CTA Case No. 4141 (Decision)

REPUDLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY COnPANIA GENERAL DE TABACOS DE FILIPINAS <Phi1ippine Offices) Peti "lione�r, - versus - � C.T.A. CASE No. 4141 THE COHHISSIONER OF INTERNAL REVEN UE , Respondent. X- - - - --- -- -X DEG I s I 0 N Befor e this Court is a Pet i tio n for Revi ew fi l ed by the petitioner, a foreign cor poratio n duly licensed by Phil ippine law s to engage in busi ness through its branch office, seeking a refund of the total amount of P 1, 768,931.05, representing the alleged o verpaid branch profit remittance taxes du rin g the years 1 980 to 1985. On February 4, 1 986 , petitioner f i l ed a re quest before the res pondent Commissioner of Internal Revenue for the refund of the sum of P1,447,295.62, as alleged over paid branch pr o fit remittance t a xes fat� the years 1980 to 1 98~ , com puted as fo llows: 1 08~

- DECISION - C.T.A. No. 4141 -2- !nco e Correct Overpaid Re�ittance Year Branch Profits Re�ittance Oate Branch Profits Subjected to Re1ittance !Grossi Tax Paid _ill_ Paid !Actually Re1ittedl Final Tax Tax 1980 Pll,266,175. 31 P1,689,926.29 2/07/84 p 9,576,249.02 p 782,042. 92 Pl, 319,130.92 p 370,795.37 1981 11,839, 681.,41 1, 775, 952. 21 4/10/85 10,063,729.20 287,257.74 1,466,470. 72 309,481.49 1982 10,663,298.95 1,599,494.84 4/10/85 9, 063, 804. 11 305,618.33 1,313, 727.86 285,766.98 1983 17,860, 260.!1 2,679,039.01 4122185 15, 181, 221. 10 529,306.23 2,197,787.23 481,251.78 TOTAL P51,629,415. 7~ P7, 744, 412. 35 P43,885,003.43 Pl,904,225.22 P61 2971 116.73 P11 4471 295.62 Thereafter or on April 8, 1987, petitioner filed another request for the refund of P321,635. 40, this ti.e for the years 1984 and 1985, details of which are sho�n belo�: Correct Overpaid Oate Branch Profits Reaittance Year Branch Profits Reaittance Paid !Actually Reaittedl ____ill_ Earned !Grossi Tax Paid 1984 p 4,614, 723.34 p 692,208.49 8/04/86 p 3,922,514.85 p 588,377.24 P103, 831.25 1,234,223.60 217,804.15 1985 9;680,184.96 1,452,027.75 8/04/86 8,228,157.25 Pl1 8221610.84 P3211 635.40 TOTAL P141 2941 908.30 P21 1441 236.24 P121 1501672.10 Since respondent has not acted on petitioner's request, the latter filed the instant petition on April 9, 1987 to interr upt t he running of the prescri ptive period for claims for refund . The issues raised before this Co urt are: 1. Whethe . or not the righ to c l aim ior refund of payments has already prescribed ; '' 2. Whether or not the petitioner is legally entit l ed to the refund of the total amount of P1,768,931.05 on alleged excess branch profit remittance taxes paid during the years 1980 to 1985. Respondent, in his answer, and by way of special

