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SUPREME COURT P&G-Phil., on 13 July 1977, filed a petition for review with public
Manila respondent Court of Tax Appeals ("CTA") docketed as CTA Case No.
2883. On 31 January 1984, the CTA rendered a decision ordering
EN BANC petitioner Commissioner to refund or grant the tax credit in the amount
of P4,832,989.00.
G.R. No. L-66838 December 2, 1991
On appeal by the Commissioner, the Court through its Second
COMMISSIONER OF INTERNAL REVENUE, petitioner, Division reversed the decision of the CTA and held that:
vs.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING (a) P&G-USA, and not private respondent P&G-Phil., was the
CORPORATION and THE COURT OF TAX APPEALS,respondents. proper party to claim the refund or tax credit here involved;
T.A. Tejada & C.N. Lim for private respondent. (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
RESOLUTION
Philippines equivalent to twenty percent (20%) which
represents the difference between the regular tax of thirty-five
FELICIANO, J.: percent (35%) on corporations and the tax of fifteen percent
(15%) on dividends; and
For the taxable year 1974 ending on 30 June 1974, and the taxable
year 1975 ending 30 June 1975, private respondent Procter and (c) private respondent P&G-Phil. failed to meet certain
Gamble Philippine Manufacturing Corporation ("P&G-Phil.") declared conditions necessary in order that "the dividends received by
dividends payable to its parent company and sole stockholder, Procter its non-resident parent company in the US (P&G-USA) may
and Gamble Co., Inc. (USA) ("P&G-USA"), amounting to be subject to the preferential tax rate of 15% instead of 35%."
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. 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.
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 I
pursuant to Section 24 (b) (1) of the National Internal Revenue Code
("NITC"), 1 as amended by Presidential Decree No. 369, the 1. There are certain preliminary aspects of the question of the capacity
applicable rate of withholding tax on the dividends remitted was only of P&G-Phil. to bring the present claim for refund or tax credit, which
fifteen percent (15%) (and not thirty-five percent [35%]) of the need to be examined. This question was raised for the first time on
dividends. 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 collected, or of any penalty claimed to have been collected
allowed to defeat an otherwise valid claim for refund by raising this without authority, or of any sum alleged to have been
question of alleged incapacity for the first time on appeal before this excessive or in any manner wrongfully collected, until a claim
Court. This is clearly a matter of procedure. Petitioner does not for refund or credit has been duly filed with the Commissioner
pretend that P&G-Phil., should it succeed in the claim for refund, is of Internal Revenue; but such suit or proceeding may be
likely to run away, as it were, with the refund instead of transmitting maintained, whether or not such tax, penalty, or sum has been
such refund or tax credit to its parent and sole stockholder. It is paid under protest or duress. In any case, no such suit or
commonplace that in the absence of explicit statutory provisions to the proceeding shall be begun after the expiration of two years
contrary, the government must follow the same rules of procedure from the date of payment of the tax or penalty regardless of
which bind private parties. It is, for instance, clear that the government any supervening cause that may arise after payment: . . .
is held to compliance with the provisions of Circular No. 1-88 of this (Emphasis supplied)
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 Section 309 (3) of the NIRC, in turn, provides:
the Republic of the Philippines is exempt by the Rules of Court.
Sec. 309. Authority of Commissioner to Take Compromises
More importantly, there arises here a question of fairness should the and to Refund Taxes.—The Commissioner may:
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
xxx xxx xxx
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 (3) credit or refund taxes erroneously or illegally received, . . . No credit
corporation to bring the claim for refund, then P&G-Phil. would have or refund of taxes or penalties shall be allowed unless the taxpayer
been able forthwith to secure and produce such authorization before files in writing with the Commissioner a claim for credit or refund within
filing the action in the instant case. The action here was commenced two (2) years after the payment of the tax or penalty. (As amended by
just before expiration of the two (2)-year prescriptive period. P.D. No. 69) (Emphasis supplied)
2. The question of the capacity of P&G-Phil. to bring the claim for Since the claim for refund was filed by P&G-Phil., the question which
refund has substantive dimensions as well which, as will be seen arises is: is P&G-Phil. a "taxpayer" under Section 309 (3) of the NIRC?
