vi. Allocation of income and deductions YUTIVO SONS HARDWARE CO.

v CTA (Jan 28, 1961) DOCTRINE: Yutivo & SM are one entity (SM just a branch) because Yutivo financed the business of SM. NATURE: Petition for review on certiorari PONENTE: Gutierrez David, J. FACTS: Yutivo Sons Hardware Co. (hereafter referred to as Yutivo) is a domestic corporation, organized under the laws of the Philippines, with principal office at 404 Dasmarias St., Manila. Incorporated in 1916, it was engaged, prior to the last world war, in the importation and sale of hardware supplies and equipment. After the liberation, it resumed its business and until June of 1946 bought a number of cars and trucks from General Motors Overseas Corporation (hereafter referred to as GM for short), an American corporation licensed to do business in the Philippines. As importer, GM paid sales tax prescribed by sections 184, 185 and 186 of the Tax Code on the basis of its selling price to Yutivo. Said tax being collected only once on original sales, Yutivo paid no further sales tax on its sales to the public. After the incorporation of SM and until the withdrawal of GM from the Philippines in the middle of 1947, the cars and tracks purchased by Yutivo from GM were sold by Yutivo to SM which, in turn, sold them to the public in the Visayas and Mindanao. When GM left they appointed Yutivo as importer for the Visayas and Mindanao, and Yutivo continued its previous arrangement of selling exclusively to SM. In the same way that GM used to pay sales taxes based on its sales to Yutivo, the latter, as importer, paid sales tax prescribed on the basis of its selling price to SM, and since such sales tax, as already stated, is collected only once on original sales, SM paid no sales tax on its sales to the public. On November 7, 1950, after several months of investigation by revenue officers started in July, 1948, the Collector of Internal Revenue made an assessment upon Yutivo and demanded from the latter P1,804,769.85 as deficiency sales tax plus surcharge. CIR claimed that the taxable sales were the retail sales by SM to the public and not the sales at wholesale made by, Yutivo to the latter inasmuch as SM and Yutivo were one and the same corporation, the former being the subsidiary of the latter. (The contention in simpler words: Before GM imported cars sold it to Yutivo who then sold it to SM to be sold for retail. GM paid the sales tax as the importer, Yutivo and SM didnt pay as sales tax is only paid once. GM then stopped operations in the Phil and assigned Yutivo as importer. Yutivo was paying sales tax as importer, selling wholesale exclusively to SM. CIR comes in and says that they should be paying sales tax on the Retail price, as Yutivo and SM are one entity.) ISSUES/HELD: 1. WON SM/Yutivo committed tax evasion through fraud? (Fundamentals pa to, so recap lang) No. They werent able to prove fraud because (1) GM was still importer when SM was organized (2) transactions between SM and Yutivo out 2.

in the open and (3) there was good faith in interpreting the Code which said sales tax are collected once only on every original sale. Taxpayer has legal right to decrease tax within means law permits. WON SM and Yutivo had separate juridical personalities? Yes (Important to our topic. I think.)

RATIO/RULING: However, the Court agreed that SM was actually owned and controlled by petitioner as to make it a mere subsidiary or branch of the latter created for the purpose of selling the vehicles at retail and maintaining stores for spare parts as well as service repair shops. 1) 2) 3) 4) The founders of the corporation are closely related to each other either by blood or affinity, and most of its stockholders are members of the Yu (Yutivo or Young) family. It is, likewise, admitted that SM was organized by the leading stockholders of Yutivo headed by Yu Khe Thai. Subscription of shares to SM were credited from Yutivo, and no money actually passed hands. The shareholders in SM are mere nominal stockholders holding the shares for and in behalf of Yutivo, so even conceding that the original subscribers were stockholders bona fide, Yutivo was at all times in control of the majority of the stock of SM and that the latter was a mere subsidiary of the former. SM is under the management and control of Yutivo by virtue of a management contract between the two. The companies have the same controlling majority of Board of Directors, principal officers and share a common comptroller. The cash assets of SM were actually handled by Yutivo. All receipts of cash by SM were transferred directly to Yutivo in Manila. Likewise, all expenses incurred by SM were referred to Yutivo which prepares disbursement vouchers and payments. The payment was made out of the cash deposits of SM. These transactions were made without need of further requests. All payments were made on Yutivo stationery, without a copy furnished to SM. All detailed records for SM are kept by Yutivo. The accounting system of Yutivo shows that it maintained a high degree of control over SMs accounts. All transactions between Yutivo and SM are effected by debit/credit entries against the reciprocal account maintained in their respective books. The management fees due from SM to Yutivo were taken up as expenses of SM and credited to the account of Yutivo. If the two were separate entities, the fees should have been income of Yutivo. But these fees were recorded as reserve for Bonus and were thus a liability, not an incime account. This reserve for bonus was then distributed directly to the employees and directors of Yutivo, showing that the management fees were paid directly to Yutivo officers and employees.

5)

6)

7)

8)

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

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been exhausted. Thus, the increases in the capital stock were made in advances or "Guarantee" payments by Yutivo and credited in favor of SM. The funds of SM were all merged in the cash fund of Yutivo. At all times Yutivo thru officers and directors common to it and SM, exercised full control over the cash funds, policies, expenditures and obligations of the latter. SM being merely an instrumentality of Yutivo, the sales tax should be paid on the Retail sale to the public. DISPOSITION: IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals under review is hereby modified in that petitioner shall be ordered to pay to respondent the sum of P820,549.91, plus 25% surcharge thereon for late payment. So ordered without costs. VOTE: EN BANC. Bengzon, Labrador, Concepcion, Reyes, J.B.L., Barrera and Paredes, JJ., concur. Padilla, J., took no part. ADDITIONAL NOTES: Thank you Miggy! Just updated his digest. -Steph vii. Networth method Perez v CTA May 30, 1958 Nature: Appeal by certiorari to review CTA decision Ponente: Reyes, J.B.L. 1. 2. 3. Perez was ordered to pay P41,547.77 as deficiency income tax and surcharges for 1947 to 1950. Amount was arrived at on the basis of Perez increase in net worth. The CIR resorted to summary distraint to enforce the liability. CTA affirmed CIR decision.

WON CIR erred in applying the net worth method of determining taxable income. HELD: No. 1. Method is based upon the general theory that money and other assets in excess of liabilities of a taxpayer (after an accurate and proper adjustment of non-deductible items) not accounted for by his income tax returns, leads to the inference that part of his income has not been reported. Method stems from Section 41 of the IRC of 1939 of the US. Section 38 of NIRC also authorizes the application of the net worth method.

