age!, et al.

DECISION -

CTA CASE WO, 1503 » ment by Kepublie Act No. 2343, Section 24 of the National Internal “evenue Code imposed a tax upon net income and, therefore, recognized the deduetibility of expenses incurred or paid by it in Brussels which were direetiy conneeted with the production of income realized within the Philippines by a nonresident foreign corporation. Tt eites Sections 46 and 37 of the said Code to buttress its contention.

On the other hand, respondent, invoking Seetion §% of the same Code, before its amendment by Republic Aet No. 2343, contends that a non- resident foreign cerporation not engaged in trade or business in the Philippines, of which peti- tioner is one, is taxed not on the basis of ites net income but on its gross income, or the entire amount received from within the Philippines with- . out any deduction, Consequently, it is urged that the questioned expenses are not deductible from petitioner's gross income for the purpose of computing the tex. | The pertinent provisions of the "ational In- ternal Revenue Code upon whiea the respective con- tentions of the parties are predicated, are as follows:

DECISION -

CTA CASE NO. 1503 es Dates fa tee assessed, collected end naid an- nually upoa the total net income received in the preceding taxable year from ail sources by every cor- poration organised in, or existing unfer the laws of the Vhilippines no metter how ereated or organi ‘sea, but not including duly registered genere! apt gens = { solegtivas), « a such income equal to } sun of following:

\ x x x z x - Qwenty-eight per certs upon the amount by which s sche) net income exeeeds one hunt ovserd pesos, and ’ : aived ‘int he Pree ' ing taxa ble ask Sie .

= xxx (Underscoring sup- ods at amended by Rewihltie Act SEC, 30. beduetions [rom shose ~~ ine ne net incone dncome there shall be allowed as deduetions - (ea) Expenses:

eae - in the case a nonresicert alien intivi¢val oe 3 Si e o SHC rr oe Mm ry Ve

DECISION «

CTA CASS MO. 1903 P.y a eae to and a ratable part of any expenses, losses, or other deductions which cannot definitely be slloeated te some item or class of gross income. the ponniniats ir a aie shall be in- eluded in fail ineome from sourees within the Philippines. x xm x (Underscoring supplied.)

SC. 46. Sorpgration returns. - p 7 r 4 . : 4% - i. 2 er: bec by the Collector of nternal Mevenne with the approval of the Secretary of Finance, and containing such facts, Gata, and in- formation at are ap SS ami in the opinion of the eon ctor of In- ternal Revenue secessary to ¢eter- . @ine the correctness of the net in- come returned and te carry out the ° provisions of this Title. The age rl shall be filed by the president president, er other prineipal obeteer, ané shall be sworn to by such officer and by the treasurer or assistant treasurer, (Unierscoring suprifed.)

cage © gn yeoory one subject to taxation unier ge Title not en- gassed in trade or business within Philippine and not having any.

office or = of business therein there shall be deducted and withheld at the source in the same sanner and upon the same items of iacome as is provided in Section fifty-three « tax equal to twenty-four thereof, and duch tax shell be re~- turned and paid im the same manner and subject to the same conditions as provided in that seetion. (As amended by Nepublie Act No, 690,)

DECISION «

CTA CASE MO, 1903 ?

Section 2, before its amendment by Republic Ket No. 2343, imposed a corporate tax upon the met income of domestic and foreign corpora- tions. As regards foreign corporations, the lew 414 not make any distinetion between a resident foreign corporation ané a nonresident foreign corporation not engaged in business or trade an the Philippines (alexander flowden « Cos, et al.

v. Comm, of Int. Revs, G8. No. lm 19392, April 1%, 1965 see algo British Traders’ Insurance Cosy Ltd. v. Comm. of Int. Reve, Gell. Ho. L- 20501, April 30, 1965) » Neither this nor any other related provisions (Sections 37 ané 46) of the Code imposed the corporate tax upon gross “dneome. ( it follows that a nonresident foreign corporation not engaged in trade or business like petitioner was taxable,prior to the effeet- ivity of Republie Act No. 2343, on its net ine come. In fact, the corporate tax imposed in Section 24 had been previously computed by re~ spondent oa net income, that is, only after deduct- ing the generel expenses from gross income )(4 1ex- ander lowden & Co., et al, v. The Coll. of Int. Reve, Menila Civil Case No. 22048, Decision, Nov. 24, 1961, aff'd, in Alexander Howden & Co., et al., on» cit-).

