CTA Case No. 4643 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY ZURICH INSURANCE CO./and MALAYAN ZURICH INSURANCE CO., INC., v e r~ s �..1s - C.T.. A. CASE NO. 4643 COMMI SSIONER OF INT�~N~ ~EVENUE, Respon d t. t'lt. x-�-� ��� ��� ,.. �- - ��� .�� ~ } < EC N Thi s case i s a c l a im f or th e re f und of the amount of PSOO,OOO.OO all eged fi nal withholding tax on dividend r-emittances by a domestic corporation to a non - resident foreign corporation. Petitioner' !Yii:\layan Zur- ich Instn-ance Co mpany, Inc. is a d o me s t i c c or' pot'at i on organ i z e d t o en gag e in i n s ttt' an c e b usin ess under Philippines laws, wherein P2,'3'3'3,'380.00 shar�� es of stock, r-epr- esenting 301- of its capital stock is owned by its co--petitioner�, Zur�ic h Insut-ance Company, a �� non-r~esident for-eign cor�por�ation organized and ex � ~ti nQ under the l a ws of S wit ze rland . On tr1ay 12, 1'38'3, the of of petit i onet~ Malayan � t�esolved to a ,I P5,000,000.00 cash dividend in favor of all stockholders

DEC I S I ON C. T.A Ca se No. 4643 -2 o f record as o f Ap ril 30, 1.989 , the dividend to be p<.\yable o n 1~1 ay 30 , 1'389. <E xh i b i t s "A" and "A- 1"> Agai n on !Yiay 14, 1. '3'90 , a P5, 0 00 , 000 . 00 cas h d i vid e nd ~s to "' as of May 14, 19'30. <E><hibits "B " and "B-1."). Acc ot~dingl y , pt~ ovisio n s a n d actual payment of cash dividends equi va len t t o P5 .00 pet~ s h at~ e we r�' e mad e d m~ i n g t h e a f o t~ e me n t i on e d y eat~ s �a s _, cert i fied in the audited financial state me n ts of th e peti t ionet ' <E xh ibits "D" , "D --2 " , "D�-3", "D-4" a nd "D-5"). Zur~ic h Insut~.::~nce, with i t s stockholc.h ng s of 29'3 , 980 paid by t�lalayan cash di v i dend a mo u nting to P 1, 500,00.00 i n 198'3 a nd w it h the sa me <.\mo u nt in :L'3 r:30. For eac h of the cash div id e nd p ay ments, tr1a l a y ~~ n Z �.w i c h 1-'li t h h e 1 d i.\ n d r~ e m i t t e d t o t h e r~ e s p on d en t withholding tax in the amount of P525, 000.00 on Sept e mber .t 1 ' a nd P5c~o::-, 000. ( H) on Aug u st 10, 1'390 <Exhibit s both instan ces , t he tax "F" .:md " I" >. In withheld a nd remitt ~d were co mp uted at the rate o f 35~ o f the cash dividend payments as b ot~ ne out by the v ari ou s payment co n f i r~ mat ion rece ip ts and cert i fication of remittance issued b y t h e re s pon den t <Ex hibit s "E", "F", "G", " H", " I" and "J" ). On September~ 3, 1'39 1, petitionet~ s, th r~ough a udito r~s , Syc i p , Velayo and Compan y , filed with the respo nd ent a written c l ai m for the ref u nd o r i ssuance of

