MARUBENI CORPORATION v.

CIR
G.R. No. 76573
March 7, 1990

Notes from Tax 1:

GENERAL RULE: The head office of a foreign corporation is the same juridical entity as its branch in the Philippines following the "single entity
concept." The income from sources within the Philippines of the foreign head office shall thus be taxable to the Philippine branch.
TAXPAYER: Resident Foreign Corporation.

EXCEPTION: When the head office of a foreign corporation independently and directly invested in a domestic corporation without the funds
passing through its Philippine branch, the taxpayer with respect to the tax on dividend income would be the foreign corporation itself.
TAXPAYER: Non-resident foreign corporation.

FACTS:
1. Marubeni Corporation is a Japanese corporation licensed to engage in business in the
Philippines.
2. When the profits on Marubeni’s investments in Atlantic Gulf and Pacific Co. of Manila
were declared, a 10% final dividend tax was withheld from it, and another 15% profit
remittance tax based on the remittable amount after the final 10% withholding tax were
paid to the Bureau of Internal Revenue.
3. Marubeni Corp. now claims for a refund or tax credit for the amount which it has allegedly
overpaid the BIR.
4. CIR denied refund claimed.
5. Appealed to CTA, also denied.

January 29, 1981 Petitioner sought a ruling from the Bureau of Internal Revenue on whether or not the
dividends petitioner received from AG&P are effectively connected with its conduct or business in
the Philippines as to be considered branch profits subject to the 15% profit remittance tax
imposed under Section 24 (b) (2) of the National Internal Revenue Code as amended by
Presidential Decrees Nos. 1705 and 1773.

In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled:

Pursuant to Section 24 (b) (2) of the Tax Code, as amended, only profits remitted abroad by
a branch office to its head office which are effectively connected with its trade or business in the
Philippines are subject to the 15% profit remittance tax. To be effectively connected it is not
necessary that the income be derived from the actual operation of taxpayer-corporation's trade
or business; it is sufficient that the income arises from the business activity in which the
corporation is engaged. For example, if a resident foreign corporation is engaged in the buying
and selling of machineries in the Philippines and invests in some shares of stock on which
dividends are subsequently received, the dividends thus earned are not considered 'effectively
connected' with its trade or business in this country. (Revenue Memorandum Circular No. 55-80).
In the instant case, the dividends received by Marubeni from AG&P are not income arising
from the business activity in which Marubeni is engaged. Accordingly, said dividends if remitted
abroad are not considered branch profits for purposes of the 15% profit remittance tax imposed
by Section 24 (b) (2) of the Tax Code, as amended . . .

September 21, 1981 Consequently, in a letter filed with the Commissioner of Internal Revenue, Marubeni claimed
for the refund or issuance of a tax credit of P229,424.40 "representing profit tax remittance
erroneously paid on the dividends remitted by Atlantic Gulf and Pacific Co. of Manila (AG&P) on
April 20 and August 4, 1981 to ... head office in Tokyo.

June 14, 1982 Respondent Commissioner of Internal Revenue denied petitioner's claim for refund/credit of
P229,424.40 on the following grounds:
While it is true that said dividends remitted were not subject to the 15% profit remittance tax
as the same were not income earned by a Philippine Branch of Marubeni Corporation of Japan;
and neither is it subject to the 10% intercorporate dividend tax, the recipient of the dividends,
 being a non-resident stockholder, nevertheless, said dividend income is subject to the 25 % tax
pursuant to Article 10 (2) (b) of the Tax Treaty dated February 13, 1980 between the Philippines
and Japan.
Inasmuch as the cash dividends remitted by AG&P to Marubeni Corporation, Japan is subject
to 25 % tax, and that the taxes withheld of 10 % as intercorporate dividend tax and 15 % as profit
remittance tax totals (sic) 25 %, the amount refundable offsets the liability, hence, nothing is left
to be refunded.

