTA DECISION: The CTA sustained the assessment except the

demand for the payment of the fixed tax on dealer of securities and the disallowance of some of the deductions for contributions. It held as follows:

1. Decision affirmed with respect to the Brothers; they are to pay deficiency income as assessed plus 5% surcharge and 1% monthly interest

2. Decision modified with respect to the Partnership; it should pay only P150 as real estate dealer’s tax only The Brothers appealed to the SC.

ISSUE: WON the CTA was correct in sustaining the

assessment.

RULING: YES, but subject to modification in the computation

of deficiency income taxes of the brothers.

RATIO:

I. The Partnership is NOT a real estate dealer

A. The CIR argues that the Partnership could be considered a real estate dealer

1. Since it engaged in the business of selling real estate

2. When they subdivided the farm lands and sold them to the farmer-occupants

3. CIR relied on one of the purposes of the Partnership as contained in its articles of partnership

B. SC said that the proposition of the CIR in this isolated transaction with its peculiar circumstances in spite of the fact that there were hundreds of vendees cannot be accepted

1. The sale of the farm lands to the actual farmers who tilled them for generations was not only in consonance with, but more in obedience to the request, and pursuant to the policy of the Government to allocate lands to the landless 2. It was the duty of the Government to pay the

agreed compensation after it had persuaded the Partnership to sell

3. Since the Government cannot pay, the Partnership went out of its way to shoulder the burden and still proceeded with the sale

C. The Partnership cannot be considered a real estate dealer for the sale in question

1. Hence, pursuant to Sec. 34 Tax Code, lands sold to farmers are capital assets

a. Gain derived from sale thereof is capital gain, taxable only to 50%

II. Discussion on taxation

A. The power of taxation is sometimes called also the power to destroy

1. It should be exercised with caution to minimize injury to the proprietary rights of a taxpayer 2. It must be exercised fairly, equally and

uniformly, lest the tax collector kill the “hen that lays the golden egg”

B. The power must be used justly and not treacherously

1. In order to maintain the general public’s trust and confidence in the Government

C. It does not conform to justice in the instant case for the Government to persuade the taxpayer to lend it a helping hand and later on to penalize him for duly answering the urgent call

III. As to the disallowed deductions [RELEVANT]: A. The representation expenses were correctly

disallowed

1. The Partnership deducted from its gross income P40 for tickets to a banquet given in honor of Sergio Osmena and P28 for San Miguel beer given as gifts; these were declared as representation expenses

2. According to Sec. 30(a) Tax Code, Representation expenses are deductible PROVIDED that taxpayer proves that they are reasonable in amount, ordinary and necessary, and incurred in connection with his business

a. The Partnership failed to prove this link between the said expenses and its business. 3. The CTA correctly disallowed this deduction B. The petitioners claim that the deductions for

contributions to the Pasay City Police, Pasay City Firemen, Baguio City Police Christmas funds, Philippine Herald’s fund for Manila’s neediest families and Our Lady of Fatima Chapel at FEU should not have been disallowed.

1. Contributions to Christmas funds are not deductible since the funds were not spent for public purposes but as Christmas gifts to the families of the members of said entities. A contribution to a government entity is deductible when used exclusively for public purposes.

2. The contribution to the Manila Police trust fund is an allowable deduction for said trust belongs to the Manila Police, a government entity, intended to be used exclusively for its public functions.

3. The contributions to the Philippines Herald’s fund for Manila’s neediest families were actually made not to Philippines Herald itself but to a group of civic spirited citizens organized by the Philippines Herald solely for charitable purposes. There is no question that the members of this group of civic spirited citizens do not receive profits, for all the fund they raised were for Manila’s neediest families. Such group may be classified as an association organized exclusively for charitable purposes under Sec. 30(h) Tax Code

4. The contribution to Our Lady of Fatima chapel in FEU should be disallowed since FEU gives dividends to its stockholders. Located within the premises of FEU, the chapel has not been shown to belong to the Catholic Church or any religious organization. It belongs to the FEU, contributions

to which are not deductible under Sec. 30(h) Tax Code for the reason that the net income of said university inures to the benefit of its stockholders.

DISPOSITIVE: Wherefore, the decision appealed from is

modified.

1. The Partnership is ordered to pay P150 as real estate dealer’s fixed tax for 1952

2. The Brothers are ordered to pay the respective sums of P109, P91, and P49 as their individual deficiency income tax for 1955.

GANCAYCO v. COLLECTOR

OF INTERNAL REVENUE

April. 20, 1961 Concepcion, J. Dave Anastacio

SUMMARY: Gancayco questions the assessment of CIR,

which did not deduct “farming expenses.” CTA ruled that these expenses, being in the nature of capital expenditures and not ordinary and necessary business expenses, are not deductible. SC agreed.

DOCTRINE: The cost of farm machinery, equipment and

farm building represents a capital investment and is not an allowable deduction as an item of expense. Amounts expended in the development of farms, orchards, and ranches prior to the time when the productive state is reached may be regarded as investments of capital. Expenses for clearing off and grading lots acquired is a capital expenditure, representing part of the cost of the land and was not deductible as an expense. Ordinary and necessary business expenses is intended primarily, although not always necessarily, to cover expenditures of a recurring

nature where the benefit derived from the payment is realized and exhausted within the taxable year.

