INTEREST INCOME

[G.R. No. 54908. January 22, 1990.]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MITSUBISHI METAL CORPORATION,
ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION and the COURT OF TAX
APPEALS, respondents.
[G.R. No. 80041. January 22, 1990.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MITSUBISHI METAL CORPORATION,
ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION and the COURT OF TAX
APPEALS, respondents.

Gadioma Law Offices for respondents.

SYLLABUS
1. REMEDIAL LAW; APPEAL; FINDINGS OF FACT OF COURT OF APPEALS RESPECTED; EXCEPTION. We
have ruled that findings of fact of the Court of Tax Appeals are entitled to the highest respect and can only
be disturbed on appeal if they are not supported by substantial evidence or if there is a showing of gross
error or abuse on the part of the tax court.
2. ID.; ID.; ID.; ID.; CASE AT BAR. Ordinarily, we could give due consideration to the holding of
respondent court that Mitsubishi is a mere agent of Eximbank. Compelling circumstances obtaining and
proven in these cases, however, warrant a departure from said general rule, since we are convinced that
there is a misapprehension of facts on the part of the tax court to the extent that its conclusions are
speculative in nature.
3. TAXATION; EXEMPTION THEREFROM; STRICTLY CONSTRUED. It is too settled a rule in this
jurisdiction, as to dispense with the need for citations, that laws granting exemption from tax are
construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the
rule and exemption is the exception. The burden of proof rests upon the party claiming exemption to prove
that it is in fact covered by the exemption so claimed.
4. ID.; ID.; SECTION 29(b) (7) (4) OF THE TAX CODE; CASE AT BAR NOT COVERED. The principal issue
in both petitions is whether or not the interest income from the loans extended to Atlas by Mitsubishi is
excludible from gross income taxation pursuant to Section 29 (b) (7) (A) of the tax code and, therefore,
exempt from withholding tax. Apropos thereto, the focal question is whether or not Mitsubishi is a mere
conduit of Eximbank which will then be considered as the creditor whose investments in the Philippines on
loans are exempt from taxes under the code. The loan and sales contract between Mitsubishi and Atlas
does not contain any direct or inferential reference to Eximbank whatsoever. The agreement is strictly
between Mitsubishi as creditor in the contract of loan and Atlas as the seller of the copper concentrates.
From the categorical language used in the document, one prestation was in consideration of the other. The
specific terms and the reciprocal nature of their obligations make it implausible, if not vacuous, to give
credit to the cavalier assertion that Mitsubishi was a mere agent in said transaction. Surely, Eximbank had
nothing to do with the sale of the copper concentrates since all that Mitsubishi stated in its loan application
with the former was that the amount being procured would be used as a loan to and in consideration for
importing copper concentrates from Atlas. Such an innocuous statement of purpose could not have been
intended for, nor could it legally constitute, a contract of agency. If that had been the purpose as
respondent court believes, said corporations would have specifically so stated, especially considering their
experience and expertise in financial transactions, not to speak of the amount involved and its purchasing
value in 1970. Respondents postulate that Mitsubishi had to be a conduit because Eximbank's charter
1

prevents it from making loans except to Japanese individuals and corporations. We are not impressed. Not
only is there a failure to establish such submission by adequate evidence but it posits the unfair and
unexplained imputation that, for reasons subject only of surmise, said financing institution would
deliberately circumvent its own charter to accommodate an alien borrower through a manipulated
subterfuge, but with it as a principal and the real obligee. Definitely, the taxability of a party cannot be
blandly glossed over on the basis of a supposed "broad, pragmatic analysis" alone without substantial
supportive evidence, lest governmental operations suffer due to diminution of much needed funds. Nor can
we close this discussion without taking cognizance of petitioner's warning, of pervasive relevance at this
time, that while international comity is invoked in this case on the nebulous representation that the funds
involved in the loans are those of a foreign government, scrupulous care must be taken to avoid opening
the floodgates to the violation of our tax laws. Otherwise, the mere expedient of having a Philippine
corporation enter into a contract for loans or other domestic securities with private foreign entities, which in
turn will negotiate independently with their governments, could be availed of to take advantage of the tax
exemption law under discussion.
DECISION
REGALADO, J p:
These cases, involving the same issue being contested by the same parties and having originated from the
same factual antecedents generating the claims for tax credit of private respondents, the same were
consolidated by resolution of this Court dated May 31, 1989 and are jointly decided herein.
The records reflect that on April 17,1970, Atlas Consolidated Mining and Development Corporation
(hereinafter, Atlas) entered into a Loan and Sales Contract with Mitsubishi Metal Corporation (Mitsubishi, for
brevity), a Japanese corporation licensed to engage in business in the Philippines, for purposes of the
projected expansion of the productive capacity of the former's mines in Toledo, Cebu. Under said contract,
Mitsubishi agreed to extend a loan to Atlas in the amount of $20,000,000.00, United States currency, for
the installation of a new concentrator for copper production. Atlas, in turn, undertook to sell to Mitsubishi
all the copper concentrates produced from said machine for a period of fifteen (15) years. It was
contemplated that $9,000,000.00 of said loan was to be used for the purchase of the concentrator
machinery from Japan. 1
Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank, for short)
obviously for purposes of its obligation under said contract. Its loan application was approved on May 26,
1970 in the sum of Y4,320,000,000.00, at about the same time as the approval of its loan for
Y2,880,000,000.00 from a consortium of Japanese banks. The total amount of both loans is equivalent to
$20,000,000.00 in United States currency at the then prevailing exchange rate. The records in the Bureau
of Internal Revenue show that the approval of the loan by Eximbank to Mitsubishi was subject to the
condition that Mitsubishi would use the amount as a loan to Atlas and as a consideration for importing
copper concentrates from Atlas, and that Mitsubishi had to pay back the total amount of loan by September
30, 1981. 2
Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the former to the
latter totalling P13,143,966.79 for the years 1974 and 1975. The corresponding 15% tax thereon in the
amount of P1,971,595.01 was withheld pursuant to Section 24 (b) (1) and Section 53 (b) (2) of the
National Internal Revenue Code, as amended by Presidential Decree No. 131, and duly remitted to the
Government. 3
On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum of P1,971,595.01
be applied against their existing and future tax liabilities. Parenthetically, it was later noted by respondent
2

Court of Tax Appeals in its decision that on August 27, 1976, Mitsubishi executed a waiver and disclaimer of
its interest in the claim for tax credit in favor of Atlas. 4
The petitioner not having acted on the claim for tax credit, on April 23, 1976 private respondents filed a
petition for review with respondent court, docketed therein as CTA Case No. 2801. 5 The petition was
grounded on the claim that Mitsubishi was a mere agent of Eximbank, which is a financing institution
owned, controlled and financed by the Japanese Government. Such governmental status of Eximbank, if it
may be so called, is the basis for private respondents' claim for exemption from paying the tax on the
interest payments on the loan as earlier stated. It was further claimed that the interest payments on the
loan from the consortium of Japanese banks were likewise exempt because said loan supposedly came
from or were financed by Eximbank. The provision of the National Internal Revenue Code relied upon
is Section 29 (b) (7) (A), 6 which excludes from gross income:
"(A) Income received from their investments in the Philippines in loans, stocks, bonds or other domestic
securities, or from interest on their deposits in banks in the Philippines by (1) foreign governments, (2)
financing institutions owned, controlled, or enjoying refinancing from them, and (3) international or regional
financing institutions established by governments."
Petitioner filed an answer on July 9, 1976. The case was set for hearing on April 16, 1977 but was later
reset upon manifestation of petitioner that the claim for tax credit of the alleged erroneous payment was
still being reviewed by the Appellate Division of the Bureau of Internal Revenue. The records show that on
November 16, 1976, the said division recommended to petitioner the approval of private respondent's
claim. However, before action could be taken thereon, respondent court scheduled the case for hearing on
September 30, 1977, during which trial private respondents presented their evidence while petitioner
submitted his case on the basis of the records of the Bureau of Internal Revenue and the pleadings. 7
On April 18, 1980, respondent court promulgated its decision ordering petitioner to grant a tax credit in
favor of Atlas in the amount of P1,971,595.01. Interestingly, the tax court held that petitioner admitted the
material averments of private respondents when he supposedly prayed "for judgment on the pleadings
without offering proof as to the truth of his allegations." 8 Furthermore, the court declared that all papers
and documents pertaining to the loan of Y4,320,000,000.00 obtained by Mitsubishi from Eximbank's show
that this was the same amount given to Atlas. It also observed that the money for the loans from the
consortium of private Japanese banks in the sum of Y2,880,000,000.00 "originated" from Eximbank. From
these, respondent court concluded that the ultimate creditor of Atlas was Eximbank with Mitsubishi acting
as a mere "arranger or conduit through which the loans flowed from the creditor Export-Import Bank of
Japan to the debtor Atlas Consolidated Mining & Development Corporation." 9
A motion for reconsideration having been denied on August 20, 1980, petitioner interposed an appeal to
this Court, docketed herein as G.R. No. 54908.
While CTA Case No. 2801 was still pending before the tax court, the corresponding 15% tax on the amount
of P439,167.95 on the P2,927,789.06 interest payments for the years 1977 and 1978 was withheld and
remitted to the Government. Atlas again filed a claim for tax credit with the petitioner, repeating the same
basis for exemption.
On June 25, 1979, Mitsubishi and Atlas filed a petition for review with the Court of Tax Appeals docketed as
CTA Case No. 3015. Petitioner filed his answer thereto on August 14, 1979, and, in a letter to private
respondents dated November 12, 1979, denied said claim for tax credit for lack of factual or legal basis. 10
On January 15, 1981, relying on its prior ruling in CTA Case No. 2801, respondent court rendered judgment
ordering the petitioner to credit Atlas the aforesaid amount of tax paid. A motion for reconsideration, filed
on March 10, 1981, was denied by respondent court in a resolution dated September 7, 1987. A notice of
3

appeal was filed on September 22, 1987 by petitioner with respondent court and a petition for review was
filed with this Court on December 19, 1987. Said later case is now before us as G.R. No. 80041 and is
consolidated with G.R. No. 54908.
The principal issue in both petitions is whether or not the interest income from the loans extended to Atlas
by Mitsubishi is excludible from gross income taxation pursuant to Section 29 (b) (7) (A) of the tax code
and, therefore, exempt from withholding tax. Apropos thereto, the focal question is whether or not
Mitsubishi is a mere conduit of Eximbank which will then be considered as the creditor whose investments
in the Philippines on loans are exempt from taxes under the code.
Prefatorily, it must be noted that respondent court erred in holding in CTA Case No. 2801 that petitioner
should be deemed to have admitted the allegations of the private respondents when it submitted the case
on the basis of the pleadings and records of the bureau. There is nothing to indicate such admission on the
part of petitioner nor can we accept respondent court's pronouncement that petitioner did not offer to
prove the truth of its allegations. The records of the Bureau of Internal Revenue relevant to the case were
duly submitted and admitted as petitioner's supporting evidence. Additionally, a hearing was conducted,
with presentation of evidence, and the findings of respondent court were based not only on the pleadings
but on the evidence adduced by the parties. There could, therefore, not have been a judgment on the
pleadings, with the theorized admissions imputed to petitioner, as mistakenly held by respondent court.
Time and again, we have ruled that findings of fact of the Court of Tax Appeals are entitled to the highest
respect and can only be disturbed on appeal if they are not supported by substantial evidence or if there is
a showing of gross error or abuse on the part of the tax court. 11 Thus, ordinarily, we could give due
consideration to the holding of respondent court that Mitsubishi is a mere agent of Eximbank. Compelling
circumstances obtaining and proven in these cases, however, warrant a departure from said general rule,
since we are convinced that there is a misapprehension of facts on the part of the tax court to the extent
that its conclusions are speculative in nature.
The loan and sales contract between Mitsubishi and Atlas does not contain any direct or inferential
reference to Eximbank whatsoever. The agreement is strictly between Mitsubishi as creditor in the contract
of loan and Atlas as the seller of the copper concentrates. From the categorical language used in the
document, one prestation was in consideration of the other. The specific terms and the reciprocal nature of
their obligations make it implausible, if not vacuous, to give credit to the cavalier assertion that Mitsubishi
was a mere agent in said transaction.
Surely, Eximbank had nothing to do with the sale of the copper concentrates since all that Mitsubishi stated
in its loan application with the former was that the amount being procured would be used as a loan to and
in consideration for importing copper concentrates from Atlas. 12 Such an innocuous statement of purpose
could not have been intended for, nor could it legally constitute, a contract of agency. If that had been the
purpose as respondent court believes, said corporations would have specifically so stated, especially
considering their experience and expertise in financial transactions, not to speak of the amount involved
and its purchasing value in 1970.
A thorough analysis of the factual and legal ambience of these eases impels us to give weight to the
following arguments of petitioner:
"The nature of the above contract shows that the same is not just a simple contract of loan. It is not a
mere creditor-debtor relationship. It is more of a reciprocal obligation between ATLAS and MITSUBISHI
where the latter shall provide the funds in the installation of a new concentrator at the former's Toledo
mines in Cebu, while ATLAS in consideration of which, shall sell to MITSUBISHI, for a term of 15 years, the
entire copper concentrate that will be produced by the installed concentrator.
4

"Suffice it to say, the selling of the copper concentrate to MITSUBISHI within the specified term was the
consideration of the granting of the amount of $20 million to ATLAS. MITSUBISHI, in order to fulfill its part
of the contract, had to obtain funds. Hence, it had to secure a loan or loans from other sources. And from
what sources, it is immaterial as far as ATLAS in concerned. In this case, MITSUBISHI obtained the $20
million from the EXIMBANK of Japan and the consortium of Japanese banks financed through the
EXIMBANK of Japan.
"When MITSUBISHI therefore secured such loans, it was in its own independent capacity as a private entity
and not as a conduit of the consortium of Japanese banks or the EXIMBANK of Japan. While the loans were
secured by MITSUBISHI primarily 'as a loan to and in consideration for importing copper concentrates from
ATLAS,' the fact remains that it was a loan by EXIMBANK of Japan to MITSUBISHI and not to ATLAS.
"Thus, the transaction between MITSUBISHI and EXIMBANK of Japan was a distinct and separate contract
from that entered into by MITSUBISHI and ATLAS. Surely, in the latter contract, it is not EXIMBANK that
was intended to be benefited. It is MITSUBISHI which stood to profit. Besides, the Loan and Sales Contract
cannot be any clearer. The only signatories to the same were MITSUBISHI and ATLAS. Nowhere in the
contract can it be inferred that MITSUBISHI acted for and in behalf of EXIMBANK of Japan nor of any
entity, private or public, for that matter.
"Corollary to this, it may well be stated that in this jurisdiction, well-settled is the rule that when a contract
of loan is completed, the money ceases to be the property of the former owner and becomes the sole
property of the obligor (Tolentino and Manio vs. Gonzales Sy, 50 Phil. 558).
"In the case at bar, when MITSUBISHI obtained the loan of $20 million from EXIMBANK of Japan, said
amount ceased to be the property of the bank and became the property of MITSUBISHI.
"The conclusion is indubitable: MITSUBISHI, and NOT EXIMBANK, is the sole creditor of ATLAS, the former
being the owner of the $20 million upon completion of its loan contract with EXIMBANK of Japan.
"The interest income of the loan paid by ATLAS to MITSUBISHI is therefore entirely different from the
interest income paid by MITSUBISHI to EXIMBANK of Japan. What was the subject of the 15% withholding
tax is not the interest income paid by MITSUBISHI to EXIMBANK but the interest income earned by
MITSUBISHI from the loan to ATLAS. . . . " 13
To repeat, the contract between Eximbank and Mitsubishi is entirely different. It is complete in itself, does
not appear to be suppletory or collateral to another contract and is, therefore, not to be distorted by other
considerations aliunde. The application for the loan was approved on May 20, 1970, or more than a month
after the contract between Mitsubishi and Atlas was entered into on April 17, 1970. It is true that under the
contract of loan with Eximbank, Mitsubishi agreed to use the amount as a loan to and in consideration for
importing copper concentrates from Atlas, but all that this proves is the justification for the loan as
represented by Mitsubishi, a standard banking practice for evaluating the prospects of due repayment.
There is nothing wrong with such stipulation as the parties in a contract are free to agree on such lawful
terms and conditions as they see fit. Limiting the disbursement of the amount borrowed to a certain person
or to a certain purpose is not unusual, especially in the case of Eximbank which, aside from protecting its
financial exposure, must see to it that the same are in line with the provisions and objectives of its charter.
Respondents postulate that Mitsubishi had to be a conduit because Eximbank's charter prevents it from
making loans except to Japanese individuals and corporations. We are not impressed. Not only is there a
failure to establish such submission by adequate evidence but it posits the unfair and unexplained
imputation that, for reasons subject only of surmise, said financing institution would deliberately circumvent
its own charter to accommodate an alien borrower through a manipulated subterfuge, but with it as a
principal and the real obligee.
5

The allegation that the interest paid by Atlas was remitted in full by Mitsubishi to Eximbank, assuming the
truth thereof, is too tenuous and conjectural to support the proposition that Mitsubishi is a mere conduit.
Furthermore, the remittance of the interest payments may also be logically viewed as an arrangement in
paying Mitsubishi's obligation to Eximbank. Whatever arrangement was agreed upon by Eximbank and
Mitsubishi as to the manner or procedure for the payment of the latter's obligation is their own concern. It
should also be noted that Eximbank's loan to Mitsubishi imposes interest at the rate of 75% per annum,
while Mitsubishi's contract with Atlas merely states that the "interest on the amount of the loan shall be the
actual cost beginning from and including other dates of releases against loan."14
It is too settled a rule in this jurisdiction, as to dispense with the need for citations, that laws granting
exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing
power. Taxation is the rule and exemption is the exception. The burden of proof rests upon the party
claiming exemption to prove that it is in fact covered by the exemption so claimed, which onus petitioners
have failed to discharge. Significantly, private respondents are not even among the entities which, under
Section 29 (b) (7) (A) of the tax code, are entitled to exemption and which should indispensably be the
party in interest in this case.
Definitely, the taxability of a party cannot be blandly glossed over on the basis of a supposed "broad,
pragmatic analysis" alone without substantial supportive evidence, lest governmental operations suffer due
to diminution of much needed funds. Nor can we close this discussion without taking cognizance of
petitioner's warning, of pervasive relevance at this time, that while international comity is invoked in this
case on the nebulous representation that the funds involved in the loans are those of a foreign
government, scrupulous care must be taken to avoid opening the floodgates to the violation of our tax
laws. Otherwise, the mere expedient of having a Philippine corporation enter into a contract for loans or
other domestic securities with private foreign entities, which in turn will negotiate independently with their
governments, could be availed of to take advantage of the tax exemption law under discussion.
WHEREFORE, the decisions of the Court of Tax Appeals in CTA Cases Nos. 2801 and 3015, dated April 18,
1980 and January 15, 1981, respectively, are hereby REVERSED and SET ASIDE.
SO ORDERED.
||| (Commr. v. Mitsubishi Metal Corp., G.R. No. 54908, 80041, January 22, 1990)

DIVIDENDS
[G.R. No. 108576. January 20, 1999.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE COURT OF APPEALS, COURT OF
TAX APPEALS and A. SORIANO CORP., respondents.

M. L. Gadioma Law Office for private respondent.

The Solicitor General for petitioner.
SYNOPSIS
Don Andres Soriano, a citizen and resident of the United States formed in the 1930's the corporation "A
Soriano Y Cia," predecessor of ANSCOR. On December 30, 1964 Don Andres died. On June 30, 1968,
pursuant to a Board Resolution, ANSCOR redeemed 28,000 common shares from Don Andres' estate. By
November 1968, the Board further increased ANSCOR's capital stock to P75M divided into 150,000
preferred shares and 600,000 common shares. About a year later ANSCOR again redeemed 80,000
6

common shares from Don Andres' estate, further reducing the latter's common shareholdings. ANSCOR's
business purpose for both redemptions of stock is to partially retire said stocks as treasury shares in order
to reduce the company's foreign exchange remittances in case cash dividends are declared. In 1973, after
examining ANSCOR's books of account and records Revenue Examiners issued a report proposing that
ANSCOR be assessed for deficiency withholding tax-at-source, pursuant to Sections 53 and 54 of the 1939
Revenue Code for the year 1968 and the second quarter of 1969 based on the transactions of exchange
and redemption of stocks. Subsequently, ANSCOR filed a petition for review with the Court of Tax Appeals
assailing the tax assessments on the redemptions and exchange of stocks. In its decision, the CTA reversed
the BIR's ruling after finding sufficient evidence to overcome the prima facie correctness of the questioned
assessments. In a petition for review, the Court of Appeals affirmed the ruling of the CTA. Hence, the
present petition. The issue is whether ANSCOR's redemption of stocks from its stockholders as well as the
exchange of common shares can be considered as equivalent to the distribution of taxable dividend making
the proceeds thereof taxable under the provisions Section 83 (B) of the 1939 Revenue Act.
The Supreme Court modified the decision of the Court of Appeals in that ANSCOR'S redemption of 82,752.5
stock dividends is herein considered as essentially equivalent to a distribution of taxable dividends for which
it is liable for the withholding tax-at-source. While the Board Resolutions authorizing the redemptions state
only one purpose reduction of foreign exchange remittances in case cash dividends are declared. Said
purpose was not given credence by the court in case at bar. Records show that despite the existence of
enormous corporate profits no cash dividends were ever declared by ANSCOR from 1945 until the BIR
started making assessments in the early 1970's. Although a corporation under certain exceptions, has the
prerogative when to issue dividends, yet when no cash dividends are issued for about three decades, this
circumstance negate the legitimacy of ANSCOR's alleged purposes. With regard to the exchange of shares,
the Court ruled that the exchange of common with preferred shares is not taxable because it produces no
realized income to the subscriber but only a modification of the subscriber's rights and privileges which is
not a flow of wealth for tax purposes.
SYLLABUS
1.TAXATION; Presidential Decree No. 67; NOT BEING A TAXPAYER, A WITHHOLDING AGENT LIKE THE
PRIVATE RESPONDENT IS NOT PROTECTED BY THE AMNESTY UNDER THE DECREE. An income
taxpayer covers all persons who derive taxable income. ANSCOR was assessed by petitioner for deficiency
withholding tax under Section 53 and 54 of the 1939 Code. As such, it is being held liable in its capacity as
a withholding agent and not in its personality as a taxpayer. In the operation of the withholding tax system,
the withholding agent is the payor, a separate entity acting no more than an agent of the government for
the collection of the tax in order to ensure its payments; the payer is the taxpayer he is the person
subject to tax impose by law; and the payee is the taxing authority. In other words, the withholding agent
is merely a tax collector, not a taxpayer. Under the withholding system, however, the agent-payor becomes
a payee by fiction of law. His (agent) liability is direct and independent from the taxpayer, because the
income tax is still impose on and due from the latter. The agent is not liable for the tax as no wealth flowed
into him he earned no income. The Tax Code only makes the agent personally liable for the tax arising
from the breach of its legal duty to withhold as distinguish from its duty to pay tax since: "the government's
cause of action against the withholding agent is not for the collection of income tax, but for the
enforcement of the withholding provision of Section 53 of the Tax Code, compliance with which is imposed
on the withholding agent and not upon the taxpayer." Not being a taxpayer, a withholding agent, like
ANSCOR in this transaction is not protected by the amnesty under the decree. Codal provisions on
withholding tax are mandatory and must be complied with by the withholding agent. The taxpayer should
not answer for the non-performance by the withholding agent of its legal duty to withhold unless there is
collusion or bad faith. The former could not be deemed to have evaded the tax had the withholding agent
performed its duty. This could be the situation for which the amnesty decree was intended. Thus, to curtail
7

tax evasion and give tax evaders a chance to reform, it was deemed administratively feasible to grant tax
amnesty in certain instances. In addition, a "tax amnesty, much like a tax exemption, is never favored nor
presumed in law and if granted by a statute, the terms of the amnesty like that of a tax exemption must be
construed strictly against the taxpayer and liberally in favor of the taxing authority." The rule on strictissimi
juris equally applies. So that, any doubt in the application of an amnesty law/decree should be resolved in
favor of the taxing authority.
2.ID.; NATIONAL INTERNAL REVENUE CODE OF 1939; TAX ON STOCK DIVIDENDS; REDEMPTION AND
CANCELLATION; PURPOSES INVOKED BY PRIVATE RESPONDENT CORPORATION, UNDER THE FACTS OF
THE PRESENT CASE ARE NO EXCUSE FOR ITS TAX LIABILITY; REASON. First, the alleged "filipinization"
plan cannot be considered legitimate as it was not implemented until the BIR started making assessments
on the proceeds of the redemption. Such corporate plan was not stated in nor supported by any Board
Resolution but a mere afterthought interposed by the counsel of ANSCOR. Being a separate entity, the
corporation can act only through its Board of Directors. The Board Resolutions authorizing the redemptions
state only one purpose reduction of foreign exchange remittances in case cash dividends are declared.
Not even this purpose can be given credence. Records show that despite the existence of enormous
corporate profits no cash dividend was ever declared by ANSCOR from 1945 until the BIR started making
assessments in the early 1970's. Although a corporation under certain exceptions, has the prerogative when
to issue dividends, yet when no cash dividends was issued for about three decades, this circumstances
negates the legitimacy of ANSCOR's alleged purposes. Moreover, to issue stock dividends is to increase the
shareholdings of ANSCOR's foreign stockholders contrary to its "filipinization" plan. This would also increase
rather than reduce their need for foreign exchange remittances in case of cash dividend declaration,
considering that ANSCOR is a family corporation where the majority shares at the time of redemptions were
held by Don Andres' foreign heirs. Secondly, assuming arguendo, that those business purposes are
legitimate, the same cannot be valid excuse for the imposition of tax. Otherwise, the taxpayer's liability to
pay income tax would be made to depend upon a third person who did not earn the income being taxed.
Furthermore, even if the said purposes support the redemption and justify the issuance of stock dividends,
the same has no bearing whatsoever on the imposition of the tax herein assessed because the proceeds of
the redemption are deemed taxable dividends since it was shown that income was generated therefrom.
Thirdly, ANSCOR argued that to treat as 'taxable dividend' the proceeds of the redeemed stock dividends
would be to impose on such stock an undisclosed lien and would be extremely unfair to intervening
purchasers, i.e. those who buys the stock dividends after their issuance. Such argument, however, bears no
relevance in this case as no intervening buyer is involved. And even if there is an intervening buyer, it is
necessary to look into the factual milieu of the case if income was realized from the transaction. Again, we
reiterate that the dividend equivalence test depends on such "time and manner" of the transaction and its
net effect. The undisclosed lien may be unfair to a subsequent stock buyer who has no capital interest in
the company. But the unfairness may not be true to an original subscriber like Don Andres, who holds stock
dividends as gains from his investments. The subsequent buyer who buys stock dividends is investing
capital. It just so happen that what he bought is stock dividends. The effect of its (stock dividends)
redemption from that subsequent buyer is merely to return his capital subscription, which is income if
redeemed from the original subscriber. After considering the manner and the circumstances by which the
issuance and redemption of stock dividends were made, there is no other conclusion but that the proceeds
thereof are essentially considered equivalent to a distribution of taxable dividends. As "taxable dividend"
under Section 83(b), it is part of the "entire income" subject to tax under Section 22 in relation to Section
21 of the 1939 Code. Moreover, under Section 29(a) of said Code, dividends are included in "gross income."
As income, it is subject to income tax which is required to be withheld at source. The 1997 Tax Code may
have altered the situation but it does not change this disposition.

