CTA Case No. 4288 (Decision)

v� REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY KIMBERLY-CLARK CORPORATION (U.S.A.) AND KIMBERLY-CLARK (PHILIPPINES) INC.~ F'eti t.ioner�s ~ C.T.A. CASE NO. 4288 COMMISSIONER OF INTERNAL REVENUE, Respondent. H- - - - --� - -- ,. ~ DECI S I 0 N This is a claim for refund of allegE~d erroneously overpaid withholding tax on royalty. Petitioner~ Ki mb erly-Clark Corpor21t.i.on (U.S.A.) is a United States Corporation with principal office at Neenah~ Wi sco nsin~ U .S. A.~ ~'-I h i 1e petitioner- ~ Kimberly-C l ark (Philippine s ) Inc. is a corporation organized and existing under the law s of the Philippines ~ with principal office at Makati~ Metro Manila. On November 1~ 198 3~ petitioner Kimberly- C 1ark (Phi 1 i pp.i.ne s ) Inc. en tet- ed in to a 1 icensed ~ technological and marketing assistance agreement . with petitioner Kimberly-C l ark Corporation of USA~ whereby in consideration for the use of the latter ' s trademarks~ patents and technology on consu m!?r� products~ the former was ob 1 ige d to p a y the 1at tet- one and one - ha 1 f ( 1 1./21..) per-c en turn 14

DECISION CTA CASE NO. 4288 - 2- royalty based on the total net sales of the former. On July 2 ~ 1984~ petitioner likewise entered into another license~ technological and marketing agreement in the manufacture and sale of cigarettes~ p a per- and other fine products. ~amber 1y - C1ark (F'hils.) was obliged to pay Kimberly- Clark Corporation (USA) one and one- half ( 1 1/2/.) perc en tum roya 1ty based on the former ' s net sales of the licensed products and an additional one (1/.) percentum royalty based on the total net sales of cigarettes and other fine paper products. Both licensing agreements were duly registered with the Technology Transfer Bo .:H- d of the Min is try of Trade and Industry. Pursuant to the said agreements peti. tionet- ~ ~<imber- 1 y-C 1 ad~ (Phils. > Inc.~ alleged that i t withheld from the remittable royalties to for June 1986 to October 1987~ the total amount of P3~i58~670 which is equiva l ent to 25/. of the royalties . However~ on November 13~ 1987~ petitioner through its counse 1 ~ Bito~ Lozada~ obtained from Mr. Bienvenido A. Tan~ Jr.~ then Commissioner of Internal Revenue~ BIR Ruling 15

DECISION CTA CASE NO. 4288 - 3- No. 3 60 - 87~ holding the royalty payments by virtue of the afareme ~ tianed Licensing Agreements subje c t to 10/. vJi thhalding ta >: pur s uant to the RF'- US Ta >: Treaty Agreement in relation to the RP - t..<Jest Ge rm a ny Ta x T rea ty. Accordingly~ in a l e t t e r dat e d December 19~ 1987~ duly stamped received b y the Bureau of Internal Revenue an December 22 ~ 1987~ petitioner through its said counsel~ filed a Claim far Refund of the excess tax withheld in the a mount of P1~895~202.00. To date respondent has nat rendered his decision an petitioners claim for refund and because the two year period within which a suit may be brought to enforce this claim was about to expire, petitioner filed this instant petition far review before this Court. Respondent on his part denies in general all material facts in the petition for review and as special and a �ffirmative defenses alleged as follovJs: a. Petitioner, Kimberly-Clark~ Phils. Inc. is not the proper party to claim the refund but Kimberly- Clark Corporation U.S.A.; b. Petitioner l<imber 1y-C 1ark U.S.A. Corporation has no legal capacity to sue. In order to� maintain a suit in the 16

