CTA Case No. 4156 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITV GRAPHICS INTERNATIONAL. INC., Petiti on er, - versus - C.T.A . CA S E NO. 4156 CO MMIS S I ONER OF INTERNAL REVENU E, Re s pond e n t. X- - - - - - - - - - - - - - X DEcI sI 0N Th i s i s a c l a i m fo r refun d inv olving al lege d ov e t� paid b ra n c h p ro fit r� e mi tt anc e taxes f or ta xa bl e y ea r s 1983. 1 984 a nd 198 5 in t h e tot al a mount o �f P 2 7 9 . 908 ..~..: . � Pet i tio n e r , Gr a.ph i c s Inte rna tional, I n c . , is a r es id e n t foreign cor p o r ation d u ly lice n s ed to e n gage in t h e ma nu fac turing , prin ti n g a nd sa le of pri nting e qu i pm e n t and me r c h a nd i s e . It i s t h e li ce n s o r in t h e P h ili ppin e s of �"Hal lm a r k " a n d oth e r gree t i n g car d s a nd d e riv es r o yalty i n c o me as s u c h l ice n s o r. Fo r th e y ea r s 19 8 3 , 1 9 8 4 ~ nd 1985, P eti tio n er c o mp u te d i t s to t a 1 b r a n c h p r �o f i t r e mi t t an c e tax i 1000 I !

DECISI ON CTA CA SE NO. 4 1 5 6 - 2- ba se d on the branch profits per financial statement in the amount of P7, 019,003 �-~-~-� For the said years it included interest income net of withholding taxes in the total amount of P956,711 as branch pr ofi ts which P etiti oner � alleged ~hould ha ve been exc luded in t h e computation of t h~ ) br anc h p rofit remittance tax. Furthermore, it lik ewise alle9ed that it erroneously u se d as tax ba se the branch profits t o be remitted instead of branch profits actually remitted. Petiti on er computed the amount allegedly refundable as follows: Branch profits remitted P7,019,003.00 for the years 1983, 1984 and 1985 which included interest income Le ss: Interest inco me for the years 1983 to 1985 Branch profit s excl uding 6,062,292.00 interest income ���-�----~_9.~.-~..?.. :1..?....:_.?._9.. Les s! Branch profit r emitta n ce ta x P5,152 , 945 .5 0 at 15 % Branc h profit re mittan ce 772,942.23 ta x due base d on actual remittance (15% of P5,152,945.50) l OLJl

DECI SION CTA CASE NO. 4156 - 3- ) Amount ref und able: Branch profits remittance actually paid 1,052,85 0 .45 Less: Branch profits ........?.. ?....?....! ?.. ..~..~.. .::...?...~. r- emittance actually due (?...:..~.!...~..~..~-~.~-.~..~-~ ) Total amo unt refundable There we r- e no factual issues raised by the parties but co nfi ned the controversy on two legal issues: (1) Whether or not interest income shoul d be included the bra nc h profits for purposes of co mputing the branch profit r- emitta n ce tax; (2) Whether or not the tax base should be the branc h profits t o be remitt ed abroad or th~ b ~n o h prof ts ctually remitted On these i ss ue s , we quote hereunder the pertin e nt pro v isions of law a pplicable on the mat ter: Secti on 24 . Rate of t ax on cor po ra tion s. XXX XXX XXX (b ) Tax on foreign ~orporations XXX XXX XXX

