CTA Case No. 2961 (Decision)

R.�. & J. ALEXANDER & CO., LTD. and TOOT~L LT~. and ALLIED THR~AD Co 411 I-N.l\.',"..'.tt ' r t,f-~A- .;., v11.L��. "�.. "uJ.�~�o.L' c....;tll' r'jt~~ A g .at ��;-} � . ._ _ .... !~ Petitioner: s, - V~~r GUS � .. C.T.A . CASE NO . 2961 THE CO�-'il�'ll. ':;;JONE: OF INTERNAL REVENUE, P.esl'_)orden t:.. }; �- - � � - - --------X DE C I S I 0 N Ser:tion 24 (b) (1) .of th e National lnte~:nal Revenue Code imposes on a forei gn corporation not engaged ir trade or business in the Philippines gn incom' 3 tax egual to thirty-five percent (35% ) cf t')1e ~;ross income received during each taxabl ye ~ r from all sour c es within the Philippines, as, among others, divi6en~s,J r other fixed r deter- minable, a rnu al, periodical or c2su~l gains, profits and income, and capital gains . Howev-r, on dividends r eceiveJ from a domestic corporation 1 iable to tax , the ta}~ is fifteen perce n t (15%) . .o~ the dividends ��eccived, which is collected and paid as provided in Section 53(d) _of the Tax Code, :3ubj :;ct t:o the condition that the country in which the non-res i dent ~ o re ign corpor2tion is dorn i~iled

DECISION -� CTA CAS E NO. ~9(1 -2 allows a credit agains t tl:v:: '�:a:< due fro;n t>-2 i."'\on- .i: es .:.dE.'.nt fore i<;;11 corpor c1 tion r taxes d ::..er,"r1 �:.c have been p~id in the Philippines equi 7~ .. ~~~ t~ twenty percent f2L~) .which represents ~~~ ~~f~~r- ence between the regular tax ( 35% ) .on corp)rations and the tu.x (1 5%) _on di'liden::Js. (Now 2ection 24{b)(_iii)d. 1977 National Int'.e.rnal Hevenue Code.) In this Guit for recovery of alleged ouerpaid Hi t ':1hold ~.ng, ta:. on di v idcnds, it appear~ that peLitioner Allied Thread Co., Inc. (hereinafter called "l\llied 11 ) .declared and paid dividends on June 28, 1976 to i ts co-petU:ioners R.F . & J�. A. exander & Co. , Ltd. (hereinafter called "Ale }'ander") and Tootid. Ltd. (hereinafter called "Tootal") '� frorn which Alli ed wi thheld and paid to th e Bureau .of Internal Reve~u c the 35~ withhol din g (inc ome ) .tax, pursu .1nt to the at,ovc Section 24 (b) (1) in relation to Sec',:ion 53 (b ) of the National Inte .rn al Re� enue Code. Averring, however, that unde r the Income Tax Law of the United Kingdom i n which Alexander and Tootal are lomiciled, the allowable deemed paid tax credit exceeds 20% of the dividends rece1ved by them , Allied now claims that since it withheld 35% tax o n the d iv idends paid to its co-petitionE~ ::s ins tead of only 15 %, in accor~ance wi~h the above 2SO

.' DECIS""ON - CT! CASE NO. 2961 -� 3 .,.. Sectior:. 2tl(0) (1) o� th~ Cod::.v it had o�verpaid the withholding tax by 20%. Consequentl:, claim for refund or tax credit of the over;aid or erroneously paid withho:� � n-:J ta~~ or1 divi _.c'.~ds dec- lared an~ paid by Allied to its co-petitioners Alexander and Tootal was filed wit~ respondent Commissioner of Internal Re-~nue. And to inter- rupt th~ running of the prescriptive period for t~e refund o_ tax credit claified, petitioners filed the present suit in acco.dance with Section 292 of the National Int.er:naJ. Revenue Code . There is no cispute as t.o the facts of the case. After petitioners have rresented their evidence, both oral and documentary, and rested Lheir case, counsel for respondent, without con- troverting or dibputing Lhe evidence of petitioners and witJ.1.out offerir:g, proof as to t.he truth of his own allegations in the answer, submitted this appeal fo r decision on the basis of the plead i ngs and the records of the case. (nit utes o[ the sessicm. of the Cour : , June 4, 1980, p. 76, C'l'A recorr~�.) And the reco tds of the case 0onsi ~t of the uncon- tested oral and documentary evidence of petitioners s~pporting and justifying their claim for refund 2J 1