DECISION CTA CASE NO. 4288 - 4- Philipp i nes , petitioner corporation mu s t be registered with the Securities and Exchange Commission pursuant to Section 69 of the Corporation law; c . That the tax in question was paid in accordance with law; The issues to be resolved are as follows: (1) Whether or not Kimberly- Clark (Phils.) Inc. and Kimberly- Clark Corporation (U.S.A.) have legal capacity to institute legal action to claim for refund; (2) Whether or not petitioners have in fact overpaid the withholding tax or royalties. It is noteworthy that the first issue has recently been resolved by the Supreme Court in the case of Co��issioner of In-ternal Revenue, Petitioner vs. Procter Philippine Hanut"acturing Corp. et. al. Respondent, G.R. Ho. 66838 dated December 2 ~ 1991. � This settles the original conflic ting decisions rendered by the Second Division of the SL1preme Court on the same .is s ue on April 15, 1988 and the case of Co��issioner of Internal Revenue, Petitioner vs. Uander Philippines, Inc. and the Court of" Tax 17

DECISION CTA CASE NO. 4288 - 5- Appeals, Respondent, G. R. 68375, April 15, 1988 rendered by the Third Division of the Supreme Court on the same issue. The December 2, 1991 resolution by the Supreme Court, en bane, was a result of a motion for reconsideration by private respondent from the said original decision by the Second Division of the Supreme Court. These petitions for review instituted by the Commissioner of Internal Revenue before the Supreme Court were in turn the result of the favorable decisions rendered by this court in C.T.A ~ Case Nos. 2883 & 2884, declaring Procter & Gamble, PMC, and Wander Philippines, Inc., respectively, as the proper entity who should claim for refund or credit of overpaid withholding tax on dividends. As affirmed in the aforementioned Supreme Court resolution en bane, the highest court concluded that by any reasonable standard Procter & Gamble (Phils.) should be regarded as a party in interest ot- as a person having sufficient legal interest, to bring suit for refund of taxes it believes were illegally collected from it. This conclusion is arrived at by the Supreme Court after ana 1yz ing Section 306 in re 1a tion to Sections 309 of the National Internal Revenue Code 18

- DECISION CTA CASE NO. 4288 - 6- which requires the filing of a claim for refund by the ta x payer with the Commissioner of Internal Revenue within two (2) years after the payment of the ta>: or penalty. The ultimate issue to be r�esolved is whether or not P & G Phils. is a ta x payer under Section 309 (a) of the NIRC. We quote below the discussion made by the Supreme Court on the issue: "The Term "tax.r;@Yer:." is defined in our NIRC as referring to "~IJ:i.._persqn_ su..!2..LLc;_Lt.Q.._...J.E.Ji imposed by the Title (on Ta>: on Income)." 2 It thus becomes important to note that under Section 53 (c) of the NIRC~ the withholding agent who is "required to deduct and withhold any t a >: " is made " t!�..!:.!?..QD.~..!lY..__!..i_C!Q.l e _fQ.r.:. �.1,-.!.!;.tL_...t._~.-0- " and indeed is indemnified against any claims and demands which the stockholder might wish to make in questioning the amount of payments effected by the withholding agent in accordance with the provisions of the NIRC. The withholding agent, P S1. G - Phi 1 s � , i s d i r~!;__t.l.Y_ . .E.m:t___..!JJQ_tg_pen_d e _n tty . .l!.~.!?Jg~ for the correct amount of the tax that should be withheld from the dividend t- emittances. The withholding agent is moreover~ subject to and liable for defi c iency assessments~ surcharges a nd penal ties should the amount of the ta x withheld be finally found to be less than the amount that should have been withheld under law. A "person liable for tax" has been held to be a "person subject to ta>:" and properly considered a "taxpayer." The terms "liable for tax" and "subject to tax" both connote legal obligation or duty to pay a ta x . It is very difficult~ indeed conceptually impossible~ to consider a person who is 19