DECISION C.T.A Case No. 4643 a tax ct�' edi t -3 the amount of PE.OO,OOO.OO cet' tificatE~ in t'<~pt'esenting the a ll eged ovet'payment of withholding tax by ;::~01- <Ex h i bit "L" >� ,. To date, howevet', t'espondent ~s neither granted nor acted upon petitioners' claim for Dn <-� eptembet' 10, 1991, petitionet' filed the instant petition for review <pp. 1- 4, CTR records). DUt' j_ n ~l t h e h ea t' l. n g o f t h e cas e at bar, pet i t i on e t' s and submitt ed document at'y and testimonial evidence. On the other hand, respondent failed to present .::my evidence c:\nd was constt' ained to submit the case based on the pleadings. The :it; suE~s t'aised fot' t' esolution of thi s Cotwt are th~: follov.�ing: (1) Whethet~ dividend payments by a domestic cot' pOt' at ion to a non - reside nt foreign COt''p!H' at ion iS s�.tbj ect to a withholding tax of 351- Ot' 151-, <2> Whether p e titioner is entitled to the ref und of PE.OO,OOO.OO, representing their alleged ovet'paid ~.-<dthholding tax fot' the yeat'S 1 r:J8'3 and 1 '3'30. Respondent contends th a t dividend payments made by petitioner Malayan Zurich Insurance Co., Inc., to its co- petitione r Zurich In s urance Co. are subject to 351- final withholding tc.'\x ptwsuant to Section 25(b) (1) of the tax Code , to wit: "SECTION .�..--.:c.J: . Rates of tax on foreign corporation.

DECISION _, C.T. A Cas e No. 4643 XXX - 4- XXX XXX (b) 1\lon - t~e sident fot~ eign cot~ pot~ations. (1) In g e neral. Unle ss otherwise provided, a foreign corporation not engaged in trade or bu siness in the Philippines sha ll pay a tax eq uc.~_l _i.Q 35'1- of tlli__gt~o s s income rec eive d during each taxable y ear fro m all sources "'1ithin t h e Phj.lippi ne s such as intet~est, !Ll':{..t�1..~�1~, r�ent s, t~oya 1ties, sa l at~i e s premises ( except reinsurance premiums>, ann uitie s , e mol ume nts Ot' othet' fixed or determinable ;ann�..tc.'\1 1 pet~iodic.:d ot~ c.:lsual gains, profi ts and inc()me, and capitii\\1 gains, except capita l gain s Sl..\b,ject to t;a x �..mdet~ s �.tbp ar~a gt~ aph 5<c>". <Un derscoring supp l ied. > XXX XXX XXX On the peti tioner tnvoked Section 25 <b > <5 > ( B > of � he m< Code in suppo t~t of its stand , which r�eads: SECTION 25. Rates of tax on corpot�at ion �. XXX XXX XXX <b) Non - resident for eign corpo rat ions. XXX XXX XXX <5> Ta>< on cer t ain incomes rece ived by non t��es ident foreign eorporati~ns. ><><X XXH XXX <B> On dividend s received from a domestic coq.JIH'<-~tio n l i ab l e to ta>< �.~ndet' t h i s Chapter~, the_ _!_~ hajl be 1tl'1- of the dividends receiv ed whi.ch s h a ll b e co ll ecte d and paid as provided in Section 50( a ) of the National Internal F~even�.te Code, <:As "" "' er1ded, subject to the condi tion that the co �.mtr~ y i n which the non - r~esi<Je n t fo r~eig n ct:n~ pcn�atiOT1 � s domiciled shall allow a cr�� edit against the tax dlle from the nonre si dent foreig n corporation, ~axes deemed to h a ve bee n pa id in the Philippines equivalent

