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2. In computing its taxable gross receipts, petitioner included the 20% final
110. China Banking Corporation vs. Commissioner of Internal Revenue
February 27, 2013 | PERALTA | Corporations- Domestic Corporations
PETITIONER​: CHINA BANKING CORPORATION
RESPONDENTS​: COMMISSIONER OF INTERNAL REVENUE
SUMMARY​:
China Bank (CBC) paid its gross receipt tax (GRT) amounting to about 93M. It
included in its GRT the 20% final withholding tax on its passive interest income.
It claimed for a refund after CTA rendered its Asia Bank decision saying that the
final withholding tax does not form part of the GRT. Asia Bank decision was
subsequently reversed in another case.
CTA agreed with CBC that final withholding tax does not form part of the GRT
but CTA still denied CBC’s claim for refund because CBC failed to prove that it
included the withholding tax in its GRT.
On appeal, CA held that final withholding tax forms part of the GRT.
In SC, it ruled that the amount of interest income withheld, in payment of the
20% final withholding tax, forms part of the bank’s gross receipts in computing
the GRT on banks. CBC failed to point to any specific provision of law allowing
the deduction, exemption or exclusion from its taxable gross receipts, of the
amount withheld as final tax.
DOCTRINE
The exclusion of the final withholding tax from gross receipts operates as a tax
exemption which the law must expressly grant. No law provides for such
exemption.
FACTS:
1. China Banking Corp (CBC) paid P93,119,433.50 as gross receipts tax
(GRT) on its income from the interests on loan investments, commissions,
service and collection charges, foreign exchange profit and other operating
earnings.
withholding tax on its passive interest income.
3. On January 30, 1996, the Court of Tax Appeals (CTA) rendered a Decision
entitled Asian Bank Corporation v. Commissioner of Internal Revenue,4
wherein it ruled that the 20% final withholding tax on a bank’s passive
interest income should not form part of its taxable gross receipts.
4. On the strength of the aforementioned decision, CBC filed with respondent
a claim for refund on April 20, 1998, of the alleged overpaid GRT for the
four (4) quarters of 1996 in the aggregate amount of P6,646,829.67.
5. The CTA, on November 8, 2000, rendered a Decision agreeing with
petitioner that the 20% final withholding tax on interest income does not
form part of its taxable gross receipts. However, the CTA dismissed
petitioner’s claim for its failure to prove that the 20% final withholding tax
forms part of its 1996 taxable gross receipts.
6. CBC filed an appeal in CA. It insists that it erroneously included the 20%
final withholding tax on the bank’s passive interest income in computing
the taxable gross receipts. Therefore, it argues that it is entitled, as a matter
of right, to a refund or tax credit.
7. CA denied the appeal and said that CBC is flogging a dead horse as its
argument has already been shot down in China Banking Corporation v.
Court of Appeals where it was ruled the Tax Court, which decided Asia
Bank on June 30, 1996 not only erroneously interpreted Section 4(e) of
Revenue Regulations No. 12-80, it also cited Section 4(e) when it was no
longer the applicable revenue regulation. The revenue regulations
applicable at the time the tax court decided Asia Bank was Revenue
Regulations No. 17-84, not Revenue Regulation 12-80.
8. Hence, the case was elevated to SC.
ISSUES:
1. WON the 20% final tax withheld on a bank’s passive income should be
included in the computation of the GRT. - ​YES. It should be part of the
GRT absence any law allowing for its deduction.
RATIO:
1. SC does not agree with the arguments of CBC. In China Banking
Corporation v. Court of Appeals, SC ruled that the amount of interest
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income withheld, in payment of the 20% final withholding tax, forms part expenses of management. The word “gross” must be used in its plain and
of the bank’s gross receipts in computing the GRT on banks. ordinary meaning. It is defined as “whole, entire, total, without deduction.”
2. SC cited several cases about the cause of confusion on what rule is A common definition is “without deduction.” x x x Gross is the antithesis of
applicable so summary nalang: net.
a. In Asia Bank case, the CTA held that the final withholding tax is 5. All told, CBC failed to point to any specific provision of law allowing the
not part of the bank’s taxable gross receipts. The tax court deduction, exemption or exclusion from its taxable gross receipts, of the
anchored its ruling on Section 4(e) of Revenue Regulations No. amount withheld as final tax. Besides, the exclusion sought by petitioner of
12-80, which stated that the gross receipts “shall be based on all the 20% final tax on its passive income from the taxpayer’s tax base
items actually received” by the bank. The tax court ruled that the constitutes a tax exemption, which is highly disfavored. A governing
bank does not actually receive the final withholding tax. As principle in taxation states that tax exemptions are to be construed in
authority, the tax court cited Collector of Internal Revenue v. strictissimi juris against the taxpayer and liberally in favor of the taxing
Manila Jockey Club, which held that “gross receipts of the authority and should be granted only by clear and unmistakable terms.
proprietor should not include any money which although delivered
to the amusement place had been especially earmarked by law or SEPARATE OPINIONS:
regulation for some person other than the proprietor CONCURRING:
b. Pero after that case may subsequent decision si CTA reversing
itself. It said that the final withholding tax forms part of the bank’s
gross receipts in computing the gross receipts tax. The tax court
held that Section 4(e) of Revenue Regulations 12-80 did not
prescribe the computation of the gross receipts but merely
authorized “the determination of the amount of gross receipts on
the basis of the method of accounting being used by the taxpayer.
The tax court also held in ​Far East Bank and Standard Chartered
Bank ​that the exclusion of the final withholding tax from gross
receipts operates as a tax exemption which the law must
expressly grant. No law provides for such exemption. In
addition, the tax court pointed out that Section 7(c) of Revenue
Regulations No. 17-84 had already superseded Section 4(e) of
Revenue Regulations No. 12-80
3. The Bureau of Internal Revenue (BIR) has consistently ruled that the term
gross receipts do not admit of any deduction. It emphasized that interest
earned by banks, even if subject to the final tax and excluded from taxable
gross income, forms part of its gross receipt for GRT purposes. The interest
earned refers to the gross interest without deduction, since the regulations
do not provide for any deduction.
4. Court held that “gross receipts” refer to the total, as opposed to the net,
income. These are, therefore, the total receipts before any deduction for the
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111. BDO v. CIR (Cla)
January 13, 2015 | Leonen, J. | Domestic Corporations
PETITIONER: ​Banco De Oro, Bank of Commerce, CHina Banking,
MBTC, PC, PNB, Phil Veterans Bank, Planters Devt Bank, RCBC, RCBC
Capital Corp. CODE-NGO
RESPONDENTS: ​Republic of the Philippines, CIR, BIR, Sec of FInance,
Dept of Finance, National Treasurer, Bureau of Treasury
SUMMARY: ​A notice by the Bureau of Treasury (BTr) to all
Government Securities Eligible Dealer (GSED) entitled Public Offering of
Treasury Bonds denominated as the Poverty Eradication and Alleviation
Certificates or the PEACE Bonds, announced that P30 Billion worth of
10-year Zero-Coupon Bonds will be auctioned on Oct. 16, 2011. The
notice stated that the Bonds “shall be issued to not more than 19
buyers/lenders. Lastly, it stated that “while taxable shall not be subject to
the 20% final withholding tax” pursuant to the BIR Revenue Regulation
No. 020 2001. After the auction, RCBC which participated on behalf of
CODE-NGO was declared as the winning bidder having tendered the
lowest bids. On October 7, 2011, “the BIR issued the assailed 2011 BIR
Ruling imposing a 20% FWT on the Government Bonds and directing the
BTr to withhold said final tax at the maturity thereof. Furthermore the
Bureau of Internal Revenue issued BIR Ruling No. DA 378-201157
clarifying that the final withholding tax due on the discount or interest
earned on the PEACE Bonds should “be imposed and withheld not only
on RCBC/CODE NGO but also onall subsequent holders of the Bonds.
Banco de Oro, et al. filed a petition for Certiorari, Prohibition and
Mandamus under Rule 65 to the Supreme Court contending that the
assailed 2011 BIR Ruling which ruled that “all treasury bonds are ‘deposit
substitutes’ regardless of the number of lenders, in clear disregard of the
requirement of twenty (20) or more lenders mandated under the NIRC.
Furthermore it will cause substantial impairment of their vested rights
under the Bonds since the ruling imposes new conditions by “subjecting
the PEACE Bonds to the twenty percent (20%) final withholding tax
notwithstanding the fact that the terms and conditions thereof as
previously represented by the Government, through respondents BTr and
BIR, expressly state that it is not subject to final withholding tax upon
their maturity.”
The Commissioner of the Internal Revenue countered that the BTr has no
power to contractually grant a tax exemption in favour of Banco de Oro, et
al.. Moreover, they contend that the word “any” in Section 22(Y) of the
National Internal Revenue Code plainly indicates that the period
contemplated is the entire term of the bond and not merely the point of
origination or issuance.
DOCTRINE:
Deposit substitute is an alternative form of obtaining funds from the public
(the term 'public' means borrowing from twenty (20) or more individual or
corporate lenders at any one time). The number of lenders is determinative
of whether a debt instrument should be considered a deposit substitute and
consequently subject to the 20% final withholding tax. The phrase “at any
one time” for purposes of determining the “20 or more lenders” would
mean every transaction executed in the primary or secondary market in
connection with the purchase or sale of securities.
FACTS:
1. Caucus of Development NGO Networks (CODE-NGO) with the assistance
of Rizal Commercial Banking Corp. (RCBC), RCBC Capital Corp. (RCBC
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Capital) CAPEX Finance and Investment Corp. (CAPEX) and SEED
Capital Ventures Inc. (SEED), requested an approval from the Department
of Finance for the issuance by the Bureau of Treasury of 10 year
zero-coupon Treasury Certificates (T-notes). The T-notes would initially be
purchased by a special purpose vehicle on behalf of CODE-NGO,
repackaged and sold at a premium to investors as the PEACe Bonds.
2. The net proceeds from the sale of the Bonds will be used to endow a
permanent fun (Hanapbuhay Fund) to finance activities of NGOs
throughout the country.
a. Zero coupon bond - a bond bought at a price substantially lower
than its face value or at a discount with a face value repaid at the
time of maturity. It does not make periodic interest payments.
However, the discount to face value constitutes the return to the
bondholder.
3. BIR issued BIR Ruling No. 020-2001 on the tax treatment of the proposed
PEACe Bonds.
a. Confirmed that the PEACe Bonds would not be classified as
deposit substitutes and would not be subject to the corresponding
withholding tax
b. To be classified as deposit substitutes, the borrowing of funds must
be obtained from 20 or more individuals or corporate lenders at
any one time.
i. Deposit substitutes - an alternative form of obtaining
funds from the public (public - borrowing from 20 or
more individual/ corporate lenders at any one time), other
than deposits, through the issuance, endorsement, or
acceptance of debt instruments for the borrower’s own
account for purposes of re-lending or purchasing
receivables and other similar obligation, or financing their
own needs or the needs of their agent or dealer.
c. This was reiterated in BIR Ruling 035-2001 and BIR Ruling
DA-175-01.
4. In sum, these rulings pronounced that to be able to determine whether the
financial assets are deposit substitutes, the 20 or more individual or
corporate lenders rule must apply. Moreover, the determination of the
phrase “at any one time” for purposes of determining the “20 or more
lenders” is to be determined at the time of the original issuance. Such being
the case, the PEACe Bonds were not to be treated as deposit substitutes.
5. Former Treasurer Edeza questioned the propriety of issuing the bonds
directly to a special purpose vehicle considering that the latter was not a
Government Securities Eligible Dealer (GSED).
6. In the notice to all GSEDs, the Bureau of Treasury announced that P30
Billion worth of 10-year Zero COupon Bonds would be auctioned on Oct.
16, 2001. The notice stated that the Bonds shall be issued to not more than
19 buyers/lenders hence the necessity of a manual auction for the maiden
issue. It stated that the issue being limited to 19 lenders and while taxable
shall not be subject to the 20% final withholding tax.
7. On Oct. 16, 2001, the Bureau of Treasury held an auction for the 10-year
zero coupon bonds. RCBC which participated on behalf of CODE-NGO
was declared the winning bidder having tendered the lowest bids.
8. On Oct. 7, 2011, “the BIR issued the assailed 2011 BIR Ruling imposing a
20% FWT on the Government Bonds and directing the BTr to withhold said
final tax at the maturity thereof. Furthermore the Bureau of Internal
Revenue issued BIR Ruling No. DA 378-201157 clarifying that the final
withholding tax due on the discount or interest earned on the PEACE Bonds
should be imposed and withheld not only on RCBC/CODE NGO but also
on all subsequent holders of the Bonds.
9. Banco de Oro, et al. filed a petition for Certiorari, Prohibition and
Mandamus under Rule 65 to the Supreme Court contending that the assailed
2011 BIR Ruling which ruled that “all treasury bonds are ‘deposit
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substitutes’ regardless of the number of lenders, in clear disregard of the
requirement of twenty (20) or more lenders mandated under the NIRC.
10. Furthermore it will cause substantial impairment of their vested rights under
the Bonds since the ruling imposes new conditions by “subjecting the
PEACE Bonds to the twenty percent (20%) final withholding tax
notwithstanding the fact that the terms and conditions thereof as previously
represented by the Government, through respondents BTr and BIR,
expressly state that it is not subject to final withholding tax upon their
maturity.”
11. The Commissioner of the Internal Revenue countered that the BTr has no
power to contractually grant a tax exemption in favour of Banco de Oro, et
al.. Moreover, they contend that the word “any” in Section 22(Y) of the
National Internal Revenue Code plainly indicates that the period
contemplated is the entire term of the bond and not merely the point of
origination or issuance.
ISSUE:
1. Is the 10-year zero-coupon treasury bonds issued by the Bureau of Treasury
subject to 20% Final Withholding Tax?
RATIO:
1. Under Sections 24(B)(1), 27(D)(1), and 28(A)(7) of the 1997 National
Internal Revenue Code, a final withholding tax at the rate of 20% is
imposed on interest on any currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and similar
arrangements.
2. Under Section 22(Y), deposit substitute is an alternative form of obtaining
funds from the public (the term 'public' means borrowing from twenty (20)
or more individual or corporate lenders at any one time).
3. Hence, the number of lenders is determinative of whether a debt instrument
should be considered a deposit substitute and consequently subject to the
20% final withholding tax. Furthermore the phrase “at any one time” for
purposes of determining the “20 or more lenders” would mean every
transaction executed in the primary or secondary market in connection with
the purchase or sale of securities.
4. In this case, it may seem that there was only one lender — RCBC on behalf
of CODE-NGO — to whom the PEACE Bonds were issued at the time of
origination. However, a reading of the underwriting agreement and RCBC
term sheet reveals that the settlement dates for the sale and distribution by
RCBC Capital (as underwriter for CODE-NGO) of the PEACE Bonds to
various undisclosed investors.
5. At this point, however, we do not know as to how many investors the
PEACE Bonds were sold to by RCBC Capital. Should there have been a
simultaneous sale to 20 or more lenders/investors, the PEACE Bonds are
deemed deposit substitutes within the meaning of Section 22(Y) of the 1997
National Internal Revenue Code and RCBC Capital/CODE-NGO would
have been obliged to pay the 20%final withholding tax on the interest or
discount from the PEACE Bonds.
6. The obligation to withhold the 20% final tax on the corresponding interest
from the PEACE Bonds would likewise be required of any lender/investor
had the latter turned around and sold said PEACE Bonds, whether in whole
or part, simultaneously to 20 or more lenders or investors.
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112. RR 4-99 (Charlie)
March 9, 1999| Espiritu, Secretary of Finance | Corporations- Capital Gains
Tax
SUMMARY​: REVENUE REGULATIONS NO. 4-99 issued March 16, 1999
further amends Revenue Memorandum Order No. 6-92 relative to the payment
of Capital Gains Tax and Documentary Stamp Tax on extrajudicial foreclosure
sale of capital assets initiated by banks, finance and insurance companies. Where
the right of redemption of the mortgagor exists, the certificate of title of the
mortgagor will not be cancelled yet even if the property had already been
subjected to foreclosure sale. Instead, only a brief memorandum will be
annotated at the back of the certificate of title, and the cancellation of the title
and the subsequent issuance of a new title in favor of the purchaser/highest
bidder depends on whether the mortgagor will redeem or not the mortgaged
property within one year from the issuance of the certificate of sale. Thus, no
transfer of title to the highest bidder can be effected yet until and after the lapse
of the one-year period from the issuance of the said certificate of sale. ​In case the
mortgagor exercises his right of redemption within one year from the issuance of
the certificate of sale, no Capital Gains Tax will be imposed because no capital
gains has been derived by the mortgagor and no sale or transfer of real property
was realized. ​In case of non-redemption, the Capital Gains Tax on the
foreclosure sale shall become due based on the bid price of the highest bidder,
but only upon the expiration of the one-year period of redemption, and will be
paid within thirty (30) days from the expiration of the said one-year redemption
period. The corresponding Documentary Stamp Tax will be levied, collected and
paid by the person making, signing, issuing, accepting or transferring the real
property wherever the document is made, signed, issued, accepted or transferred
where the property is situated in the Philippines.
DOCTRINE: ​In case the mortgagor exercises his right of redemption within
one year from the issuance of the certificate of sale, no capital gains tax shall be
imposed because no capital gains has been derived by the mortgagor and no sale
or transfer of real property was realized. ​If the mortgagor does not exercise his
right of redemption, capital gains tax on the foreclosure sale shall become due.
1. Scope.— ​ Pursuant to Section 244 of the Tax Code of 1997, in
relation to Sections 24(D)(1) and 27(D)(5)1 of the same Code,
these Regulations are hereby promulgated amending Revenue
Memorandum Order No. 29-86, as last amended by Revenue
Memorandum Order No. 6-92 and other relevant revenue
regulations and issuances regarding the ​payment of capital gains
tax and documentary stamp tax on extrajudicial foreclosure
sale of capital assets initiated by banks, finance and insurance
companies.
2. Foreclosure of Mortgage Provision Under Presidential Decree No.
1529, Otherwise Known as "Property Registration Decree". —
Where the right of redemption of the mortgagor exists, the
certificate of title of the mortgagor shall not be cancelled yet even
if the property had already been subjected to foreclosure sale, BUT
INSTEAD only a brief memorandum shall be annotated at the back
of the certificate of title, and the cancellation of the title and the
subsequent issuance of a new title in favor of the purchaser/highest
bidder depends on whether the mortgagor shall redeem or not the
mortgaged property within one year from the issuance of the
certificate of sale. Thus, no transfer of title to the highest bidder
can be effected yet until and after the lapse of the one-year period
from the issuance of the said certificate of sale.
3. Capital Gains Tax.—
1
SEC. 27 - ​Rates of Income Tax on D ​ omestic Corporations
xxx
(D)​ Rates of Tax on Certain Passive Incomes
xxx
(5) ​Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or
Buildings.​ - A final tax of six percent (6%) is hereby imposed on the gain presumed
to have been realized on the sale, exchange or disposition of lands and/or buildings
which are not actually used in the business of a corporation and are treated as capital
assets, based on the gross selling price of fair market value as determined in
accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or
buildings.
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a. In case the mortgagor exercises his right of (10) days after the close of the month following the lapse
redemption within one year from the issuance of the of the one-year redemption period, and the tax due under
certificate of sale, ​no capital gains tax shall be imposed Sec. 196 of the Tax Code shall be paid based on the bid
because no capital gains has been derived by the price at the same time the aforesaid return is filed.
mortgagor and no sale or transfer of real property was 5. Tax Clearance Certificate/Certificate Authorizing Registration. —
realized. A certification to that effect or the deed of In case of non-redemption, a tax clearance certificate (TCC) or
redemption shall be filed with the Revenue District Office Certificate Authorizing Registration (CAR) in favor of the
having jurisdiction over the place where the property is purchaser/highest bidder shall only be issued upon presentation of
located which certification or deed shall likewise be filed the capital gains and DST returns duly validated by an authorized
with the Register of Deeds and a brief memorandum agent bank (AAB) evidencing full payment of taxes due imposed
thereof shall be made by the Register of Deeds on the under Secs. 3 and 4 of these Regulations on the sale of the property
Certificate of Title of the mortgagor. classified as capital asset.
b. In case of non-redemption:
i. The capital gains tax on the foreclosure sale
imposed under Secs. 24(D)(1) and 27(D)(5) of
the Tax Code of 1997 shall become due based
on the bid price​ ​of the highest bidder
ii. But only upon the expiration of the one-year
period of redemption provided for under Sec. 6
of Act No. 3135, as amended by Act No. 4118
iii. Shall be paid within thirty (30) days from the
expiration of the said one year redemption
period.
4. Documentary Stamp Tax.
a. In case the mortgagor exercises his right of redemption,
the transaction shall only be subject to the P15.00 DST
imposed under Sec. 188 of the Tax Code because no land
or realty was sold or transferred for a consideration.
b. In case of non-redemption, the corresponding DST shall
be levied, collected and paid by the person making,
signing, issuing, accepting, or transferring the real
property wherever the document is made, signed, issued,
accepted or transferred where the property is situated in
the Philippines; Provided, that whenever one party to the
taxable document enjoys exemption from the tax, the
other party thereto who is not exempt shall be the one
directly liable for the tax. The tax return filed within ten
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113. RR 06-2008 (¥)
April 22, 2008 | Capital Gains Tax
This revenue regulation was promulgated to harmonise and consolidate the
rules relative to the ​imposition of tax for the sale, barter, exchange or
other disposition of shares of stock of domestic corporations that are
listed and traded through the Local Stock Exchange or disposition of
shares through ​Initial Public Offering (IPO) or disposition of shares
through the Local Stock Exchange.
Some definitions: (​for other definitions, check the regulation)​
1. Local stock exchange (LSE) - ​refers to any domestic
organization, association, or group of persons, whether
incorporated or unincorporated, licensed or unlicensed, which
constitutes, maintains, or provides a marketplace or facilities for
bringing together purchasers and sellers of stocks, and includes the
market place and the market facilities maintained by such
exchange. “Exchange” is an organized domestic marketplace or
facility that brings together buyers and sellers and executes trades
of securities and/or commodities, duly registered with the
Securities and Exchange Commission.
2. Initial Public Offering - a public offering f shares of stock made
for the first time in the Local Stock Exchange.
3. Primary Offering - original sale made to the investing public by
the issuer corporation of its unissued Shares of Stock.
4. Secondary Offering ​- an offer for sale to the investing public by
existing shareholders f their securities which is conducted during
an IPO or follow-on/follow-through offering.
5. Follow-on/Follow-through Offering of Shares - offering of
shares tot he investing public subsequent to an IPO.
6. Shares Listed and Traded Through the LSE ​- for purposes of
these Regulations, refers to all sales, trades or transactions of listed
Shares of Stock executed through the trading system and/or
facilities of the Local Stock Exchange.
7. Net Capital Gain - ​excess of the gains from sales or exchanges of
capital assets over losses from such sales or exchanges.
8. Closely-held Corporation - means corporation at least fifty
percent (50%) in value of the outstanding capital stock or at least
fifty percent (50%) of the total combined voting power of all
classes of stock entitled to vote is owned directly or indirectly by
or for not more than twenty (20) individuals. (​For the rules in
determining whether Corp is considered closely-held corp, check
the regulation)​
Sec. 3. Persons liable to the tax:
1. Individual taxpayers whether its zen or alien;
2. Corporate taxpayer, whether domestic or foreign; and
3. Other taxpayers not falling under (a) and (b) above, such as estate,
trust, trust funds and pension funds, among others
Sec. 4 Persons not liable to the tax:
1. Dealers in securities (merchant of stocks or certificates)
2. Investor in shares of stock in a mutual fund company, as defined
in Section 22 (BB) of the Tax Code, as amended, and
Sec. 2(s) of these Regulations, in connection with the gains
realized by said investor upon redemption of said shares of
stock in a mutual fund company ; and
3. All other persons, whether natural or juridical, who are specifically
exempt from national internal revenue taxes under existing
investment incentives and other special laws.
Sec. 5. SALE, BARTER OR EXCHANGE OF SHARES OF STOCK
LISTED AND TRADED THROUGH THE LOCAL STOCK
EXCHANGE. — ​There shall be levied, assessed and collected on every
sale, barter, exchange or other disposition of Shares of Stock Listed and
Traded through the Local Stock Exchange other than the sale by a dealer of
securities, under the following rules:
A. Tax Rate . — A stock transaction tax at the rate of 1/2 of 1%
based on the amount determined in subsection (b) hereunder.
B. Tax Base. — Gross selling price or gross value in money of the
shares of stock sold, bartered, exchanged or otherwise disposed
which shall be assumed and paid by the seller or transferor through
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 BLOCK 2A 2021 | TAXATION 1 | Montero
the remittance of the stock transaction tax by the seller or
transferor’s broker.
SEC.6. SALE, BARTER OR EXCHANGE, OR ISSUANCE OF
SHARES OF STOCK THROUGH IPO. — There shall be levied,
assessed and collected on every sale, barter, exchange or other disposition
through IPO of shares of stock in closely held corporations, under the
following rules:
A. Tax Rates. — A tax at the rates provided hereunder shall be
imposed based on subsection (b) in accordance with the proportion
of shares of stock sold, bartered, exchanged or otherwise disposed
to the total outstanding shares of stock after the listing in the Local
Stock Exchange:
Proportion of Disposed Shares to Outstanding Shares Tax Rate
Up to 25% 4%
Over 25% but not over 33 ⅓% 2%
Over 33 ⅓% 1%
B. Tax Base. — Gross selling price or gross value in money of the
shares of stock sold, bartered, exchanged or otherwise disposed of.
Sec. 7. SALE, BARTER OR EXCHANGE OF SHARES OF STOCK
NOT TRADED THROUGH A LOCAL STOCK EXCHANGE.
A. Tax Rate. — Afinal tax at the rates prescribed below is hereby
imposed on the sale, barter or exchange of shares of stock not
traded through the LSE.
Amount of Capital Gain Tax Rate
Not over P100k 5%
On any amount in excess of P100k 10%
B. Tax Base. The tax imposed in Subsection (a) above shall be upon
the net capital gains realized during the taxable year from the sale,
barter, exchange or disposition of shares of stock, except shares
sold or disposed of through the Local Stock Exchange which is
covered by the provisions of Secs. 5 and 6 above.
Determination of Gain or Loss from Sale or Disposition of Shares of
Stock​. The gain from the sale or other disposition of shares of stock shall be
the excess of the amount realized therefrom over the basis or adjusted basis
for determining gain, and the loss shall be the excess of the basis or
adjusted basis for determining loss over the amount realized. The amount
realized from the sale or other disposition of property shall be the sum of
money received plus the fair market value of the property (other than
money) received, if any.
Basis for Determining Gain or Loss from Sale or Disposition of Shares
of Stock - ​Gain or loss from the sale, barter or exchange of property, for a
valuable consideration, shall be determined by deducting from the amount
of consideration contracted to be paid, the vendor/transferor’s basis for the
property sold or disposed plus expenses of sale/disposition, if any.
If the property is acquired by purchase, the basis is the cost of such
property. ​The cost basis for determining the capital gains or losses for
shares of stock acquired through purchase shall be governed by the
following rules:
1. If the shares of stock can be identified, then the cost shall be the
actual purchase price plus all costs of acquisition, such as
commissions, documentary stamp taxes, transfer fees, etc.
2. If the shares of stock cannot be properly identified, then the cost to
be assigned shall be computed on the basis of the first- in first-out
(FIFO) method.
3. If books of accounts are maintained by the seller where every
transaction of a particular stock is recorded, then the moving
average method shall be applied rather than the FIFO method.
4. In general, stock dividend received shall be assigned with a cost
basis which shall be determined by allocating the cost of the
original shares of stock to the total number shares held after receipt
of stock dividends (i.e., the original shares plus the shares of stock
received as stock dividends).
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The capital gain or loss derived therefrom shall be subject to the regular
Limitation of Capital Losses - For sale, barter, exchange or other forms of income tax rates imposed under the Tax Code, as amended, on individual
disposition of shares of stock subject to the 5%/10% capital gains tax on taxpayers or to the corporate income tax rate, in case of corporations.
the net capital gain during the taxable year, the capital losses realized from
this type of transaction during the taxable year are deductible only to the Sec. 9. Taxation of Shares Redeemed for Cancellation or Retirement.
extent of capital gains from the same type of transaction during the same When preferred shares are redeemed at a time when the issuing corporation
period. If the transferor of the shares is an individual, the rule on holding is still in its “going-concern” and is not contemplating in dissolving or
period and capital loss carry-over will not apply. liquidating its assets and liabilities, capital gain or capital loss upon
redemption shall be recognized on the basis of the difference between the
Shares of Stock Becoming Worthless - ​Losses from shares of stock, held amount/value received at the time of redemption and the cost of the
as capital asset, which have become worthless during the taxable year shall preferred shares. Similarly, the capital gain or loss derived shall be subject
be treated as capital loss as of the end of the year. However, this loss is not to the regular income tax rates imposed under the Tax Code, as amended,
deductible against the capital gains realized from the sale, barter, exchange on individual taxpayers or to the corporate income tax rate, in case of
or other forms of disposition of shares of stock during the taxable year, but corporations. This section, however, does not cover situations where a
must be claimed against other capital gains to the extent provided for under corporation voluntarily buys back its own shares, in which it becomes
Section 34 of the Tax Code, as amended. For the 5% and 10% net capital treasury shares. Otherwise, if the shares are not listed and traded through
gains tax to apply, there must be an actual disposition of shares of stock the Local Stock Exchange, it is subject to the 5% and 10% net capital
held as capital asset, and the capital gain and capital loss used as the basis gains tax.
in determining net capital gain, must be derived and incurred respectively,
from a sale, barter, exchange or other disposition of shares of stock. Tax on Shares of Stock Not Traded through the LSE: ​Persons deriving
capital gains from the sale or exchange of listed shares of stock not traded
Sec. 8. Taxation of Surrender of Shares by the Investor Upon through the LSE shall file a return within 30 days after each transaction and
Dissolution of the Corporation and Liquidation of Assets and Liabilities a final consolidated return of all transactions.
of Said Corporation​. Upon surrender by the investor of the shares in
exchange for cash and property distributed by the issuing corporation upon
its dissolution and liquidation of all assets and liabilities, the investor shall
recognize either capital gain or capital loss upon such surrender of shares
computed by comparing the cash and fair market value of property received
against the cost of the investment in shares. The difference between the sum
of the cash and the fair market value of property received and the cost of the
investment in shares shall represent the capital gain or capital loss from the
investment, whichever is applicable. If the investor is an individual, the rule
on holding period shall apply and the percentage of taxable capital gain or
deductible capital loss shall depend on the number of months or years the
shares are held by the investor. Section 39 of the Tax Code, as amended,
shall herein apply in all possible situations.

