TAX REVIEW CASES
time PD 1959 was promulgated, employees’ trust ceased to be
1. CIR VS CA AND GCL RETIREMENT
FACTS:
Petitioner CIR seeks a reversal of the decision of the CA
which ordered a refund to the GCL Retirement Plan representing
the withholding tax on income from money market placements
and purchase of treasury bills.
GCL Retirement is an employees’ trust maintained by the
employer, GCL Inc. to provide retirement, pension, disability and
death benefits to its employees. The Plan was considered as
exempt from income tax. Respondent GCL made investments and
earned interest income which was withheld the 15% FWT. GCL
then filed for two claims of refund claiming that it was an entity
full exempt from income tax. CA ruled in favor of GCL, ordering a
refund of the tax withheld as it was exempt from the FWT. PD
1156 provided for the first time a withholding from the interest on
bank deposits at the source of a tax of 15% of said interest. In said
decree it provided that “in all cases where the depositor is tax-
exempt or is enjoying preferential income tax treatment under
existing laws, the withholding tax imposed in this paragraph shall be
refunded or credited as the case may be upon submission to the CIR
of proof that said depositor is a tax exempt entity or enjoys a
preferential income tax treatment”. This was carried over to PD
1739 which subjected interest from bank deposits and deposit
substitutes to a final tax of 20%, as well as stating tat if the
recipient of such interest is exempt from income taxation, no tax
shall be imposed and if the recipient is enjoying preferential
income tax treatment, then the preferential tax rates so provided
shall be imposed. However, it should be noted that the exemption
from withholding tax on interest on bank deposits previously
extended by PD 1739 was deleted by PD 1959.
Petitioner argues that this deletion provides that at the
exempt and became subject to the final withholding tax. GCL
claims that the tax exempt status of employees’ trust applies to all
kinds of taxes, including the final withholding tax on interest
income.
ISSUE: Whether or not GCL Retirement should be exempt from the
final withholding tax on interest income on money market
placements and purchase of treasury bills
HELD:
YES. The GCL Plan was qualified as exempt from income tax
by the CIR in accordance with RA 4917. Under the Tax Code, it has
singled out employees’ trusts for tax exemption as provided under
Sec. 56. Employees’ trust is established for their exclusive benefit
and for no other purpose. The explanatory note of RA 1983 which
is for the establishment of private plans for the benefit of the
laborers and employees outside of the SSS Act provides that all
contributions as well as income of the pension trust are exempt
from tax, assessments, fees or charges. Tax exemption is
likewise enjoyed by the income of the pension trust.
PD 1959, being a general law, cannot repeal by implication
a specific provision granting tax exemption from income tax to
employees’ trusts. Also, since the final tax and withholding are
embraced in the title on Income Tax, said trust is deemed exempt
therefrom. The final withholding tax collected from income in
respect of which employees’ trust are declared exempt. Since GCL
enjoys a tax-exempt status from income, there is no logic in
withholding a certain percentage of that income that it is not
supposed to pay in the first place.
 2. MARUBENI VS CIR
FACTS:
Petitioner Marubeni is a foreign corporation with a branch
office in the Philippines. Marubeni of Japan has equity investments
in AG&P in Manila. AG &P declared and paid cash dividends to the
petitioner and withheld the 10% final dividend tax. AG&P directly
remitted the cash dividends to the petitioner’s head office in
Tokyo, Japan net of the 10% final dividend tax as well as the 15%
branch profit remittance tax. Petitioner sought a ruling from the
BIR on whether or not the dividends petitioner received from
AG&P are effectively connected with its conduct or business in the
Philippines as to be considered branch profits subject to the 15%
BPRT. The BIR issued a ruling that said that the dividends received
from Marubeni from AG&P are not income arising from the
business activity in which Marubeni is engaged. However, in a
subsequent ruling denying the petitioner’s claim for refund/credit,
while said dividends are not subject to the BPRT or the 10%
intercorporate dividend tax, the recipient of the dividends, being a
non-resident stockholder, nevertheless, said dividend income is
subject to the 25% tax pursuant to the Tax Treaty between the
Philippines and Japan.
The CA affirmed the denial of the refund by the CIR stating
that said dividends were distributions made by the AG&P to its
shareholder out of its profits on the investments of Marubeni of
Japan, a NRFC. It was directly made and received by Marubeni
Corporation of Japan. Petitioner Marubeni Philippine branch has
no participation or intervention, directly or indirectly in the
recipient of the dividends.
Marubeni, Japan argues that it is a RFC subject only to 10%
intercorporate final tax on dividends received from a foreign
corporation. Public respondents claim that Marubeni, Japan, being
a NRFC and not engaged in trade or business in the Philippines, is
subject to tax on income earned from Philippine sources at the
rate of 35% of its gross income but expressly made subject to the
special rate of 25 % of the Tax Treaty between Philippines and
Japan.
ISSUES:
1) Whether Marubeni is a resident or non-resident foreign
corporation and whether there can be a refund
HELD:
It is a non resident foreign corporation. Under the Tax
Code, a resident foreign corporation is one that is “engaged in
trade or business” within the Philippines. Petitioner reasons that
since the Philippine branch and the Tokyo head office are one and
the same entity, whoever made the investment in AG&P, Manila
does not matter at all. A single corporate entity cannot be both a
resident and non-resident corporation depending on the nature of
the transaction involved. Thus, whether the dividends are paid
directly to the head office or coursed through its local branch is of
no moment for after all, the head office and the office branch
constitute but one corporate entity, the Marubeni Corporation
which is considered a resident foreign corporation transacting
business in the Philippines.
The Court did not uphold this contention and upheld the
Solicitor General stating that a foreign corporation is the same
juridical entity as its branch office in the Philippines cannot apply
here. It is a principal-agent relationship. So when the foreign
corporation transacts business in the Philippines independently of
its branch, the principal-agent relationship is set aside. The
transaction becomes one of the foreign corporation, not of the
branch. Thus, the taxpayer is the foreign corporation, not the
branch or the resident foreign corporation. Thus, the alleged
overpaid taxes were incurred for the remittance of dividend
income to the head office in Japan which is a separate and distinct
income taxpayer from the branch in the Philippines. Since the
petitioner made this independent investment, it can only be
attributable to the head office and cannot now claim the
increments as ordinary consequences of its trade or business in
the Philippines and avail itself of the lower tax rate of 10%.

There can still be a refund because the taxes withheld

totaled the 25% rate imposed by the Philippine-Japan Tax
Convention was erroneous. It only means that any tax imposable
by the contracting state concerned should not exceed the 25%
limitation and that the said rate would apply only if the tax
imposed by our laws exceeds he same. Petitioner, being a NRFC, as
a general rule, is taxed 35% of its gross income from all sources
within the Philippines. However, a discounted rate of 15% is given
to petitioner on dividends received from a domestic corporation
on the condition that its domicile state extends in favor of the
petitioner, a tax credit of not less than 20% of the dividends
received Thus, it is entitled to a refund.