DECISION �- C.T. A. No. 4141 -3- and affirmative defenses, alleges among others, that "the right to claim for refund of payments mad e prio r to Ap r il 9, 1985 has already prescribed." <Answer, P� 2: C.T.A. Records, p. 30 >. Section 230 of th& Tax Code provides: "Recovery of tax erroneously or illegally col! cted No e u � p ooeed ing s hall be maintain d ' n eny court for the r covery of any nation internal venue tax hereaft er alleged o have been e roneousl y or illegal y assessed or collected, o of any penal ty cl~ ime d to have been collected without auth or'ty oro any su m alleged to h ve been exoe ~s �v r in any manner wrongfully collec e , un il a cl aim for refund or credit h as been du ly fi l , d w'th the Commissioner ; but s uch suit or p ro edi ng ma y be main �taine-d, whet her or not such tax, penalty, or sum ha s been paid un der :r�otest or duress. In any case, no s uc h s u or proceeding shall be begun e::� r the lit p �rat on of two years from the date o pa yment f the t ax o r penalty regardl sa of any supervening cause that may a i e gf er paymDnt xxx." <Underscoring sup pl ied) It is evident th pa yment m ~d~ pt or to " April 9, 1985, had already prescribed. The profit remittance tax corresponding to branc h profi t for 1980 was paid on February 7, 1 984. When this case was filed o~ April 9 , 1987 , more than two years have lapsed from the time t h e payment of the tax was made. This Court is now left to decide on t h e correct branch profit remittance taxes paid during the period j' �' 1 () _q ~'

DECISION - C.T.A. No. 4141 - 4- from 1981 to 1985. Petitioner contends hat he co rect tax base for computing the branch profit remi ance tax is the profit actuall y r emitted abroad ne t of income already subjected to final ta~�t. To support i ts contention, petitioner ) brought t o he e tention o� �hi e Court , B.I.R. ruling dated Janua r y 2 1, 980 and the ee w~ ,.... Commissioner o:f Internal R venu vo. Burroughs Li it~d (142 SCR A 324> wherein the Supreme Caurt held that1 " n a ur u of Inte rft ~ l venue ruling d~ted Januar y 2~ 980 y � her1 Acting Co10missiou �r C' In . rr1 . l Rev - rJ e Ht~n. E f :n?n I. Pla na the afore quo e provision had be en interpreted to mean that the ' tax base upon which the 15X branch profit remittance tax xxx shall be imposed xxx (is) the profit ac~ually remitted abroad and not on the total branch profits out of which the remittance is to be made. ' The said ruling is hereinbelow quoted as f o llows~ 'In reply to your letter of November 3, 1978, relative to your quer y as to the tax base upon which the 15X branch profits remittance tax provided for under Section 2 4 <b><2> of the 1977 Tax Code shall be imposed, please be advised that the 15X branch p rofit tax shall be imposed on the branch profits actually remitted abroad and not on the total branch profitq out of whi c h the remittance is to be made. Please be gu 'd ed accor �dingly.' :~If� �" ftpplying , therefore, the �, aforequoted ruling, the claim of private respondent that it made an overpayment in the amount of P172, 058.90 which is the difference between the remittance tax actually paid of ?1,147,058.70 and remittance tax that should h~ve been paid ~ � -1 �

DECISION - C.T.A. No. 4141 -5- of P 974,999.89 co mput ed as follo ws - Profits actually remi tted P5, 499,999.30 Remittance tax rate 15X Remittance tax due p 974, 999 . 89 is well taken. " Respondent, on the other hand , contends that the case o� Burrough s Cs pra> is not ap pl icabl e to the instant case b caus~ of R~v nue Memo randum Circular No. 8- 8 2, dated March 17, 1 982, wh i ch s ates that since the "t a:�: is imposed nd call cte d at so urce , necessari ly the tax base should be the amount mctually applied for by t he branch ~ith the Central Bank of the P h ilippi ne s as profit t o be remitted abroad." The applicable provision of he Tax Code is Section 24 Cb>C 2><ii) <now Section 25Ca><~>> which provides: "Tax on branch pro�its e mittances - Any profit remitted by a branch to its heap . office sha ll be subject to a tax of 15X < exc~ pt those registered with the Export Pr ocessi ng . zone Auth ority>: Provided, That any p ro fit re~itted by a branch to its head office authorized to engage in petroleum operations in the Phi lippines s hall be subjected to tax at 7- 1/ 2%. In both cases, the tax shal l be collected and paid in the s a me manner as p rovided in Sectic1ns 51 and 52 o:f this � Code :<:XX � " Th e que s io n now lies on what part~cular B.I.R Ru ling or Circular is appl'cable o the instant case. Whe r eas petitioner relies on B.I.R. Rul ing dated Jan u ary 21 , 1 9BO , :respondent is a~ the opinion that Revenue

