CTA Case No. 4414 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY CHINA BANKING CORPORATION, Petitioner) - versus - C.I.A. CASE NO _ 4414 THE COMMISSIONER OF INTERNAL REVENUE, Respondent. X - - - - - - - - - - - - - - - - - - - - -X DECISION This petition seeks for tlle refund of alleged overpaid ~Nithlwlding taxes on cash dividends due to petitioner's non- resident stod:holders in the amount of P4f\6:i6..30. J>etitioner is a commercial banking corporation organized a.nd existing under .t=:�hilippine la.ws. Anwng its st1.)Ck1wlders are non -resident American ancl British citizens vlho received cash dividends net of the .30% final ~llithholding tax under Section 22(a)(2) of the National Internal Revenue Code/ V-lhicli provides:

DECISION- C.LA . CASE BO . 4414 -2- �sec. 22. Tax on non-resident alien individuals. - (a) Non -resident alien engaged in trade or business within the Philippines. ( l} In generaL - x x x (2) Dividends, share in the net profits of a taxable partnership, interest, royalties, prizes and other winnings. - Dividends from a domestic corporation, share in the net profits of a partnership taxable under Section 24(a), interest, royalties (in any form) and prizes (except prizes amounting to PJ.OOO or le::s V�T11ic11 shall t>e subject to tax under paragrc:tph (a) of Section 2 1) atKl other t pr tv ~,.,\'r1il111 1. 11Cbr�.-j {~.~���"'':-~..r�.�~�.� p-�� -� Pl11.11� ..-1)1� 11�~-� i�~~l1a_1�1� 7 ._-.<:'~o.'�VT'..~,-.;o:t p_.c..; trak:Lp.v.c.J ~Ninnings), :::hall be subject to a tax of thirty percent (30;t) on the t~.)tal a.mount thereof.� On July 2f>, 1969_. petitioner filed \'Y'ith the respondent a cla.im ior refund oi alleged overpaid vvithholding tax on cash dividend::: paid to its Arnerican ::md nrit.ish stockholders (Exh. Y, pp . 1 5� 0-15~), CT.e.. record). During the years 1908 and 1989, it is the contention oi petitioner that by virtue of certain t3.X treaties entered into bv our !2�overmnent T1.vith the United States of f �-� America (US.A.) and the United Kingdom oi Great Britain, it should have onlv, TNithlleld 2-c-)% oi the cash dividends due to its Americ::m and British stJ)<::kllolders. Consequently, it sought for the refund of the amount oi P46,6~)6._30, :+: computed as iollovvs: (pp. 3-4, CTA record) 426

DECISIOH- C_T_A_ CASE 110 _4114 -3- Re : iuneric:m Citizens Nt~me of D8.t.e of Gross ".if /H T8.x 'Ql /H Tax Amount. to Stoc:kholdet�s PaYment Amount 30'7.; 2')% be Refunded Steiner Sei 7-07-88 P6,690.00 P2.007 .00 PL672 .50 p 334.)0 H\.ra. Hu..."'.ng 1-26-89 6Jo90.0(1 2,007 .00 1.672 .~)0 4-21-139 6,690 .00 2))07.00 t ,6n.:.o 3'3450 1"14 .')0 Total p l,OO}r:>O N;3ffi8 of D8.te of Gross W/H T;3.X ~if /H Ta.x Amount w <':�.r) ~�.lv be Refunded Sto�::J:hol.:jers Pavment. Aiilount 10~~- � M817feng 7-07-83 P9._604.00 P2.B81.20 P2/Wl.OO p 480.20 Ling Htl811g 1-26-89 9,604.00 2,881.20 2..401 .00 480.20 4- 2 H39 9,604.00 2,88 1.20 2,401.00 480 .20 Total p L440 .60 ClotiHe 7-07-8Ei p :.6 .00 p 16BO p 14 .00 p 2.80 Hyndman 1-26-:9 ~~6 .00 16 .80 14 .00 2 .80 4-21-89 56 .00 16 .80 14 .00 2.80 Total p 8 .40 Amount Refundable p 2,4~\2 .50 Re: �;ritisl1 Citizens Nt~me of D8.t.e of Gross ~llH T8x 'r,!lH T8X Amount to Stod=:holders PayiDent Aiilount 'i07o zr:.,''lo be Refunded Cheng 7-07-89 P 12JI40.00 PT612.00 P} 010 .00 P 602 .00 Yung Li 1-26-89 12_(140.00 '1612 .00 } .010 .00 602.00 4-21-89 12JI40.00 3..612.00 3..010.00 602.00 Total P L806 .00 C8riDen Kuo 7-07-88 P299,002 .00 P89,700 .60 P74,750.50 P14,950.10 1-26-B9 299_[102 .00 89,700.60 74_750.50 14_9~)0.10 4-21-89 299,002.00 89,700.60 74,750 .;.o 14. 9r>0 .1 0 Tot a 1 P44,8">0.10 Amount Refundable P46.656.30* (Note: The tottd 8.mount refund8.ble should be P49_!08 .80, but petitioner opted to doifll for refund onty the 8mount of P46,6~l6.30 in the inst8.nt petition .) 42 7