below, also ultimately relate to fairness. 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
Under Section 306 of the NIRC, a claim for refund or tax credit filed
withholding agent who is "required to deduct and withhold any tax" is
with the Commissioner of Internal Revenue is essential for made " personally liable for such tax" and indeed is indemnified
maintenance of a suit for recovery of taxes allegedly erroneously or
against any claims and demands which the stockholder might wish to
illegally assessed or collected: make in questioning the amount of payments effected by the
withholding agent in accordance with the provisions of the NIRC. The
Sec. 306. Recovery of tax erroneously or illegally collected. withholding agent, P&G-Phil., is directly and independently liable 3 for
— No suit or proceeding shall be maintained in any court for the correct amount of the tax that should be withheld from the dividend
the recovery of any national internal revenue tax hereafter remittances. The withholding agent is, moreover, subject to and liable
alleged to have been erroneously or illegally assessed or for deficiency assessments, surcharges and penalties should the
amount of the tax withheld be finally found to be less than the amount payment of the tax to the government, such authority may reasonably
that should have been withheld under law. 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
A "person liable for tax" has been held to be a "person subject to tax" especially warranted where, is in the instant case, the withholding
and properly considered a "taxpayer." 4 The terms liable for tax" and agent is the wholly owned subsidiary of the parent-stockholder and
"subject to tax" both connote legal obligation or duty to pay a tax. It is therefore, at all times, under the effective control of such parent-
very difficult, indeed conceptually impossible, to consider a person stockholder. In the circumstances of this case, it seems particularly
who is statutorily made "liable for tax" as not "subject to tax." By any unreal to deny the implied authority of P&G-Phil. to claim a refund and
reasonable standard, such a person should be regarded as a party in to commence an action for such refund.
interest, or as a person having sufficient legal interest, to bring a suit
for refund of taxes he believes were illegally collected from him. 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
In Philippine Guaranty Company, Inc. v. Commissioner of Internal P&G-USA of the subsidiary's authority to claim the refund or tax credit
Revenue, 5 this Court pointed out that a withholding agent is in fact and to remit the proceeds of the refund., or to apply the tax credit to
the agent both of the government and of the taxpayer, and that the some Philippine tax obligation of, P&G-USA, before actual payment of
withholding agent is not an ordinary government agent: 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-
The law sets no condition for the personal liability of the Phil. is directly and personally liable to the Government for the taxes
withholding agent to attach. The reason is to compel the and any deficiency assessments to be collected, the Government is
withholding agent to withhold the tax under all circumstances. 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
In effect, the responsibility for the collection of the tax as well
beginning. A sovereign government should act honorably and fairly at
as the payment thereof is concentrated upon the person over
all times, even vis-a-vis taxpayers.
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 We believe and so hold that, under the circumstances of this case,
the tax, he is the Government's agent. In regard to the filing of P&G-Phil. is properly regarded as a "taxpayer" within the meaning of
the necessary income tax return and the payment of the tax Section 309, NIRC, and as impliedly authorized to file the claim for
to the Government, he is the agent of the taxpayer. The refund and the suit to recover such claim.
withholding agent, therefore, is no ordinary government agent
especially because under Section 53 (c) he is held personally II
liable for the tax he is duty bound to withhold; whereas the
Commissioner and his deputies are not made liable by law. 6 1. We turn to the principal substantive question before us: the
(Emphasis supplied) 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:
If, as pointed out in Philippine Guaranty, the withholding agent is also (b) Tax on foreign corporations.—
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
(1) Non-resident corporation. — A foreign corporation not equivalent to the twenty (20) percentage points waived by the
engaged in trade and business in the Philippines, . . ., shall Philippines.
pay a tax equal to 35% of the gross income receipt during its
taxable year from all sources within the Philippines, as . . . 2. The question arises: Did the US law comply with the above
dividends . . . Provided, still further, that on dividends received requirement? The relevant provisions of the US Intemal Revenue
from a domestic corporation liable to tax under this Chapter, Code ("Tax Code") are the following:
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 Sec. 901 — Taxes of foreign countries and possessions of United
the condition that the country in which the non-resident foreign States.