2. 3.

DISPOSITIVE: Affirmed CTA ruling with modification that summary distraint to enforce taxpayers liability for 1947-50 is improper and void. -Zoilo Collector of Internal Revenue v. Reyes Justin viii. Tax Evasion v. Tax Avoidance Commissioner of Internal Revenue v. Benigno Toda, ibid. Miggy (NOTE: hard copies of the digest were already distributed to the class) xxx b. Final adjustment return (Sec. 76, NIRC) COMMISSIONER OF INTERNAL REVENUE v BANK OF THE PHILIPPINE ISLANDS (7 July 2009) Doctrine: Hence, the controlling factor for the operation of the irrevocability rule is that the taxpayer chose an option; and once it had already done so, it could no longer make another one. Consequently, after the taxpayer opts to carry-over its excess tax credit to the following taxable period, the question of whether or not it actually gets to apply said tax credit is irrelevant. Section 76 of the NIRC of 1997 is explicit in stating that once the option to carry over has been made, no application for tax refund or issuance of a tax credit certificate shall be allowed therefor. The phrase for that taxable period (in section 76) merely identifies the excess income tax, subject of the option, by referring to the taxable period when it was acquired by the taxpayer. Nature: Petition for review on certiorari of the decision and resolution of the CA Ponente: Chico-Nazario, J. Facts: On 15 April 1999, BPI filed with the Bureau of Internal Revenue (BIR) its final adjusted Corporate Annual Income Tax Return (ITR) for the taxable year ending on 31 December 1998, showing a taxable income of P1,773,236,745.00 and a total tax due of P602,900,493.00.

MAIN ISSUE: WON Perez is liable to pay deficiency income tax and surcharges for 1947 to 1950. HELD: YES WON CIR was barred from resorting to summary distraint and levy to enforce liability. HELD: YES 1. 2. 3. Summary distraint and levy to collect deficiency income taxes assessed against appellant for 1947, 1948 and 1949 was invalid. Sec. 51(d) of NIRC provides for a 3 year prescriptive period limiting the right of the govt to enforce collection of income taxes by summary proceedings of distraint and levy, though it can proceed to recover through a civil action. Appeal by Perez vested jurisdiction on the CTA to review and determine his tax liability for the period.

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For the same taxable year 1998, BPI already made income tax payments for the first three quarters, which amounted to P563,547,470.46.[2] The bank also received income in 1998 from various third persons, which, were already subjected to expanded withholding taxes amounting to P7,685,887.90. BPI additionally acquired foreign tax credit when it paid the United States government taxes in the amount of $151,467.00, or the equivalent of P6,190,014.46, on the operations of formers New York Branch. Finally, respondent BPI had carried over excess tax credit from the prior year, 1997, amounting to P59,424,222.00. Crediting the aforementioned amounts against the total tax due from it at the end of 1998, BPI computed an overpayment to the BIR of income taxes in the amount of P33,947,101.00 BPI opted to carry over its 1998 excess tax credit, in the amount of P33,947,101.00, to the succeeding taxable year ending 31 December 1999.[3] For 1999, however, respondent BPI ended up with (1) a net loss in the amount of P615,742,102.00; (2) its still unapplied excess tax credit carried over from 1998, in the amount of P33,947,101.00; and (3) more excess tax credit, acquired in 1999, in the sum of P12,975,750.00. So in 1999, the total excess tax credits of BPI increased to P46,922,851.00, which it once more opted to carry over to the following taxable year. For the taxable year ending 31 December 2000, respondent BPI declared in its Corporate Annual ITR: (1) zero taxable income; (2) excess tax credit carried over from 1998 and 1999, amounting to P46,922,851.00; and (3) even more excess tax credit, gained in 2000, in the amount of P25,207,939.00. This time, BPI failed to indicate in its ITR its choice of whether to carry over its excess tax credits or to claim the refund of or issuance of a tax credit certificate for the amounts thereof. On 3 April 2001, BPI filed with petitioner Commissioner of Internal Revenue (CIR) an administrative claim for refund in the amount of P33,947,101.00, representing its excess creditable income tax for 1998. The CIR failed to act on the claim for tax refund of BPI. Hence, BPI filed a Petition for Review before the CTA. The CTA promulgated its Decision in CTA Case No. 6276 on 12 March 2003, ruling therein that since BPI had opted to carry over its 1998 excess tax credit to 1999 and 2000, it was barred from filing a claim for the refund of the same. The CTA relied on the irrevocability rule laid down in Section 76 of the National Internal Revenue Code (NIRC) of 1997, which states that once the taxpayer opts to carry over and apply its excess income tax to succeeding taxable years, its option shall be irrevocable for that taxable period and no application for tax refund or issuance of a tax credit shall be allowed for the same. BPI filed a Motion for Reconsideration of the foregoing Decision, but the CTA denied the same in a Resolution dated 3 June 2003. BPI filed an appeal with the Court of Appeals, docketed as CA-G.R. SP No. 77655. On 29 April 2005, the Court of Appeals rendered its Decision, reversing that of the CTA and holding that BPI was entitled to a refund of the excess income tax it paid for 1998.

The Court of Appeals conceded that BPI indeed opted to carry over its excess tax credit in 1998 to 1999 by placing an x mark on the corresponding box of its 1998 ITR. Nonetheless, there was no actual carrying over of the excess tax credit, given that BPI suffered a net loss in 1999, and was not liable for any income tax for said taxable period, against which the 1998 excess tax credit could have been applied. The Court of Appeals added that even if Section 76 was to be construed strictly and literally, the irrevocability rule would still not bar BPI from seeking a tax refund of its 1998 excess tax credit despite previously opting to carry over the same. The phrase for that taxable period qualified the irrevocability of the option of BIR to carry over its 1998 excess tax credit to only the 1999 taxable period; such that, when the 1999 taxable period expired, the irrevocability of the option of BPI to carry over its excess tax credit from 1998 also expired. The Court of Appeals further reasoned that the government would be unjustly enriched should the appellate court hold that the irrevocability rule barred the claim for refund of a taxpayer, who previously opted to carry-over its excess tax credit, but was not able to use the same because it suffered a net loss in the succeeding year. Finally, the appellate court cited BPI-Family Savings Bank, Inc. v. Court of Appeals wherein this Court held that if a taxpayer suffered a net loss in a year, thus, incurring no tax liability to which the tax credit from the previous year could be applied, there was no reason for the BIR to withhold the tax refund which rightfully belonged to the taxpayer. In a Resolution dated 20 April 2007, the Court of Appeals denied the Motion for Reconsideration of the CIR. Issue: WON THE IRREVOCABILITY RULE UNDER SECTION 76 OF THE TAX CODE BARS PETITIONER FROM ASKING FOR A TAX REFUND. Held & Ratio: Yes. The Court of Appeals erred in relying on BPI-Family, missing significant details that rendered said case inapplicable to the one at bar. The prevailing tax law then was the NIRC of 1985, Section 79[10] of which (had no irrevocability rule)1.