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114. Air New Zealand v. CIR (Jen)
January 30, 2008 | Uy (CTA) | Resident Foreign Corp
PETITIONER:​ Air New Zealand
RESPONDENT: ​Commissioner of Internal Revenue
SUMMARY:
Air New Zealand foreign corporation organized and existing
under the laws of New Zealand with principal office in NZ. As an
off-line international air carrier having no landing rights in the PH,
petitioner does not maintain flight operations to and from the PH.
It is not registered with SEC and is not licensed to do business in
FACTS:
PH. It has a general sales agent in PH, Aerotel, which sells passage
documents for compensation or commission covering off-line
flights of Air NZ. Air NZ filed its Quarterly Income Tax Returns
for 1st and 2nd Quarters for taxable year 2002 and paid the amount
of 257,698. It filed a formal claim for refund but the CIR denied.
The issue is whether Air NZ is engaged in trade or business in PH
subject to corporate income tax on resident foreign corp either at
32% under Section 28(A)(1) of NIRC of 1997 or at 1 ½% under
RP-NZ Tax Treaty - YES (liable under RP-NZ Tax Treaty) since
petitioner admitted that it sells passage documents .in the
Philippines through its sales agent, Aerotel, and that it derives
revenues from the conduct of its business activity regularly
pursued within the Philippines, petitioner is a resident foreign
corporation engaged in trade or business in the Philippines and
must be subject to income tax. applying Article 8(2) of the
RP-New Zealand Tax Treaty, it shall be subject to an income tax
equivalent to 1 1/2% on the profits derived from sources within the
Philippines. Since, as found by the Court in Division, petitioner
already paid its income tax liabilities for taxable year 2002 at the
rate of 1 1/2% of its gross income, the payment is correct and
therefore no refundable amount is due.
DOCTRINE:
1. absence of flight operations to and from the Philippines is
not determinative of the source of income for purposes of
ascertaining income tax liability. It is sufficient that the
income is derived from activity within the Philippine
territory.
2. The source of an income is the property, activity or service
that produced the income. For the source of income to be
considered as coming from the Philippines, it is sufficient
that the income is derived from activity within the
Philippines. In BOAC's case, the sale of tickets·in the PH
is the activity that produces the income.
1. Air New Zealand (AIR NZ) is a foreign corporation
organized and existing under the laws of New Zealand with
principal office in NZ. As an off-line international air carrier
having no landing rights in the PH, petitioner does not
maintain flight operations to and from the PH. It is not
registered with SEC and is not licensed to do business in PH.
2. Petitioner, though, has a general sales agent in the PH,
Aerotel Limited Corporation (Aerotel), which, among others,
sells passage documents for compensation or commission
covering off-line flights of Air NZ.
3. Air NZ filed through Aerotel its Quarterly Income Tax
Returns for 1st and 2nd Quarters of taxable year 2002 and
paid the amount.
4. Air NZ filed a formal claim for refund allegedly representing
erroneously paid tax on Gross PH BIllings for the 1st and
2nd Quarters of taxable year 2002.
5. CIR denied claim for refund. Air NZ filed a petition for
review before the Court in Division which was denied. The
Division ruled that petitioner, being a resident foreign
corporation engaged in trade or business in the Philippines is
not liable to pay tax on Gross Philippine Billings as provided
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 BLOCK 2A 2021 | TAXATION 1 | Montero
in Section I 28(A)(3)(a) of the National Internal Revenue
1. CIR v. BOAC
Code (NIRC) of 1997. However, it concluded by denying its
claim for refund considering that petitioner it is still liable
for income tax not at the rate of 32% as generally imposed
on resident foreign corporations, but at the lower rate of 1
%% pursuant to the RP-New Zealand Tax Treaty on the
profits derived from sources within the PH.
6. Court in Division denied Air NZ’s MR for lack of merit.
7. Hence, this recourse before the Court En Banc praying that
Air NZ be declared as non-resident foreign corp and thus not
subject either the 32% regular income tax undrr Section
28(A)(1) of NIRC of 1997 or 1 1/2% tax pursuant to RP-NZ
Tax Treaty; the income derived by petitioner from the sale of
passage documents covering its off-line flights in not
Philippine-source income and, consequently, not subject to
Philippine income tax; and (d) petitioner be declared as
entitled to a refund or tax credit.
ISSUES:
1. W/N Air NZ is engaged in trade or business in the
Philippines subject to the corporate income tax on resident
foreign corporations, either at 32% under Section 28(A)(1)
of the NIRC of 1997 or at 1 1/2% under the RP-New
Zealand Tax Treaty - YES
2. W/M the income derived by petitioner from the sale of
passage documents covering petitioner's off-line flights is
Philippine-source income subject to Philippine income tax -
YES
3. Whether or not petitioner is entitled to the refund or tax
credit - NO
RATIO:
a. '​Gross income' ​includes gains, profits, and income
derived from salaries, wages or compensation for
personal service of whatever kind and in whatever
form paid, or from profession, vocations, trades,
business, commerce, sales, or dealings in property,
whether real or personal, growing out of the
ownership or use of or interest in such property; also
from interests, rents, dividends, securities, or the
transactions of any business carried on for gain or
profit, or gains, profits, ·a~d .income derived from
any source whatever’
b. The definition is broad and comprehensive to
include proceeds from sales of transport documents.
'The words 'income from any source whatever'
disclose a legislative policy to include all income not
expressly exempted within the class of taxable
income under our laws.' Income means 'cash
received or its equivalent'; it is the amount of money
coming to a person within a specific time x x x; it
means something distinct from principal or capital.
For, while capital is a fund, income is a flow. As
used in our income tax law, 'income' refers to the
flow of wealth.
c. The source of an income is the property, activity or
service that produced the income. For the source of
income to be considered as coming from the
Philippines, it is sufficient that the income is derived
from activity within the Philippines. In BOAC's
case, the sale of tickets·in the PH is the activity that
produces the income. The· tickets exchanged hands
here and payments for fares were also made here in.
Philippine currency. The situs of the source of
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 BLOCK 2A 2021 | TAXATION 1 | Montero
payments is the Philippines. The flow of wealth
proceeded from, and occurred within,Philippine
territory, enjoying the protection accorded by the
Philippine government. In consideration of such
protection, the flow of wealth should share the
burden of supporting the government.
d. A transportation ticket is not a mere piece of paper.
When issued by a common carrier, it constitutes the
contract between the ticket-holder and the carrier. It
gives rise to the obligation of the purchaser of the
ticket to pay the fare and the corresponding
obligation of the carrier to transport the passenger
upon the terms and conditions set forth thereon. The
ordinary ticket issued to members of the travelling
public in general embraces within its terms all the
elements to constitute it a valid contract, binding
upon the parties entering into the relationship.
e. Section 37(a) of the Tax Code which enumerates
items of gross income from sources within PH does
not mention income from sale of tickets for int’l
transpo. However, that does not render it less an
income from sources within the Philippines. Section
37, by its language, does not intend the enumeration
to be exclusive. It merely directs that the types of
income listed therein be treated as income from
sources within the Philippines.
2. In CIR v. Baier-Nickel, SC reiterated the ruling of CIR v.
BOAC:
a. In CIR v. BOAC, the issue was whether BOAC, a
foreign airline company which does not maintain
any flight to and from the Philippines is liable for
Philippine income taxation in respect of sales of air
tickets in the Philippines, through a general sales
agent relating to the carriage of passengers and cargo
between two points both outside the Philippines.
b. Ruling in the affirmative, the Court applied the case
of Alexander Howden & Co., Ltd. v. Collector of
Internal Revenue, and reiterated the rule that the
source of income is that 'activity' which produced
the income. It was held that the 'sale of tickets' in the
Philippines is the 'activity' that produced the income
and therefore BOAC should pay income tax in the
Philippines because it undertook an income
producing activity in the country.
c. Both the petitioner and respondent cited the case of
Commissioner of Internal Revenue v. British
Overseas Airways Corporation in support of their
arguments, but the correct interpretation of the said
case favors the theory of respondent that it is the
situs of the. a.ctivity that determines whether such
income is taxable in ,the Philippines.The majority
through Justice Ameurfina Melencio-Herrera, as
ponente, interpreted the sale of tickets as a business
activity that gave rise to the income of BOAC
3. We affirm the Court in Division's ruling that since petitioner
admitted that it sells passage documents .in the Philippines
through its sales agent, Aerotel, and that it derives revenues
from the conduct of its business activity regularly pursued
within the Philippines, petitioner is a resident foreign
corporation engaged in trade or business in the Philippines
and must be subject to income tax.
4. Considering, therefore, that petitioner is a resident foreign
corporation doing business in the Philippines, and applying
Article 8(2) of the RP-New Zealand Tax Treaty, it shall be
subject to an income tax equivalent to 1 1/2% on the profits
derived from sources within the Philippines. Since, as found
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 BLOCK 2A 2021 | TAXATION 1 | Montero

by the Court in Division, petitioner already paid its income Revenue vs. Baier-Nickel 9 promulgated on August 29,
tax liabilities for taxable year 2002 at the rate of 1 1/2% of 2006.
its gross income, the payment is correct and therefore no 9. The rule in this jurisdiction is that "[t]ax refunds are in the
refundable amount is due. It cannot escape tax liability from nature of tax exemptions.
the clear provisions of the Philippine tax laws.
5. To reiterate, the absence of flight operations to and from the
Philippines is not determinative of the source of income for
purposes of ascertaining income tax liability. It is sufficient
that the income is derived from activity within the Philippine
territory.
6. petitioner is a resident foreign corporation doing business in
the Philippines within the purview of our tax law and the
income earned from its flight operations outside the
Philippines is subjeCt to income tax.
7. Another issue worth mentioning is the matter raised by
petitioner regarding the applicability of Revenue Regulations
No. 15-2002 which does not consider an off-line airline
having a branch office or sales agent in the Philippines
selling passage documents, engaged in business as an
international air carrier in the Philippines. This has already
been properly addressed by the Court in Division in the
assailed Decision where it ruled that the aforesaid regulation
is not applicable in the instant case considering that the same
only took effect on October 26, 2002 while the transaction
covered by the present claim is the First and Second Quarters
of taxable period 2002.
8. It is worthy to note that judicial decisions of the Supreme
Court applying and interpreting the law shall form part of the
1.
legal system of the Philippines.8 And it bears stressing that
the BOAC decision has not been reversed nor modified by
the Supreme Court and was again applied by the Supreme
Court in the recent case of Commissioner of Internal

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115. CIR v. British Overseas Airways Corporation (Feli)
April 30, 1987 | J. Melencio-Herrera | Corporations - Resident Foreign
Corporations
PETITIONER​: Commissioner of Internal Revenue
RESPONDENTS​: British Overseas Airways Corporation (BOAC) and
Court of Tax Appeals
SUMMARY​: BOAC, a 100% British government-owned corporation
organized under the laws of the UK, operates air transportation service and
sells transportation tickets over the routes of other airline members.
Although it did not carry passengers or cargo or have any landing rights in
the Philippines, it ​maintained a general sales agent in the Philippines
which was responsible for selling BOAC tickets covering passengers and
cargoes.The CIR assessed BOAC the amount of P2,498,358.56 for
deficiency income taxes from 1959 to 1963. After BOAC protested, the
CIR issued a new assessment of P858,307.79, which BOAC paid under
protest. BOAC filed a claim for refund of the P858,307.79, which was
denied by the CIR. However, before the denial, BOAC had already filed a
petition for review with the CTA assailing the assessment. The CTA
eventually reversed the decision of the CIR, stating that the proceeds of
the BOAC tickets do not constitute income from Philippine sources. Since
no service of carriage was performed by BOAC in the Philippines, the
income is not subject to Philippine income tax. Thus, income from
transportation is income from services, so the place where the services are
rendered determines the source.
The issues are WON BOAC is a resident foreign corporation and WON
the sales of the tickets in the Philippines constitute taxable income. The
SC held that ​BOAC is a resident foreign corporation. In order that a
foreign corporation may be regarded as doing business within a State,
there must be ​continuity of conduct and intention to establish a
continuous business ​such as the appointment of a local agent, and not one
of a temporary character. In this case, During the periods of the
assessment, it maintained a general sales agent in the Philippines. The
agent was in charge of: 1. Selling and issuing tickets, 2. Breaking down
the trip into a series of trips corresponding to a different airline company,
3. Receiving the fare, 4. Allocating the payment to the various airline
companies on the basis of their participation in the services. The activities
were in the exercise of the functions normally incident to and for the
purpose and object of its organization as an international air carrier. Thus,
BOAC is engaged in business in the Philippines through a local agent,
and, as a resident foreign corporation, it is subject to income tax.
The SC also held that the ​income generated from the sales of the tickets in
the Philippines constitutes taxable income. ​To be considered as ​coming
from the Philippines, ​it is sufficient that the income is ​derived from
activity within the Philippines. In this case, the sale of BOAC tickets in
the Philippines is the activity that produces the income, since the payments
and the giving of the tickets were made in the Philippines. The absence of
flight operations is not determinative of the source income. The income
was derived from the sale of tickets, which is a business activity regularly
pursued within the Philippines.
DOCTRINE:
Sec 20, 1977 Tax Code: ​Resident foreign corporation: ​a foreign
corporation engaged in trade or business within the Philippines or having
an office or place of business therein
In order that a foreign corporation may be regarded as doing business
within a State, there must be ​continuity of conduct and intention to
establish a continuous business ​such as the appointment of a local agent,
and not one of a temporary character.
Source of income​: property, acvitity or service that produced the income.
To be considered as ​coming from the Philippines, ​it is sufficient that the
income is ​derived from activity within the Philippines.
FACTS:
1. BOAC, a 100% British government-owned corporation organized
under the laws of the UK, operates air transportation service and
sells transportation tickets over the routes of other airline members.
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 BLOCK 2A 2021 | TAXATION 1 | Montero
BOAC had no landing rights for traffic purposes in the Philippines,
and was not granted a certificate of public convenience and
necessity to operate in the Philippines, except when it was given a
temporary landing period by the Civil Aeronautics Board.
2. Although it did not carry passengers or cargo, it ​maintained a
general sales agent in the Philippines which was responsible for
selling BOAC tickets covering passengers and cargoes.
3. The CIR assessed BOAC the amount of P2,498,358.56 for
deficiency income taxes from 1959 to 1963. After BOAC
protested, the CIR issued a new assessment of P858,307.79, which
BOAC paid under protest.
4. BOAC filed a claim for refund of the P858,307.79, which was
denied by the CIR. However, before the denial, BOAC had already
filed a petition for review with the CTA assailing the assessment.
5. BOAC was again assessed for deficiency income taxes for the
years 1968/1969 to 1971 in the amount of P549,327.43. BOAC
requested that the assessment be set aside, but the CIR re-issued
the assessment for P534,132.08.
6. The CTA eventually reversed the decision of the CIR, stating that
the proceeds of the BOAC tickets do not constitute income from
Philippine sources. Since no service of carriage was performed by
BOAC in the Philippines, the income is not subject to Philippine
income tax. Thus, income from transportation is income from
services, so the place where the services are rendered determines
the source.
ISSUES:
1. WON BOAC derived income from the sales of tickets in the
Philippines while having no landing rights - ​YES
2. WON BOAC is a resident foreign corporation doing business in
the Philippines - ​YES
RATIO:
BOAC is a resident foreign corporation
1. Sec 20, 1977 Tax Code:
a. Resident foreign corporation: ​a foreign corporation
engaged in trade or business within the Philippines or
having an office or place of business therein
b. Non-resident foreign corporation​: a foreign corporation
not engaged in trade or business within the Philippines
and not having any office or place of business therein.
2. The terms “doing”, “engaging in”, “transacting” business imply a
continuity of commercial dealings and contemplates the
performance of acts or works normally incident to and for the
purpose and object of the business.
a. In order that a foreign corporation may be regarded as
doing business within a State, there must be ​continuity of
conduct and intention to establish a continuous
business ​such as the appointment of a local agent, and not
one of a temporary character.
3. In this case,​ ​BOAC is a resident foreign corporation​.
a. During the periods of the assessment, it maintained a
general sales agent in the Philippines. The agent was in
charge of:
i. Selling and issuing tickets
ii. Breaking down the trip into a series of trips
corresponding to a different airline company
iii. Receiving the fare
iv. Allocating the payment to the various airline
companies on the basis of their participation in
the services
b. The activities were in the exercise of the functions
normally incident to and for the purpose and object of its
organization as an international air carrier. Thus, BOAC
is engaged in business in the Philippines through a local
agent, and, as a resident foreign corporation, it is subject
to income tax.
The revenue from the BOAC ticket sales constitutes income from Philippine
sources
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1. [TAX CODE] Gross income: ​gains, profits, and income derived

from salaries, wages….and ​income derived from any source
whatever
a. “Income from any source whatever” discloses a
legislative intent to include all income not expressly
exempted within the class of taxable income, ​including
proceeds from sales of transport documents​.
2. Source of income​: property, acvitity or service that produced the
income.
a. To be considered as ​coming from the Philippines, ​it is
sufficient that the income is ​derived from activity within
the Philippines.
3. In this case, the sale of BOAC tickets in the Philippines is the
activity that produces the income, since the payments and the
giving of the tickets were made in the Philippines.
a. Even though the income from the sale of international
transportation tickets is not one of the items of gross
income as enumerated in the Tax Code, the enumeration
is not exclusive, and thus it is considered as taxable
income.
b. The absence of flight operations is not determinative of
the source income. The income was derived from the sale
of tickets, which is a business activity regularly pursued
within the Philippines.
4. JAL v. CIR does not apply because that case involved carrier’s tax
which is an excise tax (the State can only levy the tax when the
acts--transporation in this case-- are performed). In this case, it is
income tax that is being levied by the CIR.

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116. United Airlines Inc. v. CIR (Lex)
September 29, 2010​ | Villarama, Jr. J. | ​Corporations- Resident Foreign
Corporations
PETITIONER​: United Airlines, Inc.
RESPONDENTS​: Commissioner of Internal Revenue
SUMMARY​:
United Airlines Inc. is a foreign corporation organized and existing under the
laws of Delaware, USA. It is engaged in the international airline business and it
used to operate both passenger and cargo flights originating in the Philippines.
However in Feb 1998, its passenger flights operations ceased and it appointed
Aerotel sales agent in the Phil while its cargo flights continued until 2001.
United Airlines filed a claim for an income tax refund with the CIR. It claims
that P5M represented income taxes paid in 1999-2001 on passenger revenue
tickets sold in the Philippines (the uplifts of which did not originate in the Phil)
should not be taxed under the NIRC and the RP-US Tax Treaty which provides
that ​Phil. tax authorities have jurisdiction to tax only the gross revenue derived
by US air and shipping carriers from outgoing traffic in the Phil. Since it no
longer operated passenger flights originating from the Phil since 1998, it should
not be subject to income tax. The issue is WON United Airlines is entitled to be
refunded the P5,028,813.23 ​it paid as income tax on its passenger revenues in
1999. - NO.
The SC upheld the decision of the CTA which found that although United
Airlines is not liable for the P5M (as it stopped operating passenger flights
originating from the Phil) it is still cannot be entitled for the refund of P5M
because it erroneously understated its gross cargo revenue in 1999 by deducting
2 items consisting of commision and other incentives of its agents.
Thus, having underpaid the ​GPB2 tax due on its cargo revenues for 1999,
United Airlines is not entitled to a refund of its ​GPB tax on its passenger
revenue​, the amount of the former being even much higher (P31.43 million)
than the tax refund sought (P5.2 million). The CTA therefore correctly denied
the claim for tax refund after determining the proper assessment and the tax due
DOCTRINE:
As correctly pointed out by United Airlines, inasmuch as it ceased operating
passenger flights to or from the Philippines in 1998, it is not taxable under
Section 28(A)(3)(a) of the NIRC for gross passenger revenues. In ​South African
Airways v. CIR​, the SC ruled that the correct interpretation is that if an
international air carrier maintains flights to and from the Philippines, it shall be
taxed at the rate of two and one half percent (2​1/2 ​%)of its GPB, while
international air carriers that do not have flights to and from the Philippines but
nonetheless earn income from other activities in the country will be taxed at the
rate of 32% of such income.
However, it is not entitled to refund because CTA found that it had erroneously
deducted commissions and incentives of agent from gross cargo revenue. The
under payment was around P31M which is higher than the P5M refund
FACTS:
1. United Airlines Inc. is a foreign corporation organized and existing under
the laws of the State of Delaware, USA, engaged in the international
airline business.
2. Petitioner used to be an online international carrier of passenger and cargo,
i.e., it used to operate passenger and cargo flights originating in the
Philippines.
3. Upon cessation of its passenger flights in and out of the Philippines
beginning Feb 21, 1998, petitioner appointed a sales agent in the
2
Gross Philippine Billings (GPB) - Under Section 28 (A)(3) of the NIRC, GPB of an
international carrier refers to the amount of gross revenue derived from the carriage of persons,
excess baggage, cargo and mail originating from the PH in a continuous and uninterrupted
flight, irrespective of the place or issue and the place of payment of the ticket or passage
document.
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 BLOCK 2A 2021 | TAXATION 1 | Montero
Philippines (Aerotel). Petitioner continued operating cargo flights until Jan
31, 2001.
4. On April 12, 2002, petitioner filed with respondent commissioner a claim
for income tax refund pursuant to the NIRC in relation to the RP-US Tax
Treaty.
5. Petitioner sought to refund P15.9M pertaining to income taxes paid on
gross passenger and cargo revenues from 1999-2001, including P5
representing income taxes paid in 1999 on passenger revenue from tickets
sold in the Phil, the uplifts of which did not originate in the Philippines.
6. Petitioner’s arguments:
a. Under the new definition of GPB under the NIRC ​and RP-US
Tax Treaty3, ​Phil. tax authorities have jurisdiction to tax only the
gross revenue derived by US air and shipping carriers from
outgoing traffic in the Phil.
b. Since it no longer operated passenger flights originating from
the Phil. beginning Feb of 1998, its passenger revenue for
1999-2001 cannot be considered as income from sources within
the Phil and should not be subject to income tax under the
RP-US Tax Treat​y4.
3
​Article 4
Source of Income
For the purpose of this Convention:
xxxx
(7) Gross revenues from the operation of ships in international traffic shall be treated as from
sources within a Contracting State to the extent they are derived from international traffic
originating in that State.
xxxx
4
​Article 9
Shipping and Air Transport
1. Notwithstanding any other provision of this Convention, profits derived by a
resident of one of the Contracting States from sources within the other Contracting
State from the operation of ships in international traffic may be taxed by both
Contracting States; however, the tax imposed by the other Contracting State may be
as much as, but shall not exceed, the lesser of—
a. one and one​ half percent of the gross revenues derived from sources in
that State; and
b. the lowest rate of Philippine tax that may be imposed on profits of the
same kind derived under similar circumstances by a resident of a third
State.
2. Nothing in the Convention shall affect the right of a Contracting State to tax, in
accordance with its domestic laws, profits derived by a resident of the other
Contracting State from sources within the first​ mentioned Contracting State from
the operation of aircraft in international traffic.
7. CTA: no excess or erroneously paid tax.
a. In reporting a cargo revenue of P740, petitioner deducted 2
items from its gross cargo revenue of P2.84B (commission and
incentives of agent). These deductions were erroneous because
gross revenue referred to in the NIRC was total revenue before
deductions. The tax should be P42.54M and not P11.1M.
b. Petitioner:
i. The denial of its refund based on the the claim of CTA
that its underpayment of P31M is higher than the 5M
refund it is asking is tantamount to an offsetting which
is not allowed according to rules in taxation cases.
ii. Due process was also violated because there was no
investigation nor any valid assessment issued by the
CIR against petitioner to inform him of the basis of
such assessments.
iii. Assessments against it is barred by prescription as the
prescriptive period is 3 years after filing of tax return.
– Not an issue according the SC as Section 203 and
222 find no application in this case.
ISSUES:
1.WON United Airlines is entitled to be refunded the P5,028,813.23
it paid as income tax on its passenger revenues in 1999. - NO.
RATIO:
Petition Denied
1. As correctly pointed out by petitioner, inasmuch as it ceased operating
passenger flights to or from the Philippines in 1998, it is not taxable under
Section 28(A)(3) (a) of the NIRC for gross passenger revenues.
a. The correct interpretation is that if an international air
carrier maintains flights to and from the Philippines, it shall
be taxed at the rate of 21⁄2% of its GPB, while international
air carriers that do not have flights to and from the
Philippines but nonetheless earn income from other
3. The provisions of paragraphs 1) and 2) shall also apply to profits derived from the
participation in a pool, a joint business or in an international operating agency.
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activities in the country will be taxed at the rate of 32% of SEPARATE OPINIONS:
such income. CONCURRING:
2. The subject claim for tax refund is the tax paid on passenger revenue in
1999 when petitioner had ceased passenger flight operations.
3. The CTA found that it had underpaid deductions from its gross revenues
which was greater than the refund.
4. Under Section 72 of the NIRC, the CTA can make a valid finding that
petitioner made erroneous deductions on its gross cargo revenue and
because of that, it paid a lower income tax such that the refund cannot be
granted.
5. In the case at bar, the CTA explained that it merely determined whether
petitioner is entitled to a refund based on the facts. On the assumption that
petitioner filed a correct return, it had the right to file a claim for refund of
6. GPB tax on passenger revenues it paid in 1999 when it was not operating
passenger flights to and from the Philippines. However, upon examination
by the CTA, petitioner’s return was found erroneous as it understated its
gross cargo revenue for the same taxable year due to deductions of two (2)
items consisting of commission and other incentives of its agent.
7. Having underpaid the GPB tax due on its cargo revenues for 1999,
petitioner is not entitled to a refund.
8. The CTA therefore correctly denied the claim for tax refund after
determining the proper assessment and the tax due.
9. Petitioner has not discharged its burden of proof in establishing the factual
basis for its claim for a refund and we find no reason to disturb the ruling
of the CTA