.' DECJ:S I "JN - CTA CASE NO. 2961 or tax credi -p and t~e record of t.e Bureau of Internal F. .Nenue pertaining to ~:h is proce-sding which is only the written claim for refund qr t.::J.x credit filcc.'l. by petitio<~E:!rs vd. th respondent togEther with the documents which support their claim. U1der the well-settled rule that one who prays for judgment on the pleadings without offering p:uof: as to t.he truth of his own alle- gations, must be understood to have admitted the truth of all t he material and relevnnt allegations of the opposing pa rt.yi and to rest hie- motion for judgment on these allegations ~ aken together with such as his own as are admitted (Bauerman vs. Casas, 10 P~i l. 386; Evangelista vs. De la Rosa, et al., 76 Phil. 1 5) ~ the factual background of t~e case as ga~hered from ~he petition for review borne out by the records, a d supported by the uncontrove rted evidence of pet~tioners may be stated as follows : 1. Petitioners Alexander (R F . & J. Alexa nder & Co., Ltd.) _ar d Toot:al (Tootal Ltd.) _which are non-resident foreig~ corporations, no t engaged in trade or business in the Philippines and cxis~ing un~er anJ by virtue of E r gl~sh Law, are both do1nicil~d in and Hi.th pri.ncipa.Ol. ofi:iceE in

DECISION ~- CTA C~SE NO. 2961 ... 5 - the United Kingdom. ( p. ..... , t.s,n., March 11, ,J J. 1 1980~ 'Testimony of Alejo Alvar-ez; Exhs. "1\n t "B", 2. Petitioner All ied (Allied Thread Co., Inc.) is a domestic corp~ration organized and existing by virtue of the lar,�,:.; of the Philippines, with o.ffice a~d place of busines s at Pasig, Metro Manila. , Petition for Review; adm itted , par . 1, Answer.) 3. Petitioners Alexander and Tootal are fcreign corporate stockholders of co-petitioner All1.ed. " l " } ( '.C<: '~'vb �h �..� 4. On June 23, 1S76 , Allied f~led a with- holding t.ax return (BIR Form No. 17.43-B) .covering , / among othera, the dividends it decl~red and paid to Alexander and Tootal amoun ting to Pl,377,090.00 and P1,773, 015.00f respective ly. rv1ay 11, 1979 ,� testimony of V.Jitness l�d.frE:do Carill.oi Exhs. "D" & "F".) 5. As withholding agent, Allied paid the 35% withholding tax on dividends rem~tted to Alexander and Tootal in the respective amount of P481,982 . 00 and ~620 ,55 5.00, or a total of Pl,~02 , 527.00, under Official Receipt No. 2861946, dat~J July 23, 1976. (Exhs. "C 11 , nD", "[;" & 11 F".)

DEClSION - CTA CASE ~0. 2961 �~� rr� _. Such dividends were remitted on June 28, 1976. {p � 3 1 t. c "n � 1 ,JL!l y 2 0 , 19 7 9 s test i. mo n y of I\ J. f L e c'! o Ca 1~ i 11-J � E �h � 11 F " � ) 6. AlLeging that L�iE.':: tax on dividenc\:-.; p~n'\ to a non-residsnt United Kingd� m corporation by a di)mestir; corporatLm is only 15'6 ptL.'.A1D.nt to Pr�sident'al D.cree No. 369 wh~ch amended Section 24 (b)(') .fi1ow s.-;ction 24 (b) (iii)_/ of t.he National Inte~nal Revenue Code, petitioners, on June 21, 19 7 8 ; � i 1 e d a c 1 a i m f o .r. r e fund ' r tax c r e d i t of excess withholding tax on dividends, repre senting the difference be~ween the 35% tax paid and the l~ % ~h~t should have been paid, such refundable or cre?itable tax amounting to a total of P630,02l.OO, compuLed ae follo~c: Non-resider t A.10unt of 15~.; Tax Exce s foreign Dividends 35% Tax ~L'hat Should ~ra."-~ corpora tiol!. -P-ai-d - I-�.V--it-h� h-e-1d Have bee!. withheld \'�Jithheld Alcxan\:er �31,377,090 ~ 481,982 P206,564 P 275 , 418 Tootal .J::.I273 1015 620,555 265,92_~ Total 105 J::?.:l:3;.;:o!1:=5.::=0,:!:::::::::;.::: !ll 102 537 :::;o:.:�.L:�.:;:;::�.!!:.::::::~"' 7. In accordance with Section 292 of the National Internal RevenuP Code and Section 7 of Republic Act No. 1125, peti ioners on June 28, 1978, file1 their petition for review wi:h th~s Cou:t. l q-<.- (._') '