DECISION- LLA. _CASE .HO_ 4414 -4- Petitioner rnade a. follo~H-up letter. dated November 28, 19�39, on its previous clailn for refund, dated July 28, 1989 (Exll. CT ,\ BLt:�>_, rL-�' . '.:)... .�_~.10-:-::�. 1 - �J-. J. r��t:~-(' --..r (�-.�) t��'�-. 1.) . It-1 t_.ll.P_, ~.-,~..lt--l-c.j�p�..- tl(��.�� e c..�Jt� Grl. n1~lT r�?v>�-c'r-�rJot�1�c-'-�p"" fr�rv't1l til6 o;;:; .r respondent. the petitioner filed the instant petition on December - T'�"T�il�1t�l1~:3j ;:,1_( r-!-!l�,t_t.t�!-l0c", t-�ll1-:3 1-(~)1-e~ "6Alv�t-li:o:,� t~-k"~~~1�(�'J f~�:K~ t_c.;, t_.hP..; r�,,_;.:.:_.,c-pJctl(-l P t l tJ' v in her r.HlS'.~ler, refuted the claitn for refund and alleged among others: that the petitioner is not the real party in interest instead it is tlw non -resident ttockholder '��\lho should file the instant petition because it ,,va.s the latter whose dividend income was ;3Jlegedly ex(essively ta.xed, citing the case of Comrnissioner of Internal Revenue v. Procter 8{ Gamble, et. a.l., G.R. No. 66038, 1 1 ""'f r1'...rr-)t_l.l r- t:J�:Jo.i'�'&�. c_}} e>:1 00 _�, t-1� �1"0"'. t tllP ~'- ��J t�::�:r�rl?._,>tltJ t�r�-)t.!.P_,i. j tr"'��"' tJ.� _.... 'tJQ.- pc- (-�1r�-)?v>�S t1r1t (_)(,) v"' .r -� �-� '� ' J �..J apply to the present (:ase; and that the taxpayer has the burden t tl�l" t tl�i?> p -=-�1.rl \Tpt-.r' 1.tlrlt:>''<l n-=>1� t�:. ' f) .�� c� f-1 <~, ~1.\!T ~II �-� ~ rV>t.!.P,O�lJ.<�=..J-1\,'1~ .f:""a: I. _ . '-'" 7 p�..- c� Pt�r� <"l �- v '=:;" �� v �-' .Ll. _. �=' .� ..,/ t"_l. �� �� J. IJ . -- Petitioner . presented testimonial and document3.rv ' evidence to support its case. Respondent. after having been deemed to ha.ve ;,.vaived her right to cross-ex3.mine petitioner's ~Nitness, merely submitted the case for decision on tile b;3.sis of the plea.dings and evidence submitted by the petitioner. Thus, the issues to be resolved in this case are: 1. ~Nhether or not the petitioner has the legal personality to bring this suit for claiming a refu.n(l of alleged overr)I":::dd ~<"~�ithholdiw;.-,_-, taxes on dividends on behalf of its n()n- resident US stoctholders and British stockholders; and 2. -.;Nlwtller or not the petitioner is entitled to the refund claimed for . 428 ..