Sec. 79. Final Adjustment Return. - Every corporation liable to tax under Section 24 shall file a final adjustment return covering the total net income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable net income of that year the corporation shall either: (a) Pay the excess tax still due; or (b) Be refunded the excess amount paid, as the case may be. In case the corporation is entitled to a refund of the excess estimated quarterly income taxes-paid, the refundable amount shown on its final adjustment return may be credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable year. (Emphases ours.)
1

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By virtue of the afore-quoted provision, the taxpayer with excess income tax was given the option to either (1) refund the amount; or (2) credit the same to its tax liability for succeeding taxable periods. Section 79 of the NIRC of 1985 was reproduced as Section 76 of the NIRC of 1997,[11] with the addition of one important sentence, which laid down the irrevocability rule. Xxx In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the refundable amount shown on its final adjustment return may be credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for tax refund or issuance of a tax credit certificate shall be allowed therefor. When BPI-Family was decided by this Court, it did not yet have the irrevocability rule to consider. Hence, BPI-Family cannot be cited as a precedent for this case. The factual background of Philam Asset Management, Inc. v. Commissioner of Internal Revenue,[12] cited by the CIR, is closer to the instant Petition. Both involve tax credits acquired and claims for refund filed more than a decade after those in BPI-Family, to which Section 76 of the NIRC of 1997 already apply. The Court, in Philam, recognized the two options offered by Section 76 of the NIRC of 1997 to a taxable corporation whose total quarterly income tax payments in a given taxable year exceeds its total income tax due. These options are: (1) filing for a tax refund or (2) availing of a tax credit. The Court further explained: The first option is relatively simple. Any tax on income that is paid in excess of the amount due the government may be refunded, provided that a taxpayer properly applies for the refund. The second option works by applying the refundable amount, as shown on the [Final Adjustment Return (FAR)] of a given taxable year, against the estimated quarterly income tax liabilities of the succeeding taxable year. These two options under Section 76 are alternative in nature. The choice of one precludes the other. Indeed, in Philippine Bank of Communications v. Commissioner of Internal Revenue, the Court ruled that a corporation must signify its intention -- whether to request a tax refund or claim a tax credit -- by marking the corresponding option box provided in the FAR. While a taxpayer is required to mark its choice in the form provided by the BIR, this requirement is only for the purpose of facilitating tax collection. One cannot get a tax refund and a tax credit at the same time for the same excess income taxes paid. x x x The Court categorically declared in Philam that: Section 76 remains clear and unequivocal. Once the carry-over option is taken, actually or constructively, it

becomes irrevocable. It mentioned no exception or qualification to the irrevocability rule. Hence, the controlling factor for the operation of the irrevocability rule is that the taxpayer chose an option; and once it had already done so, it could no longer make another one. Consequently, after the taxpayer opts to carry-over its excess tax credit to the following taxable period, the question of whether or not it actually gets to apply said tax credit is irrelevant. Section 76 of the NIRC of 1997 is explicit in stating that once the option to carry over has been made, no application for tax refund or issuance of a tax credit certificate shall be allowed therefor. The phrase for that taxable period (in section 76) merely identifies the excess income tax, subject of the option, by referring to the taxable period when it was acquired by the taxpayer. In the present case, the excess income tax credit, which BPI opted to carry over, was acquired by the said bank during the taxable year 1998. The option of BPI to carry over its 1998 excess income tax credit is irrevocable; it cannot later on opt to apply for a refund of the very same 1998 excess income tax credit. The Court similarly disagrees in the declaration of the Court of Appeals that to deny the claim for refund of BPI, because of the irrevocability rule, would be tantamount to unjust enrichment on the part of the government. The Court addressed the very same argument in Philam, where it elucidated that there would be no unjust enrichment in the event of denial of the claim for refund under such circumstances, because there would be no forfeiture of any amount in favor of the government. The amount being claimed as a refund would remain in the account of the taxpayer until utilized in succeeding taxable years,[14] as provided in Section 76 of the NIRC of 1997. It is worthy to note that unlike the option for refund of excess income tax, which prescribes after two years from the filing of the FAR, there is no prescriptive period for the carrying over of the same. Therefore, the excess income tax credit of BPI, which it acquired in 1998 and opted to carry over, may be repeatedly carried over to succeeding taxable years, i.e., to 1999, 2000, 2001, and so on and so forth, until actually applied or credited to a tax liability of BPI. Finally, while the Court, in Philam, was firm in its position that the choice of option as regards the excess income tax shall be irrevocable, it was less rigid in the determination of which option the taxpayer actually chose. It did not limit itself to the indication by the taxpayer of its option in the ITR. Thus, failure of the taxpayer to make an appropriate marking of its option in the ITR does not automatically mean that the taxpayer has opted for a tax credit. The Court ratiocinated in G.R. No. 156637[15] of Philam: One cannot get a tax refund and a tax credit at the same time for the same excess income taxes paid. Failure to signify ones intention in the FAR does not mean outright barring of a valid request for a refund, should one still choose this option later on xxxx When circumstances show that a choice has been made by the taxpayer to carry over the excess income tax as credit, it should be respected; but when indubitable

