Commissioner of Internal Revenue v St Luke’s | G.R. No. 195909 | Sep 26, 2012 | Carpio, J.

Petitioners: Commissioner of Internal Revenue

Respondents: St Luke’s Medical Center

SUMMARY: St Luke’s was assessed by the BIR for deficiency taxes amounting to 76M which was comprised of VAT and
income tax among other things. St Luke’s argues that as a non-stock & non-profit hospital it is exempt from the payment
of the income tax deficiency. The CTA eventually ruled in favor of the hospital which lowered the tax deficiency to 6M
due to the exemption from income tax. The SC reversed this on the ground that even though St Luke’s is indeed a non-
stock & non-profit institution which is exempt from the taxation for income derived from non-profit activity, the large
revenues derived from for-profit activity are subject to income taxation.

FACTS:

 St Luke’s Medical Center is non-stock, non-profit hospital. It’s articles of incorporation states that its purpose is
o To establish, equip, operate and maintain a non-stock, non-profit Christian, benevolent, charitable and
scientific hospital which shall give curative, rehabilitative and spiritual care to the sick, diseased and
disabled persons; provided that purely medical and surgical services shall be performed by duly licensed
physicians and surgeons who may be freely and individually contracted by patients;
o To provide a career of health science education and provide medical services to the community through
organized clinics in such specialties as the facilities and resources of the corporation make possible;
o To carry on educational activities related to the maintenance and promotion of health as well as provide
facilities for scientific and medical researches which, in the opinion of the Board of Trustees, may be
justified by the facilities, personnel, funds, or other requirements that are available;
o To cooperate with organized medical societies, agencies of both government and private sector; establish
rules and regulations consistent with the highest professional ethics;
 December, 2002: BIR assessed St. Luke’s deficiency taxes amounting to P76M for 1998, comprised of deficiency
income tax, VAT, withholding tax on compensation and expanded withholding tax.
o The BIR reduced the amount to P63M during trial CTA
 January 2003, St. Luke’s filed an administrative protest with the BIR. BIR didn’t act on it
 St. Luke’s appealed to the CTA. (APPEAL TO CA)
o BIR argued that NIRC s27(B) imposes a 10% preferential tax rate on the income of proprietary nonprofit
hospitals, should be applicable to St. Luke’s.
 It’s a new provision intended to amend the exemption on non-profit hospitals that were
previously categorized as non-stock, non-profit corporations
 It is a specific provision which prevails over the general exemption
 The BIR claimed that St. Luke’s was operating for profit in 1998 because only 13% of its revenues
came from charitable purposes.
o St Luke’s argues that the BIR should not consider its total revenues, because its free services to patients
65% of its 1998 operating income
 St. Luke’s also claimed that its income does not inure to the benefit of any individual.
 St. Luke’s maintained that it is a non-stock and non-profit institution for charitable and social
welfare purposes under NIRC s30(E) and (G).
 It argued that the making of profit per se does not destroy its income tax exemption.
 CTA ruled that St. Luke’s is a non-stock and non-profit charitable institution covered by NIRC s30(E) and (G). This
ruling would exempt all income derived by St. Luke’s from services to its patients, whether paying or non-paying.
o CTA ruled that a charitable institution does not lose its charitable character and its exemption from
taxation merely because recipients of its benefits who are able to pay are required to do so, where
funds derived in this manner are devoted to the charitable purposes of the institution. The generation
of income from paying patients does not per se destroy the charitable nature of St. Luke’s.
o Hence, the P63M in taxes was reduced to P6M
 BIR appeals said decision

ISSUES + RULING:

 Whether or not St. Luke’s is liable for deficiency income tax in 1998 under Section 27(B) of the NIRC, which
imposes a preferential tax rate of 10% on the income of proprietary non-profit hospitals? St Luke’s is not
exempt, hence liable
o BIR argues that NIRC s27(B) that the 10% income tax rate specifically pertains to proprietary educational
institutions and proprietary non-profit hospitals. (TAXABLE UNDER S27B DAW)
 Congress intended to remove the exemption that non-profit hospitals previously enjoyed under
Section 27(E) of the NIRC of 1977, which is now substantially reproduced in NIRC s30(E)
 NIRC s27(B) provides that “Proprietary educational institutions and hospitals which are non-
profit shall pay a tax of ten percent (10%) on their taxable income” (CLEARLY PROVIDED FOR
 10% TAX)
o St. Luke’s claims tax exemption under Section 30(E) and (G) of the NIRC.
 Contends that it is a charitable institution and an organization promoting social welfare.
 The argument of St. Luke’s focus on the wording of Section 30(E) exempting from income tax non-
stock, non-profit charitable institutions
 The legislative intent behind NIRC s27(b) was only to remove the exemption for “proprietary
non-profit” hospitals. (INTENT TO REMOVE SUCH EXEMPTION)
 SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed
under this Title in respect to income received by them as such:
 (E) Nonstock corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans,
no part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person;
 G) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;
 Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind
and character of the foregoing organizations from any of their properties, real or
personal, or from any of their activities conducted for profit regardless of the disposition
made of such income, shall be subject to tax imposed under this Code.
o SC: Partly grants the petition of the BIR but on a different ground.
 NIRC s27(B) does not remove the income tax exemption of proprietary non-profit hospitals under
s30(E) and (G).
 s27(B) and s30(E) and (G) can be construed together without the removal of such tax exemption.
 The effect of the introduction of s27(B) is to subject the taxable income of proprietary non-
profit hospitals, among the institutions covered by Section 30, to the 10% preferential rate
under s27(B) instead of the ordinary 30% corporate rate under the last paragraph of Section 30
in relation to s27(A). (EXEMPTION STILL EXISTS; READ TOGETHER = 10% TAXABLE INCOME
INSTEAD OF ORDINARY RATE OF 30%)
 The only qualifications for hospitals are that they must be proprietary and non-profit.
 Proprietary means private, Non-profit means no net income or asset accrues to or
benefits any member or specific person, with all the net income or asset devoted to the
institution’s purposes and all its activities conducted not for profit.
 Non-profit does not necessarily mean “charitable.”
 Lung center v QC: Charity in was defined as a gift, to be applied consistently with existing
laws, for the benefit of an indefinite number of persons, either by bringing their minds
and hearts under the influence of education or religion, by assisting them to establish
themselves in life or by otherwise lessening the burden of government.
o Charitable institutions provide for free goods and services to the public which
would otherwise fall on the shoulders of government
 An organization may be considered as non-profit if it does not distribute any part of its
income to stockholders or members.
 Despite its being a tax-exempt institution, any income such institution earns from activities
conducted for profit is taxable, as expressly provided in the last paragraph of s30. (income
earned from activities conducted for profit is taxable)
 Charitable institutions are not ipso facto entitled to a tax exemption.
 The requirements for a tax exemption are specified by the law granting it.
 The Consti exempts charitable institutions only from real property taxes.
 In the NIRC, Congress decided to extend the exemption to income taxes.
 However, the way Congress crafted NIRC s30(E) is materially different from Constitution.
 NIRC s30(E) defines the corporation or association that is exempt from income tax.
 The Constitution does not define a charitable institution, but requires that the institution
“actually, directly and exclusively” use the property for a charitable purpose.
 NIRC s30(E) provides that a charitable institution must be:
 A non-stock corporation or association;
 Organized exclusively for charitable purposes;
 Operated exclusively for charitable purposes; and
 No part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person.
 Thus, both the organization and operations of the charitable institution must be devoted
“exclusively” for charitable purposes.
 The organization of the institution refers to its corporate form, as shown by its articles of
incorporation, by-laws and other constitutive documents.
 NIRC s30(E) specifically requires that the corporation or association be nonstock, which is
defined by the Corporation Code as “one where no part of its income is distributable as
dividends to its members, trustees, or officers” and that any profit “obtained as an
incident to its operations shall, whenever necessary or proper, be used for the
furtherance of the purpose or purposes for which the corporation was organized
 But under Lung Center v QC any profit by a charitable institution must not only be plowed back
 “whenever necessary or proper,” but must be “devoted or used altogether to the charitable
object which it is intended to achieve.”
 The operations of the charitable institution generally refer to its regular activities.
 NIRC s30(E) requires that these operations be exclusive to charity (TO BE EXEMPT
COMPLETELY, HAS TO BE EXCLUSIVELY FOR CHARITY)
o that no part of the net income or asset shall belong to or inure to the benefit of
any member, organizer, officer or any specific person.
o the use of lands, buildings and improvements of the institution is but a part of its
operations
o Instance case:
 St. Luke’s is organized as a non-stock and non-profit charitable institution.
 But this does not automatically exempt St. Luke’s from paying taxes.
 This only refers to the organization of St. Luke’s.
 Even if St. Luke’s meets the test of charity, a charitable institution is not ipso facto tax
exempt.
 To be exempt from real property taxes, the Constitution requires that a charitable
institution use the property “actually, directly and exclusively” for charitable purposes.
 To be exempt from income taxes, NIRC s30(E) requires that a charitable institution must
be “organized and operated exclusively” for charitable purposes.
 Likewise, to be exempt from income taxes, NIRC s30(G) requires that the institution be
“operated exclusively” for social welfare.
 But the last paragraph of NIRC s30 qualifies the words “organized and operated exclusively”
 It provides that if a tax-exempt charitable institution conducts “any” activity for profit,
such activity is not tax exempt even as its not-for-profit activities remain tax exempt.
 This paragraph qualifies the requirements in Section 30(E) that the “[n]on-stock
corporation or association [must be] organized and operated exclusively for x x x
charitable x x x purposes x x x.” It
 It also qualifies the requirement in s30(G) that the civic organization must be “operated
exclusively” for the promotion of social welfare.
o Thus, even if the charitable institution must be “organized and operated exclusively” for charitable
purposes, it is allowed to engage in “activities conducted for profit” without losing its tax exempt status
for its not-for-profit activities. (ONLY THE COMPLETELY CHARITABLE ACTIVITIES ARE EXEMPT FROM
TAX, THE ACTIVITIES FOR PROFIT ARE TAXABLE)
 The consequence is that the “income of whatever kind and character” of a charitable institution
“from any of its activities conducted for profit, regardless of the disposition made of such income,
shall be subject to tax.”
o Prior to the introduction of NIRC s27(B), the tax rate on such income from for-profit activities was the
ordinary corporate rate under Section 27(A).
 But with the introduction of Section 27(B), the tax rate is now 10%.
o It can’t be disputed that a hospital which receives P1.73 billion from paying patients is not an institution
“operated exclusively” for charitable purposes.
 Indeed, St. Luke’s admits that it derived profits from its paying patients.
 St. Luke’s declared P1,730,367,965 as “Revenues from Services to Patients” in contrast to its “Free
Services” expenditure of P218,187,498.
o Services to paying patients are activities conducted for profit.
 They cannot be considered any other way.
 There is a “purpose to make profit over and above the cost” of services
o St Luke’s claims that its charity expenditure of P218M is 65.20% of its operating income in 1998.
 But if a part of the remaining 34% of the operating income is reinvested in property, equipment
or facilities used for services to paying and non-paying patients, then it cannot be said that the
income is “devoted or used altogether to the charitable object which it is intended to achieve.”56
 The income is plowed back to the corporation not entirely for charitable purposes, but for profit
as well.
 NIRC s30 expressly qualifies that income from activities for profit is taxable “regardless of the
disposition made of such income.”
o The Court finds that St. Luke’s is a corporation that is not “operated exclusively” for charitable or social
welfare purposes insofar as its revenues from paying patients are concerned.
 This ruling is based not only on a strict interpretation of a provision granting tax exemption, but
also on the clear and plain text of s30(E) and (G).
 NIRC s30(E) and (G) requires that an institution be “operated exclusively” for charitable or social
welfare purposes to be completely exempt from income tax.
 An institution under s30(E) or (G) does not lose its tax exemption if it earns income from its for-
profit activities.
 Such income from for-profit activities, under the last paragraph of s 30, is merely subject to
income tax, previously at the ordinary corporate rate but now at the preferential 10% rate
pursuant to s27(B).

WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is PARTLY GRANTED. The Decision
of the Court of Tax Appeals En Banc dated 19 November 2010 and its Resolution dated 1 March 2011 in CTA Case No. 6746
are MODIFIED. St. Luke’s Medical Center, Inc. is ORDERED TO PAY the deficiency income tax in 1998 based on the 10%
preferential income tax rate under Section 27(8) of the National Internal Revenue Code. However, it is not liable for
surcharges and interest on such deficiency income tax under Sections 248 and 249 of the National Internal Revenue Code.
All other parts of the Decision and Resolution of the Court of Tax Appeals are AFFIRMED.

N.V. Reederij “Amsterdam” v. CIR | G.R. No. L-46029 | June 23, 1988 | Gancayco, J.

Petition – N.V. Reederij “Amsterdam and Royal Interocean lines

Respondent – Commissioner of Internal Revenue

SUMMARY: Petitioner Reederij “Amsterdam” had 2 vessels which were called on Philippine ports to load cargoes to
foreign destinations. The freight fees for the transactions were paid abroad in the amount of 98k USD in 1963 and 137k
USD in 1964 with petitioner Royal Interoacean lines as husbanding agent (Person who deals with the management of the
affairs of a ship). Respondent CIR then filed an income tax return on behalf of Petitioner applying the prevailing market
conversion rate of 3.9 PhP to 1 USD to calculate the assessment. Petitioner was then assessed for the amounts of 194k
PHP and 263k PHP as a non-resident foreign corporation NOT engaged in business under Sec. 24 (b) (1).

TOPIC: Resident Foreign Corporations; In General

FACTS:
 Petitioner Reederij “Amsterdam” had 2 vessels which were called on Philippine ports to load cargoes to
foreign destinations.
o MV “Amstalmeer” from March 27 to April 30, 1963
o MV “Amstalkroon” from September 24 to October 28, 1964
 The freight fees for the two were 98,175 USD for Amstalmeer and 137,193 USD for Amstalkoon.
 Co-petitioner, Royal Interoacean lines served as the husbanding agent – (The one in charge of filing tax
returns, custom dues, general shipping stuff)
 NV Reederij did not pay any income tax on the freight receipts.
 Respondent CIR then filed the tax returns on behalf of the petitioner pursuant to Sec. 15 of the NIRC.
 1967 - In assessing them the amounts in pesos, Respondent CIR applied the 3.9 PHP to 1 USD and
included fraud compromise
o Assessment of Amstalmeer’s transaction -194k Php
o Assessment for Amstalkoon’s transaction – 264k Php.
 They were assessed as non-resident foreign corporation not engaged in trade or business in the
Philippines. (NONRESIDENT NOT ENGAGED IN BUSINESS)
 Also in 1967 Herein co-petitioner Royal Interocean filed an income tax return assuming that petitioner
was a foreign corporation engaged in trade or business in the Philippines
o Computed the exchange rate of 2 PhP to 1 USD
o Paid the amounts of 1,835 Php and 9,448 Php for the two transactions as income tax.
o Pursuant to Sec. 24(b)(2)
 Co-petitioner also filed a protest to the assessment made by the CIR.
 Petitioners also filed a petition before the CTA praying for cancellation of the assessment.
o The CTA eliminated the 50% fraud penalty but the assessment remained.
 Petitioners filed this appeal.

