Bayer Pharmaceuticals, Inc., et al. vs. <- Commissioner of Internal —.: Revenue, et al.

DECISION -

CTA CASE NO. 2646 - 2 = selling, and, in general, dealing in all kinds of chemical, medicinal, pharmaceutical and bio-~ legical products. Sometime in 1966, petitioner and Bayer Aktiengesellschaft, Leverkusen Bayer- merk (hereinafter referred to as Bayer), a non- resident foreign corporation, entered into an agreement whereby petitioner was granted by Bayer the right to manufacture certain iammacextiesl products from active ingredients of Bayer, in accordance with Bayer'’s prescriptions, and to sell such products under the trademarks registered in the fFhilippines in Bayer'’s name. In ccnside- ration of such right, petitioner agreed to pay Bayer a royalty of 5% on the net sales proceeds of the licensed products. | Verification cf petitioner's books of accounts ond other releted accounting records by an examiner of respondent, relative to its rejuest for refund ef alleged overpaid income tax, disclosed that for. the year 1972, the amount of royalty Gue from pe- titioner to Sayer pursuant to the royalty agreement amounted to P69,529,00, itemized as follows:

Royalty on pharmaceutical products sold -~=-=- = ~55,961.90 Royalty on veterinary products sold ---- 508 69,529,400

Total Royalties

DECISION ~-

‘It was also discovered that the said royal- ties in the amount of ?69,525.00 had been set up in the books and records of petitioner as liabi- lity and the same was Claimed as deduction from its gross income for 1972. And Bayer had likewtse issued a debit memo to petitioner for the royal~ eiebs Accordingly, for failure of petitioner to withhold and pay the tax on the royalties, res- pondent issued a deficiency assessment for P36,834,73 against petitioner through his demand letter dated November 25, 1974, computed as follows:

4972 Royalties paid to non-resident foreign . ecrporation "_@ @ @ © @© @® # » 8 @ «@ P69, 929,00 fax due thereon eeeeeeeeee« P24, 335,00 Add: 25% surcharge .. ++ e««s2e PF 6,083.75 14% int. fr. 1-26-73 to 1)~-25-74 P 6,245.98 Compromise for failure to file return and late payment ..

Total amount due and collectible .. £36,834,73 Petitioner, in a letter dated January 10, 1975, contested the assessment, arguing that it had no liability to withhold and pay the tax, since the obligation to withhold and pay the tax arises only upon actual peyment or remittance. Ina. letter-decision dated September 17, 1976, respon- dent however reiterated the deficiency assessment 49 CTA CASE NO. 2845 for ° 36,834.73, inclusive of surcharge and inte- rest, and demanded the payment thereof, contending that the obligation to withhold and pay the tax arises at the time of accrual of the royalties and not at the time of actual remittance or payment therecf.

Hence, the present recourse. The lone questicn tendered fcr resolution ig whether or not the ehhigetion to withhold and pay income tax-at-source on the royalties is upon the accrual of the royalties or upon the actual remittance or payment thereof. Petitioner maintaing that there was no obli- Pr gation to deduct, withhold, and pay the withhold- ‘ing tax in 1972 since the royalties could not be remitted due to Central Sank restrictions. In submitting, however, that the liability to he 9 hold and pay the income tax withheld at source from royalty payments to a non-resident foreign corporation, like Sayer iene aie ca ieee kusen Bayermerk, is at the time of the accrual of © sees royalties and not at the time se{ecer | remittance or payment thereof, respondent relies st Le mainly on Bureau of Internal Revenue Ruling NOe 5 _ Sa ae a a a 71-003, dated Feneuary 26, 1971, the pertinent portions of which are quoted as ; follows:

qr

S

:

‘ :

a ee ey cel - J a de

DECISIGON «

CTA CASE NO. 2845 “Pfhis refers to your letter dated February 16, 1971 requesting a ruling as to the basis of the withholding tax due ‘on film rentals or royalties payable by you to non-resident foreign film corporations, ” x x x “In your letter, you contended thet _ the 35% withholding tax should be based only on actually remittable amount under Central Bank regulations and not on the entire amount due and payable to the non- resident foreign corporation. This con- tention has no legal basis.., Withholding tax is not dependent on remittance of the income payable to the non-resident foreign _ corporation but on accrual thereof. Such being the case, although a portion of the amount due to the ncn-resident foreign corporation cannot be remitted on account of Central Bank restrictions, the tax due on said portion should be deducted and withheld as if there ia no restriction.