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circumstances clearly show that another choice a tax refund is in order, it should be granted. In the Petition at bar, BPI was unable to discharge the burden of proof necessary for the grant of a refund. BPI expressly indicated in its ITR for 1998 that it was carrying over, instead of refunding, the excess income tax it paid during the said taxable year. BPI consistently reported the said amount in its ITRs for 1999 and 2000 as credit to be applied to any tax liability the bank may incur; only, no such opportunity arose because it suffered a net loss in 1999 and incurred zero tax liability in 2000. BPI itself never denied that its original intention was to carry over the excess income tax credit it acquired in 1998, and only chose to refund the said amount when it was unable to apply the same to any tax liability in the succeeding taxable years. There can be no doubt that BPI opted to carry over its excess income tax credit from 1998; it only subsequently changed its mind which it was barred from doing by the irrevocability rule. Dispositive: Petition for Review of the Commissioner for Internal Revenue is GRANTED. Vote: Ynares-Santiago, Velasco, Nachura, Peralta, JJ., concur. -Wiggy Commissioner of Internal Revenue v. PL Management International Philippines Sandra xxx g. Return of corporations contemplating dissolution/reorganization BPI v. Commissioner of Internal Revenue Jan (NOTE: Hard copies of the digest will be distributed to the class) DD. WITHHOLDING TAX Withholding of creditable tax FILSYN v. CA (July 11, 1989) FILIPINAS SYNTHETIC FIBER CORPORATION, petitioner, vs. COURT OF APPEALS, COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents. DOCTRINE: Under the accrual basis method of accounting, income is reportable when all the events have occurred that fix the taxpayer's right to receive the income, and the amount can be determined with reasonable accuracy. Thus, it is the right to receive income, and not the actual receipt, that determines when to include the amount in gross income.

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

NATURE: Petitions for Review on Certiorari under Rule 45 of the Revised Rules of Court seeking to set aside the Decisions of the Court of Appeals PONENTE: PURISIMA, J.: FACTS: 1. The Filipinas Synthetic Fiber Corporation, a domestic corporation received on December 27, 1979 a letter of demand from the Commissioner of Internal Revenue assessing it for deficiency withholding tax at source in the total amount of P829,748.77, inclusive of interest and compromise penalties, for the period from the fourth quarter of 1974 to the fourth quarter of 1975. 2. The bulk of the deficiency withholding tax assessment, however, consisted of interest and compromise penalties for alleged late payment of withholding taxes due on interest loans, royalties and guarantee fees paid by the petitioner to non-resident corporations. 3. The assessment was seasonably protested by the petitioner through its auditor, SGV and Company. 4. Respondent denied the protest in a letter dated 14 May 1985 on the following ground: "For Philippine internal revenue tax purposes, the liability to withhold and pay income tax withheld at source from certain payments due to a foreign corporation is at the time of accrual and not at the time of actual payment or remittance thereof." Since the taxpayer failed to pay the withholding tax on interest, royalties, and guarantee fee at the time of their accrual and in the books of the corporation the aforesaid assessment is therefore legal and proper. 5. Petitioner brought a Petition for Review before the Court of Tax Appeals. The CTA rendered judgment ordering petitioner to pay respondent the amount of P306,165.35 as deficiency withholding tax at source for the fourth quarter of 1974 to the third quarter of 1975 plus 10% surcharge and 14% annual interest from November 29, 1979 to July 31, 1980, plus 20% interest from August 1, 1980 until fully paid but not to exceed that which corresponds to a period of three (3) years pursuant to P.D. No. 1705. ISSUES: Whether the liability to withhold tax at source on income payments to nonresident foreign corporations arises upon remittance of the amounts due to the foreign creditors or upon accrual thereof HELD/RATIO/RULING: UPON ACCRUAL PETITIONER: The withholding taxes on the said interest income and royalties were paid to the government when the subject interest and royalties were actually remitted abroad. Stated otherwise, whatever amount has accrued in the books, the withholding tax due thereon is ultimately paid to the government upon remittance abroad of the amount accrued. COURT:

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Sec. 53: Withholding Tax at source . . . (b) Non-resident aliens and foreign corporations Every individual, corporation, partnership, or association, in whatever capacity acting, including a lessee or mortgagor of real or personal property, trustee acting in any trust capacity, executor, administrator, receiver, conservator, fiduciary, employer, and every officer or employee of the Government of the Republic of the Philippines having the control, receipt, custody, disposal, or payment of interest, dividends, rents, royalties, salaries, wages, premiums, annuities, compensation, remunerations, emoluments, or other fixed or determinable annual, periodical, or casual gains, profits, and income, and capital gains, of any non-resident alien not engaged in trade or business within the Philippines, shall (except in the case provided in sub-section (a) (1) of this Section) deduct and withhold from the annual, periodical, or casual gains, profits, and income, and capital gains, a tax equal to 30 per cent thereof. (c) Every person required to deduct and withhold any tax under this section shall make return thereof, . . . for the payment of the tax, shall pay the amount withheld to the officer of the Government of the Philippines authorized to receive it. Every such person is made personally liable for such tax, and is indemnified against the claims and demands of any person for the amount of any payments made in accordance with the provision of this section. xxx xxx xxx (2) Non-resident foreign corporations In the case of foreign corporations subject to tax under this Title, not engaged in trade or business within the Philippines, there shall be deducted and withheld at the source in the same manner and upon the same items as is provided in subsection (b) (1) of this section, as well as on remunerations for technical services or otherwise, a tax equal to thirty-five (35) per cent thereof. This tax shall be returned and paid in and subject to the same conditions as provided in Section 54. Section 54: Returns and payments of taxes withheld at source (a) Quarterly return and payment of taxes withheld Taxes deducted and withheld under Section 53 shall be covered by a return and paid to the Commissioner of Internal Revenue or his collection agent in the province, city, or municipality where the withholding agent has his legal residence or principal place of business, or where the withholding agent is a corporation, where the principal office is located. The taxes deducted and withheld by the withholding agent shall be held as a special fund in trust for the Government until paid to the collecting officers. The Commissioner of Internal Revenue may, with the approval of the Secretary of Finance, require these withholding agents to pay or deposit the taxes deducted and withheld at more frequent intervals when necessary to protect the interest of the Government. The return shall be filed and the payment made within 25 days from the close of each calendar quarter . . .

In the case at bar, there was a definite liability, a clear and imminent certainty that at the maturity of the loan contracts, the foreign corporation was going to earn income in an ascertained amount, so much so that petitioner already deducted as business expense the said amount as interests due to the foreign corporation. This is allowed under the law, petitioner having adopted the "accrual method" of accounting in reporting its incomes." Petitioner cannot now claim that there is no duty to withhold and remit income taxes as yet because the loan contract was not yet due and demandable. Having "written-off" the amounts as business expense in its books, it had taken advantage of the benefit provided in the law allowing for deductions from gross income. Moreover, it had represented to the BIR that the amounts so deducted were incurred as a business expense in the form of interest and royalties paid to the foreign corporations. It is estopped from claiming otherwise now.

