CTA Case No. 5173 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY GENERAL MILLING CORPORATION, Petitioner, - versus - I' COMMISSIONER OF INTERNAL REVENUE, C.T.A. CASE NO. 5173 Respondent. J4; pr omu gate : ' -- - FB 1 _ -'1-.Q ;Q._;:7 ._.; ___ _ X - - -- - -- - --- - - --- --- -X DECISION Before U for consideration Is a petition for the issuance of tax credit in the aggregate amount of P2,328,257.11 allegedly representing overpaid withholding taxes on royalty and .r-�� covering technical assistance fees various periods from January 1, 1993 to September 30, 1993. Petitioner Is a domestic corporation organized and existing under and by virtue of Philippine laws. It is principally engaged in the business of manufacturing and marketing flour, milk and other dairy products, yeasts, and other food products. This petition for review embraces three separate claims for refund which were all originally filed by the petiti . oner with the Bureau of InternaI Revenue <BIR) none of which received any response from said office prompting 174

DECISION - C.T.A. CASE NO. 5173 -2 - herein petitioner to consolidate all these claims before this Court on November 15, 1994. The foremost claim for refund fi I ed by the petitioner with the BIR on September 29, 1993 <Exhibit "A"), embodied in a letter, dated September 28, 1993, pertains to alleged overpaid Income tax withheld on royalties remitted to Universal Foods Corporation (UFC), a business entity organized and based In Wisconsin, USA. Petitioner is a licensee of UFC and In consideration of its right . products through the use to manufacture yeast of the technology of UFC, it was obi iged to pay a royalty fee of 2% of the net sales of the Iicensed .products it . ..- " was able to manufacture and sell. However, on August 27, 1992, the Licensing and Technical Assistance Agreement between petitioner and UFC was amended reducing the royalty fees from 2% to 1% of the net sales f the Iicensed products and correspondingly provided for a retroactive application of said reduction starting July 1, 1992. Petitioner alleged that since it had paid withholding tax based on the 2% royalty fees in the total sum of P455,206.32 for the period July 1, 1992 to December 31, 1992, there was an overpayment of withholding tax in the sum of P227,603.32 on account of the reduction in royalty fees brought about by the amendment, reducing the royalty fees to 1%.

DECISION - C.T.A. CASE NO. 5173 -3 - The other claim for refund, dated September 1, 1993 (Exhibit "B"), represents overpayment of withholding tax for the period January 1, 1992 to September, 1992 on royalty and technical assistance fees paid to Campina Melkunie BV United Dairymen (formerly Holland Canned Milk InternationaI>, a foreign corporation based In Netherlands. Under this Iicensing agreement, petitioner pays 1% royalty to said corporation for the right to manufacture milk products by avaiIing of the latter 's . Petitioner alleges that it trademarks and technology. withheld and remitted 35% income tax on the royalty fees it paid to said foreign corporation from the period ,.,.-- January 1, 1992 to September 30, 1992 in the total amount of P2,215,949.95. MeanwhiIe, the tax treaty between the PhiIippines and the Netherlands came into force on January 1, 1992. Under Article 12(2)(b) of said treaty, the withholding tax on royalty paid by a PhiIipplne resident to a resident of Netherlands shal not exceed the 15% rate imposed under the Tax Code, as amended. In the Iight of this provision, petitioner filed on behalf of Camplna Melkunie BV, a claim for tax credit of the overpaid ,r taxes it had paid In the amount of withholding P1,266,257.11 with the International Tax Affairs Division of the Bureau of InternaI Revenue.

DECISION - C.T.A. CASE NO. 5173 -4- The final claim for refund included in this petition was filed with respondent on November 24, 1993 <Exhibit " c " ) representing overpayment of withholding tax on royalty payments made to foreign Iicensors who are residents of the United States in compl lance with Revenue Memorandum Circular (RMC) No. 39-92 which in part provides: "2. Taxpayers who have rei ied on such ruIings, but are not the recipients of such rulings directly providing for the "most favored nation" tax rate of 10% on their royalty payments, and accordingly have failed to withhold the correct taxes on royalties paid to recipients in the United States are deemed to be deficient in their tax payments beginning from such date that they have started _.,. paying the incorrect amount of taxes of 10%/ These taxpayers cannot claim that they have a vested right to such "most favored nation" tax treatment which cannot be given retroactive app I ication. As such, these taxpayers are given not later than October 30, 1992 to amend their withholding tax returns and pay the corresponding taxes, without the penalties...." On July 21, 1993, this Court made the pronouncement in the case of IBM Phillppines, Inc. v. Commissioner of Internal Revenue, CTA Case No. 4308, that royalty payments made to residents of the United States shaI I be sub j ect to only 10% withholding tax under the "most favored nation clause" of the R.P. - U.S. Tax Treaty. Petitioner then filed a claim for tax credit for excess withholding taxes it paid under protest In the total amount of P813,610.46, representing the difference in the

