Cir vs Procter and Gamble

7/23/2019 Cir vs Procter and Gamble

1/36

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-66838 December 2, 1991

COMMISSIONER OF INTERNL RE!ENUE, petitioner,vs.PROCTER " GM#LE P$ILIPPINE MNUFCTURING CORPORTION %&' T$E COURT OFT( PPELS,respondents.

T.A. Tejada & C.N. Lim for private respondent.

R E S O L ! " O N

FELICINO, J.:p

#or the ta$able %ear &'() endin* on + -une &'(), and the ta$able %ear &'( endin* + -une &'(,private respondent Procter and /a0ble Philippine Manufacturin* Corporation 12P3/4Phil.25 declareddividends pa%able to its parent co0pan% and sole stoc6holder, Procter and /a0ble Co., "nc. 1SA512P3/4SA25, a0ountin* to P7),&8),')8.+, fro0 9hich dividends the a0ount of P:,)(,(+&.7&representin* the thirt%4five percent 1+;5 9ithholdin* ta$ at source 9as deducted.

On -anuar% &'((, private respondent P3/4Phil. filed 9ith petitioner Co00issioner of "nternalRevenue a clai0 for refund or ta$ credit in the a0ount of P),:+7,':'.78 clai0in*, a0on* otherthin*s, that pursuant to Section 7) 1b5 1&5 of the National "nternal Revenue Code 12N"!C25, 1as a0endedb% Presidential


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ta$es dee0ed to have been paid in the Philippines euivalent tot9ent% percent 17;5 9hich represents the difference bet9een there*ular ta$ of thirt%4five percent 1+;5 on corporations and the ta$ offifteen percent 1&;5 on dividends@ and

1c5 private respondent P3/4Phil. failed to 0eet certain conditions

necessar% in order that 2the dividends received b% its non4residentparent co0pan% in the S 1P3/4SA5 0a% be subect to thepreferential ta$ rate of &; instead of +;.2

!hese holdin*s 9ere uestioned in P3/4Phil.s Motion for Re4consideration and 9e 9ill deal 9iththe0 seriatimin this Resolution resolvin* that Motion.

"

&. !here are certain preli0inar% aspects of the uestion of the capacit% of P3/4Phil. to brin* thepresent clai0 for refund or ta$ credit, 9hich need to be e$a0ined. !his uestion 9as raised for thefirst ti0e on appeal, i.e., in the proceedin*s before this Court on the Petition for Revie9 filed b% the

Co00issioner of "nternal Revenue. !he uestion 9as notraised b% the Co00issioner on thead0inistrative level, and neither 9as it raised b% hi0 before the C!A.

De believe that the Bureau of "nternal Revenue 12B"R25 should not be allo9ed to defeat an other9isevalid clai0 for refund b% raisin* this uestion of alle*ed incapacit% for the first ti0e on appeal beforethis Court. !his is clearl% a 0atter of procedure. Petitioner does not pretend that P3/4Phil., should itsucceed in the clai0 for refund, is li6el% to run a9a%, as it 9ere, 9ith the refund instead oftrans0ittin* such refund or ta$ credit to its parent and sole stoc6holder. "t is co00onplace that in theabsence of e$plicit statutor% provisions to the contrar%, the *overn0ent 0ust follo9 the sa0e rules ofprocedure 9hich bind private parties. "t is, for instance, clear that the *overn0ent is held toco0pliance 9ith the provisions of Circular No. &4:: of this Court in e$actl% the sa0e 9a% that privateliti*ants are held to such co0pliance, save onl% in respect of the 0atter of filin* fees fro0 9hich theRepublic of the Philippines is e$e0pt b% the Rules of Court.

More i0portantl%, there arises here a uestion of fairness should the B"R, unli6e an% other liti*ant, beallo9ed to raise for the first ti0e on appeal uestions 9hich had not been liti*ated either in the lo9ercourt or on the ad0inistrative level. #or, if petitioner had at the earliest possible opportunit%, i.e., atthe ad0inistrative level, de0anded that P3/4Phil. produce an e$press authoriation fro0 its parentcorporation to brin* the clai0 for refund, then P3/4Phil. 9ould have been able forth9ith to secureand produce such authoriation before filin* the action in the instant case. !he action here 9asco00enced ust before e$piration of the t9o 1754%ear prescriptive period.

7. !he uestion of the capacit% of P3/4Phil. to brin* the clai0 for refund has substantive di0ensionsas 9ell 9hich, as 9ill be seen belo9, also ulti0atel% relate to fairness.

nder Section +8 of the N"RC, a clai0 for refund or ta$ credit filed 9ith the Co00issioner of"nternal Revenue is essential for 0aintenance of a suit for recover% of ta$es alle*edl% erroneousl% orille*all% assessed or collected?

Sec. +8. Recovery of tax erroneously or illegally collected. F No suit or proceedingshall be maintained in any courtfor the recover% of an% national internal revenue ta$hereafter alle*ed to have been erroneousl% or ille*all% assessed or collected, or ofan% penalt% clai0ed to have been collected 9ithout authorit%, or of an% su0 alle*edto have been e$cessive or in an% 0anner 9ron*full% collected, until a claim for


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refund or credit has been duly filed ith the Commissioner of !nternal Revenue @ butsuch suit or proceedin* 0a% be 0aintained, 9hether or not such ta$, penalt%, or su0has been paid under protest or duress. "n an% case, no such suit or proceedin* shallbe be*un after the e$piration of t9o %ears fro0 the date of pa%0ent of the ta$ orpenalt% re*ardless of an% supervenin* cause that 0a% arise after pa%0ent? . . .1E0phasis supplied5

Section +' 1+5 of the N"RC, in turn, provides?

Sec. +'.Authority of Commissioner to Ta"e Compromises and toRefund Taxes.F!he Co00issioner 0a%?

$$$ $$$ $$$

1+5 credit or refund ta$es erroneousl% or ille*all% received, . . . No credit or refund ofta$es or penalties shall be alloed unless the taxpayer files in riting 9ith theCo00issioner a claim for credit or refund 9ithin t9o 175 %ears after the pa%0ent ofthe ta$ or penalt%. 1As a0ended b% P.


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authorit% to file a clai0 for refund and to brin* an action for recover% of such clai0. !his i0pliedauthorit% is especiall% 9arranted 9here, is in the instant case, the 9ithholdin* a*ent is the hollyoned subsidiary of the parent,stoc"holder and therefore at all times under the effective control ofsuch parent,stoc"holder."n the circu0stances of this case, it see0s particularl% unreal to den% thei0plied authorit% of P3/4Phil. to clai0 a refund and to co00ence an action for such refund.

De believe that, even no9, there is nothin* to preclude the B"R fro0 reuirin* P3/4Phil. to sho9so0e 9ritten or tele$ed confir0ation b% P3/4SA of the subsidiar%s authorit% to clai0 the refund orta$ credit and to re0it the proceeds of the refund., or to appl% the ta$ credit to so0e Philippine ta$obli*ation of, P3/4SA, before actual payment of the refund or issuance of a tax credit certificate.Dhat appears to be vitiated b% basic unfairness is petitioners position that, althou*h P3/4Phil. isdirectl% and personall% liable to the /overn0ent for the ta$es and an% deficienc% assess0ents to becollected, the /overn0ent is not le*all% liable for a refund si0pl% because it did not de0and a9ritten confir0ation of P3/4Phil.s i0plied authorit% fro0 the ver% be*innin*. A soverei*n*overn0ent should act honorabl% and fairl% at all ti0es, even vis,a,vis ta$pa%ers.