FACTS: Gancayco filed his income tax return for the year

1949. Two (2) days later, Collector of Internal Revenue issued ta notice advising him that his income tax liability for that year amounted P9,793.62, which he paid. A year later, CIR notified that there was still due from him, a deficiency income tax for the year 1949, the sum of P29,554.05. Gancayco sought a reconsideration, which was partly granted. CIR informed him that his income tax defendant deficiency for 1949 amounted to P16,860.31. Gancayco sought another reconsideration but no action was taken on this request.

CIR issued a warrant of distraint and levy against the properties of Gancayco for the satisfaction of his deficiency income tax liability. Gancayco filed a case asking the Court of Tax Appeal questioning his liability and asking to enjoin CIR from collection of the alleged tax liability due. CTA ruled against him. Gancayco appealed to the SC.

ISSUES: WON Gancayco’s deductions are allowed- NO RULING: Capital expenditures, which are not ordinary and necessary business expenses, are not deductible RATIO: The question whether the sum of P16,860.31 is due

from Gancayco as deficiency income tax for 1949 hinges on the validity of his claim for deduction of two (2) items, namely: (a) for farming expenses, P27,459.00; and (b) for representation expenses, P8,933.45.

Section 30 of the Tax Code partly reads:

(a) Expenses:

(1) In General — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on

any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for the purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.

In this case, there was no evidence presented as to the nature of the said "farming expenses" other than the bare statement of Gancayco that they were spent for the "development and cultivation of (his) property". No specification has been made as to the actual amount spent for purchase of tools, equipment or materials, or the amount spent for improvement. The entire amount was spent

exclusively for clearing and developing the farm which were necessary to place it in a productive state. It is not, therefore, an ordinary expense but a capital expenditure. Accordingly, it is not deductible but it may be

amortized, in accordance with section 75 of Revenue Regulations No. 2, cited above. See also, section 31 of the Revenue Code which provides that in computing net income, no deduction shall in any case be allowed in respect of any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate.

Section 31 of the Tax Code, pursuant to which:

(a) General Rule — In computing net income no deduction shall in any case be allowed in respect of —

(1) Personal, living, or family expenses;

(2) Any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate;

(3) Any amount expended in restoring property or in making

good the exhaustion thereof for which an allowance is or has been made; or

(4) Premiums paid on any life insurance policy covering the life of any officer or employee, or any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy.

Expenses incident to the acquisition of property follow the same rule as applied to payments made as direct consideration for the property. For example, commission paid in acquiring property are considered as representing part of the cost of the property acquired. The same treatment is to be accorded to amounts expended for maps, abstracts, legal opinions on titles, recording fees and surveys. Other non-deductible expenses include amounts paid in connection with geological explorations, development and subdividing of real estate; clearing and grading; restoration of soil, drilling wells, architects's fees and similar types of expenditures. The cost

of farm machinery, equipment and farm building represents a capital investment and is not an allowable deduction as an item of expense. Amounts expended in the development of farms, orchards, and ranches prior to the time when the productive state is reached may be regarded as investments of capital. Expenses for clearing off and grading lots acquired is a capital expenditure, representing part of the cost of the land and was not deductible as an expense.

An item of expenditure, in order to be deductible under this section of the statute providing for the deduction of ordinary and necessary business expenses, must fall squarely within the language of the statutory provision. This section is

intended primarily, although not always necessarily, to cover expenditures of a recurring nature where the benefit derived from the payment is realized and exhausted within the taxable year. Accordingly, if the

result of the expenditure is the acquisition of an asset which has an economically useful life beyond the taxable year, no

deduction of such payment may be obtained under the provisions of the statute. In such cases, to the extent that a deduction is allowable, it must be obtained under the provisions of the statute which permit deductions for amortization, depreciation, depletion or loss.

Gancayco's claim for representation expenses aggregated P31,753.97, of which P22,820.52 was allowed, and P8,933.45 disallowed. Such disallowance is justified by the record, for, apart from the absence of receipts, invoices or vouchers of the expenditures in question, petitioner could not specify the items constituting the same, or when or on whom or on what they were incurred.

DISPOSITIVE: Being in accordance with the facts and law, the decision of the Court of Tax Appeals is hereby affirmed therefore, with costs against petitioner Santiago Cancayco. It is so ordered.

NV REEDERIT v. CIR (Apacible)

Bank of America v. CIR

Vitug, J. Sai

SUMMARY: Petitioner Bank of America NT & SA argues that

the 15% branch profit remittance tax on the basis of the above provision should be assessed on the amount actually remitted abroad, which is to say that the 15% profit

remittance tax itself should not form part of the taxbase. CIR holds the position that, in computing the 15% remittance tax, the tax should be inclusive of the sum deemed remitted. CTA ruled i

DOCTRINE: Where the law does not qualify that the tax is

imposed and collected at source based on profit to be

remitted abroad, that qualification should not be read into the law. It is a basic rule of statutory construction that there is no safer nor better canon of interpretation than that when the language of the law is clear and unambiguous, it should be applied as written. And to SC's mind, the term "any profit remitted abroad" can only mean such profit as is "forwarded, sent, or transmitted abroad" as the word "remitted" is

commonly and popularly accepted and understood. To say therefore that the tax on branch profit remittance is imposed and collected at source and necessarily the tax base should be the amount actually applied for the branch with the Central Bank as profit to be remitted abroad is to ignore the unmistakable meaning of plain words.