DECISION C.T.A Case No. 4643 -5 to 20~ which represents the differenc e between the t~egular~ tax <:35~> on cot~po t' ati ons and the tax <15~) on dividends as provid ed in this SIJbpat'a~p' aph;" <Und erscor~ i ng s upp 1 i ed. ) XXX XXX XXX It is i mmedi a tel.'y appa t"ent fro m a reading of t he of law tha t Section 25 (b) ( 1> pe r"tains in genet"a l to l�"ates of tax on gross income t"eceived by ncm - r"esident fot"eig n corporations from all wi th:l. 1'1 the P hilipp ines whereas Section 25(b) (5) ()3) '"Pec ifi c~lly to tax on divid ends received by a nan - ~ ~s idant for gn corporati on from a domesti c corporation. in statutot' Y co n str~l..\ ction th<;~t whtn"e ther~e ar e two provisions, one of which is sp~c � al and the other general, the special pl-'Ovisio n , must be co n str~ ued C\S ~otl s tituting an exception vs. Apost ol, J.~'� Phi 1. 3 8>. o "'void confli ct. <Lichauco The g e neral rule is that the Ph ilipp in ~ inco me of n on - r esident foreign corpora tion s sha ll be Sl.tb .ject to t he tax t~ ate of 35~ , with cet'tain exceptions, suc h as div id e nd s t~ecei v ed from a domestic cot"pot"ation b y a non -- t~ esident for~eign corporation which s h a ll taxed .;:o. t l w't. st.tbj er..: t t o the condition that the countt~y in which the nont'esident foreign corpm"atio n is domi c il ed sht:\ll. allow a ct�edit aga � nst the tax dr.te from it, tax es deem e d to h;::we been pa id in the Phili ppines eq uiva le nt to 20't. which represents the difference between

DECISION C.T.A Case No . 4643 - 6- the t'egulat' tax (351-> <Jn cot'pOt'atio n s a nd the tax (151.) o n d i vide r1 cj s, Th e above i n t et'pt�etatio n finds s u p pot' t ,. in t' ulif\$Js iss ued by the Bu r eau of I n tern a l Revenue <BIR> that d i v i d end s t' e c e i v e d b y n on - t' e s i d e n t f o t' e i g n corp o t' at i on s f r o m a domestic cor po ration s h a l l be subject to a wit hh ol di n g tax o 15'il. p rcvided th e co nd it ion s st ipulated by l e'l.vl c\t'l? met . l1�..1otr~ d hf.' l'' el,\lld et' is BIR Rul' n g No . 208 - 8 '3 , dated 11 J: n t"' !i.' ply het-et, hsve t h e ho not' to in " OI ' !TI Y<H\ th m't 1.mdet' Sect i on 25 ( b ) <5> <B > o f the Tax C<lde , as a me nded, di vide nd s r ec eived by non - resi d e nt fore � n corporation s f rom a d omest ' c corpor. io n sha ll b e subject to a withho l dinJ tcl.~H of 1. 5~ of t h e d i v i dends r eceive d s u bj&ct ta th o condi t i on that t he cc> utYb'Y in wh ic h t:h� tton - t'�sident fot'ei gn c ot'pOri:.<.titm is do micil(H.:J s hal l al low a cred i t a g ainst t h e ta~ du e f ro m the non - resid e nt f o t ' e i g n c CH' p ot' at i on , t ax e s d e e me d t o h a v e be en paid in t h e P h il i ppines e qu ivale nt t o 20~ whi c h t~ epl�'esents t h e diffet'ence betwee n the r~ egular~ t a x ( 35 1. ) on c ot' p Ot'a t ion$ and t he tax <15~> on d i v i d e nd s . T h us , i f t h e c o u n t t~ y o f do mi c i 1 e o f the rec ipient corporation a llows as credit again s t the tax imposable by it as amount equiv a l e n t to 201. of the dividends remitted to c ot' p o 'r' at i on s d o mi c i 1 e d t h e t~ e i n , t h e d i v i d end s so re mi t t e d are s ubj ec t to a withholding tax at the rate of 151. only. f3 ince this ()ffice t1 a s issued a t~uling on Febt' U i~t' Y 23, 1'378, th a t the tax dividends to be t-� emit t ed to Amer- i ca n Expt'e s s Inter~national Development Co., Ltd. Caym a n Islands is subject only to the 151. withholding tax under then Section 24 (b) of the Tax Code, as amended based on the certification of the Financial Secretary of Cayman Islands that dividends 1 I) 0