DECISION CTA CASE NO. 4288 - 7- statutory made "liable for tax" as not " sub j ec t to tax " � " ~-Y..-... ~n y:__r:.~.~-?...Q.O.E\ b 1e . 2..t..~n.t=.J..~r Q. .s.. _.......?!::l<::.. b..... . . .-~___pe rson__ s hgu 1_9___Q~. r:..~g~r.Q..~_Q_ as-���-~-...1?_<".\J:.:tY. in in 1; e r.~-~_t_,_g_r:___~.2_~ PJ::?.r.?_c,m____b..~v.!ng___.?.Y.J f ic;_J~.o..:t_l e~!__!...o.J:er:.!?.s t , tq__ t;!r..!.ng__~......�.'=J.A.i__f_q_r..::._r:_e 1_y_n d __Q:f_ _t ax ~?........l:le .!;!gj__;i. eyg..�____ w~.r:.~___!..llJ'?..9.a l_l_y co 1 1 e c ted f rom b.!_(n_!_~ (Underscoring supplied.) The high court continues its discussion of the issue by citing the case of Philippine Guaranty Inc. vs. of Internal Revenue, 15 SCRA 1 (1965)~ where the � Supreme Court pointed out that a withholding agent is in fact the agent both of the �government and of the taxpayer, and that the withholding agent is not an ordinary government agent: " I_bg__j_~-~----��e t ~ no con d i t ion f o r__:tbg ~_rspn ~.1._ 1 i..~Q.! . L!__ty____Q.f_ _ t h~;L,_w !..t h Q.g_l_g.A..!Jg ~g -~n. t:._____t.Q....._.....~..t:t.~_c;_b_!_ The reason is to compel the withholding agent to withhold the tax under all circumstances. In effect, the responsibi 1i ty for the collection of the ta>: as If-Jell as the payment thereof is concentrated upon the person over whom the Government as jurisdiction. Jhus. t..h..~____wi_thh_g_l d!D..9. ~ggo_t..........!.�._S _QD..?._'I; i .1:_l::L1;gQ_ t h~_p-~.!J..!;_..Q_f___Q_g_t h .t..bg___G..Q.Y_~rn.m.~_fl..t...._~[l_Q_ the ~_Kf@_yer. With respect to the collection and/or withholding of the tax, he is the Government's agent. l.o__ r@ard t;p__.t._he .f..!J_!o_g____. _Q ..f___.._t._b_!?.___o.ec::..!?. s ~~..r.y___i n c,;_q[ll_g__ _t~.K r.::.g.t_\:!r:.O._~.r.lf.L..ttHL..tt~Y-I!!ent of the tax t9 t. h~ __ E.Q.Y..~r.!J.IJ.l.�1JJ..t..._,____b_~ __!__g; the agg[l t of _the .:t~.KQ.~.Y.~r_.!'..__..I..b.~ withholding aggnt there- fg_.r_~_,__j._?.___O.Q__...._Qr:_d;i.nM_y__government ___~gen:t !?..?.Qec;_i~l...!.Y_P._~_c,;,~.l:::\�.�1__l,!n d f;? r s_~c t i Q!l_5 3 _Lc:;j_ h�__;i,...�.___t!.~.!.9... . . .P.go_r.:::.?.Q.O_~_U...Y- 1 i a b l.!? for the tax bg,___.! _?..___..f.IJ:.l:t..Y____Q.Q.\:!!1 d____.:t.Q_wi:...t. h t}Ql.c.;l...1.__.!1.b..!?...r~.a~ the_ CQ.f!!!!!l- ~-s -i.,_gng_r:.__ ?f1 d his de..Q.!::-1 t i e!!L..~re Q_Q_t._____l!!ft\..<:1...!?.__1..1-..~.9 1e by 1 ~w." (Underscoring t 1 supplied.) 20

DECISION CTA CASE NO. 4288 - 8- If, a s pointed out in Phi 1ippine Guaranty case, the withholding agent is also an agent of the beneficial owner of the dividends with respect to the filing of the necessary income tax return and wi th res pect to ac tual payment of the tax to the government, such authority may reasonably be held to inc lude the authority to file a claim for refund and to bring an action for recovery of such claim. This implied authority is especially warranted where, as in the instant case, the withholding agent is the ~holly owned subsidiary of the pa.re.n._t.- ~:tgckholder and therefore at all In the circumstances of this case, it seems particularly unreal to deny the implied authority of P & G Phil. to claim a refund and to commence an action for such refund. On the bas is of the above discussions, P & G Phil. is properly regarded as a "taxpayer" within the meaning of Section 30 of the NIRC and as impliedly autho r ized to file the claim for ~efund and the suit to recover such claim. On the s econd issue, whether or not petitioners have in fact overpaid the withholding tax on royalties. 21