FACTS: Bank of America is a foreign corporation duly licensed

to engage in business in the Philippines. In1982 it paid 15% branch profit remittance tax in the amount of P7,538,460.72 on profit from its regular banking unit operations and

P445,790.25 on profit from its foreign currency deposit unit operations or a total of P7,984,250.97. The tax was based on net profits after income tax without deducting the amount corresponding to the 15% tax. It filed a claim for refund with the BIR of that portion of the payment which corresponds to the 15% branch profit remittance tax, on the ground that the tax should have been computed on the basis of profits actually remitted, which is P45,244,088.85, and not on the amount before profit remittance tax, which is P53,228,339.82. Without waiting for the BIR deicision, it filed a petition for review with SC for the recovery of the amount of P1,041,424.03.

CTA upheld claim for refund. CIR filed an appeal citing DBP v. CA. CTA reversed its decision The Court of Appeals in reversing the CTA,stated that the use of the word remitted may well be understood as referring to that part of the said total branch profits which would be sent to the head office as distinguished from the total profits of the branch. If the legislature indeed had wanted to mitigate the harshness of successive taxation, it would have been simpler to just lower the rates without in effect requiring the relatively novel and complicated way of

computing the tax. The same result would have been achieved.

ISSUE AND RULING:

WON the 15% profit remittance tax itself should form part of the taxbase in the computation of remittance tax- NO!

The Solicitor General correctly points out that almost invariably in an ad valorem tax, the tax paid or withheld is not deducted from the tax base. Such impositions as the ordinary income tax, estate and gift taxes, and the value added tax are

generally computed in like manner. In these cases, however, it is so because the law, in defining the tax base and in providing for tax withholding, clearly spells it out to be such,that tax is

on the total amount thereof which shall be collected and paid as provided in Sections 53 and 54 of the Tax Code.

Dividends received by an individual who is a citizen or resident of the Philippines from a domestic corporation, shall be subject to a final tax at the rate of (15%) per cent on the total amount

thereof, which shall be collected and paid as provided in Sections 53 and 54 of this Code.

Interest from Philippine Currency bank deposits and yield from deposit substitutes whether received by citizens of the

Philippines or by resident alien individuals, shall be subject to a final tax as follows: (a) 15% of the interest or savings deposits, and (b) 20% of the interest on time deposits and yield from deposits substitutes, which shall be collected and paid as

provided in Sections 53 and 54 of the Code.

And on rental payments payable by the lessee to the lessor (at 5%), Section 1, paragraph (C), of Revenue Regulations No. 13-78, November 1, 1913-78, provides that the basis of the 5% withholding tax, as expressly and unambiguously provided therein, is on the gross rental. Revenue Regulations No. 13-78 was promulgated pursuant to Section 53(f) of the then in force

NIRC which authorized the Minister of Finance, upon recommendation of the CIR to require the withholding of income tax on the same items of income payable to natural or juridical persons residing in the Philippines by the persons making such payments at the rate of not less than 2 1/2% but not more than 35% which are to be credited against the income tax liability of the taxpayer for the taxable year.

On the other hand, there is absolutely nothing in Section 24(b) (2) (ii), which indicates that the 15% tax on branch profit remittance is on the total amount of profit to be remitted abroad which shall be collected and paid in accordance with the tax withholding device provided in Sections 53 and 54 of the Tax Code. The statute employs "Any profit remitted abroad by a branch to its head office shall be subject to a tax of 15%" — without more. Nowhere is there said of "base on the total

amount actually applied for by the branch with the Central Bank of the Philippines as profit to be remitted abroad, which shall be collected and paid as provided in Sections 53 and 54

of this Code." Where the law does not qualify that the tax

is imposed and collected at source based on profit to be remitted abroad, that qualification should not be read into the law. It is a basic rule of statutory construction that there is no safer nor better canon of interpretation than that when the language of the law is clear and unambiguous, it should be applied as written. And to SC's mind, the term "any profit remitted abroad" can only mean such profit as is "forwarded, sent, or transmitted abroad" as the word "remitted" is

commonly and popularly accepted and understood. To say therefore that the tax on branch profit remittance is imposed and collected at source and necessarily the tax base should be the amount actually applied for the branch with the Central Bank as profit to be remitted abroad is to ignore the unmistakable meaning of plain words.

In the 15% remittance tax, the law specifies its own tax base to be on the "profit remitted abroad." There is absolutely nothing equivocal or uncertain about the language of the

provision. The tax is imposed on the amount sent abroad, and the law which was then in force calls for nothing further. The taxpayer is a single entity, and it should be understandable if, such as in this case, it is the local branch of the corporation, using its own local funds, which remits the tax to the Philippine Government.

The remittance tax was conceived in an attempt to equalize the income tax burden on foreign corporations maintaining, on the one hand, local branch offices and organizing, on the other hand, subsidiary domestic corporations where at least a

majority of all the latter's shares of stock are owned by such foreign corporations. Prior to the amendatory provisions of the Revenue Code, local branches were made to pay only the usual corporate income tax of 25%-35% on net income (now a uniform 35%) applicable to resident foreign corporations. While Philippine subsidiaries of foreign corporations were subject to the same rate of 25%-35% (now also a uniform 35%) on their net income, dividend payments, however, were additionally subjected to a 15% withholding tax (reduced conditionally from 35%). In order to avert what would otherwise appear to be an unequal tax treatment on such subsidiaries vis-a-vis local branch offices, a 20%, later reduced to 15%, profit remittance tax was imposed on local branches on their remittances of profits abroad. But this is where the tax

pari-passu ends between domestic branches and subsidiaries

of foreign corporations.

