CTA Case No. 3605 (Decision)

- - - � ---~� EftJBLlC Oi' tiU: PHILU'PINn I COURT OF TAX APPEALa~ QUEZON ctT'( MARUBENI CORPORAT ION, (formerly MARUBENI-IIDA CO., LTD. ) , Petitioner, - versus - C.T.A. CASE NO. 3 6 05 THE ACTING COMMISSIONER OF INTERNAL REVENUE, Respondent . X- - - - - - - - - - - - - - X DEC I S I 0 N Questioned in this petition for review is the dec~sion of respondent Commi ssioner of I nter nal Reven�ue de nying petitioner Mar ubeni Corporation's claim for refund or tax credit o f the amount of P229,424.40 as a lleg ed overpaid profit remittance tax withheld on dividends remitted by the Atlantic, Gulf & Pacific Company of Manila to the Marubeni Corporation of Japan during the first and third quarters of 1981 . The pertinent facts as al l eged in the petition f or ie vie w and adm itted in the answer are: Petitioner is a foreign corporation duly organ- ized a nd e xisting under the laws of Japan, and duly licensed to engage in business under Philippine law, wit~ branch office at the 4th Floor, FEMII Bui l d ing, Aduana, In tr amuros, ,Manila. 51

DECISION - CTA CASE NO. 3605 - 2- Respondent is the duly designated, qualified and incumbent Acting Commissioner of Internal Revenue of t he Philippines authorized under the law to act on claims for tax refund and credit, and on other matters involving the enforcement of the National Internal Revenue laws; respondent holds office at the BIR National Office Building, East Avenue, Diliman, Quezon City, where h e may be serve d w ~ t h summons. For the first quarter of 1981 ending March 31, Atl ~ntic, Gulf & Pacific Co. of Manila (A G & P) dec- ~ lar0d and paid cash dividends to petitioner of ~849,720, and withheld the corr esponding 10% final divide n j tax thereon. Sim i larly, for the third quarter of 1981 ending September 30, AG & P declared and paid cash dividends to petitioner of F849,720, and withheld the corres- ponding 10% final dividend tax thereon. AG & P directly remitted to the petitioner's head office ' in Tokyo, Japan, the cash dividends, ne t not only of the 10% final dividend tax, in the amount s of P764,748, for each quarter (first and third) of 1981, but it also withheld the 15% profit remitt a nc e tax based on the remittable amount after deducting the final withholding t ax of 10 %. A schedule o f div i- dends declared and paid by AG & P to its cli e nt 52

DECIS ION - CTA CASE NO. 3605 - 3- (Marubeni Corporation of Japan), ~he 10% final inter- corporate divid end tax and the 15% branch profit remit- tance paid ther eon , is shown below: -l -9�-8--1 Fir s t Qu ar t e r Third Quar te r Total of First and (Three mon ths (Three months Third Quarter Cash Dividends ended ' 3.31.81) ended 9 .30.81) Paid fll,699,440.00 I 1'2849,720.00 El849 1,720.44 10 % Dividend I fl 84 , 972.00 fl 169,944.00 Tax vJi thhe ld Fl 84~972.00 Cash Dividends l'l764 ,7 48.00 P764,748.00 E11 , 529 , 496.00 Net of 10% Dividend ! Tax Withheld 15% Branch .Profit flll4,712.20 Pll4 , 712.20 I;il 229,424.40 Remittance Tax Wi thheld Net Amount Remitted El650,035.80 �:! 650, 035 . 80 Ell,300,0 7J_ .6 0 To Pet itioner The 10 % final dividend tax of P84,972 an d th e 15% branch profit remittance tax o f Pll4,712.20 for the first qua rter of 19 81 was paid to the Bu rea u of Internal Revenue : by AG & P on Apr il 20, 1981 under Central Ban k Receipt No . 67578 80. Copies of the Quarterly Return of Income Tax Wit hheld at Sourc e for Mar~h 31, 1981 of AG & P on div idends payab le to petitioner , Revenue Tax Receipt No. 6890 370 and Central Bank Confirmation Receip t No. 67578 80 dated April 20, 1981 showing the aforement i oned paymen ts of dividend tax and branch profit remittance t ax are here to attached as Annexes "A", "A-1" a nd "A-2" , respective l y , and made i ntegral parts hereof. 53