‘Restricted funds. - In connection with the restriction on the transfer of funds from U.S. to persons in Nor- way, Denmark, the Netherlands, Bbelgiua, Luxembourg and France, the tax should be withheld in the same manner as if no restriction existed. In custodian accounts, the name of the foreign bank or other foreign person should be en- tered on the ownership certificate, and an amended ownership certificate filed as soon as the actual owner is 4875.405) “In view thereof, this Office believes and so holds that the 35% withholding tax | should be deducted and withheld on the entire amount of film rentals or royalties payable — to the non-resident foreign film cor; orations including that portion which, on account of Central Bank restrictions, cannot as yet be remitted abroad.”

51

DECIDIO

CT

C o• • 2845 - 6 s expressly stat ed th r in, t h Bureau o f Inter nal Revenue rule th t wi t hholding tax is not dependent on remitt nee of the income p y- abl to the non- resid nt for ign corpor tion ' but on accrual th reo£ .

nd as · suc h, although the incom c nnot be remitted on ccount of Cen- tr l ank restrictions , the tax due th r eon should be deducted nd withheld s i f there is no r estr iction .

. .

The.statut involv d is ~ection 53(b) (2) of th a t ional Int rnal evenue Code, th con- t rolling provisions of 1ich read as follows:

" ec . 53(b) (2) on-resident for i gn corpora~ions . - In the case of for ign corporations subject to tax under this Ti tle, not engaged in trade or business wi thin the Philippines, th.re sh 11 b deducted and withh ld at the sourc in the s e manner and u on the same items as is provided in Subsection (b) (1) of this sec tion, x x x , a tax qual to 35 per cent t h reef .

This sh-11 be r turned and paid i n the same manner and subject to th sam conditions as provided in s ction 54 . xxxx' And Section 53(b) (1) of the same Code per- t inently pro vides~

(b) Non- resident aliens and for ign corpcretions . -

(1) . on- res i dent aliens . - Every i ndividual, c orporation, partnership, o r association, in what ver capacity acting , including a less e or mortgagor of r eal or personal property, t r ustee ac ting i n any trust c a~ city, xec utor« adminis- t r tor, receiver, conservator, fiduciary , mployer, -nd ev ry officer or employee of the Governm nt of th epublic of the 0 C wl CT.

C .,:;.

• 2&45 - 7 - • X X X Y. X ~h se provision , by the y , r m rely im rt_ and co ied cl. st v rb ti frcm simil r nit d tat withh lding t x revision of t v nue Co e LS cti ·n l43(bl/. ccordingly, in conscn nc with s ttled rule~ of at tutcry cons- tructi n, the interpretation t .ey have r c· ived in th rnited ... t te rV authorit tiv_ ffect in "'"h • ro r c un:>tructicm and int .cpret tion of our 1 "· Thus; as corrC"ctly nc d by p tition r anc wh:i ch · is not dis .. u , ,d by r sponuent: 1 .

n rrivin.;

t

I

Ruling t: • ·n-003, d ted ~ ru ry 2 # 1971 , our ~ur au of Int .... rn 1 evenue qu t d as u rity th excerpt o United ...

t .s In rnal ev u ervic r lin hich is foun t I.) .t • 875 . 405 of CCh, 1 69.

Volum ~ 5 .

t apt: ears that th said u~s. ruling

DECISI N -

CTA CA 'E

O. 2845 - 8 - i s actually irneograph Ruling o . 5075, which was is~ued b j the Offic of t.he Commissioner of Int rnal Rev nue, ~ashington, D. c . , on July 8, 1940 an can b fcund at the Cumulative Bulletin 1940- 2, at p ge 141.

2 .

Th

said Mimeograph Ruling o . 5075 h s been a ecl r d obsol~te by the Unit~d States In- ternal Revenue Service itself in its Revenu Ruling ·o . 70-29 3.

(u.~. ·Int rnal v nue ul- letin ~o . 197n-23, d t~d Jun 8 , 1970) It is thus evi dent th t in issuing its IR ruling r;o .

