CTA Case No. 4308 (Decision)

r.P P 1.1 nl . 1 \: I If' I' !{!:' ..., ll I 1 1 fT 1 ITr' .-. crJ 11P 1 1 ' F�� r , ;( A 1T r-: til.:-; t_i ! JF :�' I "' ~J ( ~ l TV IBM PHILIPPINESr INCORPORATEDr f'pi�_ j _ t n n P r , vc:>rsus C.T.A. CASE NO. 4 308 COMMISSIONER OF INTERNAL REVENUEr R<=>spnndPnt. X - --------- - --- ------- - --�---- y F. :r: ( ) N ThiR i s a c:lr:~.im :for the re:fund o� the a mount o :f P29. 223 r 638. 94 reprPf'><=.>nt. ing rlllegedly overpaid wi t.hho .lding on royalti.Ps remi.t ted by the pPtiti.oner to IBM WOR D WORLD TRADE CORPORATION I a non -- res� dr->nt fnrP ign corporation , organized under t . h P .l a w s o :f t h P s t-. r=t I P o f N '? w Yo r k , U � S � A � P e t-. :i t. i on P r a dnrnP8t.ic: corporation organi. zPd and Px :lr--t. i nq under thP la\<~'S o� the Ph �LJ. ippi nPs wi th pri n c::i pal o�:f.i.cP r:~. t IBM Building, Pasr->o de Roxas, Makati, Me tro Man:i.la. For th e tax years 1986r 1987 and :for the per i od January - July 1988r IBM Wor ld Trade has granted p etition er IBM Phils. r a .lic:Pnsr, includi.ng the right to .! s blicense its <World Trade) suhsidiaries under all patents, inventions, and copyrights and under all 290

C.T.A. CASE No. 4308 DE C I S I 0 N -2 .) proprietary riqht. s i .n programs, wi �th respect to which patents, inventions, copyrights and propriet::try thP- r �. qht to u s ~=> i t . trade names and trademarks owned a nd/or registered in the name o:f World Trade. IBM World Trade in an Agreement dated Sep+.ember 1, 198 2 , had su h .licensed to i t s r:;ub sidi.a ry the s::tid rights and likewise agreed to provide IBM Phils., its technical knowledge and know-how. In consideration o� such ag r eement, herein petitioner agreed to pay IBM World Trade royalties equivalent to 10% of the gross c harges less returns and allowances, made dur i ng each calendar month lby petitioner to its customers :for the sale , service, lease and/or installat'on o:f IHS Products. The World Tra de Agr eement expired on Aug'ust 31, 1987, extended the period o:f the gran t :for another :five ( 5) yea rs . Th is second agreement was approved by the Central Bank <Annexes "LL" , "LL-1 " a nd " L L - 2>. Petitioner IBM World Trade agreed t o de:fer the prov i sion wi t h respect t o Programs s tar t ing on January 1 , 1 988 <Annex " MM>. 3ULJ

C.T.A. CASE No. 4 3 08 DEC I S I 0 N .) Hen ce , on Jl'"lnu8ry 1,1988 l'1 new agreemE?nt with InM Wor .ld Trad e, wi.t.h Pspect to licensjng of IBM Programs and acCF>SS t.o and u se of technical knowledge and know - how of IBM Programs, <Annex "NN" >. Petitioner were likewise granted the right to use all of IBM's trademarks on or in association with IBM program s and to p ovide the pet. i t ioner with available technicRJ. knowJF>dge and know-how relating to the reproduction, use, modif ication, marketability, education o .f us~=>rs, servi.ces and maintenance of IBM Programs. For and in consideration of such agreement, petitioner agreed to pay IBM World Trade royalties equivalent to of all its revenu es, excluding discounts and other allowances, billed or accrued during each calendar month, on sale, s~=>rvice, lease, or i n s t a l l a t i o n of an IBM Program which petitioner authorized, license, or distributed to any affiliated party, or 40% of the price of one unit that petitioner would bill a third party for the licensing or authorizing to use IBM Programs for each copy of an IBM Program that petitioner uses internally. For the tax years 1986, 1987 and during the period from January to July 1988, petitioner 3U .1.

