CTA Case No. 5644 (Decision)

/ REPUBLIC OF THE PHILIPPINES COURT OF TA."X APPEALS QUEZON CITY SCIENCE PARK OF TI-IE PHILIPPINES INC. as withholding agent of FREMONT INVESTORS, INC. (formerly Bechtel), Petitioner, -versus- C.T.A. CASE NO. 5644 CO:MJ\HSSIONER OF INTERNAL _;t; Promulgated: RIVENUE, MAR 2 0 2000 Respondent. x- - - - - - -- - - -- - -- -- - - - - - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - - - -x DECISION Petitioner seeks to enforce by way of this pelition a claim for refund of alleged ctToneously withheld and remitted tax on cash dividends in the amount of P2,656,674.06 for the period covering the years 1996 and 1997. Petitioner is a corporation duly organized and existing under and by virtue of the laws of the Philippines. The controversy at bar arose from Petitioner's withholding of cash cliviclencb for one of its shareholders, Fremont Investors, Inc. a foreign corporation in the total amount ofP26,567,357.61 which was alleged to have been enoneously subjected to an expanded withholding tax rate of 25%> instead of 5o/?, as claimed by the Petitioner. Relyig heavily on the decision of the Com1 of Tax Appea ls (not Supreme Court as n enoneously stated by the Petitioner in its Petition for Review) in the case of General Electric Philippines Meter & Investment Co. Inc. vs. Commissioner of Intemal Revenue, � I ;� �:'.]> ! .

DECISION- CTA CASE NO. 5644 PAGE2 CTA Case No. 4878, March 28, 1995, where we categorically ruled that the applicable withlwlding tax rat shall be 15%, citing the Procter and Gamble case promulgated on December 2, 1991, Petitioner elevated its grievance io this Court on May 22, 1998 after th Respondent failed to act on its claim for refund fikd on April 1, 1998 . The claimed amount of P2,656,674.06 computed by petitioner is detailed as follows, to wit: Date of Amount of Cash 25%EWT 15%J EWT Refundable Payment Dividend Amount 4- 96 P9,962,686. 50 P2,490,617.17 Pl,494,402.97 p 996,214.20 10-96 6,641,839.40 1,660,459.85 996,275.91 664,183.94 4-97 9 ,962,759.10 2,490,689. 78 996,275.92 1,494,413.87 - P- 2,6- 56,674.06 - - - - ----------- -- In his Answer, Respondent denied Petitioner's asset1ions and i.nteqJosecl the following Special and Affinnative Defenses, to wit: 5. Petitioner has no cause of action as the petition docs not all eged (sic) the dates when the taxes sought to be refumkd were actually paid; 6. The judicial action for the refund of taxes paid before May 22, 1996 has already prescribed pursuant to Section 230 (now 229) of the NIRC, as amended; 7. In an action for tax refund, the burden is upon the taxpayer to prove that he is entitled to the refund and failure to sustain the same is f atal to the action for refund; 8. Claims for refund are constmed stric1ly against the claimant, the same being in the nature of exemption fiom t<1xes. (CIR vs, Ledesma, 31 SCRA 95, Ivianila Electric Co. vs. CIR, 67 SCRA 35); 9. The taxes sought to be refimded wete collected in accordance with law, mles and regulations.