71- 003 on F bruary 26 , 1971 , our own ure u of Int rnal Revenue has relied on a nited tates Internal Rev nue ·ervice ruling th t has already , been ov rrul d , the sa e having been declared · obsolet~ as of June , 1970 . 3 .

Follo~ing the decision of Lhe nited States District Court in L. D. Caulk Co , vs . nited Stat s , 11 F.

upp . 835_, rendered on No- vember 19, 1953, to the effect that corporation which held licenses und r patents own d by non- resident li ns ho s r sult of blocking proc- la ation cr forbidden right to receive or d is - poP of roy ltics was n t bound to withheld tax before paym nt f roy 1 ti ·.s, the rule th t is .

/ nov1 observed in the nit d ....;tates is that th . ' -----

DECI IO

CT

CASE NO . 2845 - 9 - oblig tion to withhold nd pay~.~~4~~~u l payment or remittanc of the income to a non- re- --- sident alien .

In the setting, law involved nd issue litigat d re practically on all fours with he c se at bar, laintiff, a Dela are corporation, held licenses under patents owned by two ncn- resident ali ns ,

Robert Doge and

mmanuel d Trey .

Loth pat entees wer Swiss .

Under the lie nsing agreements , plain- tiff oblig ted itself to pay royalties to Doge. and de Trey .

In its treatm nt of the i mpact of r oyalties on its operations , plaintiff, adh-ring to the accrual method of accounting, ntered net r oyalti.s nd ithhelc tax s as accrued liabili- ties of 1941 nd 1942 , the periods involved in the case.

Thus , 1941 and 1942 r oyalti s and taxes were set up as accounts payable on plain- tiff's books and as art of its cost of doing business for those y ars.

No

ithholding returns for non- resident ali ns D ge and de Trey were pre- par d fo r 1941 cr 1942 . hile the critical issue is when the returns were due for royalties attri- butable to sales made by plaintiff dur ing the years 1941 and 1942, th i nquir y shifted from .

"when was th return du 11 t o''when, if at all, was ~s NO . 2845 - 10 - pl inti f re uir d t wit held th t X frcm the royalti fl h r w ;;;) no que ti n r i d by • 1 intiff s to xi t c of it duty to ithhold on th r Y ties. Th uwhen" of the m tter* not th "who" or th "wh t" th int of disp t nd in uiry b c u

I

w re u1t cf lac inq pr c- l m tion,. non-resi ent liens w r fvrbid en righ to rec iv or dispo of royalti u th m und r ccntr ct with c 'r or ti n which ld lie nseo un- der ali ns • p t nt • (L.D . Caulk Co. vs. Unite tati~ , 116 • 835 , 8 0 . )

~tat d oth rwis , th qu stion a to hen to withhold th t x rom th~ 1941 nd 1942 roy lti aro~ b c u~ , lt ugh th roy ti ere accru d in the p1 lntiff•~ books in 1941 nd 19 . 2 . s io.bi ity to th n n- r sident lie n ors, th !:> m could n t b p id 0 ren itted to the 1 tt r r ult of a blocking prccl m tion.

Th

Unit d t tes FecAeral Court rul d th t wh re, s r sult of lee ing procl rn t1on, non- r id nt lieni'.> r for idd .n righ · to XcC iv or dis cse of roy lti s ·ue t. under C<..;ntr ct ith cor~or tion hich h 1 licens nd r aliens' p t nts , such lie ~ h n "g ins, profits nd inccme 11 w~t in int.ernal r enu st tute requiring all ·erscns h~vin~ con rol , rec 1pt, cust dy, • l . 2 45 - 11 - di pes 1 or paym nt of fixed or d t rroin bl n- nu 1 or riodic 1 g 1 , profits , n· inc Me of ny non-r ident 11 n to wit h ld t x nd. th r - for , no nee s ity of filing .ithh l ing t x re- urn d volv do cor .cr ticn •hil corp ration ret n d bl eked rc ltie • ult i th t th i u.on o y ent or remitt nee ~f d -----------------~ St tes eriv d incom to th non-re nt reci- pi n • ' c use of it not controlling ffects, on the r s nt ca , w •ill uote at length from th n.

