CTA Case No. 4451 (Decision)

� - .- ) .� REPUBLIC OF THE PHILIPPINES COt~T OF TAX APPEALS QUEZON CITY COJ1PAJ.liA GENERAL DE TABACOS DE FlLIPTMAS (Philippine Offices) . Pe titioner . C. T.A . CASE HO . 4451 THE COnttiSSIONER OF INTERNAL Rf.TI:NUF. . Pe;::;pond ent . X- - - - - - - - - - - - - - X f) E C I I 0 N Petitioner i s a foreign corporation duly licensed by Philippine la~�7s t o eng:..ge in t�usine::; ::; thro,_tgh it::= Bra.n ch �)n ll8y 3 . 19:33 . petitioner paid the 15:>~ l:rrt~nc:h pro�it remitt::mce tt< x for the yea.rs 1985 (P''Ht.ia.l) a.nd 1?86 in the ::<mcrl_Ult c�f P 3 _14:3 . 26 7 . 96 (Exhs P 8.nd P-1 ) . Het. Inc nme a ft er tt~. x per 81ldi ted Fin~nr: i ;3l St;3tement3 t or t he Yea r 1985 P11 05 1 oos . oo L>:> .:;s: Am.o1.mt 8ppro~.' ed fr�r r em itt8nc e CB- Let.ter authority det ed 7/ 24/ 86 9 680 . 18 4 . 96

DECISIOH C.T. A. Case Ho _ 4451 - paqe Z - Balance of remittance branch profits 1985 P L 370,913 . 04 Add : Net Income after tax per audited Financial Statements for the year , 1986 19,617 . 540 . 00 Gros3 amount remittable P20 , 988,453 . 04 15% remittance tax p :3,148,267 . 96 On July 6 , 1988, petitioner filed a claim for reftmrl (Exhs . A and A-1) liTith respondent in the a.motmt of P593, 948 , 6L representing alleged overpaid branch profit remittance taxes, computed as f ollorns : (p . 6, Petition for Branch profit a ctuall y remitted P17.840,185 . 08. Less: Income stmject to fina l tax : Dividends - 1985 P590,008 . 64 1986 10 , 122. 01 Interest on Savings Account - 1985 125, 268.94 1986 56,285 . 37 Intere st on 24, 244 . 14 Honey l1arket Placement - 1985 Interest on Land ) Bank Bonds - 1985 2. 730 . 00 2 730 . 00 811 ,389.43 1986 Th.x Ba.se of Branch Profit P17,028 ,795.65 Remittance Tax 15% branch profit remittance tax P2 , 554 , 319 . 35 due thereon ( 3,148, 267.96) Less : branch profit remittance tax previously paid Overpaid Branch Pr ofi t Remittance Tax P 593 , 948 . 61 86 fj

DECISION C_T_A _ Case Bo_ 4451 - page 3 - Up to the filing of the petition for revie~T on llay 3 .� 1qqn respondent has not acted on petitioner' s claim . The issues posed to this Court are : ( 1) Whether or not the branch profits tax a.re computed based on the profits actually remitted abroad or 't on the total branch profits out of ~~hich the remittance is I made ; and (2) Whether or not pa.ssive income ~vhich are already subjected to the final tax are still included for purposes of computing the branch profits remittance tax . First . Petitioner contends that the 15% Branch Profit Remittance Tax should be based on the profits actually remitted abroad . Petitioner cited as authority Section 24(b)(2)(ii) of the National Internal Revenue Code (NIPC for short); BIR Ruling dated .January 21, 1930; aJ�1 the C8.se of Commissioner of Internal Revenue v . Burroughs Limited aml the Court of Tax Appeals, G. R . No . L-66653, .June 19 , 1986 , 14 2 SCPA 32 4 , ~there the Supreme Court held that II the tax base upon ~vhich the 15% branch prof it remittance tax shall be imposed on the prof it actwll.r�� re.mitted abroad 8.nd not on the total branch prof it s out of which the remittance is to be Dl8.de . II Respondent for his part ans~,tered that the 15% branch profit remittance tax is imposed and collected at source; necessarily the tF.t.X ba se should be the amount actually applied for by the branch ~,ri th the Central Ba.nk of the Philippines as profit to be remitted a.broad pursuant to Re-venue l1emorandum No . 8-82 , da.ted l1arch 17, 1982. Bt>ti

DECISION C.T.A . Ca3e Ho . 4451 - paqe 4 - Section 24(b)(2) of the 1977 NIRC and Sect ion 24{b)(2}(ii) of the 1986 lHRC both proYides for a 15% em1 t~ nce tax on any profit rem1tted by a br8nch to if's mother company or head office . Petitioner relies on BIR Rulinq dated January 21. 1980, issued by then Acting Commissioner Ef ren I. Plan8.. ~~hich provides � "In. reply to your lett er of No~rem.ber 3 , 1978 . re la ti�,re to your query as to the ta.x b8.se upon r.1rhi ch the 15% bra.nch pro fi ts remit te.nce tax proYided for under Section 24(b)(2) of the 1977 Ta.x Code sha.ll be imposed, plet~.e e t'e advised tha.t the 15% branch profit. ta.x sh8.11 be imposed on the branch profits a.ctua lly remitted 8.bro8.d a.nd not on the tot .l branch profits out of ~vhich the rer.o.i ttance is to be made. " T!lhile e~ponden ~tresse d that what is applic::~.ble in this case is Revenue lfe�orandu... Cir cular 1to . 8-82 (dated l1C~rch 17 , 982L ~~hich eads : � s .JECT : 1 ~<.) � fie on ~ s to the proper tax bl::!se �n t.h . ompl\ .. tion of the 15~ r nch profit remi t nee ~ x . To . All Int~r t Pevenue Officers and . th sCone rned . In. BIR Ruling No . 016 - 79 dated April 18 . t97Q anent the 15~ branch profit remittance tax as an income tax imposed tmder Section 24 (b)( 2 )_ Na tionB.l InterM.l Revenue Code of 1977 . as amended , this Of fi ce ruled that 'x x x the 15% branch pr ofit remittance tax should be b8.sed on the aro.o1.mt of Pi. 50 4 . 330. 43 repreeenting profit derived from the disposition of the shares , 15% of r,7hich is P225. 649 . 57 . ' It ~,rill be noted tha.t the b8.sis of comput.':l.tion in Et.ccordance T.�7ith the ruling is profit without deduction tor the 15n tax. 86 '(

DlCISIOlf C. T . A. Ca s e Ho . ii51 - paqe 5 - On January 2L 1980, this Office, in a.not.her ruling issued in ans~.rer to a query as to the tax base upon i.rhich the 15% branch prof it remit t$3.n ce tax should be imposed held tha.t I the 15% branch profit rem.itta.nce tax sh8.ll be imposed on the prof it actually ) remi ted abroad end not on the tot al branch prof it out of ~,rhich the remittance is to be .~ made . ' As the latter ruling 3eem.s o have given rise to some misconception that it modified BIR Ruling No . 016-79 v7i th re spect o he manner of computa t.ion of the 15~ br8.nch prof i t remittance tax. this Office iBsuect a. clarifi catory ruling on �e tober 23 , 1981 explaining - The ab ove tlit'lg (of anu.ary ~1, 1980) merely empha ized the dis inc .ion between the otal branch prof � � I�Yhich is . rem.i t ta.ble ~n th t portion of the branch profi ~ c lly rem.i ed without d~d tcti on on e.cc ou.nt. of he tax to be p id . Th I any profit remit ed b shoul d be ems rued tom ..n the prof i t to le remit. . d Hen e . t here must. b e.n actua.l remi nee . e.s d � stinouished t rom prof � t t~hi h is rem.i tab-le . To qive n exampl e : If the to 1 ran h rofi t is 115 , 000 00 but: he ~roouxlt to be mi ted is P100 ,000 . 00, hen the tax ase s hould be P100 .000.00. tloreover , the 15% profit remit t nee tax imposed by Section 24 (b) ( 2) of the Ta.:c Cod e i~ e.n income tax. it i3 he ref re clear that the eame is non-deductible from he gros s (pr fit) iwome. In .sm.u -h he t x i ~n e xactiru on prot i r lized tor rem.i ance sb o d . th deduc ion th- eof ae a n expense 1 not ~ s ned by law no'''h re � S - tion 30 of b~ 'fu:t c~:t e i i pro,,.ir.1ed t the same i~ d.e�juc ible . Besides ded ct. � ons from gros s income re m tter5 of le!Jisl . h�e g ~ ~vha t is not

DECISION C. T . A. Case Ho . 4451 - page 6 - ~xpr~ssly granted by the law is deemed r,7ittJ.he ld . ' Cons idering that the 157~ t1nmch prof it remittanc e tax i s imposed and 80 llF> ct~d at ~ n~tr~"'e , nec~ S3A ri 1y th e t ~ :~ b ~ s e s h ou ld be the Am nnnt 8c tu lly ~'~rplied f or by the b r a n ch ~-rit.h the Centra l Bank of the Philippine s as profit to be remi tted abroad . It is de s ired that thi. s Cir cule.r be given . .s wide publi city as possible . ( Sgd . ) PUBEN B . ANCHETA Acting Coro.ro.is sioner" The . se in question. is r e8.dily di st ingui shable from. the Burroughs Linli ted c8.se ( supra . ) , vThere the Sup re:m.e Court upheld the applica tion of BIR Ruling of Janu.:1ry 2L 1980 bee.. us e the bran ch pr ofit remit t ance tax r.Ya s paid on t!arch 14 , 1979 . The High Court add ed tha t Uemo ran.dum Circul r No . 8- 82 . dated U r ch 17, 1982, canno t t1e given r etrot~. ctiYe effect in the light of Section 327 of the NIPC S~ c tion 327 provides for the non- r etroactive applic:a tion of rules and r egulations re-voking , modifying or reversing prior ones if the revo cation , m.odifica.tion or reversal is prejudicia l to the t e. xpa.ye r s. In an earlier ca s e , involving the eB.me pa.rties and i3sue reg:nding the taxa ble ba s e for the imposition of the 15% bra.nch pro fi t re:m.ittance ax , t hi s Court , in a deci s i on v7hi ch ha.s a.lready become fina l a.nd. executory , ha.s this to say :

DEC ISION C. T.A. Ca3e Ko. 4451 - paqe 7 - "A fortiori . the holding in the Burroughs Limited case lend s se ttling COtJniza.nce to the Y8 lidit y of the Hemor::t.njum Cir cular No . 8-82 , ~�rhere ,3_::, ruled by the Supreme Court - Whet r,ms eppli ceb le in the ca s e a.t bar i s still the F:evenue Puling of .Jamvny 2L 1980 be cause the priva te respondent Burroughs Limited p8id the branch profit remit te.nce ta x in question on Uar ch 14 . 1982 . l1emorandl..un Cir cular No . 8 - 3 2 dated 118 r ch 17 , 1982 cam1ot be given retroactive effect in t he light of Secti on 327 of the Ha t.iona l Internal Revenue Code x x Y. II St ::t.ted othenrise , the circul8.r must be prospective in application. Established at bar is a peyment effected on Aur:Just 16 , 1982 sub ::,e quent to the issua.n ce ther eof . Hence ) petitioner's case fe.lls lirithin the compelling imp or t a nd force of the Revenue tlem.orandl..U!l. Cir cular No . 8-82 d8.t ed l18.rch 17 , 1982 . " [ Co�pania General De Tabacos De Filipina s (Philipp ine Br a nch). v . The c o. .issioner of Internal Revenue. CTA Case Ho . 3827 . Oct ober 11 . 1 98 8 . ) In the recent case of co...issioner of I nternal Rev enue v. Bank of Aaerica NT & SA and t he Court of Ta x Appeal s . A- G. SP o _ 2252 9 . Septe-aber 19. 1990. the Cour t ot Appea s uphe d he v lid ity of Rev enue Hemoran.,jt.un. Cir cula r No . 8-8 2. Thi s Cour .. adopts the rea s oning of the Court of App e8.l3 r.vhen. it ruled : " x x x. The u se of the ~�ro rd remitted m.s.y r,rell be tmderstood as referring to that part of t.he said total branch prof it.s "~>rhi ch ~�rould be s ent to the head off ice as distinguished f rom. the tot~.:~ ! profits of the brs.nch (not all of which need be sent or would be ordered remitted a.broa.d ) . If the legisl~.:~. ture indeed he.d 1iro.nted to m1t1gat e the har shness of successive ta.xe.tion , it. ~muld ha-..re e en s impl e r to just lm�Yer the rates ~�:ri thout in effect. requi r i ng the 8 '/ 0

DECISION C. T .A. Ca se Ho_ 4451 - page 8 - rele.tively novel and complica.t.ed "'B.y of computing the tax , as envisioned by the -herein priva.te respondent . The same result ,,rould he.v e been achieved . The e.t tempt to deduce legis l ative intent ~iTi th rega.rd to Section 24 (b)( 2 )( ii) of the Ta.x Code ~vould only s er-....e t o a llovr a capt i ous e.nd ~:trained int endment of he laiv . � Nil1IA SUBTILITAS IN .JURE REPROBATIJR, ET TALIS CEPTITUDO CERTI'I'UDI11El1 CONFUNDIT (The l aiv does not a. llow of a ca.ptious a.nd str8.ined intendment , for s 1ch nice pretenc e of certaint y- con! o1.m.d3 r te a leg .. 1 certe.inty) . As held in the c. ~e of United St:.3.tes v s . ~�Turzbach , 280 u s. 39- ' . 96 : The � no TIYif rr .nt for ~A. kinq Et. r~. uments t o sho,,r �at th doe9 n ot m.e n ~hat it. ~'�~ )rs In viei,r of the foregoing , this Court find s that the cl ea r imp or t of Sec ti on 24{b)(2)(i i) of the Ta.x Code mandates the imposition of the fift een per cent (15%) tax on the branch profits remittance , ~,rhich in tax parlance i s a llud ed to e.s the "tax handle" , ~;rit h the total amount remit ted (not the tota.l amount of the bre.nch profits) e.s b8.s e f or the tiJX . " [cited in co. .ercial Uni on Assurance Co pany v . The Coiaissi oner ot Internal Revenue, CTA Case Ho . 41 8 9, Sep teiber 8, 1992 . ) Tims , in vie~Y of the f act that petitioner's branch profit remittance tax for 1985 (p8rtia l) a nd 1986 ,,ye re p~ id on lkqr 3, 1988 , s.tter the eft ec tivity of Revenue tremor n.d�un Circule. N' . 6-SZ (t111 r �h 7, 198 2 )_ then r,rhat sh ould apply as taxable base in computing the 15% branch ) prof it remit t.ance ta.x i s the amount app l ied for with the Central Bank 8.3 profit to t�e remitted abroad a.nd n ot the tote.l amo1.mt of branch pr ofit s . 871

DECISION C. T.A _ Case Ho _ 4451 - pag-e 9 - Second _ Petitioner 8.rg11es tl-v3 t pa ssi�;e income s.lready subject ed to the final ta.x should not be included in the tax b8.se for computing the 15% branch profits remit.tJ:~.n c e t 8x . Emph::;~_s is ~'1'8.3 ma de on Sect ion 24 (b)(2)(ii) of the NIRC of 1986 , ~Thich provide s: "(ii) Tax on branch profits re�it tances Any profit remitted b'fr a brBtKh to its h eed offi ce sha ll be subjec t t o a. tB x of 1 5~ [except t ho~e r eg1~te r e d '~i th the Expor t Pr �ceas ing Zone Authority! Provided. 'T'h8 t 8n)r prof it. r emit ted by t~ b r::mch t o it s l1r-:-.d nU ir.: e _utho riz~d t o enq ~ ge in pe trolPtUft np~r8 t.i o n 3 111 the Philippin es s r.t19.ll be 3�_tb . Pct to tax t 7 - 1 /2~ . In both cases . he t .x hall be> cn l1 ~c t.Pd end p9 �d in th e M me me.nner as p �o?Ueri in Sec ion3 51 and 52 of this Cod a.nd P nv � d ed. further. Tlv~ t. i n tere s t dividend s r,::,nt e. royalties . i n cl uding reroJmera tions Eor t ~:�chnir:8l services . s~.1. rie s . ~-!8 g es , premiums . :~_ nnu it:.ie s, em.o l unen.t.3 or other f ixed or d.etermim.ble a.nnu 1 , periodica l or c~_ su~l �J8ins . profit s, irn:ome 8.nd capit~ l ge.in3 received by a f ore ign corpor.. tion during each taxab l e year from. all sou ~e s within the Philippines shall no be conside r ~d as bra nch pr ofit s tmless the sa.me are e tf ect ivelv cOimected with the conduct of trade or bus iness in the Philippine s (8.3 a.mend ed by P . D 1705, P D_ 1773 8.lll1 P . D_ 1994 _) " Petit ioner like'iri se invoked BIR Rulin'J No . 032 -7 9 , dated .]l_Ule 6 , 1 979 , e.nd BIR Ruling 157-31, d8.ted .July 13 , 1981 , pertinent porti ons of sa id rulings are '::P.toted h~?reunder : BIR Ruling- Ho _ 032 - 79 Dated June 6. 1979 " x x x, I he 'Te the honor to confirm your opinion the.t the 15?1. remitt s.nce t a x imposed by 58: tion 24 ( b )( 2) of the Ta.x Code of 1977 on

DECISION C . T . A. Case Ho _ 1151 - page 10 - profit s remit ted abro;:~rl by a br8nch off i c e to its mother company i s an inc ome tax . The above conc lusion ca.n be dr::nm from the fact that the 1 5~ r emittence tax is impo s ed 1.mder 'Titl e II - Income T- x' of the Tax Code 8nd t hat it is be.sed on profi ts derived by the t~r e.nc b . lioreoYe r , T1Jhil e dividend s r emitted by Philippine s ubsidiar ies to their head off ices e_t,road are subject to tbe ~ol'it.hholding income tex e.t the rat e of 15% under certain cond iti ons , P . D. No . 778 ~�Yhich took effect on August 24 . 1975 , s ub jec ted profits remi ted by 8. bre.nch to its mother company abroad to remit tan ce tax at a higher rate of 20% . Pur s ue.nt to P. D. No. 158-A, sa id remittance tax 11TB.S reduced to 15% so a s to place the taxation of the profits of a branch a t par with the dividend remittcmces of foreign subsidia ry. Such re uction a l s o supports the conclusion t.he.t the 15~ rem �t ance te.x i s income te.x. " Bureau ot ntetnal R v nue ulinq 024(b}( 2) 000- 00 157-81 July 13. 1981 "In reply the reto . ple~~8 be informed th8t. pursu8nt to Section 24(b)(2) of t.he Tax Code , as amen,jed, only pr ofit3 remitted abroad by 8. brcmch office to its head office \il'hich are effe c tively connected ~�Yith its trade or business in the Philippines are subject to the 15% profit remittance tax . To be 'effectively connected' it. is not necessa.ry that the income be derived from the 8.ct.ua.l operation of taxpayer-corporation's trade of business ; it i s sufficient that ttle income a.rises t rom the busine ss activity in \vhich the corpore.tion i s enga.ged . For exam.ple , it a resident foreign cor po n~ t.ion is enga,Jed in the buying end se lling of m11chinerie s in the Philippine s a.nd invests in s ome s hare s of st ock on \vhi ch diYidends are sut, sequently received , the di 7idend thus ea.rned are not cons ider ed � e ffe c tively cotmected ' v7i th its tre.de or bus iness in this co,_mtry . " (P.evenue Uemonm.du.m Circular No . 55 -80. )"

DECISION C . T . A. Case No . 44 5 1 - paqe 11 - Pespondent reje cted the a.rg uments of petitioner and pointed that "m'lder Section 24( b )(2)( ii) of the 1'-a.x Code , interest and dividends , as 8. rule . are considered branch profits except. ~1hen the same a re not e ffectively connected with the trade or business of the fore ign corporation in )' the Philippines" It i s incumbent upon peti t.ioner to prove t.hr:~ t interest and di vidends a r e not e ft ectively connected 11tit h th ~.:~ tn~.de or business of the f oreign corpor8.tion . As ~,rorded , .~ VI Hore redibl e i s the stand of petitioner . in Section 21(b )(2 )(iiL the rule i s interest and dividends re ce ived by a foreign corpora.tion during each ta :cable year t r om all sources 1-1ithin the Philippines shall not b e conside re-d e.s branch prof its unless the same are effect ive ly connected ~~ith the conduct of its tra.de or business . The phrase "ef fective ly connected" 1-1as interpreted to mea n income derived from the business activitr in il'hich the orporation is nge.g ed . In e ll th . "'O pora qu.a. terly income tax returns tiled by pet.i tioner \\Tith r espondent' s off ice , it -.;res indica. t.ed as it ioTa S shmm that the petitioner is engaged in the bus ine3s a.s l ea f tobe.cc o de ler , expor ter, importer and general merchants . Petitioner claims that interests rec e ived fr om savings dep osit with PhilTrust , interests re c:e i-v-ed t r om money ma ket placements a.nd intere st on Land Bank Bond s 8.nd cash dividerJd 3 received from Philippine Long Di 3t3.nce Tel ephone Compa ny (PLDT) a nd Taba.calera Industri8.l Deve l opmen Corpors tion of the Phil s 8.re not 874

DECISION C_ T _A _ Case No _ -4451 - paqe 12 - Tndust. ri:3 l Development Corpore t.ion of the Phils are not e-ffectively connected ~i'ith it s trede or business_ Furthermore , pursu;;nt to Sect i on 24(c) Bnd (d) of the NIPC. dividends e.rrl interest ~. re subject. to final t.e.x . To include them e.gain as s ubject to branch pr ofit remitt8.nce t.a x tmder the same Sect ion 24 (b)(2)( ii) ~muld be cont rary to law . Rightfully so petitioner ha.s :::uf f i c 1en Uy esi:Bbli s hed a. right t o be refunded the a motmt of bra.n ch pr of it remittanc e t.Bx p8id on t hese interests ~:~nd dividF?.nd. 3 ~~h -ch were includ d as p<.~ rt of the bnmch J profl ts t or 1985 (P- r t. �81) and 1986 Co n se q~.tently , following Pe.,renue t1emo nmdum Ci r cula r No 8-82 and the jurisprudence cit ed , the t8.x base should be the AIDOtmt pplied for w� th the CentrB.l Ben.k for remittance withou t pr�or ded ~ction of the 15% branch profi t remi tt~n c e t x. Hence , th tax ref1md s hould be romput ed es f oll ows � P20 .988 , 453.04 Le3 .3 � Inc' m subjected tc tin8. l ax: I'iYidend3 1985 (Exhs S- 1 o ~- 17) PS90 , 00 3 64 1986 (Exhs. W- 1 to W- 16) 10 . 011 . 51 Int ere.:::t on Savinas Acc otmt-Philtruet 1985 (Exhs- 1'- 1 to T-12) 125 , 268 . 97 1986 (Exhs. X- 1 to X-12) 56 . 285 . 37 Int ~ rest on Honey t~rket Pla ce ments tQ85 (E~h s U-1 snd U- 2) 24 , 2 44 44 Int.ere3t. on L8nd B8.nk Bond3 2.730 . 00 811 308 . 9:3 2 . 730 . 00 19 85 (Exh3 . V- 1 8.nd V-2 ) 1986 (Exh . Y-1) 8?5

DECISION P20 . 177.14'i . 11 C. T . A. Case No . 4451 p 3 , 026, 571.62 - page 13 - 3 . 148,267 . 96 Amount s ubject t.o 15% brl::'.nch p 121.696 . 34 profit remittance tax 15~ br~nch profit remittance tax Le ss: Amo,_mt of br8.ncr.t profit tax pe id A:m.o1.mt. ref1.mdable to pet1 tioner repre s enting o-o;rerp::l.id 15:�. bra.nc.h profit remittance tax on Interest 8.nd di ridends YHrREfORE , res pondent , CoiD.IJli s::: ioner of Inte rnal Pevenue , is ordered to reftmj in fa.vor of petitioner, 1.:::omp::dii8. G�eneral De Ta.baco::. De Filipinas , the am01.mt of P121 , 696 . .34, repre senting ove rpaid 15:~ branch profit remi t.tance tax on inter est and dividend s r eceived. No costs . SO ORDE ED . Quezon City . lietro Ueni l"., Augus t - .3, 1993. lr ~ / _!)D~~VE~ RAl:ION 0 As s oc i8.te Judge WE CONCUR: ~Q.~ ERNESTO D_ ACOSTA Presiding .Judge J 876

DECISION C. T . A. Case No . 4151 - page 11. - CERTIFICATION I hereby ce rtif y that the Bbove decision 1il'a s re8.ched 8.f ter due consul t8.tion 8.mong the members of the Court of T8.X Appeals in 8.ccord8.nce vith Section 13 Arti c l e VI II of the Cons titution . ~Q,~ ERHESTO D . ACOSTA Presi,jin(l .Judoe Court of Tax Api)e8l3