ISSUE + RULING:

WON Petitioner is a non-resident foreign corporation not doing business in the Philippines? YES
- Petitioners seek a ruling to be a foreign corporation engaged in trade or business in the Philippines
(FCETBP) because the NIRC at the time provided that FCETBPs are taxed 25% upon the amount of
income that does not exceed 100k, then 35% upon the excess. On the other hand if held to be a non-
resident foreign corporation not doing business in the Philippines, the tax shall be 35% on the whole
amount. (GUSTO NILA 25% ON INCOME THAT DOESN’T EXCEED 100K, 35% ON EXCESS vs 35% ON
WHOLE AMOUNT)
- The Court held that petitioner is a foreign corporation which is not authorized or licensed to do
business in the Philippines as it does not have any branch office in the country and only made 2 calls
in Philippine ports. (NOT AUTHORIZED OR LICENSED TO DO BUSINESS HERE COZ ONLY 2 CALLS MADE
- In order that a foreign corporation may be considered engaged in trade or business, its business
transaction must be continuous not merely a casual business activity such as the present case.
 - [Discussion on classification of corporation taxpayers]
o Domestic corporation – Taxed on its income from sources WITHIN and WITHOUT the PH
o Foreign corporation – Taxed on income only WITHIN the Philippines
 Resident Foreign Corporation - Taxable on income solely in the PH but permitted to claim
deductions
 A corporation engaged in trade or business within the Philippines or having an office
therein.
 Non-resident foreign corporation – taxable on income from all sources within the PH, as
interest, dividends, rents, salaries, wages, premium, annuities, compensations,
remunerations, emoluments, or other fixed or determinable annual or periodical or casual
gains, profits and income and capital gains (Sec. 24 (b)(1))
 A corporation not engaged in trade or business within the Philippines and not having any
office therein.
- The applicable provision imposes a tax on foreign corporations falling under the classification of non-
resident corporations without any exceptions or conditions, unlike in the case of foreign corporations
engaged in trade and business in the Philippines (which had an exception to Foreign life insurance)
- Certain corporations were given special treatment in accordance with the Corporation law such as
foreign life insurance companies, domestic life insurance, and educational institutions.
- However, petitioner is a non-resident foreign steamship company not engaged in business in the
Philippines. (P IS A FOREIGN STEAMSHIP NOT ENGAGED IN PH)
- Therefore, the reliance of petitioners to Sec. 24(b)(2) and 37(B)(e) is mistaken as they cover foreign
steamship companies DOING BUSINESS IN THE PH. (LAW CITED IS NOT APPLICABLE TO THEM)

WON the conversion rate of 3.9PHP to 1USD is proper? YES

- Petitioner claims that the rate of 2PhP to 1USD was the applicable rate in determining the assessments.
- It must be noted that the transactions took place during the years 1963 and 1964 wherein the monetary
board was given the authority to fix legal conversion rates of foreign exchange under R.A. 2609.
- When petitioner paid its agency fees for services rendered by co-petitioner it had used the rate of 3.9
pesos per USD (Based on their accounting books)

DISPOSITION: Petition Denied, RTC affirmed.

Marubeni Corp. v. Commissioner of Internal Revenue | G.R. No. 76573 | Sept. 14, 1989 | Fernan, C. J.

Summary:
Marubeni, a foreign corporation based in Japan, received dividends from its investment in AG&P, a Filipino company.
AG&P withheld a 10% tax on the dividends and a further 15% tax on the net of the cash dividends that were remitted
to Marubeni in Japan. After obtaining a favorable ruling from the Commissioner of Internal Revenue (CIR) exempting it
from the 15% tax, Marubeni filed for a tax refund. This was denied by the CIR. The CIR explained that while Marubeni
was exempted from the 10% dividend tax and the 15% tax on profit remittances, it was subject to a 25% tax imposed
by a Tax Treaty between the Philippines and Japan. The tax rate in Treaty, the CIR averred, offsets the exemption.
Marubeni argued, now before the Supreme Court, that it was a resident foreign corporation whose dividends are only
subject to a 10% intercorporate dividend tax. Its conclusion was that since it is the principal of its branch office in the
Philippines, and it and the branch office being one and the same entity, it is a resident foreign corporation. The CIR
contended that it was a non-resident foreign corporation not engaged in trade or business in the Philippines subject
to the 25% tax rate. The Court agreed with the CIR in concluding that Marubeni was a non-resident foreign
corporation. However, it found that the applicable tax rate was only 15%, as provided for in Sec. 24 (b) (1) of the 1977
Tax Code. Hence, Marubeni was still entitled to a refund.

Topic: Branch Profit Remittance Tax

FACTS:
1. Marubeni Corporation is a foreign corporation duly organized under the laws of Japan. It is also duly licensed to
engage in business in the Philippines under Philippine law with a branch office in Intramuros, Manila.
(MARUBENI FOREIGN CORP, JAPAN LAWS  ALSO LICENSED TO DO BUSINESS IN PH W/ A BRANCH OFFICE)
2. Marubeni Corporation has equity investments in Atlantic, Gulf and Pacific (AG&P) Company of Manila, a Filipino
company.
3. During the 1st and 3rd quarters of 1981, AG&P declared and paid cash dividends to Marubeni in the amount of
P849,720 per quarter.
4. AG&P withheld 10% of that amount for payment of the final intercorporate dividend tax. Of the net amount, it
further withheld 15% as branch profit remittance tax. The net amount minus all those taxes was remitted to
Marubeni in Japan. (WITHHELD 10% AS INTERCORP DIVIDEND TAX  15% MORE WITHHELD AS BRANCH
REMITTANCE TAX)

P 849,720.00 Cash Dividend Paid P 764,748.00 Net Cash Dividend

-- 84,972.00 10% Dividend Tax -- 114,712.20 15% Branch Profit Tax
---------------------- ---------------------
764,748.00 Cash Dividend 650,035.80 Amount Remitted to
Net of 10% Tax Marubeni Corp. per Q