De believe and so hold that, under the circu0stances of this case, P3/4Phil. is properl% re*arded asa 2ta$pa%er2 9ithin the 0eanin* of Section +', N"RC, and as i0pliedl% authoried to file the clai0

for refund and the suit to recover such clai0.

""

&. De turn to the principal substantive uestion before us? the applicabilit% to the dividendre0ittances b% P3/4Phil. to P3/4SA of the fifteen percent 1&;5 ta$ rate provided for in thefollo9in* portion of Section 7) 1b5 1&5 of the N"RC?

1b5 Tax on foreign corporations.F

1&5 Non,resident corporation. F A forei*n corporation not en*a*ed intrade and business in the Philippines, . . ., shall pa% a ta$ eual to

+; of the *ross inco0e receipt durin* its ta$able %ear fro0 allsources 9ithin the Philippines, as . . . dividends . . .$rovidedstillfurther, that on dividends received fro0 a do0estic corporation liableto ta$ under this Chapter, the ta$ shall be &; of the dividends, 9hichshall be collected and paid as provided in Section + 1d5 of this Code,subect to the condition that the countr% in 9hich the non4residentforei*n corporation, is do0iciled shall allo9 a credit a*ainst the ta$due fro0 the non4resident forei*n corporation, ta$es dee0ed to havebeen paid in the Philippines euivalent to 7; 9hich represents thedifference bet9een the re*ular ta$ 1+;5 on corporations and the ta$1&;5 on dividends as provided in this Section . . .

!he ordinar% thirt%4five percent 1+;5 ta$ rate applicable to dividend re0ittances to non4resident

corporate stoc6holders of a Philippine corporation, *oes do9n to fifteen percent 1&;5 if the countr%of do0icile of the forei*n stoc6holder corporation 2shall allo92 such forei*n corporation a ta$ creditfor 2ta$es dee0ed paid in the Philippines,2 applicable a*ainst the ta$ pa%able to the do0iciliar%countr% b% the forei*n stoc6holder corporation. "n other 9ords, in the instant case, the reducedfifteen percent 1&;5 dividend ta$ rate is applicable if the SA 2shall allo92 to P3/4SA a ta$ creditfor 2ta$es dee0ed paid in the Philippines2 applicable a*ainst the S ta$es of P3/4SA. !he N"RCspecifies that such ta$ credit for 2ta$es dee0ed paid in the Philippines2 0ust, as a 0ini0u0, reachan a0ount euivalent to t9ent% 175 percenta*e points 9hich represents the difference bet9een the


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re*ular thirt%4five percent 1+;5 dividend ta$ rate and the preferred fifteen percent 1&;5 dividendta$ rate.

"t is i0portant to note that Section 7) 1b5 1&5, N"RC, does not reuire that the S 0ust *ive a2deemed paid# tax credit for the dividend tax *- percentage points+ aived by the $hilippinesin0a6in* applicable the preferred divided ta$ rate of fifteen percent 1&;5. "n other 9ords, our N"RC

does not reuire that the S ta$ la9 deem the parent,corporation to have paid the tenty *-+percentage points of dividend tax aivedb% the Philippines. !he N"RC onl% reuires that the S2shall allo92 P3/4SA a 2deemed paid2 tax credit in an amount e/uivalent to the tenty *-+

percentage points9aived b% the Philippines.

7. !he uestion arises?


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$$$ $$$ $$$

175 to the extent such dividends are paid by suchforeign corporation out of accumulated profits =asdefined in subsection 1c5 1&5 1b5> of a %ear for 9hichsuch forei*n corporation is a less developed countr%

corporation, be deemed to have paid the sameproportion of any income9ar profits, or e$cessprofits taxes paid or dee0ed to be paid by suchforeign corporation to any foreign countryor to an%possession of the nited States onor ith respect tosuch accumulated profits hich the amount of suchdividends bears to the amount of such accumulated

profits.

$$$ $$$ $$$

1c5 Applicable Rules

1&5Accumulated profits defined. F #or purposes of this section, theter0 2accu0ulated profits2 0eans 9ith respect to an% forei*ncorporation,

1A5 for purposes of subsections 1a5 1&5 and 1b5 1&5, thea0ount of its *ains, profits, or inco0e co0puted9ithout reduction b% the a0ount of the inco0e, 9arprofits, and e$cess profits ta$es i0posed on or 9ithrespect to such profits or inco0e b% an% forei*ncountr%. . . .@ and

1B5 for purposes of subsections 1a5 175 and 1b5 175, theamount of its*ains, profits, or income in excess of theincome, 9ar profits, and e$cess profitstaxesimposed on or 9ith respect to suchprofits or income.

!he Secretar% or his dele*ate shall have full po9er to deter0ine fro0the accu0ulated profits of 9hat %ear or %ears such dividends 9erepaid, treatin* dividends paid in the first 7 da%s of an% %ear as havin*been paid fro0 the accu0ulated profits of the precedin* %ear or%ears 1unless to his satisfaction sho9s other9ise5, and in otherrespects treatin* dividends as havin* been paid fro0 the 0ostrecentl% accu0ulated *ains, profits, or earnin*. . . . 1E0phasissupplied5

Close e$a0ination of the above uoted provisions of the S !a$ Code + sho9s the follo9in*?

a. S la9 1Section '&, !a$ Code5 *rants P3/4SA a tax credit forthe amount of the dividend tax actually paid 1i.e., ithheld5 fro0 thedividend re0ittances to P3/4SA@


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b. S la9 1Section '7, S !a$ Code5 *rants to P3/4SA a2deemed paid tax credit8fora proportionate part of the corporate income tax actuallypaid to the Philippines b% P3/4Phil.

!he parent4corporation P3/4SA is 2dee0ed to have paid2 a portion of the $hilippine corporateincome taxalthou*h that ta$ 9as actuall% paid b% its Philippine subsidiar%, P3/4Phil., not b% P3/4

SA. !his 2dee0ed paid2 concept 0erel% reflects econo0ic realit%, since the Philippine corporateinco0e ta$ 9as in fact paid and deducted fro0 revenues earned in the Philippines, thus reducin* thea0ount re0ittable as dividends to P3/4SA. "n other 9ords, S ta$ la9 treats the Philippinecorporate inco0e ta$ as if it ca0e out of the poc6et, as it 9ere, of P3/4SA as a part of theecono0ic cost of carr%in* on business operations in the Philippines throu*h the 0ediu0 of P3/4Phil. and here earnin* profits. 5hat isunder S la9, deemed paid by $&%, 0'A are not 2phanto0ta$es2 but instead$hilippine corporate income taxes actually paid here by $&%,$hil., hich are veryreal indeed.

