CTA Case No. 2884 (Decision)

R�.PUBLIC 0 F THE PHILIPPINES c JURT OF TAX ARPEALS QUEZON CITY WANDER PHILIPPINES, INC., Petitioner, - versus - C.T.A . CASE NO. 2884 COMMISSIONER OF INTERNAL REVENUE, Respondent. X- ----- - .X DEC I S I 0 N This refers to petitioner ' s claim for a refu nd and/ o r tax credit of the total sum of Etll5,441:0.00 re- presenting overpayment of withholding tax on dividends r em i tted to petitioner's Swiss parent company, the Glaro S.A�. Ltdo of Tribourg, Switzerland, covering the 2nd quarters of the years 1975 and 1976. Petitioner is a domestic corporation organized and existing under and by vi rtue of Philippine l aws. I t i s wholly- owned subsidi ary of the Glaro S.A. Ltd., a Swiss corporation , which is not engaged in trade or business in the Philippines. (Par. 1 and 2, Petition; admitted in par . 1, Answer, pp. 1 and 18, respectivel_X , CTA rec. ) On July 18, 1975, petitioner filed its withholding tax r eturn (BIR Form 17. 43-BJ _for the second quarter ended J une 30, 1975 and :temitted to its paqmt company, the said Glaro S.A. Ltd. , dividends in the amount of ' �

DECISION - CTA CASE NO. 2884 - 2- P222,000 . 00, on which 35% withholding tax thereof in the amount of P77,700.00 1:1as \'lithheld and paid to the Bureau of Internal Revenue under Official Receipt No. 4746194 dated July 18, 1975. (Par. 3, Petition; admitted in par . 2, Answer; EY..hs . "C", "C-1", "D", "E", "E-1" and "E-~", pp. 1 and 18, 43-45, CTA rec.; see also pp. 6-11, t . s.n ., Hearing of August 5, 198lo) . Again, on July 14, �1976, petitioner filed a with- holding t~ return for the second quarter ended June 30, 1976 on the dividends it remitted to its parent company, said Glare S.A . Ltd. , in the amount of P355,2UO.OO, on which 35% tax in the amount of Pl24,320.00 was withheld and pa id to the Bureau of Internal Revenue, under Official Receipt No . 3010839, dated July 14, 1976. (Par. 4, Petition ; admitted in par . 2, Answer; Exhs. "F", "F-1.", "G", "H" , " I " and " I-1" , pp . 1 and 18, 46-4;8, CTA rec .; ~also t.s.n . pp. 12-1.6 , .s?.E.� cit.) . For the aforesaid second quarter of the years 1975 and 1976 in q uestion, petitioner had paid the \'li thholding tax in the total amount of P202,020 . 00 to the gove rnment on the basis of 35% on the dividends remitted to the mother company, Glare S.A. Ltd. of Tribourg, Switzerland, in the total amount of P577 ,200.00. It is petitioner ' ~ claim that the withholding tax payable to the government should be equ i valent only to . 2

r DECISION - . CTA CASE NO . 2884 - 3- 15% of the amount remitted , pursuant to t he provisions of Section 24 (b) (1 ) _of the Tax Code, as amended by P D. Nos . 369 and 778 , which took effect on January 1 , 1974 and August 24 , 1975 , respectivel y . \ On the basis o f the aforesaid provis i ons o f l aw , peti t i oner therefore contends that it should be held liable f or withholding tax but only in the amount or P86 ,580 . 00, which runount represents 15% of the total sum of P577,200 . 00 dividends wh i ch it had remitted to Glaro S . Ao Ltd. for the second quarter of the year 1975 and 1976 , and not on the basis of 35% withhold i ng tax that was actually wi thheld and paid to the governmen t i n the t otal sum of P202,020.00 aforesaid, therefore resul t i ng i n an overpayment of Pll5, 440.00 \..r i thholding tax . (Par . 7, Pet i t i on , p . 2 , CTA rec.) Consequently , peti tioner , on July 5, 1977 , filed with the Appellate Division of the Bu r eau of Internal Revenue a clai m for the refund and/ or tax credit in the amount of Pll5 , 400 . 00 contending that it is liabl e only to 15% withholding tax in accordance with Secti'?n 24 (b) (1 ) of the Tax Code, as amended by P . D. Nos.. 369 and 778 , a nd not on the basis of 35% which was w i thheld � ~nd paid to and collected by the Government , since under the l aw of Switzerland , the Swiss Government nev�er imposed a t ax on dividends receiv�ed ~y corp_~rat i on organized 3