5. Marubeni, through accounting firm Sycip, sought to obtain a ruling from the BIR on whether or not the dividends
are effectively connected with its conduct of business in the Philippines as to be considered branch profits subject
to the 15% profit remittance tax.
6. The Commissioner at the time, Ruben Ancheta, ruled that income from dividends received by Marubeni from
AG&P do not arise from the business activity in which Marubeni is engaged in the Philippines. Thus, it should
not be subject to the 15% tax, which only applies to branch profits from income connected with its trade or
business and remitted abroad by a branch office to its head office. (DIVIDENDS FROM AG&P NOT FROM
BUSINESS ACT OF MARUBENI IN PH SO NOT SUBJECT OT 15% TAX  ONLY FOR PROFITS FROM INCOME
CONNECTED W/ TRADE)
7. Marubeni then claimed for a refund of P229,424.40 (P114,712.20 x 2 quarters), representing profit tax remittance
erroneously paid.
8. The Commissioner of Internal Revenue denied the claim.
a. It ruled that Marubeni was not subject to the 15% branch profit remittance tax because the
dividends were not income earned by its branch office.
b. It also ruled that Marubeni was not subject to the 10% intercorporate dividend tax.
c. BUT!!!  Marubeni was nonetheless subject to pay a 25% income tax pursuant to Article 10 (2)
of the 1980 Tax Treaty between the Philippines and Japan.
1. Since the total amount of tax it was exempted from payment (10%+ 15%) equals to the
amount of the tax provided in the treaty (25%), the latter offsets the former. It is thus
not entitled to any refund.
0. The Court of Tax Appeals affirmed the denial.
1. It clarified that the taxable entity was Marubeni Corporation of Japan, not its branch office. This was because the
funds invested in AG&P came from the Japanese corporation, not its Philippine branch. (TAXABLE ENTITY WAS
MARUBENI JAPAN, NOT BRANCH  FUNDS CAME FROM JAP CORP)
2. The issue was elevated to the Supreme Court.

ISSUE with HOLDING:

WON Marubeni is entitled to a refund? YES.
1. It appears that the main contention was whether or not Marubeni should be regarded as a resident foreign
corporation or a non-resident foreign corporation not engaged in trade or business in the Philippines.
a. Marubeni argued before the Supreme Court that following the principal-agent theory, with Marubeni Japan
as principal and its branch office as agent, it should be considered a resident foreign corporation subject
only to the 10% intercorporate final tax on dividends received from a domestic corporation in accordance
with Sec. 24 (c) (1) of the 1977 Tax Code. It considers the branch office and the main office in Japan as the
same entity. (1 entity si branch and principal so since ph branch, resident foreign corp siya)
b. The Commissioner, on the other hand, views Marubeni as a non-resident foreign corporation not engaged
in trade or business in the Philippines, whose income derived from sources within the Philippines is
subject to an income tax rate of 35% as provided in Sec. 24 (b) (1) of the same Tax Code. (ESSENTIALLY,
VIEWS JAPAN AND BRANCH AS SEPARATE  tapos in this case, funds were from Japan)
i. However, the Commissioner added that the Tax Treaty between the Philippines and Japan provided
for a ceiling of 25% on the gross amount of dividends (“…the tax so charged shall not exceed 25 per
cent of the gross amount of dividends”).
c. The Court ruled that the investments were evidently made for purposes germane to the conduct of
corporate affairs of the main office in Japan. Marubeni Corp. of Japan is a non-resident foreign
corporation. Marubeni cannot therefore claim that it was entitled to the lower 10% intercorporate
dividend tax, which is applicable only to resident foreign corporations. The investment is attributable only
to the main office in Japan, and not to the branch office in the Philippines.
d. The Court also ruled that the Commissioner was correct in concluding that the dividends in dispute were
not subject to the 15% profit remittance tax or the 10% intercorporate dividend tax since Marubeni is a
non-resident stockholder corporation. (NOT SUBJECT TO 15% REMITTANCE TAX or INTERCORPORATE
DIVIDENT TAX SINCE NON-RESIDENT CORP)
e. However, simply adding the 10% and 15% tax rate to come up with a 25% total tax rate (that is offset by the
25% ceiling prescribed in the tax treaty) is erroneous. It disregards a basic rule in taxation that each tax has
a different tax basis.
i. The 10% dividend tax rate is directly levied on the amount of dividends received.
ii. The 15% profit remittance tax is imposed on the profit actually remitted abroad.
f. The Commissioner also erred in automatically imposing a 25% tax rate under the Tax Treaty as if it were a
flat rate. It is not. The 25% tax rate is a maximum tax rate, which applies should the taxes imposed by either
country exceed 25%.
g. Ordinarily, under Sec. 24 (b) (1) of the 1977 Tax Code, non-resident foreign corporations are taxed 35% of
their gross income.
h. However, with dividends, the tax is reduced to 15%, provided that the country in which the non-resident
foreign corporation is domiciled extends a tax credit of not less than 20% of the dividends received.
 i. The 15% tax imposed on the dividends is thus within the maximum tax ceiling of 25% provided for in the Tax
Treaty.
j. Being subject only to a 15% tax on dividends, Marubeni is entitled to a refund.

DISPOSITIVE PORTION
The Ruling of the CTA which affirmed the denial of the Commissioner of Internal Revenue is REVERSED. The
Commissioner is ordered to refund or grant tax credit in favor of Marubeni the amount of P144,452.40 representing
overpayment of taxes on dividend received.

BANK OF AMERICA v. CA | G.R. No. 103092/103106 | July 21, 1994 | Vitug, J.