DECISION - C.T.A. CASE NO. 5173 -5- amount of taxes paid at 35% and the amount of tax that should have been paid which was pegged at only 10% of the royalties remitted to residents of the United States. The consolidated claims of the petitioner may thus be summed up as follows: claim dated September 28, 1993 - p 227,608.32 claim dated September 1, 1993 - 1,266,257.11 claim dated November 18, 1993 - 813,610.46 TOTAL P2,328,257.11 In answer to the petition, respondent did not individually .tackle each claim of the petitioner but made a general statement that the claim for refund filed by the petitioner had already prescribed and that the amount of P2,328,257.11 sought to be ,/ properly refunded was ot documented. For purposes of clarity, we shal I discuss each claim for refund separately. The claim, dated September 28, 1993, in the amount of P227,608.32 was premised on the allegation of petitioner that the Licensing and Technical Assistance Agreement it entered into with Universal Foods Corporation <UFC) was amended, resulting in the reduction of royalty fees from 2% to 1% of the net sales of the Iicensed products. Said amendment also provided for a retroactive application of this reduction starting July

DECISION - C.T.A. CASE NO. 5173 -6 - 1 ' 1992. The corresponding decrease in the taxable base resulted in a lower withholding tax rate, thus an overpayment occurred which petitioner asserts to be refundable. Petitioner was able to prove, among others, the reduction of the royalty fees from 2% to 1% by presenting the "Amended Licensing and Technical Assistance Agreement" which provided that royalty fees shalI be lowered from 2% to 1% of the net sales of the I icensed . sold <Exhibits "A-1" and "A-1- products manufactured and a" > � Petitioner also presented the Monthly Remittance Returns of Income Taxes Withheld (BIR Form 1,7.,. 4r� 3W) for the "A-16") period Ju I y to December 1992 <Exhibits "A-3" to to prove its remittance of the withholding taxes due to the Bureau of Internal Revenue. However, in the face of the evidence presented by the petitioner, this Court is not inc I ined to grant petitioner 's request for tax credit ll in the amount of P227,603.32. This denial is predicated on its failure to show that the resulting overpaid royalties comprising the excess 1% royalty fees after the reduction and previously remitted to UFC, have been actually repatriated or remitted back to the icensee, herein petitioner.

DECISION - C.T.A. CASE NO. 51 7 3 -7- No evidence whatsoever was presented to establish the return of the excess royalties if indeed the overpaid royalties were given back by UFC to the petitioner. We cannot simply rely on the amended Licensing and Technical Assistance Agreement offered in evidence by the petitioner . The agreement is only an expression of the wiII of the parties. Petitioner 's right to the claims can be required of the government only after it has proven, without doubt, that it was so reimbursed with the excess . fees. Evidence on record, however, 1% royalty does not bear this out. The undisputed fact stiI I remains that petitioner actually paid 2% royalty fees �" " despite the existence of the agreement which, to the mind of this Court, has not been properly demonstrated to have been implemented or consummated by the parties to the agreement. It Is the paramount duty of this Court to guard against the possibiIity of granting claims based on aIIeged reduced roya Ity fees founded on an amended agreement which, in truth, may reveal eventuaIIy the fact that no such real reduction ever transpired between the parties. In such a situation, the government wiII be at the losing end.