.. DECISIOll -- CTA CA:E NO. 2961 - 7- On December 4, 1978, respondent fileci his ans wer which in e_fcct is a denial of the claim for refund or tax credit of petitioners. /:..re petitioner s entitled to the :re fu nd or. tax ,., redi t of the over pay.1en t of tax wi thhe .l.d at. so1Jrce pursuant to Section 24(b) (1) of the Revenue Code? Petitioners submit, and respondent does not dispute, tha~ the claim fc~ refund and the petition for review were filed within t_wo years from the date of overpayment; and Alexander and Tootal are non-resident British corporations. This is cJearl.y borne out by the records of the case and the evi~~:e presented. While re s pondent also admits tha �t"~ti �~ . / tioner Al lied declared dividends during the fiscal year ended January 31, 1976 in favor o f co-pe titioners Ale.:ander and 'roo tal u filed tile cor responding quarterly return of income t ax withheld and paid 35 % withholding tax, r� _spondent. avers tba t "the re ,.,...... is no showing that these dividends were actually remitted to the payee non-resident foreign corpo- rations." (p p. 121-122, CTA records. ) To begin with, respondent admits, as stated above, that. Allied declared dividends in favor of Alexander and Tootal , filed the correspondins quarterly return an ~ paid the 35% withholding tax

DECISION .,. CTA CASE NO. 29;1 �~ ,8 ~� withheld therefrom; and Alexander a nd To~tal explicitly affirmed that the dividends declared in their favor were remitted to them . (pars. 4 & 5, Petition for Revi8w.) While this affirmation was made in the pet.Lt:Lon for J:eview prepared by tl'H::ir lawyer, attorneys have authority to bind their clients in any case 1n rel~tion thereto made in writing, and in taking '-lppeals und in all. matte rs of ordinar,y :judicial pr-o- ceclu1~e . (E)ec. 2.; Huh; 138 , Rules of Cou:rt.! se~� condly# the fa ct that Allied declared the dividends, filed the corresponding quarterly return of income tax withheld at source , paid the 35% withholding tax amounting to f'll~l02!537.00 to the Bu reau of Internal Revenus has been clearly and sufficiently established by the evidence. (Ex b s � "C" , �~ D" , "E" & 11 F" ; t. . s � n � pp. 10-19, hearirgs on May 11, 1979 and Ju ly 20, 1979, testimony ot 1\lfH~do Carill.o.). It is axio~� matic that a domestic corporation does not deciare dividends in favor of non-resident foreign corpo- rations, file the corresponding retLrn of income tax withheld at source and pay to the Bureau of In~ernal Revenue the 35% withholding tax unless such dividends have been remitted to the payee non-resident foreig n cor porations . Otherwise, if no dividends were declared a~d �emitted by Allied to AlexandAr and Tootal, there would bs no legal basis for the

.' DECISION ��� CTA CASE NO. 2961 withholding of the income tax at source, filing of the return ai1d payment t.o the Bu.rec:.u of Internal. Revenue of the tax with.1eld . The: ent~ire 35~s v.rith�~ holding tax of ~1,102 , 537.00 paid to the Burea u of Internal Revenue would therefore be refundable to petitioners instead of the st. m of :1?6 30,0 21. 00 as 15% e,'C(:~ss t-:r::.x withheld. 'l'o say that: these dividends were not remitted to the payee non-resident foreign cotporat.ions is to incur :�r Er>lf-~contrad.i.ction. Then too, Alfredo Carillo , cost and budget projert accountant of Allied testified. before this Court that Pl,377 , 090.00 and Pl,773,015.00 we r e remitt ed to Alexander and Tootal, respectively, as dividends withholding the respective amount of ~481,982.00 and l'f620 , 5::i5 . 00 as i come �tax thE":reon. (pp. 15-16 1 t.s.n., May 11, 1979; p. 18, t.s.n., ~ay 11, 1979.) No evidenc e whatsoever was introduce by respondent to controvert or rebut the evi once of petition2rs. Against this backdrop, the bare statement of respondent that these dividends were not actually remitted to the payee non-recident foreign corpo- rations, Lnaccompan ied by adequate evidence, has no we1ght with the Court. Another roadblock astride petitioner's route to refund or tax credit of the omount oi P63u , 21.00 7 ') ~J- """'; l

