CTA Case No. 3844 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY UNION CARBIDE PHILIPPINES, INC., Petitioner, - versus - C.T.A. CASE NO. 3844 THE COMMISSIONER OF INTERNAL REVENUE, ftb /g'1 Respondent. >t---- -- -- --- X DE C s 0N This case refers to a deficiency v ithholding tax at source assessment against the petitioner for the year 1974 in the total amount of P911,459.28, inclusive of 25X surcharge and interest. Petitioner is a domestic corporation duly organi zed and existing under the laws of the Philippines. In 1974, petitioner accrued the total amount of P4,471,75~ as due to a U.S. foreign 1icensor. Of this amount only P2,912,369 was allowed to be remitted on account of CB restrictions (E>:h. Q, pp. 291-303, BIR recs.) On account of the remitted amount of 249

--~- -- � ---..... DECISION - CTA CASE NO. 3844 - 2- P2,912,369 petitioner paid the 35% withholding ta~ imposed under Section 53(b)(2) of the Tax Code then in force. (E:<h. F, F-1, I, I - 1, 1-2, 1-3, E, E-1, E-2, G, G-1, J, J-1, J-2, J-3 and H.) Petitioner did not deduct and withhold any income ta:{ and the amount of P1, 559,386 was not remitted. However, this amount of P1, 559,386 was allowed by the Central Bank to be remitted during the year 1975 and the withholding tax due therefrom was duly paid by petitioner. (Exh. B, B-1, C, C-1, C- 2, C-3 , K, K-1, K-2, L, M, N, N-1, N-2 and N-3.) In due c ourse, of time, the 1974 books of account and other accounting records of petitioner were e}:amined by an examiner, who recommended the issuance of a defic iency assessment for the alleged failure to withhold and pay the tax on the royalties and services fees in the amount of P1,559,386 in 1974. Petitioner, through its auditors, protested the assessment in a letter dated October 17, 1978 contending that it had no liability to withhold and pay the ta:< on the service fees and royal ties and 25 0

DECISION - CTA CASE NO. 3844 - 3- the obligation to withhold and pay the tax arises on 1y upon ~.f: t_u~..L~Y.!!l_!:!nj;_ of the remittance in 1975 !J as petitioner was in 1974 prohibited by the Central Bank from remitting the royalties and service fees sought to be subject to withholding tax. (Exh. 0, pp. 291- 303, BIR rec.) Respondent, however, rendered his decision reiterating his assessment and maintaining that the obligation to withhold and pay the ta:{ arises at the time of the accrual of the royalties and not at the time of actual remittance or payment thereof. The sole issue submitted for resolution of this Court is whether or not petitioner was under obligation to withhold and pay the income tax at source on service fees and royalties it accrued in its books as 1iabi 1i ty to a non-resident foreign corporation although not yet remitted abroad; or whether or not the obligation to w.i thhold and pay the tax is upon accrual of the service fees and royalties and not upon the actual remittance or payment thereof. PetitiOner contends that it is upon the actual 251

DECISION - CTA CASE NO. 3844 - 4- remittance of the royalties and servic~ fees to the non-resident foreign corporation that there is an obligation to withheld to pay the income tax. On the other hand~ respondent contends otherwise asserting that it is not on the actual remittance of the income to the non-resident foreign corporation b ut on the S\J;..<;rt.J.?l_ 1;_b.�.reQ..f. Furthermore~ petitioner contends that petitioner's bare and gratuitous assertion that there was such restriction imposed by the Central Bank is therefore, a last ditched effort if not desperate attempt on the part of the former to extricate itself from a rather tight situation and that the Central Bank circular or regulation allegedly imposing the restriction on the amount to be remitted abroad was never presented in evidence. The assertion of the respondent that the Central Bank Circular allegedly imposing the restriction on the amount to be remitted abroad was never presented in evidence and must be just an after thought. It must be remembered that the recommendation of the assessment by Eulogio H. Natividad, Chief of the Appellate Division and 25 2