DECISION - i CTA CASE NO. 3605 -4 On the other han d, the 10% final dividend tax o f P84,972 and t he !5% branch profit � remittance tax of Pll4,712.20 for the third quarter of 1981 was paid to t he Bureau of Internal Revenue by AG & P on Aug u st 4, I I 1981 under Central Bank Confirmation Receipt No. 7905930. Copies of the Quart~rly Return of Income Tax With h eld at Source for Septe~ber 30, 1981 of AG & P on dividends payab l e to petitioneir, RevE: : mE Tax Receipt No. 7291011 and Ce n tral Bank Confirmation Receipt No. 7905930 dated Aug us t 4, 1981, sho~ing the aforesaid payments of divi - dend tax and branch profit remittance tax, are hereto atta ched as Annexes "B", "B-1" and "B-2", respec c �:. vely, a nd made integral parts hereof. For the first and third quarters of 1981, AG & P as withholding agent thus paid 15 % branch profit re mit- tance tax on cash dividends declared and remitted to petitioner at its head office in Tokyo in the total amount of P22 9 ,424.40 on April 20 and August 4, 1981. Pu r suah t to Section 24 (b) ( 2) of the Ta}~ Code, as a mended by Presidential Decree No. 1705 which took effect on August 1, 1980 and Presidential Decree No. 1773 which t ook effect on January 16, 1981, only profits re- mitted abroad by a branch office to its head office which are effectively connected with its trade or business in� the Philippi~ are subject to the 1 5 % 54

DECISION - CTA CASE NO. 3605 - 5- branch prof it remittance tax. Section 24 (b) (2) pro- vides in pertinent part: "(ii) Tax on branch profit remit- tances. Any prbfit remitted abroad by a branch to its head office shall be subject t o a tax of fi fteen per cent (15%) /except those registered with the Export Pr;cessing Zone Authority/:; x x x And ProvidErl fu rthe r, That interests, � dividends, rents, royalties, inc luding.remunbrations for technical ser- vices, salari e s~ wages , premiums, annuities , emoluments or other fixed or de terminable ann ual, periodical or c as . ~ al gains , profits, i ncome and c apital gains received b~ foreign corpora t ion during e ach taxable year from all sources within the Philippines shal l no._t. be considered as branch profits unles s the s a me a re effectively connected with the conduct of it s tr a de or business i n th e Philippines . �� L.Empha sis supplie�/ In Ruling No. 157- 81 dated July 13, 1981, respondent held ~hat dividends received by petitioner fr om AG & P, a dome stic corporation, are not effectively connected with its conduct of trade and business in t he Philippines and a s such are not considered branch profits subject to the 15% profit remittance tax imposed under Section 24 (b) (2) of the Tax Code, a s amended by Preside ntial Decr ee Nos . 1705 and 1773. The per tinent portion of the ruling r eads : 1 "In the instant case, the dividends received ty Marubeni from AG & P are not income a r ising from the business activity in which Marubeni is engaged. Accordingly , said dividends if remitted abroad are not considered branch profits for purposes o f t he 15% profit remittance tax imposed by Section 24(b) (2) of the Tax Code, as amended by Pr~siden ti al Decree Nos. 1705 and 1773." 55

