Commissioner of Internal Revenue vs. Interpublic Group of Companies, Inc.

A non-resident foreign corporation is entitled to a refund of excess final withholding tax paid on dividends when it proves entitlement to the preferential 15% tax rate under Section 28(B)(5)(b) of the National Internal Revenue Code and the applicable tax treaty, even if it failed to file a prior Tax Treaty Relief Application under RMO No. 1-2000, provided the administrative and judicial claims for refund are filed within the statutory two-year period.

Interpublic Group of Companies, Inc. (IGC), a corporation organized under the laws of Delaware, United States, owned 2,999,998 shares or 30% of the total outstanding and voting capital stock of McCann Worldgroup Philippines, Inc. (McCann), a domestic corporation engaged in the general advertising business. In 2006, McCann's Board of Directors declared cash dividends totaling P205,648,685.02, of which IGC's share amounted to P61,694,605.51. McCann withheld final withholding tax at the rate of 35% on these dividends and remitted P21,593,111.93 to the Commissioner of Internal Revenue on June 15, 2006. IGC subsequently established a Regional Headquarters in the Philippines on September 27, 2007, which was converted into a Regional Operating Headquarters on April 30, 2008.

• IGC is a non-resident foreign corporation duly organized under the laws of Delaware, United States of America, and owns 30% of the outstanding and voting capital stock of McCann Worldgroup Philippines, Inc., a domestic advertising corporation.
• On June 15, 2006, McCann withheld final withholding tax at the rate of 35% on cash dividends of P61,694,605.51 paid to IGC, remitting P21,593,111.93 to the Bureau of Internal Revenue.
• IGC established a Regional Headquarters (RHQ) in the Philippines on September 27, 2007, which was subsequently converted into a Regional Operating Headquarters (ROHQ) on April 30, 2008.
• On March 5, 2008, IGC filed an administrative claim for refund or tax credit certificate for P12,338,921.00, representing the alleged overpayment of final withholding tax resulting from the application of the 35% regular rate instead of the preferential 15% rate under Section 28(B)(5)(b) of the Tax Code.
• IGC claimed entitlement to the 15% preferential rate on the basis that the United States, its country of domicile, allows a tax credit for taxes deemed paid in the Philippines equivalent to the difference between the regular corporate income tax rate and the 15% dividend tax rate.
• The CIR failed to act on the administrative claim, prompting IGC to file a judicial claim for refund with the Court of Tax Appeals on June 16, 2008.
• The ROHQ was not involved in IGC's investment in McCann; the investment was made independently for purposes peculiarly germane to IGC's corporate affairs and was not coursed through the ROHQ.

• IGC lacks capacity to sue because as an unlicensed foreign corporation transacting business in the Philippines through its ROHQ, it is barred from maintaining any action in Philippine courts under Section 133 of the Corporation Code.
• IGC failed to comply with the mandatory requirement under Revenue Memorandum Order No. 1-2000 of filing a Tax Treaty Relief Application with the International Tax Affairs Division at least 15 days before paying the tax on dividends, which is a condition precedent to claiming treaty benefits.
• Claims for tax refund must be construed strictissimi juris against the taxpayer and are subject to administrative investigation to ascertain the veracity of the claimant's allegations.

• Mere investment as a shareholder in a duly registered domestic corporation, and the receipt of dividends therefrom, does not constitute "doing business" under Section 3(d) of Republic Act No. 7042 (Foreign Investments Act), hence IGC is not required to secure a license to sue under Section 133 of the Corporation Code.
• The investment in McCann was made independently of the ROHQ, making IGC the proper taxpayer entitled to the refund, not the ROHQ.
• The obligation to comply with the RP-US Tax Treaty, which has the force and effect of law under the principle of pacta sunt servanda, takes precedence over the administrative objective of RMO No. 1-2000.
• The prior application requirement under RMO No. 1-2000 is illogical and inapplicable to refund cases where the taxpayer paid the tax at the regular 35% rate instead of the preferential treaty rate, as the taxpayer could not have applied for treaty relief before a transaction where it was not availing of the treaty rate.
• IGC proved that the United States allows a deemed paid tax credit under Section 902 of the US Internal Revenue Code, satisfying the reciprocity condition for the 15% preferential rate under Section 28(B)(5)(b) of the NIRC.
• Both the administrative claim (filed March 5, 2008) and judicial claim (filed June 16, 2008) were filed within the two-year reglementary period under Sections 204 and 229 of the NIRC from the date of payment on June 15, 2006.

• Procedural Issues: Whether an unlicensed non-resident foreign corporation which collects dividends from a domestic corporation has the capacity to sue in Philippine courts to claim a tax refund.
• Substantive Issues:
  • Whether a non-resident foreign corporation that failed to file a Tax Treaty Relief Application under RMO No. 1-2000 prior to the payment of dividends is entitled to claim a refund for overpaid final withholding tax.
  • Whether IGC proved its entitlement to the preferential 15% final withholding tax rate on dividends under Section 28(B)(5)(b) of the National Internal Revenue Code and the RP-US Tax Treaty.

• Procedural: The Supreme Court held that IGC has the capacity to sue. Mere investment as a shareholder by a foreign entity in a duly registered domestic corporation, and the exercise of rights as such investor including receiving dividends, does not constitute "doing business" under Section 3(d) of Republic Act No. 7042. Section 133 of the Corporation Code bars only foreign corporations "transacting business" without a license from accessing Philippine courts. Since IGC's investment was independent of its ROHQ and was not coursed through said office, IGC is the proper party to claim the refund as the taxpayer.
• Substantive: The Court ruled that IGC is entitled to the refund. The requirement under RMO No. 1-2000 for prior application for tax treaty relief does not apply to claims for refund where the taxpayer erroneously paid the tax at the regular 35% rate instead of the preferential treaty rate, as such prior application would be illogical when the taxpayer was not availing of the treaty rate at the time of payment. Tax treaty obligations prevail over administrative regulations. IGC proved that the United States allows a deemed paid tax credit under Section 902 of the US Internal Revenue Code, satisfying the reciprocity requirement for the 15% rate under Section 28(B)(5)(b) of the NIRC. The claims were filed within the two-year period under Sections 204 and 229 of the NIRC, and IGC discharged the burden of proof required for tax refunds construed strictissimi juris.

• Doing Business Test under the Foreign Investments Act — Mere investment as a shareholder by a foreign entity in a duly registered domestic corporation, and the exercise of rights as such investor, shall not be deemed "doing business" in the Philippines; thus, an unlicensed foreign corporation not doing business may sue in Philippine courts without violating Section 133 of the Corporation Code.
• Pacta Sunt Servanda — Treaties have the force and effect of law and must be performed in good faith; the obligation to comply with a tax treaty takes precedence over the objective of administrative regulations such as RMO No. 1-2000.
• Strictissimi Juris in Tax Refunds — Tax refunds are in the nature of tax exemptions and are construed strictly against the claimant; the burden of proof lies with the claimant to justify the exemption by the clearest grant of organic or statute law.
• Prior Application for Treaty Relief Exception in Refund Cases — The requirement for prior application for tax treaty relief under administrative regulations does not apply to refund claims where the tax was paid at the regular rate rather than the treaty rate, as such prior application would be illogical and would impair the value of the tax treaty.

• "The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-2000."
• "Mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interests in such corporation... shall not be deemed to include mere investment as a shareholder."
• "The prior application requirement under RMO No. 1-2000 is no longer a condition precedent to refund an erroneously paid tax on the basis of the regular tax rate under the Tax Code."
• "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."

• Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue — Cited for the principle that the obligation to comply with a tax treaty takes precedence over administrative regulations like RMO No. 1-2000, and that prior application for treaty relief should merely confirm entitlement and should not divest entitlement in refund cases.
• CBK Power Company Ltd. v. Commissioner of Internal Revenue — Cited for the ruling that the prior application requirement under RMO No. 1-2000 becomes moot in refund cases where the basis is erroneous payment arising from non-availment of treaty relief at the first instance.
• B. Van Zuiden Bros., Ltd. v. GTVL Manufacturing Industries, Inc. — Cited for the distinction that unlicensed foreign corporations not doing business in the Philippines can sue, while those doing business cannot.
• The Mentholatum Co. v. Mangaliman — Cited for the test to determine "doing business" which requires continuity of commercial dealings and performance of acts normally incident to the purpose of the organization.
• Commissioner of Internal Revenue v. Procter & Gamble Philippines Manufacturing Corp. — Cited for the interpretation of Section 28(B)(5)(b) and the RP-US Tax Treaty provisions on dividend taxation and tax credits.

• Section 133 of the Corporation Code — Provisions regarding foreign corporations transacting business without a license; cited to determine capacity to sue.
• Section 3(d) of Republic Act No. 7042 (Foreign Investments Act of 1991) — Definition of "doing business" which excludes mere investment as a shareholder; cited to establish that IGC was not doing business.
• Section 28(B)(5)(b) of the National Internal Revenue Code — Provision imposing 15% final withholding tax on dividends received by non-resident foreign corporations, subject to the condition that the domiciliary country allows a tax credit; basis for IGC's claim.
• Article 11 of the RP-US Tax Treaty — Provision limiting dividend tax to 20% for corporate recipients owning at least 10% of voting stock; cited to show treaty commitment to reduced rates.
• Section 902 of the US Internal Revenue Code — Provision allowing deemed paid tax credits to US corporations receiving dividends from foreign corporations; cited to prove US allows tax credit satisfying Section 28(B)(5)(b) condition.
• Sections 204 and 229 of the National Internal Revenue Code — Provisions prescribing the two-year period for filing administrative and judicial claims for refund; cited to establish timeliness.