DECISION - CTA CASE NO. 3844 - 5- Reynoso R. Florez.a, Revenue Service Chief (Legal Office) is to the effect th.at deficiency withholding t.a:< was imposed on the unremitted but accrued royalties and service fees due to a foreign licensor in the amount of P1,559,386 .and the sole basis for this withholding tax is the policy adopted by the Bureau th.at the maturation point of the withholding duty is the time of accrual and not the actual time of payment (pp. 335 BIR rec.) And that this deficiency withholding tax on royal ties of P911 ,459.28 is sustained and reiterated since the Bureau's motion for reconsideration of the Court of Ta:< Appeals decision in the Bayer Case which involves a similar issue was given due course by said Court. Hence, it is the Bureau's position of adopt i ng the time of accrual as the maturation point of the withholding tax duty still holds legal bearing. ( pp. 332, BI R rec. ) . It seemed, that respondent had prev.iously impliedly admitted that petitioner had satisfied the former that it had in f-act restriction in remitting abroad the service fees and royalties. This issue of whether petitioner is under 253

DECISION - CTA CASE NO. 3844 - 6- obligation to withhold and pay the tax upon accrual of the service fees and royalties~ or upon the actual remittance or payment thereof, we have decided it in favor the latter, that is upon actual remittance or payment to the non-resident corporation required of the income, in the case of Bayer Pharmaceuticals, Inc . , vs. Comm. of Int. Rev., CTA Case No. 7846, March 16, 1979, wherein we held as follows: The lone question tendered for resolution is whether or not the obligation to withhold and pay income tax- at-source on the royalties is upon the accrual of the royalties or upon the actual remittance or payment thereof. Petitioner maintains that there was no obligation to deduct, withhold~ and pay the withholding tax in 1972 since the royalties could not be remitted due to Central Bank restrictions. In submitting, however, that the liability to withhold and pay the income tax withheld at source from royalty payments to a non-resident foreign corporation, like Bayer Aktiengesellschaft~ Leverkusen Bayermerk, is at the ti~e of the accrual of said royalties and not at the time of the actual remittance or payment thereof, respondent relies mainly on Bureau of Internal Revenue Ruling No. 71-003, dated February 26, 1971, the pertinent portions of which are quoted as follows: "This refers to your letter dated February 16, 1971 requesting a ruling as to the 254

DECISION - CTA CASE NO. 3844 - 7- basis of the withholding ta:< due on film rentals or royalties payable by you to non-resident foreign film corporations. " :< "In your letter, you contended that the 35/. withholding tax should be based only on actually remittable amount under Central Bank regulations and not on the entire amount due and payable to the non - resident foreign corporation. This contention has no legal basis. Withholding tax is not dependent on remittance of the income payable to the non- resident foreign corporation but on accrual thereof. Such being the case, although a portion of the amount due to the non- resident foreign corporation cannot be remitted on account of Central Bank restriction~ the tax due on said portion should be deducted and withheld as if there i s no restriction. � Ete s tr i c:;_tE'?.Q___f.1m.!:ia. - In connection with the restriction on the transfer of funds from U.S. to persons in Norway, Denmark~ the Netherlands, Belgium, Lu:<embourg and France~ the tax should be withheld in the same manner as if no restriction existed. In custodian accounts, the name of the foreign bank or other foreign person should be entered on the 255

DECISION - CTA CASE NO. 3844 - 8- ownership certificate~ and an amended ownership certificate filed as soon as the ac tua 1 owner is disc 1osed . ' (CCH~ 1969 ~ Vo 1 � 5~ par. 4875.405) In view thereof, this Office believes and so holds that the 35X withholding tax should be deducted and withheld on the entire amount of film rentals or royalties payable to the non- resident foreign film corporations including that portion which, on account of Central Bank restrictions, cannot as yet be remitted abroad." As expressly stated therein, the Bureau of Internal Revenue ruled that withholding ta:< is not dependent on remittance of the income payable to the non-resident foreign corporation but on accrual thereof. And as such, although the income cannot be remitted on account of Central Bank restrictions~ the tax due thereon should be deducted and withheld as if there is no restriction. The statute involved is Section 53( b) (2) of the National Internal Revenue Code, the controlling provisions of which read as follows: "Sec. 53( b) (2) Non-r:.�.?iq,!'!_fl.t f o r~_q[L�9.LPJ2.r aj:;j._pn ~ � In the " case of foreign corporations subject to tax Ltnder this Title, not engaged in trade or business within the Philippines, there shall be deducted and withheld at the source in the same manner and upon the same items as is provided in Subsection (b) (1) of 256