DECISION - C.T.A. CASE NO. 5173 -8- II The claim for refund, dated September 1, 1993, fi I ed by the petitioner in behalf of Campina Melkunie BV in the amount of P1,266,257.11 based on the reduced withholding tax rate on royalty fees dictated by Article 12{2){b) of the RP-Netherlands Tax Treaty, cannot be given credence as the same is considered to have prescribed In accordance with Section 230 of the Tax Code, which provides as follows: Sec. 230. Recovery of tax erroneously or i I legally collected. No suit or proceeding shaII be maintained in any court for the recovery of any national internal revenue tax hereafter aIIeged to have been erroneousIy or iIIegaIIy assessed or coIIected, or _,-of any penalty claimed to have been collecte d without authority, or of any sum alleged to have been excessive or in any manner wrongfuIIy collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or proceeding shalI be begun after the expiration of two years from the date of payment of ' the tax or penalty regardless of any supervening cause that may aris after payment: Provided, however, That the Commissioner may, even without a written claim therefore refund or credit any tax, where on face of the return upon which payment was made, such payment appears clearly to have been erroneously paid. �Withholding taxes on royalties are considered final taxes as provided in Section 50{a) of the Tax Code, thus: Sec. 50. Withholding of tax at source.

DECISION - C.T.A. CASE NO. 5173 -9- (a) Withholding of final tax on certain incomes. The tax imposed or prescribed by Sections 2Hc), 21(d)(2); 22(a)(2), (b), (c), (d), (e); 24(e)(1), (e)(2)(8), (e)(3); and 25(a)(4), (a)(5), (a)(6)(A), (a)(6)(8), (a)(6)(C)(ii), (b)(1), (b)(2), (b)(3), (b)(4), (b)(5)(A), (b)(5)(8), (b)(5)(C)(ii) of this Code on specified items of income shall be withheld by payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided in Section 51 of the NationaI InternaI Revenue Code, as amended. Section 25(b)(1) mentioned in the above-quoted provision refers to taxes on non-resident foreign corporations one of which pertains to withholding taxes on royalties as in the instant case. The Tax Code also provides that the final withholding taxes mentioned in Section 50 shall be paid within 25 days from the close of each calendar quarter as seen from the of ,..- ,. provision Section 51(a) quoted hereunder as foIIows: Sec. 51. Returns and payment of taxes withheld at source. (a) Quarterly returns and payment of taxes withheld. Taxes deducted and withheld under Section 50 shall be covered by a return and paid to the Revenue District Officer, Collection Agent, or duly authorized treasurer of the city or municipality where the withholding agent has his legal residence or principal place of business, or where the withholding agent is a corporation, where the principal office is located. The taxes deducted and withheld by the withholding agent shalI be held as a special fund in trust for the Government until paid to the collecting officers. Jhe Commissioner of Internal Revenue may, with the approval of the Secretary of Finance, require these withholding agents to pay or deposit the taxes deducted or withheld at more frequent intervals when necessary to protect the interest of the Government. The return for

DECISION - C.T.A. CASE NO. 5173 - 10 - final withholding tax shal be filed and the payment made within 25 days from the close of each caIendar quarter, whiIe the return for creditable withholding taxes shall be filed and the payment made not later than the last day of the month following the close of the quarter during which withholding was made. (as amended by B.P. Big. 41}. However, Revenue Regulations No. 5-85, particularly Section 2 provided for the synchronization of the time and manner of remitting certain taxes, among which are the final taxes mentioned in Section 50(a} <supra>. Section 2 of said Revenue Regulation directs that the . be remitted within ten (10} days after final taxes shall the end of each calendar month with the fiIing of the appropriate returns. Section 2 of Revenue __ Regulations ,....- No. 5-85 is quoted hereunder, thus: Sec. 2. Monthly Return and Remittance Taxes deducted and of Taxes Withheld withheld on: <i > compensation income, ( i i} income payments subject to the creditable (expanded} withholding taxes, and (i I}income subject to final withholding taxes (underscoring supp I ied} shall be remitted within ten (10} days after the end of each calendar month with the fiIing, of the appropriate returns as follows: BIR FORM NO. W-1a - For taxes withheld BIR FORM NO. on Compensation Income 1743-A1 - For Creditable (expanded} withholding taxes