C.T .A. C AS E No. 4 3 CA DEC I S I 0 N 4 remitted royal tieR to IB M Worl d Trade thP sum of P1 94 ,822, 459.77. The corresponrt ing t.axes on royalties were withheld thereon ~t the rate of 25% and remitted to thP. BIR in the sum of P4 8 , 705,614 .92. However, on SP.pt.Pmbe r 16, 1988, petitioner through i t s counR <=> l Romulo Mabanta, Buenaventu ra Sayoc and De Los Angeles obtained from then , Commissioner of Internal Revenue Bienvenido A. Tan, Jr., BIR ruling No. 456-88 hold i ng that "royalt.ies ar ising in the Philippines and payable to World Trade as we l l as to IBM by IBM Phi s. are subject to the Philippine tax at the rate of 10% beca u se this rat e appears in th e RP - West Germany 1 Tax Treaty and pursuant to Arti c le 13, paragraph 2<b><iii), of RP - US Tax Tr~?a ty . "<Anne x "HH", pp. 73 - 76, C.T. A. RPco rds>. Subsequently, in a letter dated October 15, 1988, p eti tioner through counsel , filed a claim for refund of excess taxes withheld in the amount of P29,223,368.94. No responsive action on said claim,having been made by respondent and to interrupt the running of the 2 year period of prescription, petitioner appealed to this Court on November 2, 1988. 3 ., r. ., LJ

C.T.A. CASE No. 4308 DE C I S I 0 N 5 Re Ppo nden 1: on h F:? o the r hrind, j _n h i:=: Answer, g~=>nerally denie s thf? mr1terj a l f:=~ct. allegP.d i n the petition for review a nd os s pe ci~ l and af:firmative defenses alleged, among others: 1. That pet. itioner i s n ot the real party in interest; 2. That BIR Ruling dated S ptember 16, 1988 invoked by petitioner does not in any way provide for the refund of the alleged overpaid tax withholding on the royalties; and 3. That petitioner has the burde n of proving th~t i t i s entitled to the amount sought to be refunded, the claim being in the nature of an exempt ion from taxati on , which cannot be made to rest on vAgue im plications and must be construed strictly aga in:=:t petitioner. The issues to be resolved in this case are as follows: 1. Wheth er or not petitioner has the legal capacity to in s titute this suit; 2. Whethe r or not petitioner should �be taxed at the rate of 10% withholding tax on royalties in accordance with Arti cle 12<2> of the R.P.- West Germany Tax Treaty and not 25% withholding tax on royalties under Article 13<2><b><iii> of the R.P.- U.S. Tax Treaty; and 3. Whether or n ot petitioner is entitled to the refund of P29,223,638.94, allegedly representing overpaid withholding tax on royalties. 3U 0

C.T.A . CASE No. 4308 DEC I S I 0 N -6 I �t-. may not Rm:i s s t. n at. thi..s junctu re, that thP �irst. issue i .. not new . The Supre me Co u r t in t. he case o:f Co mmisRioner o� Internal Revenue vs. Procter & Gamble PMC , G. R. No. 66838, t h r o u g h a R e s o l u t :i. on En Bane, d a t e d December 2, 1991, in e��ect ru .le d that by a reasonable standard , the withhold i ng agent, should be regarded a s a party in interest, to bring suit �or re�und o� t axes he believes were illegally co llect e d �rom him. We quote at leng th �ro m the said Resol ution, to wit: "The term � tax payer' is defined in our NIRC as re�erring to a~ person subject to tax imposed by the Title <on Tax on income). � It t hus b ecomes important to note that unde r Section 53 (c) o� the NIRC, the withholding agent .) wh o is req u ired to dedu c t and withh o ld any tax is mad e 'perso n ally li~ble �or such ta x" and indeed is i ndemni�ied against any claims and d emands which the sto c khold er might wis h to make in qu est ion ing the amo unt o� pa y ments � e��ected by the wit h hold:ng agent in accordance wi th th e provisions o� the NIRC. Th e with holding agent , P & G Phil., is d i rectly and indepently liable �o r the cor rect amount o� the tax that should be withheld �rom dividend remittances. The withholding agent is , moreover, subject to and liable �or de�iciency a sses sme nts, surcharges a nd penalties should the amount o� the tax withheld be finally �ound to be less than the amount that should have been

C.T.A. CASE No. 4308 DEC I S I 0 N -7 withheld be finally ~ou1rl to be ] PSS than the amount that s h o ulrl h~ve withheld under the law. heE=?n A person liable for tax h an b ee n h eld ~o be a person subject to tax and pr opPr l y considered a 'taxpay er . ' Th e t er m ' l i a b l e for tax ' ~nd "subj ec t to t a x ' both connote legal o b li . g~1 . ion or duty to pay a tax. It is very difficu J. t, indeed co nce ptually impossible, to conRider a person who is statutorily made 'l iable �or tax' as 'subject to t a x . ' ~y ~~ re~~on~~~e standard , such a ~erson should pe regarded as ~ ~ar ty in i n t e r e s t , ~~ ~ a person hav~ s u f f i c i e n t leg2~ i n t erest , to were ille92~ collected from him. In G u a r a n t y_ Inc. o� this 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 's not an ordinary government agent: 'The law sets no condition for the .) personal liability of !,he withholding agent to attach. The reason is to compel the withholding agent to withhold the tax under all circumstances. In effect, the responsibility for the collection of the tax as well as the payment thereof 3u o

C.T.A. CASE No. 4308 DE C I S I 0 N 8 concentr a t ed up on the p ersnn over whom t h e Government h as jur ~s dj _ ct~o n. Thus, the withhold~ ~ent i s c o n s t i t u t e d the agent o:f both the Government and the taxpayer. With r e spect to the collection and/or withholding o:f the tax, he i s t~e Govern ment's agent.In r egard to the :filing o:f the necessar_y_ in_come tax return and the payment o:f the tax to the Government, he is the aqent o:f the taxpayer. The wi thholqing agent, therefore, ~s no ord inary government a~en~ especially pecause under Section 53(c) he is held personally liable :for the tax he is duty bound to withhold; wher~as the Commissioner and his deputies ~ not made liable ~ law'. <Emphasis supplied) I :f, as pointed out in Philippine Guaranty, the withholding agent is also an agent o:f the beneficial owner o:f the dividends with respect to the :filing o:f the necessary inc o me tax return with res pect to actual nayment o:f the t ax to the government, such authority may reaso~a bly be .held to bring an action :for recovery o:f such claim. This implied authority is especial ly warranted where, as in the instant case , the withholding agent is the wholly owned subsidiary o:f the parent- stockholder and therefore, at all times , under ~:f:fective control o:f such parent-stockholder. In the circumstances o:f this case, it seems particularly unreal to deny the implied authority

C.T.A. CASE No. 4 3 08 DEC I S I 0 N -g of P &. G Ph~l. to cla~m a refund a nd to commence ~n action for R u c h r@funo. We beli e v e thRt, e ven n o w, there s noth~ng to preclude the BIR from requ~r~ng P & G Ph~l. t o show some written or telexed confirmation by P & G - USA of the subsidiary's authority to claim the refund or tax cred~t and to remit the proceeds of the refund, or to apply th e tax credit to some Ph~lipp~ne t a x obl~gation of, P & G - USA, before actual Q_ay ment of the refund or ~sauance of a credit certificate. What appears to be vitiated by basic u n f a i r n e s s ~s pet~tioner'a p o s i t i o n although P & G - Ph~l. i s d~rectly and peraona~ly l~able to the Government for the taxes and any def~c~ency assessmPnts to b e collected, the Government : refund ~s not leg~lly l ~ab l e for a simply because ~t did d e mand a w r ~tten confirmation of P & G - Phil. ' a ~mplied auth o r~ty from the � very beg~nning. A sovere~gn governm e n t should act honorably and fa~rly a t a l l times, eve n v~s-a-vis taxpayers. We believe and so hold that, under the circumstances o:f this case, P & G Phil. is properly regarded as �taxpayers' within the 30�

C.T.A. CASE No. 4308 - DEC I S I 0 N- 10 - meaning of Section 309 , NIRC, and as i mpJ_iedly authorized to file the claim for refund and the suit to recover such claim." <Und ersc oring supplied) The ruling is reiterated by the Supreme Court in the recent case of Commissioner o� Internal Revenue vs. The Court o� Tax Appeals, e>t al., G.R. No. 93901, February 11, 1992. We fi nd no cogent reason to deviate :from the conclusion reached in the above - c i ted cases and the same> should res olve the similar question presented in this appeal. On the> second issue, whether or not petitioner s~ould be taxed at the reduced rate lo� 10% withholding tax on royaltie� in accordance with Article> 12(2) (b) o:f the R.P. - West Germany Tax Treaty and not 25% withholding tax on royalties under Article 1 3 <2><b><iii) o� the R.P. - U.S. Tax T rea ty. This Court is of the persuasion that petitioner's stand is correct and concurs with the> opinion rendered by then Commissioner o:f Internal Revenue, Bienvenido Tan, Jr. <BIR Ruling No.456-88 , s upra., that under the most :favored nation

C.T.A. CASE No. 4308 - DE C I S I 0 N- 11 prov~s~on of the R.P.- U.S. Tax Treaty <Art~cle 13, p a r a g r a p h 2<b><~~~>, t h e t a x ~mposable on royalt~es der~ved by a res~dent of t h e Un~ted S t a t e s from sources w~th~n the Ph~l~pp~nes s h a l l be the lowest r a t e of Ph~l~pp~ne tax t h a t !flay be ~mposed on royalt~es o f �t h e same k~nd pa~d under s~m~lar cj. rcumstances to a res~dent o f a th~rd s t a t e . Art~cle 12, paragraph 2<b> of the R. p. West Germany Tax Tre aty, prov~des that r o y a l t i e s aris~ng ~n t h e Ph~lipp~~es and pa~d t o a res~dent o f West Germany may also be taxed ~n the Phil~ppines, but the tax so charged shall not excee d lO'Y. of the gross amount of royalt~es. Sa~d t r e a t y prov~des that for as long a s the transfer o:f technology und er P. h~l~pp~ne .law, ~s subject to i approval, the l~m~tat~on o:f the tax r a t e ~n case o:f royalties arising in the Ph~lippines, apply i f the contract giving r i s e to such royalt~es has "been approved by Ph~ l~ ppine competent authorit~es. Thus, ~nasmuch as the Agre e ment between World Trade and IBM Phils. as well as the Agreement between IBM and IBM Phils. had been approved by the Central Bank of the Ph~l~pp~nes, r o y a l t i e s aris~ng ~n the Phil~pp~nes and payable to World Trade as

C.T .A. CASE No. 4308 - DEC I S I 0 N- 12 - well as to IBM by IBM Ph~ls. should be taxed at the rate o� 10% because sa~d rate i s indicated ~n the R.P. - West Germany Tax Treat.y and pursuant to Article 1:J, p aragraph 2(b )( ~~i > , o� the RP - US Tax Treaty . We now come to the third issue, whether or not pet~tioner ~s ent~tled t o a t a x refund o� P29 ,223 ,638.94 representing the overpaid w~thholding t a x on royalt~es. To su pport ~ts cla ~m, petit~o n er p r e s e n t e d evidences on t h e alleged amount sought to be re:f unded by submitting dur~ng the t r i a l of th~s case, xe rox cop~es of ~ts monthly remittances, Payment Orders and correspond~ng Con:firma t ~on Rece~pts ~ssued by the Central Bank. It also subm~tted the corresponding vouchers c ha rged by the affi l ~ated company to prove that the royalties were actu a l ly pa~d. A:fter going over the ev~dences and evaluating the same, th ~s Co u r t :finds t h a t petit~oner has i ndeed, overpa~d the w~thhold~ng tax on r o y a l t i e s , in the amount o f P29,223,368.94, hence, ent~tled to the refund thereof, computed as :follows:

C.T. A. CASE No. 4308 - DEC I S I 0 N- - 13 - Am ount of Ta:x at Ta x i:!.1. !Jveq~ ayment Royalties 25% 1985 lOY. Jan p 3, 279,429.79 p 819,857 .45 p 327,942. 98 p 49 1, 914 .47 407,559 .53 511, 339. 45 Feb 4,075,595.30 1,018,899.08 345,259.03 517,888.54 393,997.8 1 590,995.71 Mar 3,452, 590.25 863, 147. 57 349, 333. 45 524,000.19 347,097. 10 520,645.64 Apr 3,939, 978.08 984 , 994.52 572, 730. 93 332,875.98 1, 009, 096.40 May 3,493,334.53 873,333.55 360,096 .08 499,315.47 451, 273.16 540,144 .12 Jun 3,470,970. 95 857;742.73 551, 134.65 576,909.74 841, 701. 98 Jul 6,727, 309. 32 1,581,827.33 1, 361,611. 43 2,042,4 17.14 Aug 3,328,769.82 832,192.45 Sep 3, 600,960. 80 900,240.20 Oct 4, 512,731. 60 1, 128 , 182.90 Nov 5, 611 , 346. 52 1,402,836.63 Dec 13 , 616 , 114. 25 3,404 , 028.56 1987 Jan p 2,649,659.28 p 562,414.82 p 2E.4, 965 . 93 p 397, 448.89 328,776.25 493,164.37 rl?b 3,287, 762.49 821,940.62 287 ,753.32 431,629. 97 555, 748.81 833, 623.21 Mar 2,877,533.16 719,383. 29 451,723.16 677 , 584.74 851,905.67 Apr 5,557,488.07 1,389,372.02 908, 940.26 1,277 , 858.5~ 448, 704.62 May 4, 5 17,231.~7 1,129,307. 89 241,169.96 1,363,410.3 720,179.66 673,056.93 Ju n 8,519,056.65 2, 129,764.16 361 ,754.94 339,665 . 9~ Ju l 9,089,402.58 2,272,350.65 1,080, 269.49 1, 606,484.67 509, 498.87 Aug 4,487,046.17 1, 121,76 1.54 2, 409,727.01 Sep 2,411,699.60 602,924. 90 Oct 7,201,796.59 1,800,449.15 Nov 3,396,659 .1 4 849,164. 78 Dec 16,064 ,846. 72 4, 016,211.68 J388 Jan p 7,369,014.68 p 1,842, 253.67 p 736,901.47 p 1,105,352.20 1, 521, 790.72 608,716.29 913, 074.43 Feb 6,087,162.88 3, 516,265.49 1, 346, 352 �.90 1,406,506. 20 2,109,759. 30 Mar 14, 065,961. 98 1,658,932.40 538, 541. 16 807 ,811.74 4,783, 324.73 663,572.96 995,359.44 Apr 5, 385, 411. 59 1,744,366.45 1,913,329.89 2,869,994.83 May 6,635,729.60 697,746.58 1,046,619.87 June 19,133,298.89 July 6,977,465.80 194,882, 459.77 48,708,614.92 19,482, 245.98 ? 29,223,368.94 -------------- ;{ I I 31 ...

'I C.T.A. CASE No. 4308 - DE C I S I 0 N- - 14 - WHEREFORE, respondent is h e reby orde red to r~fund to petitioner the amount of P29,223,368.94, representing excess payments of withholding taxes on royalties, for the tax years 1986, 1987 and during the period from January to July 1988. SO ORDERED Quezon City, Metro Manila, March 31, 1993. GRUBA Judge WE CONCUR : <{._..:xc tQ ~ ~ ESTO D. ACOSTA :iP::.Z~dge RAMON 0. DE RA Associate Ju ge 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. ({~� (2_.~ ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals J 312