DECISIOH- C.I.A . CASE HO. 44:14: -5- 'Ne rule in favor of petitioner. The first issue is not one of first impres~;ion. The Supretne Court in a resolution en bane has resolved in favor of the right of a ~Nithholding agent (domestic corporation ) to file a suit to claim fc�r a reftuid in behalf of its non-resident foreign stockholders in the c:::tse of Commissioner of Internal Revenue v . Procter & Gamble Philippine Manufacturing Corp.. et. aL. G.R. No. 66383. December 2. � 1991 . ~Nhere it had the occasion to reconsider a prev"i<:)us dec:ision (by the Second Division),, dated April 15, 19.::w, and rule as iollov'Ts: "x x x. It thus becomes important tf) note t11at under Section 5.3 ((:) of the NIRC, the ~l�Titllholcling agent 'Nlw is �required tf) cledu.ct awl V�lit.llllold any tax� is made 'personally liable f�:)r such t:1x' and indeed is indemnified 3.e-ain::;t anv claims and demands V�Thich �.J ' t11e stockholder might wish to make in questioning the amount of pa.yment; effected by t11e V.fit.llholding agent in accord;:.mce vith T... the provisi()ns of the NIRC. The Vlitllholding agent, .P8{G-Phi1., is directly and itl(lependent.lv liaNe for the correct amount of t11e tax that should be v..Titlllwld from the clividel)(l remittan(es. The Vlithholding agent, is moreover, ~;ubje(:t. tf.) and liable f�:)f deficiency assessments, surcharges and penalties should the amount of tlw tax ~Nithheld be finallv found t1.) be less than the anwunt th;:~_t ::Jwuld have b'een withheld under la'i�\oT. A �person liable for tax� lias t�een held to l)e a 'person subject to tax� aw:l properly considered a 'taxpayer'. The terms 'liable for tax� and 'subject to tax� both connote legal obligation or duty to pay a tax. -' It is very difficult, indeed conceptually impossible, to consider a person >Nho is st3.tutorily made 'liable for t3_x� as not �subject to t:1x.� B)r any reasonable standard, such a person should be regarded as a party in interest or as a p4er:23o9n ha.ving sufficient legal ~

DECISIOH- C.I.A. CASE HO _1414 -6- interest_. to bring a suit for refuncl of taxes he believes ~h'ere illes'a.llv collected from him . �_r 1- In Philippine Guarantv Company. Inc. v . Conuni~;::;ioner ()f �Internal Revenue. this Court pointecl out t11at a witllllolcling agent is in fact tlle agent l)Ot1l of the government a.w:i of t11e taxpayer_. and tllat the V'l'itllholding a.gent is not an ordinary government agent: ~::r 't 7 ~,. XXX ..:�:.. .c\. ~).. IC as pointecl out in Philippine Guarantv. the ~Hitlilwlding agent is al~;o an agent of t11e t)eneficial ovlner of the dividends with respect to the filing of the nece::;::;ary income tax return and V�lith respect to actual payment of the tax to the govenunent, such authority� may reasonal:;ly be held to include' the authority to file a claim for refund and to bring ;::m action fr.:;.r recovery of such claim. This implied authority is espedall>7 VY'arra.ntecl ~Nhere_. as in the instant case, the Vlitl1t1okling agent is the -.;Nhollv (YV�.rned subsidiarv of the parent-st::>ctholder and therefore, at all time:::;, under the effective control of I �c-�'ll-�-'--1~� -1 sn: C--J..!-t.-;.'t�lt- �c-��t,)._.-1. .-..-.-,1_.....1-l.-�--)I.�.~-l"t;'-' t-. 1�1 t11P 1�f'l t1f th1�S J<~1- .... 'J' .... 11 l". IJ lc�.J-t/"J". .tl<,~... ""\';"-�c--� �~� -� . !J. casE?, it sE?ems particularly unreal to deny the implied ::;_uthoritv of p;}{G-.Phil. to claim a refund and to commen'ce an action for such refund . Vie believe t11at. even nov.J, tl1ere is nothing t[) preclude the EHR from requiring P&G-.Phil. to show �=-r�tllA nt� tPl,::,�.T.:=>rl ("�rltlfl�t-t�r�l�:.tl.rlf-1 <�f �-� �-� ~~.~1-1- ttPtl -��-� �J ~ :... -_. �- . _.... .:, � .,., I t1~� F=� 0~:.:rJ, -T. Ja..~) A �- � �- � II ... ,....... ... � the subsidiary''3 a.uthc�rity t () claim the refund or tax credit and to remit the proceeds of the refund. or to :::tpply the tax c:redit to some Philippine tax obligation Or r.�_,. f .� rn c�<.:-.. tJ.-T..F.. .'..C,J. ... , b�~P- f rv�, r,::, ac. r..�..t�1t.'lac.1 r� f pac.~+rt-1"~'lf.-.,>1-lt. ~) t11A""' .+1 "...f. ->fllti~!l 'V' i:;:::uanc:e of a. tax cre(lit certificate. Vi,711at appears to be vitiate(! by basic unfairness is petitioner 's position that. although Pf{(r-Phil. is directly and personally liable b:) the Government for the taxes _and any deficiency :::tssessments to be collected, the G�:::overmnent is not legally liable for a refund simply be(:ause it did not demand a Vv'ritten (:onfirmation of I\:5-:G -Phil. 's implied authority frorn the very beginning. 430 .