DECISION CTA CASE NO. 4288 - 9- The cl ai m for refund amounting to P1~895~ 2 0 2 .00 represents the difference between the 25% ta>: "Ji thhe 1 d and the correct 10/. ta>: on roy a l ties arising in the Phi 1i ppines and payable to a U. S. corporation pursuant to the RP-US Tax Treaty. Th i s court concurs with the opinion rendered by then Commissioner of Internal Revenue, Bienvenido A. Tan Jr., (BIR Opinion No. 360-87 dated November 13 , 1987 ~ Exh. RR.) that pursuant to Article 13, paragraph 2 <b> (iii) of the R.P.- U.S. Ta >: Treaty, the taH imposable on royalties de rived by a r esident of the United States from sourc e s within the Philippines shall be the lowest rate of Phi 1 ippine ta>: that may be imposed on royalties of the same kind paid under similar c ircumstances to a resident of a third state. In as mLIC h as under Artie 1e 12 ~ paragraph ( 2) (b) of the RP-West Germany Treaty the tax on royalties impos able to a resident of West Germany s hall not e xceed 10/. of the gross amount of royalties~ this lower rate shall apply as well to a resident of the United States. To prove its claim, petitioners presented its evidenc es on the alleged amount sought to be refunded. It submitted its monthly remittances to the BIR as well as its corresponding official 22

DECISION CTA CASE NO. 4288 - 10 - receipts. It also submitted the corresponding v ouchers charged by affiliated company to prove that royalties were actually paid. The amount of P1,895,202.00 is proven by the presentation of the following e x hibits and is computed as follows: ['1l'Jll-l f.:Xt!l_BIT ~ Ta>: a1; 251. Ta:�: at 1Q& ~YI"ENT June A-~�' to A-5 P893~318.00 P'.L23~330.00 P89~33L.OO P1~~998.00 July B-3 to B-5 710~319.00 177~5B:l.OO 71~032.00 106~548.00 A...lg. C-3 to C-5 747~289.00 186~822.00 74~ tz7.(X) 112~093.00 Sept. D-3 to D-5 O:t. E- 3 to E-5 744~ 776.00 186~194.00 74,478.00 111 ~ 716.00 1\bv. F-3 to F-5 73~237 .00 Dec. G-3 to G-5 488~ 242.00 122~<.161.00 48~824.00 656~129.00 164~032.00 65~613.tXl 98~419.CX.) 473~051.00 118~263.CX.) 47 ~305.00 70~ 958.CX."l ,1987 Jan. H-3 to H-5 ~'f)' 483. 00 157 ~621.tXl 63~048.00 94~ 573.CX."l Feb. I-3 to I- 5 801 ,685.tXl 2tXl ~ 421 �tXl 00~169.00 120 ~ 252. tXl Mar. J -3 to J-5 819~058.00 2t14~ 765.00 81~906.00 122 ~ 859. tXl April t<- 3 to k - 5 663~459 .00 165~865.00 66 ~ ~-46 �(X.) 99~519.00 May L-~'� to L- 5 390' 966. (X_) 97~742 .00 39~097 .tXl 58,645.00 June M-3 to M-5 771 ~ 164.00 192,791.00 77 ~116.00 115~675.tXl July N-'~� to N-5 962~068.00 240~517 .00 96~207 .00 144~310.00 A...lg. D-3 to Q-5 908 ~ 286. tXl 227,072.00 90~829.0) 136~243.00 Sep. QP--..',~.�. to P-5 941 ~081.00 235 ~270.00 94~108.tXl 141~162.00 O:t. ~' to Q-5 1~0~,294.00 258~324.00 103' 3..:.'9. 00 154,995.00 p l:!:=E:!.?~ ~ ~12 � (~ T 0 TAL Petitioners have substantiated its claim for refund and thus entitled to the amount sought to be re �funded. WHEREFORE, in view of the foregoing, respondent is refund to hereby Iordered to petitioners the amount of P1,895,202.00 representing excess payments of withholding taxes 23

DECISION CTA CASE NO. 4288 � - 11 - on royal ties paid to petitioner, Kimberly-Clark Corporation (U.S.A.) from June 1986 to October 1987. SO ORDERED. Quezon City~ Metro Manila, January 30~ 1992. E&�u"):; Qc QLY~ ERNESTO D. ACOSTA Associate Judge CE RT I F I CAT I 0 N I hereby certify that this decision was reached after due consultation between the members of the Court of Ta>: Appea 1 s in accordance with Section 13~ Article VIII of the Constit tion. 24