DECISION - CTA CASE NO. 3844 - 9- this section, x x x , a tax equal to 35 per cent thereof. This shall be returned and paid the same manner and subject to the same conditions as provided in Section 54. :< :-: x " And Section 53(b)(1) of the same Code pertinently provides: ct ( b ) t'!9JJ.::X::..~l�_!.~-~n t;___~_:t!_~?.-~n i.9.r_~_!gn___~_Q.r::_gg_r_a t .!9.!1.2. ( 1 ) ~.P.JJ..:: L~.2_;!, _c;t~nJ;_______~J__.!~D�.. Every individual, corporation, partner- ship, or association, in whatever capacity acting, including a lessee or mortgagor of real or persona 1 property, trustee acting in any trust capacity, executor, administrator, receiver, conser- vator, fiduciary, employer, and every officer or employee of the Government of the Republic of the Philippines having the control, receipt, custody, disposal, or payment of interest dividends, rents, royalties, salaries, wages, premiums, annuities, compensation, remunerations, emoluments, or other fixed or determinable annual, periodical, or casual gains, profits, and income, and capital gains, of any non - resident alien not engaged in trade or business within the Philippin~s, shall (e:-:cept in the cases provided in sub-section (a)(1) of this Section) deduct and withhold from the annual, periodical, or casual gains, profits, and income, and capita 1 gains, a tax equal to 30/. thereof. XXX 25 7

DECISION - CTA CASE NO. 3844 - 10 - These provisions, by the way, were merely imported and copied almost verbatim from similar withholding tax provisions of the United States Revenue Code [Section 143 (b)]. According 1y, in consonance with settled rules of statutory construction, the inter pretation they have received in the United States have authoritative e ff ec t in the proper construction and interpretation of our law. Thus, as c orrectly noted by petitioner and which is not disputed by res pondent: 1. In arriving at BIR Ruling No. 71- 003 , dated February 26, 1971, our Bureau of Internal Revenue quoted as authority the e xcerpt of a United States Internal Revenue Service ruling which is found at par . 4875.405 of CCH, 1969, Volume 5. It appears that the said U.S. ruling is ac tually Mimeograph Ruling No. 5075, which was issued by the Office of the Commissioner of Internal Revenue, Washington D.C., on July 8, 1940 and can be found at the Cumulative Bulletin 1940- 2, at page 141. 2. The said Mimeograph Ruling No. 5075 has been declared ol2_solE?te_ by the United States Internal Revenue Service i tse 1 f in its Revenue Ruling No. 70-293. (U.S. Internal Revenue Bulletin No. 1970- 23 , dated June 8, 1970) It is thus evident that in issuing its BIR Ruling No. 71 - 003 on February 26, 1971, our own Bureau of Internal Revenue has relied on a United States Internal Revenue Service ruling that has already been overruled, the same having been declared obsolete as of June, 1970. 3 . Following the decision of the United States District Court in ~_.D.___t;_~ulk. ~.9.-~_....Y.?...! .... !JD..A:.t _g.Q.__ .!;?._:t..~..t.g_?._.,_ 116 F. Sup p . 835, 258

i' DECISION - CTA CASE NO. 3 844 - 11 - rendered on November 19~ 1953~ to the effect that corporation which held licenses under patents owned by non- resident aliens who as a result of blocking proclamation were forbidden right to receive or dispose of royalties was not bound to withhold ta:< before payment of royalties~ the rule that is now observed in the United States is that the obligation to withhold and pay the tax is upon payment or remittance of the income to a non-resident alien. I n the b._!_ll_~---Q~.\A1L__G_Q.. case ~ where the factual setting, law involved and issue litigated are practically on all fours with the case at bar, plaintiff, a Delaware corporation, held 1 icenses under patents owned by two non-resident aliens, Robert Doge and Emmanue 1 de Trey. Both patentees were Swiss. Under the licensing agreements, p 1a inti f f ob 1iga ted itself to pay r-oy a 1 ties to Doge and de Trey. In its tr-eatment of the impact of roya 1ties on its operations, plaintiff, adhering to the accrual method of accounting, entered net royalties and withheld taxes as accrued 1i.abil i ties of 1941 and 1942, the periods involved in the case. Thus, 1941 and 1942 royal ties and taxes were set up as accounts payable on plaintiff's books and as part of its cost of doing business for those years. No withholding returns for non - resident aliens Doge and de Trey were prepared for 1941 or 1942. While the critical issu~ is when the returns were due for royalties attributable to sales made by plaintiff during the years 1941 and 1942, the inquiry shifted from "when was the return due" to "when, if at all, was plaintiff required to withhold on the royalties. The "when" of the matter, not the "who" or the "what" was the point of dispute and inquiry because, as result of blocking proclamation, non-resident aliens were forbidden right to receive or dispose 259