DECI SIO N CTA CASE NO. 4156 - 4- (2)(ii) Tax on branch profits remittance . Any profit: remi t:t:ed by a bran c h t:o i t:s h ead office s h a 11 be s ub J e c t: t:o a t:ax o f 1 s�-%� [except: t:ho se regis t:ered wi t:h t:he Export Processing� Zo ne Aut:ht.lrit:y]. P rovi dad. l'ha t: any pr ofit: remit: t:ed by a b ra nch t:o i t:s head office autho rized t:o engage in pe t:rol eum o p era t i on s in t:he Phi 1 i p p 1 n e s s 1! a 11 be subJec t: to t:ax at: 7 - 1/'2-%�. In bo t:h cases, t:h e t:ax s h all be coil ec t:ed and pal d i n t:h e same manner as prov.ided in Sect:io n s 5 1 a nd ' 52 of t:his Code: and Provi de d. further. that int:erest:s. dividends�, rents, royal t:i es , includ.ing remunerat:ions fo r t:echnic al se rvices. sa l ari es, wage s, prem.iums, a nnuit:ies, emolument:s or o t:her f.i xed or de t:erm.inabl e annual, periodical or c asual gain s, p rofits, income illt7 d ca pi t:al gain s r ceived by a forei gn corporat:ion d ur.i ng each t:axabl e year from all sources '"' it:hin t:h e Pl1ilipp1n es shall not: be cons.idered as bran c h prof1 t:s unle ss t:he same a re e f f ~>c t:fvely con n ec t:ed w.i t:h t:he c �tnduc t: of i t:s trade or business f n t;he Phlll t-ip ln s. Not e th at pursu a nt to t he sai d provision of law " i n te r ests, xxx s ha ll n o t be considered as br anch profits unl ess the sa me are effectively connected with the conduct of its trade or bu siness in t he Philipp i n es. In other words, if the income i s no t con nected with the conduct of I the trade or bu s ine ss in th e ~ hil ippines, it will

DE CISION CTA CASE NO . 4156 - 5- no t form part of the branch pro fits of t he taxpayer. The phr ase "effe ctive ly connected" was interpreted to mean i ncome derived from the business activity in which the corporation is engaged (Compania General De Tabacos De Filipinas [Philippine Offices] vs. Th e Commissio n er of Inte rn al Revenue, C.T.A. 4451, August 23, 1993). Petitioner has be e n licen se d by the Securities and Excha ng e Co mmission to engage in the manufacturing, printing an d sale of printing equipment and merc handise as evidenced by a certificate i ss ued by the Secu ritie s and Excha nge ) Commi ssio n dated January 8, 1975. Petitioner is the licensor in the Philipp ine s of "Hallmark" and othet� greet'ng car d s and derives royalty inco me from the sa me. In fact , bulk of its income is r oyal ty as s hown below: 1983 1984 1985 Roy alty income P2,502,891 P3,699,836 P4,112,000 Interest inco me 10 8,937 406 ,35 8 441,416 Mi scellaneo u s .!.. ..........- ............-~..!-~.. ~. . . . . . . . ,_.Jt?...!..i.~. �. ..-.. .... -..~..?.. ~. !_~-~. income P2,618,206 P4,193,68 0 P4,559, 150 Tot 1 tnterest income f.or the years 1983, 1984 and 1985, net withholding taxes amounted to P9 56,711.00. l OO<t

-- DECISION CT A CASE NO . 41 56 - 6- We c ould n ot ag r- ee with t he Res ponden t that plac ing your money in savi n gs , time and money marke t placement s is effective ly connected with Petitioner' s trade or business. Placing your money in banks whether in savings, ti me or money mark et placements is done no t on ly by all busine ss e nt ities but a l so by individuals prima ri ly to safekeep t heir mon ey and seconda rily to earn s ome interest i n t he . process. This is done by bu si ness entities rega rdl ess of t h e purpose for which the bus iness is esta bl is h ed. The only busin ess which co u ld be related or can be cons idered effect ive ly connected with t h e taxpayer's main busines s is if th e taxpa y er is a n investment, banking or financing company which main l ine of business is n ecessarily connected with in vestin g money for i ntere st. Furthermore, pursuant to Section 24 of the Tax Code in relation to Secti o n 61 (now Secti on 50) of the sa me Cod e, withholding tax on in terests on bank depo s it s a nd deposit substitutes are considered final tax. To include them again as part of branc h profits subject to branch profit ,\ remittance tax under the sa me s ection of the Tax Code would b e contrary to law . 1 0 05

DECISION CTA CASE NO. 4156 - 7- On the second issue, we fou n d for the Re s pondent . This court b elie ves t h at Petitioner has not fully appreciated the juri sprudence establi s hed in the Burroughs Limited case where the Supreme Co urt upheld the application �of an earlier BIR ruling dated Januar y 21, 1980 because the branch profit remitta n ce tax was pa id on March 14, 1979. The Supreme Court did not apply Revenue ) Memorand um Circular No . 8-82 dated Ma rch 17, 1982 in the light of Section 327 of the Tax Code which provid es for the non-retroactivity of the appli cat ion of the rules and regulations if the revocatio n or modification is prejudicial to the taxpayers. So that in t h e recent case of Commis s ioner of Internal Revenue vs. Bank of America NT & S A and the Court of Tax Appeal s , CA - GR SP No . 22529, September 19, 1990, the Court of Appeal s upheld the validity of Revenue Memor an dum Circular No. 2- 82. The Court of Appeals stated that "the use of the word .!::..~.!!!.!..!.!.~.-~. may well be under stood as referring to that part of the said total branch profits which would be sent t~ the head office as di sti nguished from t h e total profits of the branch 1005

DECISION CTA CASE NO. 4156 - 8- (not all of which need be sent or would be ordered remitted abroad )." Likewise, this court in the very recent case of Co mpania General de Tabacos de Filipinas (Philippine Office) vs. The Commissioner of Internal Revenue, C. T. A. Case No. 4451 � dated August 23, 1993, has upheld the application of Revenue Memorandum Circular No . 8-82 (March 17, 1982) that the 15% branch pro fi t remittance tax should be co mputed on the basis of the amount actually applied for by the branch with the Central Bank of the Ph ilippin es as profits t o be remitted abroad without prior deduc ti on of the withholding tax on branch profits. As correctly pointed out by the Respondent, bran ch profit remi tance tax is a withholding tax at source. It is a tax due to a foreign corporation specifically the head office of the branch located in the Philippines. Nece ssarily , as in the case of all other withho lding tax at source, suc h as in the case of interest on savin g depo sits, r e ntal s payable by a lessee and wages payable by the employer to its. employees, the base on wh ich the tax is computed has always been the 1 amount to be paid by the payor to the payee

DECISION CTA CASE NO. 4156 - 9- without first deducting the tax . WHEREFORE. in view of the foregoing. the refund of the Pe ti tione r should be computed as follows: Branch profits remitted P7.019.003.00 for the years 1983. 1984 and 1985 which included interest income less: Interest income for the years z. ---~.!> 6_~.. ! .!..:..Q.P.. 1983 to 1985 ) Branch profits to be remitted 6.062.292.00 abroad x 15% of rate 15% Branch profit remittance tax P 909.343.80 Branch profit remittance 1.052.850.45 tax actually paid --�--~~-~...!....~. ...~~ � 8 .Q. less: Branch profit p 143 ._506. 65 Refundable remittance tax due amount Wherefore. Respondent. Commissioner of Internal Revenue is ordered to refund in favor of Petitioner. Graphics International. Inc .� the amount of P143. 506.65 representing overpaid 15% branch profit remittance tax corresponding to the interest erroneously included in the original bran ch profits. No costs. 1 006

- DECISION CTA CASE NO. 4156 - 10 - SO ORDERED. Quezon City, Metro Manila, September 30, 1993. ERNESTO D. ACOSTA Presiding J udge WE CONCUR: � GRUBA ss ociate Judge n~~ ~-/.. ' ?.< Associa te J~: I CE RT I F I CAT I 0 N I h ereby certify that this decision was reach e d after du e cons ul tation among the members of the Court of Tax Appeals i n accordan ce with Section 13, Article VIII of t he Constitution. �' c;!~o,~ ERNESTO D. ACOSTA Presidin g Judge Court of Tax App ea ls 1 008