DECISION -- C.T.A. No. 11141 -6- Memoran dum Circular No. 8-82 dated March 17, 1 982 s hould apply. Re~enu e Memorandum Circular No. 8-82 is q~ oted hereunder in full: "SU BJECT: Classification as to t he proper tax base in the computation of the 15X branch profit remittance tax. To : All Internal Revenue Officers and Others Concerned . In BIR Ruling No. 016 - 79 da ed April 18, 1979 anent the 15X branch profit remittance tax .I as an inccme tax imposed under Section 24 Cb) ( 2), National Internal Revenue Code of 1977, as amended, this Office ruled that 'xxx the 15X branch profit remittance tax should be based on the amount of Pl, 504, 330.43 representing refit derived from the disp osition of the shares , 15'l. of which is P225, 649. 57. ' It will be no ed tha the basis of computation in accordance with the ruling is p rofit without deduction for the 1 =1% tax. On Ja.nuary 21, 1980, t h is Office , in another ruling issued in answer to a query as to the tax base upon which the 15X branch profit remittance tax should be imposed held th at 'the 15X branch prof't r �emittance tax s h all be imposed on the profit actual ly remitted abroad and not on the totar branch profit out of which the remittance i s to be made. � As the latte r r uling seems o have ' given rise to some misconception that it modified BIR Ru ling No. 016 -79 with respect to the mann er of computation of he 15X branch profit remi~tance ta x , this Office issued a clarificator y �, ruling on October 23, 1981 explaining - The above ruling <of January 21,

DECISION - C . T. �A. Ho . 4 1 4 1 -7- 1 980) merely emphasize the distinct i on between the otal branch p ofit wh ich is remi table end hat portion o the branch profit actually remitted without deduction on account of he tax to be paid . The phrase 'any profi remi t e d abroad' s h ou d be construed o mean t he profit to be � m� t ed. H&nce, the:r e must be an actual remittance, as distinguished from p� ofit wh ich 's r~mi table ot'. To 9' wfl exam pl e: ~ ((g :t b e total �r an -h p:r-a � i P 115, oo , 00 �� b ut. �the mi � ed is P 10 .o 0.00 , t h en amount to tax b sw ~h uld be P100, 00( .00 . i c�r eo o v � 1. , t. h 1 ~. h p r o :f i t :r� �mi �� �t e n c e tax imposf;d by SectieHI 24 (b ) <2 > o � t h e Ta >t Code is an nc c.om e tax , i i s h 2 ef ore cle r that the same is non-d = uotible f rom ttl!::- g :rosa (pro � i t ) inc ome . In a mu ch as t he ax is an exaction on p rD:f t realized f or remit ance abroad , he ducti on t hereof as an eHp nse s n eined b y law nowhere in Sec ion 30 of Tax Code is it provided t h a t he eame is Bes �de s 1c ions .:f:t�om ma s t~x 1 Qiela~ive .g '. d eductible . ed gr' at �co' ~s\s, income are o� wh at is no e:q:ot es s y g ant.ed , by t )1 F'.; r\ .a w is deemed wi hheld. ' Consider i11g he l ~ X br~nch p rofi t remi tt.ance ta:�t impos ed c ' l ected at h~ ~hould b ~ xb the ~:..=::.==............;;;;..!~,._. ,.� ed :for by he .br an.ch w i �t h t h !'O' Philip pi nes illS p rof i t to be rem� I t is desired th thi - C .ul r b g iven a s wi d e pu b l icity as possible . The Su pre me Cou r t , <S gd> RUBEN B. AN~ HETA Actin g Commi s si oner" in the Burroughs case <s up ra> 1 ()

