Gadioma Law Offices For Respondents

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-54908 January 22, 1990
COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT
CORPORATION and the COURT OF TAX APPEALS, respondents.
G.R. No. 80041 January 22, 1990

vs.
MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT
CORPORATION and the COURT OF TAX APPEALS, respondents.
Gadioma Law Offices for respondents.
REGALADO, J.:
These cases, involving the same issue being contested by the same parties and having originated
from the same factual antecedents generating the claims for tax credit of private respondents, the
same were consolidated by resolution of this Court dated May 31, 1989 and are jointly decided
herein.
The records reflect that on April 17, 1970, Atlas Consolidated Mining and Development Corporation
(hereinafter, Atlas) entered into a Loan and Sales Contract with Mitsubishi Metal Corporation
(Mitsubishi, for brevity), a Japanese corporation licensed to engage in business in the Philippines,
for purposes of the projected expansion of the productive capacity of the former's mines in Toledo,
Cebu. Under said contract, Mitsubishi agreed to extend a loan to Atlas 'in the amount of
$20,000,000.00, United States currency, for the installation of a new concentrator for copper
production. Atlas, in turn undertook to sell to Mitsubishi all the copper concentrates produced from
said machine for a period of fifteen (15) years. It was contemplated that $9,000,000.00 of said loan
was to be used for the purchase of the concentrator machinery from Japan. 1
Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank for short)
obviously for purposes of its obligation under said contract. Its loan application was approved on
May 26, 1970 in the sum of ¥4,320,000,000.00, at about the same time as the approval of its loan for
¥2,880,000,000.00 from a consortium of Japanese banks. The total amount of both loans is
equivalent to $20,000,000.00 in United States currency at the then prevailing exchange rate. The
records in the Bureau of Internal Revenue show that the approval of the loan by Eximbank to
Mitsubishi was subject to the condition that Mitsubishi would use the amount as a loan to Atlas and
as a consideration for importing copper concentrates from Atlas, and that Mitsubishi had to pay back
the total amount of loan by September 30, 1981. 2
Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the former
to the latter totalling P13,143,966.79 for the years 1974 and 1975. The corresponding 15% tax
thereon in the amount of P1,971,595.01 was withheld pursuant to Section 24 (b) (1) and Section 53
(b) (2) of the National Internal Revenue Code, as amended by Presidential Decree No. 131, and duly
remitted to the Government. 3
On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum of
P1,971,595.01 be applied against their existing and future tax liabilities. Parenthetically, it was later
noted by respondent Court of Tax Appeals in its decision that on August 27, 1976, Mitsubishi
executed a waiver and disclaimer of its interest in the claim for tax credit in favor of Atlas.
4
The petitioner not having acted on the claim for tax credit, on April 23, 1976 private respondents filed
a petition for review with respondent court, docketed therein as CTA Case No. 2801. The petition
5
was grounded on the claim that Mitsubishi was a mere agent of Eximbank, which is a financing
institution owned, controlled and financed by the Japanese Government. Such governmental status
of Eximbank, if it may be so called, is the basis for private repondents' claim for exemption from
paying the tax on the interest payments on the loan as earlier stated. It was further claimed that the
interest payments on the loan from the consortium of Japanese banks were likewise exempt
because said loan supposedly came from or were financed by Eximbank. The provision of the
National Internal Revenue Code relied upon is Section 29 (b) (7) (A), which excludes from gross
6
income:
(A) Income received from their investments in the Philippines in loans, stocks, bonds or other
domestic securities, or from interest on their deposits in banks in the Philippines by (1)
foreign governments, (2) financing institutions owned, controlled, or enjoying refinancing
from them, and (3) international or regional financing institutions established by
governments.
Petitioner filed an answer on July 9, 1976. The case was set for hearing on April 6, 1977 but was
later reset upon manifestation of petitioner that the claim for tax credit of the alleged erroneous
payment was still being reviewed by the Appellate Division of the Bureau of Internal Revenue. The
records show that on November 16, 1976, the said division recommended to petitioner the approval
of private respondent's claim. However, before action could be taken thereon, respondent court
scheduled the case for hearing on September 30, 1977, during which trial private respondents
presented their evidence while petitioner submitted his case on the basis of the records of the
Bureau of Internal Revenue and the pleadings. 7
On April 18, 1980, respondent court promulgated its decision ordering petitioner to grant a tax credit
in favor of Atlas in the amount of P1,971,595.01. Interestingly, the tax court held that petitioner
admitted the material averments of private respondents when he supposedly prayed "for judgment
on the pleadings without off-spring proof as to the truth of his allegations." Furthermore, the court
8
declared that all papers and documents pertaining to the loan of ¥4,320,000,000.00 obtained by
Mitsubishi from Eximbank show that this was the same amount given to Atlas. It also observed that
the money for the loans from the consortium of private Japanese banks in the sum of
¥2,880,000,000.00 "originated" from Eximbank. From these, respondent court concluded that the
ultimate creditor of Atlas was Eximbank with Mitsubishi acting as a mere "arranger or conduit
through which the loans flowed from the creditor Export-Import Bank of Japan to the debtor Atlas
Consolidated Mining & Development Corporation." 9
A motion for reconsideration having been denied on August 20, 1980, petitioner interposed an
appeal to this Court, docketed herein as G.R. No. 54908.
While CTA Case No. 2801 was still pending before the tax court, the corresponding 15% tax on the
amount of P439,167.95 on the P2,927,789.06 interest payments for the years 1977 and 1978 was
withheld and remitted to the Government. Atlas again filed a claim for tax credit with the petitioner,
repeating the same basis for exemption.
On June 25, 1979, Mitsubishi and Atlas filed a petition for review with the Court of Tax Appeals
docketed as CTA Case No. 3015. Petitioner filed his answer thereto on August 14, 1979, and, in a
letter to private respondents dated November 12, 1979, denied said claim for tax credit for lack of
factual or legal basis.
10
On January 15, 1981, relying on its prior ruling in CTA Case No. 2801, respondent court rendered
judgment ordering the petitioner to credit Atlas the aforesaid amount of tax paid. A motion for
reconsideration, filed on March 10, 1981, was denied by respondent court in a resolution dated
September 7, 1987. A notice of appeal was filed on September 22, 1987 by petitioner with
respondent court and a petition for review was filed with this Court on December 19, 1987. Said later
case is now before us as G.R. No. 80041 and is consolidated with G.R. No. 54908.
The principal issue in both petitions is whether or not the interest income from the loans extended to
Atlas by Mitsubishi is excludible from gross income taxation pursuant to Section 29 b) (7) (A) of the
tax code and, therefore, exempt from withholding tax. Apropos thereto, the focal question is whether
or not Mitsubishi is a mere conduit of Eximbank which will then be considered as the creditor whose
investments in the Philippines on loans are exempt from taxes under the code.
Prefatorily, it must be noted that respondent court erred in holding in CTA Case No. 2801 that
petitioner should be deemed to have admitted the allegations of the private respondents when it
submitted the case on the basis of the pleadings and records of the bureau. There is nothing to
indicate such admission on the part of petitioner nor can we accept respondent court's
pronouncement that petitioner did not offer to prove the truth of its allegations. The records of the
Bureau of Internal Revenue relevant to the case were duly submitted and admitted as petitioner's
supporting evidence. Additionally, a hearing was conducted, with presentation of evidence, and the
findings of respondent court were based not only on the pleadings but on the evidence adduced by
the parties. There could, therefore, not have been a judgment on the pleadings, with the theorized
admissions imputed to petitioner, as mistakenly held by respondent court.
Time and again, we have ruled that findings of fact of the Court of Tax Appeals are entitled to the
highest respect and can only be disturbed on appeal if they are not supported by substantial
evidence or if there is a showing of gross error or abuse on the part of the tax court. Thus,
11
ordinarily, we could give due consideration to the holding of respondent court that Mitsubishi is a
mere agent of Eximbank. Compelling circumstances obtaining and proven in these cases, however,
warrant a departure from said general rule since we are convinced that there is a misapprehension
of facts on the part of the tax court to the extent that its conclusions are speculative in nature.
The loan and sales contract between Mitsubishi and Atlas does not contain any direct or inferential
reference to Eximbank whatsoever. The agreement is strictly between Mitsubishi as creditor in the
contract of loan and Atlas as the seller of the copper concentrates. From the categorical language
used in the document, one prestation was in consideration of the other. The specific terms and the
reciprocal nature of their obligations make it implausible, if not vacuous to give credit to the cavalier
assertion that Mitsubishi was a mere agent in said transaction.
Surely, Eximbank had nothing to do with the sale of the copper concentrates since all that Mitsubishi
stated in its loan application with the former was that the amount being procured would be used as a
loan to and in consideration for importing copper concentrates from Atlas. Such an innocuous
12
statement of purpose could not have been intended for, nor could it legally constitute, a contract of
agency. If that had been the purpose as respondent court believes, said corporations would have
specifically so stated, especially considering their experience and expertise in financial transactions,
not to speak of the amount involved and its purchasing value in 1970.
A thorough analysis of the factual and legal ambience of these cases impels us to give weight to the
following arguments of petitioner:
The nature of the above contract shows that the same is not just a simple contract of loan. It
is not a mere creditor-debtor relationship. It is more of a reciprocal obligation between
ATLAS and MITSUBISHI where the latter shall provide the funds in the installation of a new
concentrator at the former's Toledo mines in Cebu, while ATLAS in consideration of which,
shall sell to MITSUBISHI, for a term of 15 years, the entire copper concentrate that will be
produced by the installed concentrator.
Suffice it to say, the selling of the copper concentrate to MITSUBISHI within the specified
term was the consideration of the granting of the amount of $20 million to ATLAS.
MITSUBISHI, in order to fulfill its part of the contract, had to obtain funds. Hence, it had to
secure a loan or loans from other sources. And from what sources, it is immaterial as far as
ATLAS in concerned. In this case, MITSUBISHI obtained the $20 million from the
EXIMBANK, of Japan and the consortium of Japanese banks financed through the
EXIMBANK, of Japan.
When MITSUBISHI therefore secured such loans, it was in its own independent capacity as
a private entity and not as a conduit of the consortium of Japanese banks or the EXIMBANK
of Japan. While the loans were secured by MITSUBISHI primarily "as a loan to and in
consideration for importing copper concentrates from ATLAS," the fact remains that it was a
loan by EXIMBANK of Japan to MITSUBISHI and not to ATLAS.
Thus, the transaction between MITSUBISHI and EXIMBANK of Japan was a distinct and
separate contract from that entered into by MITSUBISHI and ATLAS. Surely, in the latter
contract, it is not EXIMBANK, that was intended to be benefited. It is MITSUBISHI which
stood to profit. Besides, the Loan and Sales Contract cannot be any clearer. The only
signatories to the same were MITSUBISHI and ATLAS. Nowhere in the contract can it be
inferred that MITSUBISHI acted for and in behalf of EXIMBANK, of Japan nor of any entity,
private or public, for that matter.
Corollary to this, it may well be stated that in this jurisdiction, well-settled is the rule that
when a contract of loan is completed, the money ceases to be the property of the former
owner and becomes the sole property of the obligor (Tolentino and Manio vs. Gonzales Sy,
50 Phil. 558).
In the case at bar, when MITSUBISHI obtained the loan of $20 million from EXIMBANK, of
Japan, said amount ceased to be the property of the bank and became the property of
MITSUBISHI.
The conclusion is indubitable; MITSUBISHI, and NOT EXIMBANK, is the sole creditor of
ATLAS, the former being the owner of the $20 million upon completion of its loan contract
with EXIMBANK of Japan.
The interest income of the loan paid by ATLAS to MITSUBISHI is therefore entirely different
from the interest income paid by MITSUBISHI to EXIMBANK, of Japan. What was the
subject of the 15% withholding tax is not the interest income paid by MITSUBISHI to
EXIMBANK, but the interest income earned by MITSUBISHI from the loan to ATLAS. . . . 13
To repeat, the contract between Eximbank and Mitsubishi is entirely different. It is complete in itself,
does not appear to be suppletory or collateral to another contract and is, therefore, not to be
distorted by other considerations aliunde. The application for the loan was approved on May 20,
1970, or more than a month after the contract between Mitsubishi and Atlas was entered into on
April 17, 1970. It is true that under the contract of loan with Eximbank, Mitsubishi agreed to use the
amount as a loan to and in consideration for importing copper concentrates from Atlas, but all that
this proves is the justification for the loan as represented by Mitsubishi, a standard banking practice
for evaluating the prospects of due repayment. There is nothing wrong with such stipulation as the
parties in a contract are free to agree on such lawful terms and conditions as they see fit. Limiting
the disbursement of the amount borrowed to a certain person or to a certain purpose is not unusual,
especially in the case of Eximbank which, aside from protecting its financial exposure, must see to it
that the same are in line with the provisions and objectives of its charter.
Respondents postulate that Mitsubishi had to be a conduit because Eximbank's charter prevents it
from making loans except to Japanese individuals and corporations. We are not impressed. Not only
is there a failure to establish such submission by adequate evidence but it posits the unfair and
unexplained imputation that, for reasons subject only of surmise, said financing institution would
deliberately circumvent its own charter to accommodate an alien borrower through a manipulated
subterfuge, but with it as a principal and the real obligee.
The allegation that the interest paid by Atlas was remitted in full by Mitsubishi to Eximbank,
assuming the truth thereof, is too tenuous and conjectural to support the proposition that Mitsubishi
is a mere conduit. Furthermore, the remittance of the interest payments may also be logically viewed
as an arrangement in paying Mitsubishi's obligation to Eximbank. Whatever arrangement was
agreed upon by Eximbank and Mitsubishi as to the manner or procedure for the payment of the
latter's obligation is their own concern. It should also be noted that Eximbank's loan to Mitsubishi
imposes interest at the rate of 75% per annum, while Mitsubishis contract with Atlas merely states
that the "interest on the amount of the loan shall be the actual cost beginning from and including
other dates of releases against loan." 14
It is too settled a rule in this jurisdiction, as to dispense with the need for citations, that laws granting
exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the
taxing power. Taxation is the rule and exemption is the exception. The burden of proof rests upon
the party claiming exemption to prove that it is in fact covered by the exemption so claimed, which
onus petitioners have failed to discharge. Significantly, private respondents are not even among the
entities which, under Section 29 (b) (7) (A) of the tax code, are entitled to exemption and which
should indispensably be the party in interest in this case.
Definitely, the taxability of a party cannot be blandly glossed over on the basis of a supposed "broad,
pragmatic analysis" alone without substantial supportive evidence, lest governmental operations
suffer due to diminution of much needed funds. Nor can we close this discussion without taking
cognizance of petitioner's warning, of pervasive relevance at this time, that while international comity
is invoked in this case on the nebulous representation that the funds involved in the loans are those
of a foreign government, scrupulous care must be taken to avoid opening the floodgates to the
violation of our tax laws. Otherwise, the mere expedient of having a Philippine corporation enter into
a contract for loans or other domestic securities with private foreign entities, which in turn will
negotiate independently with their governments, could be availed of to take advantage of the tax
exemption law under discussion.
WHEREFORE, the decisions of the Court of Tax Appeals in CTA Cases Nos. 2801 and 3015, dated
April 18, 1980 and January 15, 1981, respectively, are hereby REVERSED and SET ASIDE.
SO ORDERED.
Melencio-Herrera, Paras, Padilla and Sarmiento, JJ., concur.
Footnotes
1 Rollo, G.R. No. 54908, 21; G.R. No. 80041, 14.
2 Ibid., G.R. No. 80041, 15, 49.
3 Ibid., G.R. No. 54908, 45-46.
4 Ibid., id., 33-39,
5 Ibid., id., 48.
6 Now, Sec. 28 (b) (8)(A).
7 Rollo, G.R. No. 54908, 41-42.
8 Ibid., id., 42.
9 Ibid., id., 51-52.
10 Ibid., G.R. No. 80041, 17.
11 Nasiad, et al. vs. Court of Tax Appeals, 61 SCRA 238 (1974); Raymundo vs. de Joya, et
al., 101 SCRA 495 (1980); Commissioner of Internal Revenue vs. Arnoldus Carpentry Shop,
Inc., et al., 159 SCRA 199 (1988).
12 Rollo, G.R. 80041, 15.
13 Ibid., G.R. No. 54908, 23-25.
14 Ibid., G.R. No. 80041, 15, 27.