" h o us c th. wit:hh~ 1 ing re- quire~ent on pl intif i i ~c~ d by s l43(bL 1 •.• C .:

.. All er on wh tev r c p city ctin·, * h ving th c ntrol, recei t, custody. dispo- s 1, or p yment of ~ ~ fixeu or d - t rmin ble nnu 1 r periodic l gain , profit , and inco.

of any resident alien • hall d duct nd 1 tl h ld from s·tch nnu 1 or p rio- die 1 g ins, rofits , nd incom • " On the wh( 1 , thi lrovisi n not cone rri itself with nwh n" i thholding should taJ.· p 1 ce.

r, , 1 t simply sp _cifi ;;;;. "who" .,.ha11 .. h t".

Ho·eve:or, t:1is uc Ji0l t o sh d.

rhe uty to it hold presup 1 os , he exist nc of" nnual or eriodical g· .ins, pro itu, nd in- com •• .

The ection irects t:h ·d th hol .ing from uc sum a re iden i-· fi bl · as g ins, ,:>rc. .r-1 ts, and inco .e of th ncnr si.dent lien.

bviou ly.

if iere r nc -..uch "gains, oroti · s ., nd inc m 11 , t duty to ·ithhold is nonexistent.

On h oth r hand, if there re such u v~ilabl , th st tut ry l JH uag _ 1., inconclu.·ive in 7 if DEC !..!' cr c ( . - • 2845 - 12 - d c iding " h n" the withholdi n ..

uty arcs~ .

l do not ground my d ci ion on ny subtlety of construction, but I o ad- vert, in fact , to it.

er the roy 1- . t ies 'qains, J.rofits , n inco e' to thE> li n

Dog

and de Tr y hile olaintiff ret in d th m ndcr these circumst nces It in not up n re~list1c vie. of th m tt-r .

Th

blocking ~rc·cl'lm ticn pluck d every el m nt of c cn rol ov r th f nds from h ~lien • ~ thccretical bundl- of o n r- ship rights .

This lvr.

o · th s nc of private own~rsh in occurred hil re v 1- t i s wcr still in pl intiff ' s o s ssion, sine th~ b, eking fr·eze pplied to in- d i vi u 1 ebtors of ~ i ~ naticn l • As con s roy l~i ccr d to the liens under th~ co ntract ~ his cr·zy pr aic ment f ced h m:

t1ey ad th or tical right to coll ct · ~ r y Jtie )Ut ~er for id- den right to r CPiv t em or ais t hem .

~o cor. rnic dvdnt 9 wa~ ~uch a ho low Hright .. do not h core of n fit suffici nt to co titut. "gai 1 profits , and inc m .. • ·ven th u )i quitou doctrine of ccnstruc·tiv r - c ipt of income h no t ntacle long nough to r ch t roy 1 i ~· Cf.

eg. 103, § 19- 2-2 .

As said ith r-f·r nc t 22- (b) (2) , l.~.c., in Industri l Trust Co. v. arod rick, 1 c.ir. , 94 • 2d ·927, at p ~ 930, "Tiro chcut t ~ ev . u a~~ th or s gain, profit, or incvrr· mean n ctual, not fictiti u g-in or ;ro- fit ."

Cert

nly, th s w r n t.

__.--:

"incc • an , if "ga n~, or pr fit , or ~ l Lnr aliz d nd highly rti ici 1.

}urt r, t.h lin h r hac n .power to comm·nd payment to hem ves or ot r , unl ik th donor of th intere8t cc ons in hel- v ring v . Horst, 311 u . ~ . 112, at page 11 , 61 .ct. 14, 147, ... s .Ld. 75, wh r- i is s io:

.. Th pow r to di .• os of 1 uiv_lent of o er hi~ of lt ·o 1 cern, then , t ·r being no "g in , prcfits, or inccm " of the liens t 1 t urin<; th tim pl intif.f.

ret· ined h~ir ~ 1 ck d r oy l~ies , n withh l~ing duty d.v.lv a on I laintiff nd no p n l ti s r * rqper . '' 58

C/

CTA CASE NO. 2845 « 22 Against this backdrop, the situation here presented, while the royalty in the amount of P69,529.00 (although was set up in the books of petitioner as a liability to Bayer) could not be

Sneed

remitted to Sayer due to Central Bank restriction at thet time, would not create “gains, profits or income” to non-resident foreign corporation Bayer. No economic benefits were derived by Bayer; hence, there was no income subject to withholding of tax-at-source. Accordingly, pe- titioner had no duty te withhold and pay the tax. —_ — Even more, adopted basis for the decision of the United States Court is the legislative history of Section 143(b) of United States Tax Code, from which Section 53(b) of our National Internal Revenue Code was practically copied, and hints derived from the published pronounce- ments of the United States Bureau of Internal Revenue and Courts, which disclose that duty of withholding arises at time of payment. We quote from Le D. Caulk:

“Present g§ 143(b), I.8.C., is traced back to the Act of October 3, 1913. Pa- ragraphs D and E of that Act are perti- nent, Paragraph 0 provided: “* * * all persons * * * having the control, receipt, disposal, or payment of fixed or deter-

DECI~Iu

CT

CASE

• 2845 - 14 - minabl annual or periodical gains , pro- fits , and incom of anothe r person sub- ject to a , sh 11 in b half of such erson deduct and withhold from the pay- ment an mount quiv lent to th normal inc me tax * * *•" rag r aph B o f the same Act in art s~ec ' fi d:

" 11 persons * * having the control , receipt , custo- dy, d ispos 1, or p ym nt of * * * oth r fixed or determinabl annu 1 gains, pr o- fits , and income of a oth r per son, ex- ceeding $3, 000 for any taxable year * * who are r equired to mak nd render a return in behalf of anoth r , s pr ovided herein , * * are hereby aut horized nd required to deduct and ithhold from such nnual gains , profits, and income such sum as will be sufficient t v pay the nor- mal tax * * and they ar each h r by made p rsonally liable for such t x . " aragraph D is x licit in dir cting with- holding from th "payment" hile its com- panions cticn auth rizeo ·the d duction nd imposes pers~nal liability on the withholding ag nt .

In its R port to the

Hous

of Representatives on the B ill~ the

Committ

on ays nd M ans said, "Fro- bably two- thiras of the inc me tax pro- posed as t o individuals ould be ded uc~ed and withheld at the source of the income and paid in full t the Government.

* * By this method the amount of tax due or to bec ome d ue upon every fixed or determi- nable annual income is ithheld and pai d to the Government before the income re ch- es th taxpayer".

Nonresident aliens as well as citi zens were subject to this withholding system .

In the 1916 Act, quoted paragraph D was r peated as section 8(d) und r the significant h ading • eturns" . r agraph · , as quoted, was r peated s section 9 (b) under th heading "Assessment nd Ad inistration" .

By th evenue Act of 1917, par - graph 8(a) of the 191£ Act (par . D o f th 1913 ct) was repealed so as to r n- der unnecessary any "withholding at the co • s urc

o. 2 45 - 15 - or in- 11.

In- itut d .

i

Th

evenu c of 1918 m d no ch nge in th pertin nt 1 n u < of th · amended § 9(b) but did increas th withhc l ing rate nd renumb r d the s c- ti . a 221.

Bo ev r , th...

ort of h

Ways and

_ n Co mitt of t

Hcus

i ds e rch in i'l co. Ut nts on I Collectio n t th .

ource• 1 "The d . bill, as un er exis ing 1 , r only the ith ol in o f in owe ca~e of n nts by indi idu 1 , c o r por tic ns, rtn rshirs cf ix d ond d .te in nual o r e io·· 1.c 1 g in , profits, nd i ncc . to ncnr $1dent clien in ividu ls or ncnr sla nt c r pr rations". ~,1~ c om- ment i an i oc ic ti n th int nt cf wer dent time . ex_;;re.;>"" ~d in parag ra r~h ct nc wa c ontinued in 1917 Act hen th f rmer aled .

tc chang , as · t1ho l in ~ revisions pply n y t o non si-

Th

time of p y. nt ras the •ithh lc ing cuty r o e .

Th

v nu ct of 1921 a .e n ndm nt to the ~ ction p rtin nt to incuiry, n r d i d th ct of 192 •

HowQ

ev r, both the .ious

Re or

nd the en-te · ~ ort on the 192 ct h v this ccrr.ment:

.. Secti n 221;

.:: ubdi visicn (a) of this secti0n of ~h pr 1 w ro- vid ~fer t e Jith.v din t # qu 1 t the nor.al t x , on fix o determi- 61

DECISION «

CTA CASE NO. 2845 nable income paid to a nonresident slien individual, or a partnership composed in whele or in part of nonresident aliens,” Both alse refer to “requiring the with- holding of tax from payments” to a partnership.