.' DECISION - CTA C~SE NO. 2961 - JO - r cprcscn:.:j ng ove�cpaid 'dithboldi.ng t.2 �. p point�3d c by re sp on~ent f is petitioners' alleged f ailure t o show ~hat no n-r_esident for e ign corpo r at i ons 1\le .":mder and 'J.'oo t.al own at least 25% of t he vot:u1 9 pc i�, e :: i n Allied v an express r equ ireme n t prov i ded f�.n: under Sectio n 498 (4) ( b) of thE. Unit ed Kingdom Income -nd Corporation Ta x e s Act 1 97 0 . As already stated abovcv dividends dec l ~ red and paid by a domestic corporat i on to a non-resident forei g n corporatio~ are subject only to t h e 1 5% w~thholdin g t a:{ <;\ t. ~:'; I J rce and not to 35% pursuan t t o Sec t ion 2 4 (b)(_ 1 ) j _/_:�':�:i(..J'.v' Section 24 ( b) (ii. i l7 of the Na t ional Inte rnal ~cv cnue Cod e, in relati o n to Secti o ns 53 and 54 thereof, if the countr y in which the non- reside nt foreign corpo:ation is domici l ed allows .,. a credit against the tax due from the non-resident foreign corpora t ion, taxes deemed to have be~ n paid i n the Ph ili pp i nes equiva l ent t o 20% . Whi l e r e spon - den t concedes that the law o~ the Un ited Kingdom wh ere Al exan d er and Toota l are d o miciled all ows a tax credit o f more ttan 20% for taxes paid in the Philippines, he coJ,tends that petitioners failed to ~~how as rr2quired under: Section 498 (4) ( b ) .of the United Kingdom I n come a ~d Corpo ~ ation Taxes Ac L 1 970 t h a t r on-r e siden t forei gn cor por a tio ns s f...)... (J' \

DEC IS IOU CTA CASE NO. 2961 1\lcxD.ndor ar~' 'I'ooU:. l ow:1 ::ott lc-.asl: 25% of th.e To quote the per� t..:i.nen t. pm: tions ot tbc Un i t.ed Kingdom Income an~ Co~poration Taxss Act 1970: "SEC. 498. �- (l) 'Eo tr�,r~ extent appearing from the foilowing provisions of this section, relief from income tax and corporation tax in respect of income shall be given in reEpect of tax payable under the law of any territory outside the United Kingdom by allowing the last- mentioned taK as a credit again~t income tax or coroorat:!.on taxr not~withst.anding that there are not for the time beinJ in force any arrangements under section ~'7 above providing for ~uch relief: " "(3) Credit for tax paid under the law of t~~ territo_y outside the United Kingdom and computed by reference Lo income arising in that territory shall be allowed against any United Kingdom income t~ax 0.1~ corporation ta:v cowpu ted by ref~rence to that income (profit from, or remuneration for, personal or profes- sional services performed in that territory being deemed for this purpose to be income arising in that t.er.ri.tor:i) :. "( 4 ) .��lhe!:e a divid"nd paid by a company resident in the territory is paid to a company resident in the United Kingdom which either - 11 {a) controls dir:ectly ur .i.ndir:ectly,or "(b) �is subs~.diz,ry o.f a comoanv \�Jbicb C 0 n +..�.r- �o' .1...C.o' 1. .n,.-1' 1. .l."..r:��.<�.��, ~~."L..~7 , ~ y rj'1..,..... "�.", -t� _ c-;--r�-� !'--- .L- ' -� not l~ss that 25% of the voting power in ~he company paying the dividend, or not less than 10% per cent of the votina powe: if th2 tc~ritory i3 one of th~ Co-r,p n nr.-r::a:L tL ter. r i '::�n .i es 1 ar:y t.az :i.n :c?pecL of its 2r0fit& paid u~der th~ f-...). (,J' 0 J