DISPOSITION: WHEREFORE, the decisions of the Court of Appeals in CA GR. SP Nos. 32922 and 32022 are hereby AFFIRMED in toto. No pronouncement as to costs. VOTE: THIRD DIVISION; Melo, Vitug and Panganiban, JJ., concur.; Gonzaga-Reyes, J., took no part - spouse connected with counsel for petitioner. (AWWWWW talo si hubby) xxx David

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The provisions of law2 are silent as to when does the duty to withhold the taxes arise. And to determine the same, an inquiry as to the nature of accrual method of accounting, the procedure used by the herein petitioner, and to the modus vivendi of withholding tax at source come to the fore. The method of withholding tax at source is a procedure of collecting income tax sanctioned by the National Internal Revenue Code. Section 53 (c) [see FN1] that the withholding agent is explicitly made personally liable for the income tax withheld under Section 54. In Phil. Guaranty Co., Inc. vs. Commissioner of Internal Revenue, 4 the Court, has held that the law sets no condition for the personal liability of the withholding agent to attach. The reason is to compel the withholding agent to withhold the tax under all circumstances. Thus, the withholding agent is constituted the agent both the government and the taxpayer. With respect to the collection and/or withholding of the tax, he is the Government's agent. In regard to the filing of the necessary income tax return and the payment of the tax to the Government, he is the agent of the taxpayer.

The withholding agent, therefore, is no ordinary government agent especially because under Section 53 (c) he is held personally liable for the tax he is duty bound to withhold; whereas, the Commissioner of Internal Revenue and his deputies are not made liable to law. On the other hand, "under the accrual basis method of accounting, income is reportable when all the events have occurred that fix the taxpayer's right to receive the income, and the amount can be determined with reasonable accuracy. Thus, it is the right to receive income, and not the actual receipt, that determines when to include the amount in gross income." The following are the requisites of accrual method of accounting, (1) that the right to receive the amount must be valid, unconditional and enforceable, i.e., not contingent upon future time; (2) the amount must be reasonably susceptible of accurate estimate; and (3) there must be a reasonable expectation that the amount will be paid in due course." 6

4. Tax deemed paid on dividends CIR vs P&G Philippine Manufacturing Corp (Dec 2., 1991) Ponente: Feliciano Doctrine: The withholding agent is the agent of both the Government and the taxpayer. With respect to the collection and/or withholding of tax, he is the Governments agent. With regard to the filing of the necessary income tax return and the payment of the tax to the Government, he is the agent of the taxpayer. Also see computation to find out the tax deemed paid. Facts: Procter and Gamble Philippines declared dividends payable to its parent company and sole stockholder, P&G USA, and deducted 35% withholding tax at source. It then filed a claim with the Commissioner of Internal Revenue for a refund or tax credit, claiming that pursuant to Section 24(b)(1) of the National Internal Revenue Code, as amended by Presidential Decree No. 369, the applicable rate of withholding tax on the dividends remitted was only 15%. Issues and Ruling: 1. W/N P&G Philippines is entitled to the refund or tax credit. YES. The ordinary 35% tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation goes down to 15% if the country of domicile of the foreign stockholder corporation shall allow such for eign corporation a tax credit for taxes deemed paid in the Philippines, applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. Such tax credit for taxes deemed paid in the Philippines must, as a minimum, r each an amount equivalent to 20 percentage points which represents the difference between the regular 35% dividend tax rate and the preferred 15% tax rate. Since the US Congress desires to avoid or reduce double taxation of the same income stream, it allows a tax credit of both (i) the Philippine dividend tax actually withheld, and (ii) the tax credit for the Philippine corporate income tax actually paid by P&G Philippines but deemed paid by P&G USA. Moreover, under the Philippines-United States Convention With Respect to Taxes on Income, the Philippines, by treaty commitment, reduced the regular rate of dividend tax to a maximum of 20% of the gross amount of dividends paid to US parent corporations, and established a treaty obligation on the part of the United States that it shall allow to a US parent corporation receiving dividends from its Philippine subsidiary a [tax] credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine [subsidiary]. Notes: The law sets no condition for the personal liability of the withholding agent to attach. The reason is to compel the withholding agent to withhold the tax under all circumstances. In effect, the responsibility for the collection of the tax as well as the payment thereof is concentrated upon the person over whom the Government has jurisdiction. The withholding agent is the agent of both the Government and the taxpayer. With respect to the collection and/or withholding of tax, he is the Governments agent. With regard to the filing of the necessary income tax return and the payment of the tax to the Government, he is the agent of the taxpayer. The NIRC does not require that the US tax law deem the parent corporation to have paid the 20 percentage points of dividend tax waived by the Philippines. It only requires that the US shall allow P&G-USA a deemed paid tax credit in an amount equivalent to the

P100.00 Pretax net corporate income earned by P&G-Phil. x 35% Regular Philippine corporate income tax rate P35.00 Paid to the BIR by P&G-Phil. as Philippine corporate income tax. P100.00 -35.00 P65.00 Available for remittance as dividends to P&G-USA P65.00 Dividends remittable to P&G-USA x 35% Regular Philippine dividend tax rate under Section 24 (b) (1), NIRC P22.75 Regular dividend tax P65.00 Dividends remittable to P&G-USA x 15% Reduced dividend tax rate under Section 24 (b) (1), NIRC P9.75 Reduced dividend tax P22.75 Regular dividend tax under Section 24 (b) (1), NIRC -9.75 Reduced dividend tax under Section 24 (b) (1), NIRC P13.00 Amount of dividend tax waived by Philippine ===== government under Section 24 (b) (1), NIRC Next the Court determined how much of it was to be credited by the US government:

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20 percentage points waived by the Philippines. Section 24(b)(1) does not create a tax exemption nor does it provide a tax credit; it is a provision which specifies when a particular (reduced) tax rate is legally applicable. An interpretation of a tax statute that produces a revenue flow for the government is not, for that reason alone, necessarily the correct reading of the statute. Section 24(b)(1) of the NIRC seeks to promote the in-flow of foreign equity investment in the Philippines by reducing the tax cost of earning profits here and thereby increasing the net dividends remittable to the investor. The foreign investor, however, would not benefit from the reduction of the Philippine dividend tax rate unless its home country gives it some relief from double taxation by allowing the investor additional tax credits which would be applicable against the tax payable to such home country. Accordingly Section 24(b)(1) of the NIRC requires the home or domiciliary country to give the investor corporation a deemed paid tax credit at least equal in amount to the 20 percentage points of dividend tax foregone by the Philippines, in the assumption that a positive incentive effect would thereby be felt by the investor. Computation of the court: SO the court first determined the amount of tax the Philippines would have waived if put under the 15% regime. This was computed as:

P65.00 Dividends remittable to P&G-USA - 9.75 Dividend tax withheld at the reduced (15%) rate P55.25 Dividends actually remitted to P&G-USA 2. P35.00 Philippine corporate income tax paid by P&G-Phil. to the BIR Dividends actually remitted by P&G-Phil. to P&G-USA P55.25 = x P35.00 = P29.75 10 Amount of accumulated P65.00 ====== profits earned by P&G-Phil. in excess of income tax 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 Section 902 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), Section 902, US Tax Code, specifically and clearly complies with the requirements of Section 24 (b) (1), NIRC. -Kester 6. Withholding tax on dividends Marubeni Corp. v. Commissioner of Internal Revenue - Mae 7. Withholding tax on royalties Commissioner of Internal Revenue, petitioner, vs. SC Johnson and Sons, and Court of Appeals, respondents. (June 25, 1999) NOTES: Kind of tax: tax on royalties NATURE: Petition for review a decision of the CA PONENTE: Peralta; 3rd Division FACTS: 1. SC. JOHNSON AND SON, INC., a domestic corporation organized and operating under the Philippine laws, entered into a license agreement with SC Johnson and Son, United States of America (USA), a non-resident foreign corporation was granted the 3.

4.

CIR: contends that under RP-US Tax Treaty, which is known as the "most favored nation" clause, the lowest rate of the Philippine tax at 10% may be imposed on royalties derived by a resident of the United States from sources within the Philippines only if the circumstances of the resident of the United States are similar to those of the resident of West Germany. Since the RP-US Tax Treaty contains no "matching credit" provision as that provided in RP-West Germany Tax Treaty, the tax on royalties under the RP-US Tax Treaty is not paid under similar circumstances as those obtaining in the RP-West Germany Tax Treaty. Also petitioner argues that since S.C. Johnson's invocation of the "most favored nation" clause is in the nature of a claim for exemption from the application of the regular tax rate of 25% for royalties, the provisions of the treaty must be construed strictly against it. Respondent (SC Johnson and Sons): countered that the "most favored nation" clause under the RP-US Tax Treaty refers to royalties paid under similar circumstances as those royalties subject to tax in other treaties; that the phrase "paid under similar circumstances" does not refer to payment of the tax but to the subject matter of the tax, that is, royalties, because the "most favored nation" clause is intended to allow the taxpayer in one state to avail of more liberal provisions contained in another tax treaty wherein the country of residence of such taxpayer is also a party thereto, subject to the basic condition that the subject matter of taxation in that other tax treaty is the same as that in the original tax treaty under which the taxpayer is liable; thus, the RP-US Tax Treaty speaks of "royalties of the same kind paid under similar circumstances". ISSUES: (1) WON SC Johnson can refund. HELD: NO

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right to use the trademark, patents and technology owned by the latter including the right to manufacture, package and distribute the products. License Agreement was duly registered with the Technology Transfer Board of the Bureau of Patents, Trade Marks and Technology Transfer under Certificate of Registration No. 8064. SC. JOHNSON AND SON, INC was obliged to pay SC Johnson and Son, USA royalties based on a percentage of net sales and subjected the same to 25% withholding tax on royalty payments which [respondent] paid from July 1992 to May 1993. Respondent filed with the International Tax Affairs Division (ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties arguing that Since the agreement was approved by the Technology Transfer Board, the preferential tax rate of 10% should apply hence royalties paid by the [respondent] to SC Johnson and Son, USA is only subject to 10% withholding tax pursuant to the most-favored nation clause of the RP-US Tax Treaty. The Commissioner did not act on said claim for refund. Respondent filed a petition for review before the CTA to claim a refund of the overpaid withholding tax on royalty payments. CTA decided for Respondent and ordered CIR to issue a tax credit certificate in the amount of P963,266.00 representing overpaid withholding tax on royalty payments, beginning July, 1992 to May, 1993. CIR filed a petition for review with CA. CA upheld CTA.

RATIO: The tax rates on royalties and the circumstances of payment thereof are the same for all the recipients of such royalties and there is no disparity based on nationality in the circumstances of such payment. On the other hand, a cursory reading of the various tax treaties will show that there is no similarity in the provisions on relief from or avoidance of double taxation as this is a matter of negotiation between the contracting parties. This dissimilarity is true particularly in the treaties between the Philippines and the United States and between the Philippines and West Germany. The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered into for the avoidance of double taxation. The purpose of these international agreements is to reconcile the national fiscal legislations of the contracting parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions. More precisely, the tax conventions are drafted with a view towards the elimination of international juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods. The apparent rationale for doing away with double taxation is of encourage the free flow of goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic economies. Double taxation usually takes place when a person is resident of a contracting state and derives income from, or owns capital in, the other contracting state and both states impose tax on that income or capital. In order to eliminate double taxation, a tax treaty resorts to several methods. First, it sets out the respective rights to tax of the state of source or situs and of the state of residence with regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other items of income or capital, both states are given the right to tax, although the amount of tax that may be imposed by the state of source is limited. Double taxation usually takes place when a person is resident of a contracting state and derives income from, or owns capital in, the other contracting state and both states impose tax on that income or capital. In order to eliminate double taxation, a tax treaty resorts to several methods. First, it sets out the respective rights to tax of the state of source or situs and of the state of residence with regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other items of income or capital, both states are given the right to tax, although the amount of tax that may be imposed by the state of source is limited. On the other hand, in the credit method, although the income or capital which is taxed in the state of source is still taxable in the state of residence, the tax paid in the former is credited against the tax levied in the latter. The basic difference between the two methods is that in the exemption method, the focus is on the income or capital itself, whereas the credit method focuses upon the tax. The phrase "royalties paid under similar circumstances" in the most favored nation clause of the US-RP Tax Treaty necessarily contemplated "circumstances that are taxrelated".