In the operation of the withholding tax system, the payee is the taxpayer, the person on whom the tax is imposed, while the payor, a separate entity, acts no more than an agent of the government for the collection of the tax in order to ensure its payment. Obviously, the amount thereby used to settle the tax liability is deemed sourced from the proceeds constitutive of the tax base. Since the payee, not the payor, is the real

taxpayer, the rule on constructive remittance or receipt can be easily rationalized, if not indeed, made clearly manifest. It is hardly the case, however, in the imposition of the 15% remittance tax where there is but one taxpayer using its own domestic funds in the payment of the tax. To say that there is

constructive remittance even of such funds would be

stretching far too much that imaginary rule. Sound logic does not defy but must concede to facts.

DISPOSITIVE: decision of the Court of Appeals appealed from

is REVERSED and SET ASIDE, and that of the Court of Tax Appeals is REINSTATED. 15% remittance tax excluded from tax base.

Marubeni v. CIR (Bernardo)

COMPAÑiA GENERAL DE

TABACOS DE FlLIPINAS vs.

CIR

1. Compañia General de Tabacos Filipinas is a foreign corporation licensed by Philippine Laws to engage in business through its Branch office in the Philippines.

2. It paid the 15% branch profit remittane tax but subsequently claimed for refund for overpaid branch profit remittance tax saying that under the NIRC the branch profit remittance tax should be computed based on the profit actually remitted abroad and not on the total branch profit.

3. The CTA ruled in favor of Compañia.

DOCTRINE:

1. The 15% branch profit remittance tax imposed by Section 24 (b) (2) (ii), NIRC, should be computed based on the profits actually remitted abroad and not on the total

branch profits out of which the remittance as clarified in Memorandum Circular No. 8-82 (MC No. 8-82) dated March 17, 1982.

2. The phrase 'any profit remitted abroad' in Section 24 (b) (2) (ii), NIRC, has been clarified in the BIR Ruling dated January 21, 1980 as to be construed to mean the profit to be remitted.

3. Hence, there must be an actual remittance, as distinguished from profit which is remittable.

4. Moreover, the 15% branch profit remittance tax is an income tax and is not deductible from the gross (profit) income.

5. It cannot be deducted as an expense despite being an exaction on profit realized for remittance abroad because it is not enumerated under Section 30, NIRC.

6. Since it is imposed and collected at source, the tax base should be the amount actually applied for by the Branch with the Central Bank of the Philippines as profit to be remitted abroad.

FACTS:

1. Compañia General de Tabacos Filipinas (Compania) is a foreign corporation duly licensed by Philippine laws to engage in business through its Branch Office.

2. On May 1988, it paid 15% branch profit remittance tax for 1985 and 1986 in the amount of PhP 3,148,267.96, using as tax base, the entire profit of the Branch Office.

3. On July 6, 1988, it filed for a claim for refund in the amount of PhP 593,948.61 representing alleged overpaid branch profit remittances taxes.

4. Compania contention:

a. Section 24(b)(2)(ii) of the NIRC should be interpreted to mean that the branch profit remittance tax should be computed based only on the profit remitted abroad and not on the total branch profit.

b. It also cited BIR Ruling dated January 21, 1980 and CIR v. Burroughs Limited as authority.

2. CIR Contention:

a. The 15% branch profit remittance tax is imposed and collected at source, so the tax base should be the total

branch profit and amount actually applied for by the branch with the Central Bank of the Philippines as profit to be remitted abroad pursuant to Revenue Memorandum No. 8-82, dated March 17, 1982.

ISSUE/S:

1. WON the branch profits tax are computed based on the profits actually remitted abroad or on the total branch profits out of which the remittance is made.

2. WON passive income, which are already subjected to the final tax, are still included for purposes of computing the branch profits remittance tax.

RATIO:

1. Branch Profits Tax is computed based on the profits actually remitted abroad.

2. Passive income should not be included for purposes of computing the branch profit remittance tax.

RULING:

1. The 15% branch profit remittance tax imposed by Section 24 (b) (2) (ii), NIRC, should be computed based on the profits actually remitted abroad and not on the total branch profits out of which the remittance as clarified in Memorandum Circular No. 8-82 (MC No. 8-82) dated March 17, 1982.

• The phrase 'any profit remitted abroad' in Section 24 (b) (2) (ii), NIRC, has been clarified in the BIR Ruling dated January 21, 1980 as to be construed to mean the profit to be remitted.

• Hence, there must be an actual remittance, as distinguished from profit which is remittable.

• Moreover, the 15% branch profit remittance tax is an income tax and is not deductible from the gross (profit) income.

• It cannot be deducted as an expense despite being an exaction on profit realized for remittance abroad because it is not enumerated under Section 30, NIRC.

• Since it is imposed and collected at source, the tax base should be the amount actually applied for by the Branch

with the Central Bank of the Philippines as profit to be remitted abroad.

• MC No. 8-82 was upheld as valid under CIR v. Bank of America and the use of the word remitted was clarified as referring to that part of the said total branch profits which would be sent to the head office as distinguished from the total profits of the branch (not all of which need be sent or would be ordered remitted abroad).