DECISION - C.T.A. CASE NO. 5173 - 11 - BIR FORM NO. For final income taxes withheld In conformance to the aforequoted Revenue Regulation, petitioner herein paid final taxes on the royalties it remitted to UFC covering the period January 1992 to September 1992 on the 10th day after the end of each calendar month. These payments are shown by Exhibit B-20 which contains an itemized list of the payments made by petitioner and the dates when these amounts were paid. Shown hereunder Is the I ist aforementioned: . Check No. Amount Date 02-10-92 005303 5,109,640.71 03-10-92 005683 1,970,885.38 04-10-92 006108 2,300,885.. 81 05-13-92 006489 06-09-92 006976 3 ' 121 ' g'�8 � 06 07-09-92 007768 08-07-92 008898 3,263,859.82 09-08-92 010078 3,021,509.24 10-09-92 010691 4,960,271.33 4,874,151.45 2,893,119.37 Unfortunately, all such claims for refund have alI prescribed as correctly pointed out by the respondent. The present petition for review was fi I ed on November 15, , 1994 and when reckoned from the last date of payment of the tax for the instant claim for refund which was on October 9, 1992 (see above list), the total period of two (2) years, one (1) month and six (6) days have elapsed, wei I beyond the two-year prescriptive period provided for in Section 230 of the Tax Code, (supra).

DECISION - C.T.A. CASE NO. 5173 - 12 - Section 230 of the Tax Code assigns a two-year period within which to institute a claim for refund both in the administrative as weiI as in the j udicial IeveI, and this was clearly explained by the Supreme Court In the case entitled Commissioner of Internal Revenue v. Victorias MiIIing Co. , Inc. , 22 SCRA 12, when it ruled: "We have repeatedly held that the claim for refund with the Bureau of Internal Revenue and the subsequent appeal to the Court of Tax Appeals must be filed within the two-year period. If however, the Collector takes time in dec ding the claim and the period of two years is about to end, the suit or proceeding must be started in the Court of Tax Appeals before the end of the two-year period without awaiting the decision of the Collector." Thus, in the instant case the cIaim . in f'b r refund the total amount of P1,266,257. 11 cannot be granted on the ground of prescription. II I The last claim for refund in the tota I amount of P813,610.46 representing overpaid withholding taxes is premised on petitioner 's theory that royalties paid to US I icensors is sub j ect to only a 10% withholding tax in accordance with this Court's ruling in the case entitled IBM PhiIippines, Inc . v. Commissioner of Internal Revenue, CTA Case No. 4308, dated July 21, 1993. The amount of P813,610.46 represents the aIIeged excess payments made by the petitioner covering the period

DECISION - C.T.A. CASE NO. 5173 - 13 - January 1, 1983 to July 31, 1992 and July 1, 1992 to September 30, 1993, broken down as foIIows: Excess Withholding Tax payments P678,675.51 made for the period Jan. 1, 1983 to July 31, 1992 Excess Withholding Tax payments P134,934.95 made for the period July 1, 1992 P813,610.46 to September 30, 1993 TOTAL A review of the evidence presented by the petitioner leads this Court to conclude that the claims for refund of taxes paid during the period covering January 1, 1983 to October 30, 1992 have already prescribed pursuant to Section 230 of the Tax Code as earlier discussed. It should again be ,,- for refund noted that the judicial cliim via this petition for review was filed on November 15, 1994 which date is beyond the two-year prescriptive period when reckoned from the dates of payment of the two monthly remittance returns for the month of October, 1992 (Exhibit "C-14") and November 11, 1992 <Exhibits "C - 15 " and "A-10"). Therefore, the claims for refund pertaining to payments made outside the two-year period, having the date of November 1 5, 1994 as reference, have aI I prescribed. 'It was also observed by this Court that the payment allegedly made during the month of September, 1993 is not 'I '

DECISION - C.T.A. CASE NO. 5173 - 14 - substantiated by the evidence submitted by the petitioner and consequently denied for lack of proof of payment. As to the rest of the claims that falI within the two-year prescriptive period, this Court finds them with sufficient legal basis and properly supported by the evidence submitted. In the case entitled IBM Phi Iippines, Inc. v. Commissioner of Internal Revenue, CTA Case No. 4308, July 21 1 1993 1 this Court ruled that royalties remitted by a resident of the Phi I ippines to a resident of the United States shal I be sub j ect to a reduced withholding tax rate of 10% and not 25% ear I ier imposed in accprdance with Article 12(2)(b) of .,. / the R.P.-West Germany Tax Treaty. Portions of said decision are quoted hereunder, thus: "This Court is of the persuasion that petitioner's stand is correct and concurs with the opinion rendered by then Commissioner b f II Internal Revenue, Bienvenido Tan, Jr. (BIR Ruling No. 456-88, supra., that under the most favored nation provision of the R.P.-U.S. Tax Treaty (Article 13, paragraph 2(b)(iii), the tax imposable on royalties derived by a resident of the United States from sources within the PhiIippines shall be the lowest rate of Phi I ippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third, state. Article 12, paragraph 2(b) of the R.P.-West , Germany Tax Treaty, provides that royalties arising in the Philippines and paid to a resident of West Germany may also be taxed in the PhiIippines, but the tax so charged shall not exceed 10% of the gross amount of royalties. Said treaty also provides that for

