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Tax Cases

G.R. No. 127105 June 25, 1999


COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
S.C. JOHNSON AND SON, INC., and COURT OF APPEALS, respondents.
GONZAGA-REYES, J.:
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.
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.
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 most-favored 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 there fund of
P963,266.00 was computed as follows:
Gross 25% 10%
Month/ Royalty Withholding Withholding
Year Fee Tax Paid Tax Balance

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.

Tax Cases

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 RPUS 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.
28-91, 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.
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.1wphi1.nt
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

Tax Cases

TO: xxx xxx xxx


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.
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.
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.

Tax Cases

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
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

Tax Cases

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.
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 of encourage the free flow of goods and services and the movement of capital, technology and
persons between countries, conditions deemed vital in creating robust and dynamic
economies. 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. 18 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. 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 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

Tax Cases

royalties earned from sources within the Philippines as those allowed to their German counterparts
under the RP-Germany Tax Treaty.
The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting.
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 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. 24 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.
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

Tax Cases

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 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.
SO ORDERED.
Vitug, Panganiban and Purisima, JJ., concur.
Romero, J., abroad, on official business leave.

Footnotes
1 Petition, pp. 3-5; Rollo, pp. 10-12.
2 Rollo, p. 67.
3 Penned by Justice Hilarion L. Aquino, concurred in by Justices Jainal D. Rasul, Chairman, and Hector L. Hofilea.
4 Reiterated under Memorandum Circular No. 152 dated May 17, 1992.
5 Petition, pp. 10-11; Rollo, pp. 17-18.
6 See E. A. E. Ortuoste, Tax Treaty Rates: A Summary, Phil. Revenue Journal, vol. 34, No.2 March-April 1997.
7 Art. 24 RP-Australia, Article 23 RP-Belgium, Article 23 RP-Brazil, Article 22 RP-Canada, Article 23 RP-Denmark, Article 22, RP-Finland,
Article 23 RP-France, Article 24, RP-Germany, Article 24, RP-India, Section 31 RP-Indonesia, Article 22 RP-Italy, Article 23 RP-Japan, Article
23 RP-South Korea, Article 22 RP-Malaysia, Article 22 RP Netherlands, Article 23 RP-New Zealand, Article 23 RP-Pakistan, Section 29 RPSingapore, Article 23 RP-Spain, Article 18 RP-Sweden, Article 23 RP-Thailand, Article 21 RP-United Kingdom, Article 23 RP-US.
8 See Toledo, International Aspects of Taxation, Proceedings of the Eleventh Annual Institute on Tax Law (1976) @ p. 19.
9 As of June 29, 1997, the following countries have entered into tax treaties with the Philippines for the avoidance of double taxation:
Denmark, Singapore, Canada, France, United Kingdom, Pakistan, Australia, Japan, Belgium, New Zealand, Finland, Indonesia, Austria,
United States of America, Thailand, Germany, Malaysia, Korea, Sweden, Italy, Netherlands, Brazil, Spain, India, and Israel.
10 P. Baker, Double Taxation Conventions and International Tax Law (1994), 6.
11 Ibid., 11, citing the Committee on Fiscal Affairs of the Organization for Economic Co-operation and Development (OECD).
12 Ibid.
13 Ibid.
14 Ibid., 70.
15 Ibid., 70-72.
16 T. Toledo, Ibid., @ p. 18-19.
Take the case of a hundred pesos dividend to be remitted to, let us say a stockholder of United States of America. The hundred peso
dividend, if you apply the withholding tax assuming that there is no sparing credit, we taxed 35%. So, out of P100.00, you are taxed
P35.00. The Philippines under this law is willing to tax him only at P15.00 so his net dividends is P85.00. If the United States will tax the
full P85.00, there is no reason why we should reduce our tax. If we collected from him P35.00 tax out of the P100.00 dividend, then his
net dividend is only P65.00. So, instead of transferring the collections from the Philippines Treasury to the U.S. Treasury, we might just as
well retainer tax because we need these revenues.
This is always true when it comes to a developing country such as ours entering into a treaty with developed country like U. S, what do
we do in tax treaties? One or two things. First, we give consideration to investments especially where the investor controls either 10% of
the voting shares of the company in the Philippines or 25% of its capital. When the investment exceeds this proportion I've just
mentioned, we reduce the rate of tax from 15 to 10% on condition that on the tax credit provision in the same treaty we asked the
developed country to credit this investor with the tax actually at a higher rate and was paid in the Philippines. In other words, there would
be some incentives on the part of the foreigners to invest in the Philippines because the rates of tax are lowered and at the same time
they are credited against the domestic tax abroad a figure higher than what was collected in the Philippines. . . .
17 Under Article 4 (3) of the RP-US Tax Treaty, royalties for the use of, or the right to use, property or rights shall be treated as income
from sources within a Contracting State only to the extent that such royalties are for the use of, or the right use, such property or rights
within that Contracting State.1wphi1.nt
18 RP-US Tax Treaty, Article 13.
19 Id, Article 23.
20 Litex Employees Association vs. Eduvala, 79 SCRA 88, September 22, 1977.
21 Paras, vs. Commission on Elections, G. R. No. 123169, November 4, 1996; San Miguel Corporation Employees Union-PTGWO vs.
Confesor, G. R. No. 111262, September 19, 1996; Agujitas vs. Court of Appeals, G. R. No. 106560, August 23, 1996; Sajonas vs. Court of
Appeals, G. R. No. 102377, July 5, 1996; Escribano vs. Avila, 85 SCRA 245, September 12, 1978; Homes Ins. Co. vs. Eastern Shipping
Lines, 123 SCRA 424, July 20, 1983.
22 Vienna Convention on the Law of Treaties, Article 31.
23 Toledo, supra, at p. 17.
24 Ibid., 19.
25 Salonga, Yap, Public International Law, 255.

Tax Cases
26 Black's Law Dictionary 5th ed., 913.
27 Commissioner of Internal Revenue vs. Tokyo Shipping Co., Ltd., 244 SCRA 332; Province of Tarlac vs. Alcantara, 216 SCRA 790;
Magsaysay Lines, Inc. vs. Court of Appeals, 260 SCRA 513.
28 Wonder Mechanical Engineering Corporation vs. CTA, 64 SCRA 555.

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


COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE COURT OF TAX
APPEALS,respondents.
T.A. Tejada & C.N. Lim for private respondent.

RESOLUTION
FELICIANO, J.:p
For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975 ending 30 June 1975,
private respondent Procter and Gamble Philippine Manufacturing Corporation ("P&G-Phil.") declared
dividends payable to its parent company and sole stockholder, Procter and Gamble Co., Inc. (USA)
("P&G-USA"), amounting to P24,164,946.30, from which dividends the amount of P8,457,731.21
representing the thirty-five percent (35%) withholding tax at source was deducted.
On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner of Internal Revenue
a claim for refund or tax credit in the amount of P4,832,989.26 claiming, among other things, that
pursuant to Section 24 (b) (1) of the National Internal Revenue Code ("NITC"), 1 as amended by
Presidential Decree No. 369, the applicable rate of withholding tax on the dividends remitted was only
fifteen percent (15%) (and not thirty-five percent [35%]) of the dividends.
There being no responsive action on the part of the Commissioner, P&G-Phil., on 13 July 1977, filed a
petition for review with public respondent Court of Tax Appeals ("CTA") docketed as CTA Case No. 2883.
On 31 January 1984, the CTA rendered a decision ordering petitioner Commissioner to refund or grant
the tax credit in the amount of P4,832,989.00.
On appeal by the Commissioner, the Court through its Second Division reversed the decision of the CTA
and held that:
(a) P&G-USA, and not private respondent P&G-Phil., was the proper party to claim the
refund or tax credit here involved;
(b) there is nothing in Section 902 or other provisions of the US Tax Code that allows a
credit against the US tax due from P&G-USA of taxes deemed to have been paid in the
Philippines equivalent to twenty percent (20%) which represents the difference between
the regular tax of thirty-five percent (35%) on corporations and the tax of fifteen percent
(15%) on dividends; and
(c) private respondent P&G-Phil. failed to meet certain conditions necessary in order that
"the dividends received by its non-resident parent company in the US (P&G-USA) may be
subject to the preferential tax rate of 15% instead of 35%."
These holdings were questioned in P&G-Phil.'s Motion for Re-consideration and we will deal with
them seriatim in this Resolution resolving that Motion.
I
1. There are certain preliminary aspects of the question of the capacity of P&G-Phil. to bring the
present claim for refund or tax credit, which need to be examined. This question was raised for the first
time on appeal, i.e., in the proceedings before this Court on the Petition for Review filed by the
Commissioner of Internal Revenue. The question was not raised by the Commissioner on the
administrative level, and neither was it raised by him before the CTA.
We believe that the Bureau of Internal Revenue ("BIR") should not be allowed to defeat an otherwise
valid claim for refund by raising this question of alleged incapacity for the first time on appeal before
this Court. This is clearly a matter of procedure. Petitioner does not pretend that P&G-Phil., should it
succeed in the claim for refund, is likely to run away, as it were, with the refund instead of transmitting
such refund or tax credit to its parent and sole stockholder. It is commonplace that in the absence of
explicit statutory provisions to the contrary, the government must follow the same rules of procedure
which bind private parties. It is, for instance, clear that the government is held to compliance with the
provisions of Circular No. 1-88 of this Court in exactly the same way that private litigants are held to
such compliance, save only in respect of the matter of filing fees from which the Republic of the
Philippines is exempt by the Rules of Court.