DECISION C.T.A Case No. 4643 -7 t~ e c ~? j_ v e d h~ o m s o tw c e s o u t s i d e t h e Cay man .I I slands and any other income of a Cay man Islc.'\tlds Company is not subject to any form of taxation under the laws of the Cayman Islands' as vJell as a cer'tification dated September~ 14, 1989 of Naples and Calder', Attor~neys-at-law in Cayman Islands that the Government of the Cayman Islands will not under the existing laws pf the Cay man Island, impose any tax, levy, withholding or deduction on dividend income received by the Fund from companies incorporated in jurisdiction outside the Cayman Islands, i11cl�.tding the Philippines ' the dividends to be t"' emitted to the Manila F�.md (Cc.'\ylll t-:.\n) Limited is s ubject only to the 15'1- wi.thholding t<i:\x rJI.tt"Sllii:\nt to S ection 25 <b> <5> <B> of the Tax Code , as amended". J.n BlR F~llling No. 178- 85 dated October~ 4, 1985, the respondent has ruled as follows : "In ~"' !.1ply, please be infot"'med that since you ar� e �?. s u b s i d i a t' y of' Dunlo I nt et"'nat ion a 1 ~) . c. of Switz et" 1a tid, you will be r~emitt ing pt'O fitS Ot' c.1ividends to the said count r~y. Hence the HP�-�UI-\ Ti:.'\X Tt"'eat y cannot be C.'\ppl i ed. On the assumption that residerlts of Swit:zet~}i-.'\nd .:~r'e <\1\lso shat"' eholdet"'s of yam~ compc.uly, considr.n~ ing that �the Phi 1 ippines does not have a tax b "' e a ty with Switzet'land, Sec. 24 (b) (1) \iii) of the Tax Code will apply to dividends re mit ted to that country. 8 .G.�..Q.!::...d tJ:L9..lli___i�l!.td s i nee _ Switzer 1and does not il!!..f.>O~'\D.J! ta>< on dividends received from for~ eigrl sotn�ces, <BIR Ruling No. 30- 80 dated f_g_qy~uat~ y__ 15'1 1 9BC~)_,_ _t_[le dividends to be remitted by your company to Switzerland will be ?'-!...Q.i.Q_ct to withhcllc;l..l..!!9 tax at the t~ate of 15'1-". <Unde r~scot"'ing supplied.) It is settled l'"'�.ll e that constr�uction placed upon a law by the offici.:\ls in chat' ge of enfor"'cing the sa me weight. <At las Consolidated Mi ning

DECISION C.T.A Case No. 4643 - 8- .I Development corporation vs. Court of Appeals, 182 SCRA 155). T h e G up~~ e me Co 1.1 ~.. t has s i mi 1 at~ 1 y r 1.1 1 e d in t h e cas e ~o f "' Commissioner of Internal Revenue vs. Wander Phils., In~., L-58375, April 15, 1988, 160 SCRA 573, that dividend remittances to Glat' O f3. A. Ltd., a Swiss cor~pot~ation not engaged tn tr-ade at' business in the Philippines, by its t-Jholly���clwned, subsi.c.:li.::n� y Wandet� Phi ls. Inc, a domestic s ince Switzerland does not impose a tax on dividend rece ived from the Philippine s . The relevant portion of the decision reads: "In the instant case, Switzer'land did not impose any tax in the dividends r'eceived by G 1 at"o � (-k cot"d i n g 1 y , Wand e r" c 1 a i ms t hat f u 1 1 Ct"edit is gr-anted and not met'ely Cr'edit equivalent to C::01-. Petitioner', on the other hand, avet��s the tax spat'ing credit is applicab le only if the countr-y of the par'ent corporation allows a foreign tax credit not only fot' the 15 per-centage-point por-tion actually paid but also fat' thf~ equivalent 20 percent-point portion spared, waived or otherwise deemed as if paid in the Philippines; that respondent doe s not cite anywhere a Swiss law to the effect that in case where a foreign tax, s�..tch as the Philippine 351- dividend tax, i s s pat" e d , wa i v e d or' o t h e t' wi s e con s i d e r' e d as i f pc:dd in t.-Jhole Ot' in pat't, by the for'e ign co untry, a Swiss foreign-tax credit would be allovJed fot~ the whole or fat' the pc:n-t, as the case may be, of the fot'eign tax so spar-ed or wa ived or considered as if paid by the foreign countr- y. "While it may be true that claims for t' e fund at'e constt'ued stt'ictly against the claimant, neverthel ess, the fact that

