Commissioner of Internal Revenue v. S.C.

Johnson

[G.R. No. 127105. June 25, 1999]

Digest by: PADUA, Julie Ann E.

PONENTE:Gonzaga-Reyes

FACTS:

S.C. Johnson and Son, Inc. (S.C. Johnson), 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.

For the use of the trademark or technology, S.C. Johnson 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 S.C. Johnson paid for the period covering July 1992 to May 1993 in the
total amount of P1,603,443.00.

On October 29, 1993, S.C. Johnson filed with the International Tax Affairs Division (ITAD) of the BIR a claim for refund of overpaid withholding tax
on royalties arguing that the preferential tax rate of 10% withholding tax should apply to the S.C. Johnson 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)].” However, the
Commissioner did not act on said claim for refund resulting in the filing of a petition for review before the Court of Tax Appeals (CTA).

On May 7, 1996, the CTA rendered its decision in favor of S.C. Johnson and ordered the Commissioner of Internal Revenue (CIR) to issue a tax credit
certificate amounting to P963,266.00 representing overpaid withholding tax on royalty payments. The CIR thus filed a petition for review with the
Court of Appeals but the latter affirmed in too the CTA ruling; hence, this petition for review.

ISSUE:

Whether or not S. C. Johnson should be 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 German Tax Treaty.

HELD:

No. The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting. Article 24 of the RP-Germany Tax Treaty,
expressly allows crediting against German income and corporation tax of 20% of the gross amount of royalties paid under the law of the
Philippines. On the other hand, Article 23 of the RP-US Tax Treaty, which is the counterpart provision with respect to relief for double taxation,
does not provide for similar crediting of 20% of the gross amount of royalties paid.

The purpose of a most favored nation clause is to grant to the contracting party treatment not less favorable than that which has been or may be
granted to the “most favored” among other countries. The most favored nation clause is intended to establish the principle of equality of
international treatment by providing that the citizens or subjects of the contracting nations may enjoy the privileges accorded by either party to
those of the most favored nation. The essence of the principle is to allow the taxpayer in one state to avail of more liberal provisions granted in
another tax treaty to which the country of residence of such taxpayer is also a party provided that the subject matter of taxation, in this case
royalty income, is the same as that in the tax treaty under which the taxpayer is liable. 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.

Further, since the RP-US Tax Treaty does not give a matching tax credit of 20% for the taxes paid to the Philippines on royalties as allowed under
the RP-West Germany Tax Treaty, S.C. Johnson cannot be deemed entitled to the 10% rate granted under the latter treaty for the reason that there
is no payment of taxes on royalties under similar circumstances.

Commissioner of Customs vs. Eastern Sea Trading (G.R. No. L-14279)

FACTS: EST was a shipping company charged in the importation from Japan of onion and garlic into the Philippines. In 1956, the Commissioner of
Customs ordered the seizure and forfeiture of the import goods because EST was not able to comply with Central Bank Circulars 44 and 45. The
said circulars were pursuant to EO 328 w/c sought to regulate the importation of such non-dollar goods from Japan (as there was a Trade and
1
Financial Agreement b/n the Philippines and Japan then). EST questioned the validity of the said EO averring that the said EO was never concurred
upon by the Senate. The issue was elevated to the Court of Tax Appeals and the latter ruled in favor of EST. The Commissioner appealed.

ISSUE: Whether or not the EO is subject to the concurrence of at least 2/3 of the Senate.

HELD: No, executive Agreements are not like treaties which are subject to the concurrence of at least 2/3 of the members of the Senate.
Agreements concluded by the President which fall short of treaties are commonly referred to as executive agreements and are no less common in
our scheme of government than are the more formal instruments — treaties and conventions. They sometimes take the form of exchanges of
notes and at other times that of more formal documents denominated ‘agreements’ or ‘protocols’. The point where ordinary correspondence
between this and other governments ends and agreements — whether denominated executive agreements or exchanges of notes or otherwise —
begin, may sometimes be difficult of ready ascertainment. It would be useless to undertake to discuss here the large variety of executive
agreements as such, concluded from time to time. Hundreds of executive agreements, other than those entered into under the trade- agreements
act, have been negotiated with foreign governments. . . . It would seem to be sufficient, in order to show that the trade agreements under the act
of 1934 are not anomalous in character, that they are not treaties, and that they have abundant precedent in our history, to refer to certain classes
of agreements heretofore entered into by the Executive without the approval of the Senate. They cover such subjects as the inspection of vessels,
navigation dues, income tax on shipping profits, the admission of civil aircraft, customs matters, and commercial relations generally, international
claims, postal matters, the registration of trade-marks and copyrights, etc. Some of them were concluded not by specific congressional
authorization but in conformity with policies declared in acts of Congress with respect to the general subject matter, such as tariff acts; while still
others, particularly those with respect to the settlement of claims against foreign governments, were concluded independently of any legislation.

CITY GOVERNMENT OF SAN PABLO, et al. vs. HONORABLE BIENVENIDO V. REYES G.R. No. 127708. March 25, 1999

FACTS:

After the Escudero franchise under Act No. 3648 was transferred to MERALCO, PD. 551 was enacted and provides that the franchise tax shall be 2
% of the gross receipts in lieu of all taxes and assessments of whatever nature imposed by any national or local authority on earnings, receipts, inc
ome and privilege of generation, distribution and sale of electric current.

Pursuant to the enactment of the Local Government Code, the Sangguniang Panglunsod of San Pablo City enacted Ordinance No. 56, otherwise kno
wn as the Revenue Code of the City of San Pablo imposing a tax on business enjoying a franchise, at a rate of 50% of 1% of the gross annual receipt
s, which shall include both cash sales and sales on account realized during the preceding calendar year within the city.

ISSUE:

Whether or not there was violation of non-

impairment clause when the City of San Pablo imposed a local franchise tax pursuant to the LGC upon MERALCO considering that under PD 551 the
tax paid is in lieu of all taxes and assessments of whatever nature imposed by any national or local authority on savings or income

RULING:

No. The phrase in lieu of all taxes have to give way to the peremptory language of the Local Government Code specifically providing for the withdra
wal of such exemptions, privileges, and that upon the effectivity of the Local Government Code all exemptions except only as provided therein can
no longer be invoked by MERALCO to disclaim liability for the local tax.

There is further basis for the conclusion that the non-

impairment of contract clause cannot be invoked to uphold Meralco’s exemption from the local tax. Legislative franchise under Act No. 3648 provid
ed that the franchise is granted upon the condition that it shall be subject to amendment, or repeal by the Congress of the United States. Also, und
er the 1935, the 1973 and the 1987 Constitutions, no franchise or right shall be granted except under the condition that it shall be subject to amen
dment, alteration or repeal by the National Assembly when the public interest so requires. With or without the reservation clause, franchises are su
bject to alterations through a reasonable exercise of the police power; they are also subject to alteration by the power to tax, which like police pow
er cannot be contracted away.