Tax Cases

More importantly, there arises here a question of fairness should the BIR, unlike any other litigant, be
allowed to raise for the first time on appeal questions which had not been litigated either in the lower
court or on the administrative level. For, if petitioner had at the earliest possible opportunity, i.e., at the
administrative level, demanded that P&G-Phil. produce an express authorization from its parent
corporation to bring the claim for refund, then P&G-Phil. would have been able forthwith to secure and
produce such authorization before filing the action in the instant case. The action here was commenced
just before expiration of the two (2)-year prescriptive period.
2. The question of the capacity of P&G-Phil. to bring the claim for refund has substantive dimensions as
well which, as will be seen below, also ultimately relate to fairness.
Under Section 306 of the NIRC, a claim for refund or tax credit filed with the Commissioner of Internal
Revenue is essential for maintenance of a suit for recovery of taxes allegedly erroneously or illegally
assessed or collected:
Sec. 306. Recovery of tax erroneously or illegally collected. No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged
to have been erroneously or illegally assessed or collected, or of any penalty claimed to have
been collected without authority, or of any sum alleged to have been excessive or in any
manner wrongfully collected,until a claim for refund or credit has been duly filed with the
Commissioner of Internal Revenue; but such suit or proceeding may be maintained, whether or
not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or
proceeding shall be begun after the expiration of two years from the date of payment of the tax
or penalty regardless of any supervening cause that may arise after payment: . . . (Emphasis
supplied)
Section 309 (3) of the NIRC, in turn, provides:
Sec. 309. Authority of Commissioner to Take Compromises and to Refund Taxes.The
Commissioner may:
xxx xxx xxx
(3) credit or refund taxes erroneously or illegally received, . . . No credit or refund of taxes or
penaltiesshall be allowed unless the taxpayer files in writing with the Commissioner a claim for
credit or refundwithin two (2) years after the payment of the tax or penalty. (As amended by
P.D. No. 69) (Emphasis supplied)
Since the claim for refund was filed by P&G-Phil., the question which arises is: is P&G-Phil.
a "taxpayer" under Section 309 (3) of the NIRC? The term "taxpayer" is defined in our NIRC as referring
to "any person subject to taximposed by the Title [on Tax on Income]." 2 It thus becomes important to
note that under Section 53 (c) of the NIRC, the withholding agent who is "required to deduct and
withhold any tax" is made " personally liable for such tax" and indeed is indemnified against any claims
and demands which the stockholder might wish to make in questioning the amount of payments
effected by the withholding agent in accordance with the provisions of the NIRC. The withholding agent,
P&G-Phil., is directly and independently liable 3 for the correct amount of the tax that should be
withheld from the dividend remittances. The withholding agent is, moreover, subject to and liable for
deficiency assessments, surcharges and penalties should the amount of the tax withheld be finally
found to be less than the amount that should have been withheld under law.
A "person liable for tax" has been held to be a "person subject to tax" and properly considered a
"taxpayer." 4 The terms liable for tax" and "subject to tax" both connote legal obligation or duty to pay
a tax. It is very difficult, indeed conceptually impossible, to consider a person who is statutorily made
"liable for tax" as not "subject to tax." By any reasonable standard, such a person should be regarded
as a party in interest, or as a person having sufficient legal interest, to bring a suit for refund of taxes
he believes were illegally collected from him.
In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, 5 this Court pointed out
that a withholding agent is in fact the agent both of the government and of the taxpayer, and that the
withholding agent is not an ordinary government agent:
The law sets no condition for the personal liability of the withholding agent to attach. The
reason is to compel the withholding agent to withhold the tax under all circumstances. In effect,
the responsibility for the collection of the tax as well as the payment thereof is concentrated
upon the person over whom the Government has jurisdiction. Thus, the withholding agent is
constituted the agent of both the Government and the taxpayer. With respect to the collection
and/or withholding of the tax, he is the Government's agent. In regard to the filing of the
necessary income tax return and the payment of the tax to the Government, he is the agent of
the taxpayer. The withholding agent, therefore, is no ordinary government agent especially
because under Section 53 (c) he is held personally liable for the tax he is duty bound to

Tax Cases

withhold; whereas the Commissioner and his deputies are not made liable by law. 6 (Emphasis
supplied)
If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial owner
of the dividends with respect to the filing of the necessary income tax return and with respect to actual
payment of the tax to the government, such authority may reasonably be held to include the authority
to file a claim for refund and to bring an action for recovery of such claim. This implied authority is
especially warranted where, is in the instant case, the withholding agent is the wholly owned
subsidiary of the parent-stockholder and therefore, at all times, under the effective control of such
parent-stockholder. In the circumstances of this case, it seems particularly unreal to deny the implied
authority of P&G-Phil. to claim a refund and to commence an action for such refund.
We believe that, even now, there is nothing to preclude the BIR from requiring P&G-Phil. to show some
written or telexed confirmation by P&G-USA of the subsidiary's authority to claim the refund or tax
credit and to remit the proceeds of the refund., or to apply the tax credit to some Philippine tax
obligation of, P&G-USA, before actual payment of the refund or issuance of a tax credit certificate.
What appears to be vitiated by basic unfairness is petitioner's position that, although P&G-Phil. is
directly and personally liable to the Government for the taxes and any deficiency assessments to be
collected, the Government is not legally liable for a refund simply because it did not demand a written
confirmation of P&G-Phil.'s implied authority from the very beginning. A sovereign government should
act honorably and fairly at all times, even vis-a-vis taxpayers.
We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as a
"taxpayer" within the meaning of Section 309, NIRC, and as impliedly authorized to file the claim for
refund and the suit to recover such claim.
II
1. We turn to the principal substantive question before us: the applicability to the dividend remittances
by P&G-Phil. to P&G-USA of the fifteen percent (15%) tax rate provided for in the following portion of
Section 24 (b) (1) of the NIRC:
(b) Tax on foreign corporations.
(1) Non-resident corporation. A foreign corporation not engaged in trade and business in the
Philippines, . . ., shall pay a tax equal to 35% of the gross income receipt during its taxable year
from all sources within the Philippines, as . . . dividends . . . 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, 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 . . .
The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident
corporate stockholders of a Philippine corporation, goes down to fifteen percent (15%) if the country of
domicile of the foreign stockholder corporation "shall allow" such foreign corporation a tax credit for
"taxes deemed paid in the Philippines," applicable against the tax payable to the domiciliary country by
the foreign stockholder corporation. In other words, in the instant case, the reduced fifteen percent
(15%) dividend tax rate is applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes deemed
paid in the Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies that such tax
credit for "taxes deemed paid in the Philippines" must, as a minimum, reach an amount equivalent to
twenty (20) percentage points which represents the difference between the regular thirty-five percent
(35%) dividend tax rate and the preferred fifteen percent (15%) dividend tax rate.
It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a "deemed
paid" tax credit for the dividend tax (20 percentage points) waived by the Philippines in making
applicable the preferred divided tax rate of fifteen percent (15%). In other words, our NIRC
does not require that the US tax law deem the parent-corporation to have paid the twenty (20)
percentage points of dividend tax waived by the Philippines. The NIRC only requires that the US "shall
allow" P&G-USA a "deemed paid" tax credit in an amount equivalent to the twenty (20) percentage
points waived by the Philippines.
2. The question arises: Did the US law comply with the above requirement? The relevant provisions of
the US Intemal Revenue Code ("Tax Code") are the following:
Sec. 901 Taxes of foreign countries and possessions of United States.
(a) Allowance of credit. If the taxpayer chooses to have the benefits of this subpart, the tax
imposed by this chapter shall, subject to the applicable limitation of section 904, be credited
with the amounts provided in the applicable paragraph of subsection (b) plus, in the case of a

10

Tax Cases

corporation, the taxes deemed to have been paid under sections 902 and 960. Such choice for
any taxable year may be made or changed at any time before the expiration of the period
prescribed for making a claim for credit or refund of the tax imposed by this chapter for such
taxable year. The credit shall not be allowed against the tax imposed by section 531 (relating to
the tax on accumulated earnings), against the additional tax imposed for the taxable year under
section 1333 (relating to war loss recoveries) or under section 1351 (relating to recoveries of
foreign expropriation losses), or against the personal holding company tax imposed by section
541.
(b) Amount allowed. Subject to the applicable limitation of section 904, the following amounts
shall be allowed as the credit under subsection (a):
(a) Citizens and domestic corporations. In the case of a citizen of the United
States and of a domestic corporation, the amount of any income, war profits, and
excess profits taxes paid or accrued during the taxable year to any foreign
country or to any possession of the United States; and
xxx xxx xxx
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
xxx xxx xxx
(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.
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 profitstaxes
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 earning. . . . (Emphasis supplied)
Close examination of the above quoted provisions of the US Tax Code 7 shows the following:
a. US law (Section 901, Tax Code) grants P&G-USA a tax credit for the amount of the dividend
tax actually paid (i.e., withheld) from the dividend remittances to P&G-USA;
b. US law (Section 902, US Tax Code) grants to P&G-USA a "deemed paid' tax credit 8 fora
proportionate part of the corporate income tax actually paid to the Philippines by P&G-Phil.
The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate income
taxalthough that tax was actually paid by its Philippine subsidiary, P&G-Phil., not by P&G-USA. This
"deemed paid" concept merely reflects economic reality, since the Philippine corporate income tax was
in fact paid and deducted from revenues earned in the Philippines, thus reducing the amount
remittable as dividends to P&G-USA. In other words, US tax law treats the Philippine corporate income
tax as if it came out of the pocket, as it were, of P&G-USA as a part of the economic cost of carrying on
business operations in the Philippines through the medium of P&G-Phil. and here earning profits. What
is, under US law, deemed paid by P&G- USA are not "phantom taxes" but instead Philippine corporate
income taxes actually paid here by P&G-Phil., which are very real indeed.
It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually withheld, and
(ii) the tax credit for the Philippine corporate income tax actually paid by P&G Phil. but "deemed paid"

11

Tax Cases

by P&G-USA, are tax credits available or applicable against the US corporate income tax of P&G-USA.
These tax credits are allowed because of the US congressional desire to avoid or reduce double
taxation of the same income stream. 9
In order to determine whether US tax law complies with the requirements for applicability of the
reduced or preferential fifteen percent (15%) dividend tax rate under Section 24 (b) (1), NIRC, it is
necessary:
a. to determine the amount of the 20 percentage points dividend tax waived by the Philippine
government under Section 24 (b) (1), NIRC, and which hence goes to P&G-USA;
b. to determine the amount of the "deemed paid" tax credit which US tax law must allow to
P&G-USA; and
c. to ascertain that the amount of the "deemed paid" tax credit allowed by US law is at least
equal to the amount of the dividend tax waived by the Philippine Government.
Amount (a), i.e., the amount of the dividend tax waived by the Philippine government is arithmetically
determined in the following manner:
P100.00 Pretax net corporate income earned by P&G-Phil.
x 35% Regular Philippine corporate income tax rate

P35.00 Paid to the BIR by P&G-Phil. as Philippine


corporate income tax.
P100.00
-35.00

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


P65.00 Dividends remittable to P&G-USA
x 35% Regular Philippine dividend tax rate under Section 24
(b) (1), NIRC
P22.75 Regular dividend tax
P65.00 Dividends remittable to P&G-USA
x 15% Reduced dividend tax rate under Section 24 (b) (1), NIRC

P9.75 Reduced dividend tax


P22.75 Regular dividend tax under Section 24 (b) (1), NIRC
-9.75 Reduced dividend tax under Section 24 (b) (1), NIRC

P13.00 Amount of dividend tax waived by Philippine


===== government under Section 24 (b) (1), NIRC.
Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by P&G-Phil. Amount
(a) is also the minimum amount of the "deemed paid" tax credit that US tax law shall allow if P&G-USA
is to qualify for the reduced or preferential dividend tax rate under Section 24 (b) (1), NIRC.
Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law allows under
Section 902, Tax Code, may be computed arithmetically as follows:
P65.00 Dividends remittable to P&G-USA
- 9.75 Dividend tax withheld at the reduced (15%) rate

P55.25 Dividends actually remitted to P&G-USA


P35.00 Philippine corporate income tax paid by P&G-Phil.
to the BIR
Dividends actually
remitted by P&G-Phil.
to P&G-USA P55.25
= x P35.00 = P29.75 10
Amount of accumulated P65.00 ======
profits earned by
P&G-Phil. in excess
of income tax
Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of 15%) by P&GPhil. to its US parent P&G-USA, a tax credit of P29.75 is allowed by Section 902 US Tax Code for
Philippine corporate income tax "deemed paid" by the parent but actually paid by the wholly-owned
subsidiary.