DECISION - CTA CASE NO. l884 - 4- under its laws from a domestic Phil i ppine corporation . Hence , petitioner concludes that it has complied wi th the requirements of the aforesaid pro'\Tisions of Section 24(b ) (.1) of t he Tax Code, as amended by P.D � .:S69 and 778 , foi: the pucpose of paying t .he preferred rate of only 15% withholding tax . Respondent having failed to act on petitioner ' s claim for refund and/or � tax c:redi t, petitioner, on July 15, 1977, appealed to this Court. (p. 1, CTA rec .) . In answer to the petitioner's petition for revie\>J, respondent raised the following special and affirmat.ive defenses: "4. . That ta}'es are presumed to have been paid and collected in accordance with law; "5. That in an action for refund, the burden of proof is upon the taxpayer and failure to sustain the burden is fatal to the acti on; "6. That it is i ncumbent upon the petitioner to show that he has complied with the provisions of Section 3U6 and 309 all of the Tax Code. " The sole issue raised before this Court for deter- mination is whether or not petitioner is entitled to the tax refund or credit of the amount of Pll5,440.00 as overpaid withholding tax for the second quarters of the years 1975 and 1916. There is no dispute as to the correct computation � 4

DECISION - CTA CASE NOe ~884 - 5- of the amount claimed for purposes of tax refund or tax credit in this case. However, respondent i nsists that petitioner is not entitled to the refund and/or tax credit of the said amount of Pll5,440o00 because petitioner has not compl i ed with the requirements pro- vided in Section 24(b) (1) .of the Tax Code, as amended by P . D. No. 369 and 778, namely: (1) .that the country of the recipient non-resident foreign corporation allm'ls a tax credit of the withheld tax against that tax due from it, and which tax is deemed to have been paid in the Philippines, equivalent to 20%; and (2) .that this 20% represents the difference between the 35% regular corporate tax imposed upon the r emittance of dividends to non-r.esident foreign corporations and the 15% tax withheld from the dividends that were received from a domestic corporation. Section 24 (b) (1) .as amended by P.D . 369 and 778, the law involved in this case provides as follows: SECTION 1 . The first para9!aph of sub-section (b) of Section 24 of the Nati6nal I ntern~l Revenue Code, as amended, is hereby further amended to read as follows: " (b) . ~ax on foreign cor:eoration~. - (1) Non-resident corporation.- A foreign corporat1on not engage in trade or business in the Phi li ppines, i~uding a foreign life insurance company not engaged in the life insurance business in the Philippines, shall pay a tax equal t o 35% of the gross income recei ved during its taxable year from all sources within the Philippines, as interest � )

DECISION - CTA CASE NO . 2884 - 6- (except interest on foreign loans which shall be subject to 15% tax:), dividends, rents , royalties, s.alaries, wages, premiums, annui- ties, compensations, remunerations for technical services or othen<~ise, emolume nts or other fixed or determindable , annual, periodical or casual gains, profits, and income, and capital gains: Provided , however, that premiums shall not include reinsurance-- premiums: Provided, further, cinematographic film owners, lessors, or distributors, �shall pay a tax: of 15% on their gro ss income from sources within the Philippines: Provided, still further That on dividends received from a domestic corporation liable to tax: under this Chapter, the tax: shall be 15% of the dividends received, wh1ch shall be col- ~cted and paid as provided in Section 53(d) of this Code, subject to the condition that� the country in which the non-resident foreign coreoration is domiciled shall allow a credit aga1nst the tax: due from the non-resident foreign ~orEoration taxes deemed to have been paid in the Phil1ppines equivaJmt to 20% which represents the difference between the regular tax: (35%) on co rp o~ations and the tax (15%) . dividends as provided in this section: Pro- vided, finally, That regional or area head- . quarters established in t he Philippines by multi-national corporations and which head- quarters do not earn or derive income from the Philippines and which act as supervisory, communication and coordinating centers for their affiliates, subsidiaries or branches in .the Asia-P.acific Regions shall not be subject to tax:." (Underlining supplied. ) P.D. s69, amending Section 24(b) (1) ?f the Tax: Code, had set the requirements for entitlement to the r educed 15% withholding tax payment imposable against the dividends received fcom petitioner. Definitely, if the recipient country. of the non-resident foreign corporation grants a tax credit equivalent to at least twenty per cent (20%) .of the tax: due, which is consi- � dered as sufficient basis to avail of the preferential 6