DECISION- CTA CASE NO. 5644 PAGE3 Likewise, in an oral argument dated April 23, 1999, Respondent maintains the view that the applicable rate should be 25�o and not 15o of the amount remitted pursuant to the R.P.-OS Tax Treaty. Opon the other hand, Petitioner asserts that the tax rate should be 15% pmsuant to the National Internal Revenue Code. To bolster its stance, Petitioner presented as evidence, among ol'hers, the following exhibits, to wit: Exh. A " '' to A-3-a - to prove that, as authenticated by State Secretary of Califomia, Fremont Investors Inc. is a resident cmvoration of the State of Califomia, USA; Exh. "B" to "B-1" - to prove that, as authenticated by State Secretary of Califomia, Fremont Investors, Inc. is a duly incorporated corporation in the State of Nevada, USA; Exh. "D-l" - to prove that, as certiJi.ed by the Secretary of State of Nevada, the restated Articles of Incorporation of Fremont Group, Inc. is duly filed and registered with the office of the Secretary of State of Nevada; Exh. "E-1" to E-2 - to prove that in the alpha list of Expanded Taxes & Income Ta\:es \Vithheld Bechtel Investments (now Fremont Investors, Inc.) Cash Dividend of P9,962, 759.11 was etmneouly subjected to a 25% rate in the sum of P2,490,689.78 on withholding tax on cash dividends paid to a foreign corporation; Exh. "F" - to prove that on November 1996, SPPI filed its BIH.. Fom1 No. 1743-W for the qua1�ter ending on October 1996; Exh. "F" to "F-1" - to prove that in the alpha list of Expanded Ta'\es and Income Taxes Withheld Bechtel Investments (now Fremont Investors, Inc.) Cash dividend of P6,641,839.540 vv�as erroneously subjected to a 25% rate in the sum of Pl,660,459.85 on withholding tax on cash dividends paid to foreign coqJoration; , . ' ) .. , . ,_ ! t)

DECISION- CTA CASE NO. 5644 PAGE4 Exh. "G" - to prove that on May 27, 1997, SPPI filed its Bill. form No. 1743-W for the quarter ending on Apri11 997; Exh. "G-1" - to prove that the sum of P9,029,825.45 \Vas remitted and paid to the Bil.l tlu�ough its authorized agent, Far East Bank and Trust Company; Exh. "G-2" to "G-3" -to prove that in the alpha list of Expanded and Income Taxes withheld Fremont Investors' Cash Dividend of P9,962,759.10 was enoneously subjected to a 25�o rate in the sum of P2,490,689.78 on withholding tax on cash dividend paid to foreign coq)Oration; Exh. "I'' to "-1 '' - to prove that, as reflect(;d in its 1997 Fina.ncial Statements issued by SGV & Co., SPPI has paid cash dividends to its stockholders for 1996 and 1997; Exh. "J" - to prove that on April 1, 1998 Fremont Investors, Inc. has filed its letter claim for refund of the enoneously wi thhelcl and remitted withholding tax on its cash dividends received from SPPI; and that the filing was within the 2-year reglementary period; On November 11, 1999, both parties having failed to file their respective memorandum within the period given by this Cour1, this case was considered submitted for decision. Posed for our consideration now are the following issues: a) Whether or not the applicable withholding tax rate for dividends paid by a Philippine CoqJoration to its U.S.-incorvorated corporations is 15% instead of 25o; b) Whether or not the Petitioner was able to substantiate its claim for refund. Anent the :first issue, the Supreme Com1, in the case of Commissioner of Intem:-1 Revenue vs. Procter and Gamble Philippines l\1anufacturi.ng Corporation, 204 SCRA 377, bearing the same legal and factual milieu as the case at bar, had the occasion to rule in this wise ,thus: 'i 1 ' �-� u