DECISION - CTA CASE NO. 3844 - 12 - of royalties due them under contract with corporation which held 1 icenses under aliens ' patents. (L.D. Caulk Co. vs. United States, 116F. 835, 840.) Stated otherwise, the question as to when to withhold the ta x from the 1941 and 1942 r-oyal ties arose because, although the royalties were accrued in the plaintiff ' s books in 1941 and 1942 as liability to the non - resident licensors, the same could not be paid or remitted to the latter as a result of a blocking proclamation. The United States Federal Court ruled that where, as result of blocking proc 1ama tion, non-resident aliens were forbidden right to receive or dispose of royalties due them under contract with corporation which held 1 icenses under aliens ' patents, such aliens had no "gains , profits and income" within internal revenue statute requiring all persons having contra 1, receipt, custody, disposal or payment of fixed or determinable annual or periodical gains, profits, and income of any non - resident a 1 ien to wi thho 1d ta>: and, therefore, no necess ity of filing withholding ta x return devo 1ved on corporation whi 1e corporation retained blocked royal ties. The net r-esult is that the obligation to withhold and pay the tax is upon payment or 1 remittance of the United States derived income to the non-resident recipient. Because of its strong persuasive force, if not controlling effects, on the present case, we wi 11 quote at length from the decision . "The onus of the withholding requirement on plaintiff is imposed by S 143(b), I.R.C.: persons, in whatever * * * "All capacity acting, having the receipt, * * * c ontrol, custody, disposal, or payment of 26 0

DECISION - CTA CASE NO. 3844 - 13 - fixed or determinable annual or periodical gains, profits, and * * * income of any non - resident alien * * * shall deduct and withhold from such annual or * * *." periodical gains, profits, and income a ta:{ On the whole, this provision does not c oncern i tse 1 f with "when" the withholding should take place. Rather, it simply specifies "who" shall do "what". However, this much light it does shed. The duty to withhold presupposes the e :�: i s t e n c e of "annual or periodical gains, profits, and income". The section directs the withholding from such sums as are identifiable as "gains, profits, and income" of the nonresident a lien. Obviously, if there are no such "gains, profits, and income", the duty to withhold is none:dstent. On the other hand, if there are such sums available, the statutory language is inconclusive in deciding "when" the withholding duty arose. I do not ground my decision on any subtlety of construction, but I do advert, in fact, to it. Were the royal ties "gains, profits, and income" to the aliens Doge and de Trey while plaintiff retained them under these circumstances? I think not upon a realistic view of the matter. The blocking procla- mation plucked every element of control over the funds from the a 1 ien' s theoretica 1 bund 1e of ownership rights. This loss of essence of private ownership occurred while the royalties were still in plaintiff ' s possession, 26 1