DECISION - CTA CASE NO. 3605 - 6- ~ copy of BIR Ruling No. 157-81 is he reto attached as P..nnex C 11 11 and made an integral part hereof. In a letter dated September 21, 1981 and filed with respondent's office on September 24, 1981, p ~t i- tioner, through its auditors, claimed for the refun"d or issuance of a tax c redit of the aforementioned erroneously paid amount of P229,424.40. A copy o f the said writ ten c laim for : ef md or tax credit is hereto attach ed as Annex 11 D" and made an integral pa rt hereof. In a letter dated June 14, 1982 and received by petitioner�s auditors on March 9, 1983, respond c , t. denied petitioner's claim for refund/tax credit of ~2 2 9 , 424 . 40 on the following grounds: "While it i s true that said dividends remitted were not subject to the 15% profit remittance tax as the same were not income earned by a Philippine Branch o f Marubeni Corporation of Japan; a nd neither is it subject to the 10% intercorporate dividend tax, the recipient of the dividends, being a non-resident stockholde r, nevertheless, said dividend income is subject to the 25 % tax pursuant to Article 10(2) (b) of . the Tax Tr eaty date d February 13, 1980 between the Philippines and Japan. Inasmuch as the cash dividends re- mitted by AG & P to Ma: ubeni Corporation, Japan is subject to 25% tax, and that the taxes withheld of 10% as intercorporate divid end tax and 15% as profit remittance tax totals 25%, the amount refundable offsets the liability, hence, nothing is left to be refunded." 56

DECISI ON - CTA CASE NO. 360 5 - 7- A copy of the said letter of June 14, 1982, rece i ved by petitioner's auditors on March 4, �1983, is hereto attach ed as Anne x 11 E" and made an integral part hereof . Hence the instant appeal praying that respondent be ordered to refund or grant as tax credit in favor of petitioner the a mount of ~229 ,424.40 representing branch ~refit remittance tax on dividends remitted by the Atl ant ic, Gulf & Pacifi . Co mpany of Manila to the Marubeni Corpor at ion of Japan. As special and affirmative defenses respondent Commission~r of Internal Revenue avers that: Marubeni Corporation, Japan, a non - resident corporation, di rectly made its investments in Atlantic Gulf and Pacific Co mpany, a domestic corporation, without cou rsing such transaction through petitioner Marubeni Corporation, Philippines, a resident corpo- ration. Unde r the Ta x Code, dividends paid by a domestic corporation ' to a non-resident corporation are subject to a � 35% tax. Howeve r, under Article 10 (2) (b) of the Tax Treaty between the Ph il ippines and Japan dated 13 Februa ry 1980, s uch d ividends are subject to a special rate of 25 %. Atlantic Gulf & Pacific Company withheld 10 % .intercor po rate dividend tax while petitioner Marube ni 57

DECISION - CTA CASE NO. 3605 - 8- Corpor a tion , Phil ipp ines paid 15% profit remit tanc e tax on t he same d i v idends. The sum o f the 10% intercorporate div idends tax withheld a nd rem it ted by AG & P and the branch profit remittance tax paid by petitioner is equivalent to the special rate of 25%. Ther e is, therefore, no refundable amount due petitioner. Taxes are presumed to Lav 2 been collected in accordance with law . In an ac t ion for the refund of taxes, the burden of p roo f lies upon the taxpayer to show that the t a xes paid were err oneou sly or illegally c ol l ected. F d ~lure to sustain said bu rden is fatal to the action for refund. It is incumbent upon petitioner to s how that it has complied with t he provisions of Sections 292 and 295 of the Tax Code of 1977, as ame nde d. Claims for refund of taxes are construed strictl y ag ai nst claimants, the same being in the nature of � an exemption from tax at ion. (Com. of Int. Rev. vs . Ledes ma, 3 SCRA 95.) The theory of petitioner is that it is a re s ide n t forei gn corpora tion subjec t on ly to the 10% in t er- corporate dividend tax on dividends received from a domestic corporation, and not a non-resident foreign cor poration subject to the 25% dividend tax prescribed 58