In the case at bar, the state of source is the Philippines because the royalties are paid for the right to use property or rights, i.e. trademarks, patents and technology, located within the Philippines. The United States is the state of residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based there. Under the RP-US Tax Treaty, the state of residence and the state of source are both permitted to tax the royalties, with a restraint on the tax that may be collected by the state of source. the concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty should apply only if the taxes imposed upon royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid under similar circumstances. This would mean that private respondent must prove that the RP-US Tax Treaty grants similar tax reliefs to residents of the United States in respect of the taxes imposable upon royalties earned from sources within the Philippines as those allowed to their German counterparts under the RP-Germany Tax Treaty. The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting. If the rates of tax are lowered by the state of source, in this case, by the Philippines, there should be a concomitant commitment on the part of the state of residence to grant some form of tax relief, whether this be in the form of a tax credit or exemption. Otherwise, the tax which could have been collected by the Philippine government will simply be collected by another state, defeating the object of the tax treaty since the tax burden imposed upon the investor would remain unrelieved. If the state of residence does not grant some form of tax relief to the investor, no benefit would redound to the Philippines, i.e., increased investment resulting from a favorable tax regime, should it impose a lower tax rate on the royalty earnings of the investor, and it would be better to impose the regular rate rather than lose much-needed revenues to another country. The entitlement of the 10% rate by U.S. firms despite the absence of a matching credit (20% for royalties) would derogate from the design behind the most grant equality of international treatment since the tax burden laid upon the income of the investor is not the same in the two countries. The similarity in the circumstances of payment of taxes is a condition for the enjoyment of most favored nation treatment precisely to underscore the need for equality of treatment. Respondent cannot be deemed entitled to the 10 percent rate granted under the RPWest Germany Tax Treaty for the reason that there is no payment of taxes on royalties under similar circumstances in RP-US treaty. We accordingly agree with petitioner that since the RP-US Tax Treaty does not give a matching tax credit of 20 percent for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty, private respondent cannot be deemed entitled to the 10 percent rate granted under the latter treaty for the reason that there is no payment of taxes on royalties under similar circumstances. It bears stress that tax refunds are in the nature of tax exemptions. As such they are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the

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clearest grant of organic or statute law. Private respondent is claiming for a refund of the alleged overpayment of tax on royalties; however, there is nothing on record to support a claim that the tax on royalties under the RP-US Tax Treaty is paid under similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty. COURTS RULING: Petition Granted. DISPOSITION: CA Decision Set Aside. VOTE: Vitug, Panganiban and Purisima concur. -Ann CIR v. CA & S.C. JOHNSON (August 30, 1999) NATURE: Motion for Reconsideration for the decision rendered in June 25, 1999 PONENTE: (written by the clerk of court) FACTS: 1. In The Commissioner of Internal Revenue vs. Court of Appeals and S.C Johnson & Son, Inc. (June 25, 1999) decision, SC held that the phrase "paid under similar circumstances" in Article 13 (2) (b) (iii) of the RP-US Tax Treaty should be interpreted as referring to the payment of taxes, and not royalties. Such an interpretation is consistent with the purpose of the RP-US Tax Treaty which is the avoidance of double taxation. 2. As a consequence of such an interpretation, SC held that private respondent S.C. Johnson & Son, Inc. (S.C. Johnson) is not entitled to the 10 percent rate imposed on royalties under the RP-West Germany Tax Treaty because such treaty provides for a matching tax credit of 20 percent for the taxes paid to the Philippines on royalties, whereas the RP-US Tax Treaty does not. Thus, there is no payment of taxes under similar circumstances. ISSUES: 1. WON courts should NOT construe a statute which is clear and free from doubt. NO 2. WON preferential tax rate should be applied to private respondent, and is thus entitled to a refund of withholding tax. NO 3. WON the unilateral and inconsistent rulings of CIR should be the basis of a ruling. NO (but is precisely the reason why SC should rule) RATIO: CONSTRUCTION OF ARTICLE 13 (2) Private Respondent: The Courts may NOT construe a statute which is clear and free from doubt. Supreme Court: 1. It is precisely because Article 13 (2) (b) (iii) of the RP-US Tax Treaty is subject to varied interpretations, that this Court has rendered its June 25, 1999 decision interpreting it. We interpreted the contested provision with a view to its purpose, which is the avoidance of double taxation. As we stated in our decision, it is the duty of the courts to look to the object to be accompanied by the law, the evils to be remedied, or the purpose to be subserved, and to give the law a reasonable or liberal interpretation which will best effectuate its purpose.

2.

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

NOT BOUND WITH THE US INTERPRETATION OF THE RP-US TAX TREATY Private Respondents: In support of private respondent's second ground, it cites the interpretations given to the RP-US Tax Treaty by the Department of Treasury In interpretation Article 13 of the RP-US Tax Treaty, the Technical Explanation of the US Department of Treasury states that: Notwithstanding such 25 percent and 15 percent limitations, the Philippine tax cannot exceed the lowest rate of Philippine Tax that may be imposed on royalties of the same kind under similar circumstances to a resident of a third State. Thus, for example, because the Philippines agreed to limit its tax on film royalties to an amount not in excess of 10 percent of the gross amount of such royalties in its income Tax Conventions with Sweden and Denmark, that limitation will apply to film royalties paid under similar circumstances to United States residents. The US Senate Foreign Relations Committee, in its report recommending the approval of the RP-US Tax Treaty stated that: Under the proposed treaty, the withholding tax imposed by the United States on royalties derived by a resident of the Philippines is limited to 15 percent of the gross amount of the royalty. The withholding tax on royalties imposed by the Philippines is generally limited to 25 percent of the gross amount of the royalties. However, if the royalties are paid by a corporation which us registered with the Philippine Board of Investment and is engaged in preferred areas or activity, the withholding tax is limited to 15 percent of the gross amount of the royalties. In no case is either the 25 percent of the 15 percent limitation to exceed the lower withholding rate of the Philippine tax which may imposed on similar types of royalties paid to residents of a third State. Thus, U.S. residents will automatically receive the benefits of any lower withholding rates on royalties established in Philippine tax treaties with any third country Supreme Court: 1. However, said reports do not clearly support private respondent's interpretation of the RP-US Tax Treaty, they merely reiterate the law as presently worded. Also, assuming that they did support private respondent's position, the Court is not bound to adopt the interpretations given to a tax treaty by the executive or legislative branch of the United States government. 2. After the RP-US Tax Treaty was ratified by the President and concurred in by two-thirds of all the members of the Senate, it becomes a part of the law of the land and the courts have the exclusive power to interpret the same. In fact, private respondents itself recognized the court's jurisdiction when it stated in its motion for reconsideration that "when a treaty affect private