• CIR v. Burroughs Limited is not applicable to the case at bar because the branch profit remittance tax paid in that case was made in 1979 and thus, MC No. 8-82 was not applied because it cannot be given retroactive effect by virtue of Section 327 of the NIRC.

• Thus, in view of the fact that Compania’s branch profit remittance tax for 1985 (partial) and 1986 were paid on May 3, 1988, after the effectivity of MC No. 8-82 (March 17, 1982), then what should apply as taxable base in computing the 15% branch profit remittance tax is the amount applied for with the Central Bank as profit to be remitted abroad and not the total amount of branch profits. 1. Passive income should not be included for purposes of

computing the branch profit remittance tax.

• Under Section 24 (b) (2) (ii), the rule is interest and dividends received by a foreign corporation during each taxable year from all sources within the Philippines shall not be considered as branch profits unless the same are effectively connected with the conduct of its trade or business.

• The phrase "effectively connected" was interpreted to mean income derived from the business activity in which the corporation is engaged.

• In all the corporate quarterly income tax returns filed by Compania with the BIR, it was indicated and shown that it is engaged in the business as leaf tobacco dealer, exporter, importer, and general merchants.

• The interests received from savings deposit with PhilTrust, interests received from money market placements and interest on Land Bank Bonds and cash dividends received

from Philippine Long Distance Telephone Company (PLDT) and Tabacalera Industrial Development Corporation of the Phils. are not effectively connected with its trade or business. Furthermore, pursuant to Section 24(c) and (d) of the NIRC, dividends and interest are subject to final tax.

• To include them again as subject to branch profit remittance tax under the same Section 24(b)(2)(ii) would be contrary to law.

• Compania has sufficiently established a right to be refunded the amount of branch profit remittance tax paid on these interests and dividends which were included as part of the branch profits for 1985 (partial) and 1986.

• Consequently, following MC No. 8-82 and the jurisprudence cited, the tax base should be the amount applied for with the Central Bank for remittance without prior deduction of the 15% branch profit remittance tax.

• Thus, CIR must refund Compania in the amount of PhP 121,696.34 representing overpaid 15% branch profit remittance tax on interest and dividends received.

DISPOSITIVE: WHEREFORE, respondent, Commissioner of

Internal Revenue, is ordered to refund in favor of petitioner, Compañia General De Tabacos De Filipinas, the amount of P121,696.34, representing overpaid 15% branch profit remittance tax on interest and dividends received. No costs.

CIR v. PROCTER (1988)

April 15, 1988 Paras, J.

Denn

SUMMARY: PMC-Phil is a corporation duly organized under

Philippine laws. It is a wholly owned subsidiary of PMC-USA, an NRFC not engaged in trade or business in the Philippines. For the years 1974 and 1975, PMC-Phil paid for its taxes (25-35%) on its taxable net income. From its net profit, it then declared a dividend in favor of its sole stockholder and parent corporation PMC-USA. Such dividend was subject to

Philippine taxation of 35%. In 1977, PMC-Phil., invoking the tax-sparing credit provision in Section 24(b) of the TC, as the withholding agent of the Phil. government, with respect to the dividend taxes paid by PMC-U.S.A., filed a claim with the CIR, for the refund of its alleged “overpaid withholding tax”. The BIR did not take action and so PMC-Phil sought the intervention of the CTA. CTA ruled in favor of PMC-Phil. CIR filed a petition for review with the SC. SC reversed the CTA and held that PMC-USA was the real party in interest. Nevertheless, PMC-Phil also failed to meet certain conditions necessary so that the dividends sent to PMC-USA would be subject to the preferential 15% tax instead of 35%.

DOCTRINE: An NRFC’s tax on dividends received from a

domestic corporation liable to Philippine taxation shall be 15% of the dividends received, subject to the condition that the country in which the NRFC is domiciled shall allow a credit against the tax due from the non-resident foreign corporation, taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on corporations and the tax (15%) on dividends as provided in Section 24 of the Tax Code.

CASE: Petition for review on certiorari filed by CIR seeking the

reversal of the CTA Decision which declared Procter and Gamble to be entitled to the sought refund or tax credit in the amount of P4,832,989.00 representing the alleged overpaid withholding tax at source and ordering payment thereof.

FACTS: Procter and Gamble Philippine Manufacturing

Corporation (PMC-Phil.), a corporation duly organized and existing under and by virtue of the Philippine laws, is engaged in business in the Philippines and is a wholly owned subsidiary of Procter and Gamble, U.S.A. (PMC-USA), an NRFC in the Philippines, not engaged in trade and business therein. As such PMC-U.S.A. is the sole shareholder or stockholder of PMC Phil., as PMC-U.S.A. owns wholly or by 100% the voting stock of PMC Phil. and is entitled to receive income from PMC-Phil. in the form of dividends, if not rents or royalties. In addition,

Phil has a legal personality separate and distinct from PMC-U.S.A.

For the taxable year ending June 30, 1974: PMC-Phil. realized a

taxable net income (TNI) of P56,500,332.00 and accordingly

paid the corresponding income tax thereon equivalent to

P25%-35% or P19,765,116.00 as provided for under Section

24(a) of the Philippine Tax Code1_.

- After taxation its net profit was P36,735,216.00. Out of said amount it declared a dividend in favor of its sole corporate stockholder and parent corporation PMC-U.S.A. in the total sum of P17,707,460.00 which was subjected to Philippine taxation of 35% or P6,197,611.23 as provided for in Section 24(b) of the Philippine Tax Code2_.