DECISION - CTA CASE NO. 3605 - 9- under the Tax Treaty between the Philippines a nd Japan. It ma y be stated that under Section 24 (c) (l) of the National Internal Revenue Code dividends re- ceived by a domestic or resident foreign corporation fr om a domestic corporation are subject to a final tax of 10% on the total amount thereof. On the other hand, respo ndent contends that since the Marubeni Corpora t~ o~ of Japan, a non- resident corporation, directly made its investments in the Atlantic, Gulf & Pacific Company of Manila, a domestic corporation, without coursing such transaction through petitioner Marubeni Corporation Philipp :L nc branch, a resident corporation, the dividends paid by the Atlantic, Gulf & Pacific Company of Manila to the Marubeni Corpo ration of Japan are dividends received by a non-resi den t corporation subject to the 35 % c o rpo- rate tax as a foreign corporation not engaged in tr ad2 or business in the Philippines, in accordanc e with Section 24(b) of the National Internal Revenue Code. However, under Article 10(2) (b) of the Tax Treaty between the Philippines and Japan dated 13 Febru a ry .. 1 9 80, such dividends are subject to a special rate of 25%. We find no merit in the appeal of petiti oner. Whatever the dialectics employed, no amount of sophistry can ignore the fact that the dividends in u~, G._ ,

DECISION - CTA CASE NO. 3605 - 10 - question ar e income taxable to the Marubeni Corporation of Tokyo, Japan. The said dividends � were distributions made by the Atlantic, Gulf & Pacific Company of Manila to i ts shareholder out of its profits on the investments of t he Marubeni Cor poration of Japan, a non-reside nt foreig n corpor a tion. The investments in the Atlantic, Gulf & Pacific Company of the Marubeni Corporation of Japan were directly made by it and the dividends on t he investments were likewise directly remitted to and received by t he Marubeni Corporation of Japan. Petitioner Maru beni Co rpora tion Philippine Branch has no participation or intervention , directly or indirectly, in the investments and in the receipt of the dividends. And it a ppears that t he funds invested in the Atlantic, Gulf & Pacific Company did not come out of the funds infused by the Ma rubeni Corporation of Ja pan to the Marubeni Corporation Philippine Branch. As a matter of fact, the Central Bank of the Philippines , in authorizing' the remittance of the foreign exchange equivalent of t h e dividends in que~tion, treat e d the Marubeni Co1poration of Japan as a non-resident s tock- holder of the Atlant ic, Gulf & Paci[ic Company based on the supporting documents submitted to it. Subject to certain exceptions not per tinen t hereto, i ncome is taxable to the person who earned it. Admittedly, the dividends unde r consideration 60

------- DECISION - CTA CASE ~0. 3605 - 11 - were earned by the Marubeni Co poration of Japan, and hence, taxable to the said corpo ratio~. While i t is true that the Marubeni Corporation Philippine Branch is duly licensed to engage in bus i ness under Philippine law, such dividends are not the income of the Philippine branch and are not taxable to the said Philippine branch. We see no significance therefore in the identity concept or principal-agent relationf01 ir theory of petitioner because such dividends are the income of and taxable to the Japanese corporat ion in Japan and not to the Philippine branch. While it is true that said dividends remitte 1 were not subject to the 15% profit remittance tax as the same were not income earned by the Philippine branch of the Marubeni Corporation of Japan; and neither are they subject to the 10% intercorporate dividend tax, the recipien t of the div idends being a non-resident stockholder, nevertheless, the said dividend income is subject to t h e 25% tax pursuant to Articl e 10(2) (b) of th~ Tax Treaty dated February 13 , 1980 between the �Ph ilippines and Japan. Consequently, inasmuch as the cash dividends remitted by the Atlantic, Gulf & Pacific Corr;pa.ny of I'-lanila to the Marubeni Corporation, Jap <.l n, is subject to 25% tax, and that the taxes withheld of 10% as intercorpora te di v i dend tax and 15% pro~it remittance 61 I

DECISION - CTA CASE NO. 3605 - 12 - tax totals 25%, t he amount refundable is offset by the tax liabil ity of the Marubeni Corporation of Japan. WHEREPORE , the decision appealed from is hereby a ffirmed at petit ioner's costs. SO ORDERED. Quezon City, Metro Manila, February 12, 1986. z~ Associate Judge 62