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rights, the courts have the power and the duty to construe the treaty and apply it in appropriate cases. TAX CREDITS UNDER (2) TREATIES NOT PAID UNDER SAME CIRCUMSTANCES Private Respondents: Private respondents also claims that the RP-US Tax Treaty, while not providing for a matching 20 percent tax credit as found in the RP-Germany Tax Treaty, does provide for a substantially similar provision for tax credit, i.e., a credit against the United States tax for the appropriate amount of taxes actually paid or accrued to the Philippine by a citizen or resident of the United States. Supreme Court: We have already disposed of this allegation in our decision wherein we held that the tax credits under the two treaties are not paid under similar circumstance. IMPERATIVE FOR COURT TO RULE UPON INCONSISTENT RULINGS OF CIR Private respondent: claims that petitioner initially interpreted the RP-US Tax Treaty provision in question as referring to the payment of royalties under similar circumstances. Then it reversed this decision and then reverted back again. Private respondent alleges that petitioners unilateral, erratic and inconsistent and constantly changing interpretation cannot be sanctioned, as the same is tantamount to bad faith and, hence, a violation of the treaty." Supreme Court: 1. Petitioner's inconsistent rulings as to the interpretation of the RP-US Tax Treaty only made it more imperative for this Court to decide the matter with finality, which it did in its June 25, 1999 decision. Clearly, all the grounds raised by private respondent have already been effectively disposed of in its questioned ruling. DISPOSITION: Wherefore, the Motion for Reconsideration is denied. -Jenin xxx 8. Rev. Memo. Cir. 46-2002, tax on royalty payments to US entity adopts most favored nation clause under RP-China Tax Treaty effective January 1, 2002 GOLDEN ARCHES V. CIR CTA Case No. 6862 13 July 2007 Golden Arches Development Corp. (formerly McGeorge Food Industries, Inc.), petitioner v. Commissioner of Internal Revenue, respondent. Casanova, J.

DOCTRINE: "The purpose of the most favored nation clause is to grant the contracting state treatment that is not less favorable than that which has been granted to the most favored among the other countries NATURE: Petition for Review FACTS: By virtue of a merger agreement, petitioner Golden Arches took over the operation of McDonalds restaurants in the Philippines Golden Arches filed its monthly remittance returns for January to December 2002 and January to June 2003 showing final taxes withheld at a rate of 15% of royalty payments made to McDonalds pursuant to the provisions of the RP-US tax treaty

Believing that it is entitled to the lower rate of 10% compliant with the "mostfavored-nation" clause of the RP-US tax treaty, petitioner then filed on December 23, 2003 a claim for refund or issuance of a tax credit certificate for the recovery alleged over-remitted and overpaid final withholding tax on its royalty payments to McDonalds in the amounts of P19,283,004.00 and P9,548,274.04 for the taxable periods2002 and January to June of 2003 Since the CIR failed to act on this application, Golden Arches filed the present claim with the CTA to toll the prescription period Golden Arches contends that upon that based on the RP-US tax treaty, when the subsequent RP-China Tax Treaty came into force, the most-favored nation clause in the former allowed royalties paid to a US resident to be taxed at the same rate as the latter treaty provides Hence by virtue of that clause, it should be taxed only at a rate of 10% and not the 15% it originally withheld. Hence it is entitled to refunds or a tax credit for the period concerned W/N Golden Arches should apply the rate of 15% or 10% in computing the FWT on royalties paid to McDonalds for the periods from January to December 2002 and January to June2003?

ISSUE: 1.

HELD/RATIO 1. YES The RP-US tax treaty provides:

Article 13 Royalties

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

1.)

Royalties derived by a resident of one of the Contracting States fromsources within the other Contracting State may be taxed by bothContracting States. However, the tax imposed by that Contracting State shall not exceed;

2.The contract or agreement is subject to the approval un der Philipp ine law, the same must be duly approved by the Philippine competent authority.

2.)

On the other hand, the pertinent provision of the RP-China Tax Treaty provides:

However, such royalties may also be taxed in the Contrac ti ng State in which they arise and according to the laws of the State, but if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: a.15 per cent of the gross amount of royalt ies arising f rom the use of, the right to use, any copyright of literary, artistic or scientific work including cinematograph films or tapes for television or broadcasting or b.10 per cent of the gross amount of royalties arising f rom the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, or from the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience Golden Arches presented Monthly Remittance Returns on Income taxes

The purpose of the tax treaties entered into by the Philippines is evidently to reduce or eliminate instances of double taxation. The texts of the treaties uniformly provide that the reduced rates are only applicable if the taxes in both the contracting country and the Philippines are paid under the similar circumstances. This is so since only taxes paid under similar circumstances may be deemed to constitute double taxation, which the treaties aim to reduce In this case, the treaties provide similar methods of avoiding double taxation, namely the allowance of a credit of a foreign tax as against taxes actually paid in the Philippines The purpose of the most favored nation clause is to grant the contracting state treatment that is not less favorable than that which has been granted to the most favored among the other countries This establishes the principle of equality of treatment among contracting states Thus, the provisions of the RP-China tax Treaty, particularly the reduced rates should be made applicable to Golden Arches. Thus a tax credit for the overpaid taxes for 2002 and Jan-July 2003 should be issued in favor of the petitioner.

Withheld as Revenue Accounting Certificates to prove that it remitted the withholding tax on the royalties paid

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

Pursuant to Revenue Memorandum Circular No. 46-02, the following twin requirements must be complied with before the reduced tax rate of 10%may be availed of by the taxpayer invoking the same, thus:

1.It is necessary that there be an ag reement or a contract whereby the royalties paid to the US must originate from the use of, or the right to use any patent, trade mark, design or model, plan, secret formula or process, or from the use, or the right to use, industrial, commercial or scientific experience; and

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

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3.)

a.)In the case of the United States, 15 per cent of the gross amount of the royalties, b.)In the case o f the Philippin es, the least of: (i) 25 per c ent of the gross amount of the ro yalties; (ii) 15 per cent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities; and (iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematographic film or films or tapes used for radio or television, broadcasting, any patent, trade mark, design or model, plan, secret formula or process or other like right or property, or for the information concerning industrial, commercial or scientific experience. The term" royalties" also includes gains derived from the sale, exchange or other disposition thereof."

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

1.Certification issued by the Intelle ctual Pro perty Office covering IPO Certificate of Registration No. 5-2002-00122 6 valid from September 1,1993 to December 31, 2010; and 2.Li cen se Agreement and its Amendments entere d into by and between the petitioner and McDonald's Corporation, duly authenticated by the Consulate General of the Republic of the Philippines for the District of Columbia

Since the Petitioner has proven compliance with the requirements of the RMCs and the DA-ITAD ruling as to the substantiation requirements, the question is now whether the most-favored nation clause actually grants the petitioner a lower tax rate