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 76573 September 14, 1989
MARUBENI CORPORATION (formerly Marubeni — Iida, Co., Ltd.), petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS, respondents.
Melquiades C. Gutierrez for petitioner.
The Solicitor General for respondents.
FERNAN, C.J.:
Petitioner, Marubeni Corporation, representing itself as a foreign corporation duly organized and
existing under the laws of Japan and duly licensed to engage in business under Philippine laws with
branch office at the 4th Floor, FEEMI Building, Aduana Street, Intramuros, Manila seeks the reversal
of the decision of the Court of Tax Appeals dated February 12, 1986 denying its claim for refund or
1
tax credit in the amount of P229,424.40 representing alleged overpayment of branch profit
remittance tax withheld from dividends by Atlantic Gulf and Pacific Co. of Manila (AG&P).
The following facts are undisputed: Marubeni Corporation of Japan has equity investments in AG&P
of Manila. For the first quarter of 1981 ending March 31, AG&P declared and paid cash dividends to
petitioner in the amount of P849,720 and withheld the corresponding 10% final dividend tax thereon.
Similarly, for the third quarter of 1981 ending September 30, AG&P declared and paid P849,720 as
cash dividends to petitioner and withheld the corresponding 10% final dividend tax thereon. 2
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%. A schedule of dividends declared and paid by AG&P to its stockholder
Marubeni Corporation of Japan, the 10% final intercorporate dividend tax and the 15% branch profit
remittance tax paid thereon, is shown below:
1981 FIRST THIRD TOTAL OF

QUARTER QUARTER FIRST and
(three months (three months THIRD
ended 3.31.81) ended 9.30.81) quarters
(In Pesos)
Cash Dividends Paid 849,720.44 849,720.00 1,699,440.00
10% Dividend Tax 84,972.00 84,972.00 169,944.00

Withheld
Cash Dividend net of 764,748.00 764,748.00 1,529,496.00
10% Dividend Tax
Withheld
15% Branch Profit 114,712.20 114,712.20 229,424.40 3
Remittance Tax
Withheld
Net Amount Remitted to 650,035.80 650,035.80 1,300,071.60

Petitioner
The 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of P114,712.20 for
the first quarter of 1981 were paid to the Bureau of Internal Revenue by AG&P on April 20, 1981
under Central Bank Receipt No. 6757880. Likewise, the 10% final dividend tax of P84,972 and the
15% branch profit remittance tax of P114,712 for the third quarter of 1981 were paid to the Bureau of
Internal Revenue by AG&P on August 4, 1981 under Central Bank Confirmation Receipt No.
7905930. 4
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 on April 20 and August 4, 1981. 5
In a letter dated January 29, 1981, 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.
In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled:
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. To
be effectively connected it is not necessary that the income be derived from the
actual operation of taxpayer-corporation's trade or business; it is sufficient that the
income arises from the business activity in which the corporation is engaged. For
example, if a resident foreign corporation is engaged in the buying and selling of
machineries in the Philippines and invests in some shares of stock on which
dividends are subsequently received, the dividends thus earned are not considered
'effectively connected' with its trade or business in this country. (Revenue
Memorandum Circular No. 55-80).
In the instant case, the dividends received by Marubeni from AG&P are 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) of the Tax Code, as
amended . . . 6
Consequently, in a letter dated September 21, 1981 and filed with the Commissioner of Internal
Revenue on September 24, 1981, petitioner 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
Atlantic Gulf and Pacific Co. of Manila (AG&P) on April 20 and August 4, 1981 to ... head office in
Tokyo. 7
On June 14, 1982, respondent Commissioner of Internal Revenue denied petitioner's claim for
refund/credit of P229,424.40 on the following grounds:
While it is true that said dividends remitted were not subject to the 15% profit
remittance tax as the same were not income earned by a Philippine Branch of
Marubeni Corporation of Japan; and neither is it subject to the 10% intercorporate
dividend tax, the recipient of the dividends, being a non-resident stockholder,
nevertheless, said dividend income is subject to the 25 % tax pursuant to Article 10
(2) (b) of the Tax Treaty dated February 13, 1980 between the Philippines and
Japan.
Inasmuch as the cash dividends remitted by AG&P to Marubeni Corporation, Japan

is subject to 25 % tax, and that the taxes withheld of 10 % as intercorporate dividend
tax and 15 % as profit remittance tax totals (sic) 25 %, the amount refundable offsets
the liability, hence, nothing is left to be refunded.
8
Petitioner appealed to the Court of Tax Appeals which affirmed the denial of the refund by the
Commissioner of Internal Revenue in its assailed judgment of February 12, 1986. 9
In support of its rejection of petitioner's claimed refund, respondent Tax Court explained:
Whatever the dialectics employed, no amount of sophistry can ignore the fact that
the dividends in question are income taxable to the Marubeni Corporation of Tokyo,
Japan. The said dividends were distributions made by the Atlantic, Gulf and Pacific
Company of Manila to its shareholder out of its profits on the investments of the
Marubeni Corporation of Japan, a non-resident foreign corporation. The investments
in the Atlantic Gulf & Pacific Company of the Marubeni Corporation of Japan were
directly made by it and the dividends on the investments were likewise directly
remitted to and received by the Marubeni Corporation of Japan. Petitioner Marubeni
Corporation Philippine Branch has no participation or intervention, directly or
indirectly, in the investments and in the receipt of the dividends. And it appears that
the funds invested in the Atlantic Gulf & Pacific Company did not come out of the
funds infused by the Marubeni Corporation of Japan to the Marubeni Corporation
Philippine Branch. As a matter of fact, the Central Bank of the Philippines, in
authorizing the remittance of the foreign exchange equivalent of (sic) the dividends in
question, treated the Marubeni Corporation of Japan as a non-resident stockholder of
the Atlantic Gulf & Pacific Company based on the supporting documents submitted to
it.
Subject to certain exceptions not pertinent hereto, income is taxable to the person
who earned it. Admittedly, the dividends under consideration were earned by the
Marubeni Corporation of Japan, and hence, taxable to the said corporation. While it
is true that the Marubeni Corporation Philippine Branch is duly licensed to engage in
business under Philippine laws, such dividends are not the income of the Philippine
Branch and are not taxable to the said Philippine branch. We see no significance
thereto in the identity concept or principal-agent relationship theory of petitioner
because such dividends are the income of and taxable to the Japanese corporation
in Japan and not to the Philippine branch. 10
Hence, the instant petition for review.
It is the argument of petitioner corporation that following the principal-agent relationship theory,
Marubeni Japan is likewise a resident foreign corporation subject only to the 10 % intercorporate
final tax on dividends received from a domestic corporation in accordance with Section 24(c) (1) of
the Tax Code of 1977 which states:
Dividends received by a domestic or resident foreign corporation liable to tax under

this Code — (1) Shall be subject to a final tax of 10% on the total amount thereof,
which shall be collected and paid as provided in Sections 53 and 54 of this Code ....
Public respondents, however, are of the contrary view 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 which reads:
(b) Tax on foreign corporations — (1) Non-resident corporations. — A foreign

corporation not engaged in trade or business in the Philippines shall pay a tax equal
to thirty-five per cent of the gross income received during each taxable year from all
sources within the Philippines as ... dividends ....
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. Thus:
11
Article 10 (1) Dividends paid by a company which is a resident of a Contracting State

to a resident of the other Contracting State may be taxed in that other Contracting
State.
(2) However, such dividends may also be taxed in the Contracting State of which the
company paying the dividends is a resident, and according to the laws of that
Contracting State, but if the recipient is the beneficial owner of the dividends the tax
so charged shall not exceed;
(a) . . .
(b) 25 per cent of the gross amount of the dividends in all other cases.
Central to the issue of Marubeni Japan's tax liability on its dividend income from Philippine sources
is therefore the determination of whether it is a resident or a non-resident foreign corporation under
Philippine laws.
Under the Tax Code, a resident foreign corporation is one that is "engaged in trade or business"
within the Philippines. Petitioner 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. A single corporate
entity cannot be both a resident and a non-resident corporation depending on the nature of the
particular transaction involved. Accordingly, whether the dividends are paid directly to the head office
or coursed through its local branch is of no moment for after 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.
The Solicitor General has adequately refuted petitioner's arguments in this wise:
The general rule that a foreign corporation is the same juridical entity as its branch
office in the Philippines cannot apply here. This rule is based on the premise that the
business of the foreign corporation is conducted through its branch office, following
the principal agent relationship theory. It is understood that the branch becomes its
agent here. So that 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.
Consequently, the taxpayer is the foreign corporation, not the branch or the resident
foreign corporation.
Corollarily, if the business transaction is conducted through the branch office, the
latter becomes the taxpayer, and not the foreign corporation. 12
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. There can be no other logical conclusion considering the undisputed fact that the
investment (totalling 283.260 shares including that of nominee) 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. 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 %.
But while public respondents correctly concluded that the dividends in dispute were neither subject
to the 15 % profit remittance tax nor to the 10 % intercorporate dividend tax, the recipient being a
non-resident stockholder, they grossly erred in holding that no refund was forthcoming to the
petitioner because the taxes thus withheld totalled the 25 % rate imposed by the Philippine-Japan
Tax Convention pursuant to Article 10 (2) (b).
To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule in taxation that
each tax has a different tax basis. While the tax on dividends is directly levied on the dividends
received, "the tax base upon which the 15 % branch profit remittance tax is imposed is the profit
actually remitted abroad." 13
Public respondents likewise erred in automatically imposing the 25 % rate under Article 10 (2) (b) of
the Tax Treaty as if this were a flat rate. A closer look at the Treaty reveals that the tax rates fixed by
Article 10 are the maximum rates as reflected in the phrase "shall not exceed." This means that any
tax imposable by the contracting state concerned should not exceed the 25 % limitation and that
said rate would apply only if the tax imposed by our laws exceeds the same. In other words, by
reason of our bilateral negotiations with Japan, we have agreed to have our right to tax limited to a
certain extent to attain the goals set forth in the Treaty.
Petitioner, being a non-resident foreign corporation with respect to the transaction in question, the
applicable provision of the Tax Code is Section 24 (b) (1) (iii) in conjunction with the Philippine-
Japan Treaty of 1980. Said section provides:
(b) Tax on foreign corporations. — (1) Non-resident corporations — ... (iii) On

dividends received from a domestic corporation liable to tax under this Chapter, the
tax shall be 15% of the dividends received, 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; ....
Proceeding to apply the above section to the case at bar, petitioner, being a non-resident foreign
corporation, as a general rule, is taxed 35 % of its gross income from all sources within the
Philippines. [Section 24 (b) (1)].
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
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.
Consequently, petitioner is entitled to a refund on the transaction in question to be computed as

follows:
Total cash dividend paid ................P1,699,440.00

less 15% under Sec. 24
(b) (1) (iii ) .........................................254,916.00
------------------
Cash dividend net of 15 % tax

due petitioner ...............................P1,444.524.00
less net amount
actually remitted .............................1,300,071.60
-------------------
Amount to be refunded to petitioner

representing overpayment of
taxes on dividends remitted ..............P 144 452.40
===========
It is readily apparent that the 15 % tax rate imposed on the dividends received by a foreign non-
resident stockholder from a domestic corporation under Section 24 (b) (1) (iii) is easily within the
maximum ceiling of 25 % of the gross amount of the dividends as decreed in Article 10 (2) (b) of the
Tax Treaty.
There is one final point that must be settled. Respondent Commissioner of Internal Revenue is
laboring under the impression that the Court of Tax Appeals is covered by Batas Pambansa Blg.
129, otherwise known as the Judiciary Reorganization Act of 1980. He alleges that the instant
petition for review was not perfected in accordance with Batas Pambansa Blg. 129 which provides
that "the period of appeal from final orders, resolutions, awards, judgments, or decisions of any court
in all cases shall be fifteen (15) days counted from the notice of the final order, resolution, award,
judgment or decision appealed from ....
This is completely untenable. The cited BP Blg. 129 does not include the Court of Tax Appeals
which has been created by virtue of a special law, Republic Act No. 1125. Respondent court is not
among those courts specifically mentioned in Section 2 of BP Blg. 129 as falling within its scope.
Thus, under Section 18 of Republic Act No. 1125, a party adversely affected by an order, ruling or
decision of the Court of Tax Appeals is given thirty (30) days from notice to appeal therefrom.
Otherwise, said order, ruling, or decision shall become final.
Records show that petitioner received notice of the Court of Tax Appeals's decision denying its claim
for refund on April 15, 1986. On the 30th day, or on May 15, 1986 (the last day for appeal), petitioner
filed a motion for reconsideration which respondent court subsequently denied on November 17,
1986, and notice of which was received by petitioner on November 26, 1986. Two days later, or on
November 28, 1986, petitioner simultaneously filed a notice of appeal with the Court of Tax Appeals
and a petition for review with the Supreme Court. From the foregoing, it is evident that the instant
14
appeal was perfected well within the 30-day period provided under R.A. No. 1125, the whole 30-day
period to appeal having begun to run again from notice of the denial of petitioner's motion for
reconsideration.
WHEREFORE, the questioned decision of respondent Court of Tax Appeals dated February 12,
1986 which affirmed the denial by respondent Commissioner of Internal Revenue of petitioner
Marubeni Corporation's claim for refund is hereby REVERSED. The Commissioner of Internal
Revenue is ordered to refund or grant as tax credit in favor of petitioner the amount of P144,452.40
representing overpayment of taxes on dividends received. No costs.
So ordered.
Gutierrez, Jr., Bidin and Cortes, JJ., concur.
Feliciano, J., is on leave.
Footnotes
1 Penned by Amante Filler, Presiding Judge and concurred in by Constante Roaquin

and Alex Reyes, Associate Judges.
2 Rollo, p. 37.
3 Amount sought to be refunded. See Rollo, p. 38.
4 Rollo, pp. 38-39.

