LAW OF BASIC TAXATION IN THE PHILIPPINES ‘The purpose of a most favored nation clause is to grant to the contracting party treatment not less favorable than that which has been or may be granted to the “most favored” among other countries. ‘The most favored nation clause is intended to establish the principle of equality of international treatment by providing that the citizens or subjects of the contracting nations may enjoy the privileges hecorded by either party to those of the most favored nation. The ‘essence of the principle is to allow the taxpayer in one state to avail of more liberal provisions granted in another tax treaty to which the country of residence of such taxpayer is also a party provided that the subject matter of taxation, in this case royalty income, is the same as that in the tax treaty under which the taxpayer is liable. Both Article 13 of the RP-US Tax Treaty and Article 12(2)(b) of the RP-West Germany Tax Treaty speak of tax on royalties for the use of trademark, patent and technology. The entitlement of the 10% trate by U.S. firms despite the absence of a matching credit (20% for royalties) would derogate from the design behind the most favored nation clause to grant equality of international treatment since the tax burden laid upon the income of the investor is not the same in the two countries. The similarity in the circumstances of payment of taxes is a condition for the enjoyment of the most favored nation treatment precisely to underscore the need for equality of treatment, EXERCISES 1. During the period of the deficiency but prior to assessment, a law was passed providing that interest would be collectible on the ‘amount of income tax not paid. Accordingly, the Commissioner of Internal Revenue included such amount in the assessment made. ‘The taxpayer refused, contending that to require him to pay such interest would be to violate the prohibition against ex post facto laws. Decide the case with reasons. (1972 Bar) 2. Where a doubt or ambiguity arises in connection with the imposition of a tax under a particular taxing state, what rule of construction is applied? Discuss. 3, Itis oftentimes said that our tax laws, like the law on income tax under our National Internal Revenue Code, are neither political nor penal but they are actually civil, in nature. Discuss the importance of this principle especially as it relates to the deductibility of losses during wartime as the imposition of war profits taxes on increases in net worth during the war. 168 J. Assume for example that in 1986, in response to a legal query posed by a pawnshop owner, the BIR ruled that pawnshops are Hot Tending investors subject to the 5% tax under Sec. 116 of the Tax Code. Pursuant to this ruling, Squaredeal Pawnshop, Inc. did not pay any lending investors tax on its business, However, in 1988 the BIR reversed this ruling and declared that pawnshop operators are taxable. May the BIR, therefore, in consonance with this latter ruling, assess Squaredeal Pawnshop, Inc. for back taxes corresponding to the period prior to the 1988 ruling? Give your 5. Assume, however, that in the problem above, no ruling on the taxability or non-taxability of pawnshop owners was ever issued, tly you think the BIR could retroactively apply the 1988 ruling and lassess pawnshop owners accordingly? Reasons. 169