"t is also useful to note that both 1i5 the ta$ credit for the Philippine dividend ta$ actuall% 9ithheld, and1ii5 the ta$ credit for the Philippine corporate inco0e ta$ actuall% paid b% P3/ Phil. but 2dee0edpaid2 b% P3/4SA, are ta$ credits available or applicable a*ainst the S corporate inco0e ta$ ofP3/4SA. !hese ta$ credits are allo9ed because of the S con*ressional desire to avoid or reduce

double ta$ation of the sa0e inco0e strea0. 9

"n order to deter0ine 9hether S ta$ la9 co0plies 9ith the reuire0ents for applicabilit% of thereduced or preferential fifteen percent 1&;5 dividend ta$ rate under Section 7) 1b5 1&5, N"RC, it isnecessar%?

a. to deter0ine the amountof the 7 percenta*e points dividend ta$9aived b% the Philippine *overn0ent under Section 7) 1b5 1&5, N"RC,and 9hich hence *oes to P3/4SA@

b. to deter0ine the amountof the 2dee0ed paid2 ta$ credit 9hich Sta$ la9 0ust allo9 to P3/4SA@ and

c. to ascertain that the amountof the 2dee0ed paid2 ta$ creditallo9ed b% S la9 is at least eual to the amountof the dividend ta$9aived b% the Philippine /overn0ent.

A0ount 1a5, i.e., the a0ount of the dividend ta$ 9aived b% the Philippine *overn0ent is arith0eticall%deter0ined in the follo9in* 0anner?

P&. F Preta$ net corporate inco0e earned b% P3/4Phil.$ +; F Re*ular Philippine corporate inco0e ta$ rateFFFP+. F Paid to the B"R b% P3/4Phil. as Philippine

corporate inco0e ta$.

P&.4+.FFFP8. F Available for re0ittance as dividends to P3/4SA

P8. F


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FFF 1b5 1&5, N"RCP77.( F Re*ular dividend ta$

P8. F


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!he first Rulin* 9as issued in &'(8, i.e., B"R Rulin* No. (8), rendered b% then Actin*Co00issioner of "nte0al Revenue Efren ". Plana, later Associate -ustice of this Court, the relevantportion of 9hich stated?

Jo9ever, after a restud% of the decision in the A0erican Chicle Co0pan% case andthe provisions of Section '& and '7 of the .S. "nternal Revenue Code, 9e find

0erit in %our contention that our co0putation of the credit 9hich the .S. ta$ la9allo9s in such cases is erroneous as the a0ount of ta$ 2dee0ed paid2 to thePhilippine *overn0ent for purposes of credit a*ainst the .S. ta$ b% the recipient ofdividends includes a portion of the amount of income tax paid by the corporationdeclaring the dividend in addition to the tax ithheld from the dividend remitted. "nother 9ords the 0.'.government ill allo a credit to the 0.'. corporation orrecipient of the dividend in addition to the a0ount of ta$ actuall% 9ithheld a portionof the income tax paid by the corporation declaring the dividend. !hus, if a Philippinecorporation 9holl% o9ned b% a .S. corporation has a net inco0e of P&,, it 9illpa% P7, Philippine inco0e ta$ thereon in accordance 9ith Section 7)1a5 of the!a$ Code. !he net inco0e, after inco0e ta$, 9hich is P(,, 9ill then be declaredas dividend to the .S. corporation at &; ta$, or P&&,7, 9ill be 9ithheldtherefro0. nder the afore0entioned sections of the .S. "nternal Revenue Code,.S. corporation receivin* the dividend can utilie as credit a*ainst its .S. ta$pa%able on said dividends the a0ount of P+, co0posed of?

1&5 !he ta$ 2dee0ed paid2 or indirectl% paid on thedividend arrived at as follo9s?

P(, $ P7, I P&:,(FFF&,

175 !he a0ount of &; ofP(, 9ithheld I &&,7

FFFP+,

The amount of $786( deemed paid and to be credited against the 0.'.taxon thedividends received b% the .S. corporation fro0 a Philippine subsidiar%is clearlymore than -9 re/uirement ofPresidential


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Associates. "n other 9ords, the &'(8 Rulin* of Jon. Efren ". Plana 9as reiterated b% the B"R even asthe case at bar 9as pendin* before the C!A and this Court.

). De should not overloo6 the fact that the concept of 2dee0ed paid2 ta$ credit, 9hich is e0bodied inSection '7, S !a$ Code, is exactly the same #deemed paid# tax credit found in ourN"RC and9hich Philippine ta$ la9 allo9s to Philippine corporations 9hich have operations abroad 1sa%, in the

nited States5 and 9hich, therefore, pa% inco0e ta$es to the S *overn0ent.

Section + 1c5 1+5 and 1:5, N"RC, provides?

1d5 Sec. +. :eductions from %ross !ncome.F"n co0putin* netinco0e, there shall be allo9ed as deductions F . . .

1c5 Taxes. F . . .

$$$ $$$ $$$

1+5 Credits against tax for taxes of foreign countries.

F "f the ta$pa%er si*nifies in his return his desire tohave the benefits of this para*raphs, the ta$ i0posedb% this !itle shall be credited 9ith . . .

1a5 Citi2en and :omestic Corporation. F "n the caseof a citien of the Philippines and of domesticcorporation the amount of net income9ar profits ore$cess profits, taxes paid or accrued durin* theta$able %ear to any foreign country. 1E0phasissupplied5

nder Section + 1c5 1+5 1a5, N"RC, above, the B"R 0ust *ive a ta$ credit to a Philippine corporation

for ta$es actuall% paid b% it to the S *overn0entFe.*., for ta$es collected b% the S *overn0enton dividend re0ittances to the Philippine corporation. !his Section of the N"RC is the euivalent ofSection '& of the S !a$ Code.

Section + 1c5 1:5, N"RC, is practicall% identical 9ith Section '7 of the S !a$ Code, and providesas follo9s?

1:5 Taxes of foreign subsidiary. F #or the purposes of this subsection a domesticcorporation hich ons a majority of the voting stoc" of a foreign corporation fro09hich it receives dividends in an% ta$able %ear shall be deemed to have paid thesame proportion of any income, 9ar4profits, or e$cess4profits taxes paid by suchforeign corporation to any foreign country, upon or ith respect to the accumulated

profits of such foreign corporation fro0 9hich such dividends 9ere paid, hich theamount of such dividends bears to the amount of such accumulatedprofits? $rovided, !hat the a0ount of ta$ dee0ed to have been paid under thissubsection shall in no case e$ceed the sa0e proportion of the ta$ a*ainst 9hichcredit is ta6en 9hich the a0ount of such dividends bears to the a0ount of the entirenet inco0e of the do0estic corporation in 9hich such dividends are included.Theterm 2accumulated profits2 9hen used in this subsection reference to a forei*ncorporation, 0eans the a0ount of its *ains, profits, or income in excess of theincome, 9ar4profits, and e$cess4profits taxes imposed upon or 9ith respect


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to such profits or income@ and the Co00issioner of "nternal Revenue shall have fullpo9er to deter0ine fro0 the accu0ulated profits of 9hat %ear or %ears suchdividends 9ere paid@ treatin* dividends paid in the first si$t% da%s of an% %ear ashavin* been paid fro0 the accu0ulated profits of the precedin* %ear or %ears 1unlessto his satisfaction sho9n other9ise5, and in other respects treatin* dividends ashavin* been paid fro0 the 0ost recentl% accu0ulated *ains, profits, or earnin*s. "n

the case of a forei*n corporation, the inco0e, 9ar4profits, and e$cess4profits ta$es of9hich are deter0ined on the basis of an accountin* period of less than one %ear, the9ord 2%ear2 as used in this subsection shall be construed to 0ean such accountin*period. 1E0phasis supplied5

nder the above uoted Section + 1c5 1:5, N"RC, the B"R 0ust *ive a ta$ credit to aPhilippine parent corporation for ta$es 2dee0ed paid2 b% it, that is, e.*., for ta$es paid to theS b% the S subsidiar% of a Philippine4parent corporation. !he $hilippine parent orcorporate stoc6holder is 2deemed2 under our N"RCto have paid a proportionate part of the0' corporate income tax paid by its 0' subsidiary, althou*h such S ta$ 9as actuall% paidb% the subsidiar% and not b% the Philippine parent.