DECif::IO. CT~ CASE NO. 2961 - 12 -� 1 �,, of the te:rri to'.~Y by ~-;_,c c ...._,---:� Jaying the ~~~ide nd sha:~ -~' into accc nt in ro nside~� ~~ ~ i 11ny 1 and if so w;�1at 1 er e'_:_: ~ s allowed in re spe ct of the d~v ~ - PctitionersAlcxonder and ~ ~0~ a .. cc~porate stockholders of co-p2t~ti~ ��� ,""" 1 __ .:... eca.,;, '-.~ :' n'J the evidt~nce clearly shovJ t::-><.o:~: i �... ���,� (c:;:; Oh'.'�� ::;,hares , or 56 %, of the total slu~:es. c. - r:;:�~~, 2 .' ' cor:;mor:. and vot.:.n9 ;;,hares of All icd . "I �~l" & "I-2"; p. t. s . n. , March � testimon.y of Alr�jo Alvarez .). 'rhis 'C: � �. : ::.:.: �.:;e bas not been cont_overted or rebutted by respondent. To say the~cfore th at Alexander and Tootal do not own at least 25% o f the voting power in Alli - d is to ignore the logical connotations of plain facts and figures. Ownership of 44% or 56% of the total s iales of stock in Allied, and the control primari ly depende nt upon SL'Ch owr.ership - chc impor �ant ingredients cf voting power - negate any allegation that Alexander an~ Toota l do not own at least 25% of the � oting ?Ower in All i ed. For its Llscal year ended January 31 , 1976, Allic 1 had a taxable net income of PlO , S28,4~J.OO c, vJhich i- paid income ta:x: amou n ting to ?3,674,953.00 or 34 .90%. (Exhs. ' , r.r ! ~ '~ ,l.�,~. r: ; .... f :;oo

DECISION - CTA CASE NO. 2961 ... 13 �- " L " , 11 f.'l " 1 " N " r " � " '.'.. " 1? " , p J? � 5 8''" 62 :� p p " 6 5�- 7 0 ; CTA records .) From the remaining profits of P6,853,484. 0, Allied paid dividends to Alexander and Tootal. In accordance with Section 498 of the Income and Corporation Taxes Act 1970 of the United Kingdom, a tax credit for taxes paid in the Philippines is granted on the dividends received from Allied by Alexander and Tootal on the bas is of suc.h inca �.e ta;{ paid by Allied in tb.e Philippines on its income out of which the dividends were paid. Pursuant to the said Section 498 ~f the Income and Corporation Taxes Act 1970, a tax credit of 34.90% should therefore be granted for taxes paid on dividends remitted by Allied to Alexander and Tootal, which is clearly more than the 20% minimum r equired in Section 24(b) (1) ~f the National In te rnal Revenue Code. It seems clear beyond doubt therefore that as far as the dividends remitted by Allied to Alexander and Tootal are concerned, United Kingdom grants a tax credit of more than 20% on taxes deemed to have been paid �n the Philippines on such dividends. The conditions pLovided in Section 24(b) (1) of the Nation~1 :nternal Revenue Coder in relation to Sections 53 and 54 thereof, having b2en ful(illed 1 Jq./~I i

DECISION CTA CASE NO. 2961 -� 14 -� the correct with~olding tax rate on the dividcn~s paid and remitted by Allied l~.o AJ.e:xander.: o.nd Tocta l should be 15% and net 35% puro1ant to said Section of the la\ which is now Section 24 (b ( iii of the Code. There is therefore an overpayment of fl630 , 0 21.00 . WHEREFORE, respondent Commiss i oner of Internal Revenue is hereby ordered to grant a:;:; t,ax credit the amourts of �275,418.00 and P354,603.00, or a total of P630,02l . OO, as ovelpa:d withholding tax, in favor of petitioners ~.F. & J . Alexander & Co., Ltd.; Tootal Lt., and Allied Thread Co. , Inc. h'ithout pronouncement as to costs. SO ORDERED . Quezon Cit], Metro Manila, July 9p 1981. I CONCUR: :~6:/:c.c-z co~;AN~'E !,; . ROAQUIN / SSOCl:).~te ~:�d:e 1 '\... 1 (A ~A \! ~~ '�~-~~ 1�r/. '"'\ , ~B1<, . Z� REYES(/ As soc 1a te Judg(~ �) ( \ ') J 1.) ,..,