DECISION- C.LA. CASE HO. 4111 -1- A sovereh2._,�.n !._,Iovernment should act honorabl',l and fairly at all tirnes, even vis-a-vis taxpayers . '#e believe and so hold that, under the circumstances of thi:; case_. PC>~G-Pllil. is properly regarde(l as a 'taxpayer� V�Tit.hin the meaning of Section .30. NIRC, anrj as impliedly authorized to file the claim for refund and tlle suit to recover such claim." (Emphases in the original.) The Procter and Gamble case (supra .) ~vas likewise cited in the case of Commissioner of Internal Revenue v _ The Court of Tax Appeals, et. aL, G.R. No. 93901, February 11, 1992 reiterating its ruling that the '"Tithholding agent has sufficient 1eq3.1 interest to bring an ac:t.icm to recover tax �- � ._ l overpayment. .e..nent the second issue, a referra.l to the trt?a.ties rnentioned 1�-�,.), t.l�1 !�:��" 1n..~-. t..t�t..t�\�_-}t"l''="'"'t- 1.�.=-�. 1.r�1 <-..-'1��u�1'=-'""t� . Articlt? 11 of the Tax Treaty dated January 1_. 19f�.3 entered into bet"\.veen the Philippines and tlle United States of America provides: (Exh. Z-l. p. 1(32.. CTA record.) "i�.rtide 11 ( 1) Dividends derived from sources V�Tithin one of the Contracting�--� St..atet; bv, a resident of the other C:.::mt.ra(:ting State may br,;; taxed by bot.l:l Contracting St:;.tes . (2) T11e rate of t.:1.x irnposed t�y one of t11e Contracting States on divic:lena::. derived from sources 'V\Tit.hin tlE.l.t Contra.ctitw State by a resident of the '-' other Contrad.in�;,._r, State shall not exceed - - . I 431

DECISIOB - c_r _A _CASE BO . 4414 -8- (a) 2c.; percent of the gross amount of the dividencl � c:�r (Underscoring supplied.) (b) XXX A simila.r prc�vision is emlx{lied in Article 9 of tlle Tax Treaty, effective Janu.::u-y 29, 197(;., enterecl into l)etv.Jeen tJ1e Philippines an.J the Unit.e(l Kingdom of Great Britain. to VvTit: (Ex1:1. i�.A.- 1. pp. 222-223. CTi�. recor(l.) "i�.rticle IX DIVIDENDS 1. Dividends derived from a company \o..,llicll is a re;ident of tJ1e P11ilippines by a resiclent of the United Kingdom may be taxed in tlle United Kingdom. Such dividends may also be taxed in the Philippines but -=-11(��11 t�Jy a ~\,'IT1�1~.,..t-v~ --~ - ��-� (..�...11� ~1T1� '��-�t ~�."� '.l.IJr."_lc._-. �C:l. t�v~ t_�!�.~,~t�I~._f. l.f.�,~t� ,a-.ll,v o~V''"l t. 1.~..-r....l r resident of the United King�-�clom the (a) 1c:.:;t, of tl1e ugross am ount of the dividends if .. J tl��;::. t�� eli .� 1-.� ) r�-:� .t�lr'.I:" .t�l� r� t� �t1:. 1 (J~ ~I.TfiP.t- 1� �::: c~1.. ,.._..,...�_�.�t�l�lIn... �c;:.'t.ll~lT \'l } l l i - II ._. �J �-� t controls dire:::tlv' or irKlirectly at least 10 per cent of the Vi)ting pc�v..rer in tll.e� company paying tlle divi�::lend:;; (b) in all other cases 2C:;;t of the gross arnount oi the dividends... (Emphasis supplied.) Tax treaties are a.ccept.ecl limitations to the poV�ler of t3.Xat.i(:on. In the al)ove-mentione<:l treaties, the Contracting States ha.d recognized that c;3.sh diVi(iencls ma} be taxed in bot11 ,-.11 1'11 !l P.t"l.TTP. t�_'.f����.,1_Jf.l+"�l-t�t�1�;�:-:�.��:-�'~ r"""l1.''7I 1.r."_lP.... f"lf�1C�J (_:01" 1:V�,!1"1~_1-Vu. t.1�1~. ~I.Y,t1�lp' J.' !- t1�1;::. ~1 �- �-� \ �� � .:a -� �-� ._. ..- ._. ;