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 . . . (a) Allowance of credit. — If the taxpayer chooses to have the
benefits of this subpart, the tax imposed by this chapter
The ordinary thirty-five percent (35%) tax rate applicable to dividend shall, subject to the applicable limitation of section 904, be
remittances to non-resident corporate stockholders of a Philippine credited with the amounts provided in the applicable
corporation, goes down to fifteen percent (15%) if the country of paragraph of subsection (b) plus, in the case of a corporation,
domicile of the foreign stockholder corporation "shall allow" such the taxes deemed to have been paid under sections 902 and
foreign corporation a tax credit for "taxes deemed paid in the 960. Such choice for any taxable year may be made or
Philippines," applicable against the tax payable to the domiciliary changed at any time before the expiration of the period
country by the foreign stockholder corporation. In other words, in the prescribed for making a claim for credit or refund of the tax
instant case, the reduced fifteen percent (15%) dividend tax rate is imposed by this chapter for such taxable year. The credit shall
applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes not be allowed against the tax imposed by section 531
deemed paid in the Philippines" applicable against the US taxes of (relating to the tax on accumulated earnings), against the
P&G-USA. The NIRC specifies that such tax credit for "taxes deemed additional tax imposed for the taxable year under section 1333
paid in the Philippines" must, as a minimum, reach an amount (relating to war loss recoveries) or under section 1351
equivalent to twenty (20) percentage points which represents the (relating to recoveries of foreign expropriation losses), or
difference between the regular thirty-five percent (35%) dividend tax against the personal holding company tax imposed by section
rate and the preferred fifteen percent (15%) dividend tax rate. 541.
It is important to note that Section 24 (b) (1), NIRC, does not require (b) Amount allowed. — Subject to the applicable limitation of
that the US must give a "deemed paid" tax credit for the dividend tax section 904, the following amounts shall be allowed as the
(20 percentage points) waived by the Philippines in making applicable credit under subsection (a):
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- (a) Citizens and domestic corporations. — In the case
corporation to have paid the twenty (20) percentage points of dividend of a citizen of the United States and of a domestic
tax waived by the Philippines. The NIRC only requires that the US corporation, the amount of any income, war profits,
"shall allow" P&G-USA a "deemed paid" tax credit in an amount and excess profits taxes paid or accrued during the
taxable year to any foreign country or to any (A) for purposes of subsections (a) (1) and (b)
possession of the United States; and (1), the amount of its gains, profits, or income
computed without reduction by the amount of
xxx xxx xxx the income, war profits, and excess profits
taxes imposed on or with respect to such
Sec. 902. — Credit for corporate stockholders in profits or income by any foreign country. . . .;
foreign corporation. and
(A) Treatment of Taxes Paid by Foreign Corporation. (B) for purposes of subsections (a) (2) and (b)
(2), the amount of its gains, profits, or income
— For purposes of this subject, a domestic
in excess of the income, war profits, and
corporation which owns at least 10 percent of the
excess profits taxes imposed on or with
voting stock of a foreign corporation from which
itreceives dividends in any taxable year shall — respect to suchprofits or income.
Amount (b) above, i.e., the amount of the "deemed paid" tax Since P29.75 is much higher than P13.00 (the amount of
credit which US tax law allows under Section 902, Tax Code, dividend tax waived by the Philippine government), Section
may be computed arithmetically as follows: 902, US Tax Code, specifically and clearly complies with the
requirements of Section 24 (b) (1), NIRC.
More simply put, Section 24 (b) (1), NIRC, seeks to promote the in- P55.25
flow of foreign equity investment in the Philippines by reducing the tax - 15.66
———
cost of earning profits here and thereby increasing the net dividends
P39.59 — Amount received by P&G-USA net of R.P. and U.S.
remittable to the investor. The foreign investor, however, would not
===== taxes without "deemed paid" tax credit.
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
P25.415 (b) When the recipient is a corporation, 20 percent of the gross
- 29.75 — "Deemed paid" tax credit under Section 902 US amount of the dividend if during the part of the paying
——— Tax Code (please see page 18 above) corporation's taxable year which precedes the date of
payment of the dividend and during the whole of its prior
- 0 - — US corporate income tax payable on dividends taxable year (if any), at least 10 percent of the outstanding
====== remitted by P&G-Phil. to P&G-USA after shares of the voting stock of the paying corporation was
Section 902 tax credit. owned by the recipient corporation.
Art 11. — Dividends We conclude that private respondent P&G-Phil, is entitled to the tax
refund or tax credit which it seeks.
xxx xxx xxx
WHEREFORE, for all the foregoing, the Court Resolved to GRANT
private respondent's Motion for Reconsideration dated 11 May 1988,
(2) The rate of tax imposed by one of the Contracting States
on dividends derived from sources within that Contracting to SET ASIDE the Decision of the and Division of the Court
State by a resident of the other Contracting State shall not 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.
exceed —
2883 dated 31 January 1984 and to DENY the Petition for Review for
lack of merit. No pronouncement as to costs.
(a) 25 percent of the gross amount of the dividend; or