February 12, 1986 Petitioner appealed to the Court of Tax Appeals which affirmed the denial of the refund by
the Commissioner of Internal Revenue in its assailed judgment.
In support of its rejection of petitioner's claimed refund, respondent Tax Court explained:
Whatever the dialectics employed, no amount of sophistry can ignore the fact that the
dividends in question are income taxable to the Marubeni Corporation of Tokyo, Japan. The said
dividends were distributions made by the Atlantic, Gulf and Pacific Company of Manila to its
shareholder out of its profits on the investments of the Marubeni Corporation of Japan, a non-
resident foreign corporation. The investments in the Atlantic Gulf & Pacific Company of the
Marubeni Corporation of Japan were directly made by it and the dividends on the investments
were likewise directly remitted to and received by the Marubeni Corporation of Japan. Petitioner
Marubeni Corporation Philippine Branch has no participation or intervention, directly or indirectly,
in the investments and in the receipt of the dividends. And it appears that the funds invested in
the Atlantic Gulf & Pacific Company did not come out of the funds infused by the Marubeni
Corporation of Japan to the Marubeni Corporation Philippine Branch. As a matter of fact, the
Central Bank of the Philippines, in authorizing the remittance of the foreign exchange equivalent
of (sic) the dividends in question, treated the Marubeni Corporation of Japan as a non-resident
stockholder of the Atlantic Gulf & Pacific Company based on the supporting documents submitted
to it.
Subject to certain exceptions not pertinent hereto, income is taxable to the person who
earned it. Admittedly, the dividends under consideration were earned by the Marubeni
Corporation of Japan, and hence, taxable to the said corporation. While it is true that the
Marubeni Corporation Philippine Branch is duly licensed to engage in business under Philippine
laws, such dividends are not the income of the Philippine Branch and are not taxable to the said
Philippine branch. We see no significance thereto in the identity concept or principal-agent
relationship theory of petitioner because such dividends are the income of and taxable to the
Japanese corporation in Japan and not to the Philippine branch.

6. Petitioned to SC.
7. September 14, 1989, SC ruled:
In our decision dated September 14, 1989, we ruled that petitioner was a non-resident foreign corporation subject to Section 24 (b)
(1) of the National Internal Revenue Code of 1977 which states: "Tax on foreign corporations. (1) Nonresident foreign corporations .
. . (iii) On dividends received from a domestic corporation liable to tax under this Chapter, the tax shall be 15% of the dividends received
which shall be collected and paid as provided in Section 53 (d) of this Code, subject to the condition that the country in which the non-
resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation taxes
deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on
corporations and the tax (15%) on the dividends provided in this section; . . . ." "Based on this finding, we reversed the decision of
respondent Court of Tax Appeals dated February 12, 1986 which affirmed the denial by respondent Commissioner of Internal Revenue
of petitioner's claim for refund. We thus ordered the Commissioner of Internal Revenue to refund or grant as tax credit in favor of
petitioner the amount of P144,452.40.

a. Whether or not the dividends Marubeni Corporation
received from Atlantic Gulf and Pacific Co. are
effectively connected with its conduct or business in
the Philippines as to be considered branch profits
subject to 15% profit remittance tax imposed under
Section 24(b)(2) of the National Internal Revenue
Code.
b. Whether Marubeni Corporation is a resident or non-
resident foreign corporation.
NO. Pursuant to Section 24(b)(2) of the Tax Code, as amended,
only profits remitted abroad by a branch office to its head
office which are effectively connected with its trade or business
in the Philippines are subject to the 15% profit remittance tax.
The dividends received by Marubeni Corporation from Atlantic
Gulf and Pacific Co. are not income arising from the business
activity in which Marubeni Corporation is engaged.
Accordingly, said dividends if remitted abroad are not
considered branch profits for purposes of the 15% profit
remittance tax imposed by Section 24(b)(2) of the Tax Code, as
amended.
Marubeni Corporation is a non-resident foreign corporation,
with respect to the transaction. Marubeni Corporation’s head
 office in Japan is a separate and distinct income taxpayer from
the branch in the Philippines. The investment on Atlantic Gulf
and Pacific Co. was made for purposes peculiarly germane to
the conduct of the corporate affairs of Marubeni Corporation
in Japan, but certainly not of the branch in the Philippines.

c. At what rate should Marubeni be taxed? 15%.

The applicable provision of the Tax Code is Section 24(b)(1)(iii)

in conjunction with the Philippine-Japan Tax Treaty of 1980. As
a general rule, it is taxed 35% of its gross income from all
sources within the Philippines. However, a discounted rate of
15% is given to Marubeni Corporation on dividends received
from Atlantic Gulf and Pacific Co. on the condition that Japan,
its domicile state, extends in favor of Marubeni Corporation a
tax credit of not less than 20% of the dividends received. This
15% tax rate imposed on the dividends received under Section
24(b)(1)(iii) is easily within the maximum ceiling of 25% of the
gross amount of the dividends as decreed in Article 10(2)(b) of
the Tax Treaty.