DECISIOH- C.I.A . CASE HO. 4414 -9- t3.~-~ation that the abov�e provi~;ion vvTere incorporated in the said Respondent does not deny that the petitioner's stocklK~lders include both non -resident American and British citizens enumerated in the petition for revie~t~l, vvTho received cash dividends fror-n petitioner herein. On the other hand. petitioner submitte(l the Ivlonthly Rernittance Returns of Income Taxes Withheld, Sdwdu.les (;f Taxe~; Vvitl1held on cash dividends due on its I stocl~holders, BIR Payment Orders and CB non -resident Confirmation Receipts. ~A.pplications to Purchase Foreign Exchange, , Sr:::hedules of Remitta.nce of Dividends to Non-Resident . St(iCkholders, Central Bank Authorization to transmit the Dollar equivalent of the ca.sh dividends remitted by petitioner to its non -resident Arnerican and Bristish stockholders all of V'lhich tt-. l")ll. l'il(ll. (lf n �C-��j-j�f1�1�(�~�1�P�-�-t1t-�l~iT p�-�.�c-��t.'�>:�..� �C-'�11 t~t�1p-.�. t~d.�f-���t.� (�-)�1- ~V-\IT.ltJ1�11�1... !"irOY C~J. '~�-1 Ir)� v:A.~1;r~-1-1<"J!"1tJ v .ilP�J 30~: final t3.X imposed under Section 22(a)(2) in the years 1988 and 19t/} and the rernitt3.nce of cash dividends to its non- resident stod~holders . This Court has no other recourse bu.t to hold that .the cash dividends due to petitioner's non -resident American and British stx:l:holders are (.lllly subject to a final ~..vithholding tax of 25% by virtue of the Tax Tre;:t.ties enterecl into by the Philippine G-overnment 1hTitll the United St:t.tes of America and the United Kingdom of Great Brita.in. The ~.\lit111wlding t:ni payrnents made in amount due to the re~;pondent. 433

DECISION- C.T..A. CASE HO . 4414 - 10 - WHEREFORE~ in view of the foregoing, the petition is herebv' GRANTED. .ReSrT- )Otl(lent is herebv, ordered to refund in favor of petitioner the arnount of P46,6S6._)0, representing erroneously paid withholding taxes on cash dividends due to petitioner's non-resident American ;::md gritish st.od:holders for r r�fic�t �,~T..r...; pr�~�; r�l r. )�l-l�!l.-� � -~�P~-� 1-1.-i�-P� t�lt_, {?.J.c._-. t~-~ ....._, �..J -�� -� ' .1' 'J '- ' SO ORDERED. Quezon City, 1vletro 1v1anila._. June 2 1_. 1994. q~\Q_~~ ERNESTO D. OSTA WE CONCUR: ./ CERTIFICATION (�p.r�t-1�1-TT tlll�,-. f l"!P.!"P.l"� TT r�jP�.,.(v�l��'"J'l.(j"ll"l ,�,11y�.'C-.;\,�:>~ r~ -~r- tl""(l aft~t- (iJt~ ... �-� �- � ) / �- � '.1' � 1\ t-1� �1�(-..J:.ot-� -� ~ vQv 'tJ ._ - .,..., "" _\..., u- r-.�-'-�.�-�l�L�:�-U1!�-.-��3. .t.-'Lr-�.1�1 ..-::.t.!�Il�-rJ1l,0-,- t_l"1-t=.-> 1-I-L~1-I�lt.��_~�.1�-:_-. r._�.t� 1e "t_r._;. U.t�t. 0�f T�a~y,. rA ~f)--ptv=>a�-.11"~'- 1't�1 accordan(:e Vlitli Section 1J. Article VI II of tlle Constitution. ~Q~~ ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals 434