.. DECISION- CTA CASE NO. 5644 PAGE5 "1. We tum to the principal substantive question before us: the applicability to the dividend remittances by P & G-Phil to P & G-USA of the fifteen percent (15'o) tax rate provided for in the following portion of Section 24(b)(l) of the NIRC: (a) Tal.: on foreign corporations.- (J) Non-resident corporation - A foreign COll_)Oration not engaged in trade and bu<;iness in the Philippines, ..., shall pay a tax equal to 35%> of the gross income receipt during its taxable year fran\ all sources \Vithin the Philippines, as . . dividends ..... .Provided, still further, that on dividends received from a domestic corporation liable to tax under this Chapter, the tax shall be 15'o of dividends, which shall be collected and paid as provided in Section 53(d) of this Code, subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign COll_)oration, taxes deemed to have been paid in the Philippines equivalent to 20�& which represents the differences between the regular tax (35%) on corporations and the tax (15�,o) on dividends as provided in this Section ..." 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 stockholders cmvoration 'shall allow' such foreign corporation a tax credit for 'taxes deemed paid in the Philippines,' applicable against the tax payable to the domiciliary country by the foreign stockholder corporations. In other words, in the instant case, the reduced J{fieen percent (15%) dividend tax rate is applicable !l the USA "shall allmv' to P&G-USA a tax credit for 'taxes deemed paid in the Philippines' applicabie against the US /aJ:;es 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 (35o) dividend tax rate and the preferred fifteen percent (15�o) dividend tax rate. It is important to note that Section 24(b)(l), NIRC, does not require that the US must give a� deemed pcid tax credit for the dividend Ia\� (20 percentage points) received by the Philippines in making applicable the prefenecl dividend tax rate of fifteen percent (15%). In other words, our NIRC does not require that the US tax law deem the parent-corporation to have paid the twenty (20) percentage points of dividend ta1; 'rvaived by the Philippines. The NIRC only requires that the US 'shall allow' P&G-USA a "deemed paid" tax I . J' 'I - !I

DECISION- CTA CASE NO. 5644 PAGE6 credit in an amount equivalent to the twen(v (20) percentage points waived by the Philippines." (Emphasis supplied.) Prescinding from the above, it could be safely infened that the intention of the law is to at1ract foreign investors to this country by reducing the tax rate on cash dividends to 15% percent. Having settled the legal issue, we now proceed to Petitioner's compliance vvith the substantiation rule. After a careful scmtiny of all the evidence on record, this Court finds the claim meritorious. Contrary to Respondent's assettion in his AnsYver that refund of taxes paid before May 22, 1996 has already prescribed, it must be bome in mind that the reckoning petiod for refund of cash dividends shall be the date of remittance of tax payment to the BIR. Hence, Petitioner has seasonably filed its claim for refund of its withholding tax payments made on April 1996, the same having been duly remitted to the Burc:au of Internal Revenue on May 24, 1996, (Exhibit "E"); November 24, 1996 (Exhibit "F'') and May 27, 1997 (Exhibit "G"), the dates when Petitioner filed its Monthly Remittmce Returns oflncome Tax Withheld (BIR.Form 1743-W). Petitioner presented in evidence its N1onthly Remittance Returns of Income Tax Withheld attaching thereto the lists of corporation, which includes Fremont Investors, Inc., and individuals for whom the taxes have been \\ ith. held (Exh. E, E-2, F, F-2, G, G- 2). After a closer examination the Court found the same to be authentic and reflective of the fact that Petitioner, indeed, withheld and remitted to the Respondent an amount equivalent to 25% expanded withholding tax rate imposed on cash dividends declared by IJ !U

DECISION- CTA CASE NO. 5644 PAGE 7 the Petitioner, instead of the 15& tax rate as laid clown by the Supreme Com1 in the Procter and Gamble Case. Accordingly, for having overcome the burden of proof to show entitlement to the relief prayed for, the claim for refund is granted. 'WHEREFORE, in the light of all the foregoing, Respondent IS hereby ORDERED to REFUND or issue a Tax Credit Cet1ificate in favor of the Petitioner the amount of P2,656,674.06, representing overpaid withholding taxes at source on cash dividends paid and remitted to Fremont Investors, Inc., for the taxable years 1996 and 1997. SO ORDERED. o WE CONCUR: ERNESTO D. ACOSTA Presiding Judge l�1 j ssoc ate vF%;RA 0. RAMON DE {/ Associate Judge CERTIFICATIO.:\T I hereby certif-y that this decision was reached after due consultation between the members of the C ourt of Tax Appeals in accordance with_Section 13, Atiicle VIII of the Constitution. G-o. CLrL ERNESTO D. ACOSTA Presiding Judge �)I !., ��J.