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Philippine Billings and Other income of international air carriers doing business in
117. Revenue Regulation 15-2002 (Sari) the Philippines as well as the imposition of common carrier’s tax. These regulations
May 30, 2002 | Corporations - Resident Foreign Corporations further
Summary:
prescribe the manner of claiming the deductions for travel expenses and freight
This RR governs [1] the imposition of Income Tax on the Gross Philippine
charges incurred pursuant to Sec 24 of the same Code.
Billings, Common Carrier’s Tax, and Other Income of International Air Carriers
and [2] the manner of claiming deductions on Travel Expenses and Freight
Sec 2. Definition of Terms. ​For purposes of these Regulations, the following terms
Charges incurred.
shall be construed as follows:
General principle to keep in mind is that International Air Carriers with flights
(a) International Air Carrier—shall refer to a foreign airline corporation
originating from the Philippines ​are subject to the ​Gross Philippine Billings
doing business in the Philippines have been granted landing rights in any
Tax of 2.5% ​(which is advantageous for them), regardless of whether the passage
Philippine port to perform international air transportation services/activities
documents are sold here or abroad. The fact of passage documents being sold here
or flight operations anywhere in the world.
or abroad does, however, have an implication in the manner of computing the
(b) Off-Line Carrier—Shall refer to an international air carrier having no
gross revenue to which the tax rate would be applied. (Sec 5)
flight operations to and from the Philippines.
(c) On-Line Carrier—Shall refer to an international air carrier having or
*“Originating from the Philippines” has a technical definition.
maintaining flight operations to and from the Philippines.
(d) Off-line flights—Shall refer to flight operations carried out or
Only the portion of the flight originating from the Philippines to the place of final
maintained by an international air carrier between ports or points outside the
destination is subject to the Gross Philippine Billings tax rate.
territorial jurisdiction of the Philippines, without touching a port or point
situated in the Philippines, except in distress or due to force majeure.
Basic Illustration:
(e) On-Line Flights—shall refer to flight operations carried out or
- One Way Ticket: Manila → San Francisco—Revenue from the whole
maintained by an international air carrier between ports or points in the
trip is subject to Gross Philippine Billings tax rate.
territorial jurisdiction of the Philippines and any point or port outside the
- Return Trip: Manila → San Francisco → Manila—Revenue from the
Philippines.
flight from San Francisco back to Manila ​is not ​subject to Gross
(f) Chartered Flight—Shall refer to flight operations which include
Philippine Billings Tax rate.
operations between ports or points situated in the Philippines and ports and
points outside the Philippines, which includes block charter, placed under
Doctrine: ​An International carrier shall refer to a foreign airline corporation doing
the custody and control of a charterer by a contract/charter for rent or hire
business in the Philippines having been granted landing rights in any Philippine
relating to a particular airplane.
port to perform international air transportation services/activities or flight
(g) Originating from the Philippines–(Place dunder Sec. 4)
operations anywhere in the world.
(h) Continuous and Uninterrupted Flight–(Placed under Sec. 4)
(i) Place of Final Destination—Shall refer to the place of final
Sec 1. SCOPE. ​Pursuant to the provisions of Sec 244 of the NIRC, the following disembarkation designated or agreed upon by the parties in a contract of air
Regulations are hereby promulgated to implement the provisions of Sec 28(A)(3)(a), transportation where the passengers, their excess baggage, cargo and/or
28(A)(1), and 118 of the Code, relative to the imposition of income tax on the Gross mail are to be transported and unloaded by the contracting airline company.
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(j) Transient Passengers—Shall refer to a passenger who originated from
outside of the Philippines towards a final destination also outside of the
Philippines but stops in the Philippines for a period of less than 48 hours, or
even more than 48 hours if the delay is due to force majeure or reasons
beyond his control, wherein both cases the passenger boarded an airplane of
the same airline company bound to the place of final destination.
(k) Non-Revenue Passengers—shall refer to the non-revenue passengers as
defined under Resolution No. 788 of the International Air Transport
Association Regarding Free and Reduced Fare or Rate Transportation and
any other Free/Reduced Rate Mileage Programs Administered by Individual
International Air Carriers.
(l) Adult Passenger—12 years old and above.
(m) Children—Between 2 and 12 years old.
(n) Infant—Below 2 years old.
(o) Baggage—Shall refer to such articles, effects, and other personal
property of a passenger as are necessary or appropriate for wear,
use, comfort, or convenience in connection with his trip.
(p) Excess Baggage—Shall refer to that part of the baggage which is in
excess of that baggage which may be carried free of charge.
(q) Refund—Shall refer to the repayment to the purchaser of all or a
portion of the fare, rate, or charge for unused carriage or service.
Sec 3. FOREIGN AIRLINE COMPANIES WITHOUT FLIGHTS STARTING
FROM OR PASSING THROUGH ANY POINT IN THE PHILIPPINES.—​An
offline airline having a branch office or a sales agent in the Philippines which sells
passage documents for compensation or commission to cover off-line flights of its
principal or head office, or for other airlines covering flights originating from
Philippine ports or off-line flights, ​is not ​considered engaged in business as an
international air carrier in the Philippines and is, therefore,​not subject to Gross
Philippine Billings Tax ​provided for in Sec 28(A)(3) of the Code nor to the ​3%
common carrier’s tax ​under Sec 118(A) of the same Code. This provision is
without prejudice to classifying such taxpayer under a different category pursuant to
a separate provision of the same Code.
Sec 4. TAX IMPOSED ON INTERNATIONAL AIR CARRIER WITH
FLIGHTS ORIGINATING FROM PHILIPPINE PORTS.—​An international
carrier having flights originating from any port in the Philippines, as clarified in Sec
2(g) and (h) hereof, irrespective of the place where passage documents are sold or
issued, ​is subject to the Gross Philippine Billings Tax of 2.5% ​under Sec
28(A)(3)(a) of the Code ​unless subject to a different tax rate under the applicable
tax treaty to which the Philippines is a signatory.
● “Originating from the Philippines” includes:
○ Where passengers, their excess baggage, cargo, and/or mail
originally commence their flight from any Philippine port to any
other port or point outside the Philippines.
○ Chartered flights originally commencing their flights from any
foreign port and whose stay in the Philippines is for more than 48
hours prior to embarkation.
■ Exception: Flight of the airplane belonging to the same
airline company failed to depart within 48 hours by
reason of force majeure.
○ Chartered flights originally commencing their flights from any
Philippine port to any foreign port; and
○ Where originally commencing his flight from a foreign port alights
or is discharged in any Philippine port and thereafter boards or is
loaded on another aircraft, owned by the same airline company, the
flight from the Philippines to any foreign port shall not be
considered originating from the Philippines.
■ Exception: The time intervening between arrival and
departure of said passenger exceeds 48 hours, unless
failure to depart is due to reasons beyond his control.
■ Note: If the second aircraft belongs to a different airline
company, the flight from the Philippines to any foreign
port shall be considered originating from the Philippines,
regardless of the intervening period ​between the arrival
and departure from the Philippines.
○ “Continuous and Uninterrupted Flight”—shall refer to a flight in
the carrier of the same airline company from the moment a
passenger, excess baggage, cargo, and/or mail is lifted from the
Philippines up to the point of final destination of the passenger,
excess baggage, cargo, and or/mail. The flight is not considered
continuous and uninterrupted if transshipment of
passenger...and/or mail takes place at any port outside the
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Philippines on another aircraft belonging to a different airline
company.
Sec 5. DETERMINATION OF GROSS PHILIPPINE BILLINGS
(a) In computing for “Gross Philippine Billings,” there shall be included the total
amount of gross revenue derived from passage of persons, excess baggage, cargo,
and/or mail, originating from the Philippines in a continuous and uninterrupted
flight, irrespective of the place or sale or issue and the place of payment of the
passage documents.
● For tickets sold in the Philippines gross revenue shall be the actual amount
derived for transportation services on its continuous and uninterrupted flight
from any port or point in the Philippines to its final destination in any port
or point of a foreign country. (Monthly Average Net Fare Per Ticket Class
X Total Number of Passengers Flown for the Month)
● For tickets sold outside the Philippines on a continuous and uninterrupted
flight from any port or point in the Philippines to final destination in any
port or point of a foreign country shall be determined using the locally
available net fares applicable to such flight taking into consideration the
seasonal fare rate established at the time of the flight, the class of package,
the classification of passenger, the date or embarkation, and the place of
final destination.
● Passage documents revalidated, exchanged, and/or endorsed to another
on-line international airline shall be included in the taxable base of the
carrying airline and shall be subject to GPB tax if the passenger is
lifted/boarded on an aircraft from any port or point in the Philippines
towards a foreign destination.
● Gross revenue on excess baggage which originated from any point in the
Philippines shall be computed based on the actual revenue derived as
appearing on the official receipt for the said transaction.
● Gross revenue for freight or cargo and mail shall be determined based on
the revenue realized from the carriage thereof. (Amount appearing on the
airway bill – discounts granted)
● Provided, however that:
○ For fights from any point in the Philippines and back, the portion
of revenue pertaining to the return trip to the Philippines ​shall not
be included as part of Gross Philippine Billings.
○ In cases where a flight is interrupted by force majeure resulting in
the transshipment of the passengers...and/or mail to another
airplane operated by another airline company and transshipment
takes place in another country, the Gross Philippine Billings shall
be determined based on that ​portion of flight from the
Philippines up to the point of said transshipment.
(b) Non-revenue passengers shall not be given value for purposes of computing the
taxable base subject to tax. Refunded tickets shall likewise not be included in the
computation of Gross Philippines Billings.
(c) In the case of a flight that originates from the Philippines but transshipment of
passenger...and/or mail takes place elsewhere in another aircraft belonging to a
different airline company, the Gross Philippine Billings shall be that portion of the
revenue corresponding to the leg flown from any point in the Philippines to the point
of transshipment.
In computing the taxable amount, the foreign exchange conversion rate to be used
shall be the average monthly Airline rate as provided in the Bank Settlement Plan, or
Monthly Sales Report, or the Bankers Association of the Philippines (BAP) rate,
whichever is higher. The average monthly BAP rate shall be computed by adding all
the different BAP rates during the month and dividing the same by the number of
days during the month.
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118. Revenue Regulation 14-2012 (Yvonne)
November 7, 2012 | Corporations - Resident Foreign Corporations
Summary:
RR 14-2012 deals with Proper Tax Treatment of Interest Income Earnings on
Financial Instruments and Other Related Transactions.
Doctrine:
"Deposit Substitutes", as defined in Section 22 (Y) of the NIRC of 1997, as
amended, means an alternative form of obtaining funds from the public other than
deposits, through the issuance, endorsement, or acceptance of debt instruments for
the borrower's own account, for the purpose of relending or purchasing of
receivables and other obligations, or financing their own needs or the needs of
their agent or dealer.
SUBJECT: Proper Tax Treatment of Interest Income Earnings on Financial
Instruments and Other Related Transactions
TO: All Internal Revenue Officials and Employees Concerned
SECTION 1. Scope. Pursuant to the provisions of Sections 57 , 244 and 245 of the
National Internal Revenue Code (NIRC) of 1997, as amended, and in light of the
resolution contained in the PEACe Bond Ruling, these Regulations are hereby
promulgated to properly implement the income taxation of interest income earnings
on financial instruments and similar transactions based on existing laws and
regulations and to rationalize the tax exemptions of interest income derived
therefrom.
SECTION 2. Tax Treatment of Interest Income Derived from Government
Debt Instruments and Securities. ​"Deposit Substitutes", as defined in Section 22
(Y) of the NIRC of 1997, as amended, means an alternative form of obtaining funds
from the public other than deposits, through the issuance, endorsement, or
acceptance of debt instruments for the borrower's own account, for the purpose of
relending or purchasing of receivables and other obligations, or financing their own
needs or the needs of their agent or dealer.
"Public", is defined as borrowing from twenty (20) or more individual or corporate
lenders at any one time.
Consistent with the foregoing definitions, the tax treatment of interest income
derived from government debt instruments and securities is as follows:
1. Government Debt Instruments and Securities, including Bureau of Treasury (BTr)
issued instruments and securities such as Treasury bonds (T-bonds), Treasury bills
(T-bills) and Treasury notes, shall be considered as deposit substitutes irrespective of
the number of lenders at the time of origination if such debt instruments and
securities are to be traded or exchanged in the secondary market;
2. Interest income derived therefrom is subject to Final Withholding Tax (FWT) at
the rate of twenty percent (20%) pursuant to Sections 24 (B) (1), 25 (A) (2) , 27 (D)
(1) and 28 (A) (7) (a) or twenty five percent (25%) pursuant to Section 25 (B) or
thirty percent (30%) pursuant to Section 28 (B) (1) of the NIRC of 1997, as
amended, payable upon original issuance of the deposit substitutes;
3. The original issuance of these debt instruments is subject to documentary stamp
tax (DST) pursuant to Section 179 of the NIRC of 1997, as amended;
4. The mere issuance of government debt instruments and securities is deemed as
falling within the coverage of 'deposit substitutes' irrespective of the number of
lenders at the time of origination, and therefore interest income derived therefrom
shall be subject to the applicable final withholding tax rate imposed on deposit
substitutes as prescribed under the NIRC of 1997, as amended.
SECTION 3. ​Tax Treatment of Interest Income Derived from Long-Term Deposits
or Investment Certificates. "Long-term Deposit or Investment Certificate", as defined
in Section 22 (FF) of the NIRC of 1997, as amended, refers to certificate of time
deposit or investment in the form of savings, common or individual trust funds,
deposit substitutes, investment management accounts and other investments with a
maturity period of not less than five (5) years, the form of which shall be prescribed
by the Bangko Sentral ng Pilipinas (BSP) and issued by banks only (not by non-bank
financial intermediaries and finance companies) to individuals in denominations of
Ten thousand pesos (P10,000) and other denominations as may be prescribed by the
BSP.
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Consistent with the foregoing definition, the tax treatment of interest income derived
from Long-Term Deposits or Investment Certificates is as follows:
1. Interest income from long-term deposit or investment in the form of savings,
common or individual trust funds, deposit substitutes, investment management
accounts and other investments evidenced by certificates in such form prescribed by
the Bangko Sentral ng Pilipinas (BSP) shall be exempt from income tax under
Section 24 (B) (1) and 25 (A) (2) of the NIRC of 1997, as amended, provided that
the following characteristics/conditions are present:
a. the depositor or investor is an individual citizen (resident or nonresident),
a resident alien or a nonresident alien engaged in trade or business in the
Philippines;
b. the long-term deposits or investment certificates should be under the
name of the individual and not under the name of
the corporation or the bank or the trust department/unit of the
bank;
c. the long-term deposits or investments must be in the form of
savings, common or individual trust funds, deposit substitutes,
investment management accounts and other investments evidenced
by certificates in such form prescribed by the Bangko Sentral ng
Pilipinas (BSP);
d. the long-term deposits or investments must be issued by banks
only and not by other financial institutions;
e. the long-term deposits or investments must have a maturity
period of not less than five (5) years;
f. the long-term deposits or investments must be in denominations
of Ten thousand pesos (P10,000) and other denominations as may
be prescribed by the BSP;
g. the long-term deposits or investments should not be terminated
by the investor before the fifth (5th) year, otherwise they shall be
subjected to the graduated rates of 5%, 12% or 20% on interest
income earnings; and
h. except those specifically exempted by law or regulations, any
other income such as gains from trading, foreign exchange gain
shall not be covered by income tax exemption.
2. Absent any of the characteristics/conditions enumerated in Section 4 (1) of these
Regulations, interest income from long-term deposit or investment shall be subject to
a Final Withholding Tax (FWT) at the rate of twenty percent (20%) pursuant to
Sections 24 (B) (1), 25 (A) (2), 27 (D) (1) and 28 (A) (7) (a) of the NIRC of 1997, as
amended.
3. Interest income from long-term deposit or investment that is preterminated by the
depositor or investor before the fifth (5th) year shall be subject to the following
graduated rates of Final Withholding Tax (FWT) on the entire income and shall be
deducted and withheld by the depository bank from the proceeds of the long term
deposit or investment certificate based on the remaining maturity thereof as follows:
Four (4) years to less than five (5) years — 5%;
Three (3) years to less than four (4) years — 12%; and
Less than three (3) years — 20%.
Example No. 1 —
An instrument with a maturity period of 10 years was held by Mr. X (a resident
citizen) for 2 years and was transferred to Mr. Y (a resident alien), who, in turn, held
it for 8 years. The FWT due are as follows:
Mr. X 2 years 20% FWT
Mr. Y 8 years Exempt
Example No. 2 — ​An instrument with maturity period of 10 years was held by Mr.
X (a nonresident citizen) for 3 years and transferred it to Mr. Y (a resident alien). Mr.
Y held it for 2 years before subsequently transferring it to Mr. Z (a resident citizen),
who held it until the day of maturity or for 5 years. The FWT due are as follows:
Mr. X 3 years 12% FWT
Mr. Y 2 years 20% FWT
Mr. Z 5 years Exempt
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Example No. 3 —
An instrument with maturity period of 10 years held by Mr. X (a nonresident alien
engaged in trade or business in the Philippines) for 3 years and transferred it to Mr.
Y (a resident citizen). Mr. Y held it for 2 years before subsequently transferring it to
Mr. Z (a resident alien), who preterminated it after 4 years. The FWT due are as
follows:
Mr. X 3 years 12% FWT
Mr. Y 2 years 20% FWT
Mr. Z 4 years 5% FWT
4. Interest income from long-term deposit or investment shall be subject to a Final
Withholding Tax (FWT) at the rate of twenty five percent (25%) if received by a
nonresident alien not engaged in trade or business in the Philippines pursuant to
Section 25 (B) of the NIRC of 1997, as amended;
5. Interest income from long-term deposit or investment shall be subject to a Final
Withholding Tax (FWT) at the rate of thirty percent (30%) if received by a
nonresident foreign corporation pursuant to Section 28 (B) (1) of the NIRC of 1997,
as amended.
6. Interest income from long-term deposit or investment shall be subject to regular
income tax at the rate of thirty percent (30%) if received by a domestic corporation
and resident foreign corporation pursuant to Sections 27 (A) and 28 (A) (1) of the
NIRC of 1997, as amended.
SECTION 4. Tax Treatment of Interest Income Derived from Currency Bank
Deposit and Yield or Any Other Monetary Benefit from Deposit Substitutes and
from Trust Funds and Similar Arrangements.
Consistent with the provisions of Sections 24 (B) (1), 25 (A) (2), 25 (B), 27 (D) (1),
28 (A) (7) (a), 28 (B) (1) and 28 (B) (5) (a) of the NIRC of 1997, as amended, the tax
treatment of interest income derived from currency bank deposit and yield or any
other monetary benefit from deposit substitutes and from trust funds and similar
arrangements derived from sources within the Philippines, is as follows:
1. Subject to a Final Withholding Tax (FWT) of twenty percent (20%) if the interest
income is received by:
a. citizens;
b. resident aliens;
c. nonresident aliens engaged in trade or business in the Philippines;
d. domestic corporations; and
e. resident foreign corporation.
2. Subject to a Final Withholding Tax (FWT) at the rate of twenty five percent (25%)
if the interest income is received by nonresident aliens not engaged in trade or
business in the Philippines;
3. Subject to Final Withholding Tax (FWT) at the rate of thirty percent (30%) if
received by a nonresident foreign corporation, unless the interest income is from
foreign loans contracted on or after August 1, 1986, in which case, it is subject to a
Final Withholding Tax (FWT) of twenty percent (20%).
SECTION 5. Tax Treatment of Interest Income Derived from a Depository
Bank Under the Expanded Foreign Currency Deposit System.
Consistent with the provisions of Sections 24 (B) (1), 27 (D) (1), 27 (D) (3), 28 (A)
(7) (a), and 28 (A) (7) (b) of the NIRC of 1997, as amended, the tax treatment of
interest income derived from a depository bank under the Expanded Foreign
Currency Deposit System, is as follows:
1. Subject to a Final Withholding Tax (FWT) of seven and one-half percent
(7.5%) if the interest income is received by:
a. citizens;
b. resident aliens;
c. domestic corporations; and
d. resident foreign corporation.
2. Any income of nonresidents, whether individuals or corporations, from
transactions with depository banks under the expanded system shall be exempt from
income tax;
3. If a bank account is jointly in the name of a non-resident citizen such as an
overseas contract worker, or a Filipino seaman, and his/her spouse or dependent who
is a resident in the Philippines, fifty percent (50%) of the interest income from such
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bank deposit shall be treated as exempt while the other fifty percent (50%) shall be
subject to a Final Withholding Tax (FWT) of seven and one-half percent (7.5%);
4. Income derived by a depository bank under the expanded foreign currency deposit
system from foreign currency transactions with nonresidents, offshore banking units
in the Philippines, local commercial banks including branches of foreign banks that
may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business
with foreign currency deposit system units and other depository banks under the
expanded foreign currency deposit system shall be exempt from all taxes, except net
income from such transactions as may be specified by the Secretary of Finance, upon
recommendation by the Monetary Board to be subject to the regular income tax
payable by banks;
5. Interest income from foreign currency loans granted by such depository banks
under said expanded system to residents other than offshore banking units in the
Philippines or other depository banks under the expanded system shall be subject to a
final tax at the rate of ten percent (10%).
SECTION 6. ​Tax Treatment of Interest Income Derived from Offshore Banking
Units. — Consistent with the provision of Section 28 (A) (4) of the NIRC of 1997,
as amended, the tax treatment of interest income derived from offshore banking units
are as follows:
1. Income derived by offshore banking units authorized by the Bangko
Sentral ng Pilipinas (BSP), from foreign currency transactions with
nonresidents, other offshore banking units, local commercial banks,
including branches of foreign banks that may be authorized by the Bangko
Sentral ng Pilipinas (BSP) to transact business with offshore banking units
shall be exempt from all taxes except net income from such transactions as
may be specified by the Secretary of Finance, upon recommendation of the
Monetary Board which shall be subject to the regular income tax payable by
banks;
2. Interest income derived from foreign currency loans granted to residents
other than offshore banking units or local commercial banks, including local
branches of foreign banks that may be authorized by the BSP to transact
business with offshore banking units, shall be subject only to a Final
Withholding Tax (FWT) at the rate of ten percent (10%);
3. Any income of nonresidents, whether individuals or corporations, from
transactions with said offshore banking units shall be exempt from income
tax.
SECTION 7. ​Tax Treatment of Interest Income Derived from All Other
Instruments. —
Unless otherwise provided by law or regulations, interest income derived from any
other debt instruments not within the coverage of 'deposit substitutes'; and these
Regulations shall be subject to a Creditable Withholding Tax (CWT) at the rate of
twenty percent (20%). For this purpose, the income payor is required to withhold and
remit the said tax to the Bureau of Internal Revenue in accordance with Sections
2.57.3, 2.57.4 and 2.58 of Revenue Regulations No. 2-98 , as amended.
For this purpose, Section 2.57.2 of Revenue Regulations No. 2-98, as amended, is
hereby further amended, to read as follows:
Section 2.57.2. Income Payment Subject to Creditable Withholding Tax and Rates
Prescribed Thereon. — Except as herein otherwise provided, there shall be withheld
a creditable income tax at the rates herein specified for each class of payee from the
following items of income payments to persons residing in the Philippines:
xxx xxx xxx (Y) Interest income derived from any other debt instruments not within
the coverage of 'deposit substitutes' and Revenue Regulations No. ___- 2012, unless
otherwise provided by law or regulations — Twenty Percent (20%).
SECTION 8. The "19-Lender Rule". —
In order for an instrument to qualify as a "deposit substitute" pursuant to Section 22
(Y) of the NIRC of 1997, as amended, the borrowing must be made from twenty (20)
or more individual or corporate lenders at any one time. Corollarily, the mere
flotation of a debt instrument is not considered to be a "public" borrowing and is not
deemed a "deposit substitute" if there are only nineteen (19) or less individual or
corporate lenders at any one time. However, any person holding any interest,
whether legal or beneficial, on a debt instrument or holding thereof either by
assignment or participation, with or without recourse, shall be considered as lender
and thus, be counted in applying the 19-lender rule.
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SECTION 9. Documentary Stamp Tax. — The original issuance of debt instruments

shall be subject to Documentary Stamp Tax in accordance with Section 179 of the
NIRC of 1997, as amended. Thus, on every original issue of debt instruments, there
shall be collected a documentary stamp tax of one peso (P1.00) on each two hundred
pesos (P200), or fractional part thereof, of the issue price of any such debt
instrument. However, any assignment or re-assignment of said debt instruments shall
be subject to the same documentary stamp tax mentioned above pursuant to Section
198 of the NIRC of 1997.