3.ID.; ID.; ID.; THE EXCHANGE OF COMMON WITH PREFERRED SHARES IN CASE AT BAR IS NOT
TAXABLE; IT PRODUCES NO REALIZED INCOME TO THE SUBSCRIBER BUT ONLY A MODIFICATION OF
THE SUBSCRIBER'S RIGHTS AND PRIVILEGES WHICH IS NOT A FLOW OF WEALTH FOR TAX PURPOSES.
Both the Tax Court and the Court of Appeals found that ANSCOR reclassified its shares into common and
preferred, and that parts of the common shares of the Don Andres estate and all of Doa Carmen's shares
were exchanged for the whole 150,000 preferred shares. Thereafter, both the Don Andres estate and Doa
Carmen remained as corporate subscribers except that their subscriptions now include preferred shares.
There was no change in their proportional interest after the exchange. There was no cash flow. Both stocks
had the same par value. Under the facts herein, any difference in their market value would be immaterial at
the time of exchange because no income is yet realized it was a mere corporate paper transaction. It
would have been different, if the exchange transaction resulted into a flow of wealth, in which case income
tax may be imposed. Reclassification of shares does not always bring any substantial alteration in the
subscriber's proportional interest. But the exchange is different there would be a shifting of the balance
of stock features, like priority in dividend declarations or absence of voting rights. Yet neither the
reclassification nor exchangeper se, yields realize income for tax purposes. A common stock represents the
residual ownership interest in the corporation. It is a basic class of stock ordinarily and usually issued
without extraordinary rights or privileges and entitles the shareholder to a pro rata division of profits.
Preferred stocks are those which entitle the shareholder to some priority on dividends and asset
distribution. Both shares are part of the corporation's capital stock. Both stockholders are no different from
ordinary investors who take on the same investment risks. Preferred and common shareholders participate
in the same venture, willing to share in the profits and losses of the enterprise. Moreover, under the
doctrine of equality of shares all stocks issued by the corporation are presumed equal with the same
privileges and liabilities, provided that the Articles of Incorporation is silent on such differences. In this
case, the exchange of shares, without more, produces no realized income to the subscriber. There is only a
modification of the subscriber's rights and privileges which is not a flow of wealth for tax purposes. The
issue of taxable dividend may arise only once a subscriber disposes of his entire interest and not when
there is still maintenance of proprietary interest.
DECISION
MARTINEZ, J p:
Petitioner Commissioner of Internal Revenue (CIR) seeks the reversal of the decision of the Court of
Appeals (CA) 1 which affirmed the ruling of the Court of Tax Appeals (CTA) 2 that private respondent A.
Soriano Corporation's (hereinafter ANSCOR) redemption and exchange of the stocks of its foreign
stockholders cannot be considered as "essentially equivalent to a distribution of taxable dividends" under
Section 83(b) of the 1939 Internal Revenue Act. 3
The undisputed facts are as follows:
Sometime in the 1930s, Don Andres Soriano, a citizen and resident of the United States, formed the
corporation "A. Soriano Y Cia", predecessor of ANSCOR, with a P1,000,000.00 capitalization divided into
10,000 common shares at a par value of P100/share. ANSCOR is wholly owned and controlled by the family
of Don Andres, who are all non-resident aliens. 4 In 1937, Don Andres subscribed to 4,963 shares of the
5,000 shares originally issued. 5
On September 12, 1945, ANSCOR's authorized capital stock was increased to P2,500,000.00 divided into
25,000 common shares with the same par value. Of the additional 15,000 shares, only 10,000 was issued
which were all subscribed by Don Andres, after the other stockholders waived in favor of the former their
pre-emptive rights to subscribe to the new issues. 6 This increased his subscription to 14,963 common
9

shares. 7 A month later, 8 Don Andres transferred 1,250 shares each to his two sons, Jose and Andres, Jr.,
as their initial investments in ANSCOR. 9 Both sons are foreigners. 10
By 1947, ANSCOR declared stock dividends. Other stock dividend declarations were made between 1949
and December 20, 1963. 11 On December 30, 1964 Don Andres died. As of that date, the records revealed
that he has a total shareholdings of 185,154 shares 12 50,495 of which are original issues and the
balance of 134,659 shares as stock dividend declarations. 13 Correspondingly, one-half of that
shareholdings or 92,577 14 shares were transferred to his wife, Doa Carmen Soriano, as her conjugal
share. The other half formed part of his estate. 15
A day after Don Andres died, ANSCOR increased its capital stock to P20M 16 and in 1966 further increased
it to P30M. 17 In the same year (December 1966), stock dividends worth 46,290 and 46,287 shares were
respectively received by the Don Andres estate 18 and Doa Carmen from ANSCOR. Hence, increasing
their accumulated shareholdings to 138,867 and 138,864 19 common shares each. 20
On December 28, 1967, Doa Carmen requested a ruling from the United States Internal Revenue Service
(IRS), inquiring if an exchange of common with preferred shares may be considered as a tax avoidance
scheme 21 under Section 367 of the 1954 U.S. Revenue Act. 22 By January 2, 1968, ANSCOR reclassified
its existing 300,000 common shares into 150,000 common and 150,000 preferred shares. 23
In a letter-reply dated February 1968, the IRS opined that the exchange is only a recapitalization scheme
and not tax avoidance. 24 Consequently, 25 on March 31, 1968 Doa Carmen exchanged her whole
138,864 common shares for 138,860 of the newly reclassified preferred shares. The estate of Don Andres
in turn, exchanged 11,140 of its common shares, for the remaining 11,140 preferred shares, thus reducing
its (the estate) common shares to 127,727. 26
On June 30, 1968, pursuant to a Board Resolution, ANSCOR redeemed 28,000 common shares from the
Don Andres' estate. By November 1968, the Board further increased ANSCOR's capital stock to P75M
divided into 150,000 preferred shares and 600,000 common shares. 27 About a year later, ANSCOR again
redeemed 80,000 common shares from the Don Andres' estate, 28 further reducing the latter's common
shareholdings to 19,727. As stated in the Board Resolutions, ANSCOR's business purpose for both
redemptions of stocks is to partially retire said stocks as treasury shares in order to reduce the company's
foreign exchange remittances in case cash dividends are declared. 29
In 1973, after examining ANSCOR's books of account and records, Revenue examiners issued a report
proposing that ANSCOR be assessed for deficiency withholding tax-at-source, pursuant to Sections 53 and
54 of the 1939 Revenue Code, 30 for the year 1968 and the second quarter of 1969 based on the
transactions of exchange and redemption of stocks. 31 The Bureau of Internal Revenue (BIR) made the
corresponding assessments despite the claim of ANSCOR that it availed of the tax amnesty
under Presidential Decree (P.D.) 23 32 which were amended by P.D.'s 67 and 157. 33 However, petitioner
ruled that the invoked decrees do not cover Sections 53 and 54 in relation to Article 83(b) of the 1939
Revenue Act under which ANSCOR was assessed. 34 ANSCOR's subsequent protest on the assessments
was denied in 1983 by petitioner. 35
Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax assessments on the
redemptions and exchange of stocks. In its decision, the Tax Court reversed petitioner's ruling, after finding
sufficient evidence to overcome the prima facie correctness of the questioned assessments. 36 In a petition
for review, the CA, as mentioned, affirmed the ruling of the CTA. 37 Hence, this petition.
The bone of contention is the interpretation and application of Section 83(b) of the 1939 Revenue
Act 38 which provides:
"Sec. 83.Distribution of dividends or assets by corporations.
10

(b)Stock dividends A stock dividend representing the transfer of surplus to capital account shall not be
subject to tax. However, if a corporation cancels orredeems stock issued as a dividend at such time and in
such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially

equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation
of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or
profits accumulated after March first, nineteen hundred and thirteen." (Italics supplied).
Specifically, the issue is whether ANSCOR's redemption of stocks from its stockholder as well as
the exchange of common with preferred shares can be considered as "essentially equivalent to the
distribution of taxable dividend," making the proceeds thereof taxable under the provisions of the abovequoted law.
Petitioner contends that the exchange transaction is tantamount to "cancellation'' under Section 83(b)
making the proceeds thereof taxable. It also argues that the said Section applies to stock dividends which is
the bulk of stocks that ANSCOR redeemed. Further, petitioner claims that under the "net effect test," the
estate of Don Andres gained from the redemption. Accordingly, it was the duty of ANSCOR to withhold the
tax-at-source arising from the two transactions, pursuant to Section 53 and 54 of the 1939 Revenue
Act. 39
ANSCOR, however, avers that it has no duty to withhold any tax either from the Don Andres estate or from
Doa Carmen based on the two transactions, because the same were done for legitimate business purposes
which are (a) to reduce its foreign exchange remittances in the event the company would declare cash
dividends, 40and to (b) subsequently "filipinized" ownership of ANSCOR, as allegedly envisioned by Don
Andres. 41 It likewise invoked the amnesty provisions of P.D. 67.
We must emphasize that the application of Sec. 83(b) depends on the special factual circumstances of each
case. 42 The findings of facts of a special court (CTA) exercising particular expertise on the subject of tax,
generally binds this Court, 43 considering that it is substantially similar to the findings of the CA which is
the final arbiter of questions of facts. 44 The issue in this case does not only deal with facts but whether
the law applies to a particular set of facts. Moreover, this Court is not necessarily bound by the lower
courts' conclusions of law drawn from such facts. 45
AMNESTY:
We will deal first with the issue of tax amnesty. Section 1 of P.D. 67 46 provides:
"1.In all cases of voluntary disclosures of previously untaxed income and/or wealth such as earnings,
receipts, gifts, bequests or any other acquisitions from any source whatsoever which are taxable under the
National Internal Revenue Code, as amended, realized here or abroad by any taxpayer, natural or juridical;
the collection of all internal revenue taxes including the increments or penalties or account of non-payment
as well as all civil, criminal or administrative liabilities arising from or incident to such disclosures under the
National Internal Revenue Code, the Revised Penal Code, the Anti-Graft and Corrupt Practices Act, the
Revised Administrative Code, the Civil Service laws and regulations, laws and regulations on Immigration
and Deportation, or any other applicable law or proclamation, are hereby condoned and, in lieu thereof, a
tax of ten (10%) per centum on such previously untaxed income or wealth is hereby imposed, subject to
the following conditions: (conditions omitted) [Emphasis supplied].
The decree condones "the collection of all internal revenue taxes including the increments or penalties or
account of non-payment as well as all civil, criminal or administrative liabilities arising from or incident to"
(voluntary) disclosures under the NIRC of previously untaxed income and/or wealth "realized here or
abroad by any taxpayer, natural or juridical."
11

May the withholding agent, in such capacity, be deemed a taxpayer for it to avail of the amnesty? An
income taxpayer covers all persons who derive taxable income. 47ANSCOR was assessed by petitioner for
deficiency withholding tax under Sections 53 and 54 of the 1939 Code. As such, it is being held liable in its
capacity as a withholding agent and not in its personality as a taxpayer.
In the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting
no more than an agent of the government for the collection of the tax 48 in order to ensure its
payments; 49 the payer is the taxpayer he is the person subject to tax imposed by law; 50 and the
payee is the taxing authority. 51 In other words, the withholding agent is merely a tax collector, not a
taxpayer. Under the withholding system, however, the agent-payor becomes a payee by fiction of law. His
(agent) liability is direct and independent from the taxpayer, 52 because the income tax is still imposed on
and due from the latter. The agent is not liable for the tax as no wealth flowed into him he earned no
income. The Tax Code only makes the agent personally liable for the tax 53 arising from the breach of its
legal duty to withhold as distinguished from its duty to pay tax since:
"the government's cause of action against the withholding agent is not for the collection of income tax, but
for the enforcement of the withholding provision of Section 53 of the Tax Code, compliance with which is
imposed on the withholding agent and not upon the taxpayer." 54
Not being a taxpayer, a withholding agent, like ANSCOR in this transaction, is not protected by the amnesty
under the decree.
Codal provisions on withholding tax are mandatory and must be complied with by the withholding
agent. 55 The taxpayer should not answer for the non-performance by the withholding agent of its legal
duty to withhold unless there is collusion or bad faith. The former could not be deemed to have evaded the
tax had the withholding agent performed its duty. This could be the situation for which the amnesty decree
was intended. Thus, to curtail tax evasion and give tax evaders a chance to reform, 56it was deemed
administratively feasible to grant tax amnesty in certain instances. In addition, a "tax amnesty, much like a
tax exemption, is never favored nor presumed in law and if granted by a statute, the terms of the amnesty
like that of a tax exemption must be construed strictly against the taxpayer and liberally in favor of the
taxing authority." 57 The rule on strictissimi juris equally applies. 58 So that, any doubt in the application
of an amnesty law/decree should be resolved in favor of the taxing authority.
Furthermore, ANSCOR's claim of amnesty cannot prosper. The implementing rules of P.D. 370 which
expanded amnesty on previously untaxed income under P.D. 23 is very explicit, to wit:
"Section 4.Cases not covered by amnesty. The following cases are not covered by the amnesty subject
of these regulations:
xxx xxx xxx
(2)Tax liabilities with or without assessments, on withholding tax at source provided under Sections 53 and
54 of the National Internal Revenue Code, as amended;59
ANSCOR was assessed under Sections 53 and 54 of the 1939 Tax Code. Thus, by specific provision of law,
it is not covered by the amnesty.
TAX ON STOCK DIVIDENDS

General Rule
Section 83(b) of the 1939 NIRC was taken from Section 115(g)(1) of the U.S. Revenue Code of 1928. 60 It
laid down the general rule known as the 'proportionate test' 61wherein stock dividends once issued form
part of the capital and, thus, subject to income tax. 62 Specifically, the general rule states that:
12

"A stock dividend representing the transfer of surplus to capital account shall not be subject to tax." cdasia
Having been derived from a foreign law, resort to the jurisprudence of its origin may shed light. Under the
US Revenue Code, this provision originally referred to "stock dividends" only, without any exception. Stock
dividends, strictly speaking, represent capital and do not constitute income to its recipient. 63 So that the
mere issuance thereof is not yet subject to income tax 64 as they are nothing but an "enrichment through
increase in value of capital investment." 65 As capital, the stock dividends postpone the realization of
profits because the "fund represented by the new stock has been transferred from surplus to capital and no
longer available for actual distribution." 66 Income in tax law is "an amount of money coming to a person
within a specified time, whether as payment for services, interest, or profit from investment." 67 It means
cash or its equivalent. 68 It is gain derived and severed from capital, 69 from labor or from both
combined 70 so that to tax a stock dividend would be to tax a capital increase rather than the
income. 71 In a loose sense, stock dividends issued by the corporation, are considered unrealized gain, and
cannot be subjected to income tax until that gain has been realized. Before the realization, stock dividends
are nothing but a representation of an interest in the corporate properties. 72 As capital, it is not yet
subject to income tax. It should be noted that capital and income are different. Capital is wealth or fund;
whereas income is profit or gain or the flow of wealth. 73 The determining factor for the imposition of
income tax is whether any gain or profit was derived from a transaction. 74

The Exception
"However, if a corporation cancels or redeems stock issued as a dividend at such time and in such
manner as to make the distribution and cancellation or redemption, in whole or in part, essentially
equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation
of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or
profits accumulated after March first, nineteen hundred and thirteen." (Emphasis supplied).
In a response to the ruling of the American Supreme Court in the case of Eisner v. Macomber 75 (that pro
rata stock dividends are not taxable income), the exempting clause above quoted was added because
corporations found a loophole in the original provision. They resorted to devious means to circumvent the
law and evade the tax. Corporate earnings would be distributed under the guise of its initial capitalization
by declaring the stock dividends previously issued and later redeem said dividends by paying cash to the
stockholder. This process of issuance-redemption amounts to a distribution of taxable cash dividends which
was just delayed so as to escape the tax. It becomes a convenient technical strategy to avoid the effects of
taxation.
Thus, to plug the loophole the exempting clause was added. It provides that the redemption or
cancellation of stock dividends, depending on the "time" and "manner" it was made, is "essentially
equivalent to a distribution of taxable dividends," making the proceeds thereof "taxable income" "to the
extent it represents profits". The exception was designed to prevent the issuance and cancellation or
redemption of stock dividends, which is fundamentally not taxable, from being made use of as a device for
the actual distribution of cash dividends, which is taxable. 76 Thus,
"the provision had the obvious purpose of preventing a corporation from avoiding dividend tax treatment by
distributing earnings to its shareholders in two transactions a pro ratastock dividend followed by a pro
rata redemption that would have the same economic consequences as a simple dividend." 77

Although redemption and cancellation are generally considered capital transactions, as such, they are not
subject to tax. However, it does not necessarily mean that a shareholder may not realize a taxable gain
from such transactions. 78 Simply put, depending on the circumstances, the proceeds of redemption of
13

stock dividends are essentially distribution of cash dividends, which when paid becomes the absolute
property of the stockholder. Thereafter, the latter becomes the exclusive owner thereof and can exercise
the freedom of choice. 79 Having realized gain from that redemption, the income earner cannot escape
income tax. 80
As qualified by the phrase "such time and in such manner," the exception was not intended to characterize
as taxable dividend every distribution of earnings arising from the redemption of stock dividends. 81 So
that, whether the amount distributed in the redemption should be treated as the equivalent of a "taxable
dividend" is aquestion of fact, 8 2 which is determinable on "the basis of the particular facts of the
transaction in question." 83 No decisive test can be used to determine the application of the exemption
under Section 83(b). The use of the words "such manner" and "essentially equivalent" negative any idea
that a weighted formula can resolve a crucial issue Should the distribution be treated as taxable
dividend. 84 On this aspect, American courts developed certain recognized criteria, which includes the
following: 85
1)the presence or absence of real business purpose,
2)the amount of earnings and profits available for the declaration of a regular dividend and the
corporation's past record with respect to the declaration of dividends,
3)the effect of the distribution as compared with the declaration of regular dividend,
4)the lapse of time between issuance and redemption, 86
5)the presence of a substantial surplus 87 and a generous supply of cash which invites suspicion as does a
meager policy in relation both to current earnings and accumulated surplus, 88
REDEMPTION AND CANCELLATION
For the exempting clause of Section 83(b) to apply, it is indispensable that: (a) there is redemption or
cancellation; (b) the transaction involves stock dividends and (c) the "time and manner" of the transaction
makes it "essentially equivalent to a distribution of taxable dividends." Of these, the most important is the
third. cda
Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock 89 in exchange
for property, whether or not the acquired stock is cancelled, retired or held in the treasury. 90 Essentially,
the corporation gets back some of its stock, distributes cash or property to the shareholder in payment for
the stock, and continues in business as before. The redemption of stock dividends previously issued is used
as a veil for the constructive distribution of cash dividends. In the instant case, there is no dispute that
ANSCOR redeemed shares of stocks from a stockholder (Don Andres) twice (28,000 and 80,000 common
shares). But where did the shares redeemed come from? If its source is the original capital subscriptions
upon establishment of the corporation or from initial capital investment in an existing enterprise, its
redemption to the concurrent value of acquisition may not invite the application of Sec. 83(b) under the
1939 Tax Code, as it is not income but a mere return of capital. On the contrary, if the redeemed shares
are from stock dividend declarations other than as initial capital investment, the proceeds of the redemption
is additional wealth, for it is not merely a return of capital but a gain thereon.
It is not the stock dividends but the proceeds of its redemption that may be deemed as taxable dividends.
Here, it is undisputed that at the time of the last redemption, the original common shares owned by the
estate were only 25,247.5. 91 This means that from the total of 108,000 shares redeemed from the estate,
the balance of 82,752.5 (108,000 less 25,247.5) must have come from stock dividends. Besides, in the
absence of evidence to the contrary, the Tax Code presumes that every distribution of corporate property,
in whole or in part, is made out of corporate profits, 92 such as stock dividends. The capital cannot be
14

distributed in the form of redemption of stock dividends without violating the trust fund doctrine wherein
the capital stock, property and other assets of the corporation are regarded as equity in trust for the
payment of the corporate creditors. 93 Once capital, it is always capital. 94 That doctrine was intended for
the protection of corporate creditors. 95
With respect to the third requisite, ANSCOR redeemed stock dividends issued just 2 to 3 years earlier. The
time alone that lapsed from the issuance to the redemption is not a sufficient indicator to determine
taxability. It is a must to consider the factual circumstances as to the manner of both the issuance and the
redemption. The "time" element is a factor to show a device to evade tax and the scheme of cancelling or
redeeming the same shares is a method usually adopted to accomplish the end sought. 96 Was this
transaction used as a "continuing plan," "device" or "artifice" to evade payment of tax? It is necessary to
determine the "net effect" of the transaction between the shareholder-income taxpayer and the acquiring
(redeeming) corporation. 97 The "net effect" test is not evidence or testimony to be considered; it is rather
an inference to be drawn or a conclusion to be reached. 98 It is also important to know whether
the issuance of stock dividends was dictated by legitimate business reasons, the presence of which might
negate a tax evasion plan. 99
The issuance of stock dividends and its subsequent redemption must be separate, distinct, and not related,
for the redemption to be considered a legitimate tax scheme. 100 Redemption cannot be used as a cloak
to distribute corporate earnings. 101 Otherwise, the apparent intention to avoid tax becomes doubtful as
the intention to evade becomes manifest. It has been ruled that:
"[A]n operation with no business or corporate purpose is a mere devise which put on the form of a
corporate reorganization as a disguise for concealing its real character, and the sole object and
accomplishment of which was the consummation of a preconceived plan, not to reorganize a business or
any part of a business, but to transfer a parcel of corporate shares to a stockholder." 102
Depending on each case, the exempting provision of Sec. 83(b) of the 1939 Code may not be applicable if
the redeemed shares were issued with bona fide business purpose, 103 which is judged after each and
every step of the transaction have been considered and the whole transaction does not amount to a tax
evasion scheme.
ANSCOR invoked two reasons to justify the redemptions (1) the alleged "filipinization" program and (2)
the reduction of foreign exchange remittances in case cash dividends are declared. The Court is not
concerned with the wisdom of these purposes but on their relevance to the whole transaction which can be
inferred from the outcome thereof. Again, it is the "net effect rather than the motives and plans of the
taxpayer or his corporation" 104 that is the fundamental guide in administering Sec. 83(b). This tax
provision is aimed at the result. 105 It also applies even if at the time of the issuance of the stock
dividend, there was no intention to redeem it as a means of distributing profit or avoiding tax on
dividends. 106 The existence of legitimate business purposes in support of the redemption of stock
dividends is immaterial in income taxation. It has no relevance in determining "dividend
equivalence". 107 Such purposes may be material only upon the issuance of the stock dividends. The test
of taxability under the exempting clause, when it provides "such time and manner" as would make the
redemption "essentially equivalent to the distribution of a taxable dividend", is whether the
redemption resulted into a flow of wealth. If no wealth is realized from the redemption, there may not be a
dividend equivalence treatment. In the metaphor of Eisner v. Macomber, income is not deemed "realize"
until the fruit has fallen or been plucked from the tree.
The three elements in the imposition of income tax are: (1) there must be gain or profit, (2) that the gain
or profit is realized or received, actually or constructively, 108and (3) it is not exempted by law or treaty
from income tax. Any business purpose as to why or how the income was earned by the taxpayer is not a
15

requirement. Income tax is assessed on income received from any property, activity or service that
produces the income because the Tax Code stands as an indifferent neutral party on the matter of where
income comes from. 109
As stated above, the test of taxability under the exempting clause of Section 83(b) is, whether income was
realized through the redemption of stock dividends. The redemption converts into money the stock
dividends which become a realized profit or gain and consequently, the stockholder's separate
property. 110 Profits derived from the capital invested cannot escape income tax. As realized income, the
proceeds of the redeemed stock dividends can be reached by income taxation regardless of the existence of
any business purpose for the redemption. Otherwise, to rule that the said proceeds are exempt from
income tax when the redemption is supported by legitimate business reasons would defeat the very
purpose of imposing tax on income. Such argument would open the door for income earners not to pay tax
so long as the person from whom the income was derived has legitimate business reasons. In other words,
the payment of tax under the exempting clause of Section 83(b) would be made to depend not on the
income of the taxpayer, but on the business purposes of a third party (the corporation herein) from whom
the income was earned. This is absurd, illogical and impractical considering that the Bureau of Internal
Revenue (BIR) would be pestered with instances in determining the legitimacy of business reasons that
every income earner may interpose. It is not administratively feasible and cannot therefore be allowed.
The ruling in the American cases cited and relied upon by ANSCOR that "the redeemed shares are the
equivalent of dividend only if the shares were not issued for genuine business purposes", 111 or the
"redeemed shares have been issued by a corporation bona fide" 112 bears no relevance in determining the
non-taxability of the proceeds of redemption. ANSCOR, relying heavily and applying said cases, argued that
so long as the redemption is supported by valid corporate purposes the proceeds are not subject to
tax. 113 The adoption by the courts below 114 of such argument is misleading if not misplaced. A review
of the cited American cases shows that the presence or absence of "genuine business purposes" may be
material with respect to the issuance or declaration of stock dividends but not on its
subsequentredemption. The issuance and the redemption of stocks are two different transactions. Although
the existence of legitimate corporate purposes may justify a corporation's acquisition of its own shares
under Section 41 of the Corporation Code, 115 such purposes cannot excuse the stockholder from the
effects of taxation arising from the redemption. If the issuance of stock dividends is part of a tax evasion
plan and thus, without legitimate business reasons, the redemption becomes suspicious which may call for
the application of the exempting clause. The substance of the whole transaction, not its form, usually
controls the tax consequences. 116
The two purposes invoked by ANSCOR, under the facts of this case are no excuse for its tax liability. First,
the alleged "filipinization" plan cannot be considered legitimate as it was not implemented until the BIR
started making assessments on the proceeds of the redemption. Such corporate plan was not stated in nor
supported by any Board Resolution but a mere afterthought interposed by the counsel of ANSCOR. Being a
separate entity, the corporation can act only through its Board of Directors. 117 The Board Resolutions
authorizing the redemptions state only one purpose reduction of foreign exchange remittances in case
cash dividends are declared. Not even this purpose can be given credence. Records show that despite the
existence of enormous corporate profits no cash dividend was ever declared by ANSCOR from 1945 until
the BIR started making assessments in the early 1970's. Although a corporation under certain exceptions,
has the prerogative when to issue dividends, yet when no cash dividends was issued for about three
decades, this circumstance negates the legitimacy of ANSCOR's alleged purposes. Moreover, to issue stock
dividends is to increase the shareholdings of ANSCOR's foreign stockholders contrary to its "filipinization"
plan. This would also increase rather than reduce their need for foreign exchange remittances in case of
cash dividend declaration, considering that ANSCOR is a family corporation where the majority shares at
the time of redemptions were held by Don Andres' foreign heirs.
16

Secondly, assuming arguendo, that those business purposes are legitimate, the same cannot be a valid
excuse for the imposition of tax. Otherwise, the taxpayer's liability to pay income tax would be made to
depend upon a third person who did not earn the income being taxed. Furthermore, even if the said
purposes support the redemption and justify the issuance of stock dividends, the same has no bearing
whatsoever on the imposition of the tax herein assessed because the proceeds of the redemption are
deemed taxable dividends since it was shown that income was generated therefrom.
Thirdly, ANSCOR argued that to treat as 'taxable dividend' the proceeds of the redeemed stock dividends
would be to impose on such stock an undisclosed lien and would be extremely unfair to intervening
purchasers, i.e. those who buys the stock dividends after their issuance. 118 Such argument, however,
bears no relevance in this case as no intervening buyer is involved. And even if there is an intervening
buyer, it is necessary to look into the factual milieu of the case if income was realized from the transaction.
Again, we reiterate that the dividend equivalence test depends on such "time and manner" of the
transaction and its net effect. The undisclosed lien 119 may be unfair to a subsequent stock buyer who has
no capital interest in the company. But the unfairness may not be true to an original subscriber like Don
Andres, who holds stock dividends as gains from his investments. The subsequent buyer who buys stock
dividends is investing capital. It just so happen that what he bought is stock dividends. The effect of its
(stock dividends) redemption from that subsequent buyer is merely to return his capital subscription, which
is income if redeemed from the original subscriber.
After considering the manner and the circumstances by which the issuance and redemption of stock
dividends were made, there is no other conclusion but that the proceeds thereof are essentially considered
equivalent to a distribution of taxable dividends. As "taxable dividend" under Section 83(b), it is part of the
"entire income" subject to tax under Section 22 in relation to Section 21 120 of the 1939 Code. Moreover,
under Section 29(a) of said Code, dividends are included in "gross income". As income, it is subject to
income tax which is required to be withheld at source. The 1997 Tax Code may have altered the situation
but it does not change this disposition.
EXCHANGE OF COMMON WITH PREFERRED SHARES 121
Exchange is an act of taking or giving one thing for another 122 involving reciprocal transfer 123 and is
generally considered as a taxable transaction. The exchange of common stocks with preferred stocks, or
preferred for common or a combination of either for both, may not produce a recognized gain or loss, so
long as the provisions of Section 83(b) is not applicable. This is true in a trade between two (2) persons as
well as a trade between a stockholder and a corporation. In general, this trade must be parts of merger,
transfer to controlled corporation, corporate acquisitions or corporate reorganizations. No taxable gain or
loss may be recognized on exchange of property, stock or securities related to reorganizations. 124
Both the Tax Court and the Court of Appeals found that ANSCOR reclassified its shares into common and
preferred, and that parts of the common shares of the Don Andres estate and all of Doa Carmen's shares
were exchanged for the whole 150,000 preferred shares. Thereafter, both the Don Andres estate and Doa
Carmen remained as corporate subscribers except that their subscriptions now include preferred shares.
There was no change in their proportional interest after the exchange. There was no cash flow. Both stocks
had the same par value. Under the facts herein, any difference in their market value would be immaterial at
the time of exchange because no income is yet realized it was a mere corporate paper transaction. It
would have been different, if the exchange transaction resulted into a flow of wealth, in which case income
tax may be imposed. 125
Reclassification of shares does not always bring any substantial alteration in the subscriber's proportional
interest. But the exchange is different there would be a shifting of the balance of stock features, like
priority in dividend declarations or absence of voting rights. Yet neither the reclassification nor
17

exchange per se, yields realize income for tax purposes. A common stock represents the residual ownership
interest in the corporation. It is a basic class of stock ordinarily and usually issued without extraordinary
rights or privileges and entitles the shareholder to a pro rata division of profits. 126 Preferred stocks are
those which entitle the shareholder to some priority on dividends and asset distribution. 127
Both shares are part of the corporation's capital stock. Both stockholders are no different from ordinary
investors who take on the same investment risks. Preferred and common shareholders participate in the
same venture, willing to share in the profits and losses of the enterprise. 128 Moreover, under the doctrine
of equality of shares all stocks issued by the corporation are presumed equal with the same privileges
and liabilities, provided that the Articles of Incorporation is silent on such differences. 129 cdasia
In this case, the exchange of shares, without more, produces no realized income to the subscriber. There is
only a modification of the subscriber's rights and privileges which is not a flow of wealth for tax
purposes. The issue of taxable dividend may arise only once a subscriber disposes of his entire interest and
not when there is still maintenance of proprietary interest. 130
WHEREFORE, premises considered, the decision of the Court of Appeals is MODIFIED in that ANSCOR's
redemption of 82,752.5 stock dividends is herein considered as essentially equivalent to a distribution of
taxable dividends for which it is LIABLE for the withholding tax-at-source. The decision is AFFIRMED in all
other respects.
SO ORDERED.
||| (Commr. v. Court of Appeals, G.R. No. 108576, January 20, 1999)

DIVIDENDS
[G.R. No. 112675. January 25, 1999.]
AFISCO INSURANCE CORPORATION; CCC INSURANCE CORPORATION; CHARTER INSURANCE
CO., INC.; CIBELES INSURANCE CORPORATION; COMMONWEALTH INSURANCE COMPANY;
CONSOLIDATED INSURANCE CO., INC.; DEVELOPMENT INSURANCE & SURETY CORPORATION;
DOMESTIC INSURANCE COMPANY OF THE PHILIPPINES; EASTERN ASSURANCE COMPANY &
SURETY CORP.; EMPIRE INSURANCE COMPANY; EQUITABLE INSURANCE CORPORATION;
FEDERAL INSURANCE CORPORATION INC.; FGU INSURANCE CORPORATION; FIDELITY &
SURETY COMPANY OF THE PHILS., INC.; FILIPINO MERCHANTS' INSURANCE CO., INC.;
GOVERNMENT SERVICE INSURANCE SYSTEM; MALAYAN INSURANCE CO., INC.; MALAYAN
ZURICH INSURANCE CO., INC.; MERCANTILE INSURANCE CO., INC.; METROPOLITAN
INSURANCE COMPANY; METRO-TAISHO INSURANCE CORPORATION; NEW ZEALAND
INSURANCE CO., LTD.; PAN-MALAYAN INSURANCE CORPORATION; PARAMOUNT INSURANCE
CORPORATION; PEOPLE'S TRANS-EAST ASIA INSURANCE CORPORATION; PERLA COMPANIA
DE SEGUROS, INC.; PHILIPPINE BRITISH ASSURANCE CO., INC.; PHILIPPINE FIRST
INSURANCE CO., INC.; PIONEER INSURANCE & SURETY CORP.; PIONEER INTERCONTINENTAL
INSURANCE CORPORATION; PROVIDENT INSURANCE COMPANY OF THE PHILIPPINES;
PYRAMID INSURANCE CO., INC.; RELIANCE SURETY & INSURANCE COMPANY; RIZAL SURETY
& INSURANCE COMPANY; SANPIRO INSURANCE CORPORATION; SEABOARD-EASTERN
INSURANCE CO., INC.; SOLID GUARANTY, INC.; SOUTH SEA SURETY & INSURANCE CO., INC.;
STATE BONDING & INSURANCE CO., INC.; SUMMA INSURANCE CORPORATION; TABACALERA
INSURANCE CO., INC. all assessed as "POOL OF MACHINERY INSURERS," petitioners, vs.
COURT OF APPEALS, COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.
18

Angara Abello Concepcion Regala for petitioners.

