CTA Case No. 5136 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY S. C. JOHNSON AND SON, INC., Petitioner, - versus - C.T.A. CASE NO. 5136 THE COftKISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - -- - - - - - - - - - - -X ,.; ' DECISION ' �;~. This is a claim for refund of alleged overpaid withholding~tax on royalties amounting to P963,266.00. Petitioner, a domestic corporation organized and operating under Philippine laws, entered into a license \' agreement with SC Johnson and Son, United States of Ameriica <USA>, a non-resident foreign corporation based in the U. S. A. pursuant to which the petitioner was granted the right to use the trademark, patents and ') technology owned by the latter including the right to manufacture, package and distribute the products covered by the Agreement and secure assistance in management, marketing and production from SC Johnson and Son, USA. uc4ru

DECISION - C.T.A. CASE MO. 5136 -2- The said license Agreement was duly registered with the Technology Transfer Board of the Bureau of Patents, Trade Marks and Technology Transfer under Certificate of Registration Mo. 8064 <Exh. "A">. For the use of the trademark or technology, Petitioner was obliged to pay the SC Johnson and Son, USA royalties based on a percentage o~, 'net s~.les and subjected the same to 251. withholding tax on royalty payments which Petitioner paid for the period covering July 1992 to May 1993 in the total amount o:f P1,603,443.00 <Exhs. "B" to "L" and submarkings). On October 29, 1993, Petitioner :filed with the In~ernational Tax Affairs Division <ITAD> o:f the BIR a claim for refund of overpaid withholding tax on royalties arguing that, "the antecedent :facts attending petitioner's case fall squarely within the same circumstances under which the said McGeorge and Gillette rulings were issued. Since the agreement was approved by the Technology Transfer Board, the pre:ferential tax rate of 101. should apply to the petitioner. We there:f ore submit that royalties paid by the petitioner to SC Johnson and Son, USA is only subject to a 101. withholding ) tax pursuant to the most-favored nation clause o:f the RP- US Tax Treaty [Article 13 Paragraph 2<b><iii>l in relation to the RP-West Germany Tax Treaty [Article

DECISION - C.T.A. CASE NO. 5136 - 3- 12(2)(b)J" <Petition for Review, par. 12>. Petitioner's claim for the refund of P963,266.oo� was computed as follows: loath/ Gross 251 101 Balaace 'fear litllboldiag litllboldiag Rota!tr Fee Tu Paid Tu July 1992 559,878 139,970 55,988 83,982 141,984 56,794 85,190 August 567,935 148,989 59,596 89,393 158,601 63,441 95,161 Septeaber 595,956 155,221 62,089 93,133 95,819 57,491 October 634,405 170,613 38,328 102,368 141,461 68,245 84,877 Koveaber 620,885 136,813 56,585 165,203 54,725 82,088 Deceaber 383,276 150,769 66,081 99,122 P1160S.KJ 60,308 90,461 January1993 682,451 P642.1TI P963.266 February 565,845 llarch 547,253 April 660,810 llay 603,076 P6.4211 TIO Respondent did not act on said claim for re.fund. Hence, this appeal. During the trial. of the case, Petitioner's claim for refund was met without strong opposition .from the Respondent, probably because the issue involved has already been settled with finality not only with this Court but also in the higher courts. We believe so. The sole issue raised is: Whether or not Petitioner is entitled to the claim for refund in accordance to the �most favored nation clause� as provided in the R.P.-U.S. Tax Treaty, Article 13 <2><iii) in relation to Article 12 <2><b> of the R.P.-West Germany Tax Treaty�. tl5CI