5 Rollo p. 39.
6 Annex C, Ruling No. 157-81, Original Record, pp. 11-12.
7 Original B.I.R. Record, p. 8.
8 Annex E, Original Record, p. 15.
9 Original Record, p. 122.
10 Original Record, pp, 119-121,
11 Convention between the Republic of the Philippines and Japan for the Avoidance
of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on
Income.
12 Memorandum, p. 142, Rollo.
13 Commissioner of Internal Revenue vs. Burroughs, Limited G.R. No. 66653, June
19, 1986, 142 SCRA 324.
14 Rollo, p. 2; Original Record, p. 170.

SUPREME COURT
Manila
EN BANC
G.R. No. L-66838 December 2, 1991

vs.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE COURT OF
TAX APPEALS, respondents.
T.A. Tejada & C.N. Lim for private respondent.
RESOLUTION
FELICIANO, J.:
For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975 ending 30 June 1975,
private respondent 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 the thirty-five percent (35%) withholding tax at source was deducted.
On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner of Internal
Revenue a claim for refund or tax credit in the amount of P4,832,989.26 claiming, among other
things, that pursuant to Section 24 (b) (1) of the National Internal Revenue Code ("NITC"), as
1
amended by Presidential Decree No. 369, the applicable rate of withholding tax on the dividends
remitted was only fifteen percent (15%) (and not thirty-five percent [35%]) of the dividends.
There being no responsive action on the part of the Commissioner, P&G-Phil., on 13 July 1977, filed
a petition for review with public respondent Court of Tax Appeals ("CTA") docketed as CTA Case
No. 2883. On 31 January 1984, the CTA rendered a decision ordering petitioner Commissioner to
refund or grant the tax credit in the amount of P4,832,989.00.
On appeal by the Commissioner, the Court through its Second Division reversed the decision of the
CTA and held that:
(a) P&G-USA, and not private respondent P&G-Phil., was the proper party to claim the
refund or tax credit here involved;
(b) there is nothing 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
(c) private respondent 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%."
These holdings were questioned in P&G-Phil.'s Motion for Re-consideration and we will deal with
them seriatim in this Resolution resolving that Motion.
1. There are certain preliminary aspects of the question of the capacity of P&G-Phil. to bring the
present claim for refund or tax credit, which need to be examined. This question was raised for the
first time on appeal, i.e., in the proceedings before this Court on the Petition for Review filed by the
Commissioner of Internal Revenue. The question was not raised by the Commissioner on the
administrative level, and neither was it raised by him before the CTA.
We believe that the Bureau of Internal Revenue ("BIR") should not be allowed to defeat an otherwise
valid claim for refund by raising this question of alleged incapacity for the first time on appeal before
this Court. This is clearly a matter of procedure. Petitioner does not pretend that P&G-Phil., should it
succeed in the claim for refund, is likely to run away, as it were, with the refund instead of
transmitting such refund or tax credit to its parent and sole stockholder. It is commonplace that in the
absence of explicit statutory provisions to the contrary, the government must follow the same rules of
procedure which bind private parties. It is, for instance, clear that the government is held to
compliance with the provisions of Circular No. 1-88 of this Court in exactly the same way that private
litigants are held to such compliance, save only in respect of the matter of filing fees from which the
Republic of the Philippines is exempt by the Rules of Court.
More importantly, there arises here a question of fairness should the BIR, unlike any other litigant,
be allowed to raise for the first time on appeal questions which had not been litigated either in the
lower court or on the administrative level. For, if petitioner had at the earliest possible
opportunity, i.e., at the administrative level, demanded that P&G-Phil. produce an express
authorization from its parent corporation to bring the claim for refund, then P&G-Phil. would have
been able forthwith to secure and produce such authorization before filing the action in the instant
case. The action here was commenced just before expiration of the two (2)-year prescriptive period.
2. The question of the capacity of P&G-Phil. to bring the claim for refund has substantive dimensions
as well which, as will be seen below, also ultimately relate to fairness.
Under Section 306 of the NIRC, a claim for refund or tax credit filed with the Commissioner of
Internal Revenue is essential for maintenance of a suit for recovery of taxes allegedly erroneously or
illegally assessed or collected:
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: . . .
(Emphasis supplied)
Section 309 (3) of the NIRC, in turn, provides:
Sec. 309. Authority of Commissioner to Take Compromises and to Refund Taxes.—The

Commissioner may:
x x x x x x x x x
(3) credit or refund taxes erroneously or illegally received, . . . No credit or refund of taxes or
penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for
credit or refund within two (2) years after the payment of the tax or penalty. (As amended by P.D.
No. 69) (Emphasis supplied)
Since the claim for refund was filed by P&G-Phil., the question which arises is: is P&G-Phil.
a "taxpayer" under Section 309 (3) of the NIRC? 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
2
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. The withholding agent, P&G-Phil., is directly and independently liable for the correct amount
3
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.
A "person liable for tax" has been held to be a "person subject to tax" and properly considered a
"taxpayer." The terms liable for tax" and "subject to tax" both connote legal obligation or duty to pay
4
a tax. It is very difficult, indeed conceptually impossible, to consider a person who is statutorily made
"liable for tax" as not "subject to tax." By any reasonable standard, such a person should be
regarded as a party in interest, or as a person having sufficient legal interest, to bring a suit for
refund of taxes he believes were illegally collected from him.
In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, this Court pointed out
5
that a withholding agent is in fact the agent both of the government and of the taxpayer, and that the
withholding agent is not an ordinary government agent:
The law sets no condition for the personal liability of the withholding agent to attach. The
reason is to compel the withholding agent to withhold the tax under all circumstances. In
effect, the responsibility for the collection of the tax as well as the payment thereof is
concentrated upon the person over whom the Government has jurisdiction. Thus, the
withholding agent is constituted the agent of both the Government and the taxpayer. With
respect to the collection and/or withholding of the tax, he is the Government's agent. In
regard to the filing of the necessary income tax return and the payment of the tax to the
Government, he is the agent of the taxpayer. The withholding agent, therefore, is no ordinary
government agent especially because under Section 53 (c) he is held personally liable for
the tax he is duty bound to withhold; whereas the Commissioner and his deputies are not
made liable by law. 6 (Emphasis supplied)
If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial owner of the dividends with respect to the filing of the necessary income tax
return and with respect to actual payment of the tax to the government, such 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. 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.
We believe that, even now, there is nothing to preclude the BIR from requiring P&G-Phil. to show some written or telexed confirmation by P&G-USA of the subsidiary's
authority to claim the refund or tax credit and to remit the proceeds of the refund., or to apply the tax credit to some Philippine tax obligation of, P&G-USA, before actual
payment of the refund or issuance of a tax credit certificate. What appears to be vitiated by basic unfairness is petitioner's position that, although P&G-Phil. is directly and
personally liable to the Government for the taxes and any deficiency assessments to be collected, the Government is not legally liable for a refund simply because it did not
demand a written confirmation of P&G-Phil.'s implied authority from the very beginning. A sovereign government should act honorably and fairly at all times, even vis-a-
vis taxpayers.
We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as a "taxpayer" within the meaning of Section 309, NIRC, and as impliedly
authorized to file the claim for refund and the suit to recover such claim.
II
1. We turn to the principal substantive question before us: the applicability to the dividend remittances by P&G-Phil. to P&G-USA of the fifteen percent (15%) tax rate provided
for in the following portion of Section 24 (b) (1) of the NIRC:
(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 . . .
The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation, goes down to fifteen
percent (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. In other words, in the instant case, the reduced fifteen percent (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 thirty-five percent (35%) dividend tax rate and the preferred fifteen percent (15%) dividend tax rate.
It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a "deemed paid" tax credit for the dividend tax (20 percentage points) waived by
the Philippines in making applicable the preferred divided tax rate of fifteen percent (15%). In other words, our 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.
2. The question arises: Did the US law comply with the above requirement? The relevant provisions of the US Intemal Revenue Code ("Tax Code") are the following:
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; and
x x x x x x x x x
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 —
x x x x x x x x x
(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.
x x x x x x x x x
(c) Applicable Rules
(1) Accumulated profits defined. — For purposes of this section, the term "accumulated profits" means with respect to any foreign corporation,
(A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits, or income computed without reduction by the
amount of the income, war profits, and excess profits taxes imposed on or with respect to such profits or income by any foreign
country. . . .; and
(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or income in excess of the income, war profits, and
excess profits taxes imposed on or with respect to such profits or income.
The Secretary or his delegate shall have full power to determine from the accumulated profits of what year or years such dividends were paid,
treating dividends paid in the first 20 days of any year as having been paid from the accumulated profits of the preceding year or years (unless to
his satisfaction shows otherwise), and in other respects treating dividends as having been paid from the most recently accumulated gains, profits, or
earning. . . . (Emphasis supplied)
Close examination of the above quoted provisions of the US Tax Code 7

shows the following:
a. US law (Section 901, 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 902, 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.
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. 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. In other words, 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. What is, under US law, deemed paid by P&G- USA are not "phantom taxes" but
instead Philippine corporate income taxes actually paid here by P&G-Phil., which are very real indeed.
It is also useful to note that both (i) the tax credit for the Philippine dividend 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, are tax credits available
or applicable against the US corporate income 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 for applicability of the reduced or preferential fifteen percent (15%) dividend tax rate
under Section 24 (b) (1), NIRC, it is necessary:
a. to determine the amount of the 20 percentage points 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 US tax law must allow to P&G-USA; and
c. to ascertain that the amount of the "deemed paid" tax credit allowed by US law is at least equal to the amount of the dividend tax waived by the
Philippine Government.
Amount (a), i.e., the amount of the dividend tax waived by the Philippine government is arithmetically determined in the following manner:
P100.00 — Pretax net corporate income earned by P&G-Phil.

x 35% — Regular Philippine corporate income tax rate
———
P35.00 — Paid to the BIR by P&G-Phil. as Philippine
corporate income tax.
P100.00
-35.00
———
P65.00 — Available for remittance as dividends to P&G-USA
P65.00 — Dividends remittable to P&G-USA

x 35% — Regular Philippine dividend tax rate under Section 24
——— (b) (1), NIRC
P22.75 — Regular dividend tax

x 15% — Reduced dividend tax rate under Section 24 (b) (1), NIRC
———
P9.75 — Reduced dividend tax
P22.75 — Regular dividend tax under Section 24 (b) (1), NIRC

-9.75 — Reduced dividend tax under Section 24 (b) (1), NIRC
———
P13.00 — Amount of dividend tax waived by Philippine
===== government under Section 24 (b) (1), NIRC.
Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by P&G-Phil. Amount (a) is also the minimum amount of the "deemed paid"
tax credit that US tax law shall allow if P&G-USA is to qualify for the reduced or preferential dividend tax rate under Section 24 (b) (1), NIRC.
Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law allows under Section 902, Tax Code, may be computed arithmetically as
follows:

- 9.75 — Dividend tax withheld at the reduced (15%) rate
———
P55.25 — Dividends actually remitted to P&G-USA
P35.00 — Philippine corporate income tax paid by P&G-Phil.

to the BIR
Dividends actually
remitted by P&G-Phil.
to P&G-USA P55.25
——————— = ——— x P35.00 = P29.75 10
Amount of accumulated P65.00 ======
profits earned by
P&G-Phil. in excess
of income tax
Thus, 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 Section 902 US Tax Code for Philippine corporate income tax "deemed paid" by the parent but actually paid by the wholly-owned subsidiary.
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.
3. It is important to note also that the foregoing reading of Sections 901 and 902 of the US Tax Code is identical with the reading of the BIR of Sections 901 and
902 of the US Tax Code is identical with the reading of the BIR of Sections 901 and 902 as shown by administrative rulings issued by the BIR.
The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by then Acting Commissioner of Intemal Revenue Efren I. Plana, later Associate Justice
of this Court, the relevant portion of which stated:
However, after a restudy of the decision in the American Chicle Company case and the provisions of Section 901 and 902 of the U.S. Internal
Revenue Code, we find merit in your contention that our computation of the credit which the U.S. tax law allows in such cases is erroneous as the
amount of tax "deemed paid" to the Philippine government for purposes of credit against the U.S. tax by the recipient of dividends includes a
portion of the amount of income tax paid by the corporation declaring the dividend in addition to the tax withheld from the dividend remitted. In other
words, the U.S. government will allow a credit to the U.S. corporation or recipient of the dividend, in addition to the amount of tax actually withheld,
a portion of the income tax paid by the corporation declaring the dividend. Thus, if a Philippine corporation wholly owned by a U.S. corporation has
a net income of P100,000, it will pay P25,000 Philippine income tax thereon in accordance with Section 24(a) of the Tax Code. The net income,
after income tax, which is P75,000, will then be declared as dividend to the U.S. corporation at 15% tax, or P11,250, will be withheld therefrom.
Under the aforementioned sections of the U.S. Internal Revenue Code, U.S. corporation receiving the dividend can utilize as credit against its U.S.
tax payable on said dividends the amount of P30,000 composed of:
(1) The tax "deemed paid" or indirectly paid on the dividend arrived at as follows:
P75,000 x P25,000 = P18,750