DECISI ON C.T.A Case No. 4643 - 9- Swit z e r land did not impose any tax o r the dividends received by Glaro fr om the Philippines should be considered as a f ull sati�:; faction of �the given condition. For, a s aptly stated by n?sponde n t Com~t, to deny private respo n de n t the privilege t o withhold on l y 151- t;a>< pr~ rJvic.1ed for under~ Pres id e nti a l Dect' ee No. 3E.':l, amending Section 2 4(b) <1> o f the Tax Code, would r~ un counter~ t o th e ver~ y sph' it cHid i n te n t of seic:l law a nd def i n i tely wi l l a dversely affect foreign corporatio n s' interest here and discourage t hem f rom inve s ting capita l in our country. Besides , it is signifi c ant to note that the cClnclt..tsion r i::\ched by ~~ esponden t C o ur t i s but �.�. con f i t ' ma t i on o f h e May 1 9, 1 '3 7 7 r u 1 i n g of petitioner� th ,"!! t "since the Swiss Gov e t'nm en t doe s not impose a ny t a x on the divide n ds t o be r~ ecel.ved by �the st;\id pat' t'H't COt'poration i n t h e PhiU. ppin ~~ s, that ondititHI imposed u nder the abovD - mentianed section is sat i sf ied. Accot' dingly, the w ��thholding tax r�ate of 15'1- is h er� e by .., f f i t'frt e d. 11 lhe inevitable con c lu s ion that can be d rawn fo r m the fore g oing di s c u ss i on is that under our jur i s diction d i v i d end p c\ y men t s ma d e by pet i t i o n e t' Ma 1 a y an Zu t' i c h t o it s c o - p e ti ti one r� Zut� i ch In s ut�a n c e at� e subject to 151- fi n a l wi th h ol d i n g taM onl y si n ce S witzer l a nd, the country .I o n 1-'Jhi c h the l a tt et' i s do mici le, d oe s no t impo s e a ny tax on di v id�!nds. To b l? ~~ ntitl e d t o a t'ef und, petitionet' in a ddition to being ab le to point to s ome positive provision of law ct�� eating s u c h t' ight mu s t a l s o be able to establish the fac t o f pay me nt of t h e t ax so ught to be refunded as well as th e fil i ng of claim fo r r e fund within the reglementary pet� iod.