12

Tax Cases

Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the Philippine
government), Section 902, US Tax Code, specifically and clearly complies with the requirements of
Section 24 (b) (1), NIRC.
3. It is important to note also that the foregoing reading of Sections 901 and 902 of the US Tax Code is
identical with the reading of the BIR of Sections 901 and 902 of the US Tax Code is identical with the
reading of the BIR of Sections 901 and 902 as shown by administrative rulings issued by the BIR.
The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by then Acting Commissioner
of Intemal Revenue Efren I. Plana, later Associate Justice of this Court, the relevant portion of which
stated:
However, after a restudy of the decision in the American Chicle Company case and the
provisions of Section 901 and 902 of the U.S. Internal Revenue Code, we find merit in your
contention that our computation of the credit which the U.S. tax law allows in such cases is
erroneous as the amount of tax "deemed paid" to the Philippine government for purposes of
credit against the U.S. tax by the recipient of dividends includes a portion of the amount of
income tax paid by the corporation declaring the dividend in addition to the tax withheld from
the dividend remitted. In other words, the U.S.government will allow a credit to the
U.S. corporation or recipient of the dividend, in addition to the amount of tax actually withheld,
a portion of the income tax paid by the corporation declaring the dividend. Thus, if a Philippine
corporation wholly owned by a U.S. corporation has a net income of P100,000, it will pay
P25,000 Philippine income tax thereon in accordance with Section 24(a) of the Tax Code. The
net income, after income tax, which is P75,000, will then be declared as dividend to the U.S.
corporation at 15% tax, or P11,250, will be withheld therefrom. Under the aforementioned
sections of the U.S. Internal Revenue Code, U.S. corporation receiving the dividend can utilize as
credit against its U.S. tax payable on said dividends the amount of P30,000 composed of:
(1) The tax "deemed paid" or indirectly paid on the dividend arrived
at as follows:
P75,000 x P25,000 = P18,750

100,000 **
(2) The amount of 15% of
P75,000 withheld = 11,250

P30,000
The amount of P18,750 deemed paid and to be credited against the U.S. tax on the dividends
received by the U.S. corporation from a Philippine subsidiary is clearly more than 20%
requirement ofPresidential Decree No. 369 as 20% of P75,000.00 the dividends to be remitted
under the above example, amounts to P15,000.00 only.
In the light of the foregoing, BIR Ruling No. 75-005 dated September 10, 1975 is hereby
amended in the sense that the dividends to be remitted by your client to its parent company
shall be subject to the withholding tax at the rate of 15% only.
This ruling shall have force and effect only for as long as the present pertinent provisions of the
U.S. Federal Tax Code, which are the bases of the ruling, are not revoked, amended and
modified, the effect of which will reduce the percentage of tax deemed paid and creditable
against the U.S. tax on dividends remitted by a foreign corporation to a U.S. corporation.
(Emphasis supplied)
The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981 addressed to Basic Foods
Corporation and BIR Ruling dated 20 October 1987 addressed to Castillo, Laman, Tan and Associates. In
other words, the 1976 Ruling of Hon. Efren I. Plana was reiterated by the BIR even as the case at bar
was pending before the CTA and this Court.
4. We should not overlook the fact that the concept of "deemed paid" tax credit, which is embodied in
Section 902, US Tax Code, is exactly the same "deemed paid" tax credit found in our NIRC and which
Philippine tax law allows to Philippine corporations which have operations abroad (say, in the United
States) and which, therefore, pay income taxes to the US government.
Section 30 (c) (3) and (8), NIRC, provides:
(d) Sec. 30. Deductions from Gross Income.In computing net income, there shall be allowed as
deductions . . .
(c) Taxes. . . .
xxx xxx xxx

13

Tax Cases

(3) Credits against tax for taxes of foreign countries. If the taxpayer signifies in his
return his desire to have the benefits of this paragraphs, the tax imposed by this Title
shall be credited with . . .
(a) Citizen and Domestic Corporation. In the case of a citizen of the Philippines
and of domestic corporation, the amount of net income, war profits or excess
profits, taxes paid or accrued during the taxable year to any foreign country.
(Emphasis supplied)
Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a Philippine corporation for
taxes actually paid by it to the US governmente.g., for taxes collected by the US government on
dividend remittances to the Philippine corporation. This Section of the NIRC is the equivalent of Section
901 of the US Tax Code.
Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US Tax Code, and provides as
follows:
(8) Taxes of foreign subsidiary. For the purposes of this subsection a domestic
corporation which owns a majority of the voting stock of a foreign corporation from which
it receives dividends in any taxable year shall be deemed to have paid the same
proportion of any income, war-profits, or excess-profits taxes paid by such foreign
corporation to any foreign country, upon or with respect to the accumulated profits of
such foreign corporation from which such dividends were paid, which the amount of such
dividends bears to the amount of such accumulated profits: Provided, That the amount
of tax deemed to have been paid under this subsection shall in no case exceed the same
proportion of the tax against which credit is taken which the amount of such dividends
bears to the amount of the entire net income of the domestic corporation in which such
dividends are included. The term "accumulated profits" when used in this subsection
reference to a foreign corporation, means the amount of its gains, profits, or income in
excess of the income, war-profits, and excess-profits taxes imposed upon or with respect
to such profits or income; and the Commissioner of Internal Revenue 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 sixty days of any year as having been paid
from the accumulated profits of the preceding year or years (unless to his satisfaction
shown otherwise), and in other respects treating dividends as having been paid from the
most recently accumulated gains, profits, or earnings. In the case of a foreign
corporation, the income, war-profits, and excess-profits taxes of which are determined on
the basis of an accounting period of less than one year, the word "year" as used in this
subsection shall be construed to mean such accounting period. (Emphasis supplied)
Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit to a Philippine
parent corporation for taxes "deemed paid" by it, that is, e.g., for taxes paid to the US by the US
subsidiary of a Philippine-parent corporation. The Philippine parent or corporate stockholder is
"deemed" under our NIRC to have paid a proportionate part of the US corporate income tax paid
by its US subsidiary, although such US tax was actually paid by the subsidiary and not by the
Philippine parent.
Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be allowed by US law
to P&G-USA, is the same "deemed paid" tax credit that Philippine law allows to a Philippine corporation
with a wholly- or majority-owned subsidiary in (for instance) the US. The "deemed paid" tax credit
allowed in Section 902, US Tax Code, is no more a credit for "phantom taxes" than is the "deemed paid"
tax credit granted in Section 30 (c) (8), NIRC.
III
1. The Second Division of the Court, in holding that the applicable dividend tax rate in the instant case
was the regular thirty-five percent (35%) rate rather than the reduced rate of fifteen percent (15%),
held that P&G-Phil. had failed to prove that its parent, P&G-USA, had in fact been given by the US tax
authorities a "deemed paid" tax credit in the amount required by Section 24 (b) (1), NIRC.
We believe, in the first place, that we must distinguish between the legal question before this Court
from questions of administrative implementation arising after the legal question has been answered.
The basic legal issue is of course, this: which is the applicable dividend tax rate in the instant case: the
regular thirty-five percent (35%) rate or the reduced fifteen percent (15%) rate? The question of
whether or not P&G-USA is in fact given by the US tax authorities a "deemed paid" tax credit in the
required amount, relates to the administrative implementation of the applicable reduced tax rate.
In the second place, Section 24 (b) (1), NIRC, does not in fact require that the "deemed paid" tax credit
shall have actually been granted before the applicable dividend tax rate goes down from thirty-five
percent (35%) to fifteen percent (15%). As noted several times earlier, Section 24 (b) (1), NIRC, merely

14

Tax Cases

requires, in the case at bar, that the USA "shall allow a credit against the
tax due from [P&G-USA for] taxes deemed to have been paid in the Philippines . . ." There is neither
statutory provision nor revenue regulation issued by the Secretary of Finance requiring the actual grant
of the "deemed paid" tax credit by the US Internal Revenue Service to P&G-USA before the preferential
fifteen percent (15%) dividend rate becomes applicable. Section 24 (b) (1), NIRC, does not create a tax
exemption nor does it provide a tax credit;it is a provision which specifies when a particular (reduced)
tax rate is legally applicable.
In the third place, the position originally taken by the Second Division results in a severe practical
problem of administrative circularity. The Second Division in effect held that the reduced dividend tax
rate is not applicable until the US tax credit for "deemed paid" taxes is actually given in the required
minimum amount by the US Internal Revenue Service to P&G-USA. But, the US "deemed paid" tax
credit cannot be given by the US tax authorities unless dividends have actually been remitted to the
US, which means that the Philippine dividend tax, at the rate here applicable, was actually imposed
and collected. 11 It is this practical or operating circularity that is in fact avoided by our BIR when it
issues rulings that the tax laws of particular foreign jurisdictions (e.g., Republic of
Vanuatu 12 Hongkong, 13 Denmark, 14 etc.) comply with the requirements set out in Section 24 (b)
(1), NIRC, for applicability of the fifteen percent (15%) tax rate. Once such a ruling is rendered, the
Philippine subsidiary begins to withhold at the reduced dividend tax rate.
A requirement relating to administrative implementation is not properly imposed as a condition for
the applicability,as a matter of law, of a particular tax rate. Upon the other hand, upon the
determination or recognition of the applicability of the reduced tax rate, there is nothing to prevent the
BIR from issuing implementing regulations that would require P&G Phil., or any Philippine corporation
similarly situated, to certify to the BIR the amount of the "deemed paid" tax credit actually
subsequently granted by the US tax authorities to P&G-USA or a US parent corporation for the taxable
year involved. Since the US tax laws can and do change, such implementing regulations could also
provide that failure of P&G-Phil. to submit such certification within a certain period of time, would result
in the imposition of a deficiency assessment for the twenty (20) percentage points differential. The task
of this Court is to settle which tax rate is applicable, considering the state of US law at a given time. We
should leave details relating to administrative implementation where they properly belong with the
BIR.
2. An interpretation of a tax statute that produces a revenue flow for the government is not, for that
reason alone, necessarily the correct reading of the statute. There are many tax statutes or provisions
which are designed, not to trigger off an instant surge of revenues, but rather to achieve longer-term
and broader-gauge fiscal and economic objectives. The task of our Court is to give effect to the
legislative design and objectives as they are written into the statute even if, as in the case at bar, some
revenues have to be foregone in that process.
The economic objectives sought to be achieved by the Philippine Government by reducing the thirtyfive percent (35%) dividend rate to fifteen percent (15%) are set out in the preambular clauses of P.D.
No. 369 which amended Section 24 (b) (1), NIRC, into its present form:
WHEREAS, it is imperative to adopt measures responsive to the requirements of a
developing economy foremost of which is the financing of economic development
programs;
WHEREAS, nonresident foreign corporations with investments in the Philippines are taxed
on their earnings from dividends at the rate of 35%;
WHEREAS, in order to encourage more capital investment for large projects an
appropriate tax need be imposed on dividends received by non-resident foreign
corporations in the same manner as the tax imposed on interest on foreign loans;
xxx xxx xxx
(Emphasis supplied)
More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of foreign equity investment in
the Philippines by reducing the tax cost of earning profits here and thereby increasing the net
dividends remittable to the investor. The foreign investor, however, would not benefit from the
reduction of the Philippine dividend tax rate unless its home country gives it some relief from double
taxation (i.e., second-tier taxation) (the home country would simply have more "post-R.P. tax" income
to subject to its own taxing power) by allowing the investor additional tax credits which would be
applicable against the tax payable to such home country. Accordingly, Section 24 (b) (1), NIRC, requires
the home or domiciliary country to give the investor corporation a "deemed paid" tax credit at least
equal in amount to the twenty (20) percentage points of dividend tax foregone by the Philippines, in
the assumption that a positive incentive effect would thereby be felt by the investor.
The net effect upon the foreign investor may be shown arithmetically in the following manner:

15

Tax Cases

P65.00 Dividends remittable to P&G-USA (please


see page 392 above
- 9.75 Reduced R.P. dividend tax withheld by P&G-Phil.

P55.25 Dividends actually remitted to P&G-USA


P55.25
x 46% Maximum US corporate income tax rate

P25.415US corporate tax payable by P&G-USA


without tax credits
P25.415
- 9.75 US tax credit for RP dividend tax withheld by P&G-Phil.
at 15% (Section 901, US Tax Code)

P15.66 US corporate income tax payable after Section 901


tax credit.
P55.25
- 15.66

P39.59 Amount received by P&G-USA net of R.P. and U.S.


===== taxes without "deemed paid" tax credit.
P25.415
- 29.75 "Deemed paid" tax credit under Section 902 US
Tax Code (please see page 18 above)
- 0 - US corporate income tax payable on dividends
====== remitted by P&G-Phil. to P&G-USA after
Section 902 tax credit.
P55.25 Amount received by P&G-USA net of RP and US
====== taxes after Section 902 tax credit.
It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax Code, could offset the
US corporate income tax payable on the dividends remitted by P&G-Phil. The result, in fine, could be
that P&G-USA would after US tax credits, still wind up with P55.25, the full amount of the dividends
remitted to P&G-USA net of Philippine taxes. In the calculation of the Philippine Government, this
should encourage additional investment or re-investment in the Philippines by P&G-USA.
3. It remains only to note that under the Philippines-United States Convention "With Respect to Taxes
on Income,"15 the Philippines, by a treaty commitment, reduced the regular rate of dividend tax to a
maximum of twenty percent (20%) of the gross amount of dividends paid to US parent corporations:
Art 11. Dividends
xxx xxx xxx
(2) The rate of tax imposed by one of the Contracting States on dividends derived from
sources within that Contracting State by a resident of the other Contracting State shall
not exceed
(a) 25 percent of the gross amount of the dividend; or
(b) When the recipient is a corporation, 20 percent of the gross amount of the dividend if
during the part of the paying corporation's taxable year which precedes the date of
payment of the dividend and during the whole of its prior taxable year (if any), at least
10 percent of the outstanding shares of the voting stock of the paying corporation was
owned by the recipient corporation.
xxx xxx xxx
(Emphasis supplied)
The Tax Convention, at the same time, established a treaty obligation on the part of the United States
that it "shall allow" to a US parent corporation receiving dividends from its Philippine subsidiary "a [tax]
credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine
[subsidiary] .16 This is, of course, precisely the "deemed paid" tax credit provided for in Section 902,
US Tax Code, discussed above. Clearly, there is here on the part of the Philippines a deliberate
undertaking to reduce the regular dividend tax rate of twenty percent (20%) is a maximum rate, there
is still a differential or additional reduction of five (5) percentage points which compliance of US law
(Section 902) with the requirements of Section 24 (b) (1), NIRC, makes available in respect of dividends
from a Philippine subsidiary.
We conclude that private respondent P&G-Phil, is entitled to the tax refund or tax credit which it seeks.

16

Tax Cases

WHEREFORE, for all the foregoing, the Court Resolved to GRANT private respondent's Motion for
Reconsideration dated 11 May 1988, to SET ASIDE the Decision of the and Division of the Court
promulgated on 15 April 1988, and in lieu thereof, to REINSTATE and AFFIRM the Decision of the Court
of Tax Appeals in CTA Case No. 2883 dated 31 January 1984 and to DENY the Petition for Review for
lack of merit. No pronouncement as to costs.
Narvasa, Gutierrez, Jr., Grio-Aquino, Medialdea and Romero, JJ., concur.
Fernan, C.J., is on leave.
Separate Opinions
CRUZ, J., concurring:
I join Mr. Justice Feliciano in his excellent analysis of the difficult issues we are now asked to resolve.
As I understand it, the intention of Section 24 (b) of our Tax Code is to attract foreign investors to this
country by reducing their 35% dividend tax rate to 15% if their own state allows them a deemed paid
tax credit at least equal in amount to the 20% waived by the Philippines. This tax credit would offset
the tax payable by them on their profits to their home state. In effect, both the Philippines and the
home state of the foreign investors reduce their respective tax "take" of those profits and the investors
wind up with more left in their pockets. Under this arrangement, the total taxes to be paid by the
foreign investors may be confined to the 35% corporate income tax and 15% dividend tax only, both
payable to the Philippines, with the US tax liability being offset wholly or substantially by the US
"deemed paid" tax credits.
Without this arrangement, the foreign investors will have to pay to the local state (in addition to the
35% corporate income tax) a 35% dividend tax and another 35% or more to their home state or a total
of 70% or more on the same amount of dividends. In this circumstance, it is not likely that many such
foreign investors, given the onerous burden of the two-tier system, i.e., local state plus home state, will
be encouraged to do business in the local state.
It is conceded that the law will "not trigger off an instant surge of revenue," as indeed the tax
collectible by the Republic from the foreign investor is considerably reduced. This may appear
unacceptable to the superficial viewer. But this reduction is in fact the price we have to offer to
persuade the foreign company to invest in our country and contribute to our economic development.
The benefit to us may not be immediately available in instant revenues but it will be realized later, and
in greater measure, in terms of a more stable and robust economy.
BIDIN, J., concurring:
I agree with the opinion of my esteemed brother, Mr. Justice Florentino P. Feliciano. However, I wish to
add some observations of my own, since I happen to be the ponente in Commissioner of Internal
Revenue v. Wander Philippines, Inc. (160 SCRA 573 [1988]), a case which reached a conclusion that is
diametrically opposite to that sought to be reached in the instant Motion for Reconsideration.
1. In page 5 of his dissenting opinion, Mr. Justice Edgardo L. Paras argues that the failure of petitioner
Commissioner of Internal Revenue to raise before the Court of Tax Appeals the issue of who should be
the real party in interest in claiming a refund cannot prejudice the government, as such failure is
merely a procedural defect; and that moreover, the government can never be in estoppel, especially in
matters involving taxes. In a word, the dissenting opinion insists that errors of its agents should not
jeopardize the government's position.
The above rule should not be taken absolutely and literally; if it were, the government would never lose
any litigation which is clearly not true. The issue involved here is not merely one of procedure; it is also
one of fairness: whether the government should be subject to the same stringent conditions applicable
to an ordinary litigant. As the Court had declared in Wander:
. . . 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. . . . (160 SCRA at 566-577)
Had petitioner been forthright earlier and required from private respondent proof of authority from its
parent corporation, Procter and Gamble USA, to prosecute the claim for refund, private respondent
would doubtless have been able to show proof of such authority. By any account, it would be rank
injustice not at this stage to require petitioner to submit such proof.

17

Tax Cases

2. In page 8 of his dissenting opinion, Paras, J., stressed that private respondent had failed: (1) to show
the actual amount credited by the US government against the income tax due from P & G USA on the
dividends received from private respondent; (2) to present the 1975 income tax return of P & G USA
when the dividends were received; and (3) to submit any duly authenticated document showing that
the US government credited the 20% tax deemed paid in the Philippines.
I agree with the main opinion of my colleague, Feliciano J., specifically in page 23 et seq. thereof,
which, as I understand it, explains that the US tax authorities are unable to determine the amount of
the "deemed paid" credit to be given P & G USA so long as the numerator of the fraction, i.e., dividends
actually remitted by P & G-Phil. to P & G USA, is still unknown. Stated in other words, until dividends
have actually been remitted to the US (which presupposes an actual imposition and collection of the
applicable Philippine dividend tax rate), the US tax authorities cannot determine the "deemed paid"
portion of the tax credit sought by P & G USA. To require private respondent to show documentary
proof of its parent corporation having actually received the "deemed paid" tax credit from the proper
tax authorities, would be like putting the cart before the horse. The only way of cutting through this
(what Feliciano, J., termed) "circularity" is for our BIR to issue rulings (as they have been doing) to the
effect that the tax laws of particular foreign jurisdictions, e.g., USA, comply with the requirements in
our tax code for applicability of the reduced 15% dividend tax rate. Thereafter, the taxpayer can be
required to submit, within a reasonable period, proof of the amount of "deemed paid" tax credit
actually granted by the foreign tax authority. Imposing such a resolutory condition should resolve the
knotty problem of circularity.
3. Page 8 of the dissenting opinion of Paras, J., further declares that tax refunds, being in the nature of
tax exemptions, are to be construed strictissimi juris against the person or entity claiming the
exemption; and that refunds cannot be permitted to exist upon "vague implications."
Notwithstanding the foregoing canon of construction, the fundamental rule is still that a judge must
ascertain and give effect to the legislative intent embodied in a particular provision of law. If a statute
(including a tax statute reducing a certain tax rate) is clear, plain and free from ambiguity, it must be
given its ordinary meaning and applied without interpretation. In the instant case, the dissenting
opinion of Paras, J., itself concedes that the basic purpose of Pres. Decree No. 369, when it was
promulgated in 1975 to amend Section 24(b), [11 of the National Internal Revenue Code, was "to
decrease the tax liability" of the foreign capital investor and thereby to promote more inward foreign
investment. The same dissenting opinion hastens to add, however, that the granting of a reduced
dividend tax rate "is premised on reciprocity."
4. Nowhere in the provisions of P.D. No. 369 or in the National Internal Revenue Code itself would one
find reciprocity specified as a condition for the granting of the reduced dividend tax rate in Section 24
(b), [1], NIRC. Upon the other hand, where the law-making authority intended to impose a requirement
of reciprocity as a condition for grant of a privilege, the legislature does so expressly and clearly. For
example, the gross estate of non-citizens and non-residents of the Philippines normally includes
intangible personal property situated in the Philippines, for purposes of application of the estate tax
and donor's tax. However, under Section 98 of the NIRC (as amended by P.D. 1457), no taxes will be
collected by the Philippines in respect of such intangible personal property if the law or the foreign
country of which the decedent was a citizen and resident at the time of his death allows a similar
exemption from transfer or death taxes in respect of intangible personal property located in such
foreign country and owned by Philippine citizens not residing in that foreign country.
There is no statutory requirement of reciprocity imposed as a condition for grant of the reduced
dividend tax rate of 15% Moreover, for the Court to impose such a requirement of reciprocity would be
to contradict the basic policy underlying P.D. 369 which amended Section 24(b), [1], NIRC, P.D. 369 was
promulgated in the effort to promote the inflow of foreign investment capital into the Philippines. A
requirement of reciprocity, i.e., a requirement that the U.S. grant a similar reduction of U.S. dividend
taxes on remittances by the U.S. subsidiaries of Philippine corporations, would assume a desire on the
part of the U.S. and of the Philippines to attract the flow of Philippine capital into the U.S.. But the
Philippines precisely is a capital importing, and not a capital exporting country. If the Philippines had
surplus capital to export, it would not need to import foreign capital into the Philippines. In other words,
to require dividend tax reciprocity from a foreign jurisdiction would be to actively encourage Philippine
corporations to invest outside the Philippines, which would be inconsistent with the notion of attracting
foreign capital into the Philippines in the first place.
5. Finally, in page 15 of his dissenting opinion, Paras, J., brings up the fact that:
Wander cited as authority a BIR ruling dated May 19, 1977, which requires a remittance
tax of only 15%. The mere fact that in this Procter and Gamble case, the BIR desires to
charge 35% indicates that the BIR ruling cited in Wander has been obviously discarded
today by the BIR. Clearly, there has been a change of mind on the part of the BIR.