———
100,000 **
(2) The amount of 15% of

P75,000 withheld = 11,250
———
P30,000
The amount of P18,750 deemed paid and to be credited against the U.S. tax on the dividends received by the U.S. corporation from a Philippine
subsidiary is clearly more than 20% requirement of Presidential Decree No. 369 as 20% of P75,000.00 the dividends to be remitted under the
above example, amounts to P15,000.00 only.
In the light of the foregoing, BIR Ruling No. 75-005 dated September 10, 1975 is hereby amended in the sense that the dividends to be remitted by
your client to its parent company shall be subject to the withholding tax at the rate of 15% only.
This ruling shall have force and effect only for as long as the present pertinent provisions of the U.S. Federal Tax Code, which are the bases of the
ruling, are not revoked, amended and modified, the effect of which will reduce the percentage of tax deemed paid and creditable against the U.S.
tax on dividends remitted by a foreign corporation to a U.S. corporation. (Emphasis supplied)
The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981 addressed to Basic Foods Corporation and BIR Ruling dated 20 October 1987 addressed
to Castillo, Laman, Tan and Associates. In other words, the 1976 Ruling of Hon. Efren I. Plana was reiterated by the BIR even as the case at bar was pending
before the CTA and this Court.
4. We should not overlook the fact that 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 NIRC 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.
Section 30 (c) (3) and (8), NIRC, provides:
(d) Sec. 30. Deductions from Gross Income.—In computing net income, there shall be allowed as deductions — . . .
(c) Taxes. — . . .
x x x x x x x x x
(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. (Emphasis supplied)
Under Section 30 (c) (3) (a), NIRC, above, the 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.
Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US Tax Code, and provides as follows:
(8) Taxes of foreign subsidiary. — For the purposes of this subsection a domestic corporation which owns a majority of the voting stock of a foreign
corporation from which it receives dividends in any taxable year shall be deemed to have paid the same proportion of any income, war-profits, or
excess-profits taxes paid by such foreign corporation to any foreign country, upon or with respect to the accumulated profits of such foreign
corporation from which such dividends were paid, which the amount of such dividends bears to the amount of such accumulated profits: Provided,
That the amount of tax deemed to have been paid under this subsection shall in no case exceed the same proportion of the tax against which credit
is taken which the amount of such dividends bears to the amount of the entire net income of the domestic corporation in which such dividends are
included. The term "accumulated profits" when used in this subsection reference to a foreign corporation, means the amount of its gains, profits,
or income in excess of the income, war-profits, and excess-profits taxes imposed upon or with respect to such profits or income; and the
Commissioner of Internal Revenue shall have full power to determine from the accumulated profits of what year or years such dividends were paid;
treating dividends paid in the first sixty days of any year as having been paid from the accumulated profits of the preceding year or years (unless to
his satisfaction shown otherwise), and in other respects treating dividends as having been paid from the most recently accumulated gains, profits, or
earnings. In the case of a foreign corporation, the income, war-profits, and excess-profits taxes of which are determined on the basis of an
accounting period of less than one year, the word "year" as used in this subsection shall be construed to mean such accounting period. (Emphasis
supplied)
Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit to a Philippine parent corporation for taxes "deemed paid" by it, that is, e.g., for
taxes paid to the US by the US subsidiary of a Philippine-parent corporation. The Philippine parent or corporate stockholder is "deemed" under our NIRC to have
paid a proportionate part of the US corporate income tax paid by its US subsidiary, although such US tax was actually paid by the subsidiary and not by the
Philippine parent.
Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be allowed by US law to P&G-USA, is the same "deemed paid" tax credit that Philippine law
allows to a Philippine corporation with a wholly- or majority-owned subsidiary in (for instance) the US. The "deemed paid" tax credit allowed in Section 902, US Tax Code, is no
more a credit for "phantom taxes" than is the "deemed paid" tax credit granted in Section 30 (c) (8), NIRC.
III
1. The Second Division of the Court, in holding that the applicable dividend tax rate in the instant case was the regular thirty-five percent (35%) rate rather than the reduced
rate of fifteen percent (15%), held that P&G-Phil. had failed to prove that its parent, P&G-USA, had in fact been given by the US tax authorities a "deemed paid" tax credit in
the amount required by Section 24 (b) (1), NIRC.
We believe, in the first place, that we must distinguish between the legal question before this Court from questions of administrative implementation arising after the legal
question has been answered. The basic legal issue is of course, this: which is the applicable dividend tax rate in the instant case: the regular thirty-five percent (35%) rate or
the reduced fifteen percent (15%) rate? The question of whether or not P&G-USA is in fact given by the US tax authorities a "deemed paid" tax credit in the required amount,
relates to the administrative implementation of the applicable reduced tax rate.
In the second place, Section 24 (b) (1), 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 thirty-five percent (35%) to fifteen percent (15%). As noted several times earlier, 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 . . ." 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 preferential fifteen percent (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.
In the third place, the position originally taken by the Second Division results in a severe practical problem of administrative circularity. The Second Division in effect held that the reduced dividend tax rate is not applicable until the US tax credit for "deemed paid"
taxes is actually given in the required minimum amount by the US Internal Revenue Service to P&G-USA. But, the US "deemed paid" tax credit cannot be given by the US tax authorities unless dividends have actually been remitted to the US, which means that
It is this practical or operating circularity that is in fact avoided

the Philippine dividend tax, at the rate here applicable, was actually imposed and collected. 11
by our BIR when it issues rulings that the tax laws of particular foreign jurisdictions (e.g., Republic of
Vanuatu Hongkong, Denmark, etc.) comply with the requirements set out in Section 24 (b) (1),
12 13 14
NIRC, for applicability of the fifteen percent (15%) tax rate. Once such a ruling is rendered, the
Philippine subsidiary begins to withhold at the reduced dividend tax rate.
A requirement relating to administrative implementation is not properly imposed as a condition for

the applicability, as a matter of law, of a particular tax rate. Upon the other hand, upon the
determination or recognition of the applicability of the reduced tax rate, there is nothing to prevent
the BIR from issuing implementing regulations that would require P&G Phil., or any Philippine
corporation similarly situated, to certify to the BIR the amount of the "deemed paid" tax credit
actually subsequently granted by the US tax authorities to P&G-USA or a US parent corporation for
the taxable year involved. Since the US tax laws can and do change, such implementing regulations
could also provide that failure of P&G-Phil. to submit such certification within a certain period of time,
would result in the imposition of a deficiency assessment for the twenty (20) percentage points
differential. The task of this Court is to settle which tax rate is applicable, considering the state of US
law at a given time. We should leave details relating to administrative implementation where they
properly belong — with the BIR.
2. An interpretation of a tax statute that produces a revenue flow for the government is not, for that
reason alone, necessarily the correct reading of the statute. There are many tax statutes or
provisions which are designed, not to trigger off an instant surge of revenues, but rather to achieve
longer-term and broader-gauge fiscal and economic objectives. The task of our Court is to give
effect to the legislative design and objectives as they are written into the statute even if, as in the
case at bar, some revenues have to be foregone in that process.
The economic objectives sought to be achieved by the Philippine Government by reducing the thirty-
five percent (35%) dividend rate to fifteen percent (15%) are set out in the preambular clauses of
P.D. No. 369 which amended Section 24 (b) (1), NIRC, into its present form:
WHEREAS, it is imperative to adopt measures responsive to the requirements of a

developing economy foremost of which is the financing of economic development programs;
WHEREAS, nonresident foreign corporations with investments in the Philippines are taxed
on their earnings from dividends at the rate of 35%;
WHEREAS, in order to encourage more capital investment for large projects an appropriate
tax need be imposed on dividends received by non-resident foreign corporations in the same
manner as the tax imposed on interest on foreign loans;
x x x x x x x x x
(Emphasis supplied)
More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of foreign equity investment
in the Philippines by reducing the tax cost of earning profits here and thereby increasing the net
dividends remittable to the investor. The foreign investor, however, would not benefit from the
reduction of the Philippine dividend tax rate unless its home country gives it some relief from double
taxation (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. 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.
The net effect upon the foreign investor may be shown arithmetically in the following manner:
P65.00 — Dividends remittable to P&G-USA (please

see page 392 above
- 9.75 — Reduced R.P. dividend tax withheld by P&G-Phil.
———
P55.25 — Dividends actually remitted to P&G-USA
P55.25
x 46% — Maximum US corporate income tax rate
———
P25.415—US corporate tax payable by P&G-USA
without tax credits
P25.415
- 9.75 — US tax credit for RP dividend tax withheld by P&G-Phil.
at 15% (Section 901, US Tax Code)
———
P15.66 — US corporate income tax payable after Section 901
——— tax credit.
P55.25
- 15.66
———
P39.59 — Amount received by P&G-USA net of R.P. and U.S.
===== taxes without "deemed paid" tax credit.
P25.415
- 29.75 — "Deemed paid" tax credit under Section 902 US
——— Tax Code (please see page 18 above)
- 0 - — US corporate income tax payable on dividends

====== remitted by P&G-Phil. to P&G-USA after
Section 902 tax credit.
P55.25 — Amount received by P&G-USA net of RP and US

====== taxes after Section 902 tax credit.
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. The result, in fine,
could be that P&G-USA would after US tax credits, still wind up with P55.25, the full amount of the
dividends remitted to P&G-USA net of Philippine taxes. In the calculation of the Philippine
Government, this should encourage additional investment or re-investment in the Philippines by
P&G-USA.
3. It remains only to note that under the Philippines-United States Convention "With Respect to
Taxes on Income," the Philippines, by a treaty commitment, reduced the regular rate of dividend
15
tax to a maximum of twenty percent (20%) of the gross amount of dividends paid to US parent
corporations:
Art 11. — Dividends
x x x x x x x x x
(2) The rate of tax imposed by one of the Contracting States on dividends derived from
sources within that Contracting State by a resident of the other Contracting State shall not
exceed —
(a) 25 percent of the gross amount of the dividend; or
(b) When the recipient is a corporation, 20 percent of the gross amount of the dividend
if during the part of the paying corporation's taxable year which precedes the date of
payment of the dividend and during the whole of its prior taxable year (if any), at least 10
percent of the outstanding shares of the voting stock of the paying corporation was owned
by the recipient corporation.
x x x x x x x x x
(Emphasis supplied)
The Tax Convention, at the same time, 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] —. This is, of course, precisely the "deemed paid" tax credit provided for in
16
Section 902, US Tax Code, discussed above. 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 points which
compliance of US law (Section 902) with the requirements of Section 24 (b) (1), NIRC, makes
available in respect of dividends from a Philippine subsidiary.
We conclude that private respondent P&G-Phil, is entitled to the tax refund or tax credit which it
seeks.
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.
Narvasa, Gutierrez, Jr., Griño-Aquino, Medialdea and Romero, JJ., concur.