DECISION - CTA CASE NO. 2884 -7 - l!J% rate of withholding t ax shall apply favorably to petitioner. This is so becaus;e the recipient of the dividends is a non-~esident foreign corporation, the Glaro S.A . Ltd., Tribourg , a Swiss corporation, and is not engaged in t .rade or business in the Philippines, and that S\"li tzerland did no �t impose any taxes (Exh. "B ", p . 42 , CTA rec.: ~a lso t.s.n., pp. 4-~, Hearing of August 5, 1981) .on the dividends received by the s a id Glaro S . A. Ltd., from the Philippines, or particularly, from pet.i tioner domestic corporation. The conditions therefore, imposed under the said provision of law in order that pet.i tione.r can be entitled to \<li thhold only 15% of the dividends remitted to said non-resident foreign corporation was fully satisfied. It i s worthwh i le to take note that the spirit and intent of said P.D . 3.69 in amending Section 24(b ) (1) of the Tax Code, which reduced the withholding tax to only 15% on the dividends remitted by the domestic cor- poration to its parent company (foreign corporation) abroad was , and still is, to encourage foreign capital inv�estments in our o~m country . This very intention is clear and explicit from the very explanatory note which states thus - XXX "WHEREAS, in order �to encouia]Je more capital investment f or large projects, an " appropriate tax need be imposed on dividends 7

DECISION - CTA CASE NO. 2884 - .8 - received by non-r:esident foreign corpo- rations in the same manner as the tax imposed on interest in foreign loans; " To deny petitioner of the privilege to withhold only 15% tax provided for under the said Presidential Decree 369, amending Section 24 {b) (1) _of the Tax Code, would be to run against the very spirit and "intent of said law and definitely wi l l adversely affect foreign corpor�a t ions interest here and discourage them to invest capital in our country . Ou r opinion that petitioner is only liable for 15% wi thholding tax instead of 35% withholding tax im- posed on the dividends rem i tt.ed to the non-resident f or eign corporation Glaro S.A. Ltdo of Switzerland finds affirmance in a letter dated May 19, 1977 (Annex "A", Petition , p . 4 , CTA rec. ) _of the Acti ng Commissioner of Internal Revenue , Efren r . Plana , now Associate Just ice of the Supreme Court, who ruled that petitioner is s ubject to only 15% withholding tax on the dividends rec:eive'd by the Glaro S.A . Ltd. of Tribourg, Switzerland . Said ruling reads as follows: "This has reference to }OUr letter dated February 22, 1977 requestin9 confir- mation that the dividends payable by your c li e nt, WANDER fHIL. ) I NC. , a domestic corporation , to its Swiss parent company, Glaro Ltd. , Tr i bourg, a non-resident foreign corporation not engaged in trade or business in the Phil ippines, are subject only to the 15% withholding tax in accor- dance with Section 24(b) {1) of the Ta x � Code , as amended by Pres1dential Decree

DECISION - CTA CASE NO. 2884 - 9- No. 369 and 778 . In repl~, please be informed that since the S\nss Government does not impose any tax on the dividends to be received by the said parent corporation in the Philippines, the condit:ion impos ed under the above-mentioned s'ection 1s ?atisfied. Accordingly, the w1thhold1n9 tax rate of 15% is hereby affirmed." (Under lining supplied) . Fin ally, we have observed th at even after the rendering of the above r~ling by the Acting Commissioner of Internal Revenue Efren I. Plana in connection \'lith this instant case, respondent had subsequently, and in numerous occasions involving similar factual situations and issues as in the case at bar, upheld the ruling and opinion that the rate of 15% is imposed as withholding tax against the dividends received from a domestic cor- poration, and applicable in this case, by the non- resident foreign corporation, whose country of domicile does not impose taxes on dividends received by said non-resident foreign corporation from said remitt ing domestic corporation. There are at l east five (5) .subsequent rulings to that of Acting Commissioner of Internal Revenue Efren I . Plana ' s. ruling quoted above, which confirmed t .he lett.er, and which \�le quot.e hereunder: (1) BIR Ruling �dated June 29, 1977 "Under Secti on 24 (b) of the Tax Cod~, as amended by .Presidentiai Decree No. 369, the domestic corpor:ation is liable for the � 9

�. DECISION - CTA CASE NO. 2884 - 10 - payment of the 15% withholding tax subject to the condition that the country in wh i c h the non- resident foreign corporati on i s domiciled shall allow a credit against the tax due fr:om the non-resident foreign cor- poration, taxes deemed to have been paid in the Ph il ippines equivalent to 20% whi ch represe:nts the differ ence between the regular tax ( 35 %) on corporati ons and the tax (15% ) on dividends as provided in this section . x x x "From the foregoing provisions of Arti cle VI (4) of the Tax Tr eaty between the Phi l ippines and Sweden as well as the certification of the Taxing Director of Swede:n, it is clear that the c:ash dividends rece i ved by Sandvik AB Sweden f rom Sandvik Ph i lippines, Inc. is exempt from Swedish income tax. "In view thereof, the divi dends which your client, Sandvik Philippines Inc. will remit to Sandvik AB Sweden is subject only to the 15% withholdin9J tax pursuant to Sec:tion 24 (b) of the Tax Code ." (Emphasis ours.) (2 ) .BIR Ruling dated Septemberc 7 ; 1977 "Under Section 24i(c) ot the Tax Code, as amended by Presidentiai Decree No . 369 , the domestic corporation is liable for the payment of the 15% withholding tax 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 cor- poration , taxes deemed t .o have been paid in the Philippines equivalent to 20% which - represents the difference between the regular x tax ( 35% ) on corporations and the (15%) on dividends 'as provided i n this section. x x Thus if the country of domici l e of the reci- p i ent corpor.ation allows a credit. against the tax imposable by it an amount equ i valen,!: to 20% of the d ividends , or if sai d foreign country does not i mpose any tax on the divide~nds re�mi tted to corporati ons domiciled therein, the dividends so remitted are sub- ject to withholding tax at the rate of 15% only. " (Unde r.: lining supplied. ) . 10 j

DECISION - CTA CASE NO . 2884 - 11 - (3) BIR Rul ing dated Oc:tober 5 , 1977 "It appearing that dividends derived by a Pan aman i an corporation not doing business in the Philippine$ from sources outside of Panama are not subject to income tax under. the laws of Panama, 'such dividends ' ar e~ su bject to withholding! tax at the rate of 15% only , i n acc:ordanc:e with Section 24 (b) (1) of the Tax Code, as amended. 11 (Und e r- lining ours. ). (4 ) .BIR Ru ling 136i-81, J uly 3: 0 , 1981 "In reply to iour letter: dated July B, 1981 , I have the honor: to i nform you that having been established that Panama does not impose any tax on d ividends received fr.om foreign sources, the dividends to be remitted by your c:lient., Bristol Laboratories (Phils.), Inc., a Philippine corporation , to its paren t ' company, Bristol Laboratory International , S.A., a non-residen t foreign corporation or:- ganize~d unde r. the laws of, and aomiciled, in Panama, are s:ubj ect to the' wi th hold1ng tax at the~ rat e of 15% only , i n ac:cordance with Section 24( b ) (1) (i1i) of the Tax. Code." (Italics ours .) (5) BIR Rul ing 37-81 " In r eply to your letter dated July 29, 1980, I have the: honor to inform you that it having been establis:hed that Hongkong does not impose any tax on dividends receivedby corporations domiciled therein from foreign sources:, tne: dl\l' ieienas: to be rem1 t..t.ed to HSB Hongkong Trustee LimiLed, a non-res1dent foreign corporation domiciled in Hongkong etre su bject to only 15% wi thholc1 ng tax, p rescribed b:'f Eection 24 (b) (lJ (iii) of the Tax Code, as amended ." � (Ur1der a:::oring ou rs.) There ex1st no doubt in our minds that, consider.i.og all the forego i ng rulings, 1t is very clear, and without doubt that petitioner 1s entitled to the preferent1al rate of 15% withholding tax on t he divi dends remi t tal a made by it to the non-resident fore ign corporation , 11 )

'' . DECISION - CTA CASE NO. 2884 - 12 - the G1aro S . A. Ltd. of Swltzer1and, and more because it had met the requirements set forth in President1a1 Decree No. 36i9 , amending Section 24 (b) (_1) _of the Tax Code. Cons�.equent1y , the overpayment of Pll~,440 . UO paid to respondent 1s subject to refund and/or tax credit. WHEREFORE, respondent is hereby ordered to grant a refund and/or tax credit to pet1tioner in the amount of !1115,440.00 represen~ing overpaid withholding tax on divide:nds remitted by it to the Glaro S.A. Ltd. of Sw1tzerland dur1ng the second quarter of the years 1975 and 1976. Without pronouncement as to costs. SO ORDERED. Quezon City, January 19, 1984. / } // .�/ / CON STANTE /ssocia WE CONCUR: ~v� Z. REYE. sociate Ju �� � 12