DECISION - CTA CASE NO. 3 8 44 - 14 - since the blocking freeze applied to individual debtors of Swiss nationals. As soon as royal ties accrued to the aliens under the contract, this crazy predicament faced them: they had theoretical right to collect the royalties but were forbidden right to receive them or dispose of them. No economic advantage was theirs. Such a hollow "right" does not have the core of benefit s u �fficient to constitute "gains, profits, and income". Even the ubiquitous doctrine of cons- truc tive receipt of income has no tentacle long enough to reach these royalties. Cf. Reg. 103, S 19- 42- 2. As said with reference to S 22- (b)(2), I.R.C., in Industrial Trust Co. v. Br�oderick, 1 Cir., 94 F.2d 927, at page 930, "Throughout the Revenue Laws the words gain, profit, or income mean an actual, * * *." not fictitious gain or profit Certain 1y, these were not "income" and, i �f "gains, or pr�ofit", were unrealized and high 1y arti f ic ia 1. Further, the a 1 iens here had no power to command payment to themse 1ves or ' other�s, un 1 ike the donor of the interest coupons in Helvering v. Horst, 311 U.S. 112, at page 118, 61 s . ct. 144, 147, 85 L.Ed. 75, where i t is said: "The power to dispose of income is the equivalent of ownership of it." It would seem, then, there being no "gains, profits, or income" of the aliens at least during the time plaintiff retained their blocked royalties, no withholding duty devolved on plaintiff and no penalties are proper." 262

DECISION - CTA CASE NO. 3844 - 15 - Against this backdrop, the situation here pr-esented, while the royalty in the amount of P69,529.00 (although was set up in the books of petitioner as a liability to Bayer) could not be remitted to Bayer due to Central Bank restrictions at that time, wou 1d not create "gains, profits or income" to non- resident foreign corpo- ration Bayer. No econom.ic benefits wer-e derived by Bayer; hence, there was no income subject to ~li thho 1 ding of ta:-:-a t- source. Accordingly, petitioner had no duty to withhold and pay the tax. Even more, adopted basis for the decision of the United States Court is the legislative history of Section 143(b) of United States Tax Code, from which Section 53(b) of our National Internal Revenue Code was practically copied, and hints derived from the published pronouncements of the United States Bureau of Internal Revenue and Courts, which disclose that duty of withholding arises at .t.J_m_~______Q.f Q..�\Y_mg.o..t... We quote f rom b..~. Jb........!:.;�\_l,.tU~. : "PresentS 143(b), I.R.C., is traced back to the Act of October 3, 1913. Paragraphs D "* * * and E of that Act are pertinent. Paragraph D provided: all * * * persons having the control, receipt, disposal, or payment of fixed or determinable annual or period ica 1 gains, profits, and income of another per�son subject to ta:-:, shall in behalf of such person deduct and withhold from * * *." the payment an amount equivalent to the normal income tax Paragraph E of the same Act in * part specified: "All persons ** having the control, * * * receipt, custody, disposal, or payment of other fiNed or determinable annual gains, 26 3

DECISION - CTA CASE NO. 3844 - 16 - profits, and income of another person, exceeding $3,000 for any ta:�:able year * * * who are required to make and render a return in beha 1 f of another, as * * * provided herein, are hereby authorized and required to deduct and withhold from such annual gains, profits, and income such * * * sum as will be sufficient to pay the normal tax and they are each hereby made personally 1iab 1e for such ta:{." Paragraph D is explicit in directing withholding from the "payment" while its companion section authorizes the deduction and imposes personal liability on the withholding agent. In its Report to the House of Representatives on the Bill, the Committee on Ways and Means said, "Probably two- thirds of the income tax pr �oposed as to individuals would be deducted and withheld at the * * * sour�ce of the income and paid in full to the Government. By this method the amount of ta:-: due or to become due upon every fixed or determinable annual income is withheld and paid to the Gover�nment before the income r� eaches the ta:{payer". Nonresi- dent aliens as well as citizens were subject to this withholding system. In the 1916 Act, quoted paragraph D was repeated as section 8(d) under the significant heading "Returns". Paragraph E, as quoted, was repeated as section 9(b) under the heading "Assessment and Administration". 26 4