18

Tax Cases

As pointed out by Feliciano, J., in his main opinion, even while the instant case was pending before the
Court of Tax Appeals and this Court, the administrative rulings issued by the BIR from 1976 until as late
as 1987, recognized the "deemed paid" credit referred to in Section 902 of the U.S. Tax Code. To date,
no contrary ruling has been issued by the BIR.
For all the foregoing reasons, private respondent's Motion for Reconsideration should be granted and I
vote accordingly.
PARAS, J., dissenting:
I dissent.
The decision of the Second Division of this Court in the case of "Commissioner of Internal Revenue vs.
Procter & Gamble Philippine Manufacturing Corporation, et al.," G.R. No. 66838, promulgated on April
15, 1988 is sought to be reviewed in the Motion for Reconsideration filed by private respondent. Procter
& Gamble Philippines (PMC-Phils., for brevity) assails the Court's findings that:
(a) private respondent (PMC-Phils.) is not a proper party to claim the
refund/tax credit;
(b) there is nothing in Section 902 or other provision of the US Tax Code
that allows a credit against the U.S. tax due from PMC-U.S.A. of taxes
deemed to have been paid in the Phils. equivalent to 20% which
represents the difference between the regular tax of 35% on corporations
and the tax of 15% on dividends;
(c) private respondent failed to meet certain conditions necessary in order
that the dividends received by the non-resident parent company in the
U.S. may be subject to the preferential 15% tax instead of 35%. (pp. 200201, Motion for Reconsideration)
Private respondent's position is based principally on the decision rendered by the Third Division of this
Court in the case of "Commissioner of Internal Revenue vs. Wander Philippines, Inc. and the Court of
Tax Appeals," G.R. No. 68375, promulgated likewise on April 15, 1988 which bears the same issues as
in the case at bar, but held an apparent contrary view. Private respondent advances the theory that
since the Wander decision had already become final and executory it should be a precedent in deciding
similar issues as in this case at hand.
Yet, it must be noted that the Wander decision had become final and executory only by reason of the
failure of the petitioner therein to file its motion for reconsideration in due time. Petitioner received the
notice of judgment on April 22, 1988 but filed a Motion for Reconsideration only on June 6, 1988, or
after the decision had already become final and executory on May 9, 1988. Considering that entry of
final judgment had already been made on May 9, 1988, the Third Division resolved to note without
action the said Motion. Apparently therefore, the merits of the motion for reconsideration were not
passed upon by the Court.
The 1987 Constitution provides that a doctrine or principle of law previously laid down either en
banc or in Division may be modified or reversed by the court en banc. The case is now before this
Court en banc and the decision that will be handed down will put to rest the present controversy.
It is true that private respondent, as withholding agent, is obliged by law to withhold and to pay over to
the Philippine government the tax on the income of the taxpayer, PMC-U.S.A. (parent company).
However, such fact does not necessarily connote that private respondent is the real party in interest to
claim reimbursement of the tax alleged to have been overpaid. Payment of tax is an obligation
physically passed off by law on the withholding agent, if any, but the act of claiming tax refund is a
right that, in a strict sense, belongs to the taxpayer which is private respondent's parent company. The
role or function of PMC-Phils., as the remitter or payor of the dividend income, is merely to insure the
collection of the dividend income taxes due to the Philippine government from the taxpayer, "PMCU.S.A.," the non-resident foreign corporation not engaged in trade or business in the Philippines, as
"PMC-U.S.A." is subject to tax equivalent to thirty five percent (35%) of the gross income received from
"PMC-Phils." in the Philippines "as . . . dividends . . ." (Sec. 24 [b], Phil. Tax Code). Being a mere
withholding agent of the government and the real party in interest being the parent company in the
United States, private respondent cannot claim refund of the alleged overpaid taxes. Such right
properly belongs to PMC-U.S.A. It is therefore clear that as held by the Supreme Court in a series of
cases, the action in the Court of Tax Appeals as well as in this Court should have been brought in the
name of the parent company as petitioner and not in the name of the withholding agent. This is
because the action should be brought under the name of the real party in interest. (See Salonga v.
Warner Barnes, & Co., Ltd., 88 Phil. 125; Sutherland, Code Pleading, Practice, & Forms, p. 11; Ngo The
Hua v. Chung Kiat Hua, L-17091, Sept. 30, 1963, 9 SCRA 113; Gabutas v. Castellanes, L-17323, June 23,
1965, 14 SCRA 376; Rep. v. PNB, L-16485, January 30, 1945).

19

Tax Cases

Rule 3, Sec. 2 of the Rules of Court provides:


Sec. 2. Parties in interest. Every action must be prosecuted and defended in the name
of the real party in interest. All persons having an interest in the subject of the action
and in obtaining the relief demanded shall be joined as plaintiffs. All persons who claim
an interest in the controversy or the subject thereof adverse to the plaintiff, or who are
necessary to a complete determination or settlement of the questions involved therein
shall be joined as defendants.
It is true that under the Internal Revenue Code the withholding agent may be sued by itself if no
remittance tax is paid, or if what was paid is less than what is due. From this, Justice Feliciano claims
that in case of anoverpayment (or claim for refund) the agent must be given the right to sue the
Commissioner by itself (that is, the agent here is also a real party in interest). He further claims that to
deny this right would be unfair. This is not so. While payment of the tax due is an OBLIGATION of the
agent the obtaining of a refund is a RIGHT. While every obligation has a corresponding right (and viceversa), the obligation to pay the complete tax has the corresponding right of the government to
demand the deficiency; and the right of the agent to demand a refund corresponds to the
government's duty to refund. Certainly, the obligation of the withholding agent to pay in full does not
correspond to its right to claim for the refund. It is evident therefore that the real party in interest in
this claim for reimbursement is the principal (the mother corporation) and NOT the agent.
This suit therefore for refund must be DISMSSED.
In like manner, petitioner Commissioner of Internal Revenue's failure to raise before the Court of Tax
Appeals the issue relating to the real party in interest to claim the refund cannot, and should not,
prejudice the government. Such is merely a procedural defect. It is axiomatic that the government can
never be in estoppel, particularly in matters involving taxes. Thus, for example, the payment by the
tax-payer of income taxes, pursuant to a BIR assessment does not preclude the government from
making further assessments. The errors or omissions of certain administrative officers should never be
allowed to jeopardize the government's financial position. (See: Phil. Long Distance Tel. Co. v. Coll. of
Internal Revenue, 90 Phil. 674; Lewin v. Galang, L-15253, Oct. 31, 1960; Coll. of Internal Revenue v.
Ellen Wood McGrath, L-12710, L-12721, Feb. 28, 1961; Perez v. Perez, L-14874, Sept, 30, 1960; Republic
v. Caballero, 79 SCRA 179; Favis v. Municipality of Sabongan, L-26522, Feb. 27, 1963).
As regards the issue of whether PMC-U.S.A. is entitled under the U.S. Tax Code to a United States
Foreign Tax Credit equivalent to at least 20 percentage paid portion spared or waived as otherwise
deemed waived by the government, We reiterate our ruling that while apparently, a tax-credit is given,
there is actually nothing in Section 902 of the U.S. Internal Revenue Code, as amended by Public Law87-834 that would justify tax return of the disputed 15% to the private respondent. This is because the
amount of tax credit purportedly being allowed is not fixed or ascertained, hence we do not know
whether or not the tax credit contemplated is within the limits set forth in the law. While the
mathematical computations in Justice Feliciano's separate opinion appear to be correct, the
computations suffer from a basic defect, that is we have no way of knowing or checking the figure used
as premises. In view of the ambiguity of Sec. 902 itself, we can conclude that no real tax credit was
really intended. In the interpretation of tax statutes, it is axiomatic that as between the interest of
multinational corporations and the interest of our own government, it would be far better, in the
absence of definitive guidelines, to favor the national interest. As correctly pointed out by the Solicitor
General:
. . . the tax-sparing credit operates on dummy, fictional or phantom taxes, being
considered as if paid by the foreign taxing authority, the host country.
In the context of the case at bar, therefore, the thirty five (35%) percent on the dividend
income of PMC-U.S.A. would be reduced to fifteen (15%) percent if & only if reciprocally
PMC-U.S.A's home country, the United States, not only would allow against PMC-U.SA.'s
U.S. income tax liability a foreign tax credit for the fifteen (15%) percentage-point
portion of the thirty five (35%) percent Phil. dividend tax actually paid or accrued but
also would allow a foreign tax "sparing" credit for the twenty (20%)' percentage-point
portion spared, waived, forgiven or otherwise deemed as if paid by the Phil. govt. by
virtue of the "tax credit sparing" proviso of Sec. 24(b), Phil. Tax Code." (Reply Brief, pp.
23-24; Rollo, pp. 239-240).
Evidently, the U.S. foreign tax credit system operates only on foreign taxes actually paid by U.S.
corporate taxpayers, whether directly or indirectly. Nowhere under a statute or under a tax treaty, does
the U.S. government recognize much less permit any foreign tax credit for spared or ghost taxes, as in
reality the U.S. foreign-tax credit mechanism under Sections 901-905 of the U.S. Intemal Revenue Code
does not apply to phantom dividend taxes in the form of dividend taxes waived, spared or otherwise
considered "as if" paid by any foreign taxing authority, including that of the Philippine government.