Clearl%, the 2dee0ed paid2 ta$ credit 9hich, under Section 7) 1b5 1&5, N"RC, 0ust be allo9ed b% Sla9 to P3/4SA, is the sa0e 2dee0ed paid2 ta$ credit that Philippine la9 allo9s to a Philippinecorporation 9ith a 9holl%4 or 0aorit%4o9ned subsidiar% in 1for instance5 the S. !he 2dee0ed paid2ta$ credit allo9ed in Section '7, S !a$ Code, is no 0ore a credit for 2phanto0 ta$es2 than is the2dee0ed paid2 ta$ credit *ranted in Section + 1c5 1:5, N"RC.

"""

&. !he Second ta$es dee0ed to have been paid in the Philippines . . .2 !here is neither

statutor% provision nor revenue re*ulation issued b% the Secretar% of #inance reuirin* the actual*rant of the 2dee0ed paid2 ta$ credit b% the S "nternal Revenue Service to P3/4SA before thepreferential fifteen percent 1&;5 dividend rate beco0es applicable. Section 7) 1b5 1&5, N"RC, doesnot create a ta$ e$e0ption nor does it provide a ta$ credit@ it is a provision hich specifies hen a

particular *reduced+ tax rate is legally applicable.

"n the third place, the position ori*inall% ta6en b% the Second


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0ini0u0 a0ount b% the S "nternal Revenue Service to P3/4SA. But, the S 2dee0ed paid2 ta$credit cannotbe *iven b% the S ta$ authorities unless dividends have actuall% been re0itted to theS, 9hich 0eans that the Philippine dividend ta$, at the rate here applicable, 9as actuall% i0posedand collected. 11"t is this practical or operatin* circularit% that is in fact avoided b% our B"R 9hen it issues rulin*s that the ta$ la9s ofparticular forei*n urisdictions 1e.*., Republic of Kanuatu 12Jon*6on*, 13


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to subect to its o9n ta$in* po9er5 b% allo9in* the investor additional ta$ credits 9hich 9ould beapplicable a*ainst the ta$ pa%able to such ho0e countr%. Accordin*l%, Section 7) 1b5 1&5, N"RC,reuires the ho0e or do0iciliar% countr% to *ive the investor corporation a 2dee0ed paid2 ta$ creditat least eual in a0ount to the t9ent% 175 percenta*e points of dividend ta$ fore*one b% thePhilippines, in the assu0ption that a positive incentive effect 9ould thereb% be felt b% the investor.

!he net effect upon the forei*n investor 0a% be sho9n arith0eticall% in the follo9in* 0anner?

P8. F


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+. "t re0ains onl% to note that under the Philippines4nited States Convention 2Dith Respect to!a$es on "nco0e,21*the Philippines, by a treaty commitmentreduced the re*ular rate of dividend ta$ to a 0a$i0u0 of t9ent%percent 17;5 of the *ross a0ount of dividends paid to S parent corporations?

Art &&. F :ividends

$$$ $$$ $$$

175 !he rate of ta$ i0posed b% one of the Contractin* States ondividends derived fro0 sources 9ithin that Contractin* State b% aresident of the other Contractin* State shall not e$ceed F

1a5 7 percent of the *ross a0ount of the dividend@ or

1b5 5hen the recipient is a corporation - percent of the grossamount of the dividend ifdurin* the part of the pa%in* corporationsta$able %ear 9hich precedes the date of pa%0ent of the dividend anddurin* the 9hole of its prior ta$able %ear 1if an%5, at least 7 percent

of the outstanding shares of the voting stoc" of the payingcorporation as oned by the recipient corporation.

$$$ $$$ $$$

1E0phasis supplied5

!he !a$ Convention, at the sa0e ti0e, established a treat% obli*ation on the part of the nitedStates that it 2shall allo92 to a S parent corporation receivin* dividends fro0 its Philippinesubsidiar% 2a =ta$> credit for the appropriate a0ount of ta$es paid or accrued to the Philippines b% thePhilippine =subsidiar%> F.16!his is, of course, precisel% the 2dee0ed paid2 ta$ credit provided for in Section '7, S !a$ Code,discussed above. Clearl%, there is here on the part of the Philippines a deliberate underta6in* to reduce the re*ular dividend ta$ rate oft9ent% percent 17;5 is a maximumrate, there is still a differential or additional reduction of five 15 percenta*e points 9hich co0pliance of

S la9 1Section '75 9ith the reuire0ents of Section 7) 1b5 1&5, N"RC, 0a6es available in respect of dividends fro0 a Philippine subsidiar%.

De conclude that private respondent P3/4Phil, is entitled to the ta$ refund or ta$ credit 9hich itsee6s.

DJERE#ORE, for all the fore*oin*, the Court Resolved to /RAN! private respondents Motion forReconsideration dated && Ma% &'::, to SE! AS"


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CRU, J., concurrin*?

" oin Mr. -ustice #eliciano in his e$cellent anal%sis of the difficult issues 9e are no9 as6ed toresolve.

As " understand it, the intention of Section 7) 1b5 of our !a$ Code is to attract forei*n investors to thiscountr% b% reducin* their +; dividend ta$ rate to &; if their o9n state allo9s the0 a dee0ed paidta$ credit at least eual in a0ount to the 7; 9aived b% the Philippines. !his ta$ credit 9ould offsetthe ta$ pa%able b% the0 on their profits to their ho0e state. "n effect, both the Philippines and theho0e state of the forei*n investors reduce their respective ta$ 2ta6e2 of those profits and theinvestors 9ind up 9ith 0ore left in their poc6ets. nder this arran*e0ent, the total ta$es to be paidb% the forei*n investors 0a% be confined to the +; corporate inco0e ta$ and &; dividend ta$onl%, both pa%able to the Philippines, 9ith the S ta$ liabilit% bein* offset 9holl% or substantiall% b%the S 2dee0ed paid2 ta$ credits.

Dithout this arran*e0ent, the forei*n investors 9ill have to pa% to the local state 1in addition to the

+; corporate inco0e ta$5 a +; dividend ta$ and another +; or 0ore to their ho0e state or atotal of (; or 0ore on the sa0e a0ount of dividends. "n this circu0stance, it is not li6el% that 0an%such forei*n investors, *iven the onerous burden of the t9o4tier s%ste0, i.e., local state plus ho0estate, 9ill be encoura*ed to do business in the local state.