DECISION - CTA CASE NO. 3844 - 17 - By the Revenue Act of 1917 ~ pa~ag~aph 8(d) of the 1916 Act (pa~. D of the 1913 Act) was ~epealed so as to ~ende~ unnecessa~y any "withholding at the sou~ce of the tax due on p~ofits o~ incomes of ~esident ta:�:able pe~sons". Info~mation a t the sou~ce was substituted. Acco~ding to the House Repo~t~ this change was made fo~ "a mo~e effective administ~ation of the law" and the saving of annoyance and e:�:pense to the ta:-:paye~s and withholding agents". By the same Act~ pa~ag~aph 9(b) of the 1916 Act (pa~. E of the 1913 Act) was amended to limit withholding at the sou~ce to non~esident aliens. The Act fu~the~ included inte~est f~om tax-f~ee covenant bonds as a subject of withholding. The Revenue Act of 1918 made no change in the pe~tinent language of the amended S 9(b) but did inc~ease the withholding ~ate and ~enumbe~ed the sections as 221. Howeve~, the Report of the Ways and Means Committee of the House aids search in its comments on "Collection at the Sou~ce" : "The p~oposed bi 11 ~ as unde~ existing law~ ~equi~es only the withholding of income in the case of payments by individuals, co~po~ations, and pa~tne~ships of fi:<ed and dete~minable annual o~ pe~ iodical gains, p~of its, and income to non~esident alien individuals o~ non~esident co~po~ations". This comment is an indication the intent of Cong~ess was as e:<p~essed in par�ag r�aph D of the 1913 Act and was continued in S 9 (b) of the 265

DECISION - CTA CASE NO. 3844 - 18 - 1917 Act when the former provision was repealed. No change was intended when the withholding provisions were delimited to apply only to nonresident aliens. The time of payment was the time when the withholding duty arose. The Revenue Ac t of 1921 made no amendments to the Section pertinent to inquiry, nor did the Ac: t of 1924. However, both the House Report and the Senate Repor-t on the 1924 Ac: t have this c omment: Section 221: Subdi- vision (a) of this section of the present law provides for the withholding of a tax, on fixed or determinable income paid to a nonresident alien individual, or a partnership composed in whole or in part of nonresident aliens." Both also refer to "r-equiring the withholding of ta :< fr-om payments" to a pa r tnership. Rates of withholding were in c: rea sed by the Revenue Ac: t of 1926, and the Conference Report of the Committees of the House and Senate refers to the effect of the hike in rates: "This amendment requires the withhold- ing of a ta:�: of 12 1/2 per cent in respect of all payment of income made before the enactment * * * of this Ac t to foreign c:orpo- r�ations specified below. * * * Because the persons making payments had no notice that the corporation income ta:�: would be increased, the withholding r ate is not increased with res- * * *"� pee t to payments made before the enactment of this Act~ 266

DECISION - CTA CASE NO. 3844 - 19 - Although re �ference is to foreign cor- porations~ the withholding on payments to them is but as part of the same system embracing individuals. In the Revenue Act of 1928 a wholesale departure was made from the arrangement of prior Acts. S 221 became S 144. In comment -- ing on part (a) of the Section~ both the House Report and the Senate Report stated: "The pre- sent law provides for the withholding at source~ in the case of bonds~ of a tax of 5 per * * *�" cent of the interest when paid to nonresident aliens. Under the Revenue Act of 1932 ~ the section was renumbered 143 and the rates were increased without affecting the aspect of the provision under� consider- ation. The Revenue Act of 1934 made no changes bearing upon our inquiry~ but again in the House Report and in Senate Report references to withholding of taN on interest obligations were couched in terms of payment. The 1936 Act did not change the terms of S 143 as they affect the problem under investigation. Hm<>Jever~ a comment in the Senate Report confirms the prior statements: "Section 32 of the existing law provides that the ta:�: withheld at the source under section 143 from payments to an individual taNpayer shall be a c redit against such taxpayer's ta:-:". Reference is also made a 26 '1

., . DECISION - CTA CASE NO. 3844 - 20 - "withholding in the case of pay- ments to foreign corporations". The House Report~ which the Senate adopted~ on the Revenue Act of 1937 is equivocal in stating with reference to a change in S 211(a): "There will be withheld from the amounts receivable by a nonresident alien taxed under the new provisions the amounts required to be withheld under section 143 of the present law". "Receivable"~ of course~ is descriptive of minute divisions of time from the first moment of accrual to the last second before receipt of payment. The House Report on the Revenue Act of 1938 appears to reaffirm the earlier interpret- ations even if the 1937 Report be viewed as a deviation. In referring to consent dividends~ the Committee on Ways and Means reported: "In case any share- holder making a consent is a person subject to the provisions of section 143(b) and section 144~ relating to the deduction and withholding of tax at the source~ section 28(d)5 requires that such consent filed by the * * * corporation with its return shall be accompanied by cash equal to the amount which the corporation would have been required to deduct and withhold by such section 143(b) or 144 if the amount specified in such consent had been paid to such shareholder~ on the last day of the taxable year of the corporation~ in cash as a taxable dividend." The Senate Report 268

DECISION - CTA CASE NO. 3844 - 21 - used same language in referring to S 143 (b). No pertinent comment was found in the Committee Reports on the other Revenue Acts down to 1941 and 1942 ~ the ta:< years in question. However~ one further reference is made to a later committee report reflecting current thinking. The House Report on the Revenue Act of 1950 in referring to a proposed S 1311(a) states: "This subsection also provides that any person required to deduct and withhold a * * * tax under section 143 or 144 on the payment of a dividend shall not be required to deduct and withhold a ta:< under this section upon such payment". Regulations promulgated by the Commissioner contain abundant references to payment as indicating the crystal lization of the withholding duty. Treasury Regulations 111, S 29.143-1(a) * * * states: "Withholding of a tax of 30 per cent is required in the case of fixed or determinable annua l or periodical income paid * * *". to a nonresident alien individual The subsections of S 29.143 are replete with references to withholding upon payment~ such as "The tax must be withheld at the source from the gross amount of any distribution "* * * * * made by a corporation" (29.143- l.); an annual retLirn * showing the amount of tax * * required to be withheld from each nonresident alien * to which income other than interest was paid during the previous taxable 269

DECISION - CTA CASE NO. 3844 - 22 - year" (29.143 - 7); "Ta:�: withheld at. the soL1rce upon * * * income pa i d to nonresident alien fiduciaries***" (29.143- 9). And even on the question of whether withholding should be at the rate in effe c t at. the time payment s were q~g or at the rate in effect at the time payments were actually m.~.Qg_, the United States Court ruled that the time payment is ma_c;ie. governs the rate. We again quote from the ~-~ '"-ttk. decision: "On the issue of whether withholding should be at the rate in effect at the time payments were due or at the rate when payments were actually made, the Bureau has ruled the time of payment governs the rate. O.D. 167, 1 C.B. 192; I.T. 1521, I - 2 C. B. 197; I � T. 3020, XV - 2, C. B. 106; I.T. 3291, 193 9 - 1, C.B. 140, Cf. I.T. 3535, 1942- 1, C.B. 129; I. T. 3 3 42, 1940- 1, C. B. 58. In fact, language sufficiently broad to encompass the prob 1em was employed in G.C.M. 2467, 7-2 C.B. 188 (modified on other grounds in G.C.M. 8594, 9 - 1 C.B. 354): "* * * withholding is on 1y required when * * * income is paid to a nonresident a 1 ien and at the rate in force at the time of payment." As in the above, so Southern Pacific Railroad Co. v. C.I.R., 21 B. T .A. 990, held rate of withholding was that which was effective on the date of actual pa yment. In that case, the petitioning company contended unsuccessfully for a result s imilar to the one here sought by 270

DECISION - CTA CASE NO. 3844 - 23 - the Government. Bond interest due and payable dur�ing 1914-1917 could not then be paid to nonresident aliens because of war r~ estrictions. It was, in fact, paid in 1921 and .1923, after the withholding rates had been increased. The company argued the former, lower rates should apply because the interest was then due; sufficient funds were available at all times for its p<:l.ymen t; and the date of constructive receipt by the bondholders gave rise to the duty of wi thho 1ding. The Board of Ta:{ Appeals rejected these arguments, saying, 21 B.T.A. at pages 995 and 996: "The petitioners did not and were not ca 11 ed upon to pay the interest until 1923, and the nonresident aliens did not and for all that appears could * * *. not receive the interest until then When the interest was actually paid to and received by the bondholders they received income ta:�:able at the rate then ef fee t.i ve, and the petitioners were under the duty of paying so much thereof as by the statute then in effect they were required to withhold and pay." Oblique support is thus given to adoption of the time of payment as the maturation point of the withholding duty, payment being both an easily recognizable act of objective significance and a standard safeguarding the col lection of the proper amount of ta:�:." What possible ground can there be for us not to app 1y to petitioner the ruling of the United States Federa 1 Court in b:..~-12.!..