20

Tax Cases

Beyond, that, 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 parent 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.
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 . . . and cannot be permitted to exist
upon vague implications. (Asiatic Petroleum Co. v. Llanes, 49 Phil. 466; Northern Phil Tobacco Corp. v.
Mun. of Agoo, La Union, 31 SCRA 304; Rogan v. Commissioner, 30 SCRA 968; Asturias Sugar Central,
Inc. v. Commissioner of Customs, 29 SCRA 617; Davao Light and Power Co. Inc. v. Commissioner of
Custom, 44 SCRA 122). Thus, when tax exemption is claimed, it must be shown indubitably to exist, for
every presumption is against it, and a well founded doubt is fatal to the claim (Farrington v. Tennessee
& Country Shelby, 95 U.S. 679, 686; Manila Electric Co. v. Vera, L-29987, Oct. 22, 1975; Manila Electric
Co. v. Tabios, L-23847, Oct. 22, 1975, 67 SCRA 451).
It will be remembered that the tax credit appertaining to remittances abroad of dividend earned here in
the Philippines was amplified in Presidential Decree No. 369 promulgated in 1975, the purpose of which
was to "encourage more capital investment for large projects." And its ultimate purpose is to decrease
the tax liability of the corporation concerned. But this granting of a preferential right is premised on
reciprocity, without which there is clearly a derogation of our country's financial sovereignty. No such
reciprocity has been proved, nor does it actually exist. At this juncture, it would be useful to bear in
mind the following observations:
The continuing and ever-increasing transnational movement of goods and services, the emergence of
multinational corporations and the rise in foreign investments has brought about tremendous pressures
on the tax system to strengthen its competence and capability to deal effectively with issues arising
from the foregoing phenomena.
International taxation refers to the operationalization of the tax system on an international level. As it
is, international taxation deals with the tax treatment of goods and services transferred on a global
basis, multinational corporations and foreign investments.
Since the guiding philosophy behind international trade is free flow of goods and services, it goes
without saying that the principal objective of international taxation is to see through this ideal by way
of feasible taxation arrangements which recognize each country's sovereignty in the matter of taxation,
the need for revenue and the attainment of certain policy objectives.
The institution of feasible taxation arrangements, however, is hard to come by. To begin with,
international tax subjects are obviously more complicated than their domestic counter-parts. Hence,
the devise of taxation arrangements to deal with such complications requires a welter of information
and data build-up which generally are not readily obtainable and available. Also, caution must be
exercised so that whatever taxation arrangements are set up, the same do not get in the way of free
flow of goods and services, exchange of technology, movement of capital and investment initiatives.
A cardinal principle adhered to in international taxation is the avoidance of double taxation. The
phenomenon of double taxation (i.e., taxing an item more than once) arises because of global
movement of goods and services. Double taxation also occurs because of overlaps in tax jurisdictions
resulting in the taxation of taxable items by the country of source or location (source or situs rule) and
the taxation of the same items by the country of residence or nationality of the
taxpayer (domiciliary or nationality principle).
An item may, therefore, be taxed in full in the country of source because it originated there, and in
another country because the recipient is a resident or citizen of that country. If the taxes in both
countries are substantial and no tax relief is offered, the resulting double taxation would serve as a
discouragement to the activity that gives rise to the taxable item.
As a way out of double taxation, countries enter into tax treaties. A tax treaty 1 is a bilateral
convention (but may be made multilateral) entered into between sovereign states for purposes of
eliminating double taxation on income and capital, preventing fiscal evasion, promoting mutual trade
and investment, and according fair and equitable tax treatment to foreign residents or nationals. 2
A more general way of mitigating the impact of double taxation is to recognize the foreign tax either as
a tax credit or an item of deduction.
Whether the recipient resorts to tax credit or deduction is dependent on the tax advantage or savings
that would be derived therefrom.
A principal defect of the tax credit system is when low tax rates or special tax concessions are granted
in a country for the obvious reason of encouraging foreign investments. For instance, if the usual tax

21

Tax Cases

rate is 35 percent but a concession rate accrues to the country of the investor rather than to the
investor himself To obviate this, a tax sparing provision may be stipulated. With tax sparing, taxes
exempted or reduced are considered as having been fully paid.
To illustrate:
"X" Foreign Corporation income 100
Tax rate (35%) 35
RP income 100
Tax rate (general, 35%
concession rate, 15%) 15
1. "X" Foreign Corp. Tax Liability without Tax Sparing
"X" Foreign Corporation income 100
RP income 100
Total Income 200
"X" tax payable 70
Less: RP tax 15
Net "X" tax payable 55
2. "X" Foreign Corp. Tax Liability with Tax Sparing
"X" Foreign Corp. income 100
RP income 100
Total income 200
"X" Foreign Corp. tax payable 70
Less: RP tax (35% of 100, the
difference of 20% between 35% and 15%,
deemed paid to RP)
Net "X" Foreign Corp.
tax payable 35
By way of resume, We may say that the Wander decision of the Third Division cannot, and should not
result in the reversal of the Procter & Gamble decision for the following reasons:
1) The Wander decision cannot serve as a precedent under the doctrine of stare decisis. It was
promulgated on the same day the decision of the Second Division was promulgated, and while Wander
has attained finality this is simply because no motion for reconsideration thereof was filed within a
reasonable period. Thus, said Motion for Reconsideration was theoretically never taken into account by
said Third Division.
2) Assuming that stare decisis can apply, We reiterate what a former noted jurist Mr. Justice Sabino
Padilla aptly said: "More pregnant than anything else is that the court shall be right." We hereby cite
settled doctrines from a treatise on Civil Law:
We adhere in our country to the doctrine of stare decisis (let it stand, et non quieta
movere) for reasons of stability in the law. The doctrine, which is really "adherence to
precedents," states that once a case has been decided one way, then another case,
involving exactly the same point at issue, should be decided in the same manner.
Of course, when a case has been decided erroneously such an error must not be
perpetuated by blind obedience to the doctrine of stare decisis. No matter how sound a
doctrine may be, and no matter how long it has been followed thru the years, still if
found to be contrary to law, it must be abandoned. The principle of stare decisis does not
and should not apply when there is a conflict between the precedent and the law (Tan
Chong v. Sec. of Labor, 79 Phil. 249).
While stability in the law is eminently to be desired, idolatrous reverence for precedent,
simply, as precedent, no longer rules. More pregnant than anything else is that the court
shall be right (Phil. Trust Co. v. Mitchell, 59 Phil. 30).
3) Wander deals with tax relations between the Philippines and Switzerland, a country with which we
have a pending tax treaty; our Procter & Gamble case deals with relations between the Philippines and
the United States, a country with which we had no tax treaty, at the time the taxes herein were
collected.
4) Wander cited as authority a BIR Ruling dated May 19, 1977, which requires a remittance tax of only
15%. The mere fact that in this Procter and Gamble case the B.I.R. desires to charge 35% indicates that
the B.I.R. Ruling cited in Wander has been obviously discarded today by the B.I.R. Clearly, there has
been a change of mind on the part of the B.I.R.
5) Wander imposes a tax of 15% without stating whether or not reciprocity on the part of Switzerland
exists. It is evident that without reciprocity the desired consequences of the tax credit under P.D. No.
369 would be rendered unattainable.

22

Tax Cases

6) In the instant case, the amount of the tax credit deductible and other pertinent financial data have
not been presented, and therefore even were we inclined to grant the tax credit claimed, we find
ourselves unable to compute the proper amount thereof.
7) And finally, as stated at the very outset, Procter & Gamble Philippines or P.M.C. (Phils.) is not the
proper party to bring up the case.
ACCORDINGLY, the decision of the Court of Tax Appeals should be REVERSED and the motion for
reconsideration of our own decision should be DENIED.
Melencio-Herrera, Padilla, Regalado and Davide, Jr., JJ., concur.

