CIR V SC JOHNSON INC.

June 25, 1999

Facts: Respondent

is a domestic corporation organized and operating

under the Philippine Laws, entered into a licensed agreement with the SC
Johnson and Son, USA, a non-resident foreign corporation based in the USA
pursuant to which the respondent was granted the right to use the
trademark, patents and technology owned by the later including the right to
manufacture, package and

distribute

the

products

covered

by the

Agreement and secure assistance in management, marketing and production

from

SC

Johnson

and

Son

USA.

For the use of trademark or technology, respondent was obliged to pay SC

Johnson and Son, USA royalties based on a percentage of net sales and
subjected the same to 25% withholding tax on royalty payments which
respondent paid for the period covering July 1992 to May 1993 in the total
amount
On

of

October

29,

1993,

P1,603,443.00.

respondent

filed

with

the

International Tax

Affairs Division (ITAD) of the BIR a claim for refund of overpaid withholding
tax on royalties arguing that, the antecedent facts attending respondents
case fall squarely within the same circumstances under which said
MacGeorge and Gillette rulings were issued. Since the agreement was
approved by the Technology Transfer Board, the preferential tax rate of 10%
should apply to the respondent. So, royalties paid by the respondent to SC
Johnson

and

Son,

USA

is

only

subject

to

10%

withholding

tax.

The Commissioner did not act on said claim for refund. Private respondent
SC Johnson & Son, Inc. then filed a petition for review before the CTA, to
claim a refund of the overpaid withholding tax on royalty payments from July
1992

to

May

1993.

On May 7, 1996, the CTA rendered its decision in favor of SC Johnson and
ordered

the

CIR

to

issue

tax credit

certificate in

the

amount

of

P163,266.00 representing overpaid withholding tax on royalty payments

beginning

July

1992

to

May

1993.

The CIR thus filed a petition for review with the CA which rendered the
decision subject of this appeal on November 7, 1996 finding no meritin the
petition

and

Issue: Whether
Held: It

affirming

in

toto

the

CTA

ruling.

or not tax refunds are considered as taxexemptions.

bears stress that tax refunds are in the nature of taxexemptions.

As such they are registered as in derogation of sovereign authority and to be

construed

strictissimi

juris

against

the

person

or

entity

claiming

the exemption. The burden of proof is upon him who claims the exemption in
his favor and he must be able to justify his claim by the clearest grant of
organic or statute law. Private respondent is claiming for a refund of the
alleged overpayment of tax on royalties; however there is nothing on record
to support a claim that the tax on royalties under the RP-US Treaty is paid
under similar circumstances as the tax on royalties under the RP-West
Germany Tax Treaty.

CIR VS PROCTER AND GAMBLE

Topic: Tax on dividends remitted to foreign corporations Facts:

Procter and Gamble Philippines, a domestic corporation wholly owned by Procter and Gamble USA, is invoking thetaxsparing credit provision in Section 24(b) and is claiming a refund or tax credit of the 20 percentage-point portionof the 35
percentage-point whole tax on dividends that it had previously paid to the Bureau of Internal Revenue.
Issue and Ruling:
1.
W/
N Procter and Gamble Philippines is entitled to the preferential 15% tax rate on dividends declared andremitted to its parent
corporation
NO. Procter and Gamble Philippines failed to meet certain conditions necessary in order that the dividends received by the
non-resident parent company in the US may be subject to the preferential 15% tax instead of 35%, among which are:(a)

To show the actual amount credited by the US government against the income tax due from Procter andGamble USA;(b)
To present the income tax return of its mother company for the years the dividends were received; and(c)
To submit any duly authenticated document showing that the US government credited the 20% tax deemedpaid in the
Philippines.
Notes:
The State can never be in estoppel, and this is particularly true in matters involving taxation. The errors of certainadministrative
officers should never be allowed to jeopardize the governments financial position.
ANOTHER DIGEST:
NON-RESIDENT FOREIGN CORPORATION- DIVIDENDS

Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend remittances to
non-resident corporate stockholders of a Philippine corporation. This rate goes down to 15% ONLY IF the
country of domicile of the foreign stockholder corporation 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 corporation. However, such tax credit for taxes deemed paid in the
Philippines MUST, as a minimum, reach an amount equivalent to 20 percentage points

FACTS:
Procter and Gamble Philippines declared dividends payable to its parent company and sole stockholder,
P&G USA. Such dividends amounted to Php 24.1M. P&G Phil paid a 35% dividend withholding tax to the
BIR which amounted to Php 8.3M It subsequently filed a claim with the Commissioner of Internal Revenue
for a refund or tax credit, claiming that pursuant to Section 24(b)(1) of the National Internal Revenue
Code, as amended by Presidential Decree No. 369, the applicable rate of withholding tax on the dividends
remitted was only 15%.