DECISION C.T.A Cas e No. 4643 - 10 - ~") s bot-�n e o ut by t h e e v i d e n ce s ubmitted to thi s Court b y Ma l aya n Zurich, it h as withh el d and r e mitted to ,. r--espondent the 35Y. f"na l withholding ta x on di vide~d s pai d t o Zut~ich Inst.w<.H1cf:1 in 1989 and 1'390 a mount i ng to P525 , ooo.oo fer each year. Offered a s evidence and a dm itte d by this Court ar~ the followin g e xhibit s , viz: s'lid.~~nce for t>'la l a yan Zurich .lnsttrance Co. , Inc., ''E " Monthly r~e m itta n ce R e tur~ n of I n come Taxes Wi t hheld for Au g u s t 1'38'3 "filed wi th BIR Cll'l Septe m be r~ 11, 1'38'3 showing the P525, 000. 00 fina l withho l ding tax due on the P1,50o, oo.oo cash divi d end payment to Zurich I n suranc e Compan y IIFII Ce nt ra l Bank Confirmation F~ e ceipt NO. 18023855 d ate d Septemb e r 11, 1 '3~L~ show in g the r~ emittance and payme n t to BI R of P525,000.00 "Gu 1 989 f~n n �Ja 1 Ret ur~ n of Final Inco me Tax With h eld file d with BIR on Janttc.<.t-� y J. E., 1990 estab lishing the for~e g o � n g IIH II Mont h ly F~emittanr:e of Income Taxes Withheld for Ju ly 1'3'30 filed wi t h t he BIR on Augu s t 10, 1'3'30 s howing the P 525 ,000.00 final withholding t ax due on the P1,50o ,ooo . oo c a s h dividend payment to Zuri c h Insurance Company I II II Ce nt r al Ba nk Confirmation Receipt No . 2 0E.3 0 3 22 d a ted August 10, 1_'3 '30 showing th e r~emittance and payment to BIR of P525,000.00 IIJII 1 '3'3 0 (~nnual Ret ur~n of Final Income Tax Withheld filed with BIR on ,J i:.<. nuat~ y 10, 19'31 establishing the fot' egoing 1 I ) I) ' )

DECISION C.T.A Case No. 4643 - 11 - "I�\ II BIR Revenue Accounting Division Cet~tification dated Januat'Y 23, 1'::3'32 certifying that Malayan Zut~ich In s1..wance Co. actually t~ e mi t t e d t h e t a>< e s w i t h h e 1d and p a i d �J n d e t~ Ex h i b i t s F 11 11 and 11 I " The amount sought to be refunded by petitioners was I arrived at using the following computation : Correct WT Rate-15~ Overpav�ent 20~ P1,500,000.00 P525,000.00 P225,000.00 P300,000.00 1' 500, 000. 00 525,000.00 225,000.00 Total Refund - clai1ed J90.000.00 P600, 000. 00 The written claim for refund was fil ed by petitioner with the BIF~ Appellate Division on Septembet' 3 , 1'3'31 covet'ing the withholding tax ovet'paid on September 11, J 1 '38'3 and fluqust 10, _19'30. The instant petition for t~eview was filed with this Court on Septembet' 10, 1'3'31. Thel'' e is no question that the two<2 > year prescriptive pet~iod for' cL:d ml. ll ~' f) f!..tnd of OVfH"Pil.'\id taxes as pt'ovided ,I undet~ Section i:::3() of �t heT a>< C od e, as a mended have been com pl. i e d 1r1 i t h. Resp ondent's oppclsitio n to the gt'ant of t'efund is b <:1 s e d o n t h e t' e q u j, t' e me n t s s e t f o t' t h i n B I R Rul i n g N o � 080 - '32 dated M ~ t~ d.t_lJ _ j :Ei!~::)_� when the refund sought pertain s to years 1989 � nd 1990. Having p ositively e s tablished that all the requisites for entitlement to ref und have been met, petitioner is entitled to the refund being claimed. -

DECISION C.T.A Case No. 4643 WHEREFORE, - 12 - Intet'nal t� s p o nd etlt: Co mn1 i ss i onet' of to the pet U ; io ne t" IYi a l a ycH�l Zu~~ i c h In s urance Company, In,., ' the amount of . PGOO, 000. 00 rept'esent ing overpaid withholding tax on divid e nds paid for the calendar years 198'3 and 1 '390. SO ORDERED. Quezon ~ i ty, Metro Mani a, December 2 4, 1993. ,I ~........z.:; Q .~ ERNESTO D. ACOSTA Presiding Judge CERTJ:FJ:CATJ:ON I het~eby cet'tify that this decision was t�eac h ed aftet�' due consultation between the membet~s of the Co1.1rt of Tax Appeals in accot~dance with Sectio n 13, f.kticle VIII of the Constitution. L~(l.C~ ERNESTO D. ACOSTA Pt~esiding Judge Court of Tax App eals 1 ') Q ( j