;'I � DECISION - CTA CASE NO. 3844 - 24 - G.~~:,~J.t~ supr-a~ for- which Bayer- Phar-maceuticals~ Inc.. is similar-ly situated? A decision buttr-essed by the law~ which is closely if not exactly similar- to our- law~ r-eason and logic is not to be simply brushed aside to accommodate a r-u 1 ing of our- own Bur-eau of Inter-nal Revenue which mer-ely quoted as au thor� i ty the e:{cer-pt of a United States Inter-nal Revenue r-uling but which excer-pt has been dec 1 a r-ed Q.Q?_9._L~_tg_ by the same United States Inter-nal Revenue Ser-vice as a r-esult of the b...!.V_!____G,_~.!:J .ll:_ decision. As we view this legal pr-oblem~ we find no cogent and valid r-eason to modify, much less depar-t fr-om he conclusion r-eached in b...~. P-~---�-��G9.!"tJJr, ~ as e:{pr-essed in the above- quoted opinion of the United States Cour-t ther-e~ and the same should r-esolve the identical issue now br-ought befor-e us in this proceeding. We cannot ignor-e the well - settled pr-inciple of constr�uction that since our- income tax law was pr-ac tically copied fr-om that of the United States~ the inter-pr-etations it has r-eceived in the United States have author-itative effect in the pr-oper- constr-uction and application of our- law. Mor-e so in the case of our- withholding tax-at-sour-ce pr-ovision embodied in Section 53(b) of our- National Inter-nal Revenue Code which, as shown above, was mer-ely impor-ted and copied almost ver-batim fr-om Section 143(b) of the United States Ta:-: Code dur-ing the year- invo 1ved in the k,__~..P...~---�----G-~_I,Llh. decision. Accor-dingly, the c:onc lusion r-eached in b.~..P._!__G.!.1:-tU~, which is followed by the United States Internal Revenue Ser-vice - that the time of payment o �f the r-oyal ties is the matur-ation point of the withholding duty should gover-n this pr-oceeding. Not much need be said on r-espondent's asser-tion that~ based on the r-epor-t of the investigating examiner-, nothing is stated 27 ~

DECISION - CTA CASE NO. 3844 - 25 - that petitioner attempted to remit the roya 1 ties to Bayer. By respondent's own decision, it is explicitly declared "that the royalties in the amount of P69,529.00 were not remit ted by BPI (petitioner herein) to Bayer due to Central Bank restrictions." (E:<h. "5," Exh. "E-1"," p. 30 , BIR records) Since the royalties could not be remitted to Bayer due to Central Bank restrictions, as stated by respondent himself in his decision appealed from, surely, respondent's counsel should not expect petitioner to make efforts, albeit unlawful, to remit the same. And on respondent's point that si nce the royalties had been accrued in petitioner's books the income thereon became subject to withholding even if remit.tance was effected later- , suffice i t to say that the accrual of the royal ties in p et itioner- ' s books, as he 1d in the !::..!..!>...'!.. G..~.~Ltk.~ did not amount to "gains, profits and income" on the part of non - resident Bayer and, therefore, no necessity to withhold tax devolved on petitioner. We, according 1y, ru 1e that since the royal ties in question could !J..Q.t.. be paid or remit ted in 1972 � by petitioner Bayer Pharmaceuticals, Inc., to non - resident foreign corporation Bayer Aktiengesell- schalft, Leverkusen Bayermerk due to Central Bank restrictions, petitioner was under no obligation to withhold and pay income tax - at-source on said royalties and, therefore, it is not 1iabl e for the deficiency withholding tax-at-source assessment of respondent Commissioner of Internal Revenue :< :< :<." WHEREFORE, the decision of respondent Commissioner of Internal Revenue assessing 273

DECISION CTA CASE NO. 3844 - 26 - petitioner Union Carbide Philippines, Inc., the sum of P911,459.28, inclusive of surcharge and interest, as withholding tax at source is hereby reversed. Without pronouncement as to costs. SO ORDERED. Quezon City~ Metro Manila~ Judge WE CONCUR: CERTIFICATION I hereby certify that this decision was reached after due consultation among the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. 274 ng Judge Court of Tax Appeals