Commissioner of Internal Revenue vs. Goodyear Philippines, Inc.

A redemption price paid to a non-resident foreign shareholder that exceeds the par value of the shares cannot be subjected to 15% final withholding tax as intercorporate dividends when the redeeming corporation has no unrestricted retained earnings, as the distribution does not constitute "dividends" under Section 73(A) of the National Internal Revenue Code and Section 43 of the Corporation Code, and the Board of Directors is legally incapacitated from declaring dividends absent such earnings.

The case involves the tax treatment of proceeds from the redemption of preferred shares issued by Goodyear Philippines, Inc. to its foreign parent company, Goodyear Tire and Rubber Company (GTRC), a non-resident foreign corporation organized under US law. The redemption price included the aggregate par value plus accrued dividends. The Bureau of Internal Revenue withheld 15% final withholding tax on the difference between the redemption price and par value, treating it as dividend income, prompting Goodyear to seek a refund.

• Goodyear Philippines, Inc. is a domestic corporation duly organized under Philippine laws and registered with the Bureau of Internal Revenue as a large taxpayer.
• On August 19, 2003, Goodyear increased its authorized capital stock from ₱400,000,000.00 to ₱1,731,863,000.00, issuing 13,318,630 preferred shares with a par value of ₱100.00 each, which were exclusively subscribed by Goodyear Tire and Rubber Company (GTRC), a non-resident foreign corporation organized under the laws of Ohio, USA.
• On May 30, 2008, Goodyear’s Board of Directors authorized the redemption of 3,729,216 preferred shares held by GTRC, scheduled for October 15, 2008, at a redemption price of ₱470,653,914.00, comprising ₱372,921,600.00 (aggregate par value) and ₱97,732,314.00 (accrued and unpaid dividends).
• On October 15, 2008, Goodyear filed an application for relief from double taxation with the BIR International Tax Affairs Division to confirm that the redemption was not subject to Philippine income tax under the RP-US Tax Treaty.
• On November 3, 2008, Goodyear conservatively withheld and remitted ₱14,659,847.10 to the BIR, representing 15% final withholding tax computed on the difference between the redemption price and the aggregate par value of the shares.
• Goodyear’s Audited Financial Statements for the years 2003 to 2009 revealed that it had no unrestricted retained earnings and in fact operated from a deficit position during those years.
• On October 21, 2010, Goodyear filed an administrative claim for refund or tax credit certificate with the BIR.
• On November 3, 2010, Goodyear filed a judicial claim (petition for review) with the Court of Tax Appeals.

• The judicial claim should be dismissed for failure to exhaust administrative remedies, as the taxpayer filed the judicial claim only thirteen days after the administrative claim, effectively depriving the BIR of the opportunity to ascertain the validity of the claim.
• The taxpayer failed to submit complete supporting documents before the BIR.
• The amount of ₱97,732,314.00 representing the excess of the redemption price over par value constitutes accumulated dividends in arrears and should be subject to 15% final withholding tax on intercorporate dividends under Section 28(B)(5)(b) of the Tax Code.
• While the return of capital (par value) is not taxable, the premium component represents taxable dividend income.

• The simultaneous filing of administrative and judicial claims was necessitated by the impending expiration of the two-year prescriptive period under Section 229 of the Tax Code, and the law does not require awaiting the BIR’s final resolution before seeking judicial recourse.
• Under Article 14 of the RP-US Tax Treaty, gains from the alienation of property (other than real property) by a US resident are taxable only in the US, and since Goodyear’s assets did not principally consist of real property, the gain was not subject to Philippine capital gains tax.
• Under Article 11(5) of the RP-US Tax Treaty and Section 73(A) of the Tax Code, "dividends" must be distributions out of earnings or profits; Goodyear had no unrestricted retained earnings from 2003-2009, operating instead from a deficit position, so the Board had no power to declare dividends.
• The redemption proceeds represented a capital transaction (return of capital and premium), not a distribution of earnings, and thus could not be treated as dividends under Section 28(B)(5)(b) of the Tax Code.

• Procedural: Whether the judicial claim for refund should be dismissed for non-exhaustion of administrative remedies where the taxpayer filed the judicial claim only thirteen days after the administrative claim.
• Substantive Issues: Whether the gain derived by GTRC from the redemption of preferred shares is subject to 15% final withholding tax on intercorporate dividends under Section 28(B)(5)(b) of the Tax Code. Whether the Board of Directors had the corporate power and capacity to declare dividends absent unrestricted retained earnings.

• Procedural: The Court ruled in the negative. Section 229 of the Tax Code only requires that an administrative claim be duly filed with the Commissioner before seeking judicial recourse; it does not mandate that the taxpayer await the final resolution of the administrative claim. The primary purpose of the administrative claim is to serve as a notice of warning to the Commissioner that court action will follow unless the tax is refunded. Requiring the taxpayer to wait for the BIR’s final action would result in forfeiture of the right to judicial recourse if the two-year prescriptive period expires. Since both claims were filed within the two-year period from the date of payment (November 3, 2008), the filing was proper and did not constitute a premature resort to judicial remedies.
• Substantive: The Court denied the petitioner’s assertions and held that the gain is not subject to 15% final withholding tax as dividends. Under Article 11(5) of the RP-US Tax Treaty, "dividends" is defined according to the taxation law of the Philippines (the state where the distributing corporation is resident). Section 73(A) of the Tax Code defines dividends as distributions made by a corporation to shareholders out of its earnings or profits. Section 43 of the Corporation Code limits the Board of Directors’ power to declare dividends exclusively to distributions out of unrestricted retained earnings. Goodyear’s Audited Financial Statements for 2003-2009 showed no unrestricted retained earnings and revealed a deficit position. Consequently, the Board lacked the corporate capacity to declare dividends, and the amount received by GTRC could not be treated as dividends. The amount represented a premium on redemption, not a recurring return on stock, and was therefore properly characterized as capital gains exempt from Philippine income tax under Article 14 of the RP-US Tax Treaty.

• Exhaustion of Administrative Remedies in Tax Refund Cases — The filing of an administrative claim with the Commissioner of Internal Revenue is sufficient to satisfy the requirement of prior administrative action under Section 229 of the Tax Code; the taxpayer need not await the final resolution of the claim, especially when the statutory period for judicial recourse is about to expire, as the administrative claim serves merely as a notice of warning that judicial action will follow if the refund is not granted.
• Corporate Power to Declare Dividends — Under Section 43 of the Corporation Code, the Board of Directors may only declare dividends out of unrestricted retained earnings; absent such earnings, the Board is legally incapacitated from declaring dividends, and any distribution made cannot be characterized as dividends for tax purposes.
• Definition of Dividends for Tax Purposes — Pursuant to Section 73(A) of the Tax Code, dividends must be distributions to shareholders arising out of the corporation's earnings or profits; distributions made in the absence of unrestricted retained earnings, such as redemption premiums paid when a corporation operates at a deficit, do not qualify as dividends.
• Redemption of Shares Distinguished from Dividend Distribution — A redemption of shares where the shareholder surrenders stock in exchange for payment and ceases to be a shareholder is distinct from an ordinary dividend; the former represents a capital transaction (liquidation or recapitalization) rather than a recurring return on stock, and its tax treatment depends on the source of funds and intent of the parties.
• Treaty Override Principle — International tax treaties have the force and effect of law in the Philippines and complementarily govern the tax treatment of transactions involving non-resident foreign corporations, prevailing over general provisions of the Tax Code where applicable.

• "the claim with the Collector of Internal Revenue was intended primarily as a notice of warning that unless the tax or penalty alleged to have been collected erroneously or illegally is refunded, court action will follow"
• "The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them"
• "Absent the availability of unrestricted retained earnings, the board of directors of respondent had no power to issue dividends"
• "The amounts thus distributed among the plaintiffs were not in the nature of a recurring return on stock — in fact, they surrendered and relinquished their stock in return for said distributions, thus ceasing to be stockholders"

• CBK Power Company, Ltd. v. Commissioner of Internal Revenue — Cited for the principle that Section 229 of the Tax Code does not require the taxpayer to await the final resolution of the administrative claim before filing a judicial claim.
• P.J. Kiener Co., Ltd. v. David — Cited as the foundational case establishing that the administrative claim serves as a notice of warning to the Commissioner, not a requirement to await final action.
• Wise & Co., Inc. v. Meer — Cited for the distinction between ordinary dividends (recurring return on stock) and distributions in liquidation or redemption (capital transactions), emphasizing that the factual circumstances and intent of the parties determine the characterization.
• Commissioner of Internal Revenue v. Court of Appeals — Cited for the definition of redemption as the repurchase or reacquisition of stock by a corporation.
• Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue — Cited for the principle that international tax treaties have the force and effect of law in the jurisdiction.
• Republic Planters Bank v. Agana, Sr. and Crucillo v. Office of the Ombudsman — Cited for the principle that dividends may only be declared out of unrestricted retained earnings.

• Section 229 of the National Internal Revenue Code of 1997 — Governs the recovery of tax erroneously or illegally collected, requiring the prior filing of an administrative claim and setting the two-year prescriptive period for judicial claims.
• Section 28(B)(5)(b) of the National Internal Revenue Code of 1997 — Imposes 15% final withholding tax on intercorporate dividends received by non-resident foreign corporations.
• Section 28(B)(5)(c) of the National Internal Revenue Code of 1997 — Imposes tax on capital gains from sale of shares not traded in the stock exchange.
• Section 73(A) of the National Internal Revenue Code of 1997 — Defines dividends as any distribution made by a corporation to its shareholders out of its earnings or profits.
• Section 73(B) of the National Internal Revenue Code of 1997 — Provides that stock dividends redeemed in a manner essentially equivalent to a taxable dividend shall be considered taxable income.
• Section 43 of the Corporation Code of the Philippines (Batas Pambansa Blg. 68) — Limits the Board of Directors' power to declare dividends exclusively to distributions out of unrestricted retained earnings.
• Article 11(5) of the RP-US Tax Treaty — Defines dividends according to the taxation law of the State in which the corporation making the distribution is a resident.
• Article 14 of the RP-US Tax Treaty — Provides that gains from the alienation of property (other than real property) by a US resident are taxable only in the US.