SYNOPSIS
This is a Petition For Review on Certiorari assailing the Decision of the Court of Appeals dismissing
petitioners' appeal of the Decision of the Court of Tax Appeals which had sustained petitioners' liability for
deficiency income tax, interest and withholding tax. Petitioners contended that the Court of Appeals erred
in finding that the pool or clearing house was an informal partnership, which was taxable as a corporation
under the NIRC. Petitioners further claimed that the remittances of the pool to the ceding companies and
Munich are not dividends subject to tax. They insisted that taxing such remittances contravene Sections 24
(b) (I) and 263 of the 1977 NIRC and would be tantamount to an illegal double taxation. Moreover,
petitioners argued that since Munich was not a signatory to the Pool Agreement, the remittances it received
from the pool cannot be deemed dividends. However, even if such remittances were treated as dividends,
they would have been exempt under the previously mentioned sections of the 1977 NIRC, as well as Article
7 of paragraph 1 and Article 5 of the RP-West German Tax Treaty. Petitioners likewise contended that the
Internal Revenue Commissioner was already barred by prescription from making an assessment.
In the present case, the ceding companies entered into a Pool Agreement or association that would handle
all the insurance businesses covered under their quota-share reinsurance treaty and surplus reinsurance
treaty with Munich. AScHCD
Petitioner's allegation of double taxation is untenable. The pool is a taxable entity distinct from the
individual corporate entities of the ceding companies. The tax on its income is different from the tax on the
dividends received by the said companies. The tax exemptions claimed by petitioners cannot be granted.
The sections of the 1977 NIRC which petitioners cited are inapplicable, because these were not yet in effect
when the income was earned and when the subject information return for the year ending 1975 was filed.
Petitioners' claim that Munich is tax-exempt based on the RP-West German Tax Treaty is likewise
unpersuasive, because the Internal Revenue Commissioner assessed the pool for corporate taxes on the
basis of the information return it had submitted for the year ending 1975, a taxable year when said treaty
was not yet in effect. Petitioners likewise failed to comply with the requirement of Section 333 of the NIRC
for the suspension of the prescriptive period. The Resolutions of the Court of Appeals are affirmed.
SYLLABUS
1. REMEDIAL LAW; EVIDENCE; RULING OF THE COMMISSION OF INTERNAL REVENUE IS ACCORDED
WEIGHT AND EVEN FINALITY IN THE ABSENCE OF SHOWING THAT IT IS PATENTLY WRONG. The
opinion or ruling of the Commission of Internal Revenue, the agency tasked with the enforcement of tax
laws, is accorded much weight and even finality, when there is no showing that it is patently wrong,
particularly in this case where the findings and conclusions of the internal revenue commissioner were
subsequently affirmed by the CTA, a specialized body created for the exclusive purpose of reviewing tax
cases, and the Court of Appeals. Indeed, "[I]t has been the long standing policy and practice of this Court
to respect the conclusions of quasi-judicial agencies, such as the Court of Tax Appeals which, by the nature
of its functions, is dedicated exclusively to the study and consideration of tax problems and has necessarily
developed an expertise on the subject, unless there has been an abuse or improvident exercise of its
authority." TIAEac
2. CIVIL LAW; PARTNERSHIP; REQUISITES. Article 1767 of the Civil Code recognizes the creation of a
contract of partnership when "two or more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profits among themselves." Its requisites are:
"(1) mutual contribution to a common stock, and (2) a joint interest in the profits." In other words, a
partnership is formed when persons contract "to devote to a common purpose either money, property, or
19

labor with the intention of dividing the profits between themselves." Meanwhile, an association implies
associates who enter into a "joint enterprise . . . for the transaction of business."
3. ID.; ID.; INSURANCE POOL IN CASE AT BAR DEEMED PARTNERSHIP OR ASSOCIATION TAXABLE AS A
CORPORATION UNDER SECTION 24 OF THE NIRC. In the case before us, the ceding companies entered
into a Pool Agreement or an association that would handle all the insurance businesses covered under their
quota-share reinsurance treaty and surplus reinsurance treaty with Munich. The following unmistakably
indicates a partnership or an association covered by Section 24 of the NIRC: (1) The pool has a common
fund, consisting of money and other valuables that are deposited in the name and credit of the pool. This
common fund pays for the administration and operation expenses of the pool. (2) The pool functions
through an executive board, which resembles the board of directors of a corporation, composed of one
representative for each of the ceding companies. (3) True, the pool itself is not a reinsurer and does not
issue any insurance policy; however, its work is indispensable, beneficial and economically useful to the
business of the ceding companies and Munich, because without it they would not have received their
premiums. The ceding companies share "in the business ceded to the pool" and in the "expenses"
according to a "Rules of Distribution" annexed to the Pool Agreement. Profit motive or business is,
therefore, the primordial reason for the pool's formation.
4. TAXATION; NIRC; SECTION 24 THEREOF, UNREGISTERED PARTNERSHIPS AND ASSOCIATIONS ARE
CONSIDERED AS CORPORATIONS FOR TAX PURPOSES. This Court rules that the Court of Appeals, in
affirming the CTA which had previously sustained the internal revenue commissioner, committed no
reversible error. Section 24 of the NIRC, as worded in the year ending 1975, provides: "SEC. 24. Rate of tax
on corporations. (a) Tax on domestic corporations. A tax is hereby imposed upon the taxable net
income received during each taxable year from all sources by every corporation organized in, or existing
under the laws of the Philippines, no matter how created or organized, but not including duly registered
general co-partnership (compaias colectivas), general professional partnerships, private educational
institutions, and building and loan associations . . . ." Ineludibly, the Philippine legislature included in the
concept of corporations those entities that resembled them such as unregistered partnerships and
associations. Parenthetically, the NLRC's inclusion of such entities in the tax on corporations was made even
clearer by the Tax Reform Act of 1997, which amended the Tax Code. The Court of Appeals did not err in
applying Evangelista, which involved a partnership that engaged in a series of transactions spanning more
than ten years, as in the case before us.
5. ID.; DOUBLE TAXATION; DEFINED; NO DOUBLE TAXATION IN CASE AT BAR. Double taxation means
taxing the same property twice when it should be taxed only once. That is, ". . . taxing the same person
twice by the same jurisdiction for the same thing." In the instant case, the pool is a taxable entity distinct
from the individual corporate entities of the ceding companies. The tax on its income is obviously different
from the tax on the dividends received by the said companies. Clearly, there is no double taxation here.
6. ID.; TAX EXEMPTION; GRANT THEREOF NOT JUSTIFIED IN CASE AT BAR; REASONS. The tax
exemptions claimed by petitioners cannot be granted, since their entitlement thereto remains unproven and
unsubstantiated. It is axiomatic in the law of taxation that taxes are the lifeblood of the nation. Hence,
"exemptions therefrom are highly disfavored in law and he who claims tax exemption must be able to
justify his claim or right." Petitioners have failed to discharge this burden of proof. The sections of the 1977
NIRC which they cite are inapplicable, because these were not yet in effect when the income was earned
and when the subject information return for the year ending 1975 was filed. Referring to the 1975 version
of the counterpart sections of the NIRC, the Court still cannot justify the exemptions claimed. Section 255
provides that no tax shall ". . . be paid upon reinsurance by any company that has already paid the tax . . .
." This cannot be applied to the present case because, as previously discussed, the pool is a taxable entity

20

distinct from the ceding companies; therefore, the latter cannot individually claim the income tax paid by
the former as their own. EDSAac

7. ID.; ID.; CANNOT BE CLAIMED BY NON-RESIDENT FOREIGN INSURANCE CORPORATION IN CASE AT

BAR; REASONS; TAX EXEMPTION CONSTRUED STRICTISSIMI JURIS. Section 24 (b) (1) pertains to tax
on foreign corporations; hence, it cannot be claimed by the ceding companies which are domestic
corporations. Nor can Munich, a foreign corporation, be granted exemption based solely on this provision of
the Tax Code because the same subsection specifically taxes dividends, the type of remittances forwarded
to it by the pool. Although not a signatory to the Pool Agreement, Munich is patently an associate of the
ceding companies in the entity formed, pursuant to their reinsurance treaties which required the creation of
said pool. Under its pool arrangement with the ceding companies, Munich shared in their income and loss.
This is manifest from a reading of Articles 3 and 10 of the Quota-Share Reinsurance Treaty and Articles 3
and 10 of the Surplus Reinsurance Treaty. The foregoing interpretation of Section 24 (b) (1) is in line with
the doctrine that a tax exemption must be construed strictissimi juris, and the statutory exemption claimed
must be expressed in a language too plain to be mistaken.
8. ID.; ID.; BASED ON TAX TREATY NOT APPLICABLE IN CASE AT BAR; REASON. The petitioners' claim
that Munich is tax-exempt based on the RP-West German Tax Treaty is likewise unpersuasive, because the
internal revenue commissioner assessed the pool for corporate taxes on the basis of the information return
it had submitted for the year ending 1975, a taxable year when said treaty was not yet in effect. Although
petitioners omitted in their pleadings the date of effectivity of the treaty, the Court takes judicial notice that
it took effect only later, on December 14, 1984.
9. ID.; ASSESSMENT AND COLLECTION OF TAX; PRESCRIPTION; CHANGE IN THE ADDRESS OF THE
TAXPAYER WILL NOT TOLL THE RUNNING OF THE PRESCRIPTIVE PERIOD UNLESS THE COMMISSIONER
OF INTERNAL REVENUE HAS BEEN INFORMED OF SAID CHANGE. The CA and the CTA categorically
found that the prescriptive period was tolled under then Section 333 of the NIRC, because "the taxpayer
cannot be located at the address given in the information return filed and for which reason there was delay
in sending the assessment." Indeed, whether the government's right to collect and assess the tax has
prescribed involves facts which have been ruled upon by the lower courts. It is axiomatic that in the
absence of a clear showing of palpable error or grave abuse of discretion, as in this case, this Court must
not overturn the factual findings of the CA and the CTA. Furthermore, petitioners admitted in their Motion
for Reconsideration before the Court of Appeals that the pool changed its address, for they stated that the
pool's information return filed in 1980 indicated therein its "present address." The Court finds that this falls
short of the requirement of Section 333 of the NIRC for the suspension of the prescriptive period. The law
clearly states that the said period will be suspended only "if the taxpayer informs the Commissioner of
Internal Revenue of any change in the address."
DECISION
PANGANIBAN, J p:
Pursuant to "reinsurance treaties," a number of local insurance firms formed themselves into a "pool" in
order to facilitate the handling of business contracted with a nonresident foreign reinsurance company. May
the "clearing house" or "insurance pool" so formed be deemed a partnership or an association that is
taxable as a corporation under the National Internal Revenue Code (NIRC)? Should the pool's remittances
to the member companies and to the said foreign firm be taxable as dividends? Under the facts of this
case, has the government's right to assess and collect said tax prescribed? cdasia
The Case
21

These are the main questions raised in the Petition for Review on Certiorari before us, assailing the October
11, 1993 Decision 1 of the Court of Appeals 2 in CA-GR SP 29502, which dismissed petitioners' appeal of
the October 19, 1992 Decision 3 of the Court of Tax Appeals 4 (CTA) which had previously sustained
petitioners' liability for deficiency income tax, interest and withholding tax. The Court of Appeals ruled:
"WHEREFORE, the petition is DISMISSED, with costs against petitioners." 5
The petition also challenges the November 15, 1993 Court of Appeals (CA) Resolution 6 denying
reconsideration.
The Facts
The antecedent facts, 7 as found by the Court of Appeals, are as follows:
"The petitioners are 41 non-life insurance corporations, organized and existing under the laws of the
Philippines. Upon issuance by them of Erection, Machinery Breakdown, Boiler Explosion and Contractors' All
Risk insurance policies, the petitioners on August 1, 1965 entered into a Quota Share Reinsurance Treaty
and a Surplus Reinsurance Treaty with the Munchener Ruckversicherungs-Gesselschaft (hereafter called
Munich), a non-resident foreign insurance corporation. The reinsurance treaties required petitioners to form
a [p]ool. Accordingly, a pool composed of the petitioners was formed on the same day.
"On April 14, 1976, the pool of machinery insurers submitted a financial statement and filed an
"Information Return of Organization Exempt from Income Tax" for the year ending in 1975, on the basis of
which it was assessed by the Commissioner of Internal Revenue deficiency corporate taxes in the amount
of P1,843,273.60, and withholding taxes in the amount of P1,768,799.39 and P89,438.68 on dividends paid
to Munich and to the petitioners, respectively. These assessments were protested by the petitioners
through its auditors Sycip, Gorres, Velayo and Co.
"On January 27, 1986, the Commissioner of Internal Revenue denied the protest and ordered the
petitioners, assessed as "Pool of Machinery Insurers," to pay deficiency income tax, interest, and
with[h]olding tax, itemized as follows:
Net income per information return P3,737,370.00
===========
Income tax due thereon P1,298,080.00
Add: 14% Int. fr. 4/15/76
to 4/15/79 545,193.60

TOTAL AMOUNT DUE & P1,843,273.60

COLLECTIBLE ===========
Dividend paid to Munich
Reinsurance Company P3,728,412.00
===========
35% withholding tax at source due thereon P1,304,944.20
Add: 25% surcharge 326,236.05
22

14% interest from

1/25/76 to 1/25/79 137,019.14
Compromise
penalty-non-filing of return 300.00
late payment 300.00

TOTAL AMOUNT DUE & P1,768,799.39

COLLECTIBLE ===========
Dividend paid to Pool Members P655,636.00
===========
10% withholding tax at
source due thereon P65,563.60
Add: 25% surcharge 16,390.90
14% interest from
1/25/76 to 1/25/79 6,884.18
Compromise
penalty-non-filing of return 300.00
late payment 300.00

TOTAL AMOUNT DUE & P89,438.68

COLLECTIBLE ==========" 8
The CA ruled in the main that the pool of machinery insurers was a partnership taxable as a corporation,
and that the latter's collection of premiums on behalf of its members, the ceding companies, was taxable
income. It added that prescription did not bar the Bureau of Internal Revenue (BIR) from collecting the
taxes due, because "the taxpayer cannot be located at the address given in the information return filed."
Hence, this Petition for Review before us. 9
The Issues
Before this Court, petitioners raise the following issues:
"1. Whether or not the Clearing House, acting as a mere agent and performing strictly administrative
functions, and which did not insure or assume any risk in its own name, was a partnership or association
subject to tax as a corporation;
"2. Whether or not the remittances to petitioners and MUNICHRE of their respective shares of reinsurance
premiums, pertaining to their individual and separate contracts of reinsurance, were "dividends" subject to
tax; and
"3. Whether or not the respondent Commissioner's right to assess the Clearing House had already
prescribed." 10
23

The Court's Ruling

The petition is devoid of merit. We sustain the ruling of the Court of Appeals that the pool is taxable as a
corporation, and that the government's right to assess and collect the taxes had not prescribed.
First Issue:

Pool Taxable as a Corporation

Petitioners contend that the Court of Appeals erred in finding that the pool or clearing house was an
informal partnership, which was taxable as a corporation under the NIRC. They point out that the
reinsurance policies were written by them "individually and separately," and that their liability was limited to
the extent of their allocated share in the original risks thus reinsured. 11 Hence, the pool did not act or
earn income as a reinsurer. 12 Its role was limited to its principal function of "allocating and distributing
the risk(s) arising from the original insurance among the signatories to the treaty or the members of the
pool based on their ability to absorb the risk(s) ceded[;] as well as the performance of incidental functions,
such as records, maintenance, collection and custody of funds, etc." 13
Petitioners belie the existence of a partnership in this case, because (1) they, the reinsurers, did not share
the same risk or solidary liability; 14 (2) there was no common fund; 15 (3) the executive board of the
pool did not exercise control and management of its funds, unlike the board of directors of a
corporation; 16 and (4) the pool or clearing house "was not and could not possibly have engaged in the
business of reinsurance from which it could have derived income for itself." 17
The Court is not persuaded. The opinion or ruling of the Commission of Internal Revenue, the agency
tasked with the enforcement of tax laws, is accorded much weight and even finality, when there is no
showing that it is patently wrong, 18 particularly in this case where the findings and conclusions of the
internal revenue commissioner were subsequently affirmed by the CTA, a specialized body created for the
exclusive purpose of reviewing tax cases, and the Court of Appeals. 19 Indeed,

"[I]t has been the long standing policy and practice of this Court to respect the conclusions of quasi-judicial
agencies, such as the Court of Tax Appeals which, by the nature of its functions, is dedicated exclusively to
the study and consideration of tax problems and has necessarily developed an expertise on the subject,
unless there has been an abuse or improvident exercise of its authority." 20
This Court rules that the Court of Appeals, in affirming the CTA which had previously sustained the internal
revenue commissioner, committed no reversible error.Section 24 of the NIRC, as worded in the year ending
1975, provides:
"SEC. 24. Rate of tax on corporations. (a) Tax on domestic corporations. A tax is hereby imposed
upon the taxable net income received during each taxable year from all sources by every corporation
organized in, or existing under the laws of the Philippines, no matter how created or organized, but not
including duly registered general co-partnership (compaias colectivas), general professional partnerships,
private educational institutions, and building and loan associations . . . ."
Ineludibly, the Philippine legislature included in the concept of corporations those entities that resembled
them such as unregistered partnerships and associations. Parenthetically, the NLRC's inclusion of such
entities in the tax on corporations was made even clearer by the Tax Reform Act of 1997, 21 which
amended the Tax Code.Pertinent provisions of the new law read as follows:
"SEC. 27. Rates of Income Tax on Domestic Corporations.
24

(A) In General. Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is
hereby imposed upon the taxable income derived during each taxable year from all sources within and
without the Philippines by every corporation, as defined in Section 22 (B) of this Code, and taxable under
this Title as a corporation . . . ."
"SEC. 22. Definition. When used in this Title:
xxx xxx xxx
(B) The term 'corporation' shall include partnerships, no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion), associations, or insurance companies, but does not
include general professional partnerships [or] a joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations
pursuant to an operating or consortium agreement under a service contract without the Government.
'General professional partnerships' are partnerships formed by persons for the sole purpose of
exercising their common profession, no part of the income of which is derived from engaging in any trade
or business. LLphil
xxx xxx xxx."
Thus, the Court in Evangelista v. Collector of Internal Revenue 22 held that Section 24 covered these
unregistered partnerships and even associations or joint accounts, which had no legal personalities apart
from their individual members. 23 The Court of Appeals astutely applied Evangelista: 24
". . . Accordingly, a pool of individual real property owners dealing in real estate business was considered a
corporation for purposes of the tax in Sec. 24 of the Tax Code in Evangelista v. Collector of Internal
Revenue, supra. The Supreme Court said:
'The term 'partnership' includes a syndicate, group, pool, joint venture or other unincorporated
organization, through or by means of which any business, financial operation, or venture is carried on . . .
(8 Merten's Law of Federal Income Taxation, p. 562 Note 63)'"
Article 1767 of the Civil Code recognizes the creation of a contract of partnership when "two or more
persons bind themselves to contribute money, property, or industry to a common fund, with the intention
of dividing the profits among themselves." 25 Its requisites are: "(1) mutual contribution to a common
stock, and (2) a joint interest in the profits." 26 In other words, a partnership is formed when persons
contract "to devote to a common purpose either money, property, or labor with the intention of dividing the
profits between themselves." 27 Meanwhile, an association implies associates who enter into a "joint
enterprise . . . for the transaction of business." 28
In the case before us, the ceding companies entered into a Pool Agreement 29 or an association 30 that
would handle all the insurance businesses covered under their quota-share reinsurance treaty 31 and
surplus reinsurance treaty 32 with Munich. The following unmistakably indicates a partnership or an
association covered by Section 24 of the NIRC:
(1) The pool has a common fund, consisting of money and other valuables that are deposited in the name
and credit of the pool. 33 This common fund pays for the administration and operation expenses of the
pool. 34
(2) The pool functions through an executive board, which resembles the board of directors of a corporation,
composed of one representative for each of the ceding companies. 35
(3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its work is
indispensable, beneficial and economically useful to the business of the ceding companies and Munich,
25

because without it they would not have received their premiums. The ceding companies share "in the
business ceded to the pool" and in the "expenses" according to a "Rules of Distribution" annexed to the
Pool Agreement. 36 Profit motive or business is, therefore, the primordial reason for the pool's formation.
As aptly found by the CTA:
". . . The fact that the pool does not retain any profit or income does not obliterate an antecedent fact, that
of the pool being used in the transaction of business for profit. It is apparent, and petitioners admit, that
their association or coaction was indispensable [to] the transaction of the business. . . If together they have
conducted business, profit must have been the object as, indeed, profit was earned. Though the profit was
apportioned among the members, this is only a matter of consequence, as it implies that profit actually
resulted." 37
The petitioners' reliance on Pascual v. Commissioner 38 is misplaced, because the facts obtaining therein
are not on all fours with the present case. In Pascual, there was no unregistered partnership, but merely a
co-ownership which took up only two isolated transactions. 39 The Court of Appeals did not err in
applying Evangelista, which involved a partnership that engaged in a series of transactions spanning more
than ten years, as in the case before us.
Second Issues:

Pool's Remittances Are Taxable

Petitioners further contend that the remittances of the pool to the ceding companies and Munich are not
dividends subject to tax. They insist that taxing such remittances contravene Sections 24 (b) (I) and 263 of
the 1977 NIRC and "would be tantamount to an illegal double taxation, as it would result in taxing the
same premium income twice in the hands of the same taxpayer." 40 Moreover, petitioners argue that since
Munich was not a signatory to the Pool Agreement, the remittances it received from the pool cannot be
deemed dividends. 41 They add that even if such remittances were treated as dividends, they would have
been exempt under the previously mentioned sections of the 1977 NIRC, 42 as well as Article 7 of
paragraph 1 43 and Article 5 of paragraph 5 44 of the RP-West German Tax Treaty. 45
Petitioners are clutching at straws. Double taxation means taxing the same property twice when it should
be taxed only once. That is, ". . . taxing the same person twice by the same jurisdiction for the same
thing." 46 In the instant case, the pool is a taxable entity distinct from the individual corporate entities of
the ceding companies. The tax on its income is obviously different from the tax on the dividends received
by the said companies. Clearly, there is no double taxation here.
The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto remains
unproven and unsubstantiated. It is axiomatic in the law of taxation that taxes are the lifeblood of the
nation. Hence, "exemptions therefrom are highly disfavored in law and he who claims tax exemption must
be able to justify his claim or right." 47 Petitioners have failed to discharge this burden of proof. The
sections of the 1977 NIRC which they cite are inapplicable, because these were not yet in effect when the
income was earned and when the subject information return for the year ending 1975 was filed.
Referring to the 1975 version of the counterpart sections of the NIRC, the Court still cannot justify the
exemptions claimed. Section 255 provides that no tax shall ". . . be paid upon reinsurance by any company
that has already paid the tax . . . ." This cannot be applied to the present case because, as previously
discussed, the pool is a taxable entity distinct from the ceding companies; therefore, the latter cannot
individually claim the income tax paid by the former as their own.
On the other hand, Section 24 (b) (1) 48 pertains to tax on foreign corporations; hence, it cannot be
claimed by the ceding companies which are domestic corporations. Nor can Munich, a foreign corporation,
be granted exemption based solely on this provision of the Tax Code, because the same subsection
26

specifically taxes dividends, the type of remittances forwarded to it by the pool. Although not a signatory to
the Pool Agreement, Munich is patently an associate of the ceding companies in the entity formed,
pursuant to their reinsurance treaties which required the creation of said pool.
Under its pool arrangement with the ceding companies, Munich shared in their income and loss. This is
manifest from a reading of Articles 3 49 and 10 50 of the Quota-Share Reinsurance Treaty and Articles
3 51 and 10 52 of the Surplus Reinsurance Treaty. The foregoing interpretation of Section 24 (b) (1) is in
line with the doctrine that a tax exemption must be construed strictissimi juris, and the statutory exemption
claimed must be expressed in a language too plain to be mistaken. 53

Finally, the petitioners' claim that Munich is tax-exempt based on the RP-West German Tax Treaty is
likewise unpersuasive, because the internal revenue commissioner assessed the pool for corporate taxes on
the basis of the information return it had submitted for the year ending 1975, a taxable year when said
treaty was not yet in effect. 54 Although petitioners omitted in their pleadings the date of effectivity of the
treaty, the Court takes judicial notice that it took effect only later, on December 14, 1984. 55
Third Issue:

Prescription
Petitioners also argue that the government's right to assess and collect the subject tax had prescribed.
They claim that the subject information return was filed by the pool on April 14, 1976. On the basis of this
return, the BIR telephoned petitioners on November 11, 1981, to give them notice of its letter of
assessment dated March 27, 1981. Thus, the petitioners contend that the five-year statute of limitations
then provided in the NIRC had already lapsed, and that the internal revenue commissioner was already
barred by prescription from making an assessment. 56
We cannot sustain the petitioners. The CA and the CTA categorically found that the prescriptive period was
tolled under then Section 333 of the NIRC, 57 because " the taxpayer cannot be located at the address
given in the information return filed and for which reason there was delay in sending the
assessment." 58 Indeed, whether the government's right to collect and assess the tax has prescribed
involves facts which have been ruled upon by the lower courts. It is axiomatic that in the absence of a clear
showing of palpable error or grave abuse of discretion, as in this case, this Court must not overturn the
factual findings of the CA and the CTA.
Furthermore, petitioners admitted in their Motion for Reconsideration before the Court of Appeals that the
pool changed its address, for they stated that the pool's information return filed in 1980 indicated therein
its "present address." The Court finds that this falls short of the requirement of Section 333 of the NIRC for
the suspension of the prescriptive period. The law clearly states that the said period will be suspended only
"if the taxpayer informs the Commissioner of Internal Revenue of any change in the address."
WHEREFORE, the petition is DENIED. The Resolutions of the Court of Appeals dated October 11, 1993 and
November 15, 1993 are hereby AFFIRMED. Costs against petitioners.
SO ORDERED.
||| (Afisco Insurance Corp. v. Court of Appeals, G.R. No. 112675, January 25, 1999)

DIVIDENDS
[G.R. No. L-2659. October 12, 1950.]
27

In the matter of the testate estate of Emil Maurice Bachrach, deceased. MARY
MCDONALD BACHRACH, petitioner-appellee, vs. SOPHIE SEIFERT and ELISA
ELIANOFF, oppositors-appellants.

Ross, Selph, Carrascoso & Janda, for appellants.

Delgado & Flores, for appellee.
SYLLABUS
1. USUFRUCT; STOCK DIVIDED CONSIDERED CIVIL FRUIT AND BELONGS TO USUFRUCTUARY. Under
the Massachusetts rule, a stock dividend is considered part of the capital and belongs to the remainderman;
while under the Pennsylvania rule, all earnings of a corporation, when declared as dividends in whatever
form, made during the lifetime of the usufructuary, belong to the latter.
2. ID.; ID. The Pennsylvania rule is more in accord with our statutory laws than the Massachusetts rule.
Under section 16 of our Corporation Law, no corporation may make or declare from its business. Any
dividend, therefore, whether cash or stock, represent surplus profits. Article 471 of the Civil Code provides
that the usufructuary shall be entitled to receive all the natural, industrial, and civil fruits of the property in
the usufruct. The stock dividend in question in this case is a civil fruit of the original investment. The shares
of stock issued in payment of said dividend may be sold independently of the original shares just as the
offspring of a domestic animal may be sold independently of its mother.
DECISION
OZAETA, J p:
Is a stock dividend fruit or income, which belongs to the usufructuary, or is it capital or part of the corpus
of the estate, which pertains to the remainderman? That is the question raised in this appeal.
The deceased E. M. Bachrach, who left no forced heir except his widow Mary McDonald Bachrach, in his
last will and testament made varius legacies in cash and willed the remainder of his estate as follows:

"Sixth: It is my will and do herewith bequeath and devise to my beloved wife Mary McDonald Bachrach for
life all the fruits and usufruct of the remainder of all my estate after payment of the legacies, bequests, and
gifts provided for above; and she may enjoy said usufruct and use or spend such fruits as she may in any
manner wish."
The will further provided that upon the death of Mary McDonald Bachrach, one-half of all his estate "shall
be divided share and share alike by and between my legal heirs, to the exclusion of my brothers."
The estate of E. M. Bachrach, as owner of 108,000 shares of stock of the Atok-Big Wedge Mining Co., Inc.,
received from the latter 54,000 shares representing 50 per cent stock dividend on the said 108,000 shares.
On June 10, 1948, Mary McDonald Bachrach, as usufructuary or life tenant of the estate, petitioned the
lower court to authorize the Peoples Bank and Trust Company, as administrator of the estate of E.
M. Bachrach, to transfer to her the said 54,000 shares of stock dividend by indorsing and delivering to her
the corresponding certificate of stock, claiming that said dividend, although paid out in the form of stock, is
fruit or income and therefore belonged to her as usufructuary or life tenant. Sophie Siefert and Elisa
Elianoff, legal heirs of the deceased, opposed said petition on the ground that the stock dividend in
question was not income but formed part of the capital and therefore belonged not to the usufructuary but
to the remainderman. And they have appealed from the order granting the petition and overruling their
objection.

28

While appellants admit that a cash dividend is an income, they contend that a stock dividend is not, but
merely represents an addition to the invested capital. The so-called Massachusetts rule, which prevails in
certain jurisdictions in the United States, supports appellants' contention. It regards cash dividends,
however large, as income, and stock dividends, however made, as capital. (Minot vs. Paine, 99 Mass., 101;
96 Am. Dec., 705.) It holds that a stock dividend is not in any true sense any dividend at all since it
involves no division or severance from the corporate assets of the subject of the dividend; that it does not
distribute property but simply dilutes the shares as they existed before; and that it takes nothing from the
property of the corporation, and adds nothing to the interests of the shareholders.
On the other hand, the so-called Pennsylvania rule, which prevails in various other jurisdictions in the
United States, supports appellee's contention. This rule declares that all earnings of the corporation made
prior to the death of the testator stockholder belong to the corpus of the estate, and that all earnings,
when declared as dividends in whatever form, made during the lifetime of the usufructuary or life tenant
are income and belong to the usufructuary or life tenant. (Earp's Appeal, 28 Pa., 368.)
". . . It is clear that testator intended the remaindermen should have only the corpus of the estate he left in
trust, and that all dividends should go to the life tenants. It is true that profits realized are not dividends
until declared by the proper officials of the corporation, but distribution of profits, however made, is
dividends, and the form of the distribution is immaterial." (In re Thompson's Estate, 262 Pa., 278; 105 Atl.
273, 274.)
In Hite vs. Hite (93 Ky., 257; 20 S. W., 778, 780), the Court of Appeals of Kentucky, speaking thru its Chief
Justice, said:
". . . Where a dividend, although declared in stock, is based upon the earnings of the company, it is in
reality, whether called by one name or another, the income of the capital invested in it. It is but a mode of
distributing the profit. If it be not income, what is it? If it is, then it is rightfully and equitably the property
of the life tenant. If it be really profit, then he should have it, whether paid in stock or money. A stock
dividend proper is the issue of new shares paid for by the transfer of a sum equal to their par value from
the profit and loss account to that representing capital stock; and really a corporation has no right to
declare a dividend, either in cash or stock, except from its earnings; and a singular state of case it seems
to us, an unreasonable one is presented if the company, although it rests with it whether it will declare a
dividend, can bind the courts as to the proper ownership of it, and by the mode of payment substitute its
will for that of the testator, and favor the life tenants or the remainder-men, as it may desire. It cannot, in
reason, be considered that the testator contemplated such a result. The law regards substance, and not
form, and such a rule might result not only in a violation of the testator's intention, but it would give the
power to the corporation to beggar the life tenants, who, in this case, are the wife and children of the
testator, for the benefit of the ramainder-men, who may perhaps be unknown to the testator, being unborn
when the will was executed. We are unwilling to adopt a rule which to us seems so arbitrary, and devoid of
reason and justice. If the dividend be in fact a profit, although declared in stock, it should be held to be
income. It has been so held in Pennsylvania and many other states, and we think it the correct rule. Earp's
Appeal, 28 Pa. St. 368; Cook, Stocks & S. sec. 554. . . ."
We think the Pennsylvania rule is more in accord with our statutory laws than the Massachusetts rule.
Under section 16 of our Corporation Law, no corporation may make or declare any dividend except from
the surplus profits arising from its business. Any dividend, therefore, whether cash or stock, represents
surplus profits. Article 471 of the Civil Code provides that the usufructuary shall be entitled to receive all the
natural, industrial, and civil fruits of the property in usufruct. And articles 474 and 475 provide as follows:
"ART. 474. Civil fruits are deemed to accrue day by day, and belong to the usufructuary in proportion to the
time the usufruct may last.
29

"ART. 475. When a usufruct is created on the right to receive an income or periodical revenue, either in
money or fruits, or the interest on bonds or securities payable to bearer, each matured payment shall be
considered as the proceeds or fruits of such right.
"When it consists of the enjoyment of the benefits arising from an interest in an industrial or commercial
enterprise, the profits of which are not distributed at fixed periods, such profits shall have the same
consideration.
"In either case they shall be distributed as civil fruits, and shall be applied in accordance with the rules
prescribed by the next preceding article."
The 108,000 shares of stock are part of the property in usufruct. The 54,000 shares of stock dividend are
civil fruits of the original investment. They represent profits, and the delivery of the certificate of stock
covering said dividend is equivalent to the payment of said profits. Said shares may be sold independently
of the original shares, just as the offspring of a domestic animal may be sold independently of its mother.
The order appealed from, being in accordance with the above-quoted provisions of the Civil Code, is hereby
affirmed, with costs against the appellants.

Moran, C.J., Paras, Feria, Pablo, Bengzon, Tuason, Montemayor and Reyes, JJ., concur.
||| (Bachrach v. Seifert, G.R. No. L-2659, October 12, 1950)

DIVIDENDS
[G.R. No. L-28398. August 6, 1975.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. JOHN L. MANNING, W.D. McDONALD,
E.E. SIMMONS and THE COURT OF TAX APPEALS, respondents.

Solicitor General Antonio P. Barredo, Solicitor Lolita O. Gal-lang and Special Attorney Virgilio J. Saldajena for
petitioner.
Manuel O. Chan for private respondents.
SYNOPSIS
Under a trust agreement, Julius Reese who owned 24,700 shares of the 25,000 common shares of
MANTRASCO, and the three private respondents who owned the rest, at 100 shares each, deposited all
their shares with the Trustees. The trust agreement provided that upon Reese's death MANTRASCO shall
purchase Reese's shares. The trust agreement was executed in view of Reese's desire that upon his death
the Company would continue under the management of respondents. Upon Reese's death and partial
payment by the company of Reeses's share, a new certificate was issued in the name of MANTRASCO, and
the certificate indorsed to the Trustees. Subsequently, the stockholders reverted the 24,700 shares in the
Treasury to the capital account of the company as stock dividends to be distributed to the stockholders.
When the entire purchase price of Reese's interest in the company was paid in full by the latter, the trust
agreement was terminated, and the shares held in trust were delivered to the company.
The Bureau of Internal Revenue concluded that the distribution of the 24,700 shares of Reese as stock
dividends was in effect a distribution of the "assets or property of the corporation." It therefore assessed
respondents for deficiency income taxes as well as for fraud penalty and interest charges. The Court of Tax
Appeals absolved respondent from any liability for receiving the questioned stock dividends on the ground
30

that their respective one-third interest in the Company remained the same before and after the declaration
of the stock dividends and only the number of shares held by each of them had changed.
On a petition for review, the Supreme Court held that the newly acquired shares were not treasury shares;
their declaration as treasury stock dividends was a complete nullity and that the assessment by the
Commissioner of fraud penalty and the imposition of interest charges pursuant to the provision of the Tax
Code were made in accordance with law.
Judgment of the Court of Tax Appeals se aside.
SYLLABUS
1. PRIVATE CORPORATIONS; SHARES OF STOCKS; TREASURY; SHARES. Treasury shares are stocks
issued and fully paid for and re-acquired by the corporation either by purchase, donation, forfeiture or
other means. They are therefore issued shares, but being in the treasury they do not have the status of
outstanding shares. Consequently, although a treasury share, not having been retired by the corporation
re-acquiring it, may be re-issued or sold again, such share, as long as it is held by the corporation as a
treasury share, participates neither in dividends, because dividends cannot be declared by the corporation
to itself, nor in the meetings of the corporations as voting stock, for otherwise equal distribution of voting
powers among stockholders will be effectively lost and the directors will be able to perpetuate their control
of the corporation though it still represent a paid for interest in the property of the corporation.
2. ID.; ID.; ID.; DECLARATION OF QUESTIONED SHARES AS TREASURY STOCK DIVIDENDS, A NULLITY.
Where the manifest intention of the parties to the trust agreement was, in sum and substance, to treat
the shares of a deceased stockholder as absolutely outstanding shares of said stockholder's estate until
they were fully paid. the declaration of said shares as treasury stock dividend was a complete nullity and
plainly violative of public policy.
3. ID.; ID.; STOCK DIVIDEND PAYABLE ONLY FROM RETAINED EARNINGS. A stock dividend, being one
payable in capital stock, cannot be declared out of outstanding corporate stock, but only from retained
earnings.
4. ID.; ID.; PURCHASE OF HOLDING RESULTING IN DISTRIBUTION OF EARNINGS TAXABLE. Where by
the use of a trust instrument as a convenient technical device, respondents bestowed unto themselves the
full worth and value of a deceased stockholder's corporate holding acquired with the very earnings of the
companies, such package device which obviously is not designed to carry out the usual stock dividend
purpose of corporate expansion reinvestment, e.g., the acquisition of additional facilities and other capital
budget items, but exclusively for expanding the capital base of the surviving stockholders in the company,
cannot be allowed to deflect the latter's responsibilities toward our income tax laws. The conclusion is
ineluctable that whenever the company parted with a portion of its earnings "to buy" the corporate holdings
of the deceased stockholders, it was in ultimate effect and result making a distribution of such earnings to
the surviving stockholders. All these amounts are consequently subject to income tax as being, in truth and
in fact, a flow of cash benefits to the surviving stockholders.
5. ID.; ID.; ID.; COMMISSIONER ASSESSMENT BASED ON THE TOTAL ACQUISITION COST OF THE
ALLEGED TREASURY STOCK DIVIDENDS, ERROR. Where the surviving stockholders, by resolution,
partitioned among themselves, as treasury stock dividends, the deceased stockholder's interest, and
earnings of the corporation over a period of years were used to gradually wipe out the holdings therein of
said deceased stockholder, the earnings (which in effect have been distributed to the surviving stockholders
when they appropriated among themselves the deceased stockholder's interest), should be taxed for each
of the corresponding years when payments were made to the deceased's estate on account of his shares.
In other words, the Tax Commissioner may not asses the surviving stockholders, for income tax purposes,
31

the total acquisition cost of the alleged treasury stock dividends in one lump sum. However, with regard to
payment made with the corporation's earnings before the passage of the resolution declaring as stock
dividends the deceased stockholder's interest (while indeed those earnings were utilized in those years to
gradually pay off the value of the deceased stockholder's holdings), the surviving stockholders should be
liable (in the absence of evidence that prior to the passage of the stockholder's resolution the contributed
of each of the surviving stockholder rose corresponding), for income tax purposes, to the extent of the
aggregate amount paid by the corporation (prior to such resolution) to buy off the deceased stockholder's
shares. The reason is that it was only by virtue of the authority contained in said resolution that the
surviving stockholders actually, albeit illegally, appropriated and petitioned among themselves the
stockholders equity representing the deceased stockholder's interest.
6. TAXATION; INCOME TAX; ASSESSMENT OF FRAUD PENALTY AND IMPOSITION OF INTEREST CHARGES
IN ACCORDANCE WITH LAW DESPITE NULLITY OF RESOLUTION AUTHORIZING DISTRIBUTION OF
EARNINGS. The fact that the resolution authorizing the distribution of earnings is null and void is of no
moment. Under the National Internal Revenue Code, income tax is assessed on income received from any
property, activity or service that produces income. The Tax Code stands as an indifferent, neutral party on
the matter of where the income comes from. The action taken by the Commissioner of assessing fraud
penalty and imposing interest charges pursuant to the provisions of the Tax Code is in accordance with law.
DECISION
CASTRO, J p:
This is a petition for review of the decision of the Court of Tax Appeals, in CTA case 1626, which set aside
the income tax assessments issued by the Commissioner of Internal Revenue against John L. Manning,
W.D. McDonald and E.E. Simmons (hereinafter referred to as the respondents), for alleged undeclared
stock dividends received in 1958 from the Manila Trading and Supply Co. (hereinafter referred to as the
MANTRASCO) valued at P7,973,660.
In 1952 the MANTRASCO had an authorized capital stock of P2,500,000 divided into 25,000 common
shares; 24,700 of these were owned by Julius S. Reese, and the rest, at 100 shares each, by the three
respondents.
On February 29, 1952, in view of Reese's desire that upon his death MANTRASCO and its two subsidiaries,
MANTRASCO (Guam), Inc. and the Port Motors, Inc., would continue under the management of the
respondents, a trust agreement on his and the respondents' interests in MANTRASCO was executed by and
among Reese (therein referred to as OWNER), MANTRASCO (therein referred to as COMPANY), the law firm
of Ross, Selph, Carrascoso and Janda (therein referred to as TRUSTEES), and the respondents (therein
referred to as MANAGERS).
The trust agreement pertinently provides as follows:
"1. Upon the execution of this agreement the OWNER shall deposit with the TRUSTEES, duly endorsed and
ready for transfer Twenty-Four Thousand Seven Hundred (24,700) shares of the capital stock of the
COMPANY, these shares being all shares of the capital stock of the COMPANIES belonging to him . . .
"2. Upon the execution of this Agreement the MANAGERS shall deposit with the TRUSTEES, duly endorsed
and ready for transfer, all shares of the capital stock of the COMPANIES belonging to any of them.
"3. (a) The OWNER and the MANAGERS, and each of them, agree that if any of them shall at any time
during the life of this trust acquire any additional shares of stock of any of the COMPANIES, or of any
successor company, or any shares in substitution, exchange or replacement of the shares subject to this
agreement, they shall forthwith endorse and deposit such shares with the TRUSTEES hereunder and such
32

additional or other shares shall become subject to this agreement; shares deposited by the OWNER and
shares received by the TRUSTEES as stock dividends on, or in substitution, exchange or replacement of,
such shares so deposited under this agreement being MANAGERS' SHARES.
"(b) All shares deposited under paragraphs 1, 2 and 3(a) hereof shall, during the life of the OWNER, remain
in the name of and shall be voted by the respective parties making the deposit ...
"4. (a) Upon the death of the OWNER and the receipt by the TRUSTEES of the initial payment from the
company purchasing the OWNER'S SHARES, the TRUSTEES shall cause the OWNER'S SHARES to be
transferred into the name of such company and such company shall thereupon transfer such shares into
the name of the TRUSTEES and the TRUSTEES shall hold such shares until payment for all such shares
shall have been made by the company as provided in this agreement.
xxx xxx xxx
"(c) The TRUSTEES shall vote all stock standing in their name or the name of their nominees at all
meetings and shall be in all respects entitled to all the rights as owners of said shares, subject, however, to
the provisions of this agreement of trust.
"(d) Any and all dividends paid on said shares after the death of the OWNER shall be subject to the
provisions of this agreement.
xxx xxx xxx
"5. (b) It is expressly agreed and understood, however, that the declaration of dividends and amount of
earnings transferred to surplus shall be subject to the approval of the TRUSTEES and the TRUSTEES shall
participate to such extent in the affairs of the COMPANIES as they deem necessary to insure the carrying
out of this agreement and the discharge of the obligations of the COMPANIES and each of them and of the
MANAGERS hereunder.
"(c) The TRUSTEES shall designate one or more directors of each of the COMPANIES as they shall consider
advisable and corresponding shares shall be transferred to such directors to qualify them to act.
xxx xxx xxx
"8. (a) Upon the death of the OWNER, the COMPANIES or any one or more of them shall purchase the
OWNER'S SHARES; it being the intent that any of the COMPANIES shall purchase all or a proportionate part
of the OWNER'S SHARES . . .
"(b) The purchase price of such shares shall be the book value of such share computed in United States
dollars . . .
xxx xxx xxx
"(d) All dividends paid on stock that had been OWNER'S SHARES, from the time of the transfer of such
shares by one or more of the COMPANIES to the TRUSTEES as provided in Article 4 until payment in full for
such OWNER'S SHARES shall have been made by each of the COMPANIES which shall have purchased the
same, shall be credited as payments on account of the purchase price of such shares and shall be a
prepayment on account of the next due installment or installments of such purchase price.
xxx xxx xxx
"12. The TRUSTEES may from time to time increase or decrease the unpaid balance of the purchase price
of the shares being purchased by any COMPANY or COMPANIES should they in their exclusive discretion
determine that such increase or decrease would be necessary to carry out the intention of the parties that
33

the Estate and heirs of the OWNER shall receive the fair value of the shares deposited in Trust as such
value existed at the date of the death of the OWNER. . .
"13. Should the said COMPANIES or any of them be unable or unwilling to comply with their obligations
hereunder when due, the TRUSTEES may terminate this agreement and dispose of all the shares of stock
deposited hereunder, whether or not payment shall have been made for part of such stock, applying the
proceeds of such sale or disposition to the unpaid balance of the purchase price:
"(a) If, upon any such sale or disposition of the stock, the TRUSTEES shall receive an amount in excess of
the unpaid balance of the purchase price agreed to be paid by the COMPANIES for the OWNER'S SHARES
such excess, after deducting all expenses, charges and taxes, shall be paid to the then MANAGERS.
xxx xxx xxx
"17. Until the delivery to him of the shares purchased by him, no MANAGER, shall sell, assign, mortgage,
pledge, transfer or in anywise encumber or hypothecate such shares or his interest in this agreement.
xxx xxx xxx
"19. After the death of the OWNER and during the period of this trust the COMPANIES shall pay no
dividends except as may be authorized by the TRUSTEES. Dividends on MANAGER'S SHARES shall, so long
as they shall not be in default under this agreement, be paid over by the TRUSTEES to the MANAGERS.
Dividends on OWNER'S SHARES shall be applied in liquidation of the COMPANIES' liabilities hereunder as
provided in Article 8(d).
xxx xxx xxx
"26. The TRUSTEES may, after the death of the OWNER and during the life of this trust, vote any and all
shares held in trust, at any general and special meeting of stockholders for all purposes, including but not
limited to wholly or partially liquidating or reducing the capital of any COMPANY or COMPANIES, authorizing
the sale of any or all assets, and election of directors . . .
xxx xxx xxx
"28. The COMPANIES and each of them undertake and agree by proper corporate act to reduce their
capitalization, sell or encumber their assets, amend their articles of incorporation, reorganize, liquidate,
dissolve and do all other things the TRUSTEES in their discretion determine to be necessary to enable them
to comply with their obligations hereunder and the TRUSTEES are hereby irrevocably authorized to vote all
shares of the COMPANIES and each of them at any general or special meeting for the accomplishment of
such purposes. . . ."
On October 19, 1954 Reese died. The projected transfer of his shares in the name of MANTRASCO could
not, however, be immediately effected for lack of sufficient funds to cover initial payment on the shares.
On February 2, 1955, after MANTRASCO made a partial payment of Reese's shares, the certificate for the
24,700 shares in Reese's name was cancelled and a new certificate was issued in the name of
MANTRASCO. On the same date, and in the meantime that Reese's interest had not been fully paid, the
new certificate was endorsed to the law firm of Ross, Selph, Carrascoso and Janda, as trustees for and in
behalf of MANTRASCO.
On December 22, 1958, at a special meeting of MANTRASCO stockholders, the following resolution was
passed:
"RESOLVED, that the 24,700 shares in the Treasury be reverted back to the capital account of the company
as a stock dividend to be distributed to shareholders of record at the close of business on December 22,
34

1958, in accordance with the action of the Board of Directors at its meeting on December 19, 1958 which
action is hereby approved and confirmed."
On November 25, 1963 the entire purchase price of Reese's interest in MANTRASCO was finally paid in full
by the latter, On May 4, 1964 the trust agreement was terminated and the trustees delivered to
MANTRASCO all the shares which they were holding in trust.
Meanwhile, on September 14, 1962, an examination of MANTRASCO's books was ordered by the Bureau of
Internal Revenue. The examination disclosed that (a) as of December 31, 1958 the 24,700 shares declared
as dividends had been proportionately distributed to the respondents, representing a total book value or
acquisition cost of P7,973,660; (b) the respondents failed to declare the said stock dividends as part of their
taxable income for the year 1958; and (c) from 1956 to 1961 the following amounts were paid by
MANTRASCO to Reese's estate by virtue of the trust agreement, to wit:

Amounts
Year Liabilities Paid
1956
1957
1958
1959
1960
1961

P5,830,587.86 P 2,143,073.00
5,317,137.86 513,450.00
4,824,059.28 493,078.58
4,319,420.14 504,639.14
3,849,720.14 469,700.00
3,811,387.69 38,332.45

On the basis of their examination, the BIR examiners concluded that the distribution of Reese's shares as
stock dividends was in effect a distribution of the "asset or property of the corporation as may be gleaned
from the payment of cash for the redemption of said stock and distributing the same as stock dividend." On
April 14, 1965 the Commissioner of Internal Revenue issued notices of assessment for deficiency income
taxes to the respondents for the year 1958, as follows:
J.L. Manning W.D. McDonald E.E. Simmons
Deficiency Income Tax P1,416,469.00 P1,442,719.00 P1,450,434.00
Add 50% surcharge * 723,234.50 721,359.507 25,217.00
1/2% monthly interest from
6-20-59 to 6-20-62 260,364.42 259,689.42 261,078.12

TOTAL AMOUNT DUE
& COLLECTIBLE P2,430,067.92 P2,423,767.92 2,436,729.12
The respondents unsuccessfully challenged the foregoing assessments and, failing to secure a favorable
reconsideration, appealed to the Court of Tax Appeals.
On October 30, 1967 the CTA rendered judgment absolving the respondents from any liability for receiving
the questioned stock dividends on the ground that their respective one-third interest in MANTRASCO
remained the same before and after the declaration of stock dividends and only the number of shares held
by each of them had changed.
Hence, the present recourse.
All the parties rely upon the same provisions of the Tax Code and internal revenue regulations to bolster
their respective positions. These are:
A. National Internal Revenue Code
35

"SEC. 83. Distribution of dividends or assets by corporations (a) Definition of Dividends The term
'dividends' when used in this Title means any distribution made by a corporation to its shareholders out of
its earnings or profits accrued since March first, nineteen hundred and thirteen, and payable to its
shareholders, whether in money or in other property.
"Where a corporation distributes all of its assets in complete liquidation or dissolution the gain realized or
loss sustained by the stockholder, whether individual or corporate, is a taxable income or deductible loss, as
the case may be.
"(b) Stock dividend. A stock dividend representing the transfer of surplus to capital account shall not be
subject to tax. However, if a corporation cancels or redeems stock issued as a dividend at such time and in
such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially
equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation
of the stock shall be considered as taxable income to the extent that it represents a distribution of earnings
or profits accumulated after March first, nineteen hundred and thirteen."

B. B.I.R. Regulations
"SEC. 251. Dividends paid in property. Dividends paid in securities or other property (other than its own
stock), in which the earnings of the corporation have been invested, are income to the recipients to the
amount of the full market value of such property when receivable by individual stockholders . . .
"SEC. 252. Stock dividend. A stock dividend which represents the transfer of surplus to capital account is
not subject to income tax. However, a dividend in stock may constitute taxable income to the recipients
thereof notwithstanding the fact that the officers or directors of the corporation (as defined in section 84)
choose to call such distribution as a stock dividend. The distinction between a stock dividend which does
not, and one which does, constitute income taxable to the shareholders is the distinction between a stock
dividend which works no change in the corporate entity, the same interest in the same corporation being
represented after the distribution by more shares of precisely the same character, and a stock dividend
where there either has been change of corporate identity or a change in the nature of the shares issued as
dividends whereby the proportional interest of the shareholder after the distribution is essentially different
from the former interest. A stock dividend constitutes income if it gives the shareholder an interest different
from that which his former stockholdings represented. A stock dividend does not constitute income if the
new shares confer no different rights or interests than did the old the new certificate plus the old
representing the same proportionate interest in the net assets of the corporation as did the old."
The parties differ, however, on the taxability of the "treasury" stock dividends received by the respondents.
The respondents anchor their argument on the same basis as the Court of Tax Appeals; whereas the
Commissioner maintains that the full value (P7,973,660) of the shares redeemed from Reese by
MANTRASCO which were subsequently distributed to the respondents as stock dividends in 1958 should be
taxed as income of the respondents for that year, the said distribution being in effect a distribution of cash.
The respondents' interests in MANTRASCO, he further argues, were only .4% prior to the declaration of the
stock dividends in 1958, but rose to 33 1/3% each after the said declaration.
In submitting their respective contentions, it is the assumption of both parties that the 24,700 shares
declared as stock dividends were treasury shares. We are however convinced, after a careful study of the
trust agreement, that the said shares were not, on December 22, 1958 or at anytime before or after that
date, treasury shares. The reasons are quite plain.

36

Although authorities may differ on the exact legal and accounting status of so-called "treasury
shares," 1 they are more or less in agreement that treasury shares are stocks issued and fully paid for and
re-acquired by the corporation either by purchase, donation, forfeiture or other means. 2 Treasury shares
are therefore issued shares, but being in the treasury they do not have the status of outstanding
shares. 3 Consequently, although a treasury share, not having been retired by the corporation re-acquiring
it, may be re-issued or sold again, such share, as long as it is held by the corporation as a treasury share,
participates neither in dividends, because dividends cannot be declared by the corporation to itself, 4 nor in
the meetings of the corporation as voting stock, for otherwise equal distribution of voting powers among
stockholders will be effectively lost and the directors will be able to perpetuate their control of the
corporation, 5 though it still represents a paid-for interest in the property of the corporation. 6 The
foregoing essential features of a treasury stock are lacking in the questioned shares. Thus,
(a) under paragraph 4(c) of the trust agreement, the trustees were authorized to vote all stock standing in
their names at all meetings and to exercise all rights "as owners of said shares" this authority is
reiterated in paragraphs 26 and 28 of the trust agreement;
(b) under paragraph 4(d), "Any and all dividends paid on said shares after the death of the OWNER shall be
subject to the provisions of this agreement;"
(c) under paragraph 5(b), the amount of retained earnings to be declared as dividends was made subject
to the approval of the trustees of the 24,700 shares;
(d) under paragraph 5(c), the choice of corporate directors was delegated exclusively to the trustees who
were also given the authority to transfer qualifying shares to such directors; and
(e) under paragraph 19, MANTRASCO and its two subsidiaries were expressly prohibited from paying
"dividends except as may be authorized by the TRUSTEES;" in the same paragraph mention was also made
of "dividends on OWNER'S SHARES" which shall be applied to the liquidation of the liabilities of the three
companies for the price of Reese's shares.
The manifest intention of the parties to the trust agreement was, in sum and substance, to treat the 24,700
shares of Reese as absolutely outstanding shares of Reese's estate until they were fully paid. Such being
the true nature of the 24,700 shares, their declaration as treasury stock dividend in 1958 was a complete
nullity and plainly violative of public policy. A stock dividend, being one payable in capital stock, cannot be
declared out of outstanding corporate stock, but only from retained earnings: 7
Of pointed relevance is this useful discussion of the nature of a stock dividend: 8
"'A stock dividend always involves a transfer of surplus (or profit) to capital stock.' Graham and Katz,
Accounting in Law Practice, 2d ed. 1938, No. 70. As the court said in United States vs. Siegel, 8 Cir., 1931,
52 F 2d 63, 65, 78 ALR 672: 'A stock dividend is a conversion of surplus or undivided profits into capital
stock, which is distributed to stockholders in lieu of a cash dividend.' Congress itself has defined the term
'dividend' in No. 115(a) of the Act as meaning any distribution made by a corporation to its shareholders,
whether in money or in other property, out of its earnings or profits. In Eisner v. Macomber, 1920, 252 US
189, 40 S Ct 189, 64 L Ed 521, 9 ALR 1570, both the prevailing and the dissenting opinions recognized that
within the meaning of the revenue acts the essence of a stock dividend was the segregation out of surplus
account of a definite portion of the corporate earnings as part of the permanent capital resources of the
corporation by the device of capitalizing the same, and the issuance to the stockholders of additional shares
of stock representing the profits so capitalized."
The declaration by the respondents and Reese's trustees of MANTRASCO's alleged treasury stock dividends
in favor of the former, brings, however, into clear focus the ultimate purpose which the parties to the trust
instrument aimed to realize: to make the respondents the sole owners of Reese's interest in MANTRASCO
37

by utilizing the periodic earnings of that company and its subsidiaries to directly subsidize their purchase of
the said interests, and by making it appear outwardly, through the formal declaration of non-existent stock
dividends in the treasury, that they have not received any income from those firms when, in fact, by that
declaration they secured to themselves the means to turn around as full owners of Reese's shares. In other
words, the respondents, using the trust instrument as a convenient technical device, bestowed unto
themselves the full worth and value of Reese's corporate holdings with the use of the very earnings of the
companies. Such package device, obviously not designed to carry out the usual stock dividend purpose of
corporate expansion reinvestment, e.g. the acquisition of additional facilities and other capital budget items,
but exclusively for expanding the capital base of the respondents in MANTRASCO, cannot be allowed to
deflect the respondents' responsibilities toward our income tax laws. The conclusion is thus ineluctable that
whenever the companies involved herein parted with a portion of their earnings "to buy" the corporate
holdings of Reese, they were in ultimate effect and result making a distribution of such earnings to the
respondents. All these amounts are consequently subject to income tax as being, in truth and in fact, a flow
of cash benefits to the respondents.
We are of the opinion, however, that the Commissioner erred in assessing the respondents the total
acquisition cost (P7,973,660) of the alleged treasury stock dividends in one lump sum. The record shows
that the earnings of MANTRASCO over a period of years were used to gradually wipe out the holdings
therein of Reese. Consequently, those earnings, which we hold, under the facts disclosed in the case at bar,
as in effect having been distributed to the respondents, should be taxed for each of the corresponding
years when payments were made to Reese's estate on account of his 24,700 shares. With regard to
payments made with MANTRASCO earnings in 1958 and the years before, while indeed those earnings
were utilized in those years to gradually pay off the value of Reese's holdings in MANTRASCO, there is no
evidence from which it can be inferred that prior to the passage of the stockholders' resolution of December
22, 1958 the contributed equity of each of the respondents rose correspondingly. It was only by virtue of
the authority contained in the said resolution that the respondents actually, albeit illegally, appropriated and
partitioned among themselves the stockholders' equity representing Reese's interests in MANTRASCO. As
those payments accrued in favor of the respondents in 1958 they are and should be liable, for income tax
purposes, to the extent of the aggregate amount paid, from 1955 to 1958, by MANTRASCO to buy off
Reese's shares.
The fact that the resolution authorizing the distribution of the said earnings is null and void is of no
moment. Under the National Internal Revenue Code, income tax is assessed on income received from any
property, activity or service that produces income. 9 The Tax Code stands as an indifferent, neutral party
on the matter of where the income comes from. 10
Subject to the foregoing qualifications, we find the action taken by the Commissioner in all other respects
that is, the assessment of a fraud penalty and imposition of interest charges pursuant to the provisions
of the Tax Code to be in accordance with law.
ACCORDINGLY, the judgment of the Court of Tax Appeals absolving the respondents from any deficiency
income tax liability is set aside, and this case is hereby remanded to the Court of Tax Appeals for further
proceedings. More specifically, the Court of Tax Appeals shall recompute the income tax liabilities of the
respondents in accordance with this decision and with the Tax Code, and thereafter pronounce and enter
judgment accordingly. No costs.

Makasiar, Esguerra, Muoz Palma and Martin, JJ., concur.

Teehankee, J., is on leave.
||| (Commr. v. Manning, G.R. No. L-28398, August 06, 1975)
38

TAX SPARING CREDIT

[G.R. No. 66838. April 15, 1988.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PROCTER & GAMBLE PHILIPPINE
MANUFACTURING CORPORATION & THE COURT OF TAX APPEALS, respondents.
SYLLABUS
1. REMEDIAL LAW; COURT CANNOT DETERMINE AND DECIDE ISSUE NOT RAISED AT THE
ADMINISTRATIVE FORUM. To allow a litigant to assume a different posture when he comes before the
court and challenges the position he had accepted at the administrative level, would be to sanction a
procedure whereby the Court which is supposed to review administrative determinations would not
review, but determine and decide for the first time, a question not raised at the administrative forum.
2. ID.; CIVIL PROCEDURE; APPEALS; ISSUE CANNOT BE RAISED FOR THE FIRST TIME ON APPEAL. It is
well settled that under the same underlying principle of prior exhaustion of administrative remedies, on the
judicial level, issues not raised in the lower court cannot generally be raised for the first time on appeal.
(Pampanga Sugar Dev. Co., Inc. v. CIR, 114 SCRA 725 [1982]; Garcia v. C.A., 102 SCRA 597 [1981];
Matialonzo v. Servidad, 107 SCRA 726 [1981]).
3. ID.; ESTOPPEL; STATE NOT SUBJECT THEREOF. It is axiomatic that the State can never be in
estoppel, and this is particularly true in matters involving taxation. The errors of certain administrative
officers should never be allowed to jeopardize the government's financial position.
4. TAXATION; NATIONAL INTERNAL REVENUE CODE; INCOME TAX ON CORPORATION; OVERPAYMENT OF
WITHHOLDING TAX ON DIVIDENDS; CLAIM FOR REIMBURSEMENTS MAY BE FILED BY MOTHER
CORPORATION, NOT WITHHOLDING AGENT. The submission of the Commissioner of Internal Revenue
that PMC-Phil. is but a withholding agent of the government and therefore cannot claim reimbursement of
the alleged over paid taxes, is completely meritorious. The real party in interest being the mother
corporation in the United States, it follows that American entity is the real party in interest, and should have
been the claimant in this case.
5. ID.; ID.; ID.; TAX CREDIT; NOT JUSTIFIED WHERE TAXPAYER FAILED TO MEET CONDITIONS. There
is nothing in the aforecited provision that would justify tax return of the disputed 15% to the private
respondent, Furthermore, as ably argued by the petitioner, the private respondent failed to meet certain
conditions necessary in order that the dividends received by the non-resident parent company in the United
States may be subject to the preferential 15% tax instead of 35%.
DECISION
PARAS, J p:
This is a petition for review on certiorari filed by the herein petitioner, Commissioner of Internal Revenue,
seeking the reversal of the decision of the Court of Tax Appeals dated January 31, 1984 in CTA Case No.
2883 entitled "Procter and Gamble Philippine Manufacturing Corporation vs. Bureau of Internal Revenue,"
which declared petitioner therein, Procter and Gamble Philippine Manufacturing Corporation to be entitled
to the sought refund or tax credit in the amount of P4,832,989.00 representing the alleged overpaid
withholding tax at source and ordering payment thereof.
The antecedent facts that precipitated the instant petition are as follows:

39

Private respondent, Procter and Gamble Philippine Manufacturing Corporation (hereinafter referred to as
PMC-Phil.), a corporation duly organized and existing under and by virtue of the Philippine laws, is engaged
in business in the Philippines and is a wholly owned subsidiary of Procter and Gamble, U.S.A. (hereinafter
referred to as PMC-USA), a non-resident foreign corporation in the Philippines, not engaged in trade and
business therein. As such PMC-U.S.A. is the sole shareholder or stockholder of PMC-Phil., as PMC-U.S.A.
owns wholly or by 100% the voting stock of PMC-Phil. and is entitled to receive income from PMC-Phil. in
the form of dividends, if not rents or royalties. In addition, PMC-Phil. has a legal personality separate and
distinct from PMC-U.S.A. (Rollo, pp. 122-123). LLphil
For the taxable year ending June 30, 1974 PMC-Phil. realized a taxable net income of P56,500,332.00 and
accordingly paid the corresponding income tax thereon equivalent to P25%-35% or P19,765,116.00 as
provided for under Section 24(a) of the Philippine Tax Code, the pertinent portion of which reads:
"SEC. 24. Rates of tax on corporation. (a) Tax on domestic corporations. A tax in hereby imposed
upon the taxable net income received during each taxable year from all sources by every corporation
organized in, or existing under the laws of the Philippines, and partnerships, no matter how created or
organized, but not including general professional partnerships, in accordance with the following:
'Twenty-five per cent upon the amount by which the taxable net income does not exceed one hundred
thousand pesos; and
'Thirty-five per cent upon the amount by which the taxable net income exceeds one hundred thousand
pesos."
After taxation its net profit was P36,735,216.00. Out of said amount it declared a dividend in favor of its
sole corporate stockholder and parent corporation PMC-U.S.A. in the total sum of P17,707,460.00 which
latter amount was subjected to Philippine taxation of 35% or P6,197,611.23 as provided for in Section
24(b) of the Philippine Tax Code which reads in full:
"SECTION 1. The first paragraph of subsection (b) of Section 24 of the National Bureau Internal Revenue
Code, as amended, is hereby further amended to read as follows:
'(b) Tax on foreign corporations. - (1) Nonresident corporation. - A foreign corporation not engaged in trade
or business in the Philippines, including a foreign life insurance company not engaged in the life insurance
business in the Philippines, shall pay a tax equal to 35% of the gross income received during its taxable
year from all sources within the Philippines, as interest (except interest on foreign loans which shall be
subject to 15% tax), dividends, rents, royalties, salaries, wages, premiums, annuities, compensations,
remunerations for technical services or otherwise, emoluments or other fixed or determinable, annual,
periodical or casual gains, profits, and income, and capital gains: Provided, however, That premiums shall
not include re-insurance premiums: Provided, further, That cinematographic film owners, lessors, or
distributors, shall pay a tax of 15% on their gross income from sources within the Philippines: Provided, still
further That on dividends received from a domestic corporation liable to tax under this Chapter, the tax
shall be 15% of the dividends received, which shall be collected and paid as provided in Section 53(d) of
this Code, subject to the condition that the country in which the nonresident foreign corporation is
domiciled shall allow a credit against the tax due from the nonresident foreign corporation, taxes deemed
to have been paid in the Philippines equivalent to 20% which represents the difference between the regular
tax (35%) on corporations and the tax (15%) on dividends as provided in this section: Provided, finally,
That regional or area headquarters established in the Philippines by multinational corporations and which
headquarters do not earn or derive income from the Philippines and which act as supervisory,
communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific
Region shall not be subject to tax."
40

For the taxable year ending June 30, 1975 PMC-Phil. realized a taxable net income of P8,735,125.00 which
was subjected to Philippine taxation at the rate of 25%-35% or P2,952,159.00, thereafter leaving a net
profit of P5,782,966.00. As in the 2nd quarter of 1975, PMC-Phil. again declared a dividend in favor of PMCU.S.A. at the tax rate of 35% or P6,457,485.00. LLphil
In July, 1977 PMC-Phil., invoking the tax-sparing credit provision in Section 24(b) as aforequoted, as the
withholding agent of the Philippine government, with respect to the dividend taxes paid by PMC-U.S.A.,
filed a claim with the herein petitioner, Commissioner of Internal Revenue, for the refund of the 20
percentage-point portion of the 35 percentage-point whole tax paid, arising allegedly from the alleged
"overpaid withholding tax at source or overpaid withholding tax in the amount of P4,832,989.00,"
computed as follows:
Dividend Income Tax withheld 15% tax under Alleged
of PMC-U.S.A. at source at "tax sparing over
35% proviso" payment

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

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

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

========= ======== ======== ========
There being no immediate action by the BIR on PMC-Phils' letter-claim the latter sought the intervention of
the CTA when on July 13, 1977 it filed with herein respondent court a petition for review docketed as CTA
No. 2883 entitled "Procter and Gamble Philippine Manufacturing Corporation vs. The Commissioner of
Internal Revenue," praying that it be declared entitled to the refund or tax credit claimed and ordering
respondent therein to refund to it the amount of P4,832,989.00, or to issue tax credit in its favor in lieu of
tax refund. (Rollo, p. 41)
On the other hand therein respondent, Commissioner of Internal Revenue, in his answer, prayed for the
dismissal of said petition and for the denial of the claim for refund. (Rollo, p. 48)
On January 31, 1974 the Court of Tax Appeals in its decision (Rollo, p. 63) ruled in favor of the herein
petitioner, the dispositive portion of the same reading as follows:
"Accordingly, petitioner is entitled to the sought refund or tax credit of the amount representing the
overpaid withholding tax at source and the payment therefor by the respondent hereby ordered. No costs.
"SO ORDERED."
Hence this petition.
The Second Division of this Court without giving due course to said petition resolved to require the
respondents to comment (Rollo, p. 74). Said comment was filed on November 8, 1984 (Rollo, pp. 83-90).
Thereupon this Court by resolution dated December 17, 1984 resolved to give due course to the petition
and to consider respondents' comment on the petition as Answer. (Rollo, p. 93)

41

Petitioner was required to file brief on January 21, 1985 (Rollo, p. 96). Petitioner filed his brief on May 13,
1985 (Rollo, p. 107), while private respondent PMC-Phil. filed its brief on August 22, 1985. LibLex
Petitioner raised the following assignments of errors:
I
THE COURT OF TAX APPEALS ERRED IN HOLDING WITHOUT ANY BASIS IN FACT AND IN LAW, THAT THE
HEREIN RESPONDENT PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION (PMC-PHIL.
FOR SHORT) 'IS ENTITLED TO THE SOUGHT REFUND OR TAX CREDIT' OF P4,832,989.00, REPRESENTING
ALLEGEDLY THE DIVIDEND TAX OVER WITHHELD BY PMC-PHIL. UPON REMITTANCE OF DIVIDEND
INCOME IN THE TOTAL SUM OF P24,164,946.00 TO PROCTER & GAMBLE, USA (PMC-USA, FOR SHORT).
II
THE COURT OF TAX APPEALS ERRED IN HOLDING, WITHOUT ANY BASIS IN FACT AND IN LAW, THAT
PMC-USA, A NONRESIDENT FOREIGN CORPORATION UNDER SECTION 24(b) (1) OF THE PHILIPPINE TAX
CODE AND A DOMESTIC CORPORATION DOMICILED IN THE UNITED STATES, IS ENTITLED UNDER THE
U.S. TAX CODE AGAINST ITS U.S. FEDERAL TAXES TO A UNITED STATES FOREIGN TAX CREDIT
EQUIVALENT TO AT LEAST THE 20 PERCENTAGE-POINT PORTION (OF THE 35 PERCENT DIVIDEND TAX)
SPARED OR WAIVED OR OTHERWISE CONSIDERED OR DEEMED PAID BY THE PHILIPPINE GOVERNMENT.
The sole issue in this case is whether or not private respondent is entitled to the preferential 15% tax rate
on dividends declared and remitted to its parent corporation.
From this issue two questions are posed by the petitioner Commissioner of Internal Revenue, and they are
(1) Whether or not PMC-Phil. is the proper party to claim the refund and (2) Whether or not the U.S. allows
as tax credit the "deemed paid" 20% Philippine Tax on such dividends?
The petitioner maintains that it is the PMC-U.S.A., the tax payer and not PMC-Phil. the remitter or payor of
the dividend income, and a mere withholding agent for and in behalf of the Philippine Government, which
should be legally entitled to receive the refund if any. (Rollo, p. 129)
It will be observed at the outset that petitioner raised this issue for the first time in the Supreme Court. He
did not raise it at the administrative level, nor at the Court of Tax Appeals. As clearly ruled by Us "To allow
a litigant to assume a different posture when he comes before the court and challenges the position he had
accepted at the administrative level," would be to sanction a procedure whereby the Court - which is
supposed to review administrative determinations - would not review, but determine and decide for the first
time, a question not raised at the administrative forum." Thus it is well settled that under the same
underlying principle of prior exhaustion of administrative remedies, on the judicial level, issues not raised in
the lower court cannot generally be raised for the first time on appeal. (Pampanga Sugar Dev. Co., Inc. v.
CIR, 114 SCRA 725 [1982]; Garcia v. C.A., 102 SCRA 597 [1981]; Matialonzo v. Servidad, 107 SCRA 726
[1981]).
Nonetheless it is axiomatic that the State can never be in estoppel, and this is particularly true in matters
involving taxation. The errors of certain administrative officers should never be allowed to jeopardize the
government's financial position.
The submission of the Commissioner of Internal Revenue that PMC-Phil. is but a withholding agent of the
government and therefore cannot claim reimbursement of the alleged over paid taxes, is completely
meritorious. The real party in interest being the mother corporation in the United States, it follows that
American entity is the real party in interest, and should have been the claimant in this case.

42

Closely intertwined with the first assignment of error is the issue of whether or not PMC-U.S.A. a nonresident foreign corporation under Section 24(b)(1) of the Tax Code (the subsidiary of an American) a
domestic corporation domiciled in the United States, is entitled under the U.S. Tax Code to a United States
Foreign Tax Credit equivalent to at least the 20 percentage paid portion (of the 35% dividend tax) spared
or waived as otherwise considered or deemed paid by the government. The law pertinent to the issue is
Section 902 of the U.S. Internal Revenue Code, as amended by Public Law 87-834, the law governing tax
credits granted to U. S. corporations on dividends received from foreign corporations, which to the extent
applicable reads:
"SEC. 902 CREDIT FOR CORPORATE STOCKHOLDERS IN FOREIGN CORPORATION.
(a) Treatment of Taxes Paid by Foreign Corporation For purposes of this subject, a domestic corporation
which owns at least 10 percent of the voting stock of a foreign corporation from which it receives dividends
in any taxable year shall
(1) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined
in subsection (c) (1) (a)] of a year for which such foreign corporation is not a less developed country
corporation, be deemed to have paid the same proportion of any income, war profits, or excess profits
taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any possession of
the United States on or with respect to such accumulated profits, which the amount of such dividends
(determined without regard to Section 78) bears to the amount of such accumulated profits in excess of
such income, war profits, and excess profits taxes (other than those deemed paid); and
(2) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined
in subsection (c) (1) (b)] of a year for which such foreign corporation is a less developed country
corporation, be deemed to have paid the same proportion of any income, war profits, or excess profits
taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any possession of
the United States on or with respect to such accumulated profits, which the amount of such dividends bears
to the amount of such accumulated profits. Cdpr
xxx xxx xxx
(c) Applicable Rules
(1) Accumulated profits defined. - For purposes of this section, the term 'accumulated profits' means with
respect to any foreign corporation.
(A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits, or income computed
without reduction by the amount of the income, war profits, and excess profits taxes imposed on or with
respect to such profits or income by any foreign country. . . ; and
(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or income in excess of
the income, war profits, and excess profits taxes imposed on or with respect to such profits or income.
The Secretary or his delegate shall have full power to determine from the accumulated profits of what year
or years such dividends were paid, treating dividends paid in the first 20 days of any year as having been
paid from the accumulated profits of the preceding year or years (unless to his satisfaction shows
otherwise), and in other respects treating dividends as having been paid from the most recently
accumulated gains, profits, or earnings . . ." (Rollo, pp. 55-56)
To Our mind there is nothing in the aforecited provision that would justify tax return of the disputed 15%
to the private respondent, Furthermore, as ably argued by the petitioner, the private respondent failed to
meet certain conditions necessary in order that the dividends received by the non-resident parent company
43

in the United States may be subject to the preferential 15% tax instead of 35%. Among other things, the
private respondent failed: (1) to show the actual amount credited by the U.S. government against the
income tax due from PMC-U.S.A. on the dividends received from private respondent; (2) to present the
income tax return of its mother company for 1975 when the dividends were received; and (3) to submit
any duly authenticated document showing that the U.S. government credited the 20% tax deemed paid in
the Philippines. LibLex
PREMISES CONSIDERED, the petition is GRANTED and the decision appealed from, is REVERSED and SET
ASIDE.
SO ORDERED.
||| (Commr. v. Procter & Gamble Phil. Manufacturing Corp., G.R. No. 66838, April 15, 1988)

TAX SPARING CREDIT

[G.R. No. 127105. June 25, 1999.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. S.C. JOHNSON AND SON, INC., and
COURT OF APPEALS, respondents.

The Solicitor General for petitioner.

Angara Abello Concepcion Regala & Cruz for private respondent.
SYNOPSIS
Pursuant to the license agreement entered into by private respondent S.C. Johnson and Son, U.S.A., the
private respondent was granted, among others, the right to use the trademark, patents and technology of
SC Johnson and Son, U.S.A. and was obliged to pay to the latter royalties based on a percentage of net
sales. The said royalties were subjected by the government to a 25% withholding tax. Consequently, from
July, 1992 to May, 1993, the private respondent paid a total withholding tax in the amount of
P1,603,433.00. However, on October 29, 1993 the private respondent filed before the International Tax
Affairs Division of the Bureau of Internal Revenue a claim for refund of the overpaid withholding tax on
royalties in the amount of P963,266.00. The Commissioner, not having acted on the claim for refund, the
private respondent then filed a petition for review before the Court of Tax Appeals (CTA) wherein the latter
rendered a decision in favor of tax refund. The Court of Appeals affirmed in toto the CTA ruling. Hence, this
petition.
The Court ruled that the RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on
tax crediting. Article 24 of the RP-Germany Tax Treaty, expressly allows crediting against German income
and corporation tax of 20% of the gross amount of royalties paid under the law of the Philippines. On the
other hand, Article 23 of the RP-US Tax Treaty, which is the counterpart provision with respect to relief for
double taxation, does not provide for similar crediting of 20% of the gross amount of royalties paid. The
Court agreed 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 entry 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 clearest grant of organic or statute law. Private respondent is claiming for a refund
44

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. The petition was GRANTED. SHCaDA
SYLLABUS
1.REMEDIAL LAW; SUPREME COURT CIRCULAR NO. 28-91; CERTIFICATE OF NON-FORUM SHOPPING;
NECESSARY IN PETITIONS FILED BEFORE THE SUPREME COURT AND THE COURT OF APPEALS. The
circular expressly requires that a certificate of non-forum shopping should be attached to petitions filed
before this Court and the Court of Appeals. Petitioner's allegation that Circular No. 28-91 applies only to
original actions and not to appeals as in the instant case is not supported by the text nor by the obvious
intent of the Circular which is to prevent multiple petitions that will result in the same issue being resolved
by different courts.
2.ID.; ID.; ID.; SUBSTANTIALLY COMPLIED BY CERTIFICATION EXECUTED BY OFFICE OF THE SOLICITOR
GENERAL REPRESENTING A GOVERNMENT AGENCY. Anent the requirement that the party, not counsel,
must certify under oath that he has not commenced any other action involving the same issues in this
Court or the Court of Appeals or any other tribunal or agency, we are inclined to accept petitioner's
submission that since the OSG is the only lawyer for the petitioner, which is a government agency
mandated under Section 35, Chapter 12, Title III, Book IV of the 1987 Administrative Code to be
represented only by the Solicitor General, the certification executed by the OSG in this case constitutes
substantial compliance with Circular No. 28-91.
3.TAXATION; TAX TREATIES; PAYMENT OF ROYALTIES; TAX RATES ARE THE SAME FOR ALL RECIPIENTS.
We are not aware of any law or rule pertinent to the payment of royalties, and none has been brought
to our attention, which provides for the payment of royalties under dissimilar circumstances. 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.
4.ID.; ID.; RP-US TAX TREATY; PURPOSE. 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 to 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. Foreign
investments will only thrive in a fairly predictable and reasonable international investment climate and the
protection against double taxation is crucial in creating such a climate.
5.ID.; DOUBLE TAXATION; DEFINED. 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.
6.ID.; TAX TREATIES; METHODS TO ELIMINATE DOUBLE TAXATION. 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. The second method for the elimination of double taxation applies
whenever the state of source is given a full or limited right to tax together with the state of residence. In
45

this case, the treaties make it incumbent upon the state of residence to allow relief in order to avoid double
taxation.
7.ID.; ID.; ID.; EXEMPTION METHOD AND CREDIT METHOD; ELUCIDATED. There are two methods of
relief the exemption method and the credit method. In the exemption method, the income or capital
which is taxable in the state of source or situs is exempted in the state of residence, although in some
instances it may be taken into account in determining the rate of tax applicable to the taxpayer's remaining
income or capital. 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.
8.ID.; ID.; RATIONALE FOR REDUCING TAX RATE. In negotiating tax treaties, the underlying rationale
for reducing the tax rate is that the Philippines will give up a part of the tax in the expectation that the tax
given up for this particular investment is not taxed by the other country. Thus the petitioner correctly
opined that the phrase "royalties paid under similar circumstances" in the most favored nation clause of the
US-RP Tax Treaty necessarily contemplated "circumstances that are tax-related."
9.ID.; ID.; RP-US TAX TREATY; IMPOSABLE RATES ON TAX CREDITS. Under the RP-US Tax Treaty, the
state of residence and the state of sources are both permitted to tax the royalties, with a restraint on the
tax that may be collected by the state of source. Furthermore, the method employed to give relief from
double taxation is the allowance of a tax credit to citizens or residents of the United States (in an
appropriate amount based upon the taxes paid or accrued to the Philippines) against the United States tax,
but such amount shall not exceed the limitations provided by United States law for the taxable year. Under
Article 13 thereof, the Philippines may impose one of three rates 25 percent of the gross amount of the
royalties; 15 percent when the royalties are paid by a corporation registered with the Philippine Board of
Investments and engaged in preferred areas of activities; or 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.
10.ID.; ID.; RP-GERMANY TAX TREATY; 10 PERCENT CONCESSIONAL TAX RATE IS APPLICABLE TO
ROYALTIES PAID UNDER SIMILAR CIRCUMSTANCES. Given the purpose underlying tax treaties and the
rationale for the most favored nation clause, the concessional tax rate of 10 percent provided for in the RPGermany 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.

11.ID.; ID.; RP-US AND RP-WEST GERMANY TAX TREATIES DO NOT CONTAIN SIMILAR PROVISIONS ON
TAX CREDITING. The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on
tax crediting. Article 24 of the RP-Germany Tax Treaty, supra, expressly allows crediting against German
income and corporation tax of 20% of the gross amount of royalties paid under the law of the Philippines.
On the other hand, Article 23 of the RP-US Tax Treaty, which is the counterpart provision with respect to
relief for double taxation, does not provide for similar crediting of 20% of the gross amount of royalties
paid.
12.STATUTORY CONSTRUCTION; LAW NEEDS LIBERAL CONSTRUCTION TO EFFECTUATE ITS PURPOSE.
In one case, the Supreme Court pointed out that laws are not just mere compositions, but have ends to be
achieved and that the general purpose is a more important aid to the meaning of a law than any rule which
grammar may lay down. It is the duty of the courts to look to the object to be accomplished, the evils to be
46

remedied, or the purpose to be subserved, and should give the law a reasonable or liberal construction
which will best effectuate its purpose.
13.ID.; ID.; ID.; TREATIES TO BE INTERPRETED IN GOOD FAITH. The Vienna Convention on the Law of
Treaties states 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.
14.TAXATION; TAX RELIEF; ENCOURAGES FOREIGN INVESTORS TO INVEST IN PHILIPPINES. As stated
earlier, the ultimate reason for avoiding double taxation is to encourage foreign investors to invest in the
Philippines a crucial economic goal for developing countries. The goal of double taxation conventions
would be thwarted if such treaties did not provide for effective measures to minimize, if not completely
eliminate, the tax burden laid upon the income or capital of the investor. Thus, 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. SECcAI
15.ID.; TAX TREATIES; MOST FAVORED NATION CLAUSE; PURPOSE. The purpose of a most favored
nation clause is to grant to the contracting party treatment not less favorable than that which has been or
may be granted to the "most favored" among other countries. The most favored nation clause is intended
to establish the principle of equality of international treatment by providing that the citizens or subjects of
the contracting nations may enjoy the privileges accorded by either party to those of the most favored
nation. The essence of the principle is to allow the taxpayer in one state to avail of more liberal provisions
granted in another tax treaty to which the country of residence of such taxpayer is also a party provided
that the subject matter of taxation, in this case royalty income, is the same as that in the tax treaty under
which the taxpayer is liable.
16.ID.; TAX REFUNDS; TAX EXEMPTIONS IN NATURE. 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 clearest grant of
organic or statute law.
DECISION
GONZAGA-REYES, J p:
This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to set aside the
decision of the Court of Appeals dated November 7, 1996 in CA-GR SP No. 40802 affirming the decision of
the Court of Tax Appeals in CTA Case No. 5136. cda
The antecedent facts as found by the Court of Tax Appeals are not disputed, to wit:
"[Respondent], 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 based in the U.S.A. pursuant to which the [respondent] was granted the right to use the
trademark, patents and technology owned by the latter including the right to manufacture, package and
distribute the products covered by the Agreement and secure assistance in management, marketing and
production from SC Johnson and Son, U.S.A.
47

The said 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 (Exh. "A").
For the use of the trademark or technology, [respondent] 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 for the period covering July 1992 to May 1993 in the total amount of
P1,603,443.00 (Exhs. "B" to "L" and submarkings).
On October 29, 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, 'the antecedent facts attending
[respondent's] case fall squarely within the same circumstances under which said MacGeorge and
Gillete rulings were issued. Since the agreement was approved by the Technology Transfer Board, the
preferential tax rate of 10% should apply to the [respondent]. We therefore submit that royalties paid by
the [respondent] to SC Johnson and Son, USA is only subject to 10% withholding tax pursuant to the mostfavored nation clause of the RP-US Tax Treaty [Article 13, paragraph 2(b)(iii)] in relation to the RP-West
Germany Tax Treaty [Article 12(2)(b)]' (Petition for Review [filed with the Court of Appeals], par. 12).
[Respondent's] claim for the refund of P963,266.00 was computed as follows:

Month/
Year

Gross
Royalty
Fee

25%
Withholding
Tax Paid

10%
Balance
Withholding
Tax

July 1992

559,878

139,970

55,988

83,982

August

567,935

141,984

56,794

85,190

September

595,956

148,989

59,596

89,393

October

634,405

158,601

63,441

95,161

November

620,885

155,221

62,089

93,133

December

383,276

95,819

36,328

57,491

Jan 1993

602,451

170,630

68,245

102,368

February

565,845

141,461

56,585

84,877

March

547,253

136,813

54,725

82,088

April

660,810

165,203

66,081

99,122

May

603,076

150,769

60,308

90,461

P6,421,770

P1,605,443

P642,177

P963,266 " 1

======== ================

=======

The Commissioner did not act on said claim for refund. Private respondent S.C. Johnson & Son, Inc.
(S.C. Johnson) then filed a petition for review before the Court of Tax Appeals (CTA) where the case was
docketed as CTA Case No. 5136, to claim a refund of the overpaid withholding tax on royalty payments
from July 1992 to May 1993.

48

On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C. Johnson and ordered
the Commissioner of Internal Revenue 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. 2
The Commissioner of Internal Revenue thus filed a petition for review with the Court of Appeals which
rendered the decision subject of this appeal on November 7, 1996 finding no merit in the petition and
affirming in toto the CTA ruling. 3
This petition for review was filed by the Commissioner of Internal Revenue raising the following issue:
THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON AND SON, USA IS ENTITLED TO THE
"MOST FAVORED NATION" TAX RATE OF 10% ON ROYALTIES AS PROVIDED IN THE RP-US TAX TREATY
IN RELATION TO THE RP-WEST GERMANY TAX TREATY.
Petitioner contends that under Article 13(2)(b)(iii) of the 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 under Article 24 of the 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. Even assuming that the phrase "paid under similar
circumstances" refers to the payment of royalties, and not taxes, as held by the Court of Appeals, still, the
"most favored nation" clause cannot be invoked for the reason that when a tax treaty contemplates
circumstances attendant to the payment of a tax, or royalty remittances for that matter, these must
necessarily refer to circumstances that are tax-related. Finally, 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.
In its Comment, private respondent S.C. Johnson avers that the instant petition should be denied (1)
because it contains a defective certification against forum shopping as required under SC Circular No. 2891, that is, the certification was not executed by the petitioner herself but by her counsel; and (2) 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". S.C. Johnson also contends that
the Commissioner is estopped from insisting on her interpretation that the phrase "paid under similar
circumstances" refers to the manner in which the tax is paid, for the reason that said interpretation is
embodied in Revenue Memorandum Circular ("RMC") 39-92 which was already abandoned by
the Commissioner's predecessor in 1993; and was expressly revoked in BIR Ruling No. 052-95 which stated
that royalties paid to an American licensor are subject only to 10% withholding tax pursuant to Art.
13(2)(b)(iii) of the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty. Said ruling should be
given retroactive effect except if such is prejudicial to the taxpayer pursuant to Section 246 of the National
Internal Revenue Code.

49

Petitioner filed Reply alleging that the fact that the certification against forum shopping was signed by
petitioner's counsel is not a fatal defect as to warrant the dismissal of this petition since Circular No. 28-91
applies only to original actions and not to appeals, as in the instant case. Moreover, the requirement that
the certification should be signed by petitioner and not by counsel does not apply to petitioner who has
only the Office of the Solicitor General as statutory counsel. Petitioner reiterates that even if the phrase
"paid under similar circumstances" embodied in the most favored nation clause of the RP-US Tax Treaty
refers to the payment of royalties and not taxes, still the presence or absence of a "matching credit"
provision in the said RP-US Tax Treaty would constitute a material circumstance to such payment and
would be determinative of the said clause's application.
We address first the objection raised by private respondent that the certification against forum shopping
was not executed by the petitioner herself but by her counsel, the Office of the Solicitor General (O.S.G.)
through one of its Solicitors, Atty. Tomas M. Navarro.
SC Circular No. 28-91 provides:
"SUBJECT:ADDITIONAL REQUISITES FOR PETITIONS FILED WITH THE SUPREME COURT AND THE COURT
OF APPEALS TO PREVENT FORUM SHOPPING OR MULTIPLE FILING OF PETITIONS AND COMPLAINTS
TO:. . .
The attention of the Court has been called to the filing of multiple petitions and complaints involving the
same issues in the Supreme Court, the Court of Appeals or other tribunals or agencies, with the result that
said courts, tribunals or agencies have to resolve the same issues.
(1)To avoid the foregoing, in every petition filed with the Supreme Court or the Court of Appeals, the
petitioner aside from complying with pertinent provisions of the Rules of Court and existing circulars, must
certify under oath to all of the following facts or undertakings: (a) he has not theretofore commenced any
other action or proceeding involving the same issues in the Supreme Court, the Court of Appeals, or any
tribunal or agency; . . .
(2)Any violation of this revised Circular will entail the following sanctions: (a) it shall be a cause for the
summary dismissal of the multiple petitions or complaints; . . ."
The circular expressly requires that a certificate of non-forum shopping should be attached to petitions filed
before this Court and the Court of Appeals. Petitioner's allegation that Circular No. 28-91 applies only to
original actions and not to appeals as in the instant case is not supported by the text nor by the obvious
intent of the Circular which is to prevent multiple petitions that will result in the same issue being resolved
by different courts.
Anent the requirement that the party, not counsel, must certify under oath that he has not commenced any
other action involving the same issues in this Court or the Court of Appeals or any other tribunal or agency,
we are inclined to accept petitioner's submission that since the OSG is the only lawyer for the petitioner,
which is a government agency mandated under Section 35, Chapter 12, Title III, Book IV of the 1987
Administrative Code 4 to be represented only by the Solicitor General, the certification executed by the OSG
in this case constitutes substantial compliance with Circular No. 28-91. cdtai
With respect to the merits of this petition, the main point of contention in this appeal is the interpretation of
Article 13(2)(b)(iii) of the RP-US Tax Treaty regarding the rate of tax to be imposed by the Philippines upon
royalties received by a non-resident foreign corporation. The provision states insofar as pertinent that
1)Royalties derived by a resident of one of the Contracting States from sources within the other Contracting
State may be taxed by both Contracting States.
50

2)However, the tax imposed by that Contracting State shall not exceed.
a)In the case of the United States, 15 percent of the gross amount of the royalties, and
b)In the case of the Philippines, the least of:
(i)25 percent of the gross amount of the royalties;
(ii)15 percent 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.
xxx xxx xxx
(emphasis supplied)
Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted provision, it is entitled to
the concessional tax rate of 10 percent on royalties based on Article 12(2)(b) of the RP-Germany Tax
Treaty which provides:
(2)However, such royalties may also be taxed in the Contracting State in which they arise, and according to
the law of that State, but the tax so charged shall not exceed:
xxx xxx xxx
b)10 percent of the gross amount of royalties arising from the use of, or the right to use, any patent,
trademark, 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.
For as long as the transfer of technology, under Philippine law, is subject to approval, the limitation of the
tax rate mentioned under b) shall, in the case of royalties arising in the Republic of the Philippines, only
apply if the contract giving rise to such royalties has been approved by the Philippine competent
authorities.
Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit of 20 percent of the gross
amount of such royalties against German income and corporation tax for the taxes payable in the
Philippines on such royalties where the tax rate is reduced to 10 or 15 percent under such treaty. Article 24
of the RP-Germany Tax Treaty states
1)Tax shall be determined in the case of a resident of the Federal Republic of Germany as follows:
xxx xxx xxx
b)Subject to the provisions of German tax law regarding credit for foreign tax, there shall be allowed as a
credit against German income and corporation tax payable in respect of the following items of income
arising in the Republic of the Philippines, the tax paid under the laws of the Philippines in accordance with
this Agreement on:
xxx xxx xxx
dd)royalties, as defined in paragraph 3 of Article 12;
xxx xxx xxx
51

c)For the purpose of the credit referred in subparagraph b) the Philippine tax shall be deemed to be
xxx xxx xxx
cc)in the case of royalties for which the tax is reduced to 10 or 15 per cent according to paragraph 2 of
Article 12, 20 percent of the gross amount of such royalties.
xxx xxx xxx
According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not paid under
circumstances similar to those in the RP-West Germany Tax Treaty since there is no provision for a 20
percent matching credit in the former convention and private respondent cannot invoke the concessional
tax rate on the strength of the most favored nation clause in the RP-US Tax Treaty. Petitioner's position is
explained thus:
"Under the foregoing provision of the RP-West Germany Tax Treaty, the Philippine tax paid on income from
sources within the Philippines is allowed as a credit against German income and corporation tax on the
same income. In the case of royalties for which the tax is reduced to 10 or 15 percent according to
paragraph 2 of Article 12 of the RP-West Germany Tax Treaty, the credit shall be 20% of the gross amount
of such royalty. To illustrate, the royalty income of a German resident from sources within the Philippines
arising from the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula
or process, is taxed at 10% of the gross amount of said royalty under certain conditions. The rate of 10% is
imposed if credit against the German income and corporation tax on said royalty is allowed in favor of the
German resident. That means the rate of 10% is granted to the German taxpayer if he is similarly granted a
credit against the income and corporation tax of West Germany. The clear intent of the 'matching credit' is
to soften the impact of double taxation by different jurisdictions.
The RP-US Tax Treaty contains no similar 'matching credit' as that provided under the RP-West Germany
Tax Treaty. Hence, 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. Therefore, the 'most favored nation' clause in the
RP-West Germany Tax Treaty cannot be availed of in interpreting the provisions of the RP-US Tax
Treaty." 5
The petition is meritorious.
We are unable to sustain the position of the Court of Tax Appeals, which was upheld by the Court of
Appeals, that the phrase "paid under similar circumstances" in Article 13(2)(b), (iii) of the RP-US Tax Treaty
should be interpreted to refer to payment of royalty, and not to the payment of the tax, for the reason that
the phrase "paid under similar circumstances" is followed by the phrase "to a resident of a third state." The
respondent court held that "Words are to be understood in the context in which they are used," and since
what is paid to a resident of a third state is not a tax but a royalty "logic instructs" that the treaty provision
in question should refer to royalties of the same kind paid under similar circumstances.
The above construction is based principally on syntax or sentence structure but fails to take into account
the purpose animating the treaty provisions in point. To begin with, we are not aware of any law or rule
pertinent to the payment of royalties, and none has been brought to our attention, which provides for the
payment of royalties under dissimilar circumstances. 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. 6 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 7 as this is a matter of negotiation between the contracting parties. 8 As will be shown later, this
dissimilarity is true particularly in the treaties between the Philippines and the United States and between
the Philippines and West Germany.
52

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. 9 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. 10 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. 11 The apparent rationale for doing away with double taxation is to 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. 12 Foreign investments will only thrive
in a fairly predictable and reasonable international investment climate and the protection against double
taxation is crucial in creating such a climate. 13
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. 14
The second method for the elimination of double taxation applies whenever the state of source is given a
full or limited right to tax together with the state of residence. In this case, the treaties make it incumbent
upon the state of residence to allow relief in order to avoid double taxation. There are two methods of relief
the exemption method and the credit method. In the exemption method, the income or capital which is
taxable in the state of source or situs is exempted in the state of residence, although in some instances it
may be taken into account in determining the rate of tax applicable to the taxpayer's remaining income or
capital. 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. 15
In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will give
up a part of the tax in the expectation that the tax given up for this particular investment is not taxed by
the other country. 16 Thus the petitioner correctly opined that the phrase "royalties paid under similar
circumstances" in the most favored nation clause of the US-RP Tax Treaty necessarily contemplated
"circumstances that are tax-related."
In the case at bar, the state of source is the Philippines because the royalties are paid for the right to use
property or rights, i.e. trademarks, patents and technology, located within the Philippines. 17 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. 18Furthermore, the method
employed to give relief from double taxation is the allowance of a tax credit to citizens or residents of the
United States (in an appropriate amount based upon the taxes paid or accrued to the Philippines) against
the United States tax, but such amount shall not exceed the limitations provided by United States law for
the taxable year. 19 Under Article 13 thereof, the Philippines may impose one of three rates 25 percent
of the gross amount of the royalties; 15 percent when the royalties are paid by a corporation registered
with the Philippine Board of Investments and engaged in preferred areas of activities; or the lowest rate of
53

Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a
resident of a third state.
Given the purpose underlying tax treaties and the rationale for the most favored nation clause, 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 RPGermany Tax Treaty.
The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting. Article
24 of the RP-Germany Tax Treaty, supra, expressly allows crediting against German income and
corporation tax of 20% of the gross amount of royalties paid under the law of the Philippines. On the other
hand, Article 23 of the RP-US Tax Treaty, which is the counterpart provision with respect to relief for
double taxation, does not provide for similar crediting of 20% of the gross amount of royalties paid. Said
Article 23 reads:
"Article 23

Relief from double taxation

Double taxation of income shall be avoided in the following manner:
1)In accordance with the provisions and subject to the limitations of the law of the United States (as it may
be amended from time to time without changing the general principle thereof), the United States shall allow
to a citizen or resident of the United States as a credit against the United States tax the appropriate amount
of taxes paid or accrued to the Philippines and, in the case of a United States corporation owning at least
10 percent of the voting stock of a Philippine corporation from which it receives dividends in any taxable
year, shall allow credit for the appropriate amount of taxes paid or accrued to the Philippines by the
Philippine corporation paying such dividends with respect to the profits out of which such dividends are
paid. Such appropriate amount shall be based upon the amount of tax paid or accrued to the Philippines,
but the credit shall not exceed the limitations (for the purpose of limiting the credit to the United States tax
on income from sources within the Philippines or on income from sources outside the United States)
provided by United States law for the taxable year. . . . ."
The reason for construing the phrase "paid under similar circumstances" as used in Article 13(2)(b)(iii) of
the RP-US Tax Treaty as referring to taxes is anchored upon a logical reading of the text in the light of the
fundamental purpose of such treaty which is to grant an incentive to the foreign investor by lowering the
tax and at the same time crediting against the domestic tax abroad a figure higher than what was collected
in the Philippines.
In one case, the Supreme Court pointed out that laws are not just mere compositions, but have ends to be
achieved and that the general purpose is a more important aid to the meaning of a law than any rule which
grammar may lay down. 20 It is the duty of the courts to look to the object to be accomplished, the evils
to be remedied, or the purpose to be subserved, and should give the law a reasonable or liberal
construction which will best effectuate its purpose. 21 The Vienna Convention on the Law of Treaties states
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. 22
As stated earlier, the ultimate reason for avoiding double taxation is to encourage foreign investors to
invest in the Philippines a crucial economic goal for developing countries. 23 The goal of double taxation
conventions would be thwarted if such treaties did not provide for effective measures to minimize, if not
54

completely eliminate, the tax burden laid upon the income or capital of the investor. Thus, 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. 24Otherwise, 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.
At the same time, the intention behind the adoption of the provision on "relief from double taxation" in the
two tax treaties in question should be considered in light of the purpose behind the most favored nation
clause.
The purpose of a most favored nation clause is to grant to the contracting party treatment not less
favorable than that which has been or may be granted to the "most favored" among other
countries. 25 The most favored nation clause is intended to establish the principle of equality of
international treatment by providing that the citizens or subjects of the contracting nations may enjoy the
privileges accorded by either party to those of the most favored nation. 26 The essence of the principle is
to allow the taxpayer in one state to avail of more liberal provisions granted in another tax treaty to which
the country of residence of such taxpayer is also a party provided that the subject matter of taxation, in
this case royalty income, is the same as that in the tax treaty under which the taxpayer is liable. Both
Article 13 of the RP-US Tax Treaty and Article 12(2)(b) of the RP-West Germany Tax Treaty, above-quoted,
speaks of tax on royalties for the use of trademark, patent, and technology. 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 favored nation clause to 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.

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. 27 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 clearest grant of organic or statute law. 28 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.
WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision dated May 7, 1996 of the
Court of Tax Appeals and the decision dated November 7, 1996 of the Court of Appeals are hereby SET
ASIDE. cdasia
SO ORDERED.
55

||| (Commr. v. S.C. Johnson and Son, Inc., G.R. No. 127105, June 25, 1999)

TAX SPARING CREDIT

[G.R. No. 68375. April 15, 1988.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. WANDER PHILIPPINES, INC. AND THE
COURT OF TAX APPEALS, respondents.

The Solicitor General for petitioner.

Felicisimo R. Quiogue and Cirilo P. Noel for respondents.
DECISION
BIDIN, J p:
This is a petition for review on certiorari of the January 19, 1984 Decision of the Court of Tax Appeals * in
C.T.A. Case No. 2884, entitled Wander Philippines, Inc. vs. Commissioner of Internal Revenue, holding that
Wander Philippines, Inc. is entitled to the preferential rate of 15% withholding tax on the dividends
remitted to its foreign parent company, the Glaro S.A. Ltd. of Switzerland, a non-resident foreign
corporation.
Herein private respondent, Wander Philippines, Inc. (Wander, for short), is a domestic corporation
organized under Philippine laws. It is wholly-owned subsidiary of the Glaro S.A. Ltd. (Glaro, for short), a
Swiss corporation not engaged in trade or business in the Philippines.
On July 18, 975, Wander filed its withholding tax return for the second quarter ending June 30, 1975 and
remitted to its parent company, Glaro dividends in the amount of P222,000.00, on which 35% withholding
tax thereof in the amount of P77,700.00 was withheld and paid to the Bureau of Internal Revenue.
Again, on July 14, 1976, Wander filed a withholding tax return for the second quarter ending June 30, 1976
on the dividends it remitted to Glaro amounting to P355,200.00, on which 35% tax in the amount of
P124,320.00 was withheld and paid to the Bureau of Internal Revenue.
On July 5, 1977, Wander filed with the Appellate Division of the Internal Revenue a claim for refund and/or
tax credit in the amount of P115,400.00, contending that it is liable only to 15% withholding tax in
accordance with Section 24 (b) (1) of the Tax Code, as amended by Presidential Decree Nos. 369 and 778,
and not on the basis of 35% which was withheld and paid to and collected by the government.
Petitioner herein, having failed to act on the above-said claim for refund, on July 15, 1977, Wander filed a
petition with respondent Court of Tax Appeals.
On October 6, 1977, petitioner filed his Answer.
On January 19, 1984, respondent Court of Tax Appeals rendered a Decision, the decretal portion of which
reads:
"WHEREFORE, respondent is hereby ordered to grant a refund and/or tax credit to petitioner in the amount
of P115,440.00 representing overpaid withholding tax on dividends remitted by it to the Glaro S.A. Ltd. of
Switzerland during the second quarter of the years 1975 and 1976."
On March 7, 1984, petitioner filed a Motion for Reconsideration but the same was denied in a Resolution
dated August 13, 1984. Hence, the instant petition. cdphil
56

Petitioner raised two (2) assignment of errors, to wit:

I
ASSUMING THAT THE TAX REFUND IN THE CASE AT BAR IS ALLOWABLE AT ALL, THE COURT OF TAX
APPEALS ERRED IN HOLDING THAT THE HEREIN RESPONDENT WANDER PHILIPPINES, INC. IS ENTITLED
TO THE SAID REFUND.
II
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT SWITZERLAND, THE HOME COUNTRY OF GLARO
S.A. LTD. (THE PARENT COMPANY OF THE HEREIN RESPONDENT WANDER PHILIPPINES, INC.), GRANTS
TO SAID GLARO S A. LTD. AGAINST ITS SWISS INCOME TAX LIABILITY A TAX CREDIT EQUIVALENT TO
THE 20 PERCENTAGE-POINT PORTION (OF THE 35 PERCENT PHILIPPINE DIVIDEND TAX) SPARED OR
WAIVED OR OTHERWISE DEEMED AS IF PAID IN THE PHILIPPINES UNDER SECTION 24 (b) (1) OF THE
PHILIPPINE TAX CODE.
The sole issue in this case is whether or not private respondent Wander is entitled to the preferential rate
of 15% withholding tax on dividends declared and remitted to its parent corporation, Glaro.
From this issue, two questions were posed by petitioner: (1) Whether or not Wander is the proper party to
claim the refund; and (2) Whether or not Switzerland allows as tax credit the "deemed paid" 20% Philippine
Tax on such dividends.
Petitioner maintains and argues that it is Glaro, the taxpayer, and not Wander, the remitter or payor of the
dividend income and a mere withholding agent for and in behalf of the Philippine Government, which
should be legally entitled to receive the refund if any.
It will be noted, however, that Petitioner's above-entitled argument is being raised for the first time in this
Court. It was never raised at the administrative level, or at the Court of Tax Appeals. To allow a litigant to
assume a different posture when he comes before the court and challenge the position he had accepted at
the administrative level, would be to sanction a procedure whereby the Court which is supposed to
review administrative determinations would not review, but determine and decide for the first time, a
question not raised at the administrative forum. Thus, it is well settled that under the same underlying
principle of prior exhaustion of administrative remedies, on the judicial level, issues not raised in the lower
court cannot be raised for the first time on appeal (Aguinaldo Industries Corporation vs. Commissioner of
Internal Revenue, 112 SCRA 136; Pampanga Sugar Dev. Co., Inc. vs. CIR, 114 SCRA 725; Garcia vs. Court
of Appeals, 102 SCRA 597; Matialonzo vs. Servidad, 107 SCRA 726).
In any event, the submission of petitioner that Wander is but a withholding agent of the government and
therefore cannot claim reimbursement of the alleged overpaid taxes, is untenable. It will be recalled, that
said corporation is first and foremost a wholly owned subsidiary of Glaro. The fact that it became a
withholding agent of the government which was not by choice but by compulsion under Section 53 (b) of
the Tax Code, cannot by any stretch of the imagination be considered as an abdication of its responsibility
to its mother company. Thus, this Court construing Section 53 (b) of the Internal Revenue Code held that
"the obligation imposed thereunder upon the withholding agent is compulsory." It is a device to insure the
collection by the Philippine Government of taxes on incomes, derived from sources in the Philippines, by
aliens who are outside the taxing jurisdiction of this Court (Commissioner of Internal Revenue vs. Malayan
Insurance Co., Inc., 21 SCRA 944). In fact, Wander may be assessed for deficiency withholding tax at
source, plus penalties consisting of surcharge and interest (Section 54, NIRC). Therefore, as the Philippine
counterpart, Wander is the proper entity who should claim for the refund or credit of overpaid withholding
tax on dividends paid or remitted by Glaro. LibLex
57

Closely intertwined with the first assignment of error is the issue of whether or not Switzerland, the foreign
country where Glaro is domiciled, grants to Glaro a tax credit against the tax due it, equivalent to 20%, or
the difference between the regular 35% rate of the preferential 15% rate. The dispute in this issue lies on
the fact that Switzerland does not impose any income tax on dividends received by Swiss corporation from
corporations domiciled in foreign countries.
Section 24 (b) (1) of the Tax Code, as amended by P.D. 369 and 778, the law involved in this case, reads:
"Sec. 1. The first paragraph of subsection (b) of Section 24 of the National Internal Revenue Code, as
amended, is hereby further amended to read as follows:
'(b) Tax on foreign corporations. (1) Non-resident corporation. A foreign corporation not engaged in
trade or business in the Philippines, including a foreign life insurance company not engaged in the life
insurance business in the Philippines, shall pay a tax equal to 35% of the gross income received during its
taxable year from all sources within the Philippines, as interest (except interest on foreign loans which shall
be subject to 15% tar.), dividends, premiums, annuities, compensations, remuneration for technical
services or otherwise, emoluments or other fixed or determinable, annual, periodical or casual gains,
profits, and income, and capital gains: . . . Provided, still further That on dividends received from a
domestic corporation liable to tax under this Chapter, the tax shall be 15% of the dividends received, which
shall be collected and paid as provided in Section 53 (d) of this Code, subject to the condition that the
country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due
from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to
20% which represents the difference between the regular tax (35%) on corporations and the tax (15%)
dividends as provided in this section: . . .' "
From the above-quoted provision, the dividends received from a domestic corporation liable to tax, the tax
shall be 15% of the dividends received, subject to the condition that the country in which the non-resident
foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign
corporation taxes deemed to have been paid in the Philippines equivalent to 20% which represents the
difference between the regular tax (35%) on corporations and the tax (15%) dividends.
In the instant case, Switzerland did not impose any tax on the dividends received by Glaro. Accordingly,
Wander claims that full credit is granted and not merely credit equivalent to 20%. Petitioner, on the other
hand, avers the tax sparing credit is applicable only if the country of the parent corporation allows a foreign
tax credit not only for the 15 percentage-point portion actually paid but also for the equivalent twenty
percentage-point portion spared, waived or otherwise deemed as if paid in the Philippines; that private
respondent does not cite anywhere a Swiss law to the effect that in case where a foreign tax, such as the
Philippine 35% dividend tax, is spared, waived or otherwise considered as if paid in whole or in part by the
foreign country, a Swiss foreign-tax credit would be allowed for the whole or for the part, as the case may
be, of the foreign tax so spared or waived or considered as if paid by the foreign country. LLphil

While it may be true that claims for refund are construed strictly against the claimant, nevertheless, the fact
that Switzerland did not impose any tax or the dividends received by Glaro from the Philippines should be
considered as a full satisfaction of the given condition. For, as aptly stated by respondent Court, to deny
private respondent the privilege to withhold only 15% tax provided for under Presidential Decree No. 369,
amending Section 24 (b) (1) of the Tax Code, would run counter to the very spirit and intent of said law
and definitely will adversely affect foreign corporations' interest here and discourage them from investing
capital in our country.

58

Besides, it is significant to note that the conclusion reached by respondent Court is but a confirmation of
the May 19, 1977 ruling of petitioner that "since the Swiss Government does not impose any tax on the
dividends to be received by the said parent corporation in the Philippines, the condition imposed under the
above-mentioned section is satisfied. Accordingly, the withholding tax rate of 15% is hereby affirmed."
Moreover, as a matter of principle, this Court will not set aside the conclusion reached by an agency such
as the Court of Tax Appeals which is, by the very nature of its function, dedicated exclusively to the study
and consideration of tax problems and has necessarily developed an expertise on the subject unless there
has been an abuse or improvident exercise of authority (Reyes vs. Commissioner of Internal Revenue, 24
SCRA 198), which is not present in the instant case.
WHEREFORE, the petition filed is DISMISSED for lack of merit.
SO ORDERED.
||| (Commr. v. Wander Phils., Inc., G.R. No. 68375, April 15, 1988)

GPB
South African Airways vs CIR
CTA Case 6760, 9 June 2005
FACTS: South African Airways is a non-resident foreign corporation engaged in international air carrier
operations. It has a local sales agent which is in charge of selling on commission basis passage documents,
etc. The agent duly filed income tax returns but on the belief that it has overpaid its taxes by paying the
gross Philippine billings tax, it demanded the refund but was denied.
HELD: The absence of flight operations to and from the Philippines is not determinative of the source of
income or the situs of income taxation. Petitioner admitted that it sells passage documents in the
Philippines through its sales agent. Petitioner, thus, is deriving revenues from the conduct of its business
activity regularly pursued within the Philippines. Petitioner is therefore a resident foreign corporation
engaged in trade or business in the country within the purview of our tax law and is therefore subject to
tax.

GPB
[G.R. Nos. L-65773-74. April 30, 1987.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. BRITISH OVERSEAS AIRWAYS
CORPORATION and COURT OF TAX APPEALS, respondents.

Quasha, Asperilla, Ancheta, Pea, Valmonte & Marcos for respondent British Airways.
DECISION
MELENCIO-HERRERA, J p:
Petitioner Commissioner of Internal Revenue (CIR) seeks a review on Certiorari of the joint Decision of the
Court of Tax Appeals (CTA) in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, which set aside
petitioner's assessment of deficiency income taxes against respondent British Overseas Airways Corporation
(BOAC) for the fiscal years 1959 to 1967, 1968-69 to 1970-71, respectively, as well as its Resolution of 18
November, 1983 denying reconsideration. cdphil
59

BOAC is a 100% British Government-owned corporation organized and existing under the laws of the
United Kingdom. It is engaged in the international airline business and is a member-signatory of the
Interline Air Transport Association (IATA). As such, it operates air transportation service and sells
transportation tickets over the routes of the other airline members. During the periods covered by the
disputed assessments, it is admitted that BOAC had no landing rights for traffic purposes in the Philippines,
and was not granted a Certificate of public convenience and necessity to operate in the Philippines by the
Civil Aeronautics Board (CAB), except for a nine-month period, partly in 1961 and partly in 1962, when it
was granted a temporary landing permit by the CAB. Consequently, it did not carry passengers and/or
cargo to or from the Philippines, although during the period covered by the assessments, it maintained a
general sales agent in the Philippines Warner Barnes and Company, Ltd., and later Qantas Airways
which was responsible for selling BOAC tickets covering passengers and cargoes. 1

G.R. No. 65773 (CTA Case No. 2373, the First Case)
On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity) assessed BOAC the
aggregate amount of P2,498,358.56 for deficiency income taxes covering the years 1959 to 1963. This was
protested by BOAC. Subsequent investigation resulted in the issuance of a new assessment, dated 16
January 1970 for the years 1959 to 1967 in the amount of P858,307.79. BOAC paid this new assessment
under protest.
On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which claim was denied
by the CIR on 16 February 1972. But before said denial, BOAC had already filed a petition for review with
the Tax Court on 27 January 1972, assailing the assessment and praying for the refund of the amount paid.

G.R. No. 65774 (CTA Case No. 2561, the Second Case)
On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and penalty for the fiscal
years 1968/1969 to 1970-1971 in the aggregate amount of P549,327.43, and the additional amounts of
P1,000.00 and P1,800.00 as compromise penalties for violation of Section 46 (requiring the filing of
corporation returns) penalized under Section 74 of the National Internal Revenue Code (NIRC).
On 25 November 1971, BOAC requested that the assessment be countermanded and set aside. In a letter,
dated 16 February 1972, however, the CIR not only denied the BOAC request for refund in the First Case
but also re-issued in the Second Case the deficiency income tax assessment for P534,132.08 for the years
1969 to 1970-71 plus P1,000.00 as compromise penalty under Section 74 of the Tax Code. BOAC's request
for reconsideration was denied by the CIR on 24 August 1973. This prompted BOAC to file the Second Case
before the Tax Court praying that it be absolved of liability for deficiency income tax for the years 1969 to
1971.
This case was subsequently tried jointly with the First Case.
On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing the CIR. The Tax Court
held that the proceeds of sales of BOAC passage tickets in the Philippines by Warner Barnes and Company,
Ltd., and later by Qantas Airways, during the period in question, do not constitute BOAC income from
Philippine sources "since no service of carriage of passengers or freight was performed by BOAC within the
Philippines" and, therefore, said income is not subject to Philippine income tax. The CTA position was that
income from transportation is income from services so that the place where services are rendered
determines the source. Thus, in the dispositive portion of its Decision, the Tax Court ordered petitioner to
credit BOAC with the sum of P858,307.79, and to cancel the deficiency income tax assessments against
BOAC in the amount of P534,132.08 for the fiscal years 1968-69 to 1970-71.
Hence, this Petition for Review on Certiorari of the Decision of the Tax Court.
60

The Solicitor General, in representation of the CIR, has aptly defined the issues, thus:
"1. Whether or not the revenue derived by private respondent British Overseas Airways Corporation (BOAC)
from sales of tickets in the Philippines for air transportation, while having no landing rights here, constitute
income of BOAC from Philippine sources, and, accordingly, taxable.
"2. Whether or not during the fiscal years in question BOAC is a resident foreign corporation doing business
in the Philippines or has an office or place of business in the Philippines.
"3. In the alternative that private respondent may not be considered a resident foreign corporation but a
non-resident foreign corporation, then it is liable to Philippine income tax at the rate of thirty-five per cent
(35%) of its gross income received from all sources within the Philippines."
Under Section 20 of the 1977 Tax Code:
"(h) the term 'resident foreign corporation' applies to a foreign corporation engaged in trade or business
within the Philippines or having an office or place of business therein.
"(i) The term 'non-resident foreign corporation' applies to a foreign corporation not engaged in trade or
business within the Philippines and not having any office or place of business therein." LLpr
It is our considered opinion that BOAC is a resident foreign corporation. There is no specific criterion as to
what constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged in the light
of its peculiar environmental circumstances. The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some
of the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose
and object of the business organization. 2 "In order that a foreign corporation may be regarded as doing
business within a State, there must be continuity of conduct and intention to establish a continuous
business, such as the appointment of a local agent, and not one of a temporary character.' 3
BOAC, during the periods covered by the subject-assessments, maintained a general sales agent in the
Philippines. That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets;
(2) breaking down the whole trip into series of trips each trip in the series corresponding to a different
airline company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the various
airline companies on the basis of their participation in the services rendered through the mode of interline
settlement as prescribed by Article VI of the Resolution No. 850 of the IATA Agreement." 4 Those activities
were in exercise of the functions which are normally incident to, and are in progressive pursuit of, the
purpose and object of its organization as an international air carrier. In fact, the regular sale of tickets, its
main activity, is the very lifeblood of the airline business, the generation of sales being the paramount
objective. There should be no doubt then that BOAC was "engaged in" business in the Philippines through a
local agent during the period covered by the assessments. Accordingly, it is a resident foreign corporation
subject to tax upon its total net income received in the preceding taxable year from all sources within the
Philippines. 5
"Sec. 24. Rates of tax on corporations. . . .
"(b) Tax on foreign corporations. . . .
"(2) Resident corporations. A corporation organized, authorized, or existing under the laws of any foreign
country, except a foreign life insurance company, engaged in trade or business within the Philippines, shall
be taxable as provided in subsection (a) of this section upon the total net income received in the preceding
taxable year from all sources within the Philippines. (Emphasis ours)

61

Next, we address ourselves to the issue of whether or not the revenue from sales of tickets by BOAC in the
Philippines constitutes income from Philippine sources and, accordingly, taxable under our income tax laws.
The Tax Code defines "gross income" thus:
"'Gross income' includes gains, profits, and income derived from salaries, wages or compensation for
personal service of whatever kind and in whatever form paid, or from profession, vocations, trades,
business, commerce, sales, or dealings in property, whether real or personal, growing out of the ownership
or use of or interest in such property; also from interests, rents, dividends, securities, or the transactions of
any business carried on for gain or profit or gains, profits, and income derived from any source whatever"
(Sec. 29[3]; Emphasis supplied)
The definition is broad and comprehensive to include proceeds from sales of transport documents. "The
words 'income from any source whatever' disclose a legislative policy to include all income not expressly
exempted within the class of taxable income under our laws." Income means "cash received or its
equivalent"; it is the amount of money coming to a person within a specific time . . .; it means something
distinct from principal or capital. For, while capital is a fund, income is a flow. As used in our income tax
law, "income" refers to the flow of wealth. 6

The records show that the Philippine gross income of BOAC for the fiscal years 1968-69 to 1970-71
amounted to P10,428,368.00. 7
Did such "flow of wealth" come from "sources within the Philippines"?
The source of an income is the property, activity or service that produced the income. 8 For the source of
income to be considered as coming from the Philippines, it is sufficient that the income is derived from
activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that
produces the income. The tickets exchanged hands here and payments for fares were also made here in
Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded
from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine
government. In consideration of such protection, the flow of wealth should share the burden of supporting
the government.
A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the
contract between the ticket-holder and the carrier. It gives rise to the obligation of the purchaser of the
ticket to pay the fare and the corresponding obligation of the carrier to transport the passenger upon the
terms and conditions set forth thereon. The ordinary ticket issued to members of the travelling public in
general embraces within its terms all the elements to constitute it a valid contract, binding upon the parties
entering into the relationship. 9
True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the
Philippines, namely: (1) interest, (2) dividends, (3) service, (4) rentals and royalties, (5) sale of real
property, and (6) sale of personal property, does not mention income from the sale of tickets for
international transportation. However, that does not render it less an income from sources within the
Philippines. Section 37, by its language, does not intend the enumeration to be exclusive. It merely directs
that the types of income listed therein be treated as income from sources within the Philippines. A cursory
reading of the section will show that it does not state that it is an all-inclusive enumeration, and that no
other kind of income may be so considered. 10
BOAC, however, would impress upon this Court that income derived from transportation is income for
services, with the result that the place where the services are rendered determines the source; and since
62

BOAC's service of transportation is performed outside the Philippines, the income derived is from sources
without the Philippines and, therefore, not taxable under our income tax laws. The Tax Court upholds that
stand in the joint Decision under review.
The absence of flight operations to and from the Philippines is not determinative of the source of income or
the situs of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent to
this case. The test of taxability is the "source"; and the source of an income is that activity . . . which
produced the income. 11 Unquestionably, the passage documentations in these cases were sold in the
Philippines and the revenue therefrom was derived from a business activity regularly pursued within the
Philippines. And even if the BOAC tickets sold covered the "transport of passengers and cargo to and from
foreign cities", 12 it cannot alter the fact that income from the sale of tickets was derived from the
Philippines. The word "source" conveys one essential idea, that of origin, and the origin of the income
herein is the Philippines. 13
It should be pointed out, however, that the assessments upheld herein apply only to the fiscal years
covered by the questioned deficiency income tax assessments in these cases, or, from 1959 to 1967, 196869 to 1970-71. For, pursuant to Presidential Decree No. 69, promulgated on 24 November, 1972,
international carriers are now taxed as follows:
". . . Provided, however, That international carriers shall pay a tax of 2-1/2 per cent on their gross
Philippine billings." (Sec. 24[b] [2], Tax Code).
Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory definition of the term
"gross Philippine billings," thus:
". . . 'Gross Philippine billings' includes gross revenue realized from uplifts anywhere in the world by any
international carrier doing business in the Philippines of passage documents sold therein, whether for
passenger, excess baggage or mail, provided the cargo or mail originates from the Philippines. . . ."
The foregoing provision ensures that international airlines are taxed on their income from Philippine
sources. The 2-1/2% tax on gross Philippine billings is an income tax. If it had been intended as an excise
or percentage tax it would have been place under Title V of the Tax Code covering Taxes on Business.
Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit by this Court of the
appeal in JAL vs. Commissioner of Internal Revenue (G.R. No. L-30041) on February 3, 1969, is res
judicata to the present case. The ruling by the Tax Court in that case was to the effect that the mere sale
of tickets, unaccompanied by the physical act of carriage of transportation, does not render the taxpayer
therein subject to the common carrier's tax. As elucidated by the Tax Court, however, the common carrier's
tax is an excise tax, being a tax on the activity of transporting, conveying or removing passengers and
cargo from one place to another. It purports to tax the business of transportation. 14 Being an excise tax,
the same can be levied by the State only when the acts, privileges or businesses are done or performed
within the jurisdiction of the Philippines. The subject matter of the case under consideration is income tax,
a direct tax on the income of persons and other entities "of whatever kind and in whatever form derived
from any source." Since the two cases treat of a different subject matter, the decision in one cannot be res
judicata to the other.
WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET ASIDE. Private
respondent, the British Overseas Airways Corporation (BOAC), is hereby ordered to pay the amount of
P534,132.08 as deficiency income tax for the fiscal years 1968-69 to 1970-71 plus 5% surcharge, and 1%
monthly interest from April 16, 1972 for a period not to exceed three (3) years in accordance with the Tax
Code. The BOAC claim for refund in the amount of P858,307.79 is hereby denied. Without costs.
SO ORDERED.
63

||| (Commr. v. British Overseas Airways Corp., G.R. Nos. L-65773-74, April 30, 1987)

GPB
[G.R. No. 72443. January 29, 1988.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. AIR INDIA and THE COURT OF TAX
APPEALS, respondents.
SYLLABUS
1. TAXATION; REVENUE DERIVED BY AN INTERNATIONAL AIRLINE, HAVING NO LANDING RIGHTS, FROM
SALES OF AIRLINE TICKETS THROUGH IT AGENT, TAXABLE AS INCOME. Revenue derived by an
international air carrier from sales of tickets in the Philippines for air transportation, while having no landing
rights in the country, constitutes income of the said international air carrier from Philippine sources and,
accordingly, taxable under Section 24 (b) (2) of the National Internal Revenue Code as ruled
in Commissioner of Internal Revenue v. British Overseas Airways Corporation, 149 SCRA 395 (1987).
2. ID.; WILLFUL NEGLECT TO FILE REQUIRED TAX RETURN OR FRAUDULENT INTENT TO EVADE
PAYMENT OF TAXES, NOT PRESUMED. The willful neglect to file the required tax return or the fraudulent
intent to evade the payment of taxes, considering that the same is accompanied by legal consequences,
cannot be presumed. The fraud contemplated by law is actual and not constructive. It must be intentional
fraud, consisting of deception willfully and deliberately done or resorted to in order to induce another to
give up some legal right. Negligence, whether slight or gross, is not equivalent to the fraud with intent to
give up some legal right. Negligence, whether slight or gross, is not equivalent to the fraud with intent to
evade the tax contemplated by the law. It must amount to intentional wrongdoing with the sole object of
avoiding the tax.
3. ID.; IMPOSITION OF LESSER PENALTY IN THE ABSENCE OF WILLFUL NEGLECT TO FILE THE REQUIRED
TAX RETURN. There being no cogent basis to find willful neglect to file the required tax return on the
part of the private respondent, the 50% surcharge or fraud penalty imposed upon it is improper.
Nonetheless, such failure subjects the private respondent to a 25% penalty pursuant to Section 72 of the
tax code cited earlier. P74,203.90 constitutes the tax deficiency of the private respondent. 25% of this
amount is P37,101.95.
4. ID.; TAX DEFICIENCY; INTEREST COLLECTIBLE NOT TO EXCEED 3 YEARS. We find the 42% interest
assessed by the petitioner to be in order. At the time the tax liability of the private respondent accrued,
Section 51 (d) of the tax code, before it was amended by Presidential Decree No. 1705 prescribed an
interest rate of 14% per annum, provided that the maximum amount that could be collected as interest on
the tax deficiency will not exceed the amount corresponding to a period of three years. Thus, the maximum
interest rate then was 42%. This maximum interest rate is applicable to the private respondent inasmuch
as the period between March 31, 1976 (the end of the fiscal year in question) and February 20, 1981 (the
time when the petitioner made the assessment in question) exceeds three years. P74,203.90 constitutes
the tax deficiency of the private respondent. 42% of this amount is P31,165.64.
5. ID.; ID.; ADDITIONAL INTEREST COLLECTIBLE NOT TO EXCEED THREE YEARS. Pursuant to Section
51 (e) (2) of the tax code, as amended by Presidential Decree No. 1705, the private respondent is liable to
pay additional interest of 20% per annum (computed from February 20, 1981, the date when the
Commissioner sought the payment of the tax deficiency) on the total amount unpaid. A careful reading of
Section 51 (e) (2) shows that this interest is in addition to the interest provided in Section 51 (d). This view
can be gleaned from the use of the phrase "Where a deficiency, or any interest assessed in connection
64

therewith under paragraph (d) of this section" in Section 51 (e) (2). The additional interest is to be
computed upon the entire amount of the tax liability (previous interest included) which remains unpaid.
This is manifested by the use of the phrase "there shall be collected upon the unpaid amount as part of the
tax" in Section 51 (e) (2). However, the same Section provides that the maximum amount that may be
collected as interest cannot exceed the amount corresponding to a period of three years. In this case, the
maximum rate would be 60%.
6. ID.; ID.; ADDITIONAL SURCHARGE, MANDATORY. Pursuant to Section 51 (e) (3) of the same code,
as amended by the said Decree, the private respondent is likewise liable to pay an additional surcharge of
10% (flat rate) of the total amount of tax unpaid. An examination of Section 51 (e)(3) reveals that this
surcharge is imposed for the late payment of the unpaid tax deficiency and/or unpaid interest assessed in
connection therewith, in addition to all other charges. This is confirmed by the use of the words "there shall
be collected in addition to the interest prescribed herein [referring to the entire Section 51 (e)] and in
paragraph (d) above [referring to Section 51 (d)]." The additional surcharge is computed on the amount of
tax unpaid, exclusive of all other impositions. This is confirmed by the phrase "ten per centumof the
amount of tax unpaid." The failure to pay the tax deficiency within the required period of time upon
demand is penalized by this additional surcharge. Upon such failure to pay, the surcharge is automatically
due; its imposition is mandatory.
DECISION
GANCAYCO, J p:
This is a Petition which seeks the review of a Decision of the Court of Tax Appeals.
The private respondent Air India is a foreign corporation organized under the laws of India. It is not
licensed to do business in the Philippines as an international carrier. Its airplanes do not operate within
Philippine territory nor service passengers embarking from Philippine ports. The firm is represented in the
Philippines by its general sales agent, Philippine AirLines, Inc., a corporate entity duly organized under the
laws of the Philippines. Air India sells airplane tickets in the Philippine through this agent. These tickets are
serviced by Air India airplanes outside the Philippines. In sum, Air India's status in the Philippines is that of
an off-line international carrier notengaged in the business of air transportation in the Philippines.
The total sales of airplane tickets transacted by Philippine Air Lines, Inc. for the private respondent during
the fiscal year ending March 31, 1976 amounted to P2,968,156.00. On account of the same, the herein
petitioner Commissioner of Internal Revenue held the private respondent liable for the payment of
P142,471.68. 1The amount represents the 2.5% income tax on the private respondent's gross Philippine
billings for the said fiscal year pursuant to Section 24 (b) (2) of the National Internal Revenue Code, as
amended, inclusive of the 50% surcharge and interest for willful neglect to file a return as provided under
Section 72 of the same code. The computation is as follows
Gross Philippine billings P2,968,156.00
Income Tax due thereon at 2.5% 74,204.00
Add: 50% surcharge 37,102.00
14% interest per annum (42% maximum) 31,165.68

Total Amount Due and Collectible P142,471.68

65

From the action taken by the petitioner, the private respondent brought an Appeal to the Court of Tax
Appeals. 2 The thrust of the Appeal is, inter alia, that the private respondent cannot be held liable to pay
the said imposition because it did not derive any income from sources within the Philippines during the said
fiscal year and that the amount of P2,968,156.00 mentioned in the assessment made by the petitioner was
derived exclusively from sources outside the Philippines.
On the other hand, the petitioner argued that the amount of P2,968,156.00 was realized in the Philippines
and was, therefore, derived from sources within the Philippines. Petitioner also stressed that in case of any
doubt, the presumption is that the tax assessment is correct. 3
In its Decision dated June 27, 1985, the Court of Tax Appeals ruled in favor of the private respondent and
set aside the decision of the petitioner. 4 The tax court likewise held that the surcharge and interest
imposed upon the private respondent are improper. The pertinent portions of the Decision are as follows:
"Under the law, the situs of the income derived from labor or performance of service is determined by the
place where the labor is performed or the service rendered, not by the place where payment is made (Sec.
37, Nat. Int. Rev. Code.) It follows that the situs of the income derived by foreign international carriers
from the business of air transportation is the place where the airplane service is rendered or performed.
Accordingly, to tax the income derived by petitioner (Air India) from the transportation service rendered or
performed outside the Philippines would violate not only the National Internal Revenue Code but also the
due process clause of the Constitution.
"xxx xxx xxx
". . . we fully agree with petitioner (Air India) that it is not liable for surcharge of 50%, . . .
". . .The surcharge of 50% of the unpaid tax or deficiency tax is sought to be imposed in this case under
Section 72 of the Revenue Code which provides that the said surcharge is to be imposed
"In case of willful neglect to file the return or list required under this Title within the time prescribed by law,
or in case a false or fraudulent return or list iswillfully made . . ."
"There is no claim or pretense that herein petitioner (Air India) willfully failed to file an income tax return
for the fiscal year 1976. Neither the report of the examiner nor the Amended Answer filed by respondent
(the Commissioner) makes mention of any fact or circumstance to prove that the failure of petitioner (Air
India) to file the return was willful. Petitioner is charged with failure to file a return.
"Willful failure to file an income tax return which justifies the imposition of the 50% surcharge, or what is
commonly called the fraud penalty, requires that the failure to file a return was due to an intent to evade
payment of tax legally due, in other words an intention to defraud the Government of lawful revenue. Mere
failure to file are turn is not in itself, standing alone, evidence of fraud . . .(Citing Aznar v. Court of Tax
Appeals, 58 SCRA 519.)
"Petitioner (Air India) can not be charged with an intention to defraud the Government because it honestly
and sincerely believes that it is not liable for the tax sought to be imposed upon it."
Hence, this Petition for Review. 5 The Petition is anchored on the argument that the private respondent is
liable for the imposition in question.
Complying with the instructions of this Court, the private respondent submitted its Comment on the
Petition. 6
After subsequent pleadings were filed by the parties, the case was deemed submitted for decision.
We find merit in the Petition.
66

The principal issue raised in this Petition is whether or not the revenue derived by an international air
carrier from sales of tickets in the Philippines for air transportation, while having no landing rights in the
country, constitutes income of the said international air carrier from Philippine sources and, accordingly,
taxable under Section 24 (b) (2) of the National Internal Revenue Code.
This issue has been settled in the affirmative in Commissioner of Internal Revenue v. British Overseas
Airways Corporation 7 This Court, speaking, through Mme. Justice Ameurfina A. Melencio-Herrera, held that
such revenue constitutes taxable income. The pertinent portions of the said Decision are as follows
"The Tax Code defines 'gross income' thus:
"'Gross Income' includes gains, profits, and income derived from salaries, wages or compensation for
personal service of whatever kind and in whatever form paid, or from profession, vocations,
trades, business, commerce, sales, or dealings in property, whether real or personal, growing out of the
ownership or use of or interest in such property; also from interests, rents, dividends, securities, or
the transactions of any business carried on for gain or profit, or gains, profits, and income derived from any
source whatever. . .
"The definition is broad and comprehensive to include proceeds from sales of transport documents. 'The
words income from any source whatever' disclose a legislative policy to include all income not expressly
exempted within the class of taxable income under our laws.' Income means 'cash received or its
equivalent'; it is the amount of money coming to a person within a specific time . . . ; it means something
distinct from principal or capital. For, while capital is a fund, income is a flow. As used in our income tax
law, 'income' refers to the flow of wealth. 8
xxx xxx xxx
"The source of an income is the property, activity or service that produced the income. 9 For the source of
income to be considered as coming from the Philippines, it is sufficient that the income is derived from
activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that
produces the income. The tickets exchanged hands here and payments for fares were also made here in
Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded
from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine
government. In consideration of such protection, the flow of wealth should share the burden of supporting
the government.
xxx xxx xxx
"BOAC, however, would impress upon this Court that income derived from transportation is income for
services, with the result that the place where the services are rendered determines the source and since
BOAC's service of transportation is performed outside the Philippines, the income derived is from sources
without the Philippines and, therefore, not taxable under income tax laws, . . .
"The absence of flight operations to and from the Philippines is not determinative of the source of income
or the situs of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent
to this case. The test of taxability is the 'source'; and the source of an income is that activity . . . which
produced the income. 10 Unquestionably, the passage documentations in these cases were sold in the
Philippines and the revenue therefrom was derived from a business activity regularly pursued within the
Philippines. And even if the BOAC tickets sold covered the 'transport of passengers and cargo to and from
foreign cities,' it cannot alter the fact that income from the sale of tickets was derived from the Philippines.
The word source' conveys one essential idea, that of origin, and the origin of the income herein is the
Philippines."
67

Moreover, the taxable income involved in this case is for the fiscal year ending March 31, 1976. In the
concurring opinion of Chief Justice Teehankee in aforesaid case he made the following observations:
"I just wish to point out that the conflict between the majority opinion penned by Mme. Justice MelencioHerrera and the dissenting opinion penned by Mr. Justice Feliciano as to the proper characterization of the
taxable income derived by respondent BOAC from the sales in the Philippines of tickets for BOAC flights as
sold and issued by its general sales agent in the Philippines has become moot after November 24, 1972.
Both opinions state that by amendment through P.D. No. 69, promulgated on November 24, 1972, of
section 24 (b)(2) of the Tax Code providing for the rate of income tax on foreign corporations, international
carriers such as respondent BOAC, have since then been taxed at a reduced rate of 2-1/2% on their gross
Philippine billings. There is, therefore, no longer any source of substantial conflict between the two opinions
as to the present 2-1/2% tax on their gross Philippine billings charged against such international carriers as
herein respondent foreign corporation."
On the basis of the doctrine announced in British Overseas Airways Corporation, the revenue derived by the
private respondent Air India from the sales of airplane tickets through its agent Philippine Air Lines, Inc.,
here in the Philippines, must be considered taxable income. As correctly assessed by the petitioner, such
income is subject to a 2.5% tax pursuant to Presidential Decree No. 1355, amending Section 24 (b)(2) of
the tax code. The total Philippine billings of the private respondent for the taxable year in question amounts
to P2,968,156.00. 2.5% of this amount or P74,203.90 constitutes the income tax due from the private
respondent.
The tax liability of the private respondent thus settled, We come now to the propriety of the 50% surcharge
and the interest imposed upon it by the Commissioner of Internal Revenue.
The 50% surcharge or fraud penalty provided in Section 72 of the National Internal Revenue Code is
imposed on a delinquent taxpayer who willfully neglects to file the required tax return within the period
prescribed by the law, or who willfully files a false or fraudulent tax return, to wit
"Sec. 72. Surcharges for failure to render returns and for rendering false and fraudulent returns. In case
of willful neglect to file the return or list required under this Title within the time prescribed by law, or in
case a false or fraudulent return or list is willfully made, the Commissioner of Internal Revenue shall add to
the tax or to the deficiency tax, in case any payment has been made on the basis of such return before the
discovery of the falsity or fraud, a surcharge of fifty per centum of the amount of such tax or deficiency tax.
In case of any failure to make and file a return or list within the time prescribed by law or by the
Commissioner or other internal revenue officer, not due to willful neglect, the Commissioner of Internal
Revenue shall add to the tax twenty-five per centum of its amount, except that, when a return is voluntarily
and without notice from the Commissioner or other officer filed after such time, and it is shown that the
failure to file it was due to a reasonable cause, no such addition shall be made to the tax. The amount so
added to any tax shall be collected at the same time in the same manner and as part of the tax unless the
tax has been paid before the discovery of the neglect, falsity, or fraud, in which case the amount so added
shall be collected in the same manner as the tax."
On the other hand, the same Section provides that if the failure to file the required tax return is not due to
willful neglect, a penalty of 25% is to be added to the amount of the tax due from the taxpayer.
We have gone through the allegations of the petitioner as well as the Memorandum submitted by the
Solicitor General on behalf of the Commissioner and on the basis of the same. We are not convinced that
the private respondent can be considered to have willfully neglected to file the required tax return thereby
warranting the imposition of the 50% fraud penalty provided in Section 72. At the most, there is the barren
claim that such failure was fraudulent in character, without any evidence or justification for the same. The
willful neglect to file the required tax return or the fraudulent intent to evade the payment of taxes,
68

considering that the same is accompanied by legal consequences, cannot be presumed. At this point, We
call attention to the pronouncement of this Court in Aznar v. Court of Tax Appeals, 11 to wit
"The lower court's conclusion regarding the existence of fraudulent intent to evade payment of taxes was
based merely on a presumption and not on evidence establishing a willful filing of false and fraudulent
returns so as to warrant the imposition of the fraud penalty. The fraud contemplated by law is actual and
not constructive. It must be intentional fraud, consisting of deception willfully and deliberately done or
resorted to in order to induce another to give up some legal right. Negligence, whether slight or gross, is
not equivalent to the fraud with intent to give up some legal right. Negligence, whether slight or gross, is
not equivalent to the fraud with intent to evade the tax contemplated by the law. It must amount to
intentional wrongdoing with the sole object of avoiding the tax. It necessarily follows that a mere mistake
cannot be considered as fraudulent intent, and if both petitioner and respondent Commissioner of Internal
Revenue committed mistakes in making entries in the returns and in the assessment, respectively, under
the inventory method of determining tax liability, it would be unfair to treat the mistakes of the petitioner
as tainted with fraud and those of the respondent as made in good faith."
There being no cogent basis to find willful neglect to file the required tax return on the part of the private
respondent, the 50% surcharge or fraud penalty imposed upon it is improper. Nonetheless, such failure
subjects the private respondent to a 25% penalty pursuant to Section 72 of the tax code cited earlier.
P74,203.90 constitutes the tax deficiency of the private respondent. 25% of this amount is P37,101.95.
As for the interest which the private respondent is liable to pay, We find the 42% interest assessed by the
petitioner to be in order. At the time the tax liability of the private respondent accrued, Section 51 (d) of
the tax code, before it was amended by Presidential Decree No. 1705 12 prescribed an interest rate of
14% per annum, provided that the maximum amount that could be collected as interest on the tax
deficiency will not exceed the amount corresponding to a period of three years. Thus, the maximum
interest rate then was 42%. This maximum interest rate is applicable to the private respondent inasmuch
as the period between March 31, 1976 (the end of the fiscal year in question) and February 20, 1981 (the
time when the petitioner made the assessment in question) exceeds three years. P74,203.90 constitutes
the tax deficiency of the private respondent. 42% of this amount is P31,165.64.
We will now look into the propriety of the other impositions.
The petitioner prays that pursuant to Section 51 (e) (2) of the tax code, as amended by Presidential Decree
No. 1705, the private respondent is liable to pay additional interest of 20% per annum (computed from
February 20, 1981, the date when the Commissioner sought the payment of the tax deficiency) on the total
amount unpaid, to wit
"(2) Deficiency. Where a deficiency, or any interest assessed in connection therewith under paragraph
(d) of this section, or any addition to the taxes provided for in Section seventy-two of this Code is not paid
in full within thirty days from the date of notice and demand from the Commissioner of Internal Revenue,
there shall be collected upon the unpaid amount as part of the tax, interest at the rate of twenty per
centum per annum from the date of such notice and demand until it is paid:Provided, That the maximum
amount that may be collected as interest on deficiency shall in no case exceed the amount corresponding
to a period of three years, the present provisions regarding prescription to the contrary notwithstanding."
A careful reading of Section 51 (e) (2) shows that this interest is in addition to the interest provided in
Section 51 (d). This view can be gleaned from the use of the phrase "Where a deficiency, or any
interest assessed in connection therewith under paragraph (d) of this section" in Section 51 (e) (2). The
additional interest is to be computed upon the entire amount of the tax liability (previous interest included)
which remains unpaid. This is manifested by the use of the phrase "there shall be collected upon
the unpaid amount as part of the tax" in Section 51 (e) (2). However, the same Section provides that the
69

maximum amount that may be collected as interest cannot exceed the amount corresponding to a period of
three years. In this case, the maximum rate would be 60%.
The petitioner also prays that pursuant to Section 51 (e) (3) of the same code, as amended by the said
Decree, the private respondent is likewise liable to pay an additional surcharge of 10% (flat rate) of the
total amount of tax unpaid to wit
"(3) Surcharge. If any amount of tax shown on the return is not paid in full on or before the date
prescribed for its payment under paragraph (a) of this Section, or any amount of deficiency, and any
interest assessed in connection therewith, is not paid in full within the period prescribed in the assessment
notice and demand required under paragraph (b) of this Section, there shall be collected in addition to the
interest prescribed herein and in paragraph (d) above and as part of the tax a surcharge of ten per
centum of the amount of tax unpaid."
An examination of Section 51 (e)(3) reveals that this surcharge is imposed for the late payment of the
unpaid tax deficiency and/or unpaid interest assessed in connection therewith, in addition to all other
charges. This is confirmed by the use of the words "there shall be collected in addition to the interest
prescribed herein [referring to the entire Section 51 (e)] and in paragraph (d) above [referring to Section
51 (d)]." The additional surcharge is computed on the amount of tax unpaid, exclusive of all other
impositions. This is confirmed by the phrase "ten per centum of the amount of tax unpaid." The failure to
pay the tax deficiency within the required period of time upon demand is penalized by this additional
surcharge. Upon such failure to pay, the surcharge is automatically due; its imposition is mandatory. 13
Under the aforementioned provisions of the tax code, the private respondent became liable to pay the
additional interest provided in Section 51 (e) (2) and the 10% surcharge provided in Section 51 (e) (3)
thirty days after February 20, 1981, the date when the Commissioner of Internal Revenue sought the
payment of the deficiency. More than three years have passed since and yet the account remains unsettled.
Thus, the additional interest and surcharge can be imposed on the private respondent as asserted by the
petitioner. Presidential Decree No. 1705 took effect on August 1, 1980. It was, therefore, the law in effect
when the additional interest and surcharge could be legally imposed on the private respondent.
Let Us now apply the additional interest to the tax liability of the private respondent. The income tax due
from the private respondent for the taxable year ending March 31, 1976 is P74,204.00. The 25% surcharge
under Section 72 is P37,101.95. The 42% interest under Section 51 (d) is P31,165.64. The sum of these
figures is P142,471.59.14
More than three years have passed since February 20, 1981. Hence, the three-year or 60% maximum
interest provided in Section 51 (e) (2) calls for application. It is computed against the total amount unpaid
by the private respondent - P142,471.59. 60% of this amount is P85,482.95. The tax liability of the private
respondent, exclusive of interest and surcharge is P74,204.00. 10% of this amount is P7,420.40,
representing the 10% surcharge provided in Section 51 (e) (3).
In sum, the following schedule illustrates the total tax liability of the private respondent
Income Tax for Fiscal year
ending March 31, 1976 P74,204.00
Add: 25% surcharge
under Section 72 37,101.95
42% maximum interest
under Section 51 (d) 31,165.64

Total P142,471.59
70

Add: 60% maximum additional

interest under Presidential
Decree No. 1705 (computed
on P142.471.59) 85,482.95

Total P227,954.54
Add: 10% additional surcharge
under Presidential Decree
No. 1705 (computed on
unpaid tax of P74,204.00) P7,420.40

TOTAL TAX DUE FROM THE

PRIVATE RESPONDENT P235,374.94
Accordingly, We hold that the private respondent is liable for unpaid taxes and charges in the total amount
of Two Hundred Thirty-Five Thousand, Three Hundred Seventy-Four Pesos and Ninety-Four Centavos
(P235,374.94).
WHEREFORE, in view of the foregoing, the Decision of the Court of Tax Appeals in CTA Case No. 3441 is
hereby SET ASIDE. The private respondent Air India is hereby ordered to pay the amount of P235,374.94
as deficiency tax, inclusive of interest and surcharges. We make no pronouncement as to costs.
SO ORDERED.
||| (Commr. v. Air India, G.R. No. 72443, January 29, 1988)

BRANCH PROFIT REMITTANCE TAX

[G.R. No. 103092. July 21, 1994.]
BANK OF AMERICA NT & SA, petitioner, vs. HONORABLE COURT OF APPEALS, AND THE
COMMISSIONER OF INTERNAL REVENUE, respondents.
[G.R. No. 103106. July 21, 1994.]
BANK OF AMERICA NT & SA, petitioner, vs. THE HONORABLE COURT OF APPEALS AND THE
COMMISSIONER OF INTERNAL REVENUE, respondents.

Sycip, Salazar, Hernandez & Gatmaitan and Agcaoili & Associates for petitioner.
DECISION
VITUG, J p:
Section 24 (b) (2) (ii) of the National Internal Revenue Code, in the language it was worded in 1982 (the
taxable period relevant to the case at bench), provided, in part, thusly:
"SECTION 24. Rates of tax on corporations. . . .
"(b) Tax on foreign corporations. . . .
"(2) (ii) Tax on branch profit and remittances.

71

"Any profit remitted abroad by a branch to its head office shall be subject to a tax of fifteen per cent (15%)
. . . ."
Petitioner Bank of America NT & SA argues that the 15% branch profit remittance tax on the basis of the
above provision should be assessed on the amount actually remitted abroad, which is to say that the 15%
profit remittance tax itself should not form part of the tax base. Respondent Commissioner of Internal
Revenue, contending otherwise, holds the position that, in computing the 15% remittance tax, the tax
should be inclusive of the sum deemed remitted. LLpr
The statement of facts made by the Court of Tax Appeals, later adopted by the Court of Appeals, and not in
any serious dispute by the parties, can be quoted thusly:
"Petitioner is a foreign corporation duly licensed to engaged in business in the Philippines with Philippines
branch office at BA Lepanto Bldg., Paseo de Roxas, Makati, Metro Manila. On July 20, 1982 it paid 15%
branch profit remittance tax in the amount of P7,538,460.72 on profit from its regular banking unit
operations and P445,790.25 on profit from its foreign currency deposit unit operations or a total of
P7,984,250.97. The tax was based on net profits after income tax without deducting the amount
corresponding to the 15% tax.
"Petitioner filed a claim for refund with the Bureau of Internal Revenue of that portion of the payment
which corresponds to the 15% branch profit remittance tax, on the ground that the tax should have been
computed on the basis of profits actually remitted, which is P45,244,088.85, and not on the amount before
profit remittance tax, which is P53,228,339.82. Subsequently, without awaiting respondent's decision,
petitioner filed a petition for review on June 14, 1984 with this Honorable Court for the recovery of the
amount of P1,041,424.03 computed as follows: Cdpr
Net Profits After Profit Tax Due Alleged
Income Tax But Remittance Alleged by Overpayment
Before Profit Tax Paid Petitioner Item 1-2
Remittance Tax

A. Regular Banking
Unit Operations
(P50,256,404.82)
1. Computation of BIR
15% x P50,256,404.82 - P7,538,460.72
2. Computation of
Petitioner
- P50,256,404.82 x 15% P6,555,183.24 P983,277.48

1.15
B. Foreign Currency
72

Deposit Unit Operations

(P2,971,935)
1. Computation of
BIR 15% x - P2,971,935.00 P 445,790.25
2. Computation of Petitioner
= P2,971,935.00 x 15% P387,643.70 P58,146.55

T O T A L P7,984,250.97 P6,942,286.94 P1,041,424.02" 1
============ ========== ===========

The Court of Tax Appeals upheld petitioner bank in its claim for refund. The Commissioner of Internal
Revenue filed a timely appeal to the Supreme Court (docketed G.R. No. 76512) which referred it to the
Court of Appeals following this Court's pronouncement in Development Bank of the Philippines vs. Court of
Appeals, et al. (180 SCRA 609). On 19 September 1990, the Court of Appeals set aside the decision of the
Court of Tax Appeals. Explaining its reversal of the tax court's decision, the appellate court said: LLpr
"The Court of Tax Appeals sought to deduce legislative intent vis-a-vis the aforesaid law through an
analysis of the wordings thereof, which to their minds reveal an intent 'to mitigate at least the harshness of
successive taxation.' The use of the word remitted may well be understood as referring to that part of the
said total branch profits which would be sent to the head office as distinguished from the total profits of the
branch (not all of which need be sent or would be ordered remitted abroad). If the legislature indeed had
wanted to mitigate the harshness of successive taxation, it would have been simpler to just lower the rates
without in effect requiring the relatively novel and complicated way of computing the tax, as envisioned by
the herein private respondent. The same result would have been achieved." 2
Hence, these petitions for review in G. R. No. 103092 and G.R. No. 103106 (filed separately due to
inadvertence) by the law firms of "Agcaoili and Associates" and of "Sycip, Salazar, Hernandez and
Gatmaitan" in representation of petitioner bank.
We agree with the Court of Appeals that not much reliance can be made on our decision in Burroughs
Limited vs. Commission of Internal Revenue (142 SCRA 324), for there we ruled against the Commissioner
mainly on the basis of what the Court so then perceived as his position in a 21 January 1980 ruling the
reversal of which, by his subsequent ruling of 17 March 1982, could not apply retroactively against
Burroughs in conformity with Section 327 (now Section 246, re: non-retroactivity of rulings) of the National
Internal Revenue Code. Hence. we held: cdrep
"Petitioner's aforesaid contention is without merit. What is applicable in the case at bar is still the Revenue
Ruling of January 21, 1980 because private respondent Burroughs Limited paid the branch profit remittance
tax in question on March 14, 1979. MEMORANDUM CIRCULAR NO. 8-82 dated March 17, 1982 cannot be
given retroactive effect in the light of Section 327 of the National Internal Revenue Code which provides
"'SECTION 327. Non-retroactivity of rulings. Any revocation, modification, or reversal of any of the rules
and regulations promulgated in accordance with the preceding section or any of the rulings or circulars
promulgated by the Commissioner shall not be given retroactive application if the revocation, modification,
or reversal will be prejudicial to the taxpayer except in the following cases (a) where the taxpayer
deliberately misstates or omits material facts from his return or in any document required of him by the
Bureau of Internal Revenue; (b) where the facts subsequently gathered by the Bureau of Internal Revenue
73

are materially different from the facts on which the ruling is based, or (c) where the taxpayer acted in bad
faith. (ABS-CBN Broadcasting Corp. v. CTA, 108 SCRA 151-152)'
"The prejudice that would result to private respondent Burroughs Limited by a retroactive application
of MEMORANDUM CIRCULAR NO. 8-82 is beyond question for it would be deprived of the substantial
amount of P172,058.90. And, insofar as the enumerated exceptions are concerned, admittedly, Burroughs
Limited does not fall under any of them."
The Court of Tax Appeals itself commented similarly when it observed thusly in its decision: Cdpr
"In finding of the Commissioner's contention without merit, this Court however ruled against the
applicability of Revenue Memorandum Circular No. 8-82 dated March 17, 1982 to the Burroughs Limited
case because the taxpayer paid the branch profit remittance tax involved therein on March 14, 1979 in
accordance with the ruling of the Commissioner of Internal Revenue dated January 21, 1980. In view of
Section 327 of the then in force National Internal Revenue Code, Revenue Memorandum Circular No. 882 dated March 17, 1982 cannot be given retroactive effect because of any revocation or modification of
any ruling or circular of the Bureau of Internal Revenue should not be given retroactive application if such
revocation or modification will, subject to certain exceptions not pertinent thereto, prejudice taxpayers."3
The Solicitor General correctly points out that almost invariably in an ad valorem tax, the tax paid or
withheld is not deducted from the tax base. Such impositions as the ordinary income tax, estate and gift
taxes, and the value added tax are generally computed in like manner. In these cases, however, it is so
because the law, in defining the tax base and in providing for tax withholding, clearly spells it out to be
such. As so well expounded by the Tax Court
". . . In all the situations . . . where the mechanism of withholding of taxes at source operates to ensure
collection of the tax, and which respondent claims the base on which the tax is computed is the amount to
be paid or remitted, the law applicable expressly, specifically and unequivocally mandates that the tax is on

the total amount thereof which shall be collected and paid as provided in Sections 53 and 54 of the Tax
Code. Thus:
"'Dividends received by an individual who is a citizen or resident of the Philippines from a domestic
corporation, shall be subject to a final tax at the rate of fifteen (15%) per cent on the total amount thereof,
which shall be collected and paid as provided in Sections 53 and 54 of this Code. (Emphasis supplied; Sec.
21, Tax Code).
'Interest from Philippine Currency bank deposits and yield from deposit substitutes whether received by
citizens of the Philippines or by resident aliens individuals, shall be subject to a final tax as follows: (a) 15%
of the interest or savings deposits, and (b) 20$ of the interest on time deposits and yield from deposits
substitutes, which shall be collected and paid as provided in Sections 53 and 54 of this Code: . . .
(Emphasis supplied; Sec. 21, Tax Code applicable.)'
"And on rental payments payable by the lessee to the lessor (at 5%), also cited by respondent, Section 1,
paragraph (C), of Revenue Regulations No. 13-78, November 1, 1978, provides that: llcd
"'SECTION 1. Income payments subject to withholding tax and rates prescribed therein. Except as
therein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for
each class of payee from the following items of income payments to persons residing in the Philippines.

"xxx xxx xxx

74

'(c) Rentals When the gross rental or the payment required to be made as a condition to the continued
use or possession of property, whether real or personal, to which the payor or obligor has not taken or is
not taking title or in which he has no equity, exceeds five hundred pesos (P500.00) per contract or
payment whichever is greater five per centum (5%).'
"Note that the basis of the 5% withholding tax, as expressly and unambiguously provided therein, is on
the gross rental. Revenue Regulations No. 13-78 was promulgated pursuant to Section 53 (f) of the then in
force National Internal Revenue Code which authorized the Minister of Finance, upon recommendation of
the Commissioner of Internal Revenue, to require the withholding of income tax on the same items of
income payable to persons (natural or judicial) residing in the Philippines by the persons making such
payments at the rate of not less than 2 1/2% but not more than 35% which are to be credited against the
income tax liability of the taxpayer for the taxable year.
"On the other hand, there is absolutely nothing in Section 24(b) (2) (ii), supra, which indicates that the
15% tax on branch profit remittance is on the total amount of profit to be remitted abroad which shall be
collected and paid in accordance with the tax withholding device provided in Sections 53 and 54 of the Tax
Code. The statute employs 'Any profit remitted abroad by a branch to its head office shall be subject to a
tax of fifteen per cent (15%)' without more. Nowhere is there said of 'base on the total amount actually

applied for by the branch with the Central Bank of the Philippines as profit to be remitted abroad, which
shall be collected and paid as provide in Sections 53 and 54 of this Code.' Where the law does not qualify
that the tax is imposed and collected at source based on profit to be remitted abroad, that qualification
should not be read into the law. It is a basic rule of statutory construction that there is no safer nor better
canon of interpretation than that when the language of the law is clear and unambiguous, it should be
applied as written. And to our mind, the term 'any profit remitted abroad' can only mean such profit as
'forwarded, sent, or transmitted abroad' as the word 'remitted' is commonly and popularly accepted and
understood. To say therefore that the tax on branch profit remittance is imposed and collected at
source and necessarily the tax base should be the amount actually applied for the branch with the Central
Bank as profit to be remitted abroad is to ignore the unmistakable meaning of plain words." 4
In the 15% remittance tax, the law specifies its own tax base to be on the "profit remitted abroad." There
is absolutely nothing equivocal or uncertain about the language of the provision. The tax is imposed on the
amount sent abroad, and the law (then in force) calls for nothing further. The taxpayer is a single entity,
and it should be understandable if, such as in this case, it is the local branch of the corporation, using its
own local funds, which remits the tax to the Philippine Government. cdll
The remittance tax was conceived in an attempt to equalize the income tax burden on foreign corporations
maintaining, on the one hand, local branch offices and organizing, on the other hand, subsidiary domestic
corporations where at least a majority of all the latter's shares of stock are owned by such foreign
corporations. Prior to the amendatory provisions of the Revenue Code, local branches were made to pay
only the usual corporate income tax of 25%-35% on net income (now a uniform 35%) applicable to
resident foreign corporations (foreign corporations doing business in the Philippines). While Philippine
subsidiaries of foreign corporations were subject to the same rate of 25%-35% (now also a uniform 35%)
on their net income, dividend payments, however, were additionally subjected to a 15% (withholding) tax
(reduced conditionally from 35%). In order to avert what would otherwise appear to be an unequal tax
treatment on such subsidiaries vis-a-vis local branch offices, a 20%, later reduced to 15% profit remittance
tax was imposed on local branches on their remittances of profits abroad. But this is where the tax paripassuends between domestic branches and subsidiaries of foreign corporations.
The Solicitor General suggests that the analogy should extend to the ordinary application of the withholding
tax system and so that the rule on constructive remittance concept as well. It is difficult to accept the
proposition. In the operation of the withholding tax system, the payee is the taxpayer, the person on whom
75

the tax is imposed, while the payor, a separate entity, acts no more than an agent of the government for
the collection of the tax in order to ensure its payment. Obviously, the amount thereby used to settle the
tax liability is deemed sourced from the proceeds constructive of the tax base. Since the payee, not the
payor, is the real taxpayer, the rule on constructive remittance (or receipt) can be easily rationalized, if not
indeed, made clearly manifest. It is hardly the case, however, in the imposition of the 15% remittance tax
where there is but one taxpayer using its own domestic funds in the payment of the tax. To say that there
is constructive remittance even of such funds would be stretching far too much that imaginary rule. Sound
logic does not defy but must concede to facts.
We hold, accordingly, that the written claim for refund of the excess tax payment filed, within the two-year
prescriptive period, with the Court of Tax Appeals has been lawfully made.
WHEREFORE, the decision of the Court of Appeals appealed from is REVERSED and SET ASIDE, and that of
the Court of Tax Appeals is REINSTATED.
SO ORDERED.
||| (Bank of America NT & SA v. Court of Appeals, G.R. No. 103092, 103106, July 21, 1994)

BRANCH PROFIT REMITTANCE TAX

[G.R. No. L-66653. June 19, 1986.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. BURROUGHS LIMITED AND THE COURT
OF TAX APPEALS, respondents.

Sycip, Salazar, Feliciano & Hernandez Law Office for private respondent.
SYLLABUS
1. TAXATION; TAX ON FOREIGN CORPORATION; 15% BRANCH REMITTANCE TAX; SHALL BE IMPOSED ON
THE PROFIT ACTUALLY REMITTED ABROAD. As correctly held by respondent Court in its assailed
decision "Respondent concedes at least that in his ruling dated January 21, 1980 he held that under
Section 24(b) (2) of the Tax Code the 15% branch profit remittance tax shall be imposed on the
profit actually remitted abroad and not on the total branch profit out of which the remittance is to be made.
Based on such ruling petitioner should have paid only the amount of P974,999.89 in remittance tax
computed by taking the 15% of the profits of P6,499.89 in remittance tax actually remitted to its head
office in the United States, instead of P1,147,058.70 on its net profit of P7,647,058.00. Undoubtedly,
petitioner has overpaid its branch profit remittance tax in the amount of P172,058.90."
2. ID.; RULES AND REGULATIONS; ANY REVOCATION, MODIFICATION OR REVERSAL THEREOF; CANNOT
BE GIVEN RETROACTIVE EFFECT; EXCEPTION; CASE AT BAR. Petitioner's aforesaid contention is without
merit. What is applicable in the case at bar is still the Revenue Ruling of January 21, 1980 because private
respondent Burroughs Limited paid the branch profit remittance tax in question on March 14,
1979. MEMORANDUM CIRCULAR NO. 8-82 dated March 17, 1982 cannot be given retroactive effect in the
light of Section 327 of the National Internal Revenue Code which provides "Sec. 327. Non-retroactivity of
ruling. Any revocation, modification, or reversal of any of the rules and regulations promulgated in
accordance with the preceding Section or any of the rulings or circulars promulgated by
theCommissioner shall not be given retroactive application if the revocation, modification, or reversal will be
prejudicial to the taxpayer except in the following cases (a) where the taxpayer deliberately mistakes or
omits material facts from his return or in any document required of him by the Bureau of Internal Revenue;
(b) where the facts subsequently gathered by the Bureau of Internal Revenue mare materially different
76

from the facts on which the ruling is based, or (c) where the taxpayer acted in bad faith." (ABS CBN
Broadcasting Corp. v. CTA, 108 SCRA 151-152).
DECISION
PARAS, J p:
Petition for certiorari to review and set aside the Decision dated June 27, 1983 of respondent Court of Tax
Appeals in its C.T.A. Case No. 3204, entitled "Burroughs Limited vs. Commissioner of Internal Revenue"
which ordered petitioner Commissioner of Internal Revenue to grant in favor of private respondent
Burroughs Limited, tax credit in the sum of P172,058.90, representing erroneously overpaid branch profit
remittance tax.
Burroughs Limited is a foreign corporation authorized to engage in trade or business in the Philippines
through a branch office located at De la Rosa corner Esteban Streets, Legaspi Village, Makati, Metro Manila.
Sometime in March 1979, said branch office applied with the Central Bank for authority to remit to its
parent company abroad, branch profit amounting to P7,647,058.00. Thus, on March 14, 1979, it paid the
15% branch profit remittance tax, pursuant to Sec. 24 (b) (2) (ii) and remitted to its head office the
amount of P6,499,999.30 computed as follows
Amount applied for remittance P7,647,058.00
Deduct: 15% branch profit remittance tax 1,147,058.70

Net amount actually remitted P6,499,999.30

Claiming that the 15% profit remittance tax should have been computed on the basis of the amount
actually remitted (P6,499,999.30) and not on the amount before profit remittance tax (P7,647,058.00),
private respondent filed on December 24, 1980, a written claim for the refund or tax credit of the amount
of P172,058.90 representing alleged overpaid branch profit remittance tax, computed as follows:
Profits actually remitted P6,499,999.30
Remittance tax rate 15%

Branch profit remittance tax due thereon P974,999.89

Branch profit remittance tax paid P1,147,058.70
Less: Branch profit remittance tax as above computed 974,999.89

Total amount refundable P172,058.81

On February 24, 1981, private respondent filed with respondent court, a petition for review, docketed as
C.T.A. Case No. 3204 for the recovery of the above-mentioned amount of P172,058.81. LibLex
On June 27, 1983, respondent court rendered its Decision, the dispositive portion of which reads
"ACCORDINGLY, respondent Commissioner of Internal Revenue is hereby ordered to grant a tax credit in
favor of petitioner Burroughs Limited the amount of P172,058.90. Without pronouncement as to costs.
77

SO ORDERED."
Unable to obtain a reconsideration from the aforesaid decision, petitioner filed the instant petition before
this Court with the prayers as herein earlier stated upon the sole issue of whether the tax base upon which
the 15% branch profit remittance tax shall be imposed under the provisions of section 24(b) of the Tax
Code, as amended, is the amount applied for remittance on the profit actually remitted after deducting the
15% profit remittance tax. Stated differently is private respondent Burroughs Limited legally entitled to a
refund of the aforementioned amount of P172,058.90.
We rule in the affirmative. The pertinent provision of the National Revenue Code is Sec. 24 (b) (2) (ii)
which states:
"Sec. 24. Rates of tax on corporations. . . .
(b) Tax on foreign corporations. . . .
(2) (ii) Tax on branch profits remittances. Any profit remitted abroad by a branch to its head office shall
be subject to a tax of fifteen per cent (15%) . . . ."
In a Bureau of Internal Revenue ruling dated January 21, 1980 by then Acting Commissioner of Internal
Revenue Hon. Efren I. Plana the aforequoted provision had been interpreted to mean that "the tax base
upon which the 15% branch profit remittance tax . . . shall be imposed . . . (is) the profit actually
remitted abroad and not on the total branch profits out of which the remittance is to be made." The said
ruling is hereinbelow quoted as follows:
"In reply to your letter of November 3, 1978, relative to your query as to the tax base upon which the 15%
branch profits remittance tax provided for under Section 24 (b) (2) of the 1977 Tax Code shall be imposed,
please be advised that the 15% branch profit tax shall be imposed on the branch profits actually remitted
abroad and not on the total branch profits out of which the remittance is to be made.
Please be guided accordingly."
Applying, therefore, the aforequoted ruling, the claim of private respondent that it made an overpayment in
the amount of P172,058.90 which is the difference between the remittance tax actually paid of
P1,147,058.70 and the remittance tax that should have been paid of P974,999.89, computed as follows
Profits actually remitted P6,499,999.30
Remittance tax rate 15%

Remittance tax due P 974,999.89

is well-taken. As correctly held by respondent Court in its assailed decision
"Respondent concedes at least that in his ruling dated January 21, 1980 he held that under Section 24 (b)
(2) of the Tax Code the 15% branch profit remittance tax shall be imposed on the profit actually remitted
abroad and not on the total branch profit out of which the remittance is to be made. Based on such ruling
petitioner should have paid only the amount of P974,999.89 in remittance tax computed by taking the 15%
of the profits of P6,499,999.89 in remittance tax actually remitted to its head office in the United States,
instead of P1,147,058.70, on its net profits of P7,647,058.00. Undoubtedly, petitioner has overpaid its
branch profit remittance tax in the amount of P172,058.90."

78

Petitioner contends that respondent is no longer entitled to a refund because MEMORANDUM CIRCULAR
NO. 8-82 dated March 17, 1982 had revoked and/or repealed the BIR ruling of January 21, 1980. The said
memorandum circular states
"Considering that the 15% branch profit remittance tax is imposed and collected at source, necessarily the
tax base should be the amount actually applied for by the branch with the Central Bank of the Philippines
as profit to be remitted abroad." LLpr
Petitioner's aforesaid contention is without merit. What is applicable in the case at bar is still the Revenue
Ruling of January 21, 1980 because private respondent Burroughs Limited paid the branch profit remittance
tax in question on March 14, 1979. MEMORANDUM CIRCULAR NO. 8-82 dated March 17, 1982 cannot be
given retroactive effect in the light of Section 327 of the National Internal Revenue Code which provides
"Sec. 327. Non-retroactivity of rulings. Any revocation, modification, or reversal of any of the rules and
regulations promulgated in accordance with the preceding section or any of the rulings or circulars
promulgated by the Commissioner shall not be given retroactive application if the revocation, modification,
or reversal will be prejudicial to the taxpayer except in the following cases (a) where the taxpayer
deliberately misstates or omits material facts from his return or in any document required of him by the
Bureau of Internal Revenue; (b) where the facts subsequently gathered by the Bureau of Internal Revenue
are materially different from the facts on which the ruling is based, or (c) where the taxpayer acted in bad
faith." (ABS-CBN Broadcasting Corp. v. CTA, 108 SCRA 151-152)
The prejudice that would result to private respondent Burroughs Limited by a retroactive application
of MEMORANDUM CIRCULAR NO. 8-82 is beyond question for it would be deprived of the substantial
amount of P172,058.90. And, insofar as the enumerated exceptions are concerned, admittedly, Burroughs
Limited does not fall under any of them.
WHEREFORE, the assailed decision of respondent Court of Tax Appeals is hereby AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
||| (Commr. v. Burroughs Ltd., G.R. No. L-66653, June 19, 1986)

BRANCH PROFIT REMITTANCE TAX

[G.R. No. 76573. September 14, 1989.]
MARUBENI CORPORATION (formerly Marubeni Iida, Co., Ltd.), petitioner, vs. COMMISSIONER
OF INTERNAL REVENUE AND COURT OF TAX APPEALS, respondents.

Melquiades C. Gutierrez for petitioner.

The Solicitor General for respondents.
SYLLABUS
1. TAXATION; NATIONAL INTERNAL REVENUE CODE; INCOME TAX ON CORPORATIONS; RESIDENT
FOREIGN CORPORATION, DEFINED. Under the Tax Code, a resident foreign corporation is one that is
"engaged in trade or business" within the Philippines.
2. ID.; ID.; ID.; A SINGLE CORPORATION CANNOT BE BOTH A RESIDENT AND NON-RESIDENT
CORPORATION. A single corporate entity cannot be both a resident and a non-resident corporation
depending on the nature of the particular transaction involved. Accordingly, whether the dividends are paid
79

directly to the head office or coursed through its local branch is of no moment for after all, the head office
and the office branch constitute but one corporate entity, the Marubeni Corporation, which, under both
Philippine tax and corporate laws, is a resident foreign corporation because it is transacting business in the
Philippines.
3. ID.; ID.; ID.; EACH TAX HAS A DIFFERENT TAX BASIS; CASE AT BAR. But while public respondents
correctly concluded that the dividends in dispute were neither subject to the 15% profit remittance tax nor
to the 10% intercorporate dividend tax, the recipient being a non-resident stockholder, they grossly erred
in holding that no refund was forthcoming to the petitioner because the taxes thus withheld totalled the
25% rate imposed by the Philippine-Japan Tax Convention pursuant to Article 10 (2) (b). To simply add the
two taxes to arrive at the 25% tax rate is to disregard a basic rule in taxation that each tax has a different
tax basis. While the tax on dividends is directly levied on the dividends received, "the tax base upon which
the 15% branch profit remittance tax is imposed is the profit actually remitted abroad."
4. ID.; ID.; ID.; PHILIPPINE-JAPAN TAX TREATY; 25% MAXIMUM RATE, IMPOSABLE ONLY WHEN THE
LOCAL TAX EXCEEDS THE SAME. Public respondents likewise erred in automatically imposing the 25%
rate under Article 10 (2) (b) of the Tax Treaty as if this were a flat rate. A closer look at the Treaty reveals
that the tax rates fixed by Article 10 are the maximum rates as reflected in the phrase "shall not exceed."
This means that any tax imposable by the contracting state concerned should not exceed the 25%
limitation and that said rate would apply only if the tax imposed by our laws exceeds the same. In other
words, by reason of our bilateral negotiations with Japan, we have agreed to have our right to tax limited
to a certain extent to attain the goals set forth in the Treaty.
5. ID.; ID.; ID.; ID.; NON-RESIDENT CORPORATION IS TAXED 35% OF ITS GROSS INCOME FROM ALL
SOURCES WITHIN THE PHILIPPINES. Petitioner, being a non-resident foreign corporation with respect to
the transaction in question, the applicable provision of the Tax Code is Section 24 (b) (1) (iii) in conjunction
with the Philippine-Japan Treaty of 1980. Proceeding to apply the above section to the case at bar,
petitioner, being a non-resident foreign corporation, as a general rule, is taxed 35% of its gross income
from all sources within the Philippines. [Section 24 (b) (1)].
6. ID.; ID.; ID.; ID.; ID.; DISCOUNTED RATE OF 15% GRANTED WHERE A TAX CREDIT OF NOT LESS
THAN 20% OF THE DIVIDENDS RECEIVED IS EXTENDED TO OUR DOMESTIC CORPORATION. A
discounted rate of 15% is given to petitioner on dividends received from a domestic corporation (AG&P) on
the condition that its domicile state (Japan) extends in favor of petitioner, a tax credit of not less than 20%
of the dividends received. This 20% represents the difference between the regular tax of 35% on nonresident foreign corporations which petitioner would have ordinarily paid, and the 15% special rate on
dividends received from a domestic corporation.
7. ID.; ID.; ID.; ID.; ID.; TAX REFUND PROPER WHERE A FOREIGN NON-RESIDENT CORPORATION PAID
INCOME TAX ON BRANCH PROFIT REMITTANCE WITHIN THE MAXIMUM CEILING RATE DECREED IN THE
TAX TREATY. Petitioner is entitled to a refund on the transaction in question. It is readily apparent that
the 15% tax rate imposed on the dividends received by a foreign non-resident stockholder from a domestic
corporation under Section 24 (b) (1) (iii) is easily within the maximum ceiling of 25% of the gross amount
of the dividends as decreed in Article 10 (2) (b) of the Tax Treaty.
8. REMEDIAL LAW; Batas Pambansa Blg. 129; DOES NOT INCLUDE REORGANIZATION OF THE COURT OF
TAX APPEALS. BP Blg. 129 does not include the Court of Tax Appeals which has been created by virtue
of a special law, Republic Act No. 1125. Respondent court is not among those courts specifically mentioned
in Section 2 ofBP Blg. 129 as falling within its scope.
9. ID.; Republic Act No. 1125; COURT OF TAX APPEALS; THIRTY (30) DAYS PERIOD TO APPEAL FROM
NOTICE; PERIOD BEGINS AGAIN FROM NOTICE OF DENIAL OF MOTION FOR RECONSIDERATION; CASE
80

AT BAR. Under Section 18 of Republic Act No. 1125, a party adversely affected by an order, ruling or
decision of the Court of Tax Appeals is given thirty (30) days from notice to appeal therefrom. Otherwise,
said order, ruling, or decision shall become final. Records show that petitioner received notice of the Court
of Tax Appeal's decision denying its claim for refund on April 15, 1986. On the 30th day, or on May 15,
1986 (the last day for appeal), petitioner filed a motion for reconsideration which respondent court
subsequently denied on November 17, 1986, and notice of which was received by petitioner on November
26, 1986. Two days later, or on November 28, 1986, petitioner simultaneously filed a notice of appeal with
the Court of Tax Appeals and a petition for review with the Supreme Court. From the foregoing, it is
evident that the instant appeal was perfected well within the 30-day period provided under R.A. No. 1125,
the whole 30-day period to appeal having begun to run again from notice of the denial of petitioner's
motion for reconsideration.
DECISION
FERNAN, C.J p:
Petitioner, Marubeni Corporation, representing itself as a foreign corporation duly organized and existing
under the laws of Japan and duly licensed to engage in business under Philippine laws with branch office at
the 4th Floor, FEEMI Building, Aduana Street, Intramuros, Manila seeks the reversal of the decision of the
Court of Tax Appeals 1 dated February 12, 1986 denying its claim for refund or tax credit in the amount of
P229,424.40 representing alleged overpayment of branch profit remittance tax withheld from dividends by
Atlantic Gulf and Pacific Co. of Manila (AG&P).
The following facts are undisputed: Marubeni Corporation of Japan has equity investments in AG&P of
Manila. For the first quarter of 1981 ending March 31, AG&P declared and paid cash dividends to petitioner
in the amount of P849,720 and withheld the corresponding 10% final dividend tax thereon. Similarly, for
the third quarter of 1981 ending September 30, AG&P declared and paid P849,720 as cash dividends to
petitioner and withheld the corresponding 10% final dividend tax thereon. 2
AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, Japan, net not only of the
10% final dividend tax in the amounts of P764,748 for the first and third quarters of 1981, but also of the
withheld 15% profit remittance tax based on the remittable amount after deducting the final withholding
tax of 10%. A schedule of dividends declared and paid by AG&P to its stockholder Marubeni Corporation of
Japan, the 10% final intercorporate dividend tax and the 15% branch profit remittance tax paid thereon, is
shown below:
1981 FIRST QUARTER THIRD QUARTER TOTAL OF FIRST
(three months (three months and Third
ended 3.31.81) ended 9.30.81) quarters
(In Pesos)

Cash
Dividends
Paid 849,720.44 849,720.00 1,699,440.00
10% Dividend
Tax With81

held 84,972.00 84,972.00 169,944.00

Cash Dividend
net of 10% Dividend
Tax Withheld 764,748.00 764,748.00 1,529,496.00
15% Branch Profit
Remittance Tax
Withheld 114,712.20 114,712.20 229,424.40 3
Net Amount
Remitted to
Petitioner 650,035.80 650,035.80 1,300,071.60
The 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of P114,712.20 for the
first quarter of 1981 were paid to the Bureau of Internal Revenue by AG&P on April 20, 1981 under Central
Bank Receipt No. 6757880. Likewise, the 10% final dividend tax of P84,972 and the 15% branch profit
remittance tax of P114,712 for the third quarter of 1981 were paid to the Bureau of Internal Revenue by
AG&P on August 4, 1981 under Central Bank Confirmation Receipt No. 7905930. 4
Thus, for the first and third quarters of 1981, AG&P as withholding agent paid 15% branch profit
remittance on cash dividends declared and remitted to petitioner at its head office in Tokyo in the total
amount of P229,424.40 on April 20 and August 4, 1981. 5
In a letter dated January 29, 1981, petitioner, through the accounting firm Sycip, Gorres, Velayo and
Company, sought a ruling from the Bureau of Internal Revenue on whether or not the dividends petitioner
received from AG&P are effectively connected with its conduct or business in the Philippines as to be
considered branch profits subject to the 15% profit remittance tax imposed under Section 24 (b) (2) of the
National Internal Revenue Code as amended by Presidential Decrees Nos. 1705 and 1773.
In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled:
"Pursuant to Section 24 (b) (2) of the Tax Code, as amended, only profits remitted abroad by a branch
office to its head office which are effectively connected with its trade or business in the Philippines are
subject to the 15% profit remittance tax. To be 'effectively connected' it is not necessary that the income
be derived from the actual operation of taxpayer-corporation's trade or business; it is sufficient that the
income arises from the business activity in which the corporation is engaged. For example, if a resident
foreign corporation is engaged in the buying and selling of machineries in the Philippines and invests in
some shares of stock on which dividends are subsequently received, the dividends thus earned are not
considered 'effectively connected' with its trade or business in this country. (Revenue Memorandum Circular
No. 55-80).

In the instant case, the dividends received by Marubeni from AG&P are not income arising from the
business activity in which Marubeni is engaged. Accordingly, said dividends if remitted abroad are not
considered branch profits for purposes of the 15% profit remittance tax imposed by Section 24 (b) (2) of
the Tax Code, as amended . . . ." 6
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Consequently, in a letter dated September 21, 1981 and filed with the Commissioner of Internal Revenue
on September 24, 1981, petitioner claimed for the refund or issuance of a tax credit of P229,424.40
"representing profit tax remittance erroneously paid on the dividends remitted by Atlantic Gulf and Pacific
Co. of Manila (AG&P) on April 20 and August 4, 1981 to . . . head office in Tokyo." 7
On June 14, 1982, respondent Commissioner of Internal Revenue denied petitioner's claim for refund/credit
of P229,424.40 on the following grounds:
"While it is true that said dividends remitted were not subject to the 15% profit remittance tax as the same
were not income earned by a Philippine Branch of Marubeni Corporation of Japan; and neither is it subject
to the 10% intercorporate dividend tax, the recipient of the dividends, being a non-resident stockholder,
nevertheless, said dividend income is subject to the 25% tax pursuant to Article 10 (2) (b) of the Tax
Treaty dated February 13, 1980 between the Philippines and Japan.
Inasmuch as the cash dividends remitted by AG&P to Marubeni Corporation, Japan is subject to 25% tax,
and that the taxes withheld of 10% as intercorporate dividend tax and 15% as profit remittance tax totals
(sic) 25%, the amount refundable offsets the liability, hence, nothing is left to be refunded." 8
Petitioner appealed to the Court of Tax Appeals which affirmed the denial of the refund by the
Commissioner of Internal Revenue in its assailed judgment of February 12, 1986. 9
In support of its rejection of petitioner's claimed refund, respondent Tax Court explained:
"Whatever the dialectics employed, no amount of sophistry can ignore the fact that the dividends in
question are income taxable to the Marubeni Corporation of Tokyo, Japan. The said dividends were
distributions made by the Atlantic, Gulf and Pacific Company of Manila to its shareholder out of its profits on
the investments of the Marubeni Corporation of Japan, a non-resident foreign corporation. The investments
in the Atlantic Gulf & Pacific Company of the Marubeni Corporation of Japan were directly made by it and
the dividends on the investments were likewise directly remitted to and received by the Marubeni
Corporation of Japan. Petitioner Marubeni Corporation Philippine Branch has no participation or
intervention, directly or indirectly, in the investments and in the receipt of the dividends. And it appears
that the funds invested in the Atlantic Gulf & Pacific Company did not come out of the funds invested by
the Marubeni Corporation of Japan to the Marubeni Corporation Philippine Branch. As a matter of fact, the
Central Bank of the Philippines, in authorizing the remittance of the foreign exchange equivalent of (sic) the
dividends in question, treated the Marubeni Corporation of Japan as a non-resident stockholder of the
Atlantic Gulf & Pacific Company based on the supporting documents submitted to it.
"Subject to certain exceptions not pertinent hereto, income is taxable to the person who earned it.
Admittedly, the dividends under consideration were earned by the Marubeni Corporation of Japan, and
hence, taxable to the said corporation. While it is true that the Marubeni Corporation Philippine Branch is
duly licensed to engage in business under Philippine laws, such dividends are not the income of the
Philippine Branch and are not taxable to the said Philippine branch. We see no significance thereto in the
identity concept or principal-agent relationship theory of petitioner because such dividends are the income
of and taxable to the Japanese corporation in Japan and not to the Philippine branch." 10
Hence, the instant petition for review.
It is the argument of petitioner corporation that following the principal-agent relationship theory, Marubeni,
Japan is likewise a resident foreign corporation subject only to the 10% intercorporate final tax on
dividends received from a domestic corporation in accordance with Section 24(c) (1) of the Tax Code of
1977 which states:

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"Dividends received by a domestic or resident foreign corporation liable to tax under this Code (1) Shall
be subject to a final tax of 10% on the total amount thereof, which shall be collected and paid as provided
in Sections 53 and 54 of this Code . . ."
Public respondents, however, are of the contrary view that Marubeni, Japan, being a non-resident foreign
corporation and not engaged in trade or business in the Philippines, is subject to tax on income earned
from Philippine sources at the rate of 35% of its gross income under Section 24 (b) (1) of the same Code
which reads:
"(b) Tax on foreign corporations (1) Nonresident corporations. A foreign corporation not engaged in
trade or business in the Philippines shall pay a tax equal to thirty-five per cent of the gross income received
during each taxable year from all sources within the Philippines as . . . dividends . . ."
but expressly made subject to the special rate of 25% under Article 10(2) (b) of the Tax Treaty of 1980
concluded between the Philippines and Japan. 11 Thus:
"Article 10 (1) Dividends paid by a company which is a resident of a Contracting State to a resident of the
other Contracting State may be taxed in that other Contracting State.
"(2) However, such dividends may also be taxed in the Contracting State of which the company paying the
dividends is a resident, and according to the laws of that Contracting State, but if the recipient is the
beneficial owner of the dividends the tax so charged shall not exceed;
"(a) . . .
"(b) 25 per cent of the gross amount of the dividends in all other cases."
Central to the issue of Marubeni, Japan's tax liability on its dividend income from Philippine sources is
therefore the determination of whether it is a resident or a non-resident foreign corporation under
Philippine laws.
Under the Tax Code, a resident foreign corporation is one that is "engaged in trade or business" within the
Philippines. Petitioner contends that precisely because it is engaged in business in the Philippines through
its Philippine branch that it must be considered as a resident foreign corporation. Petitioner reasons that
since the Philippine branch and the Tokyo head office are one and the same entity, whoever made the
investment in AG&P, Manila does not matter at all. A single corporate entity cannot be both a resident and
a non-resident corporation depending on the nature of the particular transaction involved. Accordingly,
whether the dividends are paid directly to the head office or coursed through its local branch is of no
moment for after all, the head office and the office branch constitute but one corporate entity, the
Marubeni Corporation, which, under both Philippine tax and corporate laws, is a resident foreign
corporation because it is transacting business in the Philippines.
The Solicitor General has adequately refuted petitioner's arguments in this wise:
"The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines
cannot apply here. This rule is based on the premise that the business of the foreign corporation is
conducted through its branch office, following the principal-agent relationship theory. It is understood that
the branch becomes its agent here. So that when the foreign corporation transacts business in the
Philippines independently of its branch, the principal-agent relationship is set aside. The transaction
becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign
corporation, not the branch or the resident foreign corporation.
"Corollarily, if the business transaction is conducted through the branch office, the latter becomes the
taxpayer, and not the foreign corporation." 12
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In other words, the alleged overpaid taxes were incurred for the remittance of dividend income to the head
office in Japan which is a separate and distinct income taxpayer from the branch in the Philippines. There
can be no other logical conclusion considering the undisputed fact that the investment (totalling 283.260
shares including that of nominee) was made for purposes peculiarly germane to the conduct of the
corporate affairs of Marubeni, Japan, but certainly not of the branch in the Philippines. It is thus clear that
petitioner, having made this independent investment attributable only to the head office, cannot now claim
the increments as ordinary consequences of its trade or business in the Philippines and avail itself of the
lower tax rate of 10%.
But while public respondents correctly concluded that the dividends in dispute were neither subject to the
15% profit remittance tax nor to the 10% intercorporate dividend tax, the recipient being a non-resident
stockholder, they grossly erred in holding that no refund was forthcoming to the petitioner because the
taxes thus withheld totalled the 25% rate imposed by the Philippine-Japan Tax Convention pursuant to
Article 10 (2) (b).
To simply add the two taxes to arrive at the 25% tax rate is to disregard a basic rule in taxation that each
tax has a different tax basis. While the tax on dividends is directly levied on the dividends received, "the tax
base upon which the 15% branch profit remittance tax is imposed is the profit actually remitted
abroad." 13
Public respondents likewise erred in automatically imposing the 25% rate under Article 10 (2) (b) of the Tax
Treaty as if this were a flat rate. A closer look at the Treaty reveals that the tax rates fixed by Article 10 are
the maximum rates as reflected in the phrase "shall not exceed." This means that any tax imposable by the
contracting state concerned should not exceed the 25% limitation and that said rate would apply only if the
tax imposed by our laws exceeds the same. In other words, by reason of our bilateral negotiations with
Japan, we have agreed to have our right to tax limited to a certain extent to attain the goals set forth in the
Treaty.
Petitioner, being a non-resident foreign corporation with respect to the transaction in question, the
applicable provision of the Tax Code is Section 24 (b) (1) (iii) in conjunction with the Philippine-Japan
Treaty of 1980. Said section provides:
"(b) Tax on foreign corporations. (1) Nonresident corporations . . . (iii) On dividends received from a
domestic corporation liable to tax under this Chapter, the tax shall be 15% of the dividends received, which
shall be collected and paid as provided in Section 53 (d) of this Code, subject to the condition that the
country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due
from the non-resident foreign corporation, taxes deemed to have been paid in the Philippines equivalent to
20% which represents the difference between the regular tax (35%) on corporations and the tax (15%) on
dividends as provided in this Section; . . ."
Proceeding to apply the above section to the case at bar, petitioner, being a non-resident foreign
corporation, as a general rule, is taxed 35% of its gross income from all sources within the Philippines.
[Section 24 (b) (1)].
However, a discounted rate of 15% is given to petitioner on dividends received from a domestic corporation
(AG&P) on the condition that its domicile state (Japan) extends in favor of petitioner, a tax credit of not less
than 20% of the dividends received. This 20% represents the difference between the regular tax of 35%
on non-resident foreign corporations which petitioner would have ordinarily paid, and the 15% special rate
on dividends received from a domestic corporation.
Consequently, petitioner is entitled to a refund on the transaction in question to be computed as follows:
Total cash dividend paid P1,699,440.00
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less 15% under Sec. 24

(b) (1) (iii) 254,916.00

Cash dividend net of 15% tax

due petitioner P1,444.524.00
less net amount
actually remitted 1,300,071.60

Amount to be refunded to petitioner

representing overpayment of
taxes on dividends remitted P144.452.40
==========
It is readily apparent that the 15% tax rate imposed on the dividends received by a foreign non-resident
stockholder from a domestic corporation under Section 24 (b) (1) (iii) is easily within the maximum ceiling
of 25% of the gross amount of the dividends as decreed in Article 10 (2) (b) of the Tax Treaty.
There is one final point that must be settled. Respondent Commissioner of Internal Revenue is laboring
under the impression that the Court of Tax Appeals is covered by Batas Pambansa Blg. 129, otherwise
known as the Judiciary Reorganization Act of 1980. He alleges that the instant petition for review was not
perfected in accordance with Batas Pambansa Blg. 129 which provides that "the period of appeal from final
orders, resolutions, awards, judgments, or decisions of any court in all cases shall be fifteen (15) days
counted from the notice of the final order, resolution, award, judgment or decision appealed from . . ."
This is completely untenable. The cited BP Blg. 129 does not include the Court of Tax Appeals which has
been created by virtue of a special law, Republic Act No. 1125. Respondent court is not among those courts
specifically mentioned in Section 2 of BP Blg. 129 as falling within its scope.
Thus, under Section 18 of Republic Act No. 1125, a party adversely affected by an order, ruling or decision
of the Court of Tax Appeals is given thirty (30) days from notice to appeal therefrom. Otherwise, said order,
ruling, or decision shall become final.
Records show that petitioner received notice of the Court of Tax Appeal's decision denying its claim for
refund on April 15, 1986. On the 30th day, or on May 15, 1986 (the last day for appeal), petitioner filed a
motion for reconsideration which respondent court subsequently denied on November 17, 1986, and notice
of which was received by petitioner on November 26, 1986. Two days later, or on November 28, 1986,
petitioner simultaneously filed a notice of appeal with the Court of Tax Appeals and a petition for review
with the Supreme Court. 14 From the foregoing, it is evident that the instant appeal was perfected well
within the 30-day period provided under R.A. No. 1125, the whole 30-day period to appeal having begun to
run again from notice of the denial of petitioner's motion for reconsideration.
WHEREFORE, the questioned decision of respondent Court of Tax Appeals dated February 12, 1986 which
affirmed the denial by respondent Commissioner of Internal Revenue of petitioner Marubeni Corporation's
claim for refund is hereby REVERSED. The Commissioner of Internal Revenue is ordered to refund or grant
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as tax credit in favor of petitioner the amount of P144,452.40 representing overpayment of taxes on
dividends received. No costs.
So ordered.
||| (Marubeni Corp. v. Commr., G.R. No. 76573, September 14, 1989)

87