DECISION -� C . T. A. No . 4141 -8- applied B.I.R. Ruling d ted January ~1, 19SO and not Revenue Memorandum Ci cula No. 8 - 82. It . was ruled that: "Pet itioner's a�ares id contention is without merit. What �s applicable in the case at bar is stil the Revenue Ru ing of January 21, 1980 bee au =- pr i vat.e e-sponden Burroughs Limited paid the- branch profit remittance tax in ques ir.1n on !1a:rc.~h J4~ 979. Memorandum .I Circular No. B- 82 Led M~rch 17, 1982 can not be given re ro c ive eff o t in he light of Secti n 327 of th~ Nation n ~nal Revenue Code wh ich proviei s�� 'SectitHJ :'.;'1~1 . Nt~n ~ rg-trQii1tJtil-�ity o:f .rulings. � Any 1 l' vocaticlllJ lft~ti. :fieat.ic,n, or reversal of ny u! th ~yl �~ �ft egulations promulgated in accord a nce with 1e preced ing section or any of the rulings or ciicu lar s promulgated b y the Commissioner shall not be given retroactive a p plication if the revocation, modification, or reversal will be prejudicial to the tax p ayer except in the fo l lowing cases (a ) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Iuterna l Reve�nue;. <b) where the facts subsequently gathered by the Bureau of Internal Revenue are . mat~rially different fiom the facts on which the r uling is based, or <c) 'rlhere the tax payer� actecf � t in b~d faith. ' C ABS --CDN Broadcastin g Cor p orat�it". va. Co u rt o:f Tax Appeal s , 108 SCRA 151 - .1� 52 J: !; Th e prejudice that woul-J result to private respoudent Bur �u~h..., rui � ~;~~cl by �a retl coacti v e application of " ' "DT~ndum Circular No. 8 - 82 is beyond qu~sticon �~r i t would b~ deprived of the substantial !lfflOUfll o:f P 172, 058. 'go . ' � And, insofar as th 0 g num ~-- ~~0 ex~~~tions are concerned, � ct nd . l.. �t, _dl y, Bu "" 1' 01..1 ha Limited does not f~ll und�r any ~f t hem . � In the inat nt o~~e. th~ b � o ~ h profit remittance taxes were paid after th~ efL.ctivity o� Mf:?mora n d u m II l �1

DECISION - C.T.A. No. 4141 - 9- Circular No. 8-82 . What should therefore apply is Memorandum Circular No. 8 - 82 as correctly advanced by the respondent. Thi s Court, in deciding early cases <CTA Case No. 445 dated August 23 , 1993; CTA Case No. 382 7 date d October 14 1988) involving the same p arties and issues, applied Revenue Memorandum Circular No. 8 - 82. Furthermore, the Court of Appeals, in the recent case o f Commissioner of Internal Revenue vs. Bank of America <CA - G. R. S P No . 2 2~2J dat e d Sept e mbe r 1 9 , 1 990 ) had the o ccas ion t o �xplain h e ra ion a le of Revenue Metnorandum Ci r cular No. 8 - 82, when it r uled : "The use of the word remitted may well be underst ood as referring to that part of the said tot a l branch profits whi c h wo uld b e se nt to the l1 ead office as di s tingui s h e d from t he total profits of the branch <not all of whic h need be sent or would be orde red remitt e d abroad). If the legislature inde ed had wanted to mitigate t he har s hne s s of successive taxation, it would have been s imple r to just lower the rates without i n effec t requiring the r ~ lat"v e n o vel and compli c ated way of c omputing the ta x , as envisi oned by the herein private r e spond ent. The same result would have been a c hieved. The attempt to deduce legislative intent with r e gard to Section 24<b><2><ii) of the Tax Code would only serve to allow a captious a nd strained intendment of the law. NIHIA S UBTILITAS IN JURE REPROBATUR, . ET TALIS CERTITUDO CERTITUDIHEH CONFUNDIT <The la ws does not allow of a captious and s trained intendtne nt , for such nice pretence of certainty confounds true and legal certainty>. As held 'l

DECISION -� C. T. A. No. 4141 - 10 - in the case of United States vs. Wurzbach. 280 u.s. 395, 398: There is no warrant for seeking refined arguments to show that the statute does not mean what it says. In view of the foregoing, this Court ' finds that the clear import of Section 24Cb)C2>Cii> of the Tax Code mandates the imposition of the fifteen percent C51X> tax on the branch profits remittance , with in tax parlance is a lluded to as the "tax handle", with the total amount remitted <not the total amount of the branch profits> as base for the tax." Having found that the questioned taxes were paid when the applicable ruling is Hevenue Memorandum Circular No. 8 - 82, "then what should apply as taxable base in computing the 15X branch profit remittance tax is the amount applied for with the Central Bank as profit to be remitted abroad xxx. " CCompania General de Tabacoa �' vs. The Commissioner of Internal Revenue, C.T.A. case No. With regard to the passive income already subjected to the final tax, the same Section 2 4 Cb)C2>Cii> (now Section 25Ca>C5)) of the Tax Code provides: " )otx That interests, dividends, rents , royalties, including remunerations for technical services, salaries, wages, premiums, annuities, emoluments or other fi xed or determinable annual, periodical or casual gains, profits, income and capital gains receiv~d by a foreign corporation during each taxable year f rom all sources within the rhilippines shall not be considered as branch profits unless the same are pffectively connected with thP conduct of the trade or

- DECISION - C. T. A. No. "111.1 - 11 - business in the Philippines." <Unde rscoring supplied) Peti ti one.r claims U1at only profits remit ted abroad 'tlhich are effectively cormected with the taxpayer's :trade on busin ess in the Philippines are subject to th e 1 5% branch p rofit remittance tax . It cited B. I.R. Ruling No. 1 57 - 81 dated July 1 3 , 1981, the pertinent pro vision of which reads as follows: "In reply thereto, pl ease be informed that pursuant to Section 24(b)C2> of the Tax Code, as amended, only profits remitted abroad by a branch office to its head office which are effectiv ly COIHJec.ted w�� h its t rade or business in the rhilippines are subject to the 15% profit remittance tax . To be 'effectively connected' it is not necessary that the income be derived from he actual operation of ta~payer - corporalion's trade of business ; i t i s suffi cient that b e irJcc�me ar ises from th e bu siness act.i vi ty in which the cor poratiora is e ng aged. For example, if a resident foreign corporation is engaged in the buying and selling of machineries in the Philippines and invests in some s la a:res of stock on which divid ends are subse que 11 t ly receiv ed , the dividend thus earned are not considered ' effectively corme�c ed ' wi l h is trade or busin ess in thi s country. " (Revenue Mem ora ndum Circular No. 55-80. ) Respond e nt for his pail argues that cash dividends and int erest income of pe ti ti ,oner are effectively connect ed with the conduct of its trade and business in the Philippines that s ho u ld be sub~iected to branch profits remittance ta;.c. As fou nd by this Cour t in a previous case:

DECISION C.T.fl.. No. 4 141 - 12 - "<T>he rule is interest a nd dividends received by a foreign corporation dur�ing each ta)table year fo :crn all sources withiu t h e Philippines shall not be considered as branch profits unless the same are effectively connected with the conduct of its trade or business. The phrase "effectively connected " was interpreted to mean income derived from the bu siness activity in whi c h the corp oration is engaged. In all the corporate quarterly income tax returns filed by petitioner with Iespondent's office, it was indicated as it was shown that the petitioner is engaged in the bus iness as leaf tobacco dealer , ex por ter , importer a nd 9ene1� a1 me:cchant.s . Petitioner claims that int erests r e ceived from savings d e posit with Philtrust, interests received from money market placements and inter est ou Land Bank Bonds and c~sh div ide nds received from Philippine Long Distance Company Tele phone Company <PLDT> and Tabacalera Industr ial Development Corp oration of the Phils. are not effectively conue�cted with its trade or business . Fu rt hermor e , pursua11t. to Section 2 4(c) and (d) of NIRC , divid ends and interest are subject to fin al tax. To inc~ude them again as subject t.o ln a n c h profit remittance ta'c under the same Section 24 (b)(2J<ii> would b e con tra r y to law. Righ t fully so , petitioner h as sufficiently established a ri ght t o be refunded the amount of b I an c h p r of i t r� em i t �tan c e� t a :�t paid on these. interests and dividends which were included as part of the bionch profits xxx . " <C amp ania General de Tabacos de Filipin as vs. The Co mmissio n er o.f Iul.ernal Reven u e C . T. 11. Case No. 4451, supra) lifter considering the facts and i ssues of the case, 'thi s Court holds the petitioner enti tled to a refund or tax credit in the amount of Pl 52, 690 .61 corresponding to over paid branch profi t remi ttance taxes during the years from 190 1 to 1983, com p uted as follows :