DECISION - C.T.A. CASE NO. 5173 - 15 - as long as the transfer of technology under Phi lppine law, is subject to approval, the Iimitation of the tax rate in case of royalties arising In the Philippines, apply if the contract giving rise to such royalties has been approved by PhiIippine competent authorities." This aforecited ruIing was adopt'ed by this Court in similar other cases such as: 1) Abbot Laboratories <Ph I Iippines) v. Internal Revenue, CTA Case No. Commissioner of 9' 1996; 5119, September 2) S.C. Johnson and Son, Inc. v. No. Commissioner of Internal Revenue, CTA Case 5136, May 7, 1996; 3) Armco MarsteeI AIIoy Corporation v. No. Commissioner of Internal Revenue, CTA Case 5115, February 6, 1996; and 4l G i 1 1 ette < Phi 1 ippines l , 1 n�c�. v. No. Commissioner of Internal Revenue, CTA Case 4248, February 8, 1995. In support of its claim, petitioner has submitted, among others, its application for Rei ief from Double Taxation {BIR Form No. TC-001), the corresponding Monthly Remittance Returns of Income Taxes Withheld {BIR Form 1743W) and the Technical Assistance Agreement duly approved and registered with the Bureau of Patents, Trademarks and Technology Transfer (Exhibits "C-1", "C- 5", "C-16" to "C-35" and "A-1"). In summary, the monthly claims that are to be granted to the petitioner are enumerated hereunder, to wit:

- DECISIO N - C.T.A. CASE N O . 5 1 7 3 - 16 - Payments made at 25% Amount withholding tax: Exhibit P85,322.78 99,162.70 November 1992 C-16, 17 25,054.97 December 1992 C-18, 19 7,646.69 J anu ary 1993 40,799.69 Feb ru ary 1993 C-21 11,410.44 March 1993 C-23 7,528.47 ApriI 1993 C-24, 25 4,066.29 May 1993 C-26, 27 8,451.02 June 1993 C-29 11512.42 Ju Iy 1993 C-31 Au gu st 1993 C-33 C- 35 Total P290,955.47 Les s: 10% Withholding tax on Royalties un der the "Mo st F avo red N ation Clau se": Novembe-r 1992 P 341,291.12 December 1992 396,650.78 J anu ary 1993 77,119.94 Feb ru ary 1993 105,537.92 March 1993 163,200.77 ApriI 1993 93,335.75 May 1993 49,698.87 June 1993 37,296.17 Ju ly 1993 56,695.08 Au gu st 1993 291041.70 Total P1,349,868.10 134,986.81 Mu lti ply b y 10% P155,968.66 Overpayment/Amount av aiIable fo r tax c redit WHEREFORE, in v i ew of the fo reg o in g p rem i s es, on l y the c l ai m fo r refu n d, d ated N o v e m b er 1 8 , 1 9 9 3 , refer rin g to o v er p ai d in c o m e t a x es on ro y alti es rem i tted to U.S. L i c en s o r s i s hereb y PART IALLY GR ANTED . T he t w o o ther c l ai m s fo r refun d d ated Septem b er 2 8 , 1 9 9 3 an d Septem ber 1 , 1 9 9 3 a re b o th DENIED fo r l a ck of m erit. ACCORDINGLY, res pon d en t i s ORDERED to ISSUE a T a x C red i t Certifi c ate in the a m o u n t of P1 5 5 , 9 6 8 . 6 6 in f a v o r of the peti tion er.

--- DECISION - - 17 - C.T.A. CASE NO. 5173 -{/ Vi) fJ.c SO ORDERED. RAMON 0. DE VE A d Associate Ju CONCUR: <J...z:-LR Q. ERNESTO D. ACOSTA Presiding Judge CERTIFICATION .- y hereb certify that this decision was reached after due consultation with the members of the Court of Tax Appeals in accordance with Section 13, Article VI I I of the Constitution. . .--� ,. Q- ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals