CTA Case No. 2881 (Decision)

tt~\JBLI.C 0 P tH t.:OURT OF TAX 0 WYETH-SUACO LABORATORIES, INC., Petitioner, - versus - C.T.A . CASE NO. 2881 COMMISSIONER OF INTERNAL REVENUE, Respondent. X- ~ - ~ - - - - - - - ~- - X DECISION . Petitioner Wyet h-Suaco Laboratori~s, Inc ., appeals to this Court from a decision dated March 24, 1977 of respondent Commissioner of Internal Revenue on a dis- wi~lding puted assessment of deficie ncy tax at source for the 4th quarter of 1973 to the 4th quarter of 1974 in the total amount of ei ,l 35 , 978.89, inclusive of sur- chatge, interest and compro mi se penalty for late payme nt . The basis of the deficiency assessment is petitioner's failure to deduct, withhol d, and pay the corresponding withholding tax on royalties due to a nonresident foreign corporation, which royalties were accrued or set up as liabilities in petitioner's books during the period in- valve d in this case. Petitioner is a corpo rati on organize d and existing 26 8

DECISION - CTA CASE NO. 2881 - 2- under the laws of the Philippi nes with office and busi- ness address at 2236 Pasong Tamo Extension, Makati, Metro Manila . It is engaged in the manufacture and sale of nutritional and pharmaceutical products. During the period in question, petitioner was unde r obligation to pay certain amounts of royalty to the American Home Products Corporation (Wyeth International Limited), a nonresident foreign corporation , on the nut- ritional and pharmaceutical products manufactured and sold by it in the Philippines under o royalty agreement . Investigation conducted by examiners of the Bureau of Internal Revenue disclosed that. the amount of royalty due from petitioner to the American Home Products Corpo- ration of New York, u.s.A., amounted to e2,712,820.25, broken down as follows: Period Covered Royalty November l to December 31 , 1973 460 , 617.02 January l to March 31, 1974 669 , 555 . 28 April 1 to June 30, 1974 670 , 369 . 44 Jply 1 to September 30, 1974 642,739 . 58 269,538.93 Octob e r 1 to October 31 , 1974 (Exh. "1" & Exh. "1-A", p p. 47 , 51 & 52 , BIR Rec.) It was also ascertai ned that t he royalties in the 26 9

DECISION - CTA CASE NO . 2881 - 4- contained in the Memor a ndum to Authorized Agent Banks doted February 21 , 1970 on the rem itt a nc e of royalties acc ru ing on existing royalty contracts or on unr umitt e rl or blocked r oyaltie s , by ullowing th e full rLmittance thereof, upon compliance with certain co ndition s imposed by said Central Bank Circular 393 . It a ppe ars that as a con se quen ce o f Memorandum to Autho rized Agent Bank s dat e d February 21, 1970 of the Central Bank, p e titioner wa s able to remit onl y 50% of t l1 e royalties due to the non re si d e nt licensor f or the 4th quarter of 1973 and for th e l &t nnd 2nd qun rtors of 1974, for which the corr es ponding withholding tax was paid. In order to be able to remit the full roy a lti es , including th e remaining 50% previously un remi tt e d or blocked portion, petitioner amend e d it s royalty agr ee- ment with th e nonresident lic e nsor 011 J a nua r y 1, 19 74, to confor m with th e requir eme nts of Centr a l Gank Circular No. 393. Aft e r obtain i ng th e ap p r ov a l of the Central Bank of the amended royalty agreement und e r Circular 393 , petitioner was able to re mit all unr emi tt e d or block e d royalties for pa s t period s , inclLJdi ng those for th e 4t h quar ter of 1973 to the 4th qu arter of 19 74 . Th e co rr es- 271

DECIS ION - CTA CASE NO. 2881 - 5- pending with holding ta xes were all duly paid. In his letter dated March 24, 1977, respondent de nied petitioner's protest and reit erated the payment of the said deficiency assessment of el,l35,978.89 main - taining that the obligation to withhold a nd pay the tax arises at the time of accrual of the royalties and not at the time of the actual remittance or paymen t thereof . To quote the pertin e nt portion: 11 In reply thereto, I have th~ honor to inform you that for Philippine internal revenue tax purpos es , the liability to withhold and pay the income tax withheld at so ur ce from roy a lty paym e nt s to the non-resident foreign corporation occurs at the time of the accrual of said roya lties and not at the time of the actual remittance or payme nt thereof (BIR Ruling No. 71-003). Accordingly, an d since the royalties ha s been set up in the books of your client as accrued roy alties, sa id royalties are al- ready s ubject to the withholding provisions of Sections 53 & 54 of the Tax Cod e, eve n if remittance is made later on." From this deci si on, petitioner appealed to this Cou rt . The main is s ue in this case is whether or not the obligation to w{thhold and pay income tax at source on the royalties is upon accrual or upon the actual remit- tance or payment thereof . 27 2

DECISION - CTA CASE NO. 2881 - 6- Indeed, the issue is not one of first impression. In Bayer Pharmaceuticals, Inc. vs. Commissioner of In- ternal Revenu~, CTA Case No. 2846, March 16, 1979, certiorari denied in Commissioner of Internal Revenue vs. Court of Tax App eals, et . al. , G.R. No. 72054, September 29, 1986, where the factual setting is iden- tic al to that in the case at bar, this Court unequivocally ruled that the time of payment or actual remittance of the royalties is the maturation point ?f the withholding duty. Because of its controlling effects on the instant case, we wil l quote at length fro~ the decision: "~lhat possible ground can there be for us not to apply to petitioner the ruling of the United States federal Court in L.D.Caulk, supra , for which Bayer Pharmaceuticals, Inc. is similarly situated? A decision buttressed by the law, which is closely if not exact ly similar to our law, reason and logic is not to be simply brushed aside to accommodate a ruling of our own Bureau of Internal Reve nue which merely quoted as authority the excerpt of a United States Internal Revenue ruling but which excerpt has been declared obsolete by the same United States Internal Reven ue Service as a result of the L.D. Caulk deci- sion. As we view this legal problem, we find no cogent and valid reason to modify , much less depart from the conclusion reac hed in L.D. Caulk, as expressed in the above- quoted opinion of the United States Court there, and the same should resolve the iden- tical issue now bro ught befor e us in this proceeding. We cannot ignore the well- settled principle of construction that since our income tax law was practically 27 3

DECISION - CTA CASE NO. 2881 - 7- copied from that of the United States, the interpretations it has received in the United States have authoritative effect in the proper construction and application of our law. More so in the case of our withholding-tax-at-source provision embodied in Section 53(b) of our National Internal Revenue Code which, as shown above, was merely imported and copied almost verbatim from Section 143(b) of the United States Tax Code during the year involved in the L.D. Caulk decision. Accordingly, the conclusion reached in L.D. Caulk, which is followed by the United States Internal Service - That the time of payment of th e royalties i s� t h e ma t ur a t i o n p o i n t o f t h e wi i h - holding duty - should govern this pro- ceeding. "Not much need be said 011 respondent's assertion that , based on the report of the investigating examiner, nothing is stated that petitioner atte mpted to remit the royalties to Bayer. By respondent ' s own decision , it is expli~itly declared 'that the royalties in the amount of 869,529.00 were not remitted by BPI (petitioner herein) to Bayer due to Central Bank restrictions.' (Exhibit '5', Exhibit 'E-1', p. 30 1 BIR records) Since the roy alties could not be remitted to Bayer due to Central Bank res- trictions, as stated by respondent himself in his decision appealed from, ~urely, respondent's counsel should not expect petitioner to make efforts, albeit unlaw- ful, to remit the sa me. And on respondent's point that ~ince the royalties had been accrued in petitioner's books the income thereon became subject to withholding even if remittance was effected later, suffice it to say that the accrual of the royalties in petitioner's books, as held in the L.D. Caulk case, did not amount to 'gains, pro - fits and income' on the part of non-resident 274

DECISION - CTA CASE NO. 2881 - 8- Bayer 8nd, therefore, no necessity to withhold tax devolved on petitioner. "We, accordingly, rule that since the royaltie s in question could not be paid or remitted in 1972 by petitioner Bayer Pharmaceuticals , Inc., to non- resident foreign corporation Bayer Aktiengeselischalft, Lev erkusen Bayer- merk 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 liable. for the deficiency with- holding tax - at-source assessment of respondent Commissio ner of Internal Revenue in the amoun t of 836,834.]3 for the year 1972." Clearly, therefore, the decision dated March 24, 1977 of respondent Commissioner of Internal Revenue should be cancelled and set aside. With this co nclusion, and it app ea ring that the ta~ proper c overed in the deficiency assess ment in- valved in this case has already been paid by petitioner on various occasions when actu a l remittances o f royal- ties were effected (Resolution dated May 9, 1980 of the Court, pp . 83-84, CTA records), the secondary issue as to whether o~ not petitioner has paid the deficiency withholding tax at source assessed against it becomes moot and academic . The same is true with respect to the question of whet her or not petitioner is subject 275 ..

.. , DECISION - CTA CASE NO. 2881 - 9- to the 25% surcharge and 14% interest, as well as to certain compromise penalties , imposed upon it by respondent. WHEREFORE, the decision appealed from should be as it is hereby reversed . No costs. SO ORDERCD. Quezon City, Metro Manila, November 19, 1986. Presid Judge vJE CONCUR: ....___ C. ROAQUIN ciza~~e/~3~~ � 276