DECISION - C.T.A. CASE NO. 5136 -4- We answer in the affirmative. In the case of General. El.ectric Phil.ippines Jleter and Instruaent Co. , Inc. , vs. Coaaissioner o� Internal. Revenue, CTA Case No. 4158, December 5, 1991 this Court rul.ed, thus: On the basis of the most .favored nation clause of the RP - U.S. Tax Treaty, Art. 13 <2> <b > <ii >, taken in relation to Article 12 <2 > .<b> of the RP - West German Tax Treaty and BIR Ruling No. 263-86, . petitioner should have withheld and paid only lOY. tax instead o.f 25Y. on the royalties paid by petitioner to General Electric Company in the U.S�� Of the accrued royalties in 1984 in the amount of P15,570,208.22 paid in 1985 - 25Y. tax was actually paid by petitioner on May 10, 1985 by way of withholding 'tax in the amount o.f P81,743.59 <Exhs. I, K & J, pp. 53-54, CTA rec. >. Since the tax due thereon is only lOY., according to the above provision o.f law, the sum of P54,495.73 was due and paid resulting to an overpayment of P27,247.86. Of the technical service .fee o.f P168, 474.91, petitioner paid on June 10, 1985 the 15Y. withholding tax in the sum o.f P25,271.23. <Exhs. E, G, & F, pp. 50-51 CTA rec. >. Since the tax due is only lOY., according to the above provision of law, the sum of P14,440.71 was due and paid resulting to an overpayment of P10,830.52. Said decision was affirmed by the Court o.f Appeals in Coaaissioner of Internal. Revenue vs. General Electric Phil.ippines "eter and Instru~nt Co., Inc. C.A. G.R.-No. 30674. This case became final when the entry o.f judgment was issued on January 26, 1994. [_'c.- i)0.1.

DECISION - C.T.A. CASE NO. 5136 -5- In a latter case, this Court reiterated the above ruling, thus: On the second issue, whether or not petitioner should be taxed at the reduced rate of 107. withholding tax on royalties in accordance with Article 12 <2> <b> of the R.P.- West Germany Tax Treaty and not 254 withholding tax on royalties under Articles 13 <2> (b) <iii> of the R.P.- U.S. Tax Treaty. �~This Court is of .the persuasion that petitioner's stand is correct and concurs with the opinion rendered by then Commissioner of Internal Revenue, Bienvenido Tan, (BIR Ruling No. 456-88, supra., that under the most favored nation provision of the R. P.- U.S. Tax Treaty <Article 13 paragraph 2 (b) (iii>, the tax imposable on royalties derived by a resident of the United States from sources within the Philippines shall be the .lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident �of a third state. Article 12, paragraph 2 ( b > of the R. P.- West Germany Tax Treaty, provides that royalties arising in the Philippines and paid to a resident of West Germany may al.so be taxed in the Philippines, but the tax so charged shall not exceed 107. of the gross amount of royalties. Said treaty also provides that :for as long as the transfer of technology under Philippine law, is subject to approval., the limitation of the tax rate in case o:f royalties arising in the Philippines, apply i:f the contract giving rise to such royalties has been approved by Philippine competent authorities. Thus, inasmuch as the Agreement between World Trade and IBM Phils. as well. as. the Agreement between IBM and IBM Phil.s. had been approved by the Central Bank o:f the Philippines, royalties arising in the Philippines and payable to World Trade as well as to IBM by IBM Phils. should be taxed at the rate of 107. because said rate is indicated in the R.P.- West Germany Tax Treaty and pursuant

DECISION - C.T.A. CASE NO. 5136 -6- to Article 13, paragraph 2 <b> <iii>, of the RP - US Tax Treaty. <IBK Philippines Inc. vs. Co��i.ssi.oner o� Internal Revenue, CTA Case No. 4308, March 31, 1993 pp. 10-12> The Entry of Judgment on said case was issued on December 15, 1993 after'the Court of Appeals granted petitioner's <herein respondent> withdrawal of the case. <Coaai.ssi.oner o� Internal Revenue vs. IBK Philippines, Inc., C.A. G.R.- SP No. 31791> We do not intend to depart from the wisdom of the said rulings and thus, the same should be applied in the case at bar. WHEREFORE, in all the foregoing, Respondent is hereby ORDERED to ISSUE a TAX CREDIT CERTIFICATE in the amount of P963, 266. 00 representing overpaid withholding tax on royalty payments beginning July, 1992 to May, 1993. SO ORDERED. GRUBA Judge WE CONCUR:

DECISION - C.T.A. CASE NO. 5136 -7- CERTIFICATION I hereby certify that this decision was reached after due consultation among the members o� the Court o� Tax Appeals in accordance with Section 13p Article VIII of the Constitution. 0~0 ~1D2. -AC~OS�TA Presiding Judge Court o� Tax Appeals