# Footnotes
1 We refer here (unless otherwise expressly indicated) to the
Tax Code does not specify particular fixed amounts or percentages
provisions of the NIRC as they existed during the relevant taxable
as tax credits; what it does specify in Section 902(A) (2) and (C) (1)
years and at the time the claim for refund was made. We shall
(B) is a proportion expressed in the fraction:
hereafter refer simply to the NIRC.
dividends actually remitted by P&G-Phil. to P&G-USA
2 Section 20 (n), NIRC (as renumbered and re-arranged by Executive
amount of accumulated profits earned by P&G-Phil. in
Order No. 273, 1 January 1988).
excess of income tax
3 E.g., Section 51 (e), NIRC:
The actual or absolute amount of the tax credit allowed by Section
Sec. 51. Returns and payment of taxes withheld at source.. . .
902 will obviously depend on the actual values of the numerator and
xxx xxx xxx
the denominator used in the fraction specified. The point is that the
(e) Surcharge and interest for failure to deduct and withhold.If
establishment of the proportion or fraction in Section 902 renders
the withholding agent, in violation of the provisions of the preceding
the tax credit there alloweddeterminate and determinable.
section and implementing regulations thereunder, fails to deduct
** The denominator used by Com. Plana is the total pre-tax income
and withhold the amount of tax required under said section and
of the Philippine subsidiary. Under Section 902 (c) (1) (B), US Tax
regulations, he shall be liable to pay in addition to the tax required
Code, quoted earlier, the denominator should be the amount of
to be deducted and withheld, a surcharge of fifty per centum if the
income of the subsidiary in excess of [Philippine] income tax.
failure is due to willful neglect or with intent to defraud the
11 The US tax authorities cannot determine the amount of the
Government, or twenty-five per centum if the failure is not due to
"deemed paid" credit to be given because the correct proportion
such causes, plus interest at the rate of fourteen per centum per
cannot be determined: the numerator of the fraction is unknown,
annum from the time the tax is required to be withheld until the date
until remittance of the dividends by P&G-Phil. is in fact effected.
of assessment.
Please see computation, supra, p. 17.
xxx xxx xxx
12 BIR Ruling dated 21 March 1983, addressed to the Tax Division,
Section 251 (Id.):
Sycip, Gorres, Velayo and Company.
Sec. 251. Failure of a withholding agent to collect and remit
13 BIR Ruling dated 13 October 1981, addressed to Mr. A.R. Sarvino,
tax. Any person required to collect, account for, and remit any tax
Manager-Securities, Hongkong and Shanghai Banking Corporation.
imposed by this Code who willfully fails to collect such tax, or
14 BIR Ruling dated 31 January 1983, addressed to the Tax Division,
account for and remit such tax, or willfully assists in any manner to
Sycip, Gorres, Velayo and Company.
evade any such tax or the payment thereof,shall, in addition to other
15 Text in 7 Philippine Treaty Series 523; signed on 1 October 1976
penalties provided for under this Chapter, be liable to a penalty
and effective on 16 October 1982 upon ratification by both
equal to the total amount of the tax not collected, or not accounted
Governments and exchange of instruments of ratification.
for and remitted. (Emphasis supplied)
16 Art. 23 (1), Tax Convention; the same treaty imposes a similar
4 Houston Street Corporation v. Commissioner of Internal Revenue,
obligation upon the Philippines to give to the Philippine parent of a
84 F. 2nd. 821 (1936); Bank of America v. Anglim, 138 F. 2nd. 7
US subsidiary a tax credit for the appropriate amount of US taxes
(1943).
paid by the US subsidiary. (Art. 23[2], id) Thus, Sec. 902 US Tax Code
5 15 SCRA 1 (1965).
and Sec. 30(c) (8), NIRC, have been in effect been converted into
6 15 SCRA at 4.
treaty commitments of the United States and the Philippines,
7 The following detailed examination of the tenor and import of
respectively, in respect of US and Philippine corporations.
Sections 901 and 902 of the US Tax Code is, regrettably, made
PARAS, J., dissenting:
necessary by the fact that the original decision of the Second
1 There are two types of credit systems. The first, is the underlying
Division overlooked those Sections in their entirety. In the original
credit system which requires the other contracting state to credit not
opinion in 160 SCRA 560 (1988), immediately after Section 902, US
only the 15% Philippine tax into company dividends but also the
Tax Code is quoted, the following appears: "To Our mind, there is
35% Philippine tax on corporations in respect of profits out of which
nothing in the aforecited provision that would justify tax return of
such dividends were paid. The Philippine corporation is assured of
the disputed 15% to the private respondent" (160 SCRA at 567). No
sufficient creditable taxes to cover their total tax liabilities in their
further discussion of Section 902 was offered.
home country and in effect will no longer pay taxes therein. The
8 Sometimes also called a "derivative" tax credit or an "indirect" tax
other type provides that if any tax relief is given by the Philippines
credit; Bittker and Ebb, United States Taxation of Foreign Income
pursuant to its own development program, the other contracting
and Foreign Persons, 319 (2nd Ed., 1968).
state will grant credit for the amount of the Philippine tax which
9 American Chicle Co. v. U.S. 316 US 450, 86 L. ed. 1591 (1942);
would have been payable but for such relief.
W.K. Buckley, Inc. v. C.I.R., 158 F. 2d. 158 (1946).
2 The Philippines, for one, has entered into a number of tax treaties
10 In his dissenting opinion, Paras, J. writes that "the amount of the
in pursuit of the foregoing objectives. The extent of tax treaties
tax credit purportedly being allowed is not fixed or ascertained,
entered into by the Philippines may be seen from the following
hence we do not know whether or not the tax credit contemplated is
tabulation:
within the limits set forth in the law" (Dissent, p. 6) Section 902 US
Table 1 RP Tax Treaties
RP-West Germany
Ratified on Jan. 1, 1985
RP-Malaysia

Ratified on Jan. 1, 1985

RP-Nigeria,

Concluded in September,

Netherlands and

October and November, 1985,

Spain

respectively (documents ready for


signature)

RP-Yugoslavia

Negotiated in Belgrade,
Sept. 30-Oct. 4,1985

Pending Ratification

Signed

Ratified

RP-Italy

Dec. 5, 1980

Nov. 28, 1983

RP-Brazil

Sept. 29, 1983

23

Tax Cases
RP-East Germany
RP-Korea
Pending Signature
RP Sweden (renegotiated)
RP Romania
RP Sri Lanka
RP Norway
RP India
RP Nigeria
RP Netherlands
RP Spain

Feb. 17, 1984


Feb. 21, 1984
Negotiations conluded on
May 11, 1978
Feb. 1, 1983
30,477.00
Nov. 11, 1983
30,771.00
Sept. 27, 1985
Oct. 8, 1985
Nov. 22, 1985.

[G.R. No. 122451. October 12, 2000]


CAGAYAN ROBINA SUGAR MILLING CO., petitioner,
vs.
COURT OF APPEALS, CENTRAL BOARD OF ASSESSMENT APPEALS, BOARD OF ASSESSMENT
APPEALS, and THE PROVINCIAL ASSESSOR OF CAGAYAN, respondents.
DECISION
QUISUMBING, J.:
This petition assails the decision[1] dated September 26, 1995, of the Court of Appeals in CA-G.R. SP
No. 37934, denying petitioner's petition for review of the decision [2] dated April 30, 1994, of the Central
Board of Assessment Appeals (CBAA). Earlier, the CBAA had dismissed petitioner's appeal from the
Resolution[3] of the Local Board of Assessment Appeals (LBAA) dated April 1, 1992, which fixed at
P260,327,060.00 the market value of petitioner's properties located in Piat, Cagayan.
The factual antecedents which gave rise to the instant case, are as follows:
In 1990, the Assets Privatization Trust (APT) offered for sale all the assets and properties of the
Cagayan Sugar Corporation (CASUCO), which had been foreclosed and transferred to APT by the
Development Bank of the Philippines. The APT set the floor bid price for the said properties at three
hundred fifty five million pesos (P355,000,000.00). Petitioner, as the highest bidder, acquired the
aforesaid properties for a total price of P464,000,000.00.
Among the properties bought by petitioner were sugar mill machineries located at the CASUCO
millsite in Sto. Domingo, Piat, Cagayan. The market value of these machineries was pegged at
P391,623,520.00 and the assessed value was set at P313,298,820.00 under Tax Declaration No. 5355.
On October 18, 1990, the Provincial Assessor of Cagayan issued a "Notice of Assessment of Real
Property" to petitioner covering the machineries installed at the CASUCO millsite (Lots 89-F-1 and 89-F2 of Psd-2-01-005548) based on the market value of P391,623,520.00 and the assessed value thereof
at P313,298,820.00.
On February 8, 1991, petitioner appealed the assessment to the LBAA, on the ground that it was
excessive, erroneous, and unjust.
On September 10, 1991, petitioner asked the Provincial Assessor to reconsider his assessment,
contending that it should not be based on the APT-set selling price alone, but should likewise consider
the operating conditions of the properties and pricing factors such as goodwill and future business
potential.
On April 1, 1992, the LBAA resolved that the basis of the market value for assessment purposes of
the properties acquired by petitioner should be the APT floor bid price of P355,000,000.00. The LBAA
then deducted from this amount the value of the land (P4,721,130.00), the total market value of the
buildings (P17,605,340.00), to derive the market value of the machineries, amounting to
P332,673,530.00. By further deducting the value of machineries not subject to real property tax, the
LBAA fixed the market value of the petitioner's machineries at P260,327,060.00 for assessment
purposes. The LBAA ordered the Provincial Assessor of Cagayan to make the necessary amendments,
as a result of which Declaration No. 5514 was issued, putting the assessed value of petitioner's
machineries at P208,261,650.00.
On April 18, 1992, petitioner prepared an "Appeal of Assessment" addressed to the LBAA but did
not file the same with the CBAA. It was only on November 25, 1992, that petitioner filed with the CBAA
an "Appeal of Assessment" identical with its earlier appeal dated April 18, 1992.
On January 2, 1994, the LBAA and the Provincial Assessor of Cagayan moved to dismiss petitioner's
appeal dated November 25, 1992, on the ground that it had been filed beyond the thirty-day
reglementary period therefor.

24

Tax Cases

On May 17, 1994, the CBAA dismissed petitioner's appeal on the ground that it was timebarred. Petitioner moved for reconsideration of the decision, but its motion was denied by the CBAA in
its resolution of June 30, 1994.
On October 3, 1994, petitioner filed with this Court a special civil action for certiorari, docketed as
G.R. No. 116795, assailing the May 17, 1994 decision and June 30, 1994 resolution of the CBAA for
having been issued with grave abuse discretion amounting to lack or excess of jurisdiction.
On July 3, 1995, we resolved to refer G.R. No. 116795 to the Court of Appeals for appropriate
action, pursuant to Revised Administrative Circular No. 1-95. [4]
On September 26, 1995, the appellate court disposed of the case as follows:
IN VIEW OF ALL THE FOREGOING, the Petition is hereby DENIED due course and is DISMISSED. With
costs against the Petitioner.
SO ORDERED.[5]
Hence, the instant case anchored on the following assignment of errors:
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT:
(1) THE RESPONDENT PROVINCIAL ASSESSOR'S AND THE LOCAL BOARD OF ASSESSMENT
APPEALS' ASSESSMENT OF PETITIONER'S MACHINERIES WAS PREPARED IN ACCORDANCE
WITH SECTIONS 5 AND 28 OF THE REAL PROPERTY TAX CODE (P.D. NO. 464); AND
(2) THE RESPONDENT CENTRAL BOARD OF ASSESSMENT APPEALS ACTED IN ACCORD WITH
LAW IN FIXING THE MARKET VALUE OF THE MACHINERIES INSTALLED IN THE MILLSITE OF
PETITIONER AT P260,237,060.00 AND THE ASSESSED VALUE THEREOF AT P208,261,650.00.
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT RESPONDENT CENTRAL BOARD OF
ASSESSMENT APPEALS ACTED IN ACCORD WITH LAW WHEN IT DISMISSED PETITIONER'S APPEAL FOR
HAVING BEEN FILED OUTSIDE THE REGLEMENTARY PERIOD.
We find that the issues for our resolution are:
(1) Did the Court of Appeals err in finding the assessment of petitioner's machineries proper
and correct under the Real Property Tax Code?
(2) Did the appellate court err in upholding the dismissal of petitioner's appeal to the CBAA for
being time-barred?
We note that the real property tax being assessed and collected against petitioner's machineries is
for 1990.Hence, in this case, the applicable law is the Real Property Tax Code (P.D. No. 464), and not
the Local Government Code of 1991 (R.A. No. 7160).
Petitioner contends that in fixing the market value of the machineries in question at
P260,327,060.00, the LBAA deviated from the rules provided for in the Real Property Tax Code for the
appraisal of machineries. Petitioner argues that in simply deducting from the APT floor bid price of
P355,000,000.00, the value of the land, buildings, and machineries not subject to real property tax in
order to arrive at the market value, the LBAA used a method not sanctioned by P.D. No. 464 and it was
error for both the CBAA and the court a quo to have affirmed it.
Petitioner points out that the APT erred in relying on Sales Analysis or Market Data Approach to
determine the floor bid price. The Sales Analysis or Market Data Approach involves a comparison of the
property appraised to similar properties sold in similar markets in order to derive a market value for the
property to be appraised. Petitioner submits that in the instant case, no comparison with any similar
property was ever made. Instead, the comparison was made to a bid price. Moreover, in using as basis
the valuation of the APT, the LBAA failed to take into account other circumstances of value such as
goodwill and future business potential.
Petitioner insists that the Court of Appeals erred when it failed to rule that both the Provincial
Assessor and the LBAA should have applied the following formula provided for in Section 28 [6]of P.D. No.
464:
Remaining Economic Life x Replacement Cost = Current Market Value[7]
Economic Life.
We agree with petitioner that Section 28 of the Real Property Tax Code provides for a formula for
computing the current market value of machineries. However, Section 28 must be read in consonance
with Section 3 (n)[8] of the said law, which defines "market value." Under the latter provision, the LBAA
and CBAA were not precluded from adopting various approaches to value determination, including
adopting the APT "floor bid price" for petitioner's properties. As correctly pointed out by the CBAA and
affirmed by the court a quo:
Valuation on the basis of a floor bid price is not bereft of any basis in law. One of the approaches to
value is the Sales Analysis Approach or the Market Data Approach where the source of market data for
valuation is from offer of sales or bids of real property.Valuation based on the floor bid price belongs to
this approach, pursuant to Section 3(n)[9]