Petitioner/s: Bank of America, NT & SA

Respondent/s: CA and CIR

SUMMARY The petitioner sought to refund an overpayment because of an interpretation of the NIRC. The Court allowed
for the refund sought as the Revenue Code existing in the particular taxable year expressly stated that the
15% tax shall be imposed on the amount actually remitted abroad, hence the 15% should not form part of
the tax base. Court ruled that the law on the imposition of tax to profits of corporations remitted to their
head office abroad specifies that the tax base is composed of the total “profit remitted abroad,” hence the
tax should NOT be inclusive of the sum remitted.

TOPIC: Branch Profit Remittance Tax

FACTS:

 Petitioner bank is a foreign corporation, which on July 20, 1982 paid 15% branch profit remittance tax in
the amount of P7,538,460.72 based on profit from its regular banking unit operations, and
p445,790.25 based on profit from its foreign currency deposit unit operations.
o These taxes were based on net profits after income tax without deducting the amount
corresponding to the 15% tax.
 Petitioner filed a claim for refund with the BIR of that portion which corresponds w/ the 15% branch
profit remittance tax.
o It believes that the tax should have been computed on the basis of profits actually remitted,
which is P45,244,088.85, and not on the amount before profit remittance tax, which is
P53,228,339.82.
 Meaning, the 15% should not be part of the tax base, based on its interpretation of
Section 24(b) (2) (iii) of the NIRC.1
o Subsequently, without awaiting respondent's decision, petitioner filed a petition for review on
June 14, 1984 with the SC for the recovery of the amount of P1,041,424.03.
 CTA ruling: Upheld the petitioner’s claim for refund.
 CA ruling: Reversed CTA decision. (CTA: VALID REFUND  CTA: NO REFUND)
o “The use of the word remitted may well be understood as referring to that part of the said total
branch profits which would be sent to the head office as distinguished from the total profits of
the branch (not all of which need be sent or would be ordered remitted abroad). If the legislature
indeed had wanted to mitigate the harshness of successive taxation, it would have been simpler
to just lower the rates without in effect requiring the relatively novel and complicated way of
computing the tax, as envisioned by the herein private respondent.”

ISSUES + RULING:

 W/N the petitioner is entitled to a refund (because the 15% remittance tax should have been applied
to the entirety of the profits it sent abroad). YES.

1
Sec. 24. Rates of tax on corporations. . . .

(b) Tax on foreign corporations. . . .

(2) (ii) Tax on branch profit and remittances. —

Any profit remitted abroad by a branch to its head office shall be subject to a tax of fifteen per cent (15%) . . . ."
 o The remittance tax was conceived in an attempt to equalize the income tax burden on foreign
corporations maintaining, on the one hand, local branch offices and organizing, on the other
hand, subsidiary domestic corporations where at least a majority of all the latter's shares of
stock are owned by such foreign corporations.
o Prior to the amendatory provisions of the Revenue Code, local branches were made to pay
only the usual corporate income tax of 25%-35% on net income (now a uniform 35%)
applicable to resident foreign corporations (foreign corporations doing business in the
Philippines).
o While Philippine subsidiaries of foreign corporations were subject to the same rate of 25%-
35% (now also a uniform 35%) on their net income, dividend payments, however, were
additionally subjected to a 15% (withholding) tax (reduced conditionally from 35%).
o In order to avert what would otherwise appear to be an unequal tax treatment on such
subsidiaries vis-a-vis local branch offices, a 20%, later reduced to 15%, profit remittance tax
was imposed on local branches on their remittances of profits abroad.
 This is where the tax pari-passu ends between domestic branches and subsidiaries of
foreign corporations.
o Here, In the 15% remittance tax provided by NIRC, the law specifies its own tax base to be on
the "profit remitted abroad." (SPECIFICALLY SAYS TAX BASE = PROFIT REMITTED ABROAD)
 There is absolutely nothing equivocal or uncertain about the language of the provision.
 THE TAX IS IMPOSED ON THE AMOUNT SENT ABROAD, AND THE LAW (THEN IN
FORCE) CALLS FOR NOTHING FURTHER. The taxpayer is a single entity, and it should be
understandable if, such as in this case, it is the local branch of the corporation, using its
own local funds, which remits the tax to the Philippine Government.
o The ruling of the Court in the case of Burroughs Limited v. CIR will not apply in this case simply
because the law in effect during that time was Revenue Regulations No. 13-78, which provides
that:
 “There is absolutely nothing in Section 24(b) (2) (ii), supra, which indicates that the 15%
tax on branch profit remittance is on the total amount of profit to be remitted abroad
which shall be collected and paid in accordance with the tax withholding device provided
in Sections 53 and 54 of the Tax Code. The statute employs ‘Any profit remitted abroad
by a branch to its head office shall be subject to a tax of fifteen per cent (15%)’ —
without more. Nowhere is there said of ‘base on the total amount actually applied for by
the branch with the Central Bank of the Philippines as profit to be remitted abroad,
which shall be collected and paid as provided in Sections 53 and 54 of this Code.’”
 CAB: In this case, although Memorandum Circular No. 8-82 (which refers to the rule on
the 15% tax being applied on the entire amount remitted abroad) was already
enforced, the Court refused to have it be applied retroactively in the case as the
petitioner there paid the tax in 1979.

Disposition: Petition for Review  GRANTED.