1 _{SEC. 24. Rates of tax on corporation. — a) Tax on domestic}

corporations. — A tax is hereby imposed upon the taxable net income received during each taxable year from all sources by every corporation organized under the laws of the Philippines, and partnerships, no matter how created or organized, but not including general professional partnerships, in accordance with the following: Twenty-five per cent upon the amount by which the taxable net income does not exceed one hundred thousand pesos; and

Thirty-five per cent upon the amount by which the taxable net income exceeds one hundred thousand pesos.

2 _{(b) Tax on foreign corporations. — 41) Non-resident corporation. —}

A foreign corporation not engaged in trade or business in the Philippines, including a foreign life insurance company not engaged in the life insurance business in the Philippines, shall pay a tax equal to 35% of the gross income received during its taxable year from all sources within the Philippines, as interest (except interest on foreign loans which shall be subject to 15% tax), dividends, rents, royalties, salaries, wages, premiums, annuities, compensations, remunerations for technical services or otherwise, emoluments or other fixed or determinable, annual, periodical or casual gains, profits, and income, and capital gains: Provided, however, That premiums shall not include re-insurance premium Provided, further, That cinematograpy film owners, lessors, or distributors, shall pay a tax of 15% on their gross income from sources within the Philippines: Provided, still further That on dividends received from a domestic corporation liable to tax under this Chapter, the tax shall be 15% of the

For the taxable year ending June 30, 1975: PMC-Phil. realized a TNI of P8,735,125.00 which was subjected to Philippine taxation at the rate of 25%-35% or P2,952,159.00, thereafter leaving a net profit of P5,782,966.00. As in the 2nd quarter of 1975, Phil. again declared a dividend in favor of PMC-U.S.A. at the tax rate of 35% or P6,457,485.00.

In July, 1977 PMC-Phil., invoking the tax-sparing credit provision in Section 24(b) as aforequoted, as the withholding agent of the Philippine government, with respect to the dividend taxes paid by PMC-U.S.A., filed a claim with the Commissioner of Internal Revenue, for the refund of the 20

percentage-point portion of the 35 percentage-point whole tax paid, arising allegedly from the alleged "overpaid

withholding tax at source or overpaid withholding tax in the amount of P4,832,989.00," computed as follows:

Dividend Income Tax withheld 15% tax under Alleged of PMC-U.S.A. at source at tax sparing over

35% proviso payment

P17,707,460 P6,196,611 P2,656,119 P3,541,492

6,457,485 2,260,119 968,622 1,291,497

dividends received, which shall be collected and paid as provided in Section 53(d) of this Code, subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation, taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on corporations and the tax (15%) on dividends as provided in this section: Provided, finally That regional or area headquarters established in the Philippines by multinational corporations and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region shall not be subject to tax.

P24,164,946 P8,457,731 P3,624,941 P4,832,989

There being no immediate action by the BIR on PMC-Phils' letter-claim the latter sought the intervention of the CTA. In July 1977, it filed with the CTA a petition for review praying that it be declared entitled to the refund or tax credit claimed and ordering CIR to refund to it the amount of P4,832,989.00, or to issue tax credit in its favor in lieu of tax refund.

The CIR, in his answer, prayed for the dismissal of said Petition and for the denial of the claim for refund.

The CTA ruled in favor of PMC-Phil, holding that it was entitled to the sought refund or tax credit of the amount representing the overpaid withholding tax at source and the payment therefor by CIR. Hence this petition.

ISSUE: WON PMC-Phil. is entitled to the preferential 15% tax

rate on dividends declared and remitted to its parent corporation (PMC-USA)

- From this issue 2 questions are posed by the CIR:

(1) WON PMC-Phil. is the proper party to claim the refund (2) WON the U. S. allows as tax credit the "deemed paid" 20% Philippine Tax on such dividends

CIR: It is the PMC-U.S.A., the tax payer and not PMC-Phil., the remitter or payor of the dividend income, and a mere withholding agent for and in behalf of the Philippine Government, which should be legally entitled to receive the refund if any.

SC: Note that the CIR raised this issue for the first time in the SC. He did not raise it at the administrative level, nor at the CTA. "To allow a litigant to assume a different posture when he comes before the court and challenges the position he had accepted at the administrative level," would be to sanction a procedure whereby the Court-which is supposed to review administrative determinations would not review, but determine and decide for the first time, a question not raised at the

administrative forum." Thus it is well settled that under the same underlying principle of prior exhaustion of administrative remedies, on the judicial level, issues not raised in the lower court cannot generally be raised for the first time on appeal. - Nonetheless, the State can never be in estoppel, and this is

particularly true in matters involving taxation. The errors of certain administrative officers should never be allowed to jeopardize the government's financial position.

SC: CIR’s submission that PMC-Phil. is but a withholding agent of the government and therefore cannot claim reimbursement of the alleged over paid taxes, is completely meritorious. The real party in interest being the mother corporation in the United States, it follows that American entity is the real party in interest, and should have been the claimant in this case. Closely intertwined with the first assignment of error is the issue of WON PMC-U.S.A. — a NRFC under Sec. 24(b)(1) of the Tax Code (the subsidiary of an American) a domestic corporation domiciled in the US, is entitled under the U.S. Tax Code to a United States Foreign Tax Credit equivalent to at least the 20 percentage paid portion (of the 35% dividend tax) spared or waived as otherwise considered or deemed paid by the government.