25

Tax Cases

Tax assessments by tax examiners are presumed correct and made in good faith, with the taxpayer
having the burden of proving otherwise. [10] In the instant case, petitioner failed to show that the use by
the LBAA and CBAA of the APT floor bid price, pursuant to Section 3 (n) of the Real Property Tax Code
was incorrect and done in bad faith.The method used by the LBAA and CBAA cannot be deemed
erroneous since there is no rigid rule for the valuation of property, which is affected by a multitude of
circumstances and which rules could not foresee nor provide for. [11]Worthy of note, petitioner has not
shown that the current market value of its properties would be significantly lower if its proposed
formula is adopted. A party challenging an appraiser's finding of value is required not only to prove that
the appraised value is erroneous but also what the proper value is. [12] Factual findings of administrative
agencies, which have acquired expertise in their field, are generally binding and conclusive upon the
Court.[13] The Court will not presume to interfere with the intelligent exercise of the judgment of men
specially trained in appraising property.[14] Where the judicial mind is left in doubt, it is a sound rule to
leave the assessment undisturbed.[15] In this case, we see no reason to depart from this rule.
Petitioner insists that its protest has merit, in view of a 1st Indorsement Letter of the Deputy
Executive Director of the Bureau of Local Government Finance dated May 17, 1996, [16] directing the
Provincial Assessor of Cagayan to recompute the market value of petitioner's machineries. However,
said letter referred to the protested assessment done by the Provincial Assessor. There was no
reference at all to the assessment of petitioner's machineries, which was done by the LBAA, which
revised and corrected the protested appraisal by the Provincial Assessor. Said letter did not find
erroneous the re-assessment done by the LBAA, which was subsequently upheld by both the CBAA and
the Court of Appeals. Findings of fact of administrative agencies and quasi-judicial bodies, which have
acquired expertise because their jurisdiction is confined to specific matters, are generally accorded not
only respect, but finality when affirmed by the Court of Appeals. [17]
On the issue of whether the period for petitioner's appeal to the CBAA had already elapsed,
petitioner posits that since the appraisal and assessment of the Provincial Assessor is void ab initio for
not having been made in accordance with Section 28 of P.D. No. 464, the prescriptive period provided
for in Section 30[18] of the decree should not apply to petitioner. Petitioner cites Basey Wood Industries,
Inc. v. Board of Assessment Appeals (CBAA Case No. 100), where the CBAA held that when an
assessment is not in accordance with law, the prescriptive period for appeal to the Provincial Board of
Assessment Appeals is suspended.
Petitioner's arguments, however, are off tangent. The appeal found to be time-barred is not
petitioner's appeal of the Provincial Assessor's assessment to the LBAA, but the resolution of the LBAA
sought to be appealed to the CBAA.As found by the Court of Appeals:
Records show that the Petitioner had already received, as of April 18, 1992, the Resolution of the
Respondent LBAA dated April 1, 1992, denying Petitioner's appeal. The Petitioner, thus, had only until
May 18, 1992, to appeal the questioned Resolution of Respondent LBAA. However, it was only on
November 25, 1992 when the Petitioner lodged its appeal with the Respondent CBAABy then, the
thirty (30) day reglementary period to perfect Petitioner's appeal had long elapsed. [19]
Based on the records, we hold that the respondent court did not err in finding petitioner's appeal to
the CBAA time-barred. The applicable provision is Section 34 [20] of P.D. No. 464, and not Section
30. Where the owner or administrator of a property or an assessor is not satisfied with the decision of
the Local Board of Assessment Appeals, he may, within thirty days from the receipt of the decision,
appeal to the Central Board of Assessment Appeals. [21]Petitioner does not dispute respondent court's
findings that petitioner received on April 18, 1992, the LBAA resolution denying its appeal and that it
had only until May 18, 1992, to appeal the local board's resolution to the CBAA.Petitioner, however,
only filed its appeal with the CBAA on November 25, 1992 or way beyond the period to perfect an
appeal. No error was thus committed by the CBAA when it dismissed petitioner's appeal for having
been filed out of time and the appellate court was correct in affirming the dismissal. Well-entrenched is
the rule that the perfection of an appeal within the period therefor is both mandatory and jurisdictional,
and that failing in this regard renders the decision final and executory. [22]
WHEREFORE, the instant petition is DENIED and the decision of the Court of Appeals in CA-G.R.
SP No. 37934 AFFIRMED. Costs against petitioners.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.
Rollo, pp. 9-25.
[2]
CA Rollo, pp. 35-38.
[3]
Id. at 28-29.
[4]
The pertinent portions of the Circular which took effect on June 1, 1995
read:
1. Scope. - These rules shall apply to appeals from judgments or final orders
of the Court of Tax Appeals and from awards, judgments, final orders or
resolutions of or authorized by any quasi-judicial agency in the exercise of its
[1]

quasi judicial functions. Among these agencies are the Civil Service
Commission, Central Board of Assessment Appeals
xxx
14. Transitory provisions. - All petitions for certiorari against the Civil Service
Commission and the Central Board of Assessment Appeals filed and pending
in the Supreme Court prior to the effectivity of this Revised Administrative
Circular shall be treated as petitions for review hereunder and shall be
transferred to the Court of Appeals for appropriate disposition. Petitions
for certiorari against the aforesaid agencies which may be filed after the
effectivity hereof and up to June 30, 1995 shall likewise be considered as

26

Tax Cases
petitions for review and shall be referred to the Court of Appeals for the
same purpose.
xxx
[5]
ollo, p. 25.
[6]
he pertinent portion of the provision reads: "SEC. 28. Appraising
Machinery. - The current market value of the machinery shall be determined
on the basis of the original cost in the case of newly acquired machinery not
yet depreciated and is appraised within the year of its purchase. In the case
of all others, the current market value shall be determined by dividing the
remaining economic life of the machinery by its economic life and multiplied
by the replacement or reproduction cost (new) of said machinery. xxx"
(italics in the original).
[7]
P.D. No. 464 defines the terms in this formula as follows:
SEC. 3. Definition of Terms. - When used in this Code xxx
j) Economic life - the estimated period over which it is anticipated that a
machinery may profitably be utilized.
xxx
n) Market value - is defined as "the highest price estimated in terms of
money which the property will buy if exposed for sale in the open market
allowing a reasonable time to find a purchaser who buys with knowledge of
all the uses to which it is adapted and for which it is capable of being
used. It is also referred to as "the price at which a willing seller would sell
and a willing buyer would buy, neither being under abnormal pressure."
xxx
r) Remaining economic life. - the period of time (years) from the date of
appraisal to the date when the machinery becomes valueless.
xxx
t) Replacement or reproduction cost (new) - the cost that would be incurred
on the basis of current prices, in acquiring an equally desirable substitute
property, or the cost of reproducing a new replica property on the basis of
current prices with the same or closely similar material.
[8]
Supra Note 4.
[9]
Supra Note 1, at 60.
[10]
Commissioner of Internal Revenue v. Antonio Tuason, Inc., 173 SCRA 397,
401 (1989) citing Mindanao Bus Company v. Commissioner of Internal
Revenue, 1 SCRA 538 (1961); Sy Po v. Court of Tax Appeals, 164 SCRA 524,

530 (1988); Commissioner of Internal Revenue v. Construction Resources of


Asia, Inc., 145 SCRA 671, 679 (1986) citing Collector of Internal Revenue v.
Bohol Land Trans. Co., 107 Phil. 965, 974 (1960).
[11]
Army & Navy Club v. Trinidad, 44 Phil. 383, 385 (1923).
[12]
Caltex (Philippines), Inc. v. Court of Appeals, 292 SCRA 273, 287 (1998).
[13]
Fortich v. Corona, 298 SCRA 678, 697 (1998) citing Matalam v. Comelec,
271 SCRA 733 (1997).
[14]
Viuda e Hijos de Pedro P. Roxas v. Rafferty, 37 Phil. 957, 961 (1918).
[15]
Army & Navy Club v. Trinidad, supra, 387 (1923).
[16]
Supra Note 1, at 120-122.
[17]
Vda. de Nazareno v. Court of Appeals, 257 SCRA 589, 598 (1996).
[18]
"SEC. 30. Local Board of Assessment Appeals. - Any owner who is not
satisfied with the action of the provincial or city assessor in the assessment
of his property may, within sixty days from the date of receipt by him of the
written notice of assessment as provided in this Code, appeal to the Board of
Assessment Appeals of the province or city, by filing with it a petition under
oath using the form prescribed for the purpose, together with copies of the
tax declarations and such affidavit or documents submitted in support of the
appeal."
[19]
Supra Note 2, at 54.
[20]
The pertinent parts of said section read:
"SEC. 34. Action by the Local Board of Assessment Appeals. xxx
" The owner or administrator of the property or the assessor who is not
satisfied with the decision of the Board of Assessment Appeals, may, within
thirty days after receipt of the decision of the local Board, appeal to the
Central Board of Assessment Appeals by filing his appeal under oath with
the Secretary of the proper provincial or city Board of Assessment Appeals
using the prescribed form stating therein the grounds and the reasons for
the appeal; and attaching thereto any evidence pertinent to the case. A copy
of the appeal should be also furnished the Central Board of Assessment
Appeals, through its Chairman, by the appellant. x x x"
[21]
Chavez v. Ongpin, 186 SCRA 331, 337 (1990).
[22]
Pascual v. Court of Appeals, 300 SCRA 214, 225 (1998); Almeda v. Court
of Appeals, 292 SCRA 587, 593-594 (1998) citing Philippine Airlines, Inc. v.
National Labor Relations Commission, 263 SCRA 638 (1996).

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