Rates of withholding were increased by the Revenue Act of 1926, and the

Conference Report of the Committees of the

House and Senate refers te the effect of the hike in rates: “This amendment re- quires the withholding of a tax of 12’; per cent in respect of all payments of income made before the enactment of this Act and 13) per cent in respect cf such payments made after the enactment cf this Act to foreign corporations specified below, * * * Because the persons making payments * * * had so notice that the corporaticn income tax would be increased, the withholding rate is not increased with respect to payments made before the enact- ment of this Act; * * *". Although refe- rence is to foreign corporations, the , withhclding on payments to them is but a part of the sae system embracing indi- viduals.

in the Revenue Act of 1928 a whole-~ sale departure was made from the a ment Of pricr Acts. § 221 became § 144. In commenting on part (a) of the Section, both the Mouse Report and the Senate Report stated: “The present law provides for the withholding at the source, in the case of bonds, of a tax of 5 per cent of the interest when paid to nonresident aliens. - * *,* Under the Revenue Act of 1932, the section was renumbered 143 and the rates were increased without affecting the as- pect of the provision under ccnsideration, The Revenue Act of 1934 made no - changes bearing upon our inquiry, but again in the House Report and in Senate Report references to withholding of tax on interest obligations were ccuched in terms of payment,

DECISION -

The 1936 Act did not change the terms of § 143 as they affect the problem under investigation. However, a comment in the Senate Report confirms the prior statements: “Section 32 of the existing -leaw provides that the tax withheld at the source under section 143 from pay- ments to an individual taxpayer shall be a credit against such taxpayer's tax". Reference is also made to “withholding in the case of payments to foreign cor- porations", The House Report, which the Senate adopted, on the Revenue Act of 1937 is equivocai in stating with reference to a change in § 2ll(a): “There will be withheld from the amounts receivable by a nonresident alien taxed under the new provisions the amounts required to be withheld under section 143 of the present law". “Receivable”, of course, is des- criptive of minute divisiorsof time from the first moment of accrual to the last second before receipt of payment.

fhe House Report on the Revenue Act of 1936 appears to reaffirm the earlier interpretations even if the 1937 Report be viewed as a deviation. In referring to consent dividends, the Committee on Ways and Means reported: “In case any shareholder making a consent is a person aubject to the provisions of section 143

(b) and section 144, relatinc to the de- duetion and withholding of tax at the source, section 28(d)5 requires that such consent filed by the corporation with its return shall be accompanied by cash * * * equal te the amount which the corporation would have been required to deduct and withhold by such section 143

(b) or 144 if the amount specified in such consent had been paid toe such share- holder, on the last day of the taxable. year of the corporation, in cash as a taxable dividend." The Senate Report used Bame ianguage in referring to § 143(b).

Mo pertinent comment. was found in the Committee Reports on the other Rav- enue Acts down to 1941 and 1942, the 63 •

DECISIO

CTA C

E

O. 2845 - 18 - t x ye rs in u stion .

However, one fur- ther reference is made to a later com- mitt e report reflecting current thinking . he Hous Report on th evenu ct of 1950 in referring to reposed ~ 13ll(a} states:

'This subs ction also provides that any p rson required to de- duc t and withhold a tax under s c ion 143 or 144 r * on th payment of a dividend shall not be re ir d to deduct nd withhold a ta under this section upon such payment".

Regulations promulgat d by th C m- missioner contain abundant references t o payment as indicating th crystalliza- tion of the withholding duty .

Treasury

Regulations 111, § 29 . 143-l(a} states: "Withholding of a ta of 30 percent * * is required in th c se of fixed or determinabl annual or periodical in- come paid to a nonresident alien in- dividual* "" *" •

Th

subsections of § 29 . 143 are r pl te with ref r ences to withholding upon payment, such as "Th tax mu$t be withheld at the sourc from the gross amount of any distribution made by a corporation•• (29.143-1); 11 * an nnual return * ., showing the amount of tax required to b with- held from ~ach nonresident al ien * * * to which income oth r than interest was paid during the pr vious taxable year" (29 . 143-7); "Tax withheld at the source upon * incom paid to non- resident al~en fiduciaries * * +II ( 2 9 • 14.3- 9 } • And ev n on the qu stion of ~hether ith- holding should b a t the rpte in effect at the time payments were due or at the rate wh n pay- ments wer ctually ~ ' the United States Court rul d that the time payment is ~ governs the rate.