DECISI ON - C. T .A . No. 4 1 4 1 ) - 13 - Gross amount renit table (1~81 - 1 9831 Pl G, l SO.ll P40, 3G3,240.47 Less : lnt:O.I!'? sub jected to fina l tax 10, 357. 11 10, 844. 67 1, 017, 937. 50 al Dividends P39, 345,302. 97 1981 !Exhibits AC-1 t o AC-201 Pl42, 24'3. 04 1382 !Exhibits AB-1 to AB-33 1 211,689.59 1983 !Exhibits KK -1 to XX -331 513,480.21 bl In terest on PTG savings account 2, 730. 00 1381 <Exhibits AO � l to A0-6 l 2, 730.00 1182 !Er.hibits ZZ -1 to ZZ-71 88, 182. 11 1~83 <Exhibits YY -1 to YY -121 19, 494. 66 cl Interest on LBP bonds 1981 <Exhibi ts AD- 11 and 12! 1382 !Exhibit ZZ-Sl dl Interest on "oney Market place~ents 1981 <Exhibits AD-8 to AD-101 el Capital gain 1982 <Exhibits lllH and liW-2! Aount su jected to 15X branch profits '' t t:J.nce tax l SX branch profit remittance t x P5, 901, 795. 45 6, 054, 486. 06 Less : Amount of branch profit tax paid 11981� 19831 p 152, 690. 61 Amount refundable . � As t o t h e 1 '384 and 1 985 brar .ch prof it re mittan ce ta:~-:es, n o ref u nd or taJ-: credit is due the p e t i t i o ner s in ce th r~ l a tte r did not pt-esen t a n y pro6 � o� p a s si ve income i t 1 o?C'"-' i ved d uring the pe ri o d . He n ce , t h e co rr ec t b ranch p 1 o f � t � e m ~t tance taxes are the e~act am ount o� t a Kes p .tl � l h e p~;d: .' t on1?r s �::ampu te d b elo w: Gross amount remittable !1984-1985 1 P14, 2'34, 908.31J Less: Inco1e subject to final t ax al Dividends nil bl Interests nil c l Other passive incomes __nil Pl4,294,908. 30 Al!lount subj ected to 1 branch profits reJittanc tax P 2,144, 236. Z4 15% Branch profi ts re�i ar e 1 ~x WHEREFO RE, IN VJ EW OF T HE FOREGOING, .., r es po nde n t ' Comm is s i o n e r of In t e r n a l Re v e nu e i s h er eby . 9 rd e r e d to

.. DECISION �- C. T. A. No. 1.14.1 - 14 -- refund in . :favor oi petitioner, the amount of P152, 590.51 representing overp id 15X brancll profit remitt a nce taxes or1 div'dends , interests and capital gain receive d d~ring the years 1981 to 1983. Na pr onouncement as to cos t. so ono RED. Quez on City, Me :ret Matdl , Nt'v �mbe:r� 17, 1993 . ~~(2.~ EJ NESTO A. ACOSTA r ~id ing J udge WE cmun Juclfil" ~#~~~- - RAHON 0. DE Y� . A Associate Juclg .J CER-..IFICATICJ L I h ereby certify that this deci sion wa s r eached after due consultation among th e mem b ers o:f the Court of Ta x Appeal s in accordance with Section 13 Article VII of the Constitution . .. (~lQ.Q~ ERNESTO D. ACOSTA Pres iding Judg e Court of Tax Appeals