- Pertinent law: Section 902 of the U.S. Internal Revenue Code, the law governing tax credits granted to U.S. corporations on dividends received from foreign corporations

- SC CONCLUSION: There is nothing in the aforecited provision that would justify tax return of the disputed 15% to PMC-Phil.

- Furthermore, PMC-Phil. failed to meet certain conditions necessary in order that the dividends received by the non-resident parent company in the United States may be subject to the preferential 15% tax instead of 35%. Among other things, PMC-Phil. failed: (1) to show the actual amount credited by the U.S. government against the income tax due from PMC-U.S.A. on the dividends received from PMC-Phil.; (2) to present the income tax return of its mother company for 1975 when the dividends were

received; and (3) to submit any duly authenticated document showing that the U.S. government credited the 20% tax deemed paid in the Philippines.

DISPOSITIVE: The Petition is GRANTED and the decision

appealed from is REVERSED and SET ASIDE. PMC-Phil. Is NOT entitled to the sought tax refund or tax credit.

CIR v. PROCTER

Feliciano, J Diway SUMMARY:

P&G-Philippines claimed a tax refund from the CIR. It was taxed at the rate of 35% for the dividends remitted to its US mother company, P&G-USA. It argued that the

preferential rate of 15% should apply. SC ruled that the 15% preferential rate applies to them (see doctrine on “applicability of the preferential rate for withholding tax”). Hence, they are entitled to the refund.

DOCTRINE:

Liability of withholding agent

The withholding agent is directly and independently liable for the correct amount of the tax that should be withheld from the dividend remittances.

Capacity of withholding agent to file a suit for tax refund

The withholding agent is also an agent of the beneficial owner of the dividends with respect to the filing of the necessary ITR and with respect to actual payment of the tax, such authority may reasonably be held to include the authority to file a claim for refund and to bring an action for recovery of such claim. This implied authority is especially warranted where, as in the instant case, the withholding agent is the wholly owned subsidiary of the parent-stockholder and therefore, at all times, under the

effective control of such parent-stockholder.

Applicability of the preferential rate for withholding tax a. General Rule

The ordinary 35% tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation, goes down to 15% if the country of domicile of the foreign stockholder corporation "shall allow" such foreign corporation a tax credit for "taxes deemed paid in the Philippines," (ie, taxes paid in the Philippines by its subsidiary in the Philippines) applicable against the tax payable to the domiciliary country by the foreign stockholder corporation.

In other words, the reduced 15% dividend tax rate is applicable if the foreign country "shall allow" to the foreign corporation a tax credit for "taxes deemed paid in the Philippines" applicable against the taxes imposed by the foreign court on the foreign corporation. The NIRC specifies that such tax credit for "taxes deemed paid in the Philippines" must, as a minimum, reach an amount equivalent to 20% which represents the difference between the regular 35% dividend tax rate and the 15% dividend tax rate.

b. Interpretation of the “shall allow” requirement

Section 24 (b) (1), NIRC, does not in fact require that the "deemed paid" tax credit shall have actually been granted before the applicable dividend tax rate goes down from 35% to 15%. The NIRC, merely requires, that the foreign country "shall allow a credit against the tax due for taxes deemed to have been paid in the Philippines . . ." There is no statute or revenue regulation requiring the actual grant of the "deemed paid" tax credit before the preferential 15% dividend rate becomes applicable.

FACTS:

For the taxable year 1974 and 1975, Procter and Gamble Philippines(P&G-Phil) declared dividends payable to its parent company and sole stockholder, P&G-USA amounting to P24M

from which the amount of P8.5M was deducted as 35% withholding tax at source.

P&G-Phil. filed with CIR a claim for refund or tax credit in the amount of P4.8M claiming, that pursuant to Section 24 (b) (1) of the NIRC, the applicable rate of withholding tax on the dividends remitted was only 15% (and not 35%).

CIR RULING: No action was taken by CIR CTA RULING: In favor of P&G Phil

Commissioner must refund or grant the tax credit in the amount of P4.8M

CTA RULING ON APPEAL: In favor of CIR

(a) P&G-USA, and not P&G-Phil., was the proper party to claim the refund or tax credit

(b) there is nothing in the US Tax Code that allows a credit against the US tax due from P&G-USA of taxes deemed to have been paid in the Philippines equivalent to twenty percent (20%) which represents the difference between the regular tax of thirty-five percent (35%) on corporations and the tax of fifteen percent (15%) on dividends; and

(c) P&G-Phil. failed to meet certain conditions necessary in order that the dividends received by P&G-USA may be subject to the preferential tax rate of 15%.

ISSUES:

1. W/N P&G Phil has the capacity to bring this claim for tax credit

YES, P&G Phil may bring this suit for tax credit

2. What is the proper withholding tax rate? 35% or the preferential 15%?

15% preferential rate must be used.

RATIO:

1.

Section 309 (3) of the NIRC:

Sec. 309. Authority of Commissioner to Take Compromises and to Refund Taxes.—The Commissioner may:

(3) xxx No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty.

The term "taxpayer" is defined in the NIRC as referring to "any person subject to tax imposed by the Title [on Tax on Income]." Under Section 53(c) of the NIRC, the withholding agent who is "required to deduct and withhold any tax" is made " personally liable for such tax" and indeed is indemnified against any claims which the stockholder might wish to make in questioning the taxes paid. The withholding agent, P&G-Phil., is directly and independently liable for the correct amount of the tax that should be withheld from the dividend remittances. The withholding agent is, moreover, subject to and liable for deficiency assessments, surcharges and penalties should the amount of the tax withheld be finally found to be less than the amount that should have been withheld under law.