Commissioner v Procter and Gamble PMC | GR No. L-66838 | December 2, 1991 | Feliciano, J

Petitioner: COMMISSIONER OF INTERNAL REVENUE

Respondents: PROCTER AND GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE COURT OF TAX APPEALS

Summary: P&G Philippines filed a claim for refund with CIR, claiming that it was entitled to the reduced tax rate of
15% on corporate dividends instead of the regular 35%. The SC held that P&G was indeed entitled to the reduced tax
rate of 15%, since under the NIRC the reduced tax rate is available if the country of domicile “shall allow” a credit
against the tax due, and in this case the US law provides a tax credit for corporate income tax paid to the Philippines
by P&G.

Topic: Passive Income > Dividends

FACTS:

1. In 1974 and 1975, P&G Philippines declared dividends payable to its parent company P&G USA
amounting to P24,164,946.30, 35% of which were deducted as withholding tax.
2. P&G Philippines filed with CIR a claim for refund or tax credit in the amount of P4,832,989.26
claiming that pursuant to the NIRC the applicable rate of withholding tax on the dividends was only
15%. (15% lang daw dapat)
3. Since there was no response from the CIR, petitioner filed a petition with the CTA, which rendered a
decision ordering CIR to refund or grant the tax credit. (CTA GRANTED REFUND)
4. On appeal, the SC (2nd div) reversed the decision of the CIR and held among others that:
a. There is nothing in the provisions that allows a credit against the US tax due from P&G USA
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

ISSUES:

WON the 15% tax rate provided for in Sec 24(b)(1) of the NIRC is applicable to the dividends remitted by P&G
Philippines — YES

1. Sec. 24(b)(1) provides that a foreign corporation not engaged in trade and business in the Philippines
will pay 35% tax on gross income; however the tax goes down to 15% if the country of domicile “shall
allow” a credit against the tax due.
a. Such tax credit must reach an amount equal to 20%, which represents the difference between
the regular 35% and the preferred 15% dividend tax rate.
2. The provision does not require that the country of domicile (in this case, the US) give a “deemed paid”
tax credit for the dividend tax (20%) waived by the Philippines. The NIRC only requires that the US
“shall allow” P&G USA a “deemed paid” tax credit of 20%.
3. To see if the US law complied with the above requirement, the Court looked at relevant provisions of
the US Internal Revenue Code:
a. Sec. 901 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. Sec. 902 grants to P&G- USA a “deemed paid” tax credit for a proportionate part of the
corporate income tax actually paid to the Philippines by P&G-Phil
4. The “deemed paid” concept merely reflects economic reality, because the Philippine corporate income
tax was paid and deducted from the amount remittable to the US. The tax credits are allowed because
of the US congressional desire to avoid or reduce double taxation of the same income stream.

5. In order to determine whether US tax law complies with the requirements of the applicability of the
reduced 15% dividend tax rate it is necessary:
a. To determine the amount of the 20% dividend tax waived by the Philippine government
b. To determine the amount of the “deemed paid” tax credit which US tax law must allow to P&G
USA
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
6. Amount a is determined as follows:
P100 — Pretax net corporate income earned by P&G Phil

x 35% — Regular Philippine corporate income tax rate

P 35 — Paid to the BIR by P&G Phil as Philippine corporate income tax

P100

- 35

P65 — Available for remittance as dividends to P&G USA

P65 — Dividends remittable to P&G USA

x35% — Regular Philippine dividend tax rate under Sec 24(b)(1) NIRC

P22.75 — Regular dividend tax

 P65 — Dividends remittable to P&G USA

x15% — Reduced dividend tax rate under Sec 24(b)(1) NIRC

P9.75 — Reduced dividend tax

P22.75 — Regular dividend tax

-9.75— Reduced dividend tax

P13 — Amount of 20% dividend tax waived by Philippine government

a. Thus, amount a is P13 for every P100 of pre-tax net income earned by P&G Phil; this is the
minimum amount of the “deemed paid” tax credit that the US tax law shall allow, for P&G USA
to qualify for the reduced dividend tax rate in Sec 24(b)(1).

7. Amount b is determined as follows:

P65 — 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

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

P65 — Amount of accumulated profits earned by P&G Phil in excess of income tax

P35 — Philippine corporate income tax paid by P&G Phil to the BIR

P55.25 / P65 x P35 = P29.75

a. For every P55.25 of dividends actually remitted by P&G Phil to P&G USA, a tax credit of P29.75
is allowed by Sec. 902 of the US Tax Code for Philippine corporate income tax “deemed paid” by
the parent but actually paid by the wholly-owned subsidiary.
8. 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.
9. The Court’s reading of Sections 901 and 902 of the US Tax Code is identical with the reading of the BIR
of the same, as shown by administrative rulings issued by the BIR.
10. The concept of “deemed paid” tax credit in US law is exactly the same “deemed paid” tax credit found
in the NIRC, Sec 30(c)(3) and (8).
11. Section 24(b)(1) 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.
12. The provision 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 by allowing the investor additional
tax credits which would be applicable against the tax payable to such home country.

DISPOSITION: Motion for reconsideration GRANTED.

PARAS, J., Dissenting:

1. While apparently, a tax-credit is given by US Tax Code, there is actually nothing in the Code 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.
2. While the mathematical computations in the SC decision 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
 3. 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.
4. 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.
5. Beyond, that, the private respondent failed:
a. 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;
b. To present the income tax return of its parent company for 1975 when the dividends were
received; and
c. To submit any duly authenticated document showing that the U.S. government credited the
20% tax deemed paid in the Philippines
6. 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.
7. Tax credit appertaining to dividend remittances abroad’s 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.