"t is conceded that the la9 9ill 2not tri**er off an instant sur*e of revenue,2 as indeed the ta$collectible b% the Republic fro0 the forei*n investor is considerabl% reduced. !his 0a% appearunacceptable to the superficial vie9er. But this reduction is in fact the price 9e have to offer topersuade the forei*n co0pan% to invest in our countr% and contribute to our econo0ic develop0ent.!he benefit to us 0a% not be i00ediatel% available in instant revenues but it 9ill be realied later,and in *reater 0easure, in ter0s of a 0ore stable and robust econo0%.

#IDIN, J., concurrin*?

" a*ree 9ith the opinion of 0% estee0ed brother, Mr. -ustice #lorentino P. #eliciano. Jo9ever, " 9ishto add so0e observations of 0% o9n, since " happen to be theponente in Commissioner of !nternalRevenue v. 5ander $hilippines !nc. 1&8 SCRA (+ =&'::>5, a case 9hich reached a conclusionthat is dia0etricall% opposite to that sou*ht to be reached in the instant Motion for Reconsideration.

&. "n pa*e of his dissentin* opinion, Mr. -ustice Ed*ardo L. Paras ar*ues that the failure ofpetitioner Co00issioner of "nternal Revenue to raise before the Court of !a$ Appeals the issue of9ho should be the real part% in interest in clai0in* a refund cannot preudice the *overn0ent, assuch failure is 0erel% a procedural defect@ and that 0oreover, the *overn0ent can never be inestoppel, especiall% in 0atters involvin* ta$es. "n a 9ord, the dissentin* opinion insists that errors ofits a*ents should not eopardie the *overn0ents position.

!he above rule should not be ta6en absolutel% and literall%@ if it 9ere, the *overn0ent 9ould neverlose an% liti*ation 9hich is clearl% not true. !he issue involved here is not 0erel% one of procedure@ itis also one of fairness? 9hether the *overn0ent should be subect to the sa0e strin*ent conditionsapplicable to an ordinar% liti*ant. As the Court had declared in Dander?


16/36

. . . !o allo9 a liti*ant to assu0e a different posture 9hen he co0es before the courtand challen*e the position he had accepted at the ad0inistrative level, 9ould be tosanction a procedure 9hereb% theCourt F 9hich is supposed to revie9 ad0inistrative deter0inations F 9ould notrevie9, but deter0ine and decide for the first ti0e, a uestion not raised at thead0inistrative foru0. . . . 1&8 SCRA at 884((5

Jad petitioner been forthri*ht earlier and reuired fro0 private respondent proof of authorit% fro0 itsparent corporation, Procter and /a0ble SA, to prosecute the clai0 for refund, private respondent9ould doubtless have been able to sho9 proof of such authorit%. B% an% account, it 9ould be ran6inustice not at this sta*e to reuire petitioner to sub0it such proof.

7. "n pa*e : of his dissentin* opinion, Paras, -., stressed that private respondent had failed? 1&5 tosho9 the actual a0ount credited b% the S *overn0ent a*ainst the inco0e ta$ due fro0 P 3 / SAon the dividends received fro0 private respondent@ 175 to present the &'( inco0e ta$ return of P 3/ SA 9hen the dividends 9ere received@ and 1+5 to sub0it an% dul% authenticated docu0entsho9in* that the S *overn0ent credited the 7; ta$ dee0ed paid in the Philippines.

" a*ree 9ith the 0ain opinion of 0% collea*ue, #eliciano ;. specificall% in pa*e 7+ et se/. thereof,9hich, as " understand it, e$plains that the S ta$ authorities are unable to deter0ine the a0ount ofthe 2dee0ed paid2 credit to be *iven P 3 / SA so lon* as the nu0erator of the fraction, i.e.,dividends actuall% re0itted b% P 3 /4Phil. to P 3 / SA, is still un6no9n. Stated in other 9ords, untildividends have actuall% been re0itted to the S 19hich presupposes an actual i0position andcollection of the applicable Philippine dividend ta$ rate5, the S ta$ authorities cannot deter0ine the2dee0ed paid2 portion of the ta$ credit sou*ht b% P 3 / SA. !o reuire private respondent to sho9docu0entar% proof of its parent corporation havin* actuall% received the 2dee0ed paid2 ta$ creditfro0 the proper ta$ authorities, 9ould be li6e puttin* the cart before the horse. !he onl% 9a% ofcuttin* throu*h this 19hat #eliciano, -., ter0ed5 2circularit%2 is for our B"R to issue rulin*s 1as the%have been doin*5 to the effect that the ta$ la9s of particular forei*n urisdictions, e.*., SA, co0pl%9ith the reuire0ents in our ta$ code for applicabilit% of the reduced &; dividend ta$ rate.!hereafter, the ta$pa%er can be reuired to sub0it, 9ithin a reasonable period, proof of the a0ount

of 2dee0ed paid2 ta$ credit actuall% *ranted b% the forei*n ta$ authorit%. "0posin* such a resolutor%condition should resolve the 6nott% proble0 of circularit%.

+. Pa*e : of the dissentin* opinion of Paras, ;., further declares that ta$ refunds, bein* in the natureof ta$ e$e0ptions, are to be construed strictissimi jurisa*ainst the person or entit% clai0in* thee$e0ption@ and that refunds cannot be per0itted to e$ist upon 2va*ue i0plications.2

Not9ithstandin* the fore*oin* canon of construction, the funda0ental rule is still that a ud*e 0ustascertain and *ive effect to the le*islative intent e0bodied in a particular provision of la9. "f a statute1includin* a ta$ statute reducin* a certain ta$ rate5 is clear, plain and free fro0 a0bi*uit%, it 0ust be*iven its ordinar% 0eanin* and applied 9ithout interpretation. "n the instant case, the dissentin*opinion of Paras, ;., itself concedes that the basic purpose of Pres. , N"RC. pon the other hand, 9here the la940a6in* authorit% intended to i0pose areuire0ent of reciprocit% as a condition for *rant of a privile*e, the le*islature does


17/36

so expressly and clearly.#or e$a0ple, the *ross estate of non4citiens and non4residents of thePhilippines nor0all% includes intan*ible personal propert% situated in the Philippines, for purposes ofapplication of the estate ta$ and donors ta$. Jo9ever, under Section ': of the N"RC 1as a0endedb% P.


18/36

1b5 there is nothin* in Section '7 or other provision of the S !a$Code that allo9s a credit a*ainst the .S. ta$ due fro0 PMC4.S.A.of ta$es dee0ed to have been paid in the Phils. euivalent to 7;9hich represents the difference bet9een the re*ular ta$ of +; oncorporations and the ta$ of &; on dividends@

1c5 private respondent failed to 0eet certain conditions necessar% inorder that the dividends received b% the non4resident parent co0pan%in the .S. 0a% be subect to the preferential &; ta$ instead of +;.1pp. 747&, Motion for Reconsideration5

Private respondents position is based principall% on the decision rendered b% the !hird


19/36

Sec. 7. $arties in interest. F Ever% action 0ust be prosecuted and defended in thena0e of the real part% in interest. All persons havin* an interest in the subect of theaction and in obtainin* the relief de0anded shall be oined as plaintiffs. All persons9ho clai0 an interest in the controvers% or the subect thereof adverse to the plaintiff,or 9ho are necessar% to a co0plete deter0ination or settle0ent of the uestionsinvolved therein shall be oined as defendants.

