CTA Case No. 4878 (Decision)

\. REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY GENERAL ELECTRIC PHILIPPINES METER & INSTRUMENT CO .� INC .� Petitioner, - versus - C.T.A. CASE RO. 4373 COMMISSIONER OF INTERNAL Promulgated: REVENUE. MAR2819mi Respondent. X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X DECISION In this petition for review, petitioner seeks to recover by filing a claim for refund or issuance of a tax credit certificate with the respondent tlle amount of P558,675.00, representing overpaid withholding tax at source on cash dividends paid and remitted to General Electric Co. (USA), for taxable years 1990 to 1992. The facts, as gathered by this Court, are as follows: Petitioner is a domestic corporation duly organized and existing under Philippine laws. It is engaged in the business of manufacturing and distributing electric watt-hour meters. It is Q)~ owned by General Electric Co. (U.S.A.), a non-resident foreign corporation organized and existing under tlle laws of the State of 570

( DECISIOB- C.T .A. CASE BO. 4878 -2- Delaware, U.S.A., "With Headquarters in Fairfield, Connecticut, U.S.A .. For the taxable years 1990 to 1992, petitioner's Board of Directors declared on three separate occassions cash dividends amounting to P5.730,000.00 to its stockholders of record on �October 17, 1990, May 5. 1992 and August 27, 1992 or a total of P 17,190,000.00. Petitioner paid and remitted to the BIR 20~ "Withholding tax at source on all cash dividends paid to General Electric Co. (U.S.A.), a non-resident stockholder ovming 65::& of its capital stock. The "Withholding tax rate of 20~ \'laS based on the I. . provision of Article 11(2)(b) of the RP-US Tax Treaty,� which provides: �Article 11 Dividends 1. XXX XXX XXX. 2. The rate of tax imposed by one of the Contracting States on dividends derived from sources "Within that Contracting State by a resident of the other � Contracting State shall not exceed (a) XXX XXX XXX. (b) When tlle recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of the paying corporation's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10 percent of the outstanding shares of the voting stock of the paying corporation \'laS owned by the recipient corporation ... , . ~,.. . ~ �: �.��~�� l . �. ~ ~ �~ .. '> :��~: .: ~ ~ :.., . ' .. ' ,� �� 0 571

( ( DECISIOB � -3- C.T.A. CASE BO. 4878 and on an earlier decision of the Supreme Court in the case of Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation & The Court of Tax Appeals. G. R. No. L-66838. April 15. 1988. 160 SCRA 560. One of the issues raised in that case was: Whether or not the U.S. allows as tax credit the "deemed paid" 20~ Philippine Tax on such dividends? The High Court initially ruled as follows: "To Our mind there is nothing in the aforecited provision that would justify tax return of the disputed 15~ to the private respondent. Furthermore, as ably argued by the petitioner, the private respondent failed to meet certain conditions necessary in order that the dividends received by the non-resident parent company in the United States may be subject to the preferential 15~ tax instead of 35%. Among other things, the private respondent failed: ( 1) to show the actual amount credited by the U.S. government against the income tax due from PMC-U.S.A. on the dividends received from private respondent; (2) to present the income tax return of its mother company for 1975 when the dividends were received; and (3) to submit any duly authenticated document showing that the U.S. government credited the 20~ tax deemed paid in the Philippines." However, in a Motion For Reconsideration filed by private respondent Procter and Gamble Philippine Manufacturing Corporation, the Supreme Court on December 2, 1991, (204 SCRA 337), reversed its ruling and held that: '� -... , <" ._;,��.,:.;: ' i ~-- 572

DECISJOi. C.T .A. CASE BO. 4878 -4- percent 05%) tax rate provided lor in the follov'ling portion of Section 24(b)( 1) of the NIRC: '(b) T&r on IOt"ffign corporations. - (1) HotJ-resident corpot"8.tion. - A foreign corporation not engaged in trade and business in the Philippines, x x x, shall pay a tax equal to JYl� of the gross income receipt during ils taxable year from all sources within the Philippines, as x x x dividends x x x. Pron'ded still fw�ther, that on dividends received from a domestic corporation liable to tax under this Chapter, the tax shall be 1)01. of dividends, vhich shall be collected and paid as pt�ovided in Section SJ(d) of this Code, subject to the condition that the country in vhich the non-resident foreign corporation is domiciled shall allov a credit against the tax due from the non-resident foreign corpot�ation, taxes deemed to have been paid in the Philippines equiV'alent to 201. vhich represents the difference between the regular tax (351<>) on cot�porations and the tax (151<>) on dividends as pt�ovided in this Section x x x.' The ordinary thirty -five percent <.35%) tax rate applicable to dividend remittances to non- resident corporate stockholders of a Philippine corporation, goes down to fifteen percent ( 15%) if the country of domicile of the foreign stockholder corporation 'shall allow� such foreign corporation a tax credit for 'taxes deemed paid in tlle Philippines,� applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. In other words, in the instant case, the reduced fifteen percent ( 1)%) dividend tax rate is applicable if the USA 'shall allow� to P&G-USA a tax credit for 'taxes deemed paid in the Philippines' applicable against . the US taxes of P&G-USA. The NIRC specifies that such tax credit for 'taxes deemed paid in the Philippines' must, as a minimum, reach an amount equivalent to twenty (20) percentage points which represents the difference between the regular thirty-five percent (35%) dividend tax rate and the preferred fifteen percent ( 15%) dividend tax rate. '.~�� �. It i~��t.Jl4portant to no~ tl1~t Section 24(b)( 1), J'!lRC, ~o~~ �n~'t require ,.�l:tl~t th,~�, HS, must give a :::\.~~mAt Aw�~t~ f'ftJ!If!. !tf r-�~~�4/r./f!~PJi f..tJY (20 ~r<.-ent..tg~ p:>ints waiv~i by� t.li~ PhJ11ppin~s� in 573