Fernan, C.J., is on leave.
Separate Opinions
CRUZ, J., concurring:
I join Mr. Justice Feliciano in his excellent analysis of the difficult issues we are now asked to
resolve.
As I understand it, 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. 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. 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.
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.
It is conceded that the law will "not trigger off an instant surge of revenue," as indeed the tax
collectible by the Republic from the foreign investor is considerably reduced. This may appear
unacceptable to the superficial viewer. But this reduction is in fact the price we have to offer to
persuade the foreign company to invest in our country and contribute to our economic development.
The benefit to us may not be immediately available in instant revenues but it will be realized later,
and in greater measure, in terms of a more stable and robust economy.
BIDIN, J., concurring:
I agree with the opinion of my esteemed brother, Mr. Justice Florentino P. Feliciano. However, I wish
to add some observations of my own, since I happen to be the ponente in Commissioner of Internal
Revenue v. Wander Philippines, Inc. (160 SCRA 573 [1988]), a case which reached a conclusion
that is diametrically opposite to that sought to be reached in the instant Motion for Reconsideration.
1. In page 5 of his dissenting opinion, Mr. Justice Edgardo L. Paras argues that the failure of
petitioner Commissioner of Internal Revenue to raise before the Court of Tax Appeals the issue of
who should be the real party in interest in claiming a refund cannot prejudice the government, as
such failure is merely a procedural defect; and that moreover, the government can never be in
estoppel, especially in matters involving taxes. In a word, the dissenting opinion insists that errors of
its agents should not jeopardize the government's position.
The above rule should not be taken absolutely and literally; if it were, the government would never
lose any litigation which is clearly not true. The issue involved here is not merely one of procedure; it
is also one of fairness: whether the government should be subject to the same stringent conditions
applicable to an ordinary litigant. As the Court had declared in Wander:
. . . To allow a litigant to assume a different posture when he comes before the court and
challenge the position he had accepted at the administrative level, would be to sanction a
procedure whereby the
Court — which is supposed to review administrative determinations — would not review, but
determine and decide for the first time, a question not raised at the administrative forum. . . .
(160 SCRA at 566-577)
Had petitioner been forthright earlier and required from private respondent proof of authority from its
parent corporation, Procter and Gamble USA, to prosecute the claim for refund, private respondent
would doubtless have been able to show proof of such authority. By any account, it would be rank
injustice not at this stage to require petitioner to submit such proof.
2. In page 8 of his dissenting opinion, Paras, J., stressed that private respondent had failed: (1) to
show the actual amount credited by the US government against the income tax due from P & G USA
on the dividends received from private respondent; (2) to present the 1975 income tax return of P &
G USA when the dividends were received; and (3) to submit any duly authenticated document
showing that the US government credited the 20% tax deemed paid in the Philippines.
I agree with the main opinion of my colleague, Feliciano J., specifically in page 23 et seq. thereof,
which, as I understand it, explains that the US tax authorities are unable to determine the amount of
the "deemed paid" credit to be given P & G USA so long as the numerator of the fraction, i.e.,
dividends actually remitted by P & G-Phil. to P & G USA, is still unknown. Stated in other words, 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 private respondent 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 (what Feliciano, J., termed) "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.
3. Page 8 of the dissenting opinion of Paras, J., further declares that tax refunds, being in the nature
of tax exemptions, are to be construed strictissimi juris against the person or entity claiming the
exemption; and that refunds cannot be permitted to exist upon "vague implications."
Notwithstanding the foregoing canon of construction, the fundamental rule is still that a judge must
ascertain and give effect to the legislative intent embodied in a particular provision of law. If a statute
(including a tax statute reducing a certain tax rate) is clear, plain and free from ambiguity, it must be
given its ordinary meaning and applied without interpretation. In the instant case, the dissenting
opinion of Paras, J., itself concedes that the basic purpose of Pres. Decree No. 369, when it was
promulgated in 1975 to amend Section 24(b), [11 of the National Internal Revenue Code, was "to
decrease the tax liability" of the foreign capital investor and thereby to promote more inward foreign
investment. The same dissenting opinion hastens to add, however, that the granting of a reduced
dividend tax rate "is premised on reciprocity."
4. 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. 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. 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.
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. A requirement of reciprocity, i.e., a requirement that the U.S. grant a similar reduction of
U.S. dividend taxes on remittances by the U.S. subsidiaries of Philippine corporations, would
assume a desire on the part of the U.S. and of the Philippines to attract the flow of Philippine
capital into the U.S.. But the Philippines precisely is a capital importing, and not a capital exporting
country. If the Philippines had surplus capital to export, it would not need to import foreign capital
into the Philippines. 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.
5. Finally, in page 15 of his dissenting opinion, Paras, J., brings up the fact that:
Wander cited as authority a BIR ruling dated May 19, 1977, which requires a remittance tax
of only 15%. The mere fact that in this Procter and Gamble case, the BIR desires to charge
35% indicates that the BIR ruling cited in Wander has been obviously discarded today by the
BIR. Clearly, there has been a change of mind on the part of the BIR.
As pointed out by Feliciano, J., in his main opinion, even while the instant case was pending before
the Court of Tax Appeals and this Court, the administrative rulings issued by the BIR from 1976 until
as late as 1987, recognized the "deemed paid" credit referred to in Section 902 of the U.S. Tax
Code. To date, no contrary ruling has been issued by the BIR.
For all the foregoing reasons, private respondent's Motion for Reconsideration should be granted
and I vote accordingly.
PARAS, J., dissenting:
I dissent.
The decision of the Second Division of this Court in the case of "Commissioner of Internal Revenue
vs. Procter & Gamble Philippine Manufacturing Corporation, et al.," G.R. No. 66838, promulgated on
April 15, 1988 is sought to be reviewed in the Motion for Reconsideration filed by private respondent.
Procter & Gamble Philippines (PMC-Phils., for brevity) assails the Court's findings that:
(a) private respondent (PMC-Phils.) is not a proper party to claim the refund/tax credit;
(b) there is nothing in Section 902 or other provision of the US Tax Code that allows a credit
against the U.S. tax due from PMC-U.S.A. of taxes deemed to have been paid in the Phils.
equivalent to 20% which represents the difference between the regular tax of 35% on
corporations and the tax of 15% on dividends;
(c) private respondent failed to meet certain conditions necessary in order that the dividends
received by the non-resident parent company in the U.S. may be subject to the preferential
15% tax instead of 35%. (pp. 200-201, Motion for Reconsideration)
Private respondent's position is based principally on the decision rendered by the Third Division of
this Court in the case of "Commissioner of Internal Revenue vs. Wander Philippines, Inc. and the
Court of Tax Appeals," G.R. No. 68375, promulgated likewise on April 15, 1988 which bears the
same issues as in the case at bar, but held an apparent contrary view. Private respondent advances
the theory that since the Wander decision had already become final and executory it should be a
precedent in deciding similar issues as in this case at hand.
Yet, it must be noted that the Wander decision had become final and executory only by reason of the
failure of the petitioner therein to file its motion for reconsideration in due time. Petitioner received
the notice of judgment on April 22, 1988 but filed a Motion for Reconsideration only on June 6, 1988,
or after the decision had already become final and executory on May 9, 1988. Considering that entry
of final judgment had already been made on May 9, 1988, the Third Division resolved to note without
action the said Motion. Apparently therefore, the merits of the motion for reconsideration were not
passed upon by the Court.
The 1987 Constitution provides that a doctrine or principle of law previously laid down either en
banc or in Division may be modified or reversed by the court en banc. The case is now before this
Court en banc and the decision that will be handed down will put to rest the present controversy.
It is true that private respondent, as withholding agent, is obliged by law to withhold and to pay over
to the Philippine government the tax on the income of the taxpayer, PMC-U.S.A. (parent company).
However, such fact does not necessarily connote that private respondent is the real party in interest
to claim reimbursement of the tax alleged to have been overpaid. Payment of tax is an obligation
physically passed off by law on the withholding agent, if any, but the act of claiming tax refund is a
right that, in a strict sense, belongs to the taxpayer which is private respondent's parent company.
The role or function of PMC-Phils., as the remitter or payor of the dividend income, is merely to
insure the collection of the dividend income taxes due to the Philippine government from the
taxpayer, "PMC-U.S.A.," the non-resident foreign corporation not engaged in trade or business in the
Philippines, as "PMC-U.S.A." is subject to tax equivalent to thirty five percent (35%) of the gross
income received from "PMC-Phils." in the Philippines "as . . . dividends . . ." (Sec. 24 [b], Phil. Tax
Code). Being a mere withholding agent of the government and the real party in interest being the
parent company in the United States, private respondent cannot claim refund of the alleged overpaid
taxes. Such right properly belongs to PMC-U.S.A. It is therefore clear that as held by the Supreme
Court in a series of cases, the action in the Court of Tax Appeals as well as in this Court should have
been brought in the name of the parent company as petitioner and not in the name of the withholding
agent. This is because the action should be brought under the name of the real party in interest.
(See Salonga v. Warner Barnes, & Co., Ltd., 88 Phil. 125; Sutherland, Code Pleading, Practice, &
Forms, p. 11; Ngo The Hua v. Chung Kiat Hua, L-17091, Sept. 30, 1963, 9 SCRA 113; Gabutas v.
Castellanes, L-17323, June 23, 1965, 14 SCRA 376; Rep. v. PNB, L-16485, January 30, 1945).
Rule 3, Sec. 2 of the Rules of Court provides:
Sec. 2. Parties in interest. — Every action must be prosecuted and defended in the name of
the real party in interest. All persons having an interest in the subject of the action and in
obtaining the relief demanded shall be joined as plaintiffs. All persons who claim an interest
in the controversy or the subject thereof adverse to the plaintiff, or who are necessary to a
complete determination or settlement of the questions involved therein shall be joined as
defendants.
It is true that under the Internal Revenue Code the withholding agent may be sued by itself if no
remittance tax is paid, or if what was paid is less than what is due. From this, Justice Feliciano
claims that in case of an overpayment (or claim for refund) the agent must be given the right to sue
the Commissioner by itself (that is, the agent here is also a real party in interest). He further claims
that to deny this right would be unfair. This is not so. While payment of the tax due is an
OBLIGATION of the agent the obtaining of a refund is a RIGHT. While every obligation has a
corresponding right (and vice-versa), the obligation to pay the complete tax has the corresponding
right of the government to demand the deficiency; and the right of the agent to demand a refund
corresponds to the government's duty to refund. Certainly, the obligation of the withholding agent to
pay in full does not correspond to its right to claim for the refund. It is evident therefore that the real
party in interest in this claim for reimbursement is the principal (the mother corporation) and NOT the
agent.
This suit therefore for refund must be DISMSSED.

In like manner, petitioner Commissioner of Internal Revenue's failure to raise before the Court of Tax
Appeals the issue relating to the real party in interest to claim the refund cannot, and should not,
prejudice the government. Such is merely a procedural defect. It is axiomatic that the government
can never be in estoppel, particularly in matters involving taxes. Thus, for example, the payment by
the tax-payer of income taxes, pursuant to a BIR assessment does not preclude the government
from making further assessments. The errors or omissions of certain administrative officers should
never be allowed to jeopardize the government's financial position. (See: Phil. Long Distance Tel.
Co. v. Coll. of Internal Revenue, 90 Phil. 674; Lewin v. Galang, L-15253, Oct. 31, 1960; Coll. of
Internal Revenue v. Ellen Wood McGrath, L-12710, L-12721, Feb. 28, 1961; Perez v. Perez, L-
14874, Sept, 30, 1960; Republic v. Caballero, 79 SCRA 179; Favis v. Municipality of Sabongan, L-
26522, Feb. 27, 1963).
As regards the issue of whether PMC-U.S.A. is entitled under the U.S. Tax Code to a United States
Foreign Tax Credit equivalent to at least 20 percentage paid portion spared or waived as otherwise
deemed waived by the government, We reiterate our ruling that while apparently, a tax-credit is
given, there is actually nothing in Section 902 of the U.S. Internal Revenue Code, as amended by
Public Law-87-834 that would justify tax return of the disputed 15% to the private respondent. This is
because the amount of tax credit purportedly being allowed is not fixed or ascertained, hence we do
not know whether or not the tax credit contemplated is within the limits set forth in the law. While the
mathematical computations in Justice Feliciano's separate opinion appear to be correct, the
computations suffer from a basic defect, that is we have no way of knowing or checking the figure
used as premises. In view of the ambiguity of Sec. 902 itself, we can conclude that no real tax credit
was really intended. In the interpretation of tax statutes, it is axiomatic that as between the interest of
multinational corporations and the interest of our own government, it would be far better, in the
absence of definitive guidelines, to favor the national interest. As correctly pointed out by the
Solicitor General:
. . . the tax-sparing credit operates on dummy, fictional or phantom taxes, being considered
as if paid by the foreign taxing authority, the host country.
In the context of the case at bar, therefore, the thirty five (35%) percent on the dividend
income of PMC-U.S.A. would be reduced to fifteen (15%) percent if & only if reciprocally
PMC-U.S.A's home country, the United States, not only would allow against PMC-U.SA.'s
U.S. income tax liability a foreign tax credit for the fifteen (15%) percentage-point portion of
the thirty five (35%) percent Phil. dividend tax actually paid or accrued but also would allow a
foreign tax "sparing" credit for the twenty (20%)' percentage-point portion spared, waived,
forgiven or otherwise deemed as if paid by the Phil. govt. by virtue of the "tax credit sparing"
proviso of Sec. 24(b), Phil. Tax Code." (Reply Brief, pp. 23-24; Rollo, pp. 239-240).
Evidently, 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. Intemal
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.
Beyond, that, the private respondent 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.
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 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. (Asiatic Petroleum Co. v. Llanes, 49 Phil. 466; Northern Phil Tobacco
Corp. v. Mun. of Agoo, La Union, 31 SCRA 304; Rogan v. Commissioner, 30 SCRA 968; Asturias
Sugar Central, Inc. v. Commissioner of Customs, 29 SCRA 617; Davao Light and Power Co. Inc. v.
Commissioner of Custom, 44 SCRA 122). Thus, when tax exemption is claimed, it must be shown
indubitably to exist, for every presumption is against it, and a well founded doubt is fatal to the claim
(Farrington v. Tennessee & Country Shelby, 95 U.S. 679, 686; Manila Electric Co. v. Vera, L-29987,
Oct. 22, 1975; Manila Electric Co. v. Tabios, L-23847, Oct. 22, 1975, 67 SCRA 451).
It will be remembered that 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 for large projects." And its ultimate purpose is to
decrease the tax liability of the corporation concerned. But this granting of a preferential right is
premised on reciprocity, without which there is clearly a derogation of our country's financial
sovereignty. No such reciprocity has been proved, nor does it actually exist. At this juncture, it would
be useful to bear in mind the following observations:
The continuing and ever-increasing transnational movement of goods and services, the emergence
of multinational corporations and the rise in foreign investments has brought about tremendous
pressures on the tax system to strengthen its competence and capability to deal effectively with
issues arising from the foregoing phenomena.
International taxation refers to the operationalization of the tax system on an international level. As it
is, international taxation deals with the tax treatment of goods and services transferred on a global
basis, multinational corporations and foreign investments.
Since the guiding philosophy behind international trade is free flow of goods and services, it goes
without saying that the principal objective of international taxation is to see through this ideal by way
of feasible taxation arrangements which recognize each country's sovereignty in the matter of
taxation, the need for revenue and the attainment of certain policy objectives.
The institution of feasible taxation arrangements, however, is hard to come by. To begin with,
international tax subjects are obviously more complicated than their domestic counter-parts. Hence,
the devise of taxation arrangements to deal with such complications requires a welter of information
and data build-up which generally are not readily obtainable and available. Also, caution must be
exercised so that whatever taxation arrangements are set up, the same do not get in the way of free
flow of goods and services, exchange of technology, movement of capital and investment initiatives.
A cardinal principle adhered to in international taxation is the avoidance of double taxation. The

phenomenon of double taxation (i.e., taxing an item more than once) arises because of global
movement of goods and services. Double taxation also occurs because of overlaps in tax
jurisdictions resulting in the taxation of taxable items by the country of source or location (source
or situs rule) and the taxation of the same items by the country of residence or nationality of the
taxpayer (domiciliary or nationality principle).
An item may, therefore, be taxed in full in the country of source because it originated there, and in
another country because the recipient is a resident or citizen of that country. If the taxes in both
countries are substantial and no tax relief is offered, the resulting double taxation would serve as a
discouragement to the activity that gives rise to the taxable item.
As a way out of double taxation, countries enter into tax treaties. A tax treaty is a bilateral 1
convention (but may be made multilateral) entered into between sovereign states for purposes of
eliminating double taxation on income and capital, preventing fiscal evasion, promoting mutual trade
and investment, and according fair and equitable tax treatment to foreign residents or nationals. 2
A more general way of mitigating the impact of double taxation is to recognize the foreign tax either as a tax credit or an item of deduction.
Whether the recipient resorts to tax credit or deduction is dependent on the tax advantage or savings that would be derived therefrom.
A principal defect of the tax credit system is when low tax rates or special tax concessions are granted in a country for the obvious reason of encouraging foreign investments.
For instance, if the usual tax rate is 35 percent but a concession rate accrues to the country of the investor rather than to the investor himself To obviate this, a tax sparing
provision may be stipulated. With tax sparing, taxes exempted or reduced are considered as having been fully paid.
To illustrate:
"X" Foreign Corporation income 100

Tax rate (35%) 35
RP income 100
Tax rate (general, 35%
concession rate, 15%) 15
1. "X" Foreign Corp. Tax Liability without Tax Sparing

RP income 100
Total Income 200
"X" tax payable 70
Less: RP tax 15
Net "X" tax payable 55
2. "X" Foreign Corp. Tax Liability with Tax Sparing

"X" Foreign Corp. income 100
RP income 100
Total income 200
"X" Foreign Corp. tax payable 70
Less: RP tax (35% of 100, the
difference of 20% between 35% and 15%,
deemed paid to RP)
Net "X" Foreign Corp.
tax payable 35
By way of resume, We may say that the Wander decision of the Third Division cannot, and should not result in the reversal of the Procter & Gamble decision for the following
reasons:
1) The Wander decision cannot serve as a precedent under the doctrine of stare decisis. It was promulgated on the same day the decision of the Second Division was
promulgated, and while Wander has attained finality this is simply because no motion for reconsideration thereof was filed within a reasonable period. Thus, said Motion for
Reconsideration was theoretically never taken into account by said Third Division.
2) Assuming that stare decisis can apply, We reiterate what a former noted jurist Mr. Justice Sabino Padilla aptly said: "More pregnant than anything else is that the court shall
be right." We hereby cite settled doctrines from a treatise on Civil Law:
We adhere in our country to the doctrine of stare decisis (let it stand, et non quieta movere) for reasons of stability in the law. The doctrine, which is really
"adherence to precedents," states that once a case has been decided one way, then another case, involving exactly the same point at issue, should be decided
in the same manner.
Of course, when a case has been decided erroneously such an error must not be perpetuated by blind obedience to the doctrine of stare decisis. No matter how
sound a doctrine may be, and no matter how long it has been followed thru the years, still if found to be contrary to law, it must be abandoned. The principle
of stare decisis does not and should not apply when there is a conflict between the precedent and the law (Tan Chong v. Sec. of Labor, 79 Phil. 249).
While stability in the law is eminently to be desired, idolatrous reverence for precedent, simply, as precedent, no longer rules. More pregnant than anything else
is that the court shall be right (Phil. Trust Co. v. Mitchell, 59 Phil. 30).
3) Wander deals with tax relations between the Philippines and Switzerland, a country with which we have a pending tax treaty; our Procter & Gamble case deals with relations
between the Philippines and the United States, a country with which we had no tax treaty, at the time the taxes herein were collected.
4) Wander cited as authority a BIR Ruling dated May 19, 1977, which requires a remittance tax of only 15%. The mere fact that in this Procter and Gamble case the B.I.R.
desires to charge 35% indicates that the B.I.R. Ruling cited in Wander has been obviously discarded today by the B.I.R. Clearly, there has been a change of mind on the part
of the B.I.R.
5) Wander imposes a tax of 15% without stating whether or not reciprocity on the part of Switzerland exists. It is evident that without reciprocity the desired consequences of
the tax credit under P.D. No. 369 would be rendered unattainable.
6) In the instant case, the amount of the tax credit deductible and other pertinent financial data have not been presented, and therefore even were we inclined to grant the tax
credit claimed, we find ourselves unable to compute the proper amount thereof.
7) And finally, as stated at the very outset, Procter & Gamble Philippines or P.M.C. (Phils.) is not the proper party to bring up the case.
ACCORDINGLY, the decision of the Court of Tax Appeals should be REVERSED and the motion for reconsideration of our own decision should be DENIED.
Melencio-Herrera, Padilla, Regalado and Davide, Jr., JJ., concur.
# Separate Opinions
CRUZ, J., concurring:
I join Mr. Justice Feliciano in his excellent analysis of the difficult issues we are now asked to resolve.
As I understand it, 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. 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. 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 hability being offset wholly or substantially by the Us "deemed paid' tax credits.
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.
It is conceded that the law will "not trigger off an instant surge of revenue," as indeed the tax collectible by the Republic from the foreign investor is considerably reduced. This
may appear unacceptable to the superficial viewer. But this reduction is in fact the price we have to offer to persuade the foreign company to invest in our country and
contribute to our economic development. The benefit to us may not be immediately available in instant revenues but it will be realized later, and in greater measure, in terms of
a more stable and robust economy.
BIDIN, J., concurring:
I agree with the opinion of my esteemed brother, Mr. Justice Florentino P. Feliciano. However, I wish to add some observations of my own, since I happen to be
the ponente in Commissioner of Internal Revenue v. Wander Philippines, Inc. (160 SCRA 573 [1988]), a case which reached a conclusion that is diametrically opposite to that
sought to be reached in the instant Motion for Reconsideration.
1. In page 5 of his dissenting opinion, Mr. Justice Edgardo L. Paras argues that the failure of petitioner Commissioner of Internal Revenue to raise before the Court of Tax
Appeals the issue of who should be the real party in interest in claiming a refund cannot prejudice the government, as such failure is merely a procedural defect; and that
moreover, the government can never in estoppel, especially in matters involving taxes. In a word, the dissenting opinion insists that errors of its agents should not jeopardize
the government's position.
The above rule should not be taken absolutely and literally; if it were, the government would never lose any litigation which is clearly not true. The issue involved here is not
merely one of procedure; it is also one of fairness: whether the government should be subject to the same stringent conditions applicable to an ordinary litigant. As the Court
had declared in Wander:
. . . To allow a litigant to assume a different posture when he comes before the court and challenge the position he had accepted at the administrative level,
would be to sanction a procedure whereby the Court — which is supposed to review administrative determinations — would not review, but determine and decide
for the first time, a question not raised at the administrative forum. ... (160 SCRA at 566-577)
Had petitioner been forthright earlier and required from private respondent proof of authority from its parent corporation, Procter and Gamble USA, to prosecute the claim for
refund, private respondent would doubtless have been able to show proof of such authority. By any account, it would be rank injustice not at this stage to require petitioner to
submit such proof.
2. In page 8 of his dissenting opinion, Paras, J., stressed that private respondent had failed: (1) to show the actual amount credited by the US government against the income
tax due from P & G USA on the dividends received from private respondent; (2) to present the 1975 income tax return of P & G USA when the dividends were received; and
(3) to submit any duly authenticated document showing that the US government credited the 20% tax deemed paid in the Philippines.
I agree with the main opinion of my colleagues, Feliciano J., specifically in page 23 et seq. thereof, which, as I understand it, explains that the US tax authorities are unable to
determine the amount of the "deemed paid" credit to be given P & G USA so long as the numerator of the fraction, i.e., dividends actually remitted by P & G-Phil. to P & G
USA, is still unknown. Stated in other words, 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 private respondent 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 (what Feliciano, J., termed) "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.
3. Page 8 of the dissenting opinion of Paras, J., further declares that tax refunds, being in the nature of tax exemptions, are to be construed strictissimi juris against the person
or entity claiming the exemption; and that refunds cannot be permitted to exist upon "vague implications."
Notwithstanding the foregoing canon of construction, the fundamental rule is still that a judge must ascertain and give effect to the legislative intent embodied in a particular
provision of law. If a statute (including a tax statute reducing a certain tax rate) is clear, plain and free from ambiguity, it must be given its ordinary meaning and applied without
interpretation. In the instant case, the dissenting opinion of Paras, J., itself concedes that the basic purpose of Pres. Decree No. 369, when it was promulgated in 1975 to
amend Section 24(b), [11 of the National Internal Revenue Code, was "to decrease the tax liability" of the foreign capital investor and thereby to promote more inward foreign
investment. The same dissenting opinion hastens to add, however, that the granting of a reduced dividend tax rate "is premised on reciprocity."
4. 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. 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. 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.
There is no statutory requirement of reciprocity imposed as 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. A requirement of reciprocity, i.e., a requirement that the U.S. grant a similar reduction of U.S. dividend taxes on remittances by
the U.S. subsidiary of Philippine corporations, would assume a desire on the part of the U.S. and of the Philippines to attract the flow of Philippine capital into the U.S.. But the
Philippines precisely is a capital importing, and not a capital exporting country. If the Philippines had surplus capital to export, it would not need to import foreign capital into
the Philippines. 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.
5. Finally, in page 15 of his dissenting opinion, Paras, J., brings up the fact that:
Wander cited as authority a BIR ruling dated May 19, 1977, which requires a remittance tax of only 15%. The mere fact that in this Procter and Gamble case, the
BIR desires to charge 35% indicates that the BIR ruling cited in Wander has been obviously discarded today by the BIR. Clearly, there has been a change of
mind on the part of the BIR.
As pointed out by Feliciano, J., in his main opinion, even while the instant case was pending before the Court of Tax Appeals and this Court, the administrative rulings issued
by the BIR from 1976 until as late as 1987, recognized the "deemed paid" credit referred to in Section 902 of the U.S. Tax Code. To date, no contrary ruling has been issued
by the BIR.
For all the foregoing reasons, private respondent's Motion for Reconsideration should be granted and I vote accordingly.
I dissent.
The decision of the Second Division of this Court in the case of "Commissioner of Internal Revenue vs. Procter & Gamble Philippine Manufacturing Corporation, et al.," G.R.
No. 66838, promulgated on April 15,1988 is sought to be reviewed in the Motion for Reconsideration filed by private respondent. Procter & Gamble Philippines (PMC-Phils., for
brevity) assails the Court's findings that:
(a) private respondent (PMC-Phils.) is not a proper party to claim the refund/tax aredit;
(b) there is nothing in Section 902 or other provision of the US Tax Code that allows a credit against the U.S. tax due from PMC-U.S.A. of taxes deemed to have
been paid in the Phils. equivalent to 20% which represents the difference between the regular tax of 35% on corporations and the tax of 15% on dividends;
(c) private respondent failed to meet certain conditions necessary in order that the dividends received by the non-resident parent company in the U.S. may be
subject to the preferential 15% tax instead of 35%. (pp, 200-201, Motion for Reconsideration)
Private respondent's position is based principally on the decision rendered by the Third Division of this Court in the case of "Commissioner of Internal Revenue vs. Wander
Philippines, Inc. and the Court of Tax Appeals," G.R. No. 68375, promulgated likewise on April 15, 1988 which bears the same issues as in the case at bar, but held an
apparent contrary view. Private respondent advances the theory that since the Wander decision had already become final and executory it should be a precedent in deciding
similar issues as in this case at hand.
Yet, it must be noted that the Wander decision had become final and executory only by reason of the failure of the petitioner therein to file its motion for reconsideration in due
time. Petitioner received the notice of judgment on April 22, 1988 but filed a Motion for Reconsideration only on June 6, 1988, or after the decision had already become final
and executory on May 9, 1988. Considering that entry of final judgment had already been made on May 9, 1988, the Third Division resolved to note without action the said
Motion. Apparently therefore, the merits of the motion for reconsideration were not passed upon by the Court.
The 1987 Constitution provides that a doctrine or principle of law previously laid down either en banc or in Division may be modified or reversed by the court en banc. The
case is now before this Court en banc and the decision that will be handed down will put to rest the present controversy.
It is true that private respondent, as withholding agent, is obliged by law to withhold and to pay over to the Philippine government the tax on the income of the taxpayer, PMC-
U.S.A. (parent company). However, such fact does not necessarily connote that private respondent is the real party in interest to claim reimbursement of the tax alleged to
have been overpaid. Payment of tax is an obligation physically passed off by law on the withholding agent, if any, but the act of claiming tax refund is a right that, in a strict
sense, belongs to the taxpayer which is private respondent's parent company. The role or function of PMC-Phils., as the remitter or payor of the dividend income, is merely to
insure the collection of the dividend income taxes due to the Philippine government from the taxpayer, "PMC-U.S.A.," the non-resident foreign corporation not engaged in trade
or business in the Philippines, as "PMC-U.S.A." is subject to tax equivalent to thirty five percent (35%) of the gross income received from "PMC-Phils." in the Philippines "as ...
dividends ..."(Sec. 24[b],Phil. Tax Code). Being a mere withholding agent of the government and the real party in interest being the parent company in the United States,
private respondent cannot claim refund of the alleged overpaid taxes. Such right properly belongs to PMC-U.S.A. It is therefore clear that as held by the Supreme Court in a
series of cases, the action in the Court of Tax Appeals as well as in this Court should have been brought in the name of the parent company as petitioner and not in the name
of the withholding agent. This is because the action should be brought under the name of the real party in interest. (See Salonga v. Warner Barnes, & Co., Ltd., 88 Phil. 125;
Sutherland, Code Pleading, Practice, & Forms, p. 11; Ngo The Hua v. Chung Kiat Hua, L-17091, Sept. 30, 1963, 9 SCRA 113; Gabutas v. Castellanes, L-17323, June 23,
1965, 14 SCRA 376; Rep. v. PNB, I, 16485, January 30, 1945).
Rule 3, Sec. 2 of the Rules of Court provides:
Sec. 2. Parties in interest. — Every action must be prosecuted and defended in the name of the real party in interest. All persons having an interest in the subject
of the action and in obtaining the relief demanded shall be joined as plaintiffs. All persons who claim an interest in the controversy or the subject thereof adverse
to the plaintiff, or who are necessary to a complete determination or settlement of the questions involved therein shall be joined as defendants.
It is true that under the Internal Revenue Code the withholding agent may be sued by itself if no remittance tax is paid, or if what was paid is less than what is due. From this,
Justice Feliciano claims that in case of an overpayment (or claim for refund) the agent must be given the right to sue the Commissioner by itself (that is, the agent here is also
a real party in interest). He further claims that to deny this right would be unfair. This is not so. While payment of the tax due is an OBLIGATION of the agent, the obtaining of a
refund la a RIGHT. While every obligation has a corresponding right (and vice-versa), the obligation to pay the complete tax has the corresponding right of the government to
demand the deficiency; and the right of the agent to demand a refund corresponds to the government's duty to refund. Certainly, the obligation of the withholding agent to pay
in full does not correspond to its right to claim for the refund. It is evident therefore that the real party in interest in this claim for reimbursement is the principal (the mother
corporation) and NOT the agent.
This suit therefore for refund must be DISMSSED.

In like manner, petitioner Commissioner of Internal Revenue's failure to raise before the Court of Tax Appeals the issue relating to the real party in interest to claim the refund
cannot, and should not, prejudice the government. Such is merely a procedural defect. It is axiomatic that the government can never be in estoppel, particularly in matters
involving taxes. Thus, for example, the payment by the tax-payer of income taxes, pursuant to a BIR assessment does not preclude the government from
making further assessments. The errors or omissions of certain administrative officers should never be allowed to jeopardize the government's financial position. (See: Phil.
Long Distance Tel. Co. v. Con. of Internal Revenue, 9(, Phil. 674; Lewin v. Galang, L-15253, Oct. 31, 1960; Coll. of Internal Revenue v. Ellen Wood McGrath, L-12710, L-
12721, Feb. 28,1961; Perez v. Perez, L-14874, Sept. 30,1960; Republic v. Caballero, 79 SCRA 179; Favis v. Municipality of Sabongan, L-26522, Feb. 27,1963).
As regards the issue of whether PMC-U.S.A. is entitled under the U.S. Tax Code to a United States Foreign Tax Credit equivalent to at least 20 percentage paid portion
spared or waived as otherwise deemed waived by the government, We reiterate our ruling that while apparently, a tax-credit is given, there is actually nothing in Section 902
of the U.S. Internal Revenue Code, as amended by Public Law-87-834 that would justify tax return of the disputed 15% to the private respondent. This is because the amount
of tax credit purportedly being allowed is not fixed or ascertained, hence we do not know whether or not the tax credit contemplated is within the limits set forth in the law.
While the mathematical computations in Justice Feliciano's separate opinion appear to be correct, the computations suffer from a basic defect, that is we have no way of
knowing or checking the figure used as premises. In view of the ambiguity of Sec. 902 itself, we can conclude that no real tax credit was really intended. In the interpretation of
tax statutes, it is axiomatic that as between the interest of multinational corporations and the interest of our own government, it would be far better, in the absence of definitive
guidelines, to favor the national interest. As correctly pointed out by the Solicitor General:
. . . the tax-sparing credit operates on dummy, fictional or phantom taxes, being considered as if paid by the foreign taxing authority, the host country.
In the context of the case at bar, therefore, the thirty five (35%) percent on the dividend income of PMC-U.S.A. would be reduced to fifteen (15%) percent if &
only if reciprocally PMC-U.S.A's home country, the United States, not only would allow against PMC-U.SA.'s U.S. income tax liability a foreign tax credit for the
fifteen (15%) percentage-point portion of the thirty five (35%) percent Phil. dividend tax actually paid or accrued but also would allow a foreign tax 'sparing' credit
for the twenty (20%)' percentage-point portion spared, waived, forgiven or otherwise deemed as if paid by the Phil. govt. by virtue of . he "tax credit sparing"
proviso of Sec. 24(b), Phil. Tax Code." (Reply Brief, pp. 23-24; Rollo, pp. 239-240).
Evidently, 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.
Beyond, that, the private respondent 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.
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 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 (Asiatic Petroleum Co. v. Llanes. 49 Phil. 466; Northern Phil Tobacco Corp. v. Mun. of Agoo, La
Union, 31 SCRA 304; Rogan v. Commissioner, 30 SCRA 968; Asturias Sugar Central, Inc. v. Commissioner of Customs, 29 SCRA 617; Davao Light and Power Co. Inc. v.
Commissioner of Custom, 44 SCRA 122' Thus, when tax exemption is claimed. it must be shown indubitably to exist, for every presumption is against it, and a well founded
doubt is fatal to the claim (Farrington v. Tennessee & Country Shelby, 95 U.S. 679, 686; Manila Electric Co. v. Vera. L-29987. Oct. 22. 1975: Manila Electric Co. v. Vera, L-
29987, Oct. 22, 1975; Manila Electric Co. v. Tabios, L-23847, Oct. 22, 1975, 67 SCRA 451).
It will be remembered that the tax credit appertaining to remittances abroad of dividend earned here in the Philippines was amplified in Presidential Decree 4 No. 369
promulgated in 1975, the purpose of which was to "encourage more capital investment for large projects." And its ultimate purpose it to decrease the tax liability of the
corporation concerned. But this granting of a preferential right is premised on reciprocity, without which there is clearly a derogation of our country's financial sovereignty. No
such reciprocity has been proved, nor does it actually exist. At this juncture, it would be useful to bear in mind the following observations:
The continuing and ever-increasing transnational movement of goods and services, the emergence of multinational corporations and the rise in foreign investments has
brought about tremendous pressures on the tax system to strengthen its competence and capability to deal effectively with issues arising from the foregoing phenomena.
International taxation refers to the operationalization of the tax system on an international level. As it is, international taxation deals with the tax treatment of goods and
services transferred on a global basis, multinational corporations and foreign investments.
Since the guiding philosophy behind international trade is free flow of goods and services, it goes without saying that the principal objective of international taxation is to see
through this ideal by way of feasible taxation arrangements which recognize each country's sovereignty in the matter of taxation, the need for revenue and the attainment of
certain policy objectives.
The institution of feasible taxation arrangements, however, is hard to come by. To begin with, international tax subjects are obviously more complicated than their domestic
counter-parts. Hence, the devise of taxation arrangements to deal with such complications requires a welter of information and data buildup which generally are not readily
obtainable and available. Also, caution must be exercised so that whatever taxation arrangements are set up, the same do not get in the way of free flow of goods and
services, exchange of technology, movement of capital and investment initiatives.
A cardinal principle adhered to in international taxation is the avoidance of double taxation. The phenomenon of double taxation (i.e., taxing an item more than once) arises
because of global movement of goods and services. Double taxation also occurs because of overlaps in tax jurisdictions resulting in the taxation of taxable items by the
country of source or location (source or situs rule) and the taxation of the same items by the country of residence or nationality of the taxpayer
(domiciliary or nationality principle).
An item may, therefore, be taxed in full in the country of source because it originated there, and in another country because the recipient is a resident or citizen of that country.
If the taxes in both countries are substantial and no tax relief is offered, the resulting double taxation would serve as a discouragement to the activity that gives rise to the
taxable item.
is a bilateral convention (but may be made multilateral) entered into

As a way out of double taxation, countries enter into tax treaties. A tax treaty 1
between sovereign states for purposes of eliminating double taxation on income and capital,
preventing fiscal evasion, promoting mutual trade and investment, and according fair and equitable
tax treatment to foreign residents or nationals. 2
A more general way of mitigating the impact of double taxation is to recognize the foreign tax either as a tax credit or an item of deduction.
Whether the recipient resorts to tax credit or deduction is dependent on the tax advantage or savings that would be derived therefrom.
A principal defect of the tax credit system is when low tax rates or special tax concessions are granted in a country for the obvious reason of encouraging foreign investments.
For instance, if the usual tax rate is 35 percent but a concession rate accrues to the country of the investor rather than to the investor himself To obviate this, a tax sparing
provision may be stipulated. With tax sparing, taxes exempted or reduced are considered as having been frilly paid.
To illustrate:

Tax rate (35%) 35
RP income 100
Tax rate (general, 35%
concession rate, 15%) 15
1. "X" Foreign Corp. Tax Liability without Tax Sparing

RP income 100
Total Income 200
"X" tax payable 70
Less: RP tax 15
Net "X" tax payable 55
2. "X" Foreign Corp. Tax Liability with Tax Sparing
"X" Foreign Corp. income 100
RP income 100
Total income 200
"X" Foreign Corp. tax payable 70
Less: RP tax (35% of 100, the
difference of 20% between 35% and 15%,
deemed paid to RP)
Net "X" Foreign Corp.
tax payable 35
By way of resume, We may say that the Wander decision of the Third Division cannot, and should not result in the reversal of the Procter & Gamble decision for the following
reasons:
1) The Wander decision cannot serve as a precedent under the doctrine of stare decisis. It was promulgated on the same day the decision of the Second Division was
promulgated, and while Wander has attained finality this is simply because no motion for reconsideration thereof was filed within a reasonable period. Thus, said Motion for
Reconsideration was theoretically never taken into account by said Third Division.
2) Assuming that stare decisis can apply, We reiterate what a former noted jurist Mr. Justice Sabino Padilla aptly said: "More pregnant than anything else is that the court
shall be right." We hereby cite settled doctrines from a treatise on Civil Law:
We adhere in our country to the doctrine of stare decisis (let it stand, et non quieta movere) for reasons of stability in the law. The doctrine, which is really
'adherence to precedents,' states that once a case has been decided one way, then another case, involving exactly the same point at issue, should be decided in
the same manner.
Of course, when a case has been decided erroneously such an error must not be perpetuated by blind obedience to the doctrine of stare decisis. No matter how
sound a doctrine may be, and no matter how long it has been followed thru the years, still if found to be contrary to law, it must be abandoned. The principle
of stare decisis does not and should not apply when there is a conflict between the precedent and the law (Tan Chong v. Sec. of Labor, 79 Phil. 249).
While stability in the law is eminently to be desired, idolatrous reverence for precedent, simply, as precedent, no longer rules. More pregnant than anything else
is that the court shall be right (Phil. Trust Co. v. Mitchell, 69 Phil. 30).
3) Wander deals with tax relations between the Philippines and Switzerland, a country with which we have a pending tax treaty; our Procter & Gamble case deals with
relations between the Philippines and the United States, a country with which we had no tax treaty, at the time the taxes herein were collected.
4) Wander cited as authority a BIR Ruling dated May 19, 1977, which requires a remittance tax of only 15%. The mere fact that in this Procter and Gamble case the B.I.R.
desires; to charge 35% indicates that the B.I.R. Ruling cited in Wander has been obviously discarded today by the B.I.R. Clearly, there has been a change of mind on the part
of the B.I.R.
5) Wander imposes a tax of 15% without stating whether or not reciprocity on the part of Switzerland exists. It is evident that without reciprocity the desired consequences of
the tax credit under P.D. No. 369 would be rendered unattainable.
6) In the instant case, the amount of the tax credit deductible and other pertinent financial data have not been presented, and therefore even were we inclined to grant the tax
credit claimed, we find ourselves unable to compute the proper amount thereof.
7) And finally, as stated at the very outset, Procter & Gamble Philippines or P.M.C. (Phils.) is not the proper party to bring up the case.
ACCORDINGLY, the decision of the Court of Tax Appeals should be REVERSED and the motion for reconsideration of our own decision should be DENIED.
Melencio-Herrera, Padilla, Regalado and Davide, Jr., JJ., concur.

Footnotes
1 We refer here (unless otherwise expressly indicated) to the provisions of the NIRC as they existed during the relevant taxable years and at the time the claim
for refund was made. We shall hereafter refer simply to the NIRC.
2 Section 20 (n), NIRC (as renumbered and re-arranged by Executive Order No. 273, 1 January 1988).
3 E.g., Section 51 (e), NIRC:
Sec. 51. Returns and payment of taxes withheld at source.—. . .
x x x x x x x x x
(e) Surcharge and interest for failure to deduct and withhold.—If the withholding agent, in violation of the provisions of the preceding section and implementing
regulations thereunder, fails to deduct and withhold the amount of tax required under said section and regulations, he shall be liable to pay in addition to the tax
required to be deducted and withheld, a surcharge of fifty per centum if the failure is due to willful neglect or with intent to defraud the Government, or twenty-
five per centum if the failure is not due to such causes, plus interest at the rate of fourteen per centum per annum from the time the tax is required to be withheld
until the date of assessment.
x x x x x x x x x
Section 251 (Id.):
Sec. 251. Failure of a withholding agent to collect and remit tax. — Any person required to collect, account for, and remit any tax imposed by this Code who
willfully fails to collect such tax, or account for and remit such tax, or willfully assists in any manner to evade any such tax or the payment thereof, shall, in
addition to other penalties provided for under this Chapter, be liable to a penalty equal to the total amount of the tax not collected, or not accounted for and
remitted. (Emphasis supplied)
4 Houston Street Corporation v. Commissioner of Internal Revenue, 84 F. 2nd. 821 (1936); Bank of America v. Anglim, 138 F. 2nd. 7 (1943).
5 15 SCRA 1 (1965).
6 15 SCRA at 4.
7 The following detailed examination of the tenor and import of Sections 901 and 902 of the US Tax Code is, regrettably, made necessary by the fact that the
original decision of the Second Division overlooked those Sections in their entirety. In the original opinion in 160 SCRA 560 (1988), immediately after Section
902, US Tax Code is quoted, the following appears: "To Our mind, there is nothing in the aforecited provision that would justify tax return of the disputed 15% to
the private respondent" (160 SCRA at 567). No further discussion of Section 902 was offered.
8 Sometimes also called a "derivative" tax credit or an "indirect" tax credit; Bittker and Ebb, United States Taxation of Foreign Income and Foreign Persons, 319
(2nd Ed., 1968).
9 American Chicle Co. v. U.S. 316 US 450, 86 L. ed. 1591 (1942); W.K. Buckley, Inc. v. C.I.R., 158 F. 2d. 158 (1946).
10 In his dissenting opinion, Paras, J. writes that "the amount of the tax credit purportedly being allowed is not fixed or ascertained, hence we do not know
whether or not the tax credit contemplated is within the limits set forth in the law" (Dissent, p. 6) Section 902 US Tax Code does not specify particular fixed
amounts or percentages as tax credits; what it does specify in Section 902(A) (2) and (C) (1) (B) is a proportion expressed in the fraction:
dividends actually remitted by P&G-Phil. to P&G-USA
amount of accumulated profits earned by P&G-Phil. in
excess of income tax
The actual or absolute amount of the tax credit allowed by Section 902 will obviously depend on the actual values of the numerator and the denominator used in
the fraction specified. The point is that the establishment of the proportion or fraction in Section 902 renders the tax credit there allowed determinate and
determinable.
** The denominator used by Com. Plana is the total pre-tax income of the Philippine subsidiary. Under Section 902 (c) (1) (B), US Tax Code, quoted earlier, the
denominator should be the amount of income of the subsidiary in excess of [Philippine] income tax.
11 The US tax authorities cannot determine the amount of the "deemed paid" credit to be given because the correct proportion cannot be determined: the
numerator of the fraction is unknown, until remittance of the dividends by P&G-Phil. is in fact effected. Please see computation, supra, p. 17.
12 BIR Ruling dated 21 March 1983, addressed to the Tax Division, Sycip, Gorres, Velayo and Company.
13 BIR Ruling dated 13 October 1981, addressed to Mr. A.R. Sarvino, Manager-Securities, Hongkong and Shanghai Banking Corporation.
14 BIR Ruling dated 31 January 1983, addressed to the Tax Division, Sycip, Gorres, Velayo and Company.
15 Text in 7 Philippine Treaty Series 523; signed on 1 October 1976 and effective on 16 October 1982 upon ratification by both Governments and exchange of
instruments of ratification.
16 Art. 23 (1), Tax Convention; the same treaty imposes a similar obligation upon the Philippines to give to the Philippine parent of a US subsidiary a tax credit
for the appropriate amount of US taxes paid by the US subsidiary. (Art. 23[2], id) Thus, Sec. 902 US Tax Code and Sec. 30(c) (8), NIRC, have been in effect
been converted into treaty commitments of the United States and the Philippines, respectively, in respect of US and Philippine corporations.
1 There are two types of credit systems. The first, is the underlying credit system which requires the other contracting state to credit not only the 15% Philippine
tax into company dividends but also the 35% Philippine tax on corporations in respect of profits out of which such dividends were paid. The Philippine corporation
is assured of sufficient creditable taxes to cover their total tax liabilities in their home country and in effect will no longer pay taxes therein. The other type
provides that if any tax relief is given by the Philippines pursuant to its own development program, the other contracting state will grant credit for the amount of
the Philippine tax which would have been payable but for such relief.
2 The Philippines, for one, has entered into a number of tax treaties in pursuit of the foregoing objectives. The extent of tax treaties entered into by the
Philippines may be seen from the following tabulation:
Table 1 — RP Tax Treaties
RP-West Germany Ratified on Jan. 1, 1985