"t is true that under the "nternal Revenue Code the 9ithholdin* a*ent 0a% be sued b% itself if nore0ittance ta$ is paid, or if 9hat 9as paid is less than 9hat is due. #ro0 this, -ustice #elicianoclai0s that in case of anoverpayment1or clai0 for refund5 the a*ent 0ust be *iven the ri*ht to suethe Co00issioner b% itself 1that is, the a*ent here is also a real part% in interest5. Je further clai0sthat to den% this ri*ht 9ould be unfair. !his is notso. Dhile pa%0ent of the ta$ due is anOBL"/A!"ON of the a*ent the obtainin* of a refund is a R"/J!. Dhile ever% obli*ation has acorrespondin* ri*ht 1and vice,versa5, the obli*ation to pa% the co0plete ta$ has the correspondin*ri*ht of the *overn0ent to de0and the deficienc%@ and the ri*ht of the a*ent to de0and a refundcorresponds to the *overn0ents dut% to refund. Certainl%, the obligation of the 9ithholdin* a*ent topa% in full does not correspond to its rightto clai0 for the refund. "t is evident therefore that the realpart% in interest in this clai0 for rei0burse0ent is the principal 1the 0other corporation5 and NO! thea*ent.

!his suit therefore for refund 0ust be


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"n the conte$t of the case at bar, therefore, the thirt% five 1+;5 percent on thedividend inco0e of PMC4.S.A. 9ould be reduced to fifteen 1&;5 percent if & onlyif reciprocall% PMC4.S.As ho0e countr%, the nited States, not onl% ouldalloa*ainst PMC4.SA.s .S. inco0e ta$ liabilit% a forei*n ta$ credit for the fifteen1&;5 percenta*e4point portion of the thirt% five 1+;5 percent Phil. dividend ta$actuall% paid or accrued but also9ould allo9 a forei*n ta$ 2sparin*2 credit for the

t9ent% 17;5 percenta*e4point portion spared, 9aived, for*iven or other9isedee0ed as if paid b% the Phil. *ovt. b% virtue of the 2ta$ credit sparin*2 proviso ofSec. 7)1b5, Phil. !a$ Code.2 1Repl% Brief, pp. 7+47)@ Rollo, pp. 7+'47)5.

Evidentl%, the .S. forei*n ta$ credit s%ste0 operates onlyon forei*n ta$es actually paid b% .S.corporate ta$pa%ers, 9hether directl% or indirectl%. No9here under a statute or under a ta$ treat%,does the .S. *overn0ent reco*nie 0uch less per0it an% forei*n ta$ credit for spared or *hostta$es, as in realit% the .S. forei*n4ta$ credit 0echanis0 under Sections '&4' of the .S. "nte0alRevenue Code does not appl% to phanto0 dividend ta$es in the for0 of dividend ta$es 9aived,spared or other9ise considered 2as if2 paid b% an% forei*n ta$in* authorit%, includin* that of thePhilippine *overn0ent.

Be%ond, that, the private respondent failed? 1&5 to sho9 the actual a0ount credited b% the .S.*overn0ent a*ainst the inco0e ta$ due fro0 PMC4.S.A. on the dividends received fro0 privaterespondent@ 175 to present the inco0e ta$ return of its parent co0pan% for &'( 9hen the dividends9ere received@ and 1+5 to sub0it an% dul% authenticated docu0ent sho9in* that the .S.*overn0ent credited the 7; ta$ dee0ed paid in the Philippines.

!a$ refunds are in the nature of ta$ e$e0ptions. As such, the% are re*arded as in dero*ation ofsoverei*n authorit% and to be construed strictissimi juris a*ainst the person or entit% clai0in* thee$e0ption. !he burden of proof is upon hi0 9ho clai0s the e$e0ption in his favor and he 0ust beable to ustif% his clai0 b% the clearest *rant of or*anic or statute la9 . . . and cannot be per0itted toe$ist upon va*ue i0plications. 1Asiatic Petroleu0 Co. v. Llanes, )' Phil. )88@ Northern Phil !obaccoCorp. v. Mun. of A*oo, La nion, +& SCRA +)@ Ro*an v. Co00issioner, + SCRA '8:@ AsturiasSu*ar Central, "nc. v. Co00issioner of Custo0s, 7' SCRA 8&(@


21/36

Since the *uidin* philosoph% behind international trade is free flo9 of *oods and services, it *oes9ithout sa%in* that the principal obective ofinternational taxationis to see throu*h this ideal b% 9a%of feasible ta$ation arran*e0ents 9hich reco*nie each countr%s soverei*nt% in the 0atter ofta$ation, the need for revenue and the attain0ent of certain polic% obectives.

!he institution of feasible ta$ation arran*e0ents, ho9ever, is hard to co0e b%. !o be*in 9ith,

international ta$ subects are obviousl% 0ore co0plicated than their do0estic counter4parts. Jence,the devise of ta$ation arran*e0ents to deal 9ith such co0plications reuires a 9elter of infor0ationand data build4up 9hich *enerall% are not readil% obtainable and available. Also, caution 0ust bee$ercised so that 9hatever ta$ation arran*e0ents are set up, the sa0e do not *et in the 9a% of freeflo9 of *oods and services, e$chan*e of technolo*%, 0ove0ent of capital and invest0ent initiatives.

A cardinal principle adhered to in international ta$ation is theavoidance of double taxation. !hepheno0enon of double ta$ation 1i.e., ta$in* an ite0 0ore than once5 arises because of *lobal0ove0ent of *oods and services.


22/36

!otal "nco0e 722 ta$ pa%able (Less? RP ta$ 7(Net 22 ta$ pa%able ((

7. #># 3oreign Corp. Tax Liability ith Tax 'paring

22 #orei*n Corp. inco0e &RP inco0e 7!otal inco0e 722 #orei*n Corp. ta$ pa%able (Less? RP ta$ 1+; of &, thedifference of 7; bet9een +; and &;,dee0ed paid to RP5Net 22 #orei*n Corp.ta$ pa%able )(

B% 9a% of resu0e, De 0a% sa% that the Dander decision of the !hird


23/36

indicates that the B.".R. Rulin* cited in Dander has been obviousl% discarded toda% b% the B.".R.Clearl%, there has been a chan*e of 0ind on the part of the B.".R.

5 Dander i0poses a ta$ of &; 9ithout statin* 9hether or not reciprocit% on the part of S9iterlande$ists. "t is evident that 9ithout reciprocit% the desired conseuences of the ta$ credit under P.


24/36

!he benefit to us 0a% not be i00ediatel% available in instant revenues but it 9ill be realied later,and in *reater 0easure, in ter0s of a 0ore stable and robust econo0%.

#IDIN, J., concurrin*?

" a*ree 9ith the opinion of 0% estee0ed brother, Mr. -ustice #lorentino P. #eliciano. Jo9ever, " 9ishto add so0e observations of 0% o9n, since " happen to be theponente in Commissioner of !nternalRevenue v. 5ander $hilippines !nc. 1&8 SCRA (+ =&'::>5, a case 9hich reached a conclusionthat is dia0etricall% opposite to that sou*ht to be reached in the instant Motion for Reconsideration.