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. WANDER PHILIPPINES, INC. AND THE COURT OF TAX
APPEALS, respondents
[G.R. No. 68375. April 15, 1988.]

Wander sought a tax refund or tax credit for taxes it withheld from its Swiss parent corporation (it paid 35% but sought to pay the
excess paid over 15%, the rate it claims it should pay since Switzerland does not collect tax from the foreign corporation). The CTA
granted its petition and the SC affirmed the CTA.

From E2018 reviewer: As a wholly owned subsidiary, Wander paid 35% withholding tax on its dividends remitted to its parent company
Glaro. Wander filed a claim for refund after realizing that it overpaid taxes on dividends, as it should only be assessed at 15%, and not
35%. The Court affirmed the decision of the CTA granting the refund as the tax sparing credit applies in this case.

The Tax Sparing Credit allows 15% final tax on intercorporate dividends subject to the condition that the country where the
nonresident foreign corporation (NRFC) is domiciled allows a credit for taxes deemed paid in the Philippines equivalent to at least
15%. (Note that prior to January 2009, the tax rate was 35% as applied in this case). 15% represents the difference between the regular
income tax of 30% on corporations and the 15% tax on dividends. If the country within which the NRFC is domiciled does not allow a
tax credit, a final withholding tax at the rate of 30% is imposed.

DOCTRINE
The fact that a country does not impose any tax on dividends received by the foreign corporation from the Philippines is a full
satisfaction of the condition under Sec. 24(b)(1) “that the country shall allow a credit against the tax due from the non-resident foreign
corporation taxes deemed to have been paid in the PH equivalent to 20%...”

FACTS
 Wander Philippines, Inc. (Wander) is a domestic corporation and a wholly-owned subsidiary of the Glaro S.A. Ltd. (Glaro), a Swiss
corporation not engaged in trade or business in the Philippines.
 In 1975 and 1976, Wander filed a withholding tax return for the second quarter ending June 30 on the dividends it remitted to
Glaro on which 35% tax was withheld and paid to the BIR.
 On 1977, Wander filed a claim for refund or tax credit contending that it is liable only for 15% withholding tax in accordance with
Sec. 24(b)(1) of the Tax Code, not 35%.
 The BIR failed to act upon the claim, and so Wander filed a petition with the CTA.
 The CTA ordered the CIR to grant the refund, holding that “since the Swiss government does not impose any tax on the dividends
to be received by the said parent corporation in the Philippines, the condition imposed under the abovementioned section is
satisfied. Accordingly, the withholding tax rate of 15% is hereby affirmed. MR denied. CIR appealed to the SC.

ISSUE with HOLDING: W/N Wander is entitled to the preferential rate of 15% withholding tax on dividends declared and remitted
to its parent corporation, Glaro – YES

Sub-issue #1: W/N Wander is the proper party to claim the refund – YES
 CIR: It is Glaro, the tax payer, and not Wander, the remitter or payor and mere withholding agent, which is entitled to receive the
refund, if any.
 SC: This is being raised for the first time in the SC; it was not raised at the administrative level. In any event, the argument is
untenable. The fact that Wander became a withholding agent of Glaro was not by choice but by compulsion under Sec. 53(b). In
fact, Wander may be assessed for deficiency withholding tax at source plus penalties consisting of surcharge and interest.
Therefore, as Philippine counterpart, Wander is the proper entity to claim for refund or credit of overpaid withholding tax on
dividends paid or remitted by Glaro.

Sub-issue #2: W/N Switzerland allows as tax credit the “deemed paid” 20% on such dividends – YES
 Switzerland does not impose any income tax on dividends received by Swiss corporations from corporations domiciled in foreign
countries. The issue now is whether the non-collection is considered as full credit satisfying the 20% credit requirement.
 Wander: Full credit is granted, not merely credit of 20%.
 CIR: Tax sparing credit is applicable only if the country of the parent corporation allows a foreign tax credit not only for the 15%
actually paid but also for the equivalent 20%. There was no Swiss law cited to the effect that in case where a foreign tax (like the
35% dividend tax) is spared, waived, or otherwise considered paid in whole or in part by the foreign country, a Swiss foreign-tax
credit would be allowed.
 SC: The fact that Switzerland did not impose any tax on the dividends received by Glaro from the Philippines should be considered
as a full satisfaction of the given condition. To deny Wander the privilege of withholding only 15% would run counter to the spirit
of the law and will adversely affect foreign corporations’ interest here and discourage them from investing capital in the
Philippines.

DISPOSITIVE PORTION
Petition dismissed.

OTHER NOTES

Section 24 (b) (1) of the Tax Code, as amended by P.D. 369 and 778, the law involved in this case, reads:

Sec. 1. The first paragraph of subsection (b) of Section 24 of the National Internal Revenue Code, as amended, is hereby further
amended to read as follows:

(b)Tax on foreign corporations. — 1) Non-resident corporation. A foreign corporation not engaged in trade or business in the
Philippines, including a foreign life insurance company not engaged in the life insurance business in the Philippines, shall pay a tax
equal to 35% of the gross income received during its taxable year from all sources within the Philippines, as interest (except interest
on foreign loans which shall be subject to 15% tax), dividends, premiums, annuities, compensations, remuneration for technical
services or otherwise, emoluments or other fixed or determinable, annual, periodical or casual gains, profits, and income, and capital
gains: ... 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 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%) dividends as provided in this section: ...