SECTION 10. Repealing Clause. — ​All existing rules and regulations and other
issuances or parts thereof which are inconsistent with the provisions of these
Regulations are hereby modified, amended or revoked accordingly.

SECTION 11. Effectivity Clause. — ​These Regulations shall take effect after
fifteen (15) days following complete pub

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119. Bank of America NT & SA v. CA (BAM) ○ Profit from ​foreign currency deposit unit operations =
445,7920.25
July 12, 1994 | ​Vitug, J.​ | Corporations - Branch Profit Remittance Tax 3. BA then filed a claim for refund amounting to that portion it paid as 15%
branch profit remittance tax claiming that it should have been computed on
PETITIONERS: ​Bank of America NT & SA the basis of what was ​actually remitted ​amounting to 45, 224, 088.85
RESPONDENTS: ​CA and CIR instead of 53,228,339.82 or the amount before profit remittance tax.
4.
SUMMARY:
BPRT CIR’s Bank of Alleged
Bank of America filed for a refund corresponding to alleged overpayments on Assessment America’s overpayment
their Branch Profit Remittance Taxes. It argues that the BPRT should be computation
assessed on the amount actually remitted abroad which is 45,224,088.85 instead
of 53,228,339.82. CIR argues that it should be assessed on the latter amount Regular 7,538,460.72 6,555,138.24 983,277.48
which was before the profit remittance tax. Banking

Foreign 445,790.25 387,643.70 58,146.55

The SC held that the The law specifies that in the 15% remittance tax, the
Currency
“profit remitted abroad” shall be the ​tax base​. The tax is imposed on the Deposit
amount sent abroad.
TOTAL 7,984,250.97 6,942,286,94 1,041,424.02
DOCTRINE: 5. CTA upheld the contentions of Bank of America and referred the case to the
Prior to the amendment of the Revenue Code, ​local branches ​were made to pay CA following SC’s pronouncement in DBP v. CA.
only the usual corporate tax of 25-35% on net income. 6. CA reversed the CTA.
Philippine ​subsidiaries of foreign corporations were subject to the same rate
25-35% on their net income. However, dividend payments were ​additionally ISSUES:
subjected ​to a 15% withholding tax. 1. Whether the BPRT should be assessed on the amount actually remitted
To equalize the unequal tax treatment, a 15% profit remittance tax was imposed abroad - YES
on local branches on their remittances of profits abroad.
RULING: ​Wherefore, the decision of the CA is reversed and set aside, and that of
FACTS: the CTA is reinstated.
1. Bank of America is a foreign corporation duly licensed to engage in
business in the Philippines with office at BA Lepanto Bldg. Paseo de Roxas, RATIO:
Makati City.
1. The law specifies that in the 15% remittance tax, the “profit remitted
2. Bank of America paid its branch profit remittance tax (BPRT) amounting abroad” shall be the ​tax base​. There is absolutely nothing equivocal or
to:
​ he tax is imposed on the
uncertain about the language of the provision. T
○ ​Profit from its ​regular banking unit operations = 7,538, 46072
amount sent abroad.
and

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2. The OSG correctly pointed out that almost invariably in an ​ad valorem tax,​
the amount paid is not deducted from the tax base. However, in the case at
hand, the law defined the tax base and the tax withholding as such.
Nowhere is it said in the law the the BPRT should be based on the amount
applied for by the branch as profit to be remitted with the Central Bank of
the Philippines.
3. The remittance tax was ​conceived in an attempt to equalize the income tax
burden on foreign corporations maintaining local branches vs. subsidiary
domestic corporations (majority of the shares are owned by foreign
corporations).
4. Prior to the amendment of the Revenue Code, ​local branches ​were made to
pay only the usual corporate tax of 25-35% on net income.
5. While Philippine subsidiaries of foreign corporations were subject to the
same rate 25-35% on their net income, however, dividend payments were
additionally subjected ​to a 15% withholding tax.
6. To equalize, a 15% profit remittance tax was imposed on local branches on
their remittances of profits abroad.
7. The written claim for refund was lawfully made.

SEPARATE OPINIONS:
CONCURRING:

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120. Compania General de Tabacos de Filipinas vs. CIR (JackJack)5
Aug 23 & Nov 17, 1993 | CTA | Corps - Branch Profit Remittance Tax
SUPER DOCTRINE: The taxable base in computing the 15% branch profit
remittance tax is the amount ​actually applied for by the branch with the Central Bank
as profit to be remitted abroad and not the total amount of branch profits. The use of
the word remitted may well be understood as referring to that part of the said total
branch profits which would be sent to the Head office as distinguished from the total
profits of the branch (not all of which need be sent or would be ordered remitted
abroad)
AUGUST 23, 1993 CASE
PETITIONER​: Compania General de Tabacos de Filipinas
RESPONDENTS​: Commissioner of Internal Revenue
SUMMARY​: Compania, a foreign corporation engaged in the business as leaf
tobacco dealer, importer, and general merchants, paid the 15% BPR tax for years
1985 (partial) and 1986 in the amount of P3, 148,267.96. Thereafter, it filed a
request for refund of the branch profit remittance taxes paid by it for the years
1985-86.
Issue/s:
1.) WON the BPR taxes are computed based on the profits actually remitted abroad
or on the total branch profits out of which remittance is made? - Actually remitted
abroad
2.) WON passive income which are already subjected to the final tax are still
included for purposes of computing the BPR tax? - NO
branch profit remittance tax for 1985 (partial) and 1986 were paid on May 3, 1988,
after the effectivity of Revenue Memorandum Circular 8-82, ​then what should
apply as taxable base in computing the 15% BPR tax is the amount applied for with
the Central Bank as profit to be remitted abroad and not the total amount of branch
profits.
2.) In ruling for Compania, the Court ruled that pursuant to Section 24(c) and (d) of
the NIRC, dividends and interest are subject to final tax. To include them again as
subject to branch profit remittance tax under the same Section 24 (b)(2)(ii) would
be contrary to law.
As worded in the previously mentioned provision, the rule is that interests and
dividends received by foreign corporation during a taxable year from all sources
within shall not be considered as branch profits unless the same are effectively
connected with the conduct of trade and business of the corporation. The phrase
“effectively connected” was interpreted to mean income derived from the business
activity in which the corporation is engaged. In this case, the corporation is
engaged in business of leaf tobacco dealer. In its corporate quarterly income tax
returns submitted to respondent, Compania argues that the interests it received
from savings deposit of Philtrust, or those from Land Bank bonds and cash
dividends from received from PLDT and Tabacalera Industrial Dev’t Corporation
of the Philippines are not effectively connected with the business it is engaged in
hence, not subject to tax.

Held:
1.) In ruling for CIR, the Court ruled that the tax base should be the amount which
was applied for with the Central Bank of the Philippines. Since there is a new
Memo Circular issued which is more applicable in this case, such is the appropriate
rule to use.
The Memo Circular 8-82 was issued only on March 17, 1982. Under Sec. 327 of
NIRC, it cannot be given retroactive effect. In view of the fact that Compania’s

5
These are 2 cases. Check the date for the difference
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NOVEMBER 17, 1993 CASE bonds are not effectively connected with the business it is engaged in hence, not
PETITIONER​: Compania General de Tabacos de Filipinas subject to tax.
RESPONDENTS​: Commissioner of Internal Revenue
3) As to the 1984 and 1985 branch profit remittance taxes, no refund or tax credit is
SUMMARY​: Compania, a foreign corporation engaged in the business as leaf due Compania since the latter did not present any proof of passive income it
tobacco dealer, importer, and general merchants, filed a request for refund of the received during the period. Considering that the 15% branch profit remittance tax is
branch profit remittance taxes paid by it for the years ​1980-85​. It claims that the tax imposed and collected at source, necessarily the tax base should be the amount
base for computing the branch remittance tax is the amount actually remitted abroad. ACTUALLY APPLIED for by the branch with the Central Bank of the Philippines
Compania relied on the case of CIR v Burroughs which was based on a ​Jan. 1980 as profit to be remitted abroad.
BIR ruling that says tax base to which 15% BPR tax shall be imposed is the profit
actually remitted abroad. CIR counters that the ruling in Burroughs case is
inapplicable because of the Memo Circular 8-82 which took effect in 1982. In the
said Memo, the rule is that the amount to which the BPR tax shall be imposed is that
which was actually applied by the branch with the Central Bank of the Philippines.

Issue/s:
1) WON the right to claim for refund of payments has already prescribed? - YES
2) WON Compania is legally entitled to the refund on alleged excess branch profit
remittance taxes paid during the years 1980 to 1983? - YES ​(MAIN ISSUE)
3) WON Compania is legally entitled to the refund on alleged excess branch profit
remittance taxes paid during the years 1984-1985? - NO ​(MAIN ISSUE)

Held:
1) The law provides that in a petition for tax refund, one cannot bring an action after
the expiration of 2 years from date of payment of tax. In this case, the tax was paid
prior to February 7, 1984 and the case was filed only on April 9,1987, thus, action
had prescribed.

2) The rule is that interests and dividends received by foreign corporation during a
taxable year from all sources within shall not be considered as branch profits unless
the same are effectively connected with the conduct of trade and business of the
corporation. The phrase “effectively connected” was interpreted to mean income
derived from the business activity in which the corporation is engaged. In this case,
the corporation is engaged in business of leaf tobacco dealer. In its corporate
quarterly income tax returns submitted to respondent, Compania argues that the
interests it received from savings deposit of Philtrust, or those from Land Bank

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AUGUST 23, 1993
FACTS:
1. Compania General de Tabacos de Filipinas is a foreign corporation duly
licensed by Philippine laws to engage in business through its branch office.
2. On May 3, 1988, Compania paid the 15% Branch Profit Remittance (BPR)
tax for years 1985 (partial) and 1986 in the amount of P3, 148,267.96.
3. Thereafter, Compania filed a claim for refund with CIR in the amount of
P593K representing alleged overpaid BPR taxes.
4. However, up to the filing of the petition for review, CIR has not acted on
Compania’s claim.
ISSUES:
1. WON the BPR taxes are computed based on the profits actually remitted
abroad or on the total branch profits out of which remittance is made? -
Actually remitted abroad
2. WON passive income which are already subjected to the final tax are still
included for purposes of computing the BPR tax? - NO
RATIO:
1. NO. (As will be discussed in the below Compania case; Nov case)​, the
Compania to support its claim cited the Burroughs case which has a
ruling that applied the BIR ruling dated Jan. 1980. Since there is a new
Memo Circular issued which is more applicable in this case, such is the
appropriate rule to use. The Memo Circular 8-82 was issued only on
March 17, 1982. The respondent Burroughs paid its remittance tax on
March 14, 1982. Under Sec. 327 of NIRC, it cannot be given retroactive
effect.
a. If such Memo was issued prior to the Burroughs case, then it
should have been the rule to be applied. But it is not. It cannot be
given retroactive effect. Thus, the reliance on the Burroughs case is
not tenable since the Memo Circular is really the correct rule to be
applied.
b. Thus, in view of the fact that Compania’s branch profit remittance
tax for 1985 (partial) and 1986 were paid on May 3, 1988, after the
effectivity of Revenue Memorandum Circular 8-82, then what
should apply as taxable base in computing the 15% BPR tax is the
amount applied for with the Central Bank as profit to be remitted
abroad and not the total amount of branch profits.
2. NO. ​(Same as the ruling in below case)
a. As worded in Section 21(b)(2)(ii) the rule is that interests and
dividends received by foreign corporation during a taxable year
from all sources within shall not be considered as branch profits
unless the same are effectively connected with the conduct of trade
and business of the corporation. The phrase “effectively
connected” was interpreted to mean income derived from the
business activity in which the corporation is engaged. In this case,
the corporation is engaged in business of leaf tobacco dealer. In its
corporate quarterly income tax returns submitted to CIR,
Compania argues that the interests it received from savings deposit
of Philtrust, or those from Land Bank bonds and cash dividends
from received from PLDT and Tabacalera Industrial Dev’t
Corporation of the Philippines are not effectively connected with
the business it is engaged in hence, not subject to tax.
b. Furthermore, pursuant to Section 24(c) and (d) of the NIRC,
dividends and interest are subject to final tax. To include them
again as subject to branch profit remittance tax under the same
Section 24 (b)(2)(ii) would be contrary to law.
RULING: ​Wherefore, in view of the foregoing, respondent CIR is hereby ordered to
refund in favor of petitioner, the amount of P121,696.34 representing overpaid 15%
branch profit remittance tax on interest and dividends received. No cost.
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NOVEMBER 17, 1993
FACTS:
1. Compania, a foreign corporation duly licensed by Philippine laws to engage
in business through its branch office, filed a request before the respondent
Commissioner of Internal Revenue for the refund of the sum of P1,
447,295.62, as alleged over paid branch profit remittance taxes at the years
1980 to 1983.
2. Thereafter or on April 8, 1987, Compania filed another request for the
refund of P321, 635.40, this time for the years 1984 and 1985.
3. Since CIR has not acted on Compania’s request, the latter filed the instant
petition on April 9, 1987 to interrupt the running of the prescriptive period
for claims for refund.
ISSUES:
1. WON the right to claim for refund of payments has already prescribed? -
YES
2. WON Compania is legally entitled to the refund on alleged excess
branch profit remittance taxes paid during the years 1980 to 1983? -
YES
3. WON Compania is legally entitled to the refund on alleged excess
branch profit remittance taxes paid during the years 1984-1985? - NO
RATIO:
1. YES. According to Sec. 230 of the Tax Code, for the recovery of tax
erroneously collected, “In any case, no such suit or proceeding shall be
begun after the expiration of two years from the date of payment of the
tax or penalty regardless of any supervening cause that may arise after
payment.”
a. It is evident that payment made prior to April 9, 1985, had already
prescribed. The profit remittance tax corresponding to branch
profit for 1980 was paid on February 7, 1984. When this case was
filed on April 9,1987, more than two years have lapsed from the
time the payment of the tax was made.
2. NO. WITH THE TAX PAID FOR YEARS 1981-1983​: After
considering the facts and issues of the case, this Court holds Compania
entitled to a refund or tax credit in the amount of Pl52, 690.61
corresponding to over paid branch profit remittance taxes during the
years from 1981 to 1983.
a. The rule is that interests and dividends received by foreign
corporation during a taxable year from all sources within shall not
be considered as branch profits unless the same are effectively
connected with the conduct of trade and business of the
corporation. The phrase “effectively connected” was interpreted to
mean income derived from the business activity in which the
corporation is engaged. In this case, the corporation is engaged in
business of leaf tobacco dealer. In its corporate quarterly income
tax returns submitted to CIR, Compania argues that the interests it
received from savings deposit of Philtrust, or those from Land
Bank bonds are not effectively connected with the business it is
engaged in hence, not subject to tax.
3. NO. ​As to the 1984 and 1985 branch profit remittance taxes​, no refund
or tax credit is due Compania since the latter did not present any proof
of passive income it received during the period. Considering that the
15% branch profit remittance tax is imposed and collected at source,
necessarily the tax base should be the amount ACTUALLY APPLIED
for by the branch with the Central Bank of the Philippines as profit to
be remitted abroad.
a. Compania contends that the tax base for computing the branch
profit remittance tax is the profit actually remitted abroad net of
income already subjected to final tax.
i. In support of this contention, it brought to the attention of
the Court about its previous ruling in the case of ​CIR v.
Burroughs which based its judgment in its ​BIR Ruling
dated Jan. 1980. It was held in that case that the tax base
to which the 15% branch profit remittance tax shall be
imposed is profit ​actually remitted abroad and not on the
total branch profits out of which remittance is to be made.
b. CIR, on the other hand, contends that the case of Burroughs is not
applicable to the instant case because of ​Revenue Memorandum
Circular No.8- 8 2, dated March 17, 1982​, which states that since
the "tax is imposed and collected at source​, necessarily the tax base
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should be the amount ​actually applied for by the branch with the branch profit remittance taxes on dividends, interests and capital gain received
Central Bank of the Philippines as profit to be remitted abroad." during the years ​1981 to 1983.​ No pronouncement as to cost.
c. In the instant case the branch profit remittance taxes were paid
after the effectivity of the Memorandum Circular No. 8-82. We
hold that what should therefore apply is Memo Circular No. 8-82
as correctly advanced by the CIR. ​(Dun sa Burroughs case, di pa
in effect ung Memo 8-82 kaya ung Jan.1980 ruling ang inapply
which says na ung profit actually remitted aborad ung tax base
pero sa case na ‘to, in effect na ang Memo 8-82 which says na ung
amount actually applied sa CB ang tax base kaya ito na ung
iaapply)
d. Furthermore, in the CIR v. Bank of America​, the Court had the
chance to discuss the rationale behind the Memo Circular No.
8-82. It said “"The use of the word remitted may well be
understood as referring to that part of the said total branch profits
which would be sent to the Head office as distinguished from the
total profits of the branch (not all of which need be sent or would
be ordered remitted abroad). If the legislature indeed had wanted to
mitigate the harshness of successive taxation, it would have been
simpler to just lower the rates without in effect requiring the
relative novel and complicated way of computing the tax, as
envisioned by the herein private respondent. The same result
would have been achieved. NIMIA SUBTILITAS IN JURE
REPROBATUR, ET TALIS CERTITUDO CERTITUDIMEM
CONFUNDIT (The laws does not allow of a captious and strained
intendtment, for such nice pretence of certainty confounds true and
legal certainty)
e. Having found that the questioned taxes were paid when the
applicable ruling is Revenue Memorandum Circular No. 8 - 82,
"then what should apply as taxable base in computing the 15%
branch profit remittance tax is the amount applied for with the
Central Bank as profit to be remitted abroad”.

RULING: ​Wherefore, in view of the foregoing, respondent CIR is hereby ordered to

refund in favor of petitioner, the amount of P152,590.50 representing overpaid 15%

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121. ITAD BIR Ruling No. 018-09 (Liz)
June 23, 2009 | Corporations - Branch Profit Remittance
Summary:
Det Norske is a Norweigian corporation, licensed to do business in the
Philippines. For the years 1998 to 2004, its Philippine branch remitted branch
profits to the head office in Norway, thus, the corresponding branch profits
remittance taxes (BPRT) were withheld. The country manager of Det Norske now
claims that it should be exempt from the tax pursuant to Article 25 of the
Philippines-Norway tax treaty. The BIR rejected this view. It held that it is not
exempt and should be subject to the branch profit remittance (BPRT). The
Philippines-Norway tax treaty recognizes the BPRT and gives way to its
imposition as paragraph 7, Article 10 of the tax treaty provides that branch profits
remitted by a branch office of a Norwegian corporation in the Philippines to its
head office in Norway may be subject to an additional tax like the BPRT at a rate
not to exceed 15 percent. It is not discriminatory since Det Norske is not a resident
corporation within the view of the treaty.
Doctrine:
In ruling against Det Norske, the BIR noted that the Philippines -Norway Tax
treaty recognizes the BPRT and gives way to its imposition as paragraph 7, Article
10 of the tax treaty provides that branch profits remitted by a branch office of a
Norwegian Corporation in the Philippines to its head office in Norway may be
subject to an additional tax like the BPRT at a rate not to exceed 15 percent. It is
not discretionary since Det Norske is not a resident corporation within the view of
the treaty.
Facts:
● Det Norske is a corporation organized and existing under the laws of
Norway.
○ Det Norske is a tax resident of Norway;
○ It is also licensed by the SEC to establish a branch office in the
Philippines (Det Norske Philippine Branch),whose office is located
at the Ground Floor, G-5, Velco Center, corner Ocampo and
Delgado Streets, Port Area, Manila, Philippines.
● Det Norske Philippine Branch had remitted branch profits to Det Norske for
taxable years 1998 to 2004, and also ​withheld the corresponding branch
profits remittance tax (BPRT).
● The country manager of Det Norske wrote to the BIR, contending that the
imposition of the BPRT is contrary to the provisions of paragraphs 1 and 2,
Article 25 of the Convention between the Republic of the Philippines and
the Kingdom of Norway for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income and on
Capital (Philippines-Norway tax treaty), which provide:
● Article 25 - NON-DISCRIMINATION
1. Nationals of a Contracting State shall not be subjected in the other
Contracting State to any taxation or any requirement connected therewith,
which is other or more burdensome than the taxation and connected
requirements to which nationals of that other State in the same
circumstances are or may be subjected.
2. The taxation on a permanent establishment which an enterprise of a
Contracting State has in the other Contracting State shall not be less
favourably levied in that other State than the taxation levied on enterprises
of that other State carrying on the same activities. This provision shall not
be construed as obliging a Contracting State to grant to residents of the
other Contracting State any personal allowances, reliefs and reductions for
taxation purposes on account of civil status or family responsibilities which
it grants to its own residents."
● Det Norske’s Contention ​Under the domestic tax laws of the Philippines,
no withholding tax is imposed on the remittance of the after-tax profits of a
branch of a domestic corporation in the Philippines to its head office in the
Philippines, and that applying the principles of non-discrimination in the tax
treaty, no BPRT should likewise be imposed on the remittance of the
after-tax profits of a ​branch of a Norwegian corporation in the
Philippines to its head office in Norway.
○ The BPRT imposed on the remittance of branch profits by a local
branch of a Norwegian corporation to its head office in Norway is
more burdensome (or less favorable) than the tax treatment on the
local branch of a domestic corporation whose remittance of profits
is not subject to the BPRT.
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Issue: W/N the branch profits remitted by Det Norske Philippine Branch to Det
Norske Norway are exempt from the 15% BPRT pursuant to Article 25 of the
Philippines-Norway tax treaty. ​NO!!!
Ratio:
● Under the National Internal Revenue Code of 1997, the rate of the BPRT is
simplified to 15 percent and branch profits relating to activities registered
with the Philippine Economic Zone Authority 8 are exempt from the BPRT.
Section 28 (A) (5) of the Tax Code of 1997 provides:
● "SEC. 28. Rates of Income Tax on Foreign Corporations. —
(A) Tax on Resident Foreign Corporations. —
(5) Tax on Branch Profits Remittances. — Any profit remitted by a branch to
its head office shall be subject to a tax of fifteen percent (15%) which shall be based
on the total profits applied or earmarked for remittance without any deduction for the
tax component thereof (except those activities which are registered with the
Philippine Economic Zone Authority). The tax shall be collected and paid in the
same manner as provided in Sections 57 and 58 of this Code: Provided, That
interests, dividends, rents, royalties, including remuneration for technical services,
salaries, wages, premiums, annuities, emoluments or other fixed or determinable
annual, periodic or casual gains, profits, income and capital gains received by a
foreign corporation during each taxable year from all sources within the Philippines
shall not be treated as branch profits unless the same are effectively connected with
the conduct of its trade or business in the Philippines."
Purpose of the BRPT
● The reason why the BPRT was introduced is to put into the same or similar
footing the tax treatment of foreign corporations engaged in trade or
business in the Philippines through local branches with foreign corporations
not engaged in trade or business in the Philippines but maintaining
ownership in domestic corporations in the Philippines (subsidiaries).
● Without the BPRT, the first type of foreign corporations might have an
undue advantage over the second type of foreign corporations because
dividends remitted to the latter corporations by their subsidiaries would be
subjected to a second layer of income taxation even if the profits of the
subsidiaries out of which the dividends were paid were already subjected to
a first layer of income taxation (corporate income tax). Thus the BPRT was
introduced.
The BPRT is permitted under the Philippines-Norway tax treaty
● Despite it being an additional income tax, it is noteworthy that the
Philippines-Norway tax treaty recognizes the BPRT and gives way to its
imposition, as Article 10 (Dividends), paragraph 7 thereof, provides:
○ 7. Nothing in this Convention shall be construed as preventing a
Contracting State from imposing in accordance with its internal
law, a tax apart from the corporate income tax on remittances of
profits by a branch to its head office provided that the tax so
imposed shall not exceed fifteen per cent of the amount remitted.
● According to paragraph 7, ​branch profits remitted by a branch office of a
Norwegian corporation in the Philippines to its head office in Norway
may be subject to an additional tax like the BPRT at a rate not to
exceed 15 of the amount remitted.
The BPRT in relation to Article 25 of the tax treaty
● Paragraph 1, Article 25 of the Philippines-Norway tax treaty provides that
nationals of Norway shall not be subjected in the Philippines to any
taxation, or any requirement connected therewith, which is other or more
burdensome than the taxation and connected requirements to which
nationals of the Philippines in the same circumstances are or may be
subjected. According to the OECD Model Convention on Income and
Capital, the scope of this paragraph would be limited to residents of the
Philippines only.
● Under the definition of a ‘resident’ in the said law, Det Norske is a resident
of the State where it is liable to tax by reason of its domicile, residence,
place of management, or any other similar criterion of a similar nature.
○ Det Norske's domicile, residence, or place of management is in
Norway and as such is a resident of Norway for purposes of the
Philippines-Norway tax treaty.
○ While Det Norske is licensed to establish a branch office in the
Philippines, this alone will not suffice to say that Det Norske's
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domicile, residence, or place of management is also in the
Philippines thereby not making Det Norske a resident of the
Philippines for purposes of the tax treaty.
○ Relative thereto, paragraph 1, Article 25 of the Philippines-Norway
tax treaty does not provide a legal basis for the non-imposition of
the BPRT.
● Paragraph 2 of the Philippines-Norway tax treaty provides that the taxation
on a permanent establishment which an enterprise of Norway has in the
Philippines shall not be less favourably levied in the Philippines than the
taxation levied on enterprises of the Philippines carrying on the same
activities.
○ According to the OECD Model Convention, the purpose of
paragraph 2 is to end all discrimination in the treatment of
permanent establishments as compared with resident enterprises
belonging to the same sector of activities, as regards taxes based on
business activities, and especially taxes on business profits.
○ However, the Convention likewise noted that the experience of the
OECD member countries have shown that there was a difficulty in
defining clearly and completely the substance of the principle of
equal treatment envisaged in paragraph 2, which has led to wide
differences of opinion with regard to the many implications of this
principle.
○ The main reason for the difficulty seems to reside in the actual
nature of the permanent establishment, which is not a separate
legal entity but only part of an enterprise that has its head office in
another State.
○ The situation of the permanent establishment is different from that
of a domestic enterprise, which constitutes a single entity all of
whose activities, including its fiscal affairs, can be fully brought
within the purview of the State where it has its head office. The
implications of the equal treatment clause will be examined under
several aspects of the levying of tax.
● The BIR is of the opinion and so holds that, as far as the Philippines is
concerned, as ​long as the aggregate taxes imposed by the Philippines on
a permanent establishment of a foreign enterprise in the Philippines are
not greater than the taxes imposed by the Philippines on a domestic
enterprise, it cannot be said that the permanent establishment is
treated less favorably in the Philippines than the domestic enterprise​.
● Thus, the BPRT, the corporate income tax on taxable profits, the
withholding tax on certain types of income, and other similar taxes on
income, can be imposed by the Philippines on a permanent establishment
without going against the principle of equal treatment envisaged in
paragraph 2, Article 25 of the Philippines-Norway tax treaty ​provided that
the aggregate taxes levied on the permanent establishment are not
greater than the taxes levied on a domestic enterprise.
Taxation of permanent establishments in the form of a branch and taxation of
domestic enterprises
● In most cases, and in relation to Philippines tax treaties and the Tax Code of
1997, a foreign enterprise is considered to have a permanent establishment
in the Philippines when it is engaged in trade or business in the Philippines
through a branch or branches. For this type of permanent establishment, a
foreign enterprise (like Det Norske) is registered with and licensed by the
Securities and Exchange Commission to establish a branch office and
engage in trade or business in the Philippines.
● In terms of tax liability alone, a foreign enterprise, whether or not engaged
in trade or business in the Philippines, is in a more advantageous position as
compared to a domestic enterprise because it is taxable only on income
derived from sources within the Philippines. A domestic enterprise is, on
the other hand, taxable on income derived from sources within and without
the Philippines​.
● Also, in terms of rate and structure of tax, there are preferential tax regimes
that are or can be enjoyed only by foreign enterprises engaged in trade or
business in the Philippines and which are not available to domestic
enterprises. (These are under Section 28 (A) of the Tax Code of 1997, as
amended by Republic Act No. 9337. Refer to codal na lang, but not
important naman)
Held:
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● The Philippines-Norway tax treaty recognizes the BPRT and gives way
to its imposition as paragraph 7, Article 10 of the tax treaty provides
that branch profits remitted by a branch office of a Norwegian
corporation in the Philippines to its head office in Norway may be
subject to an additional tax like the BPRT at a rate not to exceed 15
percent​.
● Paragraph 1, Article 25 of the Philippines-Norway tax treaty does not
provide a legal basis for the non-imposition of the BPRT. The principle of
equal treatment intended by this paragraph is limited to nationals of the
Philippines and of Norway who are both residents of the Philippines. While
Det Norske is a national of Norway, it is not, however, a resident of the
Philippines under paragraph 1, Article 4 of the tax treaty.
● Paragraph 2, Article 25 of the Philippines-Norway tax treaty lays down a
principle of equal treatment between a permanent establishment of a
Norwegian enterprise in the Philippines and a domestic enterprise. Similar
with the United States, the Philippines is of the view that as long as the
aggregate taxes imposed by the Philippines on a permanent establishment
are not greater than the taxes imposed by the Philippines on a domestic
enterprise, it cannot be considered that the permanent establishment is
treated less favorably in the Philippines than the domestic enterprise. In this
connection, while the BPRT is imposed only on permanent establishments
and not on domestic enterprises, the burden of this tax upon a permanent
establishment is, however, mitigated by the current tax regimes which
greatly favor the permanent establishment over the domestic enterprise.