&. "n pa*e of his dissentin* opinion, Mr. -ustice Ed*ardo L. Paras ar*ues that the failure ofpetitioner Co00issioner of "nternal Revenue to raise before the Court of !a$ Appeals the issue of9ho should be the real part% in interest in clai0in* a refund cannot preudice the *overn0ent, assuch failure is 0erel% a procedural defect@ and that 0oreover, the *overn0ent can never in estoppel,especiall% in 0atters involvin* ta$es. "n a 9ord, the dissentin* opinion insists that errors of its a*entsshould not eopardie the *overn0ents position.

!he above rule should not be ta6en absolutel% and literall%@ if it 9ere, the *overn0ent 9ould neverlose an% liti*ation 9hich is clearl% not true. !he issue involved here is not 0erel% one of procedure@ itis also one of fairness? 9hether the *overn0ent should be subect to the sa0e strin*ent conditionsapplicable to an ordinar% liti*ant. As the Court had declared in Dander?

. . . !o allo9 a liti*ant to assu0e a different posture 9hen he co0es before the courtand challen*e the position he had accepted at the ad0inistrative level, 9ould be tosanction a procedure 9hereb% the Court F 9hich is supposed to revie9ad0inistrative deter0inations F 9ould not revie9, but deter0ine and decide for thefirst ti0e, a uestion not raised at the ad0inistrative foru0. ... 1&8 SCRA at 884((5

Jad petitioner been forthri*ht earlier and reuired fro0 private respondent proof of authorit% fro0 itsparent corporation, Procter and /a0ble SA, to prosecute the clai0 for refund, private respondent9ould doubtless have been able to sho9 proof of such authorit%. B% an% account, it 9ould be ran6inustice not at this sta*e to reuire petitioner to sub0it such proof.

7. "n pa*e : of his dissentin* opinion, Paras, -., stressed that private respondent had failed? 1&5 tosho9 the actual a0ount credited b% the S *overn0ent a*ainst the inco0e ta$ due fro0 P 3 / SAon the dividends received fro0 private respondent@ 175 to present the &'( inco0e ta$ return of P 3/ SA 9hen the dividends 9ere received@ and 1+5 to sub0it an% dul% authenticated docu0entsho9in* that the S *overn0ent credited the 7; ta$ dee0ed paid in the Philippines.

" a*ree 9ith the 0ain opinion of 0% collea*ues, #eliciano ;. specificall% in pa*e 7+ et se/. thereof,9hich, as " understand it, e$plains that the S ta$ authorities are unable to deter0ine the a0ount ofthe 2dee0ed paid2 credit to be *iven P 3 / SA so lon* as the nu0erator of the fraction, i.e.,dividends actuall% re0itted b% P 3 /4Phil. to P 3 / SA, is still un6no9n. Stated in other 9ords, untildividends have actuall% been re0itted to the S 19hich presupposes an actual i0position andcollection of the applicable Philippine dividend ta$ rate5, the S ta$ authorities cannot deter0ine the2dee0ed paid2 portion of the ta$ credit sou*ht b% P 3 / SA. !o reuire private respondent to sho9docu0entar% proof of its parent corporation havin* actuall% received the 2dee0ed paid2 ta$ creditfro0 the proper ta$ authorities, 9ould be li6e puttin* the cart before the horse. !he onl% 9a% ofcuttin* throu*h this 19hat #eliciano, -., ter0ed5 2circularit%2 is for our B"R to issue rulin*s 1as the%


25/36

have been doin*5 to the effect that the ta$ la9s of particular forei*n urisdictions, e.*., SA, co0pl%9ith the reuire0ents in our ta$ code for applicabilit% of the reduced &; dividend ta$ rate.!hereafter, the ta$pa%er can be reuired to sub0it, 9ithin a reasonable period, proof of the a0ountof 2dee0ed paid2 ta$ credit actuall% *ranted b% the forei*n ta$ authorit%. "0posin* such a resolutor%condition should resolve the 6nott% proble0 of circularit%.

+. Pa*e : of the dissentin* opinion of Paras, -., further declares that ta$ refunds, bein* in the natureof ta$ e$e0ptions, are to be construed strictissimi jurisa*ainst the person or entit% clai0in* thee$e0ption@ and that refunds cannot be per0itted to e$ist upon 2va*ue i0plications.2

Not9ithstandin* the fore*oin* canon of construction, the funda0ental rule is still that a ud*e 0ustascertain and *ive effect to the le*islative intent e0bodied in a particular provision of la9. "f a statute1includin* a ta$ statute reducin* a certain ta$ rate5 is clear, plain and free fro0 a0bi*uit%, it 0ust be*iven its ordinar% 0eanin* and applied 9ithout interpretation. "n the instant case, the dissentin*opinion of Paras, -., itself concedes that the basic purpose of Pres. , N"RC. pon the other hand. 9here the la940a6in* authorit% intended to i0pose areuire0ent of reciprocit% as a condition for *rant of a privile*e, the le*islature doesso expressly and clearly.#or e$a0ple, the *ross estate of non4citiens and non4residents of thePhilippines nor0all% includes intan*ible personal propert% situated in the Philippines, for purposes ofapplication of the estate ta$ and donors ta$. Jo9ever, under Section ': of the N"RC 1as a0endedb% P.


26/36

obviousl% discarded toda% b% the B"R. Clearl%, there has been a chan*e of 0ind onthe part of the B"R.

As pointed out b% #eliciano, -., in his 0ain opinion, even 9hile the instant case 9as pendin* beforethe Court of !a$ Appeals and this Court, the ad0inistrative rulin*s issued b% the B"R fro0 &'(8 untilas late as &':(, reco*nied the 2dee0ed paid2 credit referred to in Section '7 of the .S. !a$

Code. !o date, no contrar% rulin* has been issued b% the B"R.

#or all the fore*oin* reasons, private respondents Motion for Reconsideration should be *rantedand " vote accordin*l%.

PRS, J., dissentin*?

" dissent.

!he decision of the Second


27/36

!he &':( Constitution provides that a doctrine or principle of la9 previousl% laid do9n either en bancor in


28/36

can never be in estoppel, particularl% in 0atters involvin* ta$es. !hus, for e$a0ple, the pa%0ent b%the ta$4pa%er of inco0e ta$es, pursuant to a B"R assess0ent does not preclude the *overn0entfro0 0a6in* further assess0ents. !he errors or o0issions of certain ad0inistrative officers shouldnever be allo9ed to eopardie the *overn0ents financial position. 1See? Phil. Lon*


29/36

!a$ refunds are in the nature of ta$ e$e0ptions. As such, the% are re*arded as in dero*ation ofsoverei*n authorit% and to be construed strictissimi juris a*ainst the person or entit% clai0in* thee$e0ption. !he burden of proof is upon hi0 9ho clai0s the e$e0ption in his favor and he 0ust beable to ustif%, his clai0 b% the clearest *rant of or*anic or statute la9... and cannot be per0itted toe$ist upon va*ue i0plications 1Asiatic Petroleu0 Co. v. Llanes. )' Phil. )88@ Northern Phil !obaccoCorp. v. Mun. of A*oo, La nion, +& SCRA +)@ Ro*an v. Co00issioner, + SCRA '8:@ Asturias

Su*ar Central, "nc. v. Co00issioner of Custo0s, 7' SCRA 8&(@


30/36

countries are substantial and no ta$ relief is offered, the resultin* double ta$ation 9ould serve as adiscoura*e0ent to the activit% that *ives rise to the ta$able ite0.