I ( DEC IS lOB" -5- C.T.A. CASE BO. 4878 making applicable the preferred dividend tax rate of fifteen percent ( 15$). In other words, our NIRC does not require that the US tax law df�.1"11 the p..i-r&nt- O.?ffJt'>fL!ffit'>D t;.? JJL-:r ve p..ili.1 the t'W'&nf;Y (20) per..-:-ent..fg& pt?JiJtc;� of dividen..t t..f.~'s� waived by the Philippines. The NIRC ..,n~yrequires that tlle US 'shall allow� P&G- USA a 'deemed paid' tax credit in L~w lifDJount AJlliR!fl&fJt t;.? t.h& tWlf:lnty (2 0) pen:~nt..!fg& pt?int.~ waived by tl1e Philippines." (Underlining supplied.) In view of. this recent ruling of the Supreme Court, petitioner filed a claim for refund or tax credit with the respondent on November 25, 1992 regarding the 5~ overpaid J withholding tax at source on dividends paid and remitted to General Electric Co. (USA), in the sum of P558,675.00, itemized as follows: (EXh. D) Withholding Tax Confirmation Amount of Withheld Should Be Tax Over- pavment. Date Receipt No. Dividends (201o) (151o) 11-28-90 21239699 p 3,724,500.00 p 558,675.00 p 558,675.00 P186,225.00 2-26-C~H 21661379 196,225.00 6-01-92 BNKCOMM 3,724,500.00 744,900.00 558,675.00 186,225.00 9-17-92 BNKCOMM ").724,j00 .00 744,900.00 jj8,67j.OO 186,22j.OO Total P1 L17J,j00.00 P2.234.700.00 PL676,02j.OO P558,675.00 On November 26, 1992, petitioner filed a petition for review witl1 tl1is Court claiming for tlle refund or issuance of a tax credit of P558,675.00. Respondent answered tlle petition alleging that it is premature since the claim is still being processed administratively. In claims for refund or tax credit the burden of proof lies on the petitioner-taxpayer because the claim for tax r~f~nq in i~ flle na,ture of a tax exemption and thus must strictly .' .� ' ' ~ :� .� ~ ~ .. be construed against the taxpayer. � 574

DECISit... . - ( C.T.A. CASE IO. 4878 -6- The issue is whether or not petitioner is entitled to the refund or issuance of a Tax Credit Certificate in t11e amount of P558.675.00, representing allegedly overpaid paid withholding tax at source on cash dividends paid to General Electric Co., (U.S.A.) for the years 1990 and 1992. We answer in t11e affirmative. During the presentation of evidence, respondent's witness, Ceasar Charlie Lim, Legal Officer II of the International Tax Affairs Division (ITAD) of the BIR, testified that petitioner's claim cannot be acted upon for failure on its part to present to the examiner the necessary documents in order to process its claim for refund or tax credit. However, a careful scrutiny of the BIR records Will reveal that in a memorandum report, dated February 11, 1992, prepared and submitted by the Revenue Officer to the Revenue District Officer of Revenue District No. 35. Pasig, Metro Manila, t11e examiner recommended t11e refund claimed by petitioner. (BIR Memorandum, dated February 11, 1992, p. 18, BIR records.) Based on the documentary evidence submitted by petitioner consisting of the Monthly Remittance Return of Income Taxes Withheld (Exhs. C, C-1, C-2 and C-5), Confirmation Receipts (C-3 and C-6) and BIR Payment Order (C-4 and C-7), petitioner has substantiated payments and remittances of t11e withholding ta}res on dividends at the rate of 20~ instead of the 15~ preferrential rate. The applicable rate is 15~ as provided for under Section 25(b)(5)(B) [previously Section 24(b)(2)(iii)J of the NatiQnal Internal Revenue Code and by the modified decision of .. ~ ... ; - 't�. 575 �

DECISIOA< � C.T.A. CASE IO. 4878 -7- the Supreme Court in the Procter and Gamble case promulgated on December 2, 1991. Accordingly, petitioner has overcome the burden of proof to show entitlement to the relief prayed for. WHEREFORE.. finding t11e petition meritorious and in accordance with law, the same is hereby GRANTED. Respondent is ordered to refund or issue a Tax Credit Certificate in favor of petitioner the amount of P558,675.00, representing erroneously and overpaid withholding taxes at source on cash dividends paid and remitted to General Electric Co., (USA) for the taxable years 1990 to 1992. No pronouncement as to cost. SO ORDERED. @~c;z,C~ ERNESTO D. ACOSTA Presiding Judge WE CONCUR: ;l_ i' ' � ..:i �~,;;'-: .� . . .'�~ . . ;. ~�. . ..~ ..... . . ~ .. . . ''... .. .� .... -~ .. -~--�~~-- .�. �. r� ...... '' . .::�<'~: .<:,_>::� ..., .. ��� � . . � �..� . .� .: . . ~' :- �. 't . .,.�.�.....��...�_...,.. .5?6 . ': . , .. ' : ; .�� �: ; ..

- - - - ---- --- ~- DECISIOk. C.T .A. CASE BO. 4878 -8- CERTIFICATION I hereby certify that this decision ~Nas reached after due I consultation among the members of the Court of Tax Appeals in accordance with Section 13, Article VI II of U1e Constitution. e~Q.~ ERNHSTO D. ACOSTA Presiding judge Court of Tax Appeals 577 ,.. .. �.,.