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122. RR 11-2010 (Kara)

taxable compensation income.
October 26, 2010 | Regional or Area Headquarters and ROHQs

[This is from the BIR digest, the full text is 16 pages long]
SUMMARY:
1. REVENUE REGULATIONS NO. 11-2010 further clarifies the
RR 11-2010 further clarifies the term “Managerial and Technical
term ​“Managerial and Technical Positions” under Section
Positions” under RR No. 2-98, and modifies RMC No. 41-09, including
2.57.1(D) of Revenue Regulations (RR) No. 2-98, as amended,
guidelines on availment of the 15% preferential Income Tax rate for
and modifies for this purpose Revenue Memorandum Circular
qualified Filipino personnel employed by Regional or Area Headquarters
(RMC) No. 4109 including the guidelines on availment of the
and Regional Operating Headquarters of multinational companies.
15% preferential Income Tax rate for qualified Filipino
personnel employed by Regional or Area Headquarters
What is the tax treatment of the income derived by alien individuals
(RHQs) and Regional Operating Headquarters (ROHQs) of
and qualified Filipino personnel employed by RHQs and ROHQs?
multinational companies​.
A ​Final Withholding Tax of 15% shall be withheld from the gross
2. Filipinos ​employed by ROHQs or RHQs in a managerial or
income derived by every ​alien individual occupying managerial and
technical position shall have the ​option to be taxed at either 15%
technical positions in RHQs and ROHQs and representative offices
of their gross income or at the regular Income Tax rate on
established in the Philippines by multinational companies as salaries,
taxable compensation income in accordance with Section 24 of
wages, annuities, compensation, remuneration, and other emoluments,
the Tax Code, if the employer is governed by Book III of
such as honoraria and allowances, except income which is subject to
Executive Order (EO) No. 226, as amended by Republic Act (RA)
fringe benefits tax, from such regional or area headquarters and regional
No. 8756. All other employees are considered as regular
operating headquarters. The same tax treatment shall apply to Filipinos
employees who are subject to the regular Income Tax rate on their
employed and occupying the same positions as those aliens if the
taxable compensation income.
employer is governed by Book III of EO 226 (or the Omnibus
3. Filipinos exercising the ​option to be taxed at 15% preferential
Investments Code), regardless of whether or not there is an alien
rate for occupying the same managerial or technical position as
executive occupying the same position.
that of an alien employed in an ROHQ or RHQ must meet all the
Can the Filipino employee opt to be taxed at the regular income tax
following requirements:
rate? ​Yes, such Filipinos employed by RHQs and ROHQs in a
a. Position and Function Test ​- The employee must occupy
managerial or technical position shall have the option to be taxed at either
a managerial position or technical position and must actually be
15% of gross income or at the regular rate on their taxable income in
exercising such managerial or technical functions pertaining to said
accordance with the Tax Code if the RHQ or ROHQ is governed by
position;
Book III of E.O. 226.
b. Compensation Threshold Test ​- In order to be
If the Filipino is not a managerial or technical employee, can he avail
considered a managerial or technical employee for Income Tax
of the 15% final income tax rate?
purposes, the employee must have received, or is due to receive
No. As clarified by RR 11-2010 [October 26, 2010], all other employees
under a contract of employment a gross annual taxable
other than those in managerial or technical positions are considered as
compensation of at least PhP 975,000.00 (whether or not this is
regular employees who are subject to the regular income tax rate on their
actually received); Provided that, a change in compensation as a
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consequence of which, such employee subsequently receiving less
than the compensation threshold stated in this section shall, for the
calendar year when the change becomes effective, result in the
employee being subject to the regular Income Tax rate.
Beginning December 31, 2013 and on December 31 every three
years thereafter, the compensation threshold shall be adjusted to its
present value using the Philippine Consumer Price Index (CPI), as
published by the National Statistics Office. The adjusted
compensation shall take effect not earlier than the first day of the
calendar month immediately following the issuance of a
corresponding RMC on the matter.
c. Exclusivity Test – The Filipino managerial or technical
employee must be exclusively working for the RHQ or ROHQ as a
regular employee and not just a consultant or contractual
personnel. Exclusivity means having just one employer at a time.
4. For purposes of determining the compensation threshold under
these Regulations, gross compensation shall not include
retirement and/or separation pay/benefits (whether or not
taxable), as well as items considered as de minimis benefits​.
Provided, that the foregoing shall be considered in determining the
Income Tax due at the time of the employee's retirement or
separation.
5. At the start of the year or at the start of the employee’s
employment, as the case may be, it is important to determine
whether the employee shall receive, or is due to receive under a
contract of employment, a gross annual compensation equivalent
to or above the compensation threshold. The determination should,
as far as practicable, include both regular taxable compensation
income and supplementary compensation income. The
Withholding Tax regime applicable to employees who opted to be
subjected to the 15% Final Withholding Tax rate is different from
the Withholding Tax on Compensation imposable on regular
employees.
6. Consequently, where an ​employee who is subject to the 15%
Final Withholding Tax rate works for more than one
employer, which are both ROHQs or RHQs at any one time in
a taxable year, then such employers need not annualize the
employees compensation​. The annualized withholding method
will only apply in the case of employees, having more than one
employer in a calendar year, whose income is subject to
withholding tax on compensation. On the other hand, when during
the same year, an employee is subject to both the 15% Final
Withholding Tax rate and the regular Income Tax rate, then the
employer under whom the employee is subject to the regular
Income Tax rates shall annualize that employee’s compensation
that was subject to the regular Income Tax rates. The
determination of whether or not the employee qualifies for the final
withholding tax rate of 15% shall be made on a yearly basis. In
cases where the total compensation cannot be determined at the
start of the year or employment, the option to be taxed at 15%
cannot be exercised.
7. The determinant test whether a Filipino employee has the
option to avail of the 15% preferential rate as a manager or
technical employee is independent of the criteria in the
imposition of fringe benefits tax under Section 33 of the Tax
Code, as implemented by Revenue Regulations No. 3-98, as
amended. Hence, there would be ​instances where a Filipino
employee shall enjoy a 15% preferential rate as a technical
employee but may not be covered by the fringe benefits tax not
being a supervisory employee. Inasmuch as the option to be
subject to 15% preferential rate and the coverage of fringe benefits
tax are independent of each other, there would be instances where
a Filipino employee shall enjoy a 15% preferential rate as a
technical employee but may not be covered by the fringe benefits
tax not being a supervisory employee.
8. For a Filipino managerial or technical employee to have the option
to be taxed at 15% of his or her gross income, the RHQ or ROHQ
must file the documents specified in the Regulations with the
Revenue District Office having jurisdiction over it or, for ROHQs
or RHQs that are considered large taxpayers, with the LT
Assistance Division/LT Regulatory Division/LTDOs. In case of
failure to file any of the requirements stated under Section 7 of the
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Regulations or the filing of false information, the regular Income
Tax shall be imposed on the employee.
9. Any person who willfully files a declaration, return or statement
containing information which is not true and correct as to every
material matter shall, upon conviction, be subject to the penalties
prescribed for perjury under the Revised Penal Code. Moreover,
any and all applicable criminal offense (e.g. tax evasion) under the
Tax Code, as amended, shall be charged against any person who is
discovered to have committed any false declaration or
misrepresentation.
10. The transitory provision shall cover compensation payments made
from January 1, 2010. All affected taxpayers are allowed to make
necessary adjustments in their Withholding Tax remittances
(Withholding Tax on Compensation or 15% Final Withholding
Tax on Compensation) without penalties, but in no case beyond
January 31, 2011. However, compliance to existing rules and
regulations on the availment of abatement of penalties should be
complied by the ROHQ/RHQ. All affected taxpayers are required
to file an amended BIR Form 1601C and/or BIR Form 1601F to
cover adjustments necessary as a result of these regulations.
11. The rules and guidelines in changes in classification of employee
are specified in the regulations.
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123. CIR vs. S.C. Johnson and Son, Inc​. ​(Billy)
Jan. 25 1993 | Gonzaga - Reyes | ​Nonresident Foreign Corporations​- Most Favored
Nation Clause
PETITIONER​: CIR
RESPONDENTS​: S.C. Johnson and Son Inc. and CA
SUMMARY​:
SC Johnsons and Sons, Inc. (SCJS) is a domestic corporation who entered into a
license agreement with SC Johnson and Sons USA (USA), a foreign corporation
for right to use patent, trademark and technology, with a right to manufacture,
package and distribute as well as secure assistance with USA. For their use of
trademark, SCJS was required to pay royalties to USA which payments were
subject to 25% withholding tax on royalty payments SCJS filed with the
international tax affairs division (ITAD) of BIR for refund due to the
overpayment of taxes. It claims that since the license agreement was approved
by TT, it should be subject to the 10% withholding tax only pursuant to the most
favored nation clause in the RP-US Tax treaty in relation to the RP-West
Germany Tax Treaty. SCJS filed a petition for review with the CTA, which
decided in favor of SJCS CA affirmed in toto. Hence this petition for review.
the isue in this case is WoN SCJS is entitled to the most favored nation clause -
No
In negotiating tax treaties, the underlying rationale for reducing the tax rate is
that the Philippines will give up a part of the tax in the expectation that the tax
given up for this particular investment is not taxed by the other country. Thus the
CIR correctly opined that the phrase royalties paid under similar circumstances
in the most favored nation clause of the US-RP Tax Treaty necessarily
contemplated circumstances that are tax-related. Since the state of source is the
Philippines because the royalties are paid for the right to use property or rights,
i.e. trademarks, patents and technology, located within the Philippines. Under the
RP-US Tax Treaty, the state of residence and the state of source are both
permitted to tax the royalties, with a restraint on the tax that may be collected by
the state of source. The CIR correctly opined that the phrase royalties paid under
similar circumstances in the most favored nation clause of the US-RP Tax Treaty
necessarily contemplated circumstances that are tax-related. The intention
behind the adoption of the provision on relief from double taxation in the two tax
treaties in question should be considered in light of the purpose behind the most
favored nation clause.The SC agree with CIR that since the RP-US Tax Treaty
does not give a matching tax credit of 20 percent for the taxes paid to the
Philippines on royalties as allowed under the RP-West Germany Tax Treaty,
private respondent cannot be deemed entitled to the 10 percent rate granted
under the latter treaty for the reason that there is no payment of taxes on royalties
under similar circumstances.
DOCTRINE: ​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. It 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 accorded 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.
FACTS:
1. SC Johnsons and Sons, Inc. (SCJS) is a domestic corporation who entered
into a license agreement with SC Johnson and Sons USA (USA), a foreign
corporation for right to use patent, trademark and technology, with a right to
manufacture, package and distribute as well as secure assistance from USA.
2. The agreement was registered with Technology Transfer Board (TTB) of
the bureau of Patents
3. For their use of trademark, SCJS was required to pay royalties to USA
which payments were subject to 25% withholding tax on royalty payments
4. SCJS filed with the international tax affairs division (ITAD) of BIR for
refund due to the overpayment of taxes. It claims that since the license
agreement was approved by TT, it should be subject to the 10% withholding
tax only pursuant to the most favored nation clause in the RP-US Tax treaty
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in relation to the RP-West Germany Tax Treaty
5. Unheeded, SCJS filed a petition for review with the CTA, which decided in
favor of SJCS CA affirmed in toto. Hence this petition for review.
ISSUES:
1. WON SCJS is entitled to the most favored nation clause- NO
RATIO:
1. The RP-US tax treaty is just one of a number of bilateral treaties which the
Philippines has entered into for the avoidance of double taxation, to help the
tax payer avoid simultaneous in 2 different jurisdiction
2. International juridical double taxation - imposition of comparable taxes in
two or more states on the same taxpayer in respect of the same subject
matter and for identical periods. The rationale for doing away with double
taxation is to encourage the free flow of goods and services and the
movement of capital, technology and persons between countries, conditions
deemed vital in creating robust and dynamic economies. Foreign
investments will only thrive in a fairly predictable and reasonable
international investment climate and the protection against double taxation
is crucial in creating such a climate.
3. Double taxation usually takes place when a person is resident of a
contracting state and derives income from, or owns capital in, the other
contracting state and both states impose tax on that income or capital.
4. To eliminate double taxation, a tax treaty resorts to several methods. First, it
sets out the respective rights to tax of the state of source or situs and of the
state of residence with regard to certain classes of income or capital. In
some cases, an exclusive right to tax is conferred on one of the contracting
states; however, for other items of income or capital, both states are given
the right to tax, although the amount of tax that may be imposed by the state
of source is limited.
5. The second method for the elimination of double taxation applies whenever
the state of source is given a full or limited right to tax together with the
state of residence. In this case, the treaties make it incumbent upon the state
of residence to allow relief in order to avoid double taxation.
6. There are 2 methods of relief- the exemption method and the credit
method. In the exemption method, the income or capital which is taxable in
the state of source or situs is exempted in the state of residence, although in
some instances it may be taken into account in determining the rate of tax
applicable to the taxpayers remaining income or capital. On the other hand,
in the credit method, although the income or capital which is taxed in the
state of source is still taxable in the state of residence, the tax paid in the
former is credited against the tax levied in the latter. The basic difference
between the two methods is that in the exemption method, the focus is on
the income or capital itself, whereas the credit method focuses upon the tax.
7. In negotiating tax treaties, the underlying rationale for reducing the tax rate
is that the Philippines will give up a part of the tax in the expectation that
the tax given up for this particular investment is not taxed by the other
country.
8. Thus the CIR correctly opined that the phrase royalties paid under similar
circumstances in the most favored nation clause of the US-RP Tax Treaty
necessarily contemplated circumstances that are tax-related.
9. In the case at bar, the state of source is the Philippines because the royalties
are paid for the right to use property or rights, i.e. trademarks, patents and
technology, located within the Philippines. Under the RP-US Tax Treaty,
the state of residence and the state of source are both permitted to tax the
royalties, with a restraint on the tax that may be collected by the state of
source.
10. The method employed to give relief from double taxation is the allowance
of a tax credit to citizens or residents of the United States (in an appropriate
amount based upon the taxes paid or accrued to the Philippines) against the
United States tax, but such amount shall not exceed the limitations by
United States law for the taxable year. Under Article 13, the Philippines
may impose one of three rates- 25% of the gross amount of the royalties;
15% when the royalties are paid by a corporation registered with the
Philippine Board of Investments and engaged in preferred areas of
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activities; or the lowest rate of Philippine tax that may be imposed on
royalties of the same kind paid under similar circumstances to a resident of
a third state.
11. Given the purpose underlying tax treaties and the rationale for the most
favored nation clause, the concessional tax rate of 10% provided for in the
RP-Germany Tax Treaty should apply only if the taxes imposed upon
royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are
paid under similar circumstances. (meaning that private respondent must
prove that the RP-US Tax Treaty grants similar tax reliefs to residents of the
United States in respect of the taxes imposable upon royalties earned from
sources within the Philippines as those allowed to their German
counterparts under the RP-Germany Tax Treaty.)
12. The RP-US and the RP-West Germany Tax Treaties do not contain similar
provisions on tax crediting. The RP-Germany Tax Treaty, expressly allows
crediting against German income and corporation tax of 20% of the gross
amount of royalties paid under Philippine law. On the other hand, the
RP-US Tax Treaty, which is the counterpart provision with respect to relief
for double taxation, does not provide for similar crediting of 20% of the
gross amount of royalties paid.
13. The reason for construing the phrase paid under similar circumstances of
the RP-US Tax Treaty as referring to taxes is anchored upon a logical
reading of the text in the light of the fundamental purpose of such treaty
which is to grant an incentive to the foreign investor by lowering the tax and
at the same time crediting against the domestic tax abroad a figure higher
than what was collected in the Philippines.
14. The ultimate reason for avoiding double taxation is to encourage foreign
investors to invest in the Philippines - a crucial economic goal for
developing countries. The goal of double taxation conventions would be
thwarted if such treaties did not provide for effective measures to minimize,
if not completely eliminate, the tax burden laid upon the income or capital
of the investor.
15. The tax which could have been collected by the Philippine government will
simply be collected by another state, defeating the object of the tax treaty
since the tax burden imposed upon the investor would remain unrelieved. If
the state of residence does not grant some form of tax relief to the investor,
no benefit would redound to the Philippines, i.e., increased investment
resulting from a favorable tax regime, should it impose a lower tax rate on
the royalty earnings of the investor, and it would be better to impose the
regular rate rather than lose much-needed revenues to another country.
16. At the same time, the intention behind the adoption of the provision on
relief from double taxation in the two tax treaties in question should be
considered in light of the purpose behind the most favored nation clause.
17. 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. It 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 accorded 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.
18. Both the RP-US Tax Treaty and the RP-West Germany Tax Treaty, speaks
of tax on royalties for the use of trademark, patent, and technology. The
entitlement of the 10% rate 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 upon the income of the investor is not the same in the 2
countries. The similarity in the circumstances of payment of taxes is a
condition for the enjoyment of most favored nation treatment precisely to
underscore the need for equality of treatment.
19. We agree with CIR that since the RP-US Tax Treaty does not give a
matching tax credit of 20 percent for the taxes paid to the Philippines on
royalties as allowed under the RP-West Germany Tax Treaty, private
respondent cannot be deemed entitled to the 10 percent rate granted under
the latter treaty for the reason that there is no payment of taxes on royalties
under similar circumstances.
20. tax refunds are in the nature of tax exemptions. As such they are regarded as
in derogation of sovereign authority and to be construed ​strictissimi
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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 Tax Treaty is paid under similar
circumstances as the tax on royalties under the RP-West Germany Tax
Treaty.