As a 9a% out of double ta$ation, countries enter into ta$ treaties. A ta$ treat% 1 is a bilateral convention 1but0a% be 0ade 0ultilateral5 entered into bet9een soverei*n states for purposes of eli0inatin* double ta$ation on inco0e and capital,preventin* fiscal evasion, pro0otin* 0utual trade and invest0ent, and accordin* fair and euitable ta$ treat0ent to forei*n residents ornationals.2

A 0ore *eneral 9a% of 0iti*atin* the i0pact of double ta$ation is to reco*nie the forei*n ta$ eitheras a tax credit or an item of deduction.

Dhether the recipient resorts to ta$ credit or deduction is dependent on the ta$ advanta*e or savin*sthat 9ould be derived therefro0.

A principal defect of the ta$ credit s%ste0 is 9hen lo9 ta$ rates or special ta$ concessions are*ranted in a countr% for the obvious reason of encoura*in* forei*n invest0ents. #or instance, if theusual ta$ rate is + percent but a concession rate accrues to the countr% of the investor rather thanto the investor hi0self !o obviate this, a ta$ sparin* provision 0a% be stipulated. Dith ta$ sparin*,ta$es e$e0pted or reduced are considered as havin* been frill% paid.

!o illustrate?

22 #orei*n Corporation inco0e &!a$ rate 1+;5 +RP inco0e &!a$ rate 1*eneral, +;concession rate, &;5 &

&. #># 3oreign Corp. Tax Liability ithout Tax 'paring22 #orei*n Corporation inco0e &RP inco0e 7

!otal "nco0e 722 ta$ pa%able (Less? RP ta$ 7(Net 22 ta$ pa%able ((

7. #># 3oreign Corp. Tax Liability ith Tax 'paring22 #orei*n Corp. inco0e &RP inco0e 7!otal inco0e 722 #orei*n Corp. ta$ pa%able (Less? RP ta$ 1+; of &, thedifference of 7; bet9een +; and &;,dee0ed paid to RP5Net 22 #orei*n Corp.ta$ pa%able )(

B% 9a% of resu0e, De 0a% sa% that the Dander decision of the !hird


31/36

Dander has attained finalit% this is si0pl% because no 0otion for reconsideration thereof 9as filed9ithin a reasonable period. !hus, said Motion for Reconsideration 9as theoreticall% never ta6en intoaccount b% said !hird


32/36

& De refer here 1unless other9ise e$pressl% indicated5 to the provisions of the N"RCas the% e$isted durin* the relevant ta$able %ears and at the ti0e the clai0 for refund9as 0ade. De shall hereafter refer si0pl% to theN!RC.

7 Section 7 1n5, N"RC 1as renu0bered and re4arran*ed b% E$ecutive Order No. 7(+,& -anuar% &'::5.

+ E.*., Section & 1e5, N"RC?

Sec. &. Returns and payment of taxes ithheld at source.4. . .

$$$ $$$ $$$

1e5 'urcharge and interest for failure to deduct and ithhold.4"f the ithholdingagent, in violation of the provisions of the precedin* section and i0ple0entin*re*ulations thereunder, fails to deduct and 9ithhold the a0ount of ta$ reuired undersaid section and re*ulations, he shall be liable to payin addition to the ta$ reuired tobe deducted and 9ithheld, a surchargeof fift%per centum if the failure is due to 9illful

ne*lect or 9ith intent to defraud the /overn0ent, or t9ent%4fiveper centum if thefailure is not due to such causes,plus interestat the rate of fourteenper centum perannum fro0 the ti0e the ta$ is reuired to be 9ithheld until the date of assess0ent.

$$$ $$$ $$$

Section 7& 1!d.5?

Sec. 7&. 3ailure of a ithholding agent to collect and remit tax. FAnyperson reuired to collect, account for, and re0it an% ta$ i0posed b% this Code hoillfully fails to collect such tax or account for and remit such tax or 9illfull% assistsin an% 0anner to evade an% such ta$ or the pa%0ent thereof,shall in addition to

other penalties provided for under this Chapter,be liable to a penalty e/ual to thetotal amount of the tax not collected or not accounted for and re0itted. 1E0phasissupplied5

) Jouston Street Corporation v. Co00issioner of "nternal Revenue, :) #. 7nd. :7&1&'+85@ Ban6 of A0erica v. An*li0, &+: #. 7nd. ( 1&')+5.

& SCRA & 1&'85.

8 & SCRA at ).

( !he follo9in* detailed e$a0ination of the tenor and i0port of Sections '& and '7

of the S !a$ Code is, re*rettabl%, 0ade necessar% b% the fact that the ori*inaldecision of the Second


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: So0eti0es also called a 2derivative2 ta$ credit or an 2indirect2 ta$ credit@ @itt"erand bb 0nited 'tates Taxation of 3oreign !ncome and 3oreign $ersons+&' 17ndEd., &'8:5.

' A0erican Chicle Co. v. .S. +&8 S ), :8 L. ed. &'& 1&')75@ D.. Buc6le%, "nc.v. C.".R., &: #. 7d. &: 1&')85.

& "n his dissentin* opinion, Paras,;. 9rites that 2the a0ount of the ta$ creditpurportedl% bein* allo9ed is not fi$ed or ascertained, hence 9e do not 6no9 9hetheror not the ta$ credit conte0plated is 9ithin the li0its set forth in the la92 1


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'7 S !a$ Code and Sec. +1c5 1:5, N"RC, have been in effect been converted intotreat% co00it0ents of the nited States and the Philippines, respectivel%, in respectof S and Philippine corporations.

PARAS, -., dissentin*?

& !here are t9o t%pes of credit s%ste0s. !he first, is the underl%in* credit s%ste09hich reuires the other contractin* state to credit not onl% the &; Philippine ta$into co0pan% dividends but also the +; Philippine ta$ on corporations in respect ofprofits out of 9hich such dividends 9ere paid. !he Philippine corporation is assuredof sufficient creditable ta$es to cover their total ta$ liabilities in their ho0e countr%and in effect 9ill no lon*er pa% ta$es therein. !he other t%pe provides that if an% ta$relief is *iven b% the Philippines pursuant to its o9n develop0ent pro*ra0, the othercontractin* state 9ill *rant credit for the a0ount of the Philippine ta$ 9hich 9ouldhave been pa%able but for such relief.

7 !he Philippines, for one, has entered into a nu0ber of ta$ treaties in pursuit of thefore*oin* obectives. !he e$tent of ta$ treaties entered into b% the Philippines 0a% be

seen fro0 the follo9in* tabulation?

!able & F RP !a$ !reaties

RP4Dest /er0an% Ratified on -an. &, &':

RP4Mala%sia Ratified on -an. &, &':

RP4Ni*eria, Concluded in Septe0ber,

Netherlands and October and Nove0ber, &':,

Spain respectivel% 1docu0ents read% for

si*nature5

RP4u*oslavia Ne*otiated in Bel*rade,

Sept. +4Oct. ),&':


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Pendin* Ratification Si*ned Ratified

RP4"tal%


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Cir vs Procter and Gamble

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