CTA Case No. 4110 (Decision)

Republic of the Philippines COUR T OF TAX APP EALS Qu ezon City MARUBENI CORPORATION, C. T.A. CASE HO . 4110 Petitioner , - versus - COMMISSIONER OF INTERNAL REVENUE, Responde nt. X - ------- - - - ---- -- - - ----- - - X D E C I S I Cl N Petitioner Marubeni Corporati on <Phi1ippine Branch> seeks a review o:f the decision o:f r espondent Commissioner o:f Interna1 Revenue, in assessing petitioner's de:ficie ncy in commercia1 broker's tax, surcharges and inter ests tota11ing P 3 ,601,535.68 ~or the :fisca1 year ending March 31, 1985, under Section 208 <now S e cti o n 194> o:f I the Nationa1 Interna1 Revenue Code <NIRC> o:f 1977, as a mended . The questioned assessment is : itemized as :fo 11ows: DEFICIENCY COMMERCIAL BROKER'S TAX FY ended March ~ 1985 Under c l ared s hare f rom commission P24,683,114.50 inc ome <denominated as P1,628,569.00 "Subsi dy from Home Office> P814,284. 50 Tax due thereon Add: SOY. surcharge for P407,142.55 P2 , 849,995.75 non-declaration 25Y. surcharge for late P751,539.93 payment Sub - total P3, 601, 535. 68/ / ~ Add: 20Y. int. p.a. from 4/21 - 85 to 8-15-86 TOTAL AKOUNT DUE 1 0 :.: I

C.T.A. CASE NO. 4110 ~ - DE C I S I 0 N- -2- . To support ita case, petitioner alleges that a. It ia a �oreign corporation duly organized under the laws o� Japan and licensed to do business in the Philippines, and that it maintains a Philippine branch, with address at 8th and 9th Floor, L.V. Locain Bldg., Corner Ayala and Makati Avenue, Makati, Metro Manila. b. It ia engaged in, among other things, the business o� buying, selling and trading o� ores, metals, minerals, chemicals, animal �eeda, agricultural commodities and other raw materials; c. In the transactions subject o� the aaaeaament, the Marubeni Branch in the PhilippinfB acted aa a liaaon o� ita Head O��ice in Japan; d. For the liaaon work o� Marubeni Branch, the Head O��ice transmitted certain amounts to the branch aa ita "subsidy"; e. The "subsidy" was paid by the Head o��ice in the �orm o� �oreign remittances and this "subsidy" was declared aa petitioner's income in ita income tax return and the corresponding income tax paid; �. It has also availed o� the tax amnesty under Executive Order Nos. 41 and 64.

C.T.A. CASE NO. 4110 - DEC I S I 0 N- -3- Petitioner contends that the subsidy received by the Marubeni Branch :from the Marubeni Head O:f:fice is not subject to the percentage tax on commercial brokers because the Marubeni Branch was not a commercial broker in the transactions involved in the assessment; and that ita availment o:f the tax amnesty under Executive Order Nos. 41 and 64 extinguished any tax liability in the subject transactions. Respondent, upon the other hand, contends that the "legal structures" o:f the Marubeni Head O:f:fice and Marubeni Branch are "separate and distinct" as to constitute two separate taxable entities. Respondent considered as "commissions" "brokerage services" :from Marubeni Head O:f:fice, the alleged "subsidy" received and thus he imposed "a de:finite percentage :from the commission income" received by the Philippine branch "in a completed operation o:f brokerage services". In line with his theory, respondent notes in his memorandum the :findings o:f the Revenue Examiner who teati:fied in Court, the substantive parts o:f which are as :follows: '~ I 1 0�~

C.T.A. CASE NO. 4110 - DE C I S I 0 N- -4- Atty. Abad Q. You said that you �ound it in their income statement as subsidy �rom home o��ice~ Why then did you recommend �or the assessment o� commercial broker's tax considering that the taxpayer declared it a subsidy �rom home o��ice? Will you explain to this Honorable Court? A. Marubeni~Philippine Branch as against Marubeni Corporation~ Japan~ the main o��ice~ i t being a mere branch~ the taxpayer merely acts as a trading house �or buyers and sellers. Now~ there are suppliers coming �rom the Philippines and there are buyers coming �rom abroad~ outside the Philippines~ and t h a t looking a t the way that t h i s company operate~ one is that they don't buy. There is nothing shown to me in the record that they are buying goods �or their own account. They did not store it neither did they sell it and neither did they represent that they are the owner o� the goods~ rather that they look �or the buyers � here~ sellers here and they look �or the buyers abroad. So Marubeni Corporatiqn~ Japanr is like an access and a broker and kind o� tra��ic policeman between that branch here which is their extension here in the Philippines and then also �or the buyer abroad. Sor �or the commissions that they earn �or the brokering or the commissions that they earn as a broker~ in t h i s transactionr what Marubeni Japan does is that it allocates a certain portion o� that income �rom the transaction as pertaining to the services per�orm by Marubeni Branchr Philippines within the Philippines.

C.T .A. CASE NO. 4110 - DE C I S I 0 N- -5 - So that p art of. the services in the entire transaction that is perform h ere in the services in the transaction outside the Ph i lipp'nes, what the h ome office g ives to the Philippine branch that is what they call, subsidy. So I consider even if you call it subsidy but the transaction the source of the subsidy i s linked with the i mport or export transacti on. XXX Q. Do you have any docu ment or were you able to gather some documents which will show that Ma ru beni Philippine Branch received commission out of the commission received by Ma ru beni Home Office as well as Marube ni Philippine Branch in a particular transaction? A. I wee only a ble to gather these vouchers. These a re t hose vouchers _ on file in the Philippine branch showing how the Mani l a Branch of Maruben i bills their mother, the home office in Tokyo or subsid iary abroad like Mar ubeni America or a branch corporation as in London branch becau se the set up of thi~ as far as I can recall is, Marubeni Corporation baaed in J a pan has plenty of branches in other countries not only in the Philippines. Aside f rom branches they also have subsidiaries in other countries. So these documents we have here, these vouchers that we obtained from them show how they received the commissions. XXX Q. Mr. Manalac, do Maru beni Home Office show a definite pattern 100

C .T.A. CASE NO. 4110 - DEC I S I 0 N- -6 - of p e rcentage ~n send~ng a s ub s~ dy a s t hey denom~nat~d ~t ~n th e ~ r ~ncome s t a t e ment what they r ec e ve d from the home off~c e ? Do th e y h a ve patt e rn or do they h a ve s p ec~ f'c percentage g~ven to M ruben~ Ph~l~pp~ne Branch ~n so f a r as they a c t as brok e r act~ng th r ough the home off~ce, Maruben~ Tokyo? A. They a r e charg~ng,th e y a r e comput~ng based on a c erta~n percentage based on sales pr~ce or a f~xed amount based on quant~ty. XXX Q. You want to tell th~s Honorable Court that they followed a def~n~te p e r c e n t a g e ~n transm~tt~ng the shares of Maruben~, Ph~l~pp~ne Branch from the comm~ss~on received by Marubeni Tokyo, Japan? A. When we talked about subs~dy, ~t comes from home ways let' s say it's like giving allowance or s tipend. It comes from fund s of hom e office. But when the gi v ~ng of these funds is linked up base d on e x p o r t transact~on a t a certa~n per c entage or f~xed amount based pn quant ty, we consider that as comm~ss~ons although they c l a s s i f y that, they described that ~n the book as subsidy. XXX Atty. Abad: Q. Mr. W~tness, did you encounter any situation where Marubeni,Ph~lippine Branch i s t h e seller or the buyer of goods in the Ph~lippines? /~ I 1 0 ~'

C.T.A. CASE NO . 4110 - DEC I S I 0 N- .:_ 7 - A. In the course o� the investigation I interviewed some personnel o� their o��ice at Ma kati and even their Japanese Managers, I �argot their names, in the course o� the investigation in passing , asking them, Do you buy �or your own account and sell it out? No. What they have is only their o ��ice here and that they engaged o� ex port and import. There is nothing in the books or the �inancial statemen ts showing that they are acting as buyer �or their own accoun t and selling �or their own account . XXX Q. So in your entire not investigation, you did wherein encounter a situation is the Marubeni, Philippine Branch buyer or the seller? A. None,Because I asked them, Do you buy goods and store it or where do you store it, do you have any storage? None at all." Additionally, respondent urges that "petitioner's act o� devising a sophisticated cloak o� semantics as 'subsidy �rom the home o��ice' is a mani�estation o� a will�ul and �raudulent intent to mislead the respondent and to avoid payment o� correct tax due thereon "juati�iea the charge o� 50% o� �raud penalty. Respondent does not also concede that the tax liability o� petitioner had already been extinguished with ita availment o� Executive Order l Un u-

C.T.A. CASE NO. 4110 - DE C I S I 0 N- -8 - Nos. 41 and 64. There is allegedly no voluntary disclosure o:f untaxed income by petitioner, and that this case was already be:fore this Court on September 26, 1986 when petitioner :filed its Amnesty Tax Returns on November 3, 1986 and December 13, 1986. Marubeni Corp. has its subsidiaries and o:f:fices worldwide, as it is Marubeni Corporation <Manila Branch is a multinational enterprise>. As de:fined a multinational enterprise is a combination o:f companies o:f di:f:ferent nationality connected by means o:f shareholdings, managerial control and constituting an economic unity. One basic idea which is common to all multination&!l enterprises the disparity between economic and legal entity. Whereas, they are viewed as single unit, yet they are in truth and in :fact separate legal units <Multinational Enter p rises by Robert Emmett Tindal, page V, XV>. From the above cited de:finition o:f what a multinational enterprise is, we can very well opine that Marubeni Corporation, Manila Branch and its head o:f:fice constitute a single economic unit but the legal structures are separate and L

C.T.A. CASE NO. 4110 - DEC I S I 0 N -9- distinct �rom each . other thu s constituting two <2> taxable e ntities. The �act remains t hat petitioner is engaged as commercial broker �or its ex port import trade considering that its export import trade transcends national boundaries, Marubeni Cor poration, Man ila Branch is rendering bro kerage services in the Philippines in br ngi ng about sales or purchases o� merchandise o� Japanese and other �oreign traders and Filipino businessmen or in bringing together proposed Filipino buyers and Japanese or other �oreign sellers in the Phili ppines. Unde r Section 187 <t> o� the 1977 T ax Code, a commercial broker is de�ined as �allows " ( t). "Commercial broker" includes all perso ns, other than importers, manu �act urers, p roducers or bona �ide employees, who �or comp ensation or pro�it, sell or bring about sales or purchases o� merchandise �or ot h er persons, or bring proposed buyers and sellers together, or n egotiate �reights or other business owners o� vessels or other means o� transportation, or �or the shippers, or consignors or consignee o� �reight carried by vessels or other means o� /~ I

C. T. A. CASE NO. 4110 DE C I S I 0 N 10 - transportation. The term includes commission merchants". As it is, �rom the a�orecite d prov sian o� the Tax Code, i t can very ~ell be concluded that indeed petitioner is �a commercial broker. For all the brokerage services rendered by Marubeni Corporation branch in Manila, it received commissions �rom Marubeni Corporation, Head O��ice, a de�inite percentage �rom the commissions income received by the latter in a completed operation o� brokerage services. This commission .. income was declared by Marubeni Corporation, Manila Branch, as subsidy �rom home o��ice. It is however reported by the latter as income in its Statement o� Inc9me and Expenses �or the period ended March 31, 1985 and 1984 attached to its Corporation Annual Income Tax Return. For the commissions that they earned �rom the brokerage transactions, Marubeni Japan allocates a certain portion o� that income out o� the transaction �or the services rendered by Marubeni Branch. It can be readily seen, in the course o� the transaction that the source o� the subsidy is tied with the import and export transaction. L 11 ~

C . T.A. CASE NO. 4110 - DEC I S I 0 N- 11 Now, with regard to the pattern o� percentage being sent as subsidy, the same is comp ted as based on percentage on sales price or on :fixed amount based on quantity. The Court considers said amount as commissions contrary to the petitioner's claim. It is likewise noted that it is the Head O:f:fice <Marubeni Japan> that allocates the commissions as compensation :for the services rendered by ita Philippine branch. We cannot give due assent to petitioner's claim that what it allocates to the Marubeni Branch are mere subsidies in the truest sense o� the word. To our mind, it is more o� a commission considering the :fact that the amount o:f subsidies remittep varies, dependent upon the sales price or baaed on quantities. Furthermore, i:f these subsidies are only given to :finance the transactions being undertaken by the branch o:f:fice in :favor o:f the mother company, then there would then be no need to determine the percentage o:f the subsidies on the basis o:f sales price and quantity. The bigger the amount involved in the transaction, the bigger the commissions, the amount given by the Head O:f:fice is always / 11 ~

C.T. A. CASE NO . 41 0 - DE C I S I 0 N- 12 - depen d ent on the import - ex p ort transaction. Th e term commissions, as de:fined are the allowances to an agen t or :factor :for transacting usiness :for anoth er. <Citing Wo rds a nd Phrases, Volume 7A, page 558> Co mmi ssions when used to ex press co mpensation :for serv ices rendered, it usually mon e y paid ' denotes a percent age on the amo nt o :f out or recei ved <ibid page 559> The word commission is usually employed to mean the compensation to an agent, broker or person who hand es the a:f:fairs o:f oth ers in payment :for their services (ib id 559>. From the de:finitions cited above, the :for eigp remittan ces given to Manila Branch :fall s quarely within the de:finition o:f a commission. In the instant case, petitioner laid out the nature o:f the transactions as involving two types. One , is where Marubeni Japan is itsel:f the buyer or seller in a transaction, with a counterpart buyer or seller in the Philippines; and the other is where the Marubeni Head O:f:fice is neither the buyer nor the seller, there being Philippine buyers or .) sellers and counterpart :foreign buyers or sellers.

C.T .A. CASE NO. 4110 - DEC I S I 0 N- 13 - In both types o� transactions~ there was alleged to be active partic'pation by Marubeni Branch by obtai ning in� ormation~ arranging �o r shipment~ com munic a �ting and negotiating the terms and conditions with the Philippine parties involved~ and other liason services. It was shown that Marubeni Head O��ice was itsel� the seller or the buyer in this activity in the Philippines. The role o� the branch involved �acilitation o� the said transaction. For this it .) received "commissions �rom Home O��ice" amounting to P2 2~031 ~993.00. The second type o� transaction was shown as one where petitioner was not a buyer I or seller there being Philippine buyers or sellers and counterpart �oreign buyers or sellers. The partfcipation o� the branch in this transaction also involved liason service and the commission paid to it represents all income allocated to it by the Head O��ice. Moreover~ the Court sustains i t s deviation �rom the case o� Phi~ipp Brothers Oceanic Inc. vs. Commissioner o f Interns~ Revenue~ CTA Case No. 3140 with the case at bar based on the �allowing ;( ( 11~

C.T.A. CASE NO. 4110 - DEC I S I 0 N- 14 - consi d er:::ttion s In the Philipp Brothers Oceanic case, the amount of Commissions allocated to the Philippine Branch is not dictated by the amount, bulk, quAntity or vo .lume o:f the import a nd/o r ex port transacti on. It is based on a uni:form Intercompany \ Commission sched ule supplied by the Head O:f:fice. Secondly, instead of subsidy the term used is Commies on intercompany, and the amount o:f Comm ssion is based on a pre-determined rates. Lastly, the Commissions pAid by the Head Of:fice <PhiBro New York> to Philipp ne Branch in the :form of :foreign remittances are paid only a:fter the latter has submitted a deb it memo. I <Philipp Brothers Oceanic, Inc. vs~ Commissioner o:f Internal Revenue, CTA Case No. 3140, p. 80 CTA ~ecords> On he question o:f the e:f:fect of petitioner's avail ment o:f the tax amnesty under Executive Order Nos. 41 and 64 , the Court resolves the same in the :following manner. Clearly, :filing o:f a tax amnesty return under E.0.41 ext inguis hes the :filer's income tax liability <and the penalties imposed thereon>. As enunciated in Section 6 <a > o:f E. 0 . 41, upon ~ 11 0

C.T.A. CASE NO. 41 10 - DE C I S I 0 N- 15 - compliance with the conditions o:f the a mnesty declared thereby: "The taxpayer shall be relieved o:f any income tax lia bility on any untaxed income :from Janu ary 1. 1981 to Dece mb er 31. 1985. including increments hereto and penalties on account o:f the non- payme nt o:f the said tax. Civil. criminal or administrative li a bility arising :from the non - payment o:f the said tax. which are actionable under the National Internal Revenue Code. as amended. are likewise deemed extinguished." It does not extinguish d any other tax l ia bility o:f the p etitioner like :for instance. its business tax liabilities. The records show that petitioner did ~ot have any income tax liab i l i t i e s during the per iod covered by E.O. 41. The onl~ assess ment made by the respondent a gainst p etit ioner :for taxes covering the said p eriod is one :for unpaid commercia l broker's tax, whi c h is a business. and not an income tax. Petitioner's act in :filing its amnesty return under E. 0. 41 on October 15, 1986 did not have any .practical result. It certainly did not extinguish petitioner's business tax liability. Executive Order 41, which took e:f:fect on August 22, 1986. is an amnesty on income tax while l lo

C.T. A. CASE NO . 4110 - DEC I S I 0 N- 16 - EY.ec u tive Order 64, which becnme e:f:fective on November 17. 1986, expanded the sco p e o:f the amnest y to include estate, dono rs and bus iness tax. Unli ke E.O . 41, E.O . 64 does not express ly p rovide :for exce ptions :from the amnesty dec lared thereby. I ns t ead, E. O. 64, in its Section 8 states that: "The p rovisions o:f E'ecutive Order Nos. 41 and S4 which are not contrary or inconsistent with the amendatory Executive Orde r s h a ll remain in :for ce and e:f:fect . Obviously, Section 4 o:f E. 0 . 41, which enumerates the exceptions to the income tax amnesty, i s not contrary to or incons i stent with E. 0. 64. There:fore, it is sa:fe t o say that ' it I J continued to be in :force and e:f:fect even a:fter the promulgation o:f E.O. 64. The same may be said o:f Sec �tion 6 o:f E. 0 . 41, wh ic h enu m.erates the immunities and p riveleges enjoyed b y taxp ayer who avrti l o:f the tax amnesty 9eclared thereby. .Accordi ngly, Section 4 on the excep tion to availment o:f tax amnesty under E. 0. 41 should likewise be applicable to those who will avail o:f the tax amnesty under E.O. 64. Thus, the exception or disquali:fication under subsection <b) o:f the said Section 4 that: 1 .1.l �I~'

C.T. A. CASE NO. 41 0 - DE C I S I 0 N- 17 - "Those with income ax cases already �iled i n court as o� the e��ectivity hereo�" should likewise be a pplicable to those who will a va 1 o� the a mn est y under E.O. 64. Obviously, as E.O. 64 re�ers o estate, d onor's and and buAiness ta xes. The sa'd d ' s q tali� i cation should likewise be read as to re�er to these taxes. Considering that as o � he e��ecti vit y o� E. 0. 64 on November 17, 1986, there is already a business tax (commercial brokers tax assessment> case pend ing be�ore this Court <�ile d on September 26, 1986>, Petit io n er is disquali�ied to avai l o� the amnesty under E.O. 64, reiterating as basis s ub ection <b>, Sect'on 4 o� E.O. 41. P etiti oner or ava iled o� the tax amnesty under E. 0 . 64 D ~c ember 15, 1986. Furthermore, t h e Court is bound to ' nter pret the amnesty law stric �t ly against the taxpayer. Tht?re must be clear showing o� compl ance w't h the r e quire ments o� the amnesty aw . <People vs . Castaneda G.R. No. L. - 46881, Sept e mber 15,1988> WHEREFORE, the decision o� the Commissioner o� Internal Revenue assessing petitioner the amount o� P3,601,535.68 is SUSTAINED. L 11~

C .T.A. CASE NO. 4110 - DECI S I 0 N- - 18 - SO ORDERED. Quezon C~ty, Metro Man~la, March 1, 1993. L /Z;/} .(l K. GRUBA Judge ~~ As so WE CONCUR: e~Q~o~ ERNESTO D. ACOSTA Presiding Judge (Dissenting) RAMON 0. DE VEYRA Associate Judge CER"T_I F I C A T I D N I hereby cert~:fy that t h i s qecision was reached a�ter due consultation among the members o:f t l e Court o:f Tax Appeals in accordance w~th Sect~on 13, Article VIII o:f the Constitution. ~0-~ ERNESTO D. ACOSTA Presiding Judge Court o:f Tax Appeals