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124. Marubeni Corporation vs. CIR (Marie)
September 14, 1989 | Fernan, CJ. | Corporations - Nonresident Foreign Corporations
PETITIONER​: Marubeni Corporation
RESPONDENTS​: CIR and CTA
SUMMARY​:
Marubeni Corporation is a foreign corporation duly organized and existing
under the laws of Japan and duly licensed to engage in business under
Philippine laws. It has equity investments in AG&P of Manila. For the
first quarter of 1981, AG&P declared and paid cash dividends to Marubeni
and withheld 10% final dividend tax thereon. For the third quarter of 1981,
AG&P declared and paid cash dividends to Marubeni and withheld 10%
final dividend tax thereon. AG&P directly remitted the cash dividends to
Marubeni’s head office in Tokyo, Japan, net not only of the 10% final
dividend tax for the first and third quarters of 1981, but also of the
withheld 15% profit remittance tax based on the remittable amount after
deducting the final withholding tax of 10%. Thus, for the first and third
quarters of 1981, AG&P as withholding agent paid 15% branch profit
remittance on cash dividends declared and remitted to petitioner at its head
office in Tokyo in the total amount of P229,424.40. Marubeni sought a
ruling from the BIR on whether the dividends received from AG&P are
effectively connected with its conduct or business in the Philippines as to
be considered branch profits subject to the 15% profit remittance tax
imposed under Section 24 (b) (2) of the National Internal Revenue Code
as amended by Presidential Decrees Nos. 1705 and 1773.
The alleged overpaid taxes were incurred for the remittance of dividend
income to the head office in Japan which is a separate and distinct income
taxpayer from the branch in the Philippines. This is inferred from the fact
that the investment was made for purposes peculiarly germane to the
conduct of the corporate affairs of Marubeni, Japan, but not of the branch
in the Philippines. Marubeni, having made this independent investment
attributable only to the head office, cannot now claim the increments as
ordinary consequences of its trade or business in the Philippines and avail
itself of the lower tax rate of 10%. Marubeni Japan, being a non-resident
foreign corporation, as a general rule, is taxed 35% of its gross income
from all sources within the Philippines. However, a discounted rate of
15% is given to Marubeni on dividends received from a domestic
corporation (AG&P) on the condition that its domicile state (Japan)
extends in favor of Marubeni, a tax credit of not less than 20% of the
dividends received.
DOCTRINE:
As a general rule, foreign corporation is the same juridical entity as its
branch office in the Philippines. Except when the foreign corporation
transacts business in the Philippines directly and independently of its
branch; the taxpayer is the foreign corporation.
FACTS:
1. Petitioner, Marubeni Corporation is a foreign corporation duly organized
and existing under the laws of Japan and duly licensed to engage in business
under Philippine laws.
2. It has equity investments in AG&P of Manila.
3. For the first quarter of 1981, AG&P declared and paid cash dividends to
petitioner in the amount of P849,720 and withheld the corresponding 10%
final dividend tax thereon.
4. Similarly, for the third quarter of 1981, AG&P declared and paid P849,720
as cash dividends to petitioner and withheld the corresponding 10% final
dividend tax thereon.
5. AG&P directly remitted the cash dividends to petitioner’s head office in
Tokyo, Japan, net not only of the 10% final dividend tax in the amounts of
P764,748 for the first and third quarters of 1981, but also of the withheld
15% profit remittance tax based on the remittable amount after deducting
the final withholding tax of 10%.
6. Thus, for the first and third quarters of 1981, AG&P as withholding agent
paid 15% branch profit remittance on cash dividends declared and remitted
to petitioner at its head office in Tokyo in the total amount of P229,424.40.
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7. Petitioner, through the accounting firm Sycip, Gorres, Velayo and
Company, sought a ruling from the Bureau of Internal Revenue on whether
or not the dividends petitioner received from AG&P are effectively
connected with its conduct or business in the Philippines as to be considered
branch profits subject to the 15% profit remittance tax imposed under
Section 24 (b) (2) of the National Internal Revenue Code as amended by
Presidential Decrees Nos. 1705 and 1773.
8. CIR replied , saying that pursuant to Section 24 (b) (2) of the Tax Code, as
amended, only profits remitted abroad by a branch office to its head office
which are effectively connected with its trade or business in the Philippines
are subject to the 15% profit remittance tax . In the instant case, the
dividends received by Marubeni from AG&P not income arising from the
business activity in which Marubeni is engaged. Accordingly, said
dividends if remitted abroad are not considered branch profits for purposes
of the 15% profit remittance tax imposed by Section 24 (b) (2).
9. Marubeni Corp. of Japan claimed for the refund or issuance of a tax credit
of P229,424.40 representing profit tax remittance erroneously paid on the
dividends remitted by AG&P of Manila. It is the argument of Marubeni
Corp. of Japan that it is a resident foreign corporation subject only to 10%
intercorporate final tax on dividends received from a domestic corporation
in accordance with Sec. 24 (c) (1) of the Tax Code.
10. CIR denied petitioner's claim for refund/credit of P229,424.40. CIR thinks
that Marubeni, Japan, being a non-resident foreign corporation and not
engaged in trade or business in the Philippines, is subject to tax on income
earned from Philippine sources at the rate of 35% of its gross income under
Section 24 (b) (1) of the same Code but expressly made subject to the
special rate of 25% under Article 10(2) (b) of the Tax Treaty of 1980
concluded between the Philippines and Japan.
ISSUES:
1. WON Marubeni Corp. of Japan is resident foreign corporation - NO, it
is a non-resident foreign corporation
RATIO:
1. Erroneous argument of Marubeni - Marubeni Corp. contends that precisely
because it is engaged in business in the Philippines through its Philippine
branch that it must be considered as a resident foreign corporation.
Petitioner reasons that since the Philippine branch and the Tokyo head
office are one and the same entity, whoever made the investment in AG&P,
Manila does not matter at all. the head office and the office branch
constitute but one corporate entity, the Marubeni Corporation, which, under
both Philippine tax and corporate laws, is a resident foreign corporation
because it is transacting business in the Philippines.
2. The Supreme Court refuted the argument of Marubeni Corp. by using the
argument of the Solicitor General. “The general rule that a foreign
corporation is the same juridical entity as its branch office in the Philippines
cannot apply here. When the foreign corporation transacts business in the
Philippines independently of its branch, the principal-agent relationship is
set aside. The transaction becomes one of the foreign corporation, not of
the branch here in the Philippines. Consequently, the taxpayer is the foreign
corporation, not the domestic branch or the resident foreign corporation.”
3. In other words, the alleged overpaid taxes were incurred for the remittance
of dividend income to the head office in Japan which is a separate and
distinct income taxpayer from the branch in the Philippines.
4. There can be no other logical conclusion considering the undisputed fact
that the investment was made for purposes peculiarly germane to the
conduct of the corporate affairs of Marubeni, Japan, but certainly not of the
branch in the Philippines.
5. It is thus clear that petitioner, having made this independent investment
attributable only to the head office, cannot now claim the increments as
ordinary consequences of its trade or business in the Philippines and avail
itself of the lower tax rate of 10%.
6. Marubeni Corp. of Japan, being a non-resident foreign corporation, the
applicable provision with respect to the transaction in question is the Tax
Code is Section 24 (b) (1) (iii) in conjunction with the Philippine-Japan
Treaty of 1980.
7. Proceeding to apply the above section to the case at bar, petitioner, being a
nonresident foreign corporation, as a general rule, is taxed 35% of its gross
income from all sources within the Philippines.
8. However, a discounted rate of 15% is given to petitioner on dividends
received from a domestic corporation (AG&P) on the condition that its
domicile state (Japan) extends in favor of petitioner, a tax credit of not less
than 20% of the dividends received. This 20% represents the difference
48 
 BLOCK 2A 2021 | TAXATION 1 | Montero

between the regular tax of 35% on non-resident foreign corporations which

petitioner would have ordinarily paid, and the 15% special rate on dividends
received from a domestic corporation.
SEPARATE OPINIONS: N/A
CONCURRING: N/A

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125. N.V. Reederij Amsterdam v. CIR (Sylina)
Jun 23, 1988 | Gancayco | Corporations - NRC
PETITIONER​: N.V. REEDERIJ "AMSTERDAM" and ROYAL
INTEROCEAN LINES
RESPONDENTS​: COMMISSIONER OF INTERNAL REVENUE
SUMMARY​: MV Amstelmeer and MV Amstelkroon vessels of N.B. Reederij
"AMSTERDAM," called on Philippine ports to load cargoes for foreign
destination. The freight fees were paid abroad. Royal Interocean Lines acted as
husbanding agent for a fee or commission on said vessels. CIR filed the ITR for
and in behalf of .V. Reederij "AMSTERDAM" under Sec. 15 of the NIRC. CIR
assessed the amounts of P193,973.20 and P262,904.94 as deficiency income tax
as a non-resident foreign corporation not engaged in trade or business in the
Philippines under Section 24 (b) (1) of the Tax Code. Royal filed ITR for the
subject vessels on the assumption that NV Reederij is a foreign corporation
engaged in trade or business in the Philippines. Royal as the husbanding agent
filed a written protest against the assessment made by the CIR which was denied
Petition for Review was filed in the CTA: assessment was modified eliminating
the 50% fraud compromise penalties imposed upon petitioners. The issue is
WON NV Reederij Amsterdam, not having any office or place of business in
the Ph, whose vessels called on the Ph Ports for the purpose of loading
cargoes only twice, should be taxed as a foreign corporation engaged in
trade or business in the Ph. ​The court held that N.V. Reederij
"AMSTERDAM" is a foreign corporation not authorized or licensed to do
business in the Philippines. It does not have a branch office in the Philippines
and it made only two calls in Philippine ports. ​In order that a foreign
corporation may be considered engaged in trade or business, its business
transactions must be continuous.
DOCTRINE: Foreign corporations not doing business in the Philippines are
taxable on income 'from all sources within the Philippines, as interest,
dividends, rents, salaries, wages, premiums, annuities, compensations,
remunerations, emoluments, or other fixed or determinable annual or
periodical or casual gains, profits and income and capital gains.' The tax is
30% (now 35%) of such gross income.
FACTS:
1. From March 27 - April 30, 1963, MV Amstelmeer, and from and from
September 24 to October 28, 1964, MV "Amstelkroon," vessels of N.B.
Reederij "AMSTERDAM," called on Philippine ports to load cargoes for
foreign destination.
2. The freight fees for the transactions were paid abroad ( US $98,175.00 in
1963 and US $137,193.00 in 1964)
3. Royal Interocean Lines acted as husbanding agent for a fee or commission
on said vessels
4. No income tax appears to have been paid by petitioner N.V. Reederij
"AMSTERDAM" on the freight receipts.
5. CIR filed ITR for and in behalf of N.V. Reederij "AMSTERDAM" under
Sec. 15 of the NIRC
6. CIR applied the prevailing market conversion rate of P3.90 to the $1.00, the
gross receipts amounted to P382,882.50 and P535.052.00, respectively
7. CIR assessed the amounts of P193,973.20 and P262,904.94 as deficiency
income tax as a non-resident foreign corporation not engaged in trade or
business in the Philippines under Section 24 (b) (1) of the Tax Code.
8. Royal filed ITR for the subject vessels on the assumption that NV Reederij
is a foreign corporation engaged in trade or business in the Philippines.
a. The exchange rate of P2.00 to $1.00 was applied
b. Tax paid: P1,835.52 and P9,448.94, respectively, pursuant to
Section 24 (b) (2) in relation to Section 37 (B) (e) of the National
Internal Revenue Code and Section 163 of Revenue Regulations
No. 2
9. Royal as the husbanding agent filed a written protest against the assessment
made by the CIR which was denied
10. Petition for Review was filed in the CTA: assessment was modified
eliminating the 50% fraud compromise penalties imposed upon petitioners.
11. MR was denied
ISSUES:
1. WON NV Reederij Amsterdam, not having any office or place of
business in the Ph, whose vessels called on the Ph Ports for the purpose
of loading cargoes only twice, should be taxed as a foreign corporation
engaged in trade or business in the Ph. NO
RATIO:
1. N.V. Reederij "AMSTERDAM" is a foreign corporation not authorized or
licensed to do business in the Philippines.
2. It does not have a branch office in the Philippines and it made only two
calls in Philippine ports
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3. In order that a foreign corporation may be considered engaged in trade

or business, its business transactions must be continuous.
4. A casual business activity in the Philippines by a foreign corporation, as in
the present case, does not amount to engaging in trade or business in the
Philippines for income tax purposes.
5. A corporation is itself a taxpaying entity and speaking generally, for
purposes of income tax, corporations are classified into (a) domestic
corporations and (b) foreign corporations.
6. A resident foreign corporation is a foreign corporation engaged in trade or
business within the Philippines or having an office or place of business
therein while a non-resident foreign corporation is a foreign corporation not
engaged in trade or business within the Philippines and not having any
office or place of business therein
7. Foreign corporations not doing business in the Philippines are taxable
on income 'from all sources within the Philippines, as interest,
dividends, rents, salaries, wages, premiums, annuities, compensations,
remunerations, emoluments, or other fixed or determinable annual or
periodical or casual gains, profits and income and capital gains.' The
tax is 30% (now 35%) of such gross income. ​(Sec. 24 (b) (1), Tax Code.)
8. N.V. Reederij 'Amsterdam' is a non-resident foreign corporation, organized
and existing under the laws of The Netherlands with principal office in
Amsterdam and not licensed to do business in the Philippines. It is not
engaged in trade or business in the Philippines
9. It is therefore taxable under Sec. 24 (b) (1), Tax Code. N. V. Reederij
'Amsterdam' being a non-resident foreign corporation, its taxable income
for purposes of our income tax law consists of its gross income from all
sources within the Philippines.
10. The law seems clear and specific.
11. The applicable provision imposes a tax on foreign corporations falling
under the classification of non-resident corporations without any exceptions
or conditions, unlike in the case of foreign corporations engaged in trade or
business within the Philippines which contained (at the time material to this
case) an exception with respect to foreign life insurance companies.
12. Foreign corporation not engaged in trade or business within the
Philippines and which does not have any office or place of business
therein is taxed on income received from all sources within the
Philippines at the rate of 35% of the gross income.

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126. CIR v. Procter & Gamble (Pat)
02 Dec 1991 | J. Feliciano | Preferential Dividend Tax Rate for Non-resident Foreign
Corporations
PETITIONER​: Commissioner on Internal Revenue
RESPONDENTS​: Procter & Gamble Philippine Manufacturing Corp.
SUMMARY​:
For 1974 and 1975, P&G-Phil declared dividends payable to its parent
company P&G-USA, from which amount 35% withholding tax at source was
deducted. In 1977, P&G-Phil claimed for refund arguing that the reduced
dividend tax rate of 15% was the rate applicable, and not the 35% regular rate.
The CIR did not act on the claim so the case was brought to the CTA, which
ordered the refund. On appeal to the SC, the Court reversed the CTA decision;
hence, this Motion for Reconsideration. The main issue before the court is
whether the preferential rate of 15% applies to P&G-Phil’s dividend remittances
to P&G-USA.
The SC held that the preferential rate of 15% applies to P&G-Phil. The NIRC
provides for a preferential dividend tax rate ​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. ​This means that the reduced 15% dividend tax rate is applicable if
the USA "shall allow" to P&G-USA a tax credit for "taxes deemed paid in the
Philippines" applicable against the US taxes of P&G-USA. "taxes deemed paid
in the Philippines" must, as a minimum, reach an amount equivalent to twenty
(20) percentage points which represents the difference between the regular 35%
dividend tax rate and preferred 15% dividend tax rate. The amount of “deemed
paid” tax credit allowed by US law must at least be equal to the amount of
the dividend tax waived by the Phil. govt. And in this case, counterpart US
Tax Laws and the computation in Ratio (B)(10-11) shows compliance with the
requirement.
DOCTRINE:
The ordinary 35% tax rate applicable to dividend remittances to non-resident
corporate stockholders of a Philippine corporation, goes down to 15% 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.
FACTS:
1. For the taxable years 1974 and 1975, Procter and Gamble Philippine
Manufacturing Corporation ​("P&G-Phil.") declared dividends payable to
its parent company and sole stockholder, Procter and Gamble Co., Inc.
(USA) ​("P&G-USA"), amounting to P24,164,946.30, from which
dividends the amount of P8,457,731.21 representing 35% withholding tax
at source was deducted.
2. In 1977, P&G-Phil. filed with the Commissioner of Internal Revenue
(“CIR”) a ​claim for refund for P4,832,989.26 claiming that pursuant to
Section 24 (b) (1) of the National Internal Revenue Code ("NIRC"), the
applicable rate of withholding tax on the dividends remitted was only
15% and not thirty-five percent 35% of the dividends.
3. Since there was no responsive action on the part of the Commissioner,
P&G-Phil. filed a petition for review with the Court of Tax Appeals
("CTA"). In 1984, the ​CTA rendered a decision ordering the CIR to
refund​ in the amount P4,832,989.00.
4. On appeal to the SC’s 2nd Division, the decision was ​reversed​. The Court
also held that:
a. P&G-USA and P&G-Phil. was the proper party to claim the refund
or tax credit
b. there is n​othing in Section 902 or other provisions of the US
Tax Code that allows a credit against the US tax due from
P&G-USA of taxes deemed to have been paid in the Philippines
equivalent to twenty percent (20%) which represents the
difference between the regular tax of thirty-five percent (35%) on
corporations and the tax of fifteen percent (15%) on dividends; and
52 
 BLOCK 2A 2021 | TAXATION 1 | Montero
c. P&G-Phil. failed to meet certain conditions necessary in order that
"the dividends received by its non-resident parent company in the
US (P&G-USA) may be subject to the preferential tax rate of 15%
instead of 35%."
5. Hence, this motion for reconsideration. The Court notes that the CIR raised
for the first time on appeal the issue of P&G-Phil’s incapacity to bring the
present claim (given that P&G-Phil is just a withholding agent)
ISSUES:
1. Whether P&G-Phil has the capacity to bring the suit - YES
2. [MAIN] ​Whether the preferential rate of 15% applies to the dividend
remittances of P&G-Phil to P&G-USA - YES
RATIO:
(A) [Not so important] Whether P&G-Phil has the capacity to bring the suit - YES
1. BIR cannot raise for the first time on appeal the issue of P&G-Phil’s
capacity as this matter was not litigated in the administrative level
2. Even if this issue was raised below, P&G-Phil would have been able to
secure the authorization before the filing of the action
3. More importantly, the issue of P&G’s capacity relates to fairness. Under
Sec. 3066 of the NIRC, a claim for refund or tax credit filed with the CIR is
essential for maintenance of a suit for recovery of taxes allegedly
erroneously or illegally assessed or collected.
4. Under Sec. 309(3) of the NIRC, “... No credit or refund of taxes or penalties
shall be allowed unless the taxpayer files in writing with the Commissioner
6
​Sec. 306. Recovery of tax erroneously or illegally collected. — No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been
erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without
authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a
claim for refund or credit has been duly filed with the Commissioner of Internal Revenue; but such suit or
proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or
duress. In any case, no such suit or proceeding shall be begun after the expiration of two years from the
date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: . .
.
a claim for credit or refund within two (2) years after the payment of the tax
or penalty.
5. The term "taxpayer" is defined in our NIRC as referring to "any person
subject to tax imposed by the Title [on Tax on Income]." It thus becomes
important to note that under Section 53 (c) of the NIRC, the withholding
agent who is "required to deduct and withhold any tax" is made “personally
liable for such tax" and indeed is indemnified against any claims and
demands which the stockholder might wish to make in questioning the
amount of payments effected by the withholding agent in accordance with
the provisions of the NIRC.
6. The withholding agent, P&G-Phil., is directly and independently liable for
the correct amount of the tax that should be withheld from the dividend
remittances. The withholding agent is, moreover, subject to and liable for
deficiency assessments, surcharges and penalties should the amount of the
tax withheld be finally found to be less than the amount that should have
been withheld under law.
7. In Phil. Guaranty v. CIR, the Court held that the withholding agent an agent
of both the government (as to the collection) and the taxpayer (as to filing of
returns). The withholding agent’s authority may reasonably be held to
include the authority to file a claim for refund and to bring an action for
recovery of such claim.
8. This implied authority is especially warranted where, is in the instant case,
the withholding agent is the wholly owned subsidiary of the
parent-stockholder and therefore, at all times, under the effective control of
such parent-stockholder. In the circumstances of this case, it seems
particularly unreal to deny the implied authority of P&G-Phil. to claim a
refund and to commence an action for such refund.
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(B) [MAIN] ​Whether the preferential rate of 15%7 applies to the dividend
remittances of P&G-Phil to P&G-USA - YES
1. The ordinary 35% tax rate applicable to dividend remittances to
non-resident corporate stockholders of a Philippine corporation, goes down
to 15% ​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.
2. In other words, the reduced 15% dividend tax rate is applicable if the USA
"shall allow" to P&G-USA a tax credit for "taxes deemed paid in the
Philippines" applicable against the US taxes of P&G-USA. The NIRC
specifies that such tax credit for ​"taxes deemed paid in the Philippines"
must, as a minimum, reach an amount equivalent to twenty (20)
percentage points which represents the difference between the regular
35% dividend tax rate and preferred 15% dividend tax rate
3. The NIRC does not require that the US tax law deem the parent-corporation
to have paid the twenty (20) percentage points of dividend tax waived by
the Philippines. The NIRC only requires that the US "shall allow"
P&G-USA a "deemed paid" tax credit in an amount equivalent to the twenty
(20) percentage points waived by the Philippines.
4. A review of US Tax Law shows compliance with the requirement of the
NIRC.
7
​(b) Tax on foreign corporations.—
(1) Non-resident corporation. — A foreign corporation not engaged in trade and business in the
Philippines, . .., shall pay a tax equal to 35% of the gross income receipt during its taxable year from all
sources within the Philippines, as . . . dividends . . . 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, which shall
be collected and paid as provided in Section 53 (d) of this Code, 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 corporation, taxes deemed to have been paid in the Philippines equivalent to 20%
which represents the difference between the regular tax (35%) on corporations and the tax (15%) on
dividends as provided in this Section . .
a. US law (Section 9018, Tax Code) grants P&G-USA a tax credit for
the amount of the dividend tax actually paid (i.e., withheld) from
the dividend remittances to P&G-USA;
b. US law (Section 9029, US Tax Code) grants to P&G-USA a
"deemed paid' tax credit 8 for a proportionate part of the corporate
income tax actually paid to the Philippines by P&G-Phil.
5. The parent-corporation P&G-USA is "deemed to have paid" a portion of the
Philippine corporate income tax although that tax was actually paid by its
Philippine subsidiary, P&G-Phil., not by P&G-USA.
6. This "deemed paid" concept merely reflects economic reality, since the
Philippine corporate income tax was in fact paid and deducted from
revenues earned in the Philippines, thus ​reducing the amount remittable
as dividends to P&G-USA.
7. US tax law treats the Philippine corporate income tax as if it came out
of the pocket, as it were, of P&G-USA as a part of the economic cost ​of
carrying on business operations in the Philippines through the medium of
P&G-Phil. and here earning profits.
8
Sec. 901 — Taxes of foreign countries and possessions of United States.
(a) Allowance of credit. — If the taxpayer chooses to have the benefits of this subpart, the tax imposed by
this chapter shall, subject to the applicable limitation of section 904, be credited with the amounts
provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed
to have been paid under sections 902 and 960. Such choice for any taxable year may be made or changed
at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax
imposed by this chapter for such taxable year. The credit shall not be allowed against the tax imposed by
section 531 (relating to the tax on accumulated earnings), against the additional tax imposed for the
taxable year under section 1333 (relating to war loss recoveries) or under section 1351 (relating to
recoveries of foreign expropriation losses), or against the personal holding company tax imposed by
section 541.
(b) Amount allowed. — Subject to the applicable limitation of section 904, the following amounts shall be
allowed as the credit under subsection (a):
(a) Citizens and domestic corporations. — In the case of a citizen of the United States and of a domestic
corporation, the amount of any income, war profits, and excess profits taxes paid or accrued during the
taxable year to any foreign country or to any possession of the United States; ​[xxx]
9
​Sec. 902. — Credit for corporate stockholders in foreign corporation.
(A) Treatment of Taxes Paid by Foreign Corporation. — For purposes of this subject, a domestic
corporation which owns at least 10 percent of the voting stock of a foreign corporation from which it
receives dividends in any taxable year shall (2) to the extent such dividends are paid by such foreign
corporation out of accumulated profits [as defined in subsection (c) (1) (b)] of a year for which such
foreign corporation is a less developed country corporation, be deemed to have paid the same proportion
of any income, war profits, or excess profits taxes paid or deemed to be paid by such foreign corporation
to any foreign country or to any possession of the United States on or with respect to such accumulated
profits, which the amount of such dividends bears to the amount of such accumulated profits.
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8. It is also useful to note that both (i) the tax credit for the Philippine dividend
P 65.00 Dividends remittable to P&G-USA
tax actually withheld, and (ii) the tax credit for the Philippine corporate
income tax actually paid by P&G Phil. but "deemed paid" by P&G-USA, x 35% Regular Phil. dividend tax rate
are tax credits available or applicable against the US corporate income tax
P 22.75 Regular Phil. dividend tax
of P&G-USA. These tax credits are allowed because of the US
congressional desire to avoid or reduce double taxation of the same
income stream.
9. In order to determine whether US tax law complies with the requirements P 65.00 Dividends remittable to P&G-USA
for applicability of the preferential fifteen percent (15%) dividend tax rate,
x 15% Preferential Phil. dividend tax rate
it is necessary:
a. to determine the amount of the 20 percentage points dividend tax P 9.75 Reduced Phil. dividend tax
waived by the Philippine government under Section 24 (b) (1),
NIRC, and which hence ​goes to P&G-USA;
b. to determine the ​amount of the "deemed paid" tax credit which P 22.75 Regular dividend tax
US tax law must allow to P&G-USA​; and
c. to ascertain that the amount of the "deemed paid" tax credit - P 9.75 Reduced dividend tax
allowed by US law is at least equal to the amount of the dividend
P 13.00 Amount of dividend tax waived by the Phil. govt.
tax waived by the Philippine Government.