DECISION -

CTA CASE WO, 1503 _ The imposition of the corporate tax upon the net income of a “foreign corporation,“ which as eforesaid includes a resident or nonresident foreign corporation, becomes more evident con- sidering Seetion 30(a)(2) whteh permits deduet- ibility from gross income of necessary expenses paid or ineurred in earryinge on any business or | trade conducted within the Philippines exclusive- ly. The conclusion that the tax on a nonresident foreign corporation was imposable upon its gross income under Section 5% of the National Internal Revenue Code cannot now be drawn. It is to be noted that despite the existence of a similar provision (Seetion 237) in the 0. S, Internel Revenue Code of 1918, which is substantially similar te Section Se of our Revenue Code, the tex upen a nonresident foreign corporation in | ‘the United States was nevertheless imposed upon the net income thereof, that is, after allowing. deduetions, ené not upon ite gross tneome (Xon- pagni v. Comm., 19 BTA 294, 208). It 4s only under the ". 5. Revenue Code of 1936 to 195% when nonresident foreign corporations beran to be taxed on‘ their gross income consisting of interest, dividends, salaries, ete., or other fixed or determinable ennual or periodical income (Yahras Chimehiriean vw. Comm., 42 BTA 1437, Teg Sees. 45.16 & b5.2%, Mertens, Law en Federal In- ‘™“ 4259

DECISION «

CTA CASE NO, 1903 9 come Taxation, Vol. 8, Chap. 45, pp. 2 et seq. and 55 et. seq.). Section 881 of the U. 5. Rew enue Co@e ef 1954, a cognate provision of Geetion @ of our Reverme Code, as now anended by Republic Aet Mo. 2343, reader | ge or Ak oe oreign corporation act engaged in trade or dusiness within the United States, there is hereby imposed for each taxable year, in lien of the taxes imposed | beetion 14, a tax of 30 pereent the from sources within t ates as interest (exeept interest an depes- its with persons earrying on the banking businean), dividends, rents, . gelaries, wages, premiums, annuities, _ @ompensations, remuneretions, emol- uments, or other fixed or determina- ble annual or periodical geins, profits, and income (fnelufing amounts deneribed in section 631 (b) and (¢) which are considered to be gains fron the sale or exehance ef capital as- sets). (CCH, Vol. 4, 1958 Pd., See. 61715 underlining supplied.)

Under this law, a nonresident foreign corpora- : tion is taxed upon the "mount received,” which weans “gross income” (CCl, ibid., See. ¥17243 Mertens, Qn. Sit», Sec. 45.2%, Chap. N55 pe 55) Coming now to the question at issue of vwhe- ther or not the expenses claimed by petitioner may be allowed as deduction pursuant to Section 30(a)(2) of the Revenue Code, it is necessary to restate the rule that the taxpayer aust show that its claimed deductions clearly come within

DECISION -

CTA CASE NO. 1503 16 the language of the law, since allowances of deduetions, like exemptions, ere matters of legislative grace (Mertens, on. gif., Vol. », 1998 Ed., Secs 25.03, Chap. 25, pre 7, 8-9 Mertens, ibid., Vol. 1, 1956 Bas, See. 3.09, Chaps 3, pre 19-16; Capitol Indemnity Insurance Co, ¥. Comme, 25 BTA 147, 150).

(in this ease, petitioner hes no agent oF place of business in the Philippines. At best, it 1s merely engaged in activities involving the collection of royalties as a result ef the manu- feeture of its patented products, the enthorized use of ita tradenane by Sternit Corporation, and the receipt of dividends from its stoekholdings in the latter. But mere receipt of income from “poyalties end Aividends are insufficient activi- ties by thenselves sa as te consider petitioner | as being engaged in business or trade in the _ Philippines, and this is so irrespeetive of the contimedty, repetition, requiarity or frequency of these activities/(iee MeCoach v. Ninehill, 57- Le ed. 42, B47, cited in 2 PH See. 16, S034 Wiggins v. Comms, 312 0. &, 212, 85 b. ed, 7833 Mertens, op. sits, Vols *, 1960 Rev. Bd., Sec. 25.08, Chap. 25, pe 20.) / since petitioner is not engaged im business or trade in the Philippines, it can not be seid that it hed paid or incurred expenses in carrying on a business or trade in ~ . - Ses,

DECISION ~

CTA CASE NO, 1903 1 the Pht Mippines exclusively in 1956. As a matter of fact, the expenses being elaine’ by petitioner as deductions were admittedly peid or inevrred in Prossels in 1956. Therefors, these expenses, not heving been paid or inevrred in carrying on a ‘business or trede conducted within the Philippines, are not sllowsble deductions fram its gross incone pursuant to Section 20(e)(2) of the Revenue. Cote. ) While 4t is true thet the expenses were aireetly connected with earning the dividente and royalties received fron e Philippine cerporea- tion, this is not enough justification for their allowance. The efreustance that the expenditures were incurred or paid pursuant te « contrectuel — obligation does net also suffice to make such ex- penses deductible (Capital Indemnity Tasurance Co. Ve “omiey One Sit.) because the law clearly and unequivocably linits Aednetions only te those “necessary exoenses aid or incurred in carrying OD. #07 business or trade conducted within the Phi linuines exolusively." (See. 30/07/27, ibid.) Consequently, we are of the opinion and so holé that the disallowsnee cf said expenses by respondent is proper and the assessment araeinst petitioner of the 1956 deficiency corporate ineone tax, plus | interest, in the total amount of °8,293.1% 42 in order. .

© 962

DECISION =

CTA CASE 0, 1503 12 WINAEPORE, the herein petition for review is hereby (dismissed.

20 ORDERFPD.

Quezon City, June 29, 1968.

Fw a

Presiéing Judge

W2 CONCLY |

wishing RSTAWISIAO 8. ALTAR Associate sonny RAMON fe AVARCEIA

Associate Judge