Note: Each tax has a different tax basis.

Under the Philippine-Japan Tax Convention, the 25% rate fixed is the maximum rate, as reflected in the phrase “shall not exceed.”
This means that any tax imposable by the contracting state concerned should not exceed the 25% limitation and said rate would
apply only if the tax imposed by our laws exceeds the same.

8. On October 5, 1989, the Solicitor General, representing the public respondent, filed a
motion for reconsideration stating that although we correctly ruled that petitioner is a
non-resident foreign corporation still petitioner could not avail itself of the preferential
tax rate of 15% under said Section 24(b)(1) because it failed to comply with the requisites
set forth thereunder.
9. On October 9, 1989, petitioner similarly filed its motion for reconsideration remaining
steadfast to its position that it is a resident foreign corporation subject only to the ten
percent (10%) final intercorporate dividend tax.

ISSUE:
1. WON the petitioner is a non-resident foreign corporation.
2. WON it can avail of the preferential rate of 15% under Sec. 24(b)(1).

HELD:
1. YES. Marubeni is a non-resident foreign corporation.
2. NO. It cannot avail itself of the preferential tax rate of 15% under said Section 24(b)(1)
because it failed to comply with the requisites set forth thereunder.

SC grants the motion for reconsideration filed by the Solicitor General.

 "Section 24(b)(1) is explicit on the conditions for the availment of the preferential fifteen
percent (15%) tax rate. Under said provision, petitioner must show that Japan grants a tax credit
to Marubeni, taxes deemed to have been paid in the Philippines equivalent to at least twenty
percent (20%) against the tax due from Marubeni.

"Noteworthy is the recent case of Commissioner of Internal Revenue vs. Procter and
Gamble PMC (G.R. No. 66835, April 15, 1988, 160 SCRA 560). In that case we denied Procter and
Gamble's claim for refund for its parent company in the United States since it failed to meet the
following conditions necessary for the availment of the preferential fifteen percent (15%) tax
namely:
i. to show the actual amount credited by the U.S. Government against the income
tax due from PMC- USA on the dividends received from private respondent;
ii. to present the income tax return of its mother company for 1975 when the
dividends were received;
iii. to submit any authenticated document showing that the US Government credited
20% of the tax deemed paid in the Philippines.

"In the case at bar, petitioner similarly failed to comply with the requisites set forth
under Section 24(b)(1). Petitioner reasons that it cannot furnish the Commissioner of Internal
Revenue with the confidential income tax return of Marubeni Japan since such a requirement is
beyond the power of Philippine taxation laws. (Rollo, p. 238). "Such reasoning finds no merit.
Section 24(b)(i) of the National Internal Revenue Code of 1977 is clear and explicit on the
conditions for the availment of the preferential fifteen percent (15%) tax rate. Normally the
Philippines imposes a higher thirty five percent (35%) tax rate on corporations. But since the
Philippines seeks to lessen the impact of double taxation between countries, we impose only the
lower tax rate of fifteen percent (15%) on dividends subject to the condition that the country in
which the non-resident foreign corporation is domiciled allows a tax credit of twenty percent
(20%). Such prerequisite must be strictly complied with because the fifteen percent (15%) tax
rate is a concession in the nature of a tax exemption vis-a-vis the normal rate of thirty five (35%)
on corporations.

"Petitioner's motion for reconsideration merely reiterates the same arguments previously
raised in its petition and does not raise substantial issues not raised upon in our decision dated
September 14, 1989.

DISPOSITION: Accordingly, since petitioner failed to comply with the conditions set forth under
Section 24 (b)(1) of the National Internal Revenue Code of 1977, we hereby modify the decision
dated September 14, 1989 and rule that petitioner corporation is subject to the twenty five
percent (25%) tax rate on dividends pursuant to Article 10(2) of the Philippine-Japan Tax
Convention. The Commissioner of Internal Revenue is hereby ordered to recompute the tax due
from petitioner corporation using the correct tax base and rate."