[WARNING! Math part for Ratio 9(a) and (b) starts here]
10. Amount of dividend tax waived by the Phil. Government is computed as 11. Amount of deemed paid tax credit (which US Tax law allows) is computed
follows: as:
P 65.00 Dividends remittable to P&G-USA
P 100.00 Pre-tax net corporate income earned by P&G-Phil
- 9.75 Dividend tax withheld at reduced rate
x 35% Regular Phil. corporate income tax rate
P 55.25 Dividends actually remitted to P&G-USA
P 35.00 Paid to BIR by P&G-Phil as corp. income tax

P 55.25 Dividends actually remitted to P&G-USA

P 100.00
÷ ​65.00 Available for remittance as dividends to P&G-USA
- 35.00
0.85
P 65.00 Available for remittance as dividends to P&G-USA
x 35 Paid to BIR by P&G-Phil as corp. income tax

P 29. 75 Amount of accumulated profits earned by P&G-Phil in

excess of income tax
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For every P55.25 of dividends actually remitted (after withholding at the rate of
15%) by P&G-Phil. to its US parent P&G-USA, a tax credit of P29.75 is allowed
by the US Tax Code for Phil. corporate income tax “deemed paid” by the
parent but actually paid by the wholly-owned subsidiary
12. Since ​P29.75 is much higher than P13.00 ​(the amount of dividend tax
waived by the Philippine government), Section 902, US Tax Code,
specifically and clearly complies with the requirements of Section 24 (b)
(1), NIRC.
13. The concept of "deemed paid" tax credit, which is embodied in Section 902,
US Tax Code, is exactly the same "deemed paid" tax credit found in our
NIRC10 and which Philippine tax law allows to Philippine corporations
which have operations abroad (say, in the United States) and which,
therefore, pay income taxes to the US government.
14. Under the NIRC, BIR must give a tax credit to a Philippine corporation for
taxes actually paid by it to the US government—e.g., for taxes collected by
the US government on dividend remittances to the Philippine corporation.
This Section of the NIRC is the equivalent of Section 901 of the US Tax
Code.
15. The NIRC, does not in fact require that the "deemed paid" tax credit
shall have actually been granted before the applicable dividend tax rate
goes down from 35% to 15%. Section 24 (b) (1), NIRC, merely
requires, in the case at bar, that the USA "shall allow a credit against
the tax due from [P&G-USA for] taxes deemed to have been paid in the
Philippines . . .​"
16. There is neither statutory provision nor revenue regulation issued by the
Secretary of Finance requiring the actual grant of the "deemed paid” tax
credit by the US Internal Revenue Service to P&G-USA before the
10
(d) Sec. 30. Deductions from Gross Income.—In computing net income, there shall be allowed as
deductions — . . .
(c) Taxes. — . . .
xxxxxxxxx
(3) Credits against tax for taxes of foreign countries. — If the taxpayer signifies in his return his desire to
have the benefits of this paragraphs, the tax imposed by this Title shall be credited with . . .
(a) Citizen and Domestic Corporation. — In the case of a citizen of the Philippines and of domestic
corporation, the amount of net income, war profits or excess profits, taxes paid or accrued during the
taxable year to any foreign country.
preferential 15% dividend rate becomes applicable. Section 24 (b) (1),
NIRC, 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.
17. Section 24 (b) (1), NIRC, seeks to promote the inflow 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.
18. 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 (i.e., second-tier taxation) (the home country would
simply have more "post-R.P. tax" income to subject to its own taxing
power) by allowing the investor additional tax credits which would be
applicable against the tax payable to such home country.
19. Accordingly, Section 24 (b) (1), NIRC, requires the home or domiciliary
country to give the investor corporation a "deemed paid" tax credit at least
equal in amount to the twenty (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.
20. It will be seen that the "deemed paid" tax credit allowed by Section 902, US
Tax Code, could offset the US corporate income tax payable on the
dividends remitted by P&G-Phil.
21. Under the Philippines-United States Convention "With Respect to Taxes on
Income," the Philippines, by a ​treaty commitment, reduced the regular
rate of dividend tax to a maximum of twenty percent (20%) of the gross
amount of dividends paid to US parent corporations
22. At the same time, it 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] —.
23. This is, of course, precisely the "deemed paid" tax credit provided for in
Section 902, US Tax Code. Clearly, there is here on the part of the
Philippines a deliberate undertaking to reduce the regular dividend tax rate
of twenty percent (20%) is a maximum rate, there is still a differential or
additional reduction of five (5) percentage point​s which compliance of
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US law (Section 902) with the requirements of Section 24 (b) (1), NIRC,
makes available in respect of dividends from a Philippine subsidiary.
24. P&G-Phil is entitled to the refund it seeks.
RULING​: WHEREFORE, for all the foregoing, the Court Resolved to ​GRANT
private respondent's ​Motion for Reconsideration dated 11 May 1988, to SET
ASIDE the Decision of the and Division of the Court promulgated on 15 April 1988,
and in lieu thereof, to REINSTATE and AFFIRM the Decision of the Court of Tax
Appeals in CTA Case No. 2883 dated 31 January 1984 and to DENY the Petition for
Review for lack of merit. No pronouncement as to costs.
SEPARATE OPINIONS:
J. Cruz, concurring
1. The intention of Section 24 (b) of our Tax Code is to attract foreign
investors to this country by reducing their 35% dividend tax rate to 15% if
their own state allows them a deemed paid tax credit at least equal in
amount to the 20% waived by the Philippines.
2. This tax credit would offset the tax payable by them on their profits to their
home state. In effect, both the Philippines and the home state of the foreign
investors reduce their respective tax "take" of those profits and the investors
wind up with more left in their pockets.
3. Under this arrangement, the total taxes to be paid by the foreign investors
may be confined to the 35% corporate income tax and 15% dividend tax
only, both payable to the Philippines, with the US tax liability being offset
wholly or substantially by the US "deemed paid" tax credits.
4. Without this arrangement, the foreign investors will have to pay to the local
state (in addition to the 35% corporate income tax) a 35% dividend tax and
another 35% or more to their home state or a total of 70% or more on the
same amount of dividends. In this circumstance, it is not likely that many
such foreign investors, given the onerous burden of the two-tier system, i.e.,
local state plus home state, will be encouraged to do business in the local
state.
J. Bidin, concurring
1. Until dividends have actually been remitted to the US (which presupposes
an actual imposition and collection of the applicable Philippine dividend tax
rate), the US tax authorities cannot determine the "deemed paid" portion of
the tax credit sought by P & G USA. To require P&G-Phil to show
documentary proof of its parent corporation having actually received the
"deemed paid" tax credit from the proper tax authorities, would be like
putting the cart before the horse. The only way of cutting through this
"circularity" is for our BIR to issue rulings (as they have been doing) to the
effect that the tax laws of particular foreign jurisdictions, e.g., USA, comply
with the requirements in our tax code for applicability of the reduced 15%
dividend tax rate. Thereafter, the taxpayer can be required to submit, within
a reasonable period, proof of the amount of "deemed paid" tax credit
actually granted by the foreign tax authority. Imposing such a resolutory
condition should resolve the knotty problem of circularity
2. Nowhere in the provisions of P.D. No. 369 or in the National Internal
Revenue Code itself would one find reciprocity specified as a condition for
the granting of the reduced dividend tax rate in Section 24 (b), [1], NIRC.
3. Upon the other hand, where the law-making authority intended to impose a
requirement of reciprocity as a condition for grant of a privilege, the
legislature does so expressly and clearly. For example, the gross estate of
non-citizens and non-residents of the Philippines normally includes
intangible personal property situated in the Philippines, for purposes of
application of the estate tax and donor's tax.
4. However, under Section 98 of the NIRC (as amended by P.D. 1457), no
taxes will be collected by the Philippines in respect of such intangible
personal property if the law or the foreign country of which the decedent
was a citizen and resident at the time of his death allows a similar
exemption from transfer or death taxes in respect of intangible personal
property located in such foreign country and owned by Philippine citizens
not residing in that foreign country.
5. There is no statutory requirement of reciprocity imposed as a condition for
grant of the reduced dividend tax rate of 15%. Moreover, for the Court to
impose such a requirement of reciprocity would be to contradict the basic
policy underlying P.D. 369 which amended Section 24(b), [1], NIRC. P.D.
369 was promulgated in the effort to promote the inflow of foreign
investment capital into the Philippines.
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6. A requirement of reciprocity, i.e., a requirement that the U.S. grant a similar for large projects." And its ultimate purpose is to decrease the tax liability
reduction of U.S. subsidiaries of Philippine corporations, would assume a of the corporation concerned. But this granting of a preferential right is
desire on the part of the U.S. and of the Philippines to attract the flow of premised on reciprocity, without which there is clearly a derogation of our
Philippine capital into the U.S.. But the Philippines precisely is a capital country's financial sovereignty. No such reciprocity has been proved, nor
importing, and not a capital exporting country. If the Philippines had does it actually exist.
surplus capital to export, it would not need to import foreign capital into the
Philippines.
7. In other words, to require dividend tax reciprocity from a foreign
jurisdiction would be to actively encourage Philippine corporations to invest
outside the Philippines, which would be inconsistent with the notion of
attracting foreign capital into the Philippines in the first place.

J. Paras, dissenting
1. The U.S. foreign tax credit system operates only on foreign taxes actually
paid by U.S. corporate taxpayers, whether directly or indirectly. Nowhere
under a statute or under a tax treaty, does the U.S. government recognize
much less permit any foreign tax credit for spared or ghost taxes, as in
reality the U.S. foreign-tax credit mechanism under Sections 901-905 of the
U.S. Internal Revenue Code does not apply to phantom dividend taxes in
the form of dividend taxes waived, spared or otherwise considered "as if"
paid by any foreign taxing authority, including that of the Philippine
government.
2. Beyond that, the P&G failed: (1) to show the actual amount credited by the
U.S. government against the income tax due from PMC-U.S.A. on the
dividends received from private respondent; (2) to present the income tax
return of its parent company for 1975 when the dividends were received;
and (3) to submit any duly authenticated document showing that the U.S.
government credited the 20% tax deemed paid in the Philippines.
3. Tax refunds are in the nature of tax exemptions. As such, they are regarded
as in derogation or 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 . . . and
cannot be permitted to exist upon vague implications
4. The tax credit appertaining to remittances abroad of dividend earned here in
the Philippines was amplified in Presidential Decree No. 369 promulgated
in 1975, the purpose of which was to "encourage more capital investment
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127. BIR Ruling DA-145-07 (Syl)
March 8, 2007 | NRF corporation- withholding tax rate
This was in response to a letter dated Dec 27, 2006 requesting for confirmation
of opinion that the cash dividends declared by SM Investment Corporation (SM
Investments), a domestic corporation whose shares of stocks are traded and
listed in PSE, to Asia Opportunities, a corporation organized under the British
virgin Island (BVI), are subject to 15% preferential withholding tax pursuant to
the 1997 Tax Code, as amended by RA 9337.
BIR Ruling DA-145-07 (March 8, 2007): Allowed 15% withholding tax rate as
BVI allows tax credits.
FACTS:
1. This was in response to a letter dated Dec 27, 2006 requesting for
confirmation of opinion that the cash dividends declared by SM Investment
Corporation (SM Investments), a domestic corporation whose shares of
stocks are traded and listed in PSE, to Asia Opportunities, a corporation
organized under the British virgin Island (BVI), are subject to 15%
preferential withholding tax pursuant to the 1997 Tax Code, as amended by
RA 9337.
The whole ruling:
This refers to your letter dated December 27, 2006 requesting for confirmation of
your opinion that the cash dividends declared by SM Investment Corporation (SM
Investments), a Philippine domestic corporation whose shares of stock are traded and
listed in the Philippine Stock Exchange (PSE), to Asia Opportunities Limited (Asia
Opportunities), a corporation organized and existing under the laws of the British
Virgin Island (BVI), are subject to 15% preferential withholding tax pursuant to
Section 28 (B) (5) (b) of the Tax Code of 1997, as amended by Republic Act (R.A.)
No. 9337.
In reply thereto, please be informed that Section 2 of R.A. No. 9337 reads as follows:
"SEC. 2. Section 28(A)(1) and (B)(1) and (5)(b) of the same Code, as amended, are
hereby further amended to read as follows:
SEC. 28. Rates of Income Tax on Foreign Corporations. —
xxx xxx xxx
(B) Tax on Nonresident Foreign Corporation. —
xxx xxx xxx
(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. —
xxx xxx xxx
(b) Intercorporate Dividends. — A final withholding tax at the rate of fifteen percent
(15%) is hereby imposed on the amount of cash and/or property dividends received
from a domestic corporation, which shall be collected and paid as provided in
Section 57(A) of this Code, subject to the condition that the country in which the
nonresident foreign corporation is domiciled, shall allow a credit against the tax due
from the nonresident foreign corporation taxes deemed to have been paid in the
Philippines equivalent to twenty percent (20%), which represents the difference
between the regular income tax of thirty-five percent (35%) and the fifteen percent
(15%) tax on dividends as provided in this subparagraph: Provided, That effective
January 1, 2009, the credit against the tax due shall be equivalent to fifteen percent
(15%), which represents the difference between the regular income tax of thirty
percent (30%) and the fifteen percent (15%) tax on dividends;
xxx xxx xxx"
This Office had already occasioned to rule on the matter, when it said in BIR Ruling
No. 208-89 dated September 28, 1989, as follows:
"Generally, under the above-quoted Section 24(b)(5)(B) of the Tax Code, as
amended, dividend paid to a non-resident foreign corporation is subject to
withholding tax at the rate of 35%. However, if the country where the non-resident
foreign corporation is domiciled allows a credit against the tax due from the
non-resident corporation taxes deemed to have been paid in the Philippines in an
amount equivalent to 20% of such dividend, or does not subject such dividend to
taxation, then dividend paid to such non-resident foreign corporation are taxed only
at the rate of 15%. TAEDcS
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Thus, since the International Business Companies Ordinance of the Territory of the
British Virgin Islands . . . does not impose any tax on dividend received from foreign
sources, which logically would include those received from Philippine corporations
by foreign corporations domiciled therein, then said cash dividend . . . is subject only
to the preferential withholding tax rate of 15% imposed under then Section
25(B)(5)(B) of the Tax Code, as amended (now Section 28(B)(5)(b) of the Tax Code
of 1997)."

SUCH BEING THE CASE, this Office hereby confirms your opinion that the cash
dividends received by Asia Opportunities from SM Investments, a Philippine
domestic corporation are subject to the 15% preferential withholding tax rate
imposed under Section 28(B)(5)(b) of the Tax Code of 1997, as amended by R.A.
No. 9337.

This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation, it will be disclosed that the facts are different, then
this ruling shall be considered null and void.

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128. Mirant Corp v. CIR​ (Maye c/o MB)
CTA Case | Uy, J. | Income covered by Tax Treaties
PETITIONERS: ​Mirant Operations Corporation
RESPONDENTS: ​ Commissioner of Internal Revenue
SUMMARY: Mirant Corp is a domestic corporation situated at Quezon
province. It is primarily engaged in the managing of gas turbine and other power
generating plants and related facilities for the conversion into electricity of coal
and other fuel. Mirant filed its monthly remittance return of income taxes
withheld for 1999-2000 as final taxes withheld from VHL Enterprises and WES
Worldwide Education Service. Both are non-resident foreign corporations with
head offices at Alabama, USA and England, UK, respectively. Mirant availed of
the 5% expanded/creditable withholding taxes and availed of the BIR’s
Voluntary Assessment Program as it believed that it had erroneously withheld
and remitted the final withholding taxes from VHL and WES. Mirant argued that
under the RP-US and RP-UK Tax Treaties, VHL and WES have established
their permanent establishments in the Philippines for having furnished services
through their employees or other personnel for more than 183 days. Hence, they
should be legally considered as resident foreign corporations for income tax
purposes and the income payments to said corporations are subject only to the
5% creditable withholding tax. CIR argued that absent a showing that VHL and
WES are resident foreign corp, they are subject to final withholding tax as
provided under Sec. 28(b) of the Tax Code (32%) as it had not been shown that
the corporations are doing business in the PH.
The issue is whether the transactions between Mirant and the foreign
corporations have created permanent establishments, making the foreign
corporations liable to pay tax to the PH Government? SC held YES, but Mirant
failed to apply with the International Tax Affairs Division (ITAD) and prove
that the provisions of the treaty apply to them. The finding that the foreign
corporations have effectively created permanent establishment makes them
liable to pay taxes to the PH government for taxable transactions within the PH
BUT it does NOT automatically convert their status into a “resident foreign
corporation” in the Philippines. ​Absent a showing that VHL and WES are
resident foreign corporations, they are subject to the final withholding tax as
non-resident foreign corporations under Sec. 28(b) of the Tax Code. Thus, the
income payments of Mirant to VHL and WES, which are again, both
non-resident foreign corporations, are subject to the final tax of 32%.
DOCTRINE: ​A foreign corporation wishing to avail of the benefits of the tax
treaty should invoke the provisions of the tax treaty and prove that indeed, the
provisions of the tax treaty applies to it, before the benefits may be extended to
such corporation. To avail of the tax treaty, apply first with the International Tax
Affairs Division and prove that the provisions of the treaty apply to them. No
application was filed.
FACTS:
1. This is a petition for review before CTA en banc seeking to reverse the
denial of Mirant’s claim for refund (P20,088,435.78) and MR.
2. Mirant Corp is a domestic corporation with address at Pagbilao, Quezon
Province. It is primarily engaged in the business of designing, constructing,
assembling, rehabilitating gas turbine and other power generating plants and
related facilities for the conversion into electricity of coal and other fuel.
a. It is originally registered under the name Hopewell Tileman
Project Management Corporation with the SEC in and as a
withholding agent with the BIR
b. It changed its name to CEPA Tileman to Souther Energy
Asia-Pacific Operations Inc. to Mirant Operations Corp in 2001.
3. Mirant filed its monthly remittance return of income taxes withheld for
1999-2000 as final taxes withheld from VHL Enterprises and WES
World-wide Education Service Ltd., both foreign corporations with head
offices at Alabama, USA and England, UK, respectively.
4. Believing that it had erroneously withheld and remitted the above final
withholding taxes, Mirant availed of the 5% expanded/creditable
withholding taxes and immediately availed of the BIR’s Voluntary
Assessment Program (VAP) and consequently filed and remitted
expanded/creditable withholding taxes.
5. Mirant contended:
a. Under the RP-US and RP-UK Tax Treaties, VHL and WES Corp,
as resident corporations of the US (for VHL) and UK (for WES),
although without fixed place of business in the Philippines,
through their alleged transactions with Mirant have nevertheless
created “permanent establishments” in the Philippines for having
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“furnished services through their employees or other personnel for
a period aggregate to more than 183 days in a 12-month period.”
b. Having established their existence of permanent establishments,
they should be legally considered as resident foreign corporations
for income tax purposes and the income payments to said
corporations are subject only to the 5% creditable withholding tax
under RR 2-98.
6. CIR, on the other hand, contended that absent a showing that both VHL and
WES are resident-foreign corporations, they are subject to final withholding
tax as provided under Sec. 28(b) of the Tax Code because it had not been
shown that said corporations are “doing business” in the Philippines
ISSUE: ​Whether the transactions between Mirant and the foreign corporations have
created “permanent establishments” for VHL and WES in the Philippines, making
them liable to pay tax to the PH Government? – YES but Mirant failed to apply.
RATIO:
1. To determine if any profit could be taxed pursuant to a treaty, you have to
answer to two questions:
a. Will this enterprise make a business profit as defined in the treaty?
b. If so, does he have a permanent establishment in the PH?
2. If the answer to both questions is yes, then the PH Government can tax. If
the answer to the second question is no, there is no permanent
establishment, then you cannot tax a profit.
3. The foreign corporations have established “permanent establishments” in
the Philippines as per Treaties. They are initially both non-resident foreign
corporations with no fixed place of business in the Philippines.
4. However, these corporations rendered hands-on training, instructional
and/or consultancy services to Mirant employees for a period aggregating to
more than 183 days within a 12-month period.
5. A foreign corporation wishing to avail of the benefits of the tax treaty
should invoke the provisions of the tax treaty and prove that indeed,
the provisions of the tax treaty applies to it, before the benefits may be
extended to such corporation. (See Notes after the ratio)
6. Otherwise, a resident or non-resident foreign corporation shall be taxed
according to NIRC.
a. RMO 01-2000 provides that the availment of a tax treaty
provision must be preceded by an application for a tax treaty relief
with its International Tax Affairs Division (ITAD).
b. This is to prevent any erroneous interpretation and/or application
of the treaty provisions with which the PH is a signatory to.
7. Mirant did not observe this RMO as it failed to file its ITAD.
8. The finding that the foreign corporations have effectively created permanent
establishment makes them liable to pay taxes to the PH government for
taxable transactions within the PH BUT it does NOT automatically convert
their status into a “resident foreign corporation” in the Philippines.
9. Absent a showing that VHL and WES are resident foreign corporations,
they are subject to the final withholding tax as non-resident foreign
corporations under Sec. 28(b) of the Tax Code.
10. Thus, the income payments of Mirant to VHL and WES, which are again,
both non-resident foreign corporations, are subject to the final tax of 32%.
11. The deadline for the availment of the BIR’s VAP was until Oct. 31, 2001.
Mirant filed and remitted only on Dec. 18, 2001, or 2 months after the
deadline set by the BIR.
● RP-US and RP-UK Treaties – on provisions regarding permanent business
establishments and business profits
o Permanent establishment – means a fixed place of business through which
a resident of one of the Contracting States engages in a trade or business.
▪ It includes the furnishing of services, including consultancy
services, by a resident of one of the Contracting States through
employees or other personnel, provided activities of that nature
continue (for the same or connected project) within the other
Contracting State for a period or periods aggregating more than
183 days.
o Business profits – of a resident of one of the Contracting States shall be
taxable only in the State unless the resident had a permanent establishment
in the other Contracting State. If the resident has a permanent
establishment in that other Contracting State, tax may be imposed by that
other contracting State on the business profits of the resident but only on
so much of them as are attributable to the permanent establishment.
● Sec 28 of Tax Code is about rates of income tax on foreign corporations
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o Generally, a foreign corporation not engaged in trade or business in the

Philippines shall pay a tax equal to thirty-five percent (35%) of the gross
income received during each taxable year from all sources within the
Philippines,

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129. Deutsche Bank AG Manila Branch v. CIR (℅ Vargas)
August 19, 2013 | Sereno, CJ. | Income Covered by Tax Treaties
PETITIONER​: ​Deutsche Bank AG Manila Branch
RESPONDENTS​: ​Commissioner of Internal Revenue
SUMMARY
Deutsche Bank AG Manila Branch paid to the CIR P67 million,
representing ​15% of its Branch Profit Remittance Tax (BPRT). It
subsequently filed a claim for refund alleging overpayment, requesting a
confirmation of its entitlement to the ​10% preferential tax rate under the
RP-Germany Tax Treaty.
The CIR disallowed the refund for failure to comply with the provisions of
RMO 1-2000, prescribing a 15 day filing period with the BIR prior to the
transaction (payment of remittance taxes), in order to avail for relief
provided for under a tax treaty.
ISSUE W/N Failure of to comply with RMO 1-2000 should deprive
persons/corporations of the benefit of a tax treaty - ​NO
Under the international principle of ​pacta sunt servanda​, a contracting
state must comply with its treaty obligations in good faith. The BIR cannot
impose any additional requirements that would negate availment of reliefs
provided for under a treaty, more so when the treaty itself does not provide
for pre requisites to the availment thereto. Local laws and issuances must
ensure that reliefs provided for under tax treaties are accorded to the
parties entitled thereto.
The BIR cannot totally deprive those who are entitled to the benefit of a
treaty for failure to comply with an administrative issuance.
DOCTRINE:
Under the principle of pacta sunt servanda, The obligation to comply with
a tax treaty must take precedence over the objectives of an administrative
issuance. The BIR cannot deprive those who are entitled to the benefits of
a treaty for failure to comply with an administrative issuance, especially
when the treaty itself does not provide for compliance with an
administrative order as a prerequisite to relief under such treaty.
FACTS:
1. In ​accordance with Section 28(A)(5)11 of the NIRC​, ​Deutsche Bank AG
Manila Branch (Deutsche Bank) withheld and remitted to the CIR P67
Million​, which was the appropriate 15% of its branch profit remittance tax
(​BPRT​) on its regular banking unit net income remitted to Deutsche Bank
Germany, for 2002 and prior taxable years.
Believing that it had made an overpayment, Deutsche Bank filed an
administrative claim for refund/ tax credit in the amount of P22 million.
Deutsche Bank also requested a confirmation of its entitlement to the
preferential tax rate of 10% under the RP-Germany Tax Treaty.
2. CTA division Ruling
Refund was denied on the ground that the ​application for tax treaty was
not filed with the International Tax Affairs Division ​prior to payment of
the remittance tax and actual remittance, or prior to its availment of the 10%
preferential rate. Deutsche Bank ​also violated the 15 day period to claim
for relief under a tax treaty, mandated under Revenue Memorandum
Order (RMO) 1-2000.
Affirmed by CTA en bank ​(hehe)
ISSUES: W/N ​Failure of to comply with RMO 1-2000 should deprive
persons/corporations of the benefit of a tax treaty - ​NO
RATIO:
Legal Arguments
Deutsche Bank ​- invokes the provisions of an ​RP-Germany Tax Treaty which
provides that where a resident of Germany has a branch in the Philippines, the
Philippine Branch will enjoy a ​preferential rate of 10% on Branch Profit
Remittance Taxes (BPRT) instead of the 15% prescribed under the NIRC.
11
Tax on Branch Profits Remittances. - ​Any profit remitted by a branch to its head office
shall be subject to a tax of fifteen percent (15%)​ which shall be based on the total profits
applied or earmarked for remittance without any deduction for the tax component thereof (except
those activities which are registered with the Philippine Economic Zone Authority) . . .
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Under the aforementioned tax treaty, the filing of a relief application is ​not a totally deprive those who are entitled to the benefit of a treaty for failure to
condition precedent to the availment of the preferential rate. comply with an administrative issuance.

CIR ​- BIR issued RMO 1-2000 which requires that any ​availment of a tax treaty
relief must be preceded with an application with ITAD at least 15 days before
the transaction.
The purpose of the RMO is to streamline application processing and to improve
efficiency and service to taxpayers. Compliance with the RMO is mandatory in
nature, pursuant to the authority of the Secretary of Finance to promulgate rules and
regulations for the implementation of the NIRC.
Tax Treaty v. RMO 1-2000.
Prior Application v. Claim for Refund
The underlying principle of prior application becomes moot in refund cases, where
the very basis of the claim is erroneous/excessive payment arising from non
availment of a tax treaty relief at the first instance.
Deutsche Bank ​could not have applied for a tax treaty relief within the 15 day
prescribed period prior to payment of the remittance tax, precisely because it
erroneously paid the tax not on the basis of the preferential tax rate under the
treaty, but on the regular rate prescribed by the NIRC.

The Constitution provides for adherence to the general principles of international law Deutsche Bank is hereby entitled to the refund by virtue of the 10% preferential rate
as part of the law of the land. Under the international principle of ​pacta sunt on branch profit remittance taxes.
servanda, it demands the performance in good faith of treaty obligations on the part
of the States that enter into the agreement. PETITION GRANTED
The ​purpose of Tax Treaties is to minimize, of not eliminate the harshness of
international double taxation, which is why such treaties are also known as double
tax treaty or double tax agreements.

[Local] Laws and issuances must ensure that reliefs granted under tax treaties are
accorded to the parties entitled to such relief. ​The BIR cannot impose additional
requirements that would negate the availment of reliefs provided for under
international agreements, more so when the Treaty itself does not provide for
any pre requisite act for availment.

The denial of the availment of tax relief under a treaty for failure to apply within the
prescribed period of an administrative order would impair the value of a treaty. At
most, the application for tax treaty relief from the BIR should merely operate to
confirm the entitlement of the taxpayer to relief.