MAIN ISSUE:
Whether or not P&G Philippines is entitled to the refund or tax credit.

HELD:
YES. P&G Philippines is entitled.
Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend remittances to
non-resident corporate stockholders of a Philippine corporation. This rate goes down to 15% ONLY IF he

country of domicile of the foreign stockholder corporation 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 corporation. However, such tax credit for taxes deemed paid in the
Philippines MUST, as a minimum, reach an amount equivalent to 20 percentage points which represents
the difference between the regular 35% dividend tax rate and the reduced 15% tax rate. Thus, the test is if
USA shall allow P&G USA a tax credit for taxes deemed paid in the Philippines applicable against the
US taxes of P&G USA, and such tax credit must reach at least 20 percentage points. Requirements were
met.

NOTES: Breakdown:
a) Deemed paid requirement: US Internal Revenue Code, Sec 902: a domestic corporation (owning 10%
of remitting foreign corporation) shall be deemed to have paid a proportionate extent of taxes paid by such
foreign corporation upon its remittance of dividends to domestic corporation.

b) 20 percentage points requirement: (computation is as follows)

P 100.00 -- corporate income earned by P&G Phils
x 35% -- Philippine income tax rate
P 35.00 -- paid by P&G Phil as corporate income tax

P 100.00
- 35.00
65. 00 -- available for remittance

P 65. 00
x 35% -- Regular Philippine dividend tax rate
P 22.75 -- regular dividend tax

P 65.0o
x 15% -- Reduced dividend tax rate
P 9.75 -- reduced dividend tax

P 65.00 -- dividends remittable

- 9.75 -- dividend tax withheld at reduced rate
P 55.25 -- dividends actually remitted to P&G USA

Dividends actually

remitted by P&G Phil = P 55.25

---------------------------------- ------------- x P35 = P29.75
Amount of accumulated P 65.00
profits earned

P35 is the income tax paid.

P29.75 is the tax credit allowed by Sec 902 of US Tax Code for Phil corporate income tax deemed paid
by the parent company. Since P29.75 is much higher than P13, Sec 902 US Tax Code complies with the
requirements of sec 24 NIRC. (I did not understand why these were divided and multiplied. Point is,
requirements were met)

Reason behind the law:

Since the US Congress desires to avoid or reduce double taxation of the same income stream, it allows a
tax credit of both (i) the Philippine dividend tax actually withheld, and (ii) the tax credit for the Philippine
corporate income tax actually paid by P&G Philippines but deemed paid by P&G USA.

Moreover, under the Philippines-United States Convention With Respect to Taxes on Income, the
Philippines, by treaty commitment, reduced the regular rate of dividend tax to a maximum of 20% of he
gross amount of dividends paid to US parent corporations, and established a treaty obligation on the part
of the United States that it shall allow to a US parent corporation receiving dividends from its Philippine
subsidiary a [tax] credit for the appropriate amount of taxes paid or accrued to the Philippines by the
Philippine [subsidiary].

Note:
The NIRC does not require that the US tax law deem the parent corporation to have paid the 20
percentage points of dividend tax waived by the Philippines. It only requires that the US shall allow P&GUSA a deemed paid tax credit in an amount equivalent to the 20 percentage points waived by the
Philippines. Section 24(b)(1) does not create a tax exemption nor does it provide a tax credit; it is a
provision which specifies when a particular (reduced) tax rate is legally applicable.

Section 24(b)(1) of the NIRC seeks to promote the in-flow of foreign equity investment in the Philippines
by reducing the tax cost of earning profits here and thereby increasing the net dividends remittable to the
investor. The foreign investor, however, would not benefit from the reduction of the Philippine dividend tax
rate unless its home country gives it some relief from double taxation by allowing the investor additional
tax credits which would be applicable against the tax payable to such home country. Accordingly Section
24(b)(1) of the NIRC requires the home or domiciliary country to give the investor corporation a deemed
paid tax credit at least equal in amount to the 20 percentage points of dividend tax foregone by the
Philippines, in the assumption that a positive incentive effect would thereby be felt by the investor.