RP-Malaysia Ratified on Jan. 1, 1985
RP-Nigeria, Concluded in September,
Netherlands and October and November, 1985,
Spain respectively (documents ready for
signature)
RP-Yugoslavia Negotiated in Belgrade,
Sept. 30-Oct. 4,1985
Pending Ratification Signed Ratified
RP-Italy Dec. 5, 1980 Nov. 28,
1983
RP-Brazil Sept. 29, 1983
RP-East Germany Feb. 17, 1984
RP-Korea Feb. 21, 1984
Pending Signature Negotiations conluded on
RP — Sweden May 11, 1978
(renegotiated)
RP — Romania Feb. 1, 1983
RP — Sri Lanka 30,477.00
RP — Norway Nov. 11, 1983
RP — India 30,771.00
RP — Nigeria Sept. 27, 1985
RP — Netherlands Oct. 8, 1985
RP — Spain Nov. 22, 1985.
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-68375 April 15, 1988

vs.
WANDER PHILIPPINES, INC. AND THE COURT OF TAX APPEALS, respondents.
The Solicitor General for petitioner.
Felicisimo R. Quiogue and Cirilo P. Noel for respondents.
BIDIN, J.:
This is a petition for review on certiorari of the January 19, 1984 Decision of the Court of Tax Appeals * in C.T.A. Case No.2884, entitled
Wander Philippines, Inc. vs. Commissioner of Internal Revenue, holding that Wander Philippines, Inc. is entitled to the preferential rate of
15% withholding tax on the dividends remitted to its foreign parent company, the Glaro S.A. Ltd. of Switzerland, a non-resident foreign
corporation.
Herein private respondent, Wander Philippines, Inc. (Wander, for short), is a domestic corporation
organized under Philippine laws. It is wholly-owned subsidiary of the Glaro S.A. Ltd. (Glaro for
short), a Swiss corporation not engaged in trade or business in the Philippines.
On July 18, 1975, Wander filed its withholding tax return for the second quarter ending June 30,
1975 and remitted to its parent company, Glaro dividends in the amount of P222,000.00, on which
35% withholding tax thereof in the amount of P77,700.00 was withheld and paid to the Bureau of
Internal Revenue.
Again, on July 14, 1976, Wander filed a withholding tax return for the second quarter ending June
30, 1976 on the dividends it remitted to Glaro amounting to P355,200.00, on wich 35% tax in the
amount of P124,320.00 was withheld and paid to the Bureau of Internal Revenue.
On July 5, 1977, Wander filed with the Appellate Division of the Internal Revenue a claim for refund
and/or tax credit in the amount of P115,400.00, contending that it is liable only to 15% withholding
tax in accordance with Section 24 (b) (1) of the Tax Code, as amended by Presidential Decree Nos.
369 and 778, and not on the basis of 35% which was withheld and paid to and collected by the
government.
Petitioner herein, having failed to act on the above-said claim for refund, on July 15, 1977, Wander
filed a petition with respondent Court of Tax Appeals.
On October 6, 1977, petitioner file his Answer.
On January 19, 1984, respondent Court of Tax Appeals rendered a Decision, the decretal portion of
which reads:
WHEREFORE, respondent is hereby ordered to grant a refund and/or tax credit to
petitioner in the amount of P115,440.00 representing overpaid withholding tax on
dividends remitted by it to the Glaro S.A. Ltd. of Switzerland during the second
quarter of the years 1975 and 1976.
On March 7, 1984, petitioner filed a Motion for Reconsideration but the same was denied in a
Resolution dated August 13, 1984. Hence, the instant petition.
Petitioner raised two (2) assignment of errors, to wit:
ASSUMING THAT THE TAX REFUND IN THE CASE AT BAR IS ALLOWABLE AT ALL, THE
COURT OF TAX APPEALS ERRED INHOLDING THAT THE HEREIN RESPONDENT WANDER
PHILIPPINES, INC. IS ENTITLED TO THE SAID REFUND.
II
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT SWITZERLAND, THE HOME
COUNTRY OF GLARO S.A. LTD. (THE PARENT COMPANY OF THE HEREIN RESPONDENT
WANDER PHILIPPINES, INC.), GRANTS TO SAID GLARO S.A. LTD. AGAINST ITS SWISS
INCOME TAX LIABILITY A TAX CREDIT EQUIVALENT TO THE 20 PERCENTAGE-POINT
PORTION (OF THE 35 PERCENT PHILIPPINE DIVIDEND TAX) SPARED OR WAIVED OR
OTHERWISE DEEMED AS IF PAID IN THE PHILIPPINES UNDER SECTION 24 (b) (1) OF THE
PHILIPPINE TAX CODE.
The sole issue in this case is whether or not private respondent Wander is entitled to the preferential
rate of 15% withholding tax on dividends declared and remitted to its parent corporation, Glaro.
From this issue, two questions were posed by petitioner: (1) Whether or not Wander is the proper
party to claim the refund; and (2) Whether or not Switzerland allows as tax credit the "deemed paid"
20% Philippine Tax on such dividends.
Petitioner maintains and argues that it is Glaro the tax payer, and not Wander, the remitter or payor
of the dividend income and a mere withholding agent for and in behalf of the Philippine Government,
which should be legally entitled to receive the refund if any.
It will be noted, however, that Petitioner's above-entitled argument is being raised for the first time in
this Court. It was never raised at the administrative level, or at the Court of Tax Appeals. To allow a
litigant to assume a different posture when he comes before the court and challenge the position he
had accepted at the administrative level, would be to sanction a procedure whereby the Court—
which is supposed to review administrative determinations—would not review, but determine and
decide for the first time, a question not raised at the administrative forum. Thus, it is well settled that
under the same underlying principle of prior exhaustion of administrative remedies, on the judicial
level, issues not raised in the lower court cannot be raised for the first time on appeal (Aguinaldo
Industries Corporation vs. Commissioner of Internal Revenue, 112 SCRA 136; Pampanga Sugar
Dev. Co., Inc. vs. CIR, 114 SCRA 725; Garcia vs. Court of Appeals, 102 SCRA 597; Matialonzo vs.
Servidad, 107 SCRA 726,
In any event, the submission of petitioner that Wander is but a withholding agent of the government
and therefore cannot claim reimbursement of the alleged overpaid taxes, is untenable. It will be
recalled, that said corporation is first and foremost a wholly owned subsidiary of Glaro. The fact that
it became a withholding agent of the government which was not by choice but by compulsion under
Section 53 (b) of the Tax Code, cannot by any stretch of the imagination be considered as an
abdication of its responsibility to its mother company. Thus, this Court construing Section 53 (b) of
the Internal Revenue Code held that "the obligation imposed thereunder upon the withholding agent
is compulsory." It is a device to insure the collection by the Philippine Government of taxes on
incomes, derived from sources in the Philippines, by aliens who are outside the taxing jurisdiction of
this Court (Commissioner of Internal Revenue vs. Malayan Insurance Co., Inc., 21 SCRA 944). In
fact, Wander may be assessed for deficiency withholding tax at source, plus penalties consisting of
surcharge and interest (Section 54, NLRC). Therefore, as the Philippine counterpart, Wander is the
proper entity who should for the refund or credit of overpaid withholding tax on dividends paid or
remitted by Glaro.
Closely intertwined with the first assignment of error is the issue of whether or not Switzerland, the
foreign country where Glaro is domiciled, grants to Glaro a tax credit against the tax due it,
equivalent to 20%, or the difference between the regular 35% rate of the preferential 15% rate. The
dispute in this issue lies on the fact that Switzerland does not impose any income tax on dividends
received by Swiss corporation from corporations domiciled in foreign countries.
Section 24 (b) (1) of the Tax Code, as amended by P.D. 369 and 778, the law involved in this case,
reads:
Sec. 1. The first paragraph of subsection (b) of Section 24 of the National Internal
Revenue Code, as amended, is hereby further amended to read as follows:
(b) Tax on foreign corporations. — 1) Non-resident corporation. A

foreign corporation not engaged in trade or business in the
Philippines, including a foreign life insurance company not engaged
in the life insurance business in the Philippines, shall pay a tax equal
to 35% of the gross income received during its taxable year from all
sources within the Philippines, as interest (except interest on foreign
loans which shall be subject to 15% tax), dividends, premiums,
annuities, compensations, remuneration for technical services or
otherwise, emoluments or other fixed or determinable, annual,
periodical or casual gains, profits, and income, and capital gains: ...
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 received, 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%) dividends as provided in this
section: ...
From the above-quoted provision, the dividends received from a domestic corporation liable to tax,
the tax shall be 15% of the dividends received, 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%)
dividends.
In the instant case, Switzerland did not impose any tax on the dividends received by Glaro.
Accordingly, Wander claims that full credit is granted and not merely credit equivalent to 20%.
Petitioner, on the other hand, avers the tax sparing credit is applicable only if the country of the
parent corporation allows a foreign tax credit not only for the 15 percentage-point portion actually
paid but also for the equivalent twenty percentage point portion spared, waived or otherwise deemed
as if paid in the Philippines; that private respondent does not cite anywhere a Swiss law to the effect
that in case where a foreign tax, such as the Philippine 35% dividend tax, is spared waived or
otherwise considered as if paid in whole or in part by the foreign country, a Swiss foreign-tax credit
would be allowed for the whole or for the part, as the case may be, of the foreign tax so spared or
waived or considered as if paid by the foreign country.
While it may be true that claims for refund are construed strictly against the claimant, nevertheless,
the fact that Switzerland did not impose any tax or the dividends received by Glaro from the
Philippines should be considered as a full satisfaction of the given condition. For, as aptly stated by
respondent Court, to deny private respondent the privilege to withhold only 15% tax provided for
under Presidential Decree No. 369, amending Section 24 (b) (1) of the Tax Code, would run counter
to the very spirit and intent of said law and definitely will adversely affect foreign corporations"
interest here and discourage them from investing capital in our country.
Besides, it is significant to note that the conclusion reached by respondent Court is but a
confirmation of the May 19, 1977 ruling of petitioner that "since the Swiss Government does not
impose any tax on the dividends to be received by the said parent corporation in the Philippines, the
condition imposed under the above-mentioned section is satisfied. Accordingly, the withholding tax
rate of 15% is hereby affirmed."
Moreover, as a matter of principle, this Court will not set aside the conclusion reached by an agency
such as the Court of Tax Appeals which is, by the very nature of its function, dedicated exclusively to
the study and consideration of tax problems and has necessarily developed an expertise on the
subject unless there has been an abuse or improvident exercise of authority (Reyes vs.
Commissioner of Internal Revenue, 24 SCRA 198, which is not present in the instant case.
WHEREFORE, the petition filed is DISMISSED for lack of merit.
SO ORDERED.
Fernan (Chairman), Gutierrez, Jr., Feliciano and Cortes, JJ., concur.
Footnotes
* Penned by Associate Judge Constants C. Roaquin and concurred to by Amante

Filler, Presiding Judge; and Alex Z. Reyes, Associate Judge.

Gadioma Law Offices For Respondents

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Gadioma Law Offices For Respondents

Uploaded by

Copyright:

Available Formats

Republic of the Philippines

G.R. No. L-54908 January 22, 1990

COMMISSIONER OF INTERNAL REVENUE, petitioner,

G.R. No. 80041 January 22, 1990

COMMISSIONER OF INTERNAL REVENUE, petitioner,

Gadioma Law Offices for respondents.

Melencio-Herrera, Paras, Padilla and Sarmiento, JJ., concur.

1 Rollo, G.R. No. 54908, 21; G.R. No. 80041, 14.

2 Ibid., G.R. No. 80041, 15, 49.

3 Ibid., G.R. No. 54908, 45-46.

4 Ibid., id., 33-39,

5 Ibid., id., 48.

6 Now, Sec. 28 (b) (8)(A).

7 Rollo, G.R. No. 54908, 41-42.

10 Ibid., G.R. No. 80041, 17.

12 Rollo, G.R. 80041, 15.

13 Ibid., G.R. No. 54908, 23-25.

14 Ibid., G.R. No. 80041, 15, 27.

G.R. No. 76573 September 14, 1989

MARUBENI CORPORATION (formerly Marubeni — Iida, Co., Ltd.), petitioner,

Melquiades C. Gutierrez for petitioner.

The Solicitor General for respondents.

1981 FIRST THIRD TOTAL OF

Cash Dividends Paid 849,720.44 849,720.00 1,699,440.00

10% Dividend Tax 84,972.00 84,972.00 169,944.00

15% Branch Profit 114,712.20 114,712.20 229,424.40 3

Net Amount Remitted to 650,035.80 650,035.80 1,300,071.60

In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled:

Inasmuch as the cash dividends remitted by AG&P to Marubeni Corporation, Japan

Hence, the instant petition for review.

Dividends received by a domestic or resident foreign corporation liable to tax under

(b) Tax on foreign corporations — (1) Non-resident corporations. — A foreign

Article 10 (1) Dividends paid by a company which is a resident of a Contracting State

(b) Tax on foreign corporations. — (1) Non-resident corporations — ... (iii) On

Consequently, petitioner is entitled to a refund on the transaction in question to be computed as

Total cash dividend paid ................P1,699,440.00

Cash dividend net of 15 % tax

Amount to be refunded to petitioner

Gutierrez, Jr., Bidin and Cortes, JJ., concur.

Feliciano, J., is on leave.

1 Penned by Amante Filler, Presiding Judge and concurred in by Constante Roaquin

3 Amount sought to be refunded. See Rollo, p. 38.

4 Rollo, pp. 38-39.

6 Annex C, Ruling No. 157-81, Original Record, pp. 11-12.

7 Original B.I.R. Record, p. 8.

8 Annex E, Original Record, p. 15.

9 Original Record, p. 122.

10 Original Record, pp, 119-121,

12 Memorandum, p. 142, Rollo.

14 Rollo, p. 2; Original Record, p. 170.

G.R. No. L-66838 December 2, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner,

T.A. Tejada & C.N. Lim for private respondent.

Section 309 (3) of the NIRC, in turn, provides:

Sec. 309. Authority of Commissioner to Take Compromises and to Refund Taxes.—The

(b) Tax on foreign corporations.—

Sec. 901 — Taxes of foreign countries and possessions of United States.

Sec. 902. — Credit for corporate stockholders in foreign corporation.

(c) Applicable Rules

Close examination of the above quoted provisions of the US Tax Code 7

b. US law (Section 902, US Tax Code) grants to P&G-USA a "deemed paid' tax

P100.00 — Pretax net corporate income earned by P&G-Phil.

P65.00 — Dividends remittable to P&G-USA