The obligation to comply with the tax treaty must take precedence over the
objective of RMO 1-2000​. ​The objective sought through the RMO may be remedied
through other processes such as the imposition of a fine or penalty. ​The BIR cannot

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130. Revenue Moratorium Order 072-2010 (Mina)
August 25, 2010 | Corporations - Income covered by taxes
Summary: (Cabochan)
The ITAD is the sole office charged with the receiving of tax treaty relief
applications (TTRA). All tax treaty relief applications relative to the
implementation and interpretation of the provisions of Philippine tax treaties shall
only be submitted to and received by the International Tax Affairs Division
(ITAD). All rulings relative to the application, implementation and interpretation
of the provisions of Philippine tax treaties shall emanate from ITAD. RMO
072-10 states that “All tax treaty relief applications (forms indicated on the table)
relative to the implementation and interpretation of the provisions of Philippine
tax treaties shall only be submitted to and received by the International Tax
Affairs Division (ITAD). If the forms or any necessary documents are submitted
to any other BIR Office, the application shall be considered as improperly filed.”
Doctrine: (PM Reyes)
To avail the benefits of a tax treaty provision, it must be preceded by a tax treaty
relief with ITAD (International Tax Affairs Division). ITAD is the sole office
charged with the receiving of tax treaty relief applications (TTRA). All tax treaty
relief applications relative to the implementation and interpretation of the
provisions of Philippine tax treaties shall only be submitted to and received by the
ITAD. All rulings relative to the application, implementation and interpretation of
the provisions of Philippine tax treaties shall emanate from ITAD.
SECTION 2. ​TAX TREATY RELIEF APPLICATION​. - ​In order to achieve the
above- mentioned objective, the processing for the application for tax treaty relief is
hereby revised and updated. The following Tax Treaty Relief Applications (TTRAs)
forms shall henceforth be adopted to implement this RMO:
Form No. Purpose
BIR Form No. 0901-P For Business Profits
BIR Form No. 0901-T For Profits from Shipping and Air
Transport
BIR Form No. 0901-D For Dividend Income
BIR Form No. 0901-I For Interest Income
BIR Form No. 0901-R For Royalty Income
BIR Form No. 0901-C For Capital Gains
BIR Form No. 0901-S For Income from Services
BIR Form No. 0901-O For Other Income Earnings
Thus, BIR Form No. 0901 [Application for Relief from Double Taxation] prescribed
under RMO 1-2000 and BIR Form No. 1928 [Gains from Sale or Transfer of Shares
of Stock in Philippine Corporation] prescribed under RMO 30-2002 are hereby
superseded.
SECTION 3. ​GENERAL DOCUMENTARY REQUIREMENTS. — T ​ he following
documents are the general documentary requirements which shall be attached to all
duly accomplished TTRAs (3 copies) which must be signed by the applicant who
may either be the income earner or the duly authorized representative of the income
earner, pursuant to existing Philippine tax treaties, ​viz​:
1. Proof of Residency.
Original copy of a consularized certification issued by the tax authority of
the country of the income earner to the effect that such income earner is a
resident of such country for purposes of the tax treaty being invoked in the
tax year concerned.
2. Articles of Incorporation (For income earner other than an individual).
Photocopy of the Articles of Incorporation (AOI) (or equivalent Fact of
Establishment/ Creation/ Organization) of the income earner with the
original copy of a consularized certification from the issuing agency, office
or authority that the copy of Articles of Incorporation (AOI) (or equivalent
Fact of Establishment/ Creation/ Organization) is a faithful reproduction or
photocopy.
3. Special Power of Attorney.
A. If applicant/filer is the withholding agent of the income earner or the
local representative in the Philippines of the income earner - Original copy
of a consularized Special Power of Attorney (SPA) or a consularized
written authorization duly executed by the income earner authorizing its
withholding agent or local representative in the Philippines to file tax treaty
relief application.
B. If applicant/filer is the local representative of the withholding agent of
the income earner
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i. Original copy of a consularized Special Power of Attorney (SPA) or a
consularized written authorization duly executed by the income earner
authorizing its withholding agent or local representative in the Philippines
to file tax treaty relief application; and
ii. Original copy of Letter of Authorization from the withholding agent
authorizing the local representative to file the tax treaty relief application.
4. Certification of Business Presence in the Philippines.
a. For Corporation or Partnership
Original copy of a certification from the Philippine Securities and Exchange
Commission that the income earner is or is not registered to engage in
business in the Philippines.
b. For an Individual
Original copy of a certification from the Department of Trade and Industry
that the income earner is or is not registered to engage in business in the
Philippines.
5. Certificate of No Pending Case. Original copy of a sworn statement providing
information on whether the issue(s) or transaction involving directly or indirectly the
same taxpayer(s) which is/are the subject of the request for ruling is/are under
investigation; covered by an on-going audit, administrative protest, claim for refund
or issuance of tax credit certificate, collection proceedings, or subject of a judicial
appeal.
SECTION 13. ​DEFINITIONS.—
1. “Certified copy” ​shall mean that the certification must be issued by the
proper government agency or the proper custodian of the original document.
The certification made by the proper custodian must be accompanied by a
notarized certification indicating his/her position or designation in the
company where he or she is employed, and the document he or she is
certifying.
If a ​certified copy ​cannot be obtained, the original copy of the document
should be presented to the case officer so that the authenticity and veracity
of the information contained therein may be verified, in which case, the said
case officer shall certify in the photocopy that he/she had seen and
compared the original.
2. “Consularized” ​shall mean that the document should be accompanied by a
certificate issued by a secretary of the embassy or legation, consul general,
consul, vice consul, or consular agent or by any officer in the foreign
service of the Philippines stationed in the country where such document was
executed.
3. Straight sale f​ or purposes of applying the “Capital Gains” Article of the
appropriate tax treaty, shall mean those transaction that involve simple sale
or transfer of shares of stock for consideration and does not include sale or
transfer of shares of stock as a result of mergers, consolidations, corporate
re-structuring, company spin-off, exercise of right of redemption, buyback
of redeemable preferred shares, etc.
4. First taxable event f​ or purposes of filing the Tax Treaty Relief Application
(TTRA), shall mean the first or the only time when the income payor is
required to withhold the income tax thereon or should have withheld taxes
thereon had the transaction been subjected to tax; and for 0901-C
applications, before the due date of the Documentary Stamp Tax (DST) on
the sale of the shares of stock.
SECTION 14. ​WHEN AND WHERE TO FILE THE TTRA.- A ​ ll tax treaty relief
applications (updated BIR Forms No.relative to the implementation and
interpretation of the provisions of Philippine tax treaties shall only be submitted to
and received by the International Tax Affairs Division (ITAD). If the forms or any
necessary documents are submitted to any other BIR Office, the application shall be
considered as improperly filed.
Filing should always be made BEFORE the transaction. ​Transaction ​for purposes of
filing the TTRA shall mean before the occurrence of the first taxable event.
Failure to properly file the TTRA with ITAD within the period prescribed herein
shall have the effect of disqualifying the TTRA under this RMO.
SECTION 15. RECEIVING and PROCESSING of TTRA.— A ​ ll rulings relative to
the application, implementation and interpretation of the provisions of Philippine tax
treaties shall emanate from ITAD.
ITAD is the sole office charged with the receiving of TTRA, so all filers of TTRA
are enjoined to submit their TTRA complete with all the necessary documentary
requirements as mentioned in Section 3 and related Section of this RMO to The
Chief, International Tax Affairs Division.
Within seven (7) working days from the actual receipt by ITAD of the TTRA, ITAD
shall notify the filer of lacking/missing/insufficient documentary requirements with
an instruction to submit within fifteen (15) working days from filer’s receipt of the
Notice of Submission of Documents [format herein attached as Annex "B"] in
accordance with this RMO.
If the taxpayer/applicant fails to submit the necessary documents on the designated
date mentioned in the Notice of Submission of Documents, the TTRA shall be
archived without prejudice to re-filing of TTRA to be reckoned from the date of
original TTRA filing covering exactly the same transaction. A Notice of TTRA
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Archiving [format herein attached as Annex "C"] shall be issued by ITAD to SECTION 16. “​NO-RULING”AREA.—​Requests for rulings not accompanied by
properly notify the taxpayer of such archiving of TTRA. Taxpayers/applicants, complete documents as herein prescribed and those which are based on hypothetical
re-filing an archived TTRA must submit a copy of the original filing of TTRA transactions or future transactions are construed and identified as ​“No-Ruling
together with the complete documentary requirements as earlier required for the Area”3.​ For this purpose, any request for ruling construed and identified as such
continuance of its processing. shall not be accepted by the ITAD. ITAD shall strictly implement this rule.
Taxpayer/applicant shall not be allowed to withdraw any TTRA/documents already
filed with ITAD including those subjected for archiving. In the event that the SECTION 17. ​REQUEST FOR ADDITIONAL DOCUMENTS.— ​In the course of
transaction is discontinued, taxpayer/filer shall file a letter informing such fact to review of the tax treaty relief applications, the Bureau thru ITAD reserves the right
properly close the TTRA but the filer/taxpayer shall not be allowed to withdraw as to request additional documents/revise or update documentary requirements to
well, all documents already filed with ITAD, the same shall remain with ITAD for properly process TTRA’s keeping it abreast with changes/modernization of way
custodianship and safekeeping. transactions are done by taxpayers through the issuance of an amendatory RMO to
Applications for confirmation of use of preferential tax treaty rates under the treaty, be applied prospectively.
shall be governed by the following rules:
SECTION 18. ​CONFIDENTIALITY OF THE DRAFT RULINGS OR
i. Period Within Which To Issue The Ruling​.— The ruling must be available RECOMMENDATIONS. — ​The case and reviewing officers shall not disclose to
for release after sixty (60) working days from the date of receipt of the any person, including the tax treaty relief applicant or his/its representatives, the draft
TTRA or from the date the complete documentary requirements are BIR Ruling or recommendation for the action taken on the TTRA, unless and until
received by ITAD, whichever comes later. the same has been signed by the proper signatory of this Bureau. ​[Section 3(d), Rules
As for matters without issue on income characterization, the ruling must be IV, Rules Implementing Republic Act No. 6713]. H ​ owever, for transparency of
available for release after thirty (30) working days from the date of receipt information, any applicant/filer can rightfully know the status of his/its TTRA
of the TTRA or from the date the complete documentary requirements are without disclosing the stand of the Bureau (i.e. whether the same will be granted or
received by ITAD, whichever comes later. denied) on the TTRA.
Of the said periods, the ITAD shall have forty (40) or twenty (20) working
days as the case may be to process and evaluate the said application, while
the Legal Service/Legal and Inspection Group shall have twenty (20) or ten
(10) working days, respectively.
ii. Signatory Of The Ruling.— ​The rulings issued under this Order shall be
signed by the Assistant Commissioner for the Legal Service and/or the
Deputy Commissioner for Legal and Inspection Group in accordance with
existing Revenue Delegation Authority Order (RDAO). However, rulings of
first impression or any ruling which will cause the reversal, revocation or
modification of any existing ruling shall be signed by the Commissioner of
Internal Revenue in accordance with Section 7(B) of the Tax Code as
amended.
iii. iii. ​Request For Review Of Rulings Adverse To The Taxpayer.— A ​ ny ruling
issued which is adverse to the nonresident income earner may, within thirty
(30) days from the date of receipt of such ruling, seek its review by the
Secretary of Finance in accordance with Department Order No. 23-01. No
request for reconsideration of the said adverse ruling shall be entertained by
this Bureau.

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131. ITAD Ruling 102-02 (tin ℅ Austria A2017)
20 May 2002 | ITAD | Income covered by Tax Treaties
PETITIONER​: Energizer Philippines
RESPONDENTS​: Eveready Battery
SUMMARY​: Energizer Philippines claims that its royalty payments to
Eveready Battery are subject to the preferential tax rate of 15% pursuant to the
most favored nation (MFN) clause of the RP-US Tax Treaty in relation to the
RP-Netherlands Tax Treaty. The issue is whether royalties of Energizer to
Eveready are subject to a preferential tax rate of 15% of its gross amount --
YES. The CIR found that the RP-US and RP-Netherland tax treaties show a
similarity on the manner of payment of taxes--that is, the allowable foreign tax
credit on both treaties is the amount actually paid in the Philippines. In ​CIR vs.
SC Johnson and Sons, Inc.​ , the SC interpreted the MFN clause or the phrase
“paid under similar circumstances” as referring to the manner of payment of
taxes, and not the subject matter of the tax which is royalties. Hence, the
"most-favored-nation" clause of the RP-US tax treaty must be interpreted not
only in relation to Article 12 of the RP-Netherlands tax treaty but also in
connection with the provisions on the elimination of double taxation of both.
Thus, the royalty payments of Energizer to Eveready are subject to the
preferential tax rate of 15% of the gross amount of royalties pursuant to the
“most-favored-nation” provision of the RP-US tax treaty in relation to the
RP-Netherlands tax.
DOCTRINE: ​The "most- favored-nation" clause, particularly the phrase "paid
under similar circumstances," refers to the manner of payment or taxes and not
to the subject matter of the tax which is royalties.
FACTS:
1. Eveready is a non-resident foreign corporation under the USA laws with
principal office at Delaware. It is not registered to do business in the
Philippines as evidenced by the Certificate of Non-Registration issued by
the SEC.
2. Energizer, on the other hand, is a corporation duly organized and existing
under the Philippine law.
3. Energizer and Eveready entered into a Renewal Agreement, whereby
Eveready granted to Energizer the right to use its trademarks and patents,
technical information, business information, date, and know-how relating to
the manufacture, use and sale of licensed products.
4. The Agreement was duly registered with the then Technology Transfer
Registry under the Certificate of Registration No. 1652 (1995).
5. This was renewed for another 10 years, ending in 2009.
6. In consideration of the rights granted, Energizer shall pay Eveready royalty
of 3%, based on the net sales or net sale value of all the licensed products
manufactured, used, sold or assigned by Energizer during the term of the
Agreement.
7. A letter was addressed by Joaquin Cunanan & Co. to the BIR -- requesting
the confirmation of BIR’s opinion on the 15% percentage tax on royalty
payments of Energizer Philippines, Inc. (Energizer) to Eveready Battery
Company, Inc. (Everready).
8. The said 15% percentage tax is pursuant to the “most favoured nation”
clause of the RP-US tax Treaty in relation to the RP-Netherlands tax treaty.
ISSUES: ​Whether Energizer is subject to 15% percentage tax -- YES
RULING: ​Accordingly, Energizer shall be responsible for the withholding of
income tax at the rate of 15% of the gross amount of royalties. Moreover, Energizer
shall also be responsible for the withholding of the VAT at the rate of 10% of the
contract amount by filing a separate return which, if duly validated, shall be
sufficient evidence in claiming input tax credit.
RATIO:
1. The 15% percentage tax is based on the “most-favored nation” clause.
2. Under Article 13(2)(b)(iii) of the ​RP-US tax treaty​:
"Article 13. ROYALTIES
(1) Royalties derived by a resident of one of the Contracting States
from sources within the other Contracting State may be taxed by
both Contracting States.
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(2) However, the tax imposed by that other Contracting State shall
not exceed —
(b) In the case of the Philippines, the least of:
(i) 25 percent of the gross amount of the
royalties,
(ii)15 percent of the gross amount of the
royalties, where the royalties are paid by a
corporation registered with the Philippine Board
of Investments and engaged in preferred areas of
activities, and
(iii) ​the lowest rate of Philippine tax that may
be imposed on royalties of the same kind paid
under similar circumstances to a resident of a
third State. ​xxxx
3. On the other hand, Article 12 of the ​RP-Netherlands tax treaty​ provides:
"Article 12. ROYALTIES
(1)Royalties arising in one of the States and paid to a resident of
the other State may be taxed in that other State.
(2) However, such royalties may also be taxed in the State in which
they arise, and according to the laws of that State, but if the
recipient is the beneficial owner of the royalties the tax so charged
shall not exceed.
(a) 10 percent of the gross amount of the royalties where
the royalties are paid by an enterprise registered, and
engaged in preferred areas of activities in that State; and
(b) 15 pe cent of the gross amount of the royalties in all
other cases.”
4. Based on the RP-US tax treaty in relation to the RP-Netherlands tax Treaty,
the tax imposed on royalties derived by a resident of the US from sources
within the Philippines shall be the lowest rate of Philippine tax that may be
imposed as royalty of the same kind paid under similar circumstances to a
resident of a third State. This is the "most-favored nation"` clause found in
Article 13(2)(b)(iii) of the RP-US tax treaty.
5. In this connection, it must be noted that the royalties arising from the
Philippines and paid to a resident of the Netherlands may also be taxed in
the Philippines, but the tax so charged shall not exceed 15 per cent (15%) of
the gross amount of royalties.
6. In the case of ​Commissioner of Internal Revenue vs. S.C. Johnson and Son,
Inc., and Court of Appeals (1999), the Supreme Court interpreted the "most-
favored-nation" clause--particularly the phrase "paid under similar
circumstances"--as referring to the manner of payment or taxes and not to
the subject matter of the tax which is royalties.
7. Hence, the "most-favored-nation" clause of the RP-US tax treaty must be
interpreted not only in relation to Article 12 of the RP- Netherlands tax
treaty but also in connection with the provisions on the elimination of
double taxation of both.
8. A perusal of the RP-US and the RP-Netherlands tax treaties, particularly
their provisions on the avoidance of double taxation, shows a similarity on
the manner of payment of taxes--that is, the allowable foreign tax credit on
both treaties is the amount actually paid in the Philippines.
9. Such being the case, and since Energizer is not registered and engaged in
preferred areas of activities in the Philippines, this Office is of the opinion
and so holds that the royalty payments by Energizer to Eveready are subject
to the preferential tax rate of 15% of the gross amount of royalties pursuant
to the "most-favored-nation" provision of the RP-US tax treaty in relation to
the RP-Netherlands tax treaty. (BIR Ruling No. ITAD-54-00 dated March
7, 2000)
10. Moreover, the above royalty payments by Energizer shall be subject to the
10% value-added tax (VAT) under Section 108(A)(1) and (3) of the Tax
Code of 1997. Section 4.102-1(b) of the implementing Revenue Regulation
No. 7-95
SEPARATE OPINIONS: None
CONCURRING: None
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132. ITAD Ruling 024-13 (Patrick)
Feb. 11, 2013 | JACINTO-HENARES |Articles 13 & 23, Philippines-US tax treaty
PETITIONER​: ​AVON COSMETICS through Priscilla B. Valer, Partner of
Romulo Mabanta Buenaventura Sayoc & De Los Angeles
SUMMARY​: Avon Comestics (domestic corp.) submitted a Tax Treaty Relief
Application (TTRA) on June 23, 2011 requesting confirmation that royalties to
be paid to Avon Products (foreign corp.) are subject to Philippine Income tax at
the reduced rate of 10% pursuant to the PH-US tax treaty, in relation to the
PH-Czech tax Treaty.
Issue: WON Royalty payments of Avon Cosmetics to Avon Products are subject
to Philippine income tax at the reduced rate of 10 percent? YES, but DENIES
relief on all royalties under the Agreement paid before June 24, 2011 in violation
of the requirement that filing of the TTRA should be made BEFORE the
transaction under RMO 72-2010.
Held: Under paragraph 2 (b) (iii) of the Philippine-US tax Treaty, royalties
arising in the Philippines and paid to a resident of the United States may be
taxed in the Philippines at the lowest rate of income tax that may be imposed on
royalties of the same kind paid under similar circumstances to a resident of a
third State (also known as the "most-favored-nation treatment”). Both PH-US
tax treaty and PH-CZECH Tax treaty satisfy the conditions as said in S.C.
Johnson case in order to apply the reduced rate of 10%. (Look at ratio# 5 to 8)
for this)
DOCTRINE: "S.C. Johnson case" requires two conditions for a
most-favored-nation treatment on royalties to apply:
1. Royalties arising in the Philippines and paid to a resident of the other
State, in this case, the United States, must be of the same kind as those
arising in the Philippines and paid to a resident of a third State (Czech in
this case) to which the latter's tax treaty with the Philippines subjects the
latter royalties to a most-favored-nation treatment.
2. The method of elimination of double taxation applied by the other State,
in this case, the United States, on royalties paid to a resident thereof must
be the same as that applied by the third State on royalties paid to its
resident.
FACTS:
1. Counsel for Avon Cosmetics, Inc. (Avon Cosmetics) applied for a tax relief
requesting confirmation that royalties it will pay to Avon Products, Inc.
(Avon Products) are subject to the reduced rate of 10%, pursuant to the
Convention between the Government of the Republic of the Philippines and
the Government of the USA with Respect to Taxes on Income (PH-US tax
treaty), in relation to the Convention between the Czech Republic and the
Republic of the Philippines for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income
("Philippines-Czech tax treaty").
2. Avon Products is a foreign corporation organized and existing under the
laws of the United States of America and is a resident thereof for purposes
of United States taxation. ​Avon Cosmetics is a corporation organized and
existing under laws of the Philippines situated at Makati City
3. On June 6, 2011, Avon Products and Avon Cosmetics entered into a
License Agreement ("Agreement") to replace the Original Agreement dated
January 1, 2001. Under the new Agreement, Avon Products grants Avon
Cosmetics an exclusive license to use the Property Rights in the Philippines,
strictly in connection with the manufacture, sale and distribution of the
Products;
a. that Products means all products sold by Avon Cosmetics in the
Philippines;
b. that Property Rights means all rights of Avon Products with
respect to the Technical Information, Patent Rights, and Trade
Rights
c. that Technical Information means all commercial and technical
assistance, information and know-how now or thereafter in the
possession of Avon Products which is relevant to any aspects of
the manufacture, distribution and sale of the Products and which
Avon Products is permitted under applicable laws, regulations and
agreements to disclose to Avon Cosmetics, including, without
limitation, information and know-how relating to:
i. production and manufacturing techniques, including any
formulae, secret or otherwise, used in connection
therewith,
ii. engineering matters,
iii. equipment design and maintenance,
iv. research results, techniques and procedures, including
information on pending patent applications,
v. marketing,
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vi. sales promotions and procedures,
vii. packaging and labeling, and
viii. human resources, legal, purchasing, finance, sourcing,
computers and software support;
d. that Patent Rights means all patents and patent applications in the
Philippines, now or thereafter owned or controlled by or otherwise
licensable from Avon Products, including all divisions, reissues,
re-examinations, continuations, continuations-in-part, and
extensions of the foregoing; that Trade Rights means all
trademarks, service marks, logos, designs, trade names, trade dress
and copyrights in the Philippines, which are now or thereafter
owned or controlled by or otherwise licensable from Avon
Products;
e. that in consideration, Avon Cosmetics shall pay royalties to Avon
Products equivalent to 7 percent of the Net Sales of Products sold
by Avon Cosmetics;
f. That royalties shall be in United States Dollars and shall be paid
within 30 days following the last day of each calendar month or a
part thereof; and that the Agreement shall take effect on January 6,
2011, and shall
ISSUES:
1. WON Royalty payments of Avon Cosmetics to Avon Products are
subject to Philippine income tax at the reduced rate of 10 percent? –
Yes, but only those amounts paid after the TTRA was filed. (Amounts
paid on June 24, 2011 and after, since the TTRA was filed on June 23,
2011)
Ruling: ​Since the TTRA was filed only on June 23, 2011, after the date of the
Agreement on June 6, 2011, BIR DENIES relief on all royalties under the
Agreement paid before June 24, 2011 in violation of the requirement that filing of
the TTRA should be made BEFORE the transaction under RMO 72-2010, that is the
payment of royalties. Accordingly, said payments shall be subject to tax at the rate
provided for in Section 28 of the above-cited Tax Code, as amended. – 30%
However, relief is hereby GRANTED to all payments made on June 24, 2011 and
thereafter. Accordingly, such royalties to be paid by Avon Cosmetics to Avon
Products pursuant to the Agreement being essentially royalties for the use of patent,
know-how, and trademark, are subject to income tax at the rate of 10 percent of the
gross amount thereof, pursuant to Article 12 of the Philippines-Czech tax treaty, as
amended.
RATIO:
1. Royalties paid to Avon Products, a foreign corporation not engaged in trade
or business in the Philippines, are subject to income tax in the Philippines at
the rate of 30 percent of the gross amount thereof. Section 28 (B) (1) (a) of
the National Internal Revenue Code of 1997 ("Tax Code"),
2. However, such royalties may be exempt from income tax or subject to a
reduced rate to the extent required by any treaty obligation on the
Philippines. Section 32 (B) (5) of the Tax Code [Income Exempt under
Treaty]
3. Under paragraph 2 (b) (iii) of the Philippine-US tax Treaty, royalties
arising in the Philippines and paid to a resident of the United States
may be taxed in the Philippines at the lowest rate of income tax that
may be imposed on royalties of the same kind paid under similar
circumstances to a resident of a third State (also known as the
"most-favored-nation treatment”)
4. Supreme Court, in Commissioner of Internal Revenue vs. S.C. Johnson and
Son, Inc. and Court of Appeals requires two conditions for a
most-favored-nation treatment on royalties to apply.
a. First, royalties arising in the Philippines and paid to a resident of
the other State, in this case, the United States, must be of the same
kind as those arising in the Philippines and paid to a resident of a
third State to which the latter's tax treaty with the Philippines
subjects the latter royalties to a most-favored-nation treatment.
b. Second, the method of elimination of double taxation applied by
the other State, in this case, the United States, on royalties paid to a
resident thereof must be the same as that applied by the third State
on royalties paid to its resident.
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5. For the 1​st condition, under paragraph 3, Article 12 of the
Philippines-United States tax treat, royalties are payments of any kind
received as a consideration for the use of, or the right to use, any copyright
of literary, artistic or scientific work, including cinematographic films or
films or tapes used for radio or television broadcasting, any patent, trade
mark, design or model, plan, secret formula or process, or other like right or
property, or for information concerning industrial, commercial or scientific
experience. Royalties also include gains derived from the sale, exchange or
other disposition of any such right or property which are contingent on the
productivity, use, or disposition thereof.
6. Relative to this is paragraph 2, Article 12 of the Philippines-Czech tax
treaty, royalties arising in the Philippines and paid to a resident of Czech
and paid for the use of, or the right to use, any copyright of literary, artistic
or scientific work (except cinematograph films, and films or tapes for
television or radio broadcasting), any patent, trade mark, design or model,
plan, secret formula or process, or from the use of, or the right to use,
industrial, commercial or scientific equipment, or for information
concerning industrial, commercial or scientific experience, are subject to
income tax at the rate of 10 percent.
with ITAD within the period prescribed herein shall have the effect
disqualifying the TTRA under this RMO.
10. Furthermore, under Section 108 (A) of Tax Code [Value-added Tax on Sale
of Services and Use or Lease of Properties] , as amended, the royalties in
question, being payments for the use of intangible properties (patent,
know-how, and trademark) in the Philippines, are subject to value-added tax
("VAT") at the rate of 12 percent (12%)
11. Relative thereto, Avon Cosmetics shall withhold VAT on the royalties at the
rate of 12 percent (12%) before remitting them to Avon Products.
Otherwise, Avon Cosmetics may instead treat such VAT as an asset or
expense, whichever is applicable. VAT withheld shall be remitted within 10
days following the end of the month the withholding was made.

7. For the 2​nd Condition, under paragraph 1, Article 23 of the

Philippines-United States tax treaty, in eliminating or mitigating the effects
of double taxation of income (including royalties) paid to its resident and
arising from sources in the Philippines, the ​United States shall allow as
credit against the income tax due in the United States on such income,
the income tax imposed on that income in the Philippines.
8. In the same manner, under paragraph 2 (a), Article 22 of Philippines-Czech
tax treaty, in eliminating or mitigating the effects of double taxation of
income (including royalties) paid to its resident and arising from sources in
the Philippines, ​Czech shall allow as deduction against the income tax
due on such income, the income tax imposed on that income in the
Philippines.

9. However, Section 14 of Revenue Memorandum Order ("RMO") No.

72-2010: Filing should always be made BEFORE the transaction.
Transaction for purposes of filing the TTRA shall mean before the
occurrence of the first taxable event. Failure to properly file the TTRA
73