In Philippine Guaranty v. CIR, the withholding agent is also an agent of the beneficial owner of the dividends with respect to the filing of the necessary ITR and with respect to actual payment of the tax, such authority may reasonably be held to include the authority to file a claim for refund and to bring an action for recovery of such claim. This implied authority is especially warranted where, as in the instant case, the withholding agent is the wholly owned subsidiary of the parent-stockholder and therefore, at all times, under the effective control of such parent-stockholder. In the circumstances of this case, it seems particularly unreal to deny the implied authority of P&G-Phil. to claim a refund and to commence an action for such refund.

2.

The Rule in NIRC

The ordinary 35% tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation, goes down to 15% if the country of domicile of the foreign stockholder corporation "shall allow" such foreign

corporation a tax credit for "taxes deemed paid in the Philippines," applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. In other words, in the instant case, the reduced fifteen percent (15%) dividend tax rate is applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes deemed paid in the Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies that such tax credit for "taxes deemed paid in the Philippines" must, as a minimum, reach an amount equivalent to 20% which represents the difference between the regular 35% dividend tax rate and the 15% dividend tax rate.

It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a "deemed paid" tax credit for the dividend tax (20 percentage points) waived by the Philippines in making applicable the preferred divided tax rate of fifteen percent (15%). In other words, our NIRC does not require that the US tax law deem the parent-corporation to have paid the twenty (20) percentage points of dividend tax waived by the Philippines. The NIRC only requires that the US "shall allow" P&G-USA a "deemed paid" tax credit in an amount equivalent to the 20% waived by the Philippines.

Does US Law comply with the requirements in NIRC to apply preferential rate?

Under US law, the parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate income tax although that tax was actually paid by its Philippine subsidiary. This "deemed paid" concept merely reflects economic reality, since the Philippine corporate income tax was in fact paid and deducted from revenues earned in the Philippines, thus reducing the amount remittable as dividends to P&G-USA. In other words, US tax law treats the Philippine corporate income tax as if it came out of the pocke of P&G-USA.

It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually withheld, and (ii) the tax credit for the Philippine corporate income tax actually paid by P&G Phil. but "deemed paid" by P&G-USA, are tax credits available

or applicable against the US corporate income tax of P&G-USA. These tax credits are allowed because of the US congressional desire to avoid or reduce double taxation of the same income stream.

In order to determine whether US tax law complies with the requirements for applicability of the reduced or preferential fifteen percent (15%) dividend tax rate under Section 24 (b) (1), NIRC, it is necessary:

a. to determine the amount of the 20% dividend tax waived by the Philippine government and which hence goes to P&G-USA; b. to determine the amount of the "deemed paid" tax credit which US tax law must allow to P&G-USA; and

c. to ascertain that the amount of the "deemed paid" tax credit allowed by US law is at least equal to the amount of the dividend tax waived by the Philippine Government.

The SC makes a long computation of sample figures to determine it the US law complies with the requirements for the application of preferential rate.

Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of 15%) by P&G-Phil. to its US parent P&G-USA, a tax credit of P29.75 is allowed by US Tax Code for Philippine corporate income tax "deemed paid" by the parent but actually paid by the wholly-owned subsidiary.

Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the Philippine government), US Tax Code, specifically and clearly complies with the requirements of the NIRC.

CTA decision on appeal: While US law grants the tax credit required by NIRC, P&G-Phil. had failed to prove that its parent, P&G-USA, had in fact availed of the tax credit in the amount required by the NIRC.

SC:

a. There’s a difference between legal questions and questions of administrative implementation. The question of whether

or not P&G-USA is in fact availed of the "deemed paid" tax credit allowed by the US Tax Code relates to the administrative implementation of the applicable reduced tax rate.

b. Section 24 (b) (1), NIRC, does not in fact require that the "deemed paid" tax credit shall have actually been granted before the applicable dividend tax rate goes down from 35% to 15%. The NIRC, merely requires, that the foreign country "shall allow a credit against the tax due for taxes deemed to have been paid in the Philippines . . ."

There is no statute or revenue regulation requiring the actual grant of the "deemed paid" tax credit before the preferential 15% dividend rate becomes applicable.

c. The position taken by the CTA results in a severe practical problem of administrative circularity. Their decision in effect held that the reduced dividend tax rate is not applicable until the US tax credit is actually given. But, the US tax credit cannot be given unless dividends have actually been remitted to the US, which means that the Philippine dividend tax, at the rate here applicable, was actually imposed and collected. It is this practical or operating circularity that is in fact avoided by our BIR when it issues rulings that the tax laws of particular foreign jurisdictions comply with the requirements set out in Section 24 (b) (1), NIRC, for applicability of the fifteen percent (15%) tax rate.

DISPOSITIVE:

Claim for tax refund by P&G must be allowed.

Note: I am not including in this digest the separate opinions. The majority opinion is 20 pages long. If I include the separate opinions, I will have to digest another 30 pages. Considering that (I think) no one really bothers to read these tax digests anymore, I will digest the majority opinion only.

CONCURRING OPINIONS • Cruz

• Bidin