~e again quote from the Caulk decision:

64 DECISION - , CTA CASE NO. 2845 "On the issue of whether withholding should be at the rate in effect at the time payments were due or at the rate when payments were actually made, the Bureau has ruled the time of payment governs the rate. ©.D. 167, 1 C.B. 1927 I.T. 3342, 1940-1, C.B. 58. In fact, language sufficiently broad to encompass the problem was employed in G.C.M. 2467, Jo2 C.B. 188 (modified on other grounds . withholding is only required when * * * income is paid to a nonresident alien and at the rate in force at the time of payment."

As in the above, so Southern Pacific Railroad Co. v. C.iR., 21 BeTecAe 990, held rate of withholding was that which was effective on the date of actual pay- ment. in that case, the petitioning com y contended unsuccessfully for a re- sult similar to the one here sought by the Government, Bond interest due and payable during 1914-1917 could not then be paid to nonresident aliens because of war restrictions, It was, in fact, paid is in 1921 and 1923, after the withholding . §kates had been increased, The company argued the former, lower rates should apply because the interest was then due; sufficient funds were available at all . times for its payment; and the date of constructive receipt by the bondholders gave rise to the duty of withholding, The Board of Tax Appeals rejected these arguments, saying, 21 &B.T.A. at pages 995 and 996: “The petitioners did not and were not called upon to pay the ; interest until 1923, and the nonresident aliens did not and for all that aprears could not receive the interest until then *.* *,. When the interest was actually paid to and received by the bondholders they received income taxable at the rate then effective, and the petiticners were under the duty of paying so much there-— of as by the statute then in effect they were required to withhold and pay."

ee) 65

DECISION -

CTA CASE NO. 2845 - 20 Oblique support is thus given to adop- tion of the time of payment as the mat- uration point of the withhclding duty, payment being both an easily recogniz~- able act of objective significance and a standard safeguarding the collection of the proper amount of tax,” veh What possible ground cen there be for us Mot to apply to petitioner the ruling of the United States Federal Court in L.D,. Cauik, supra, for which Bayer Pharmaceuticals, Inc., is simi-~- larly situated: A decision buttressed by the — which is closely if net exactly similar to our law, reason and logic is not to be simply brushed aside to accommodate a ruling of our own Bureau of Internal Revenue which merely quoted as authority the excerpt of a Umited States Iin- ternal Revenue ruling but which excerpt has been declared obgolste by the sane United ltates In- ternal Revenue Service as a result of the i.D, Caulk decision. As we view this legal preblem, we find no cogent anc valid reason te modify, much less depart irom the conclusion reached in L,D. | Gaulk, as expressed in the above-quoted opinion of the United states Court there, and the same should resolve the icentical issue now brought before us in this proceeding, NE enna ignere the wellesettied principle of construction that since cur income tex law was prectically copied from that of the United ftates, the interpretations it has received in the United States have autho- ritative effect in the proper construction «and o 66 .,; • 28 5 • - 21 - pplication of our 1 • ~ore so in th c s of our ithholding tax- t-~ourc provi i on .mbodied in ... ct on 53 (b } of our atio 1 1 nt rnal evenue Cod, 1hich, a s 1own ab ve , w s merely impcrt d and copied al.ost v rbatiro from section 1 3( ) f th Unit d ,t t s Tax Cod durin involv d in the th e r

II

~ ccordingly.

the ccnclusio n r a.chE~d in • • Caulk, wh ich is f llowed by th nit .d ~t t s lnt rn 1

R

~venu

Servic

- th t the tim of p·,yment of the r yal- ti s i the n,tur t ion tnt of th duty - shou d govern thi pr ce dJn it h ·ld ing

If

Not much need b said on res on ent ' tion th t , baed on thP report of ti1e inv- tig ing x ,,iner, nothin9 is state t at petitic ,r t- t m ted to remit the roy l'""'es to D y r. By res- pond nt ' o n d ci ion- it is explicitly eel r d "that the roy 6 • 52.' . oo ere not remitt ct ' by l (p titi n.r herein) t

Sa

r ue to Central ank r trictions." · (Exh .

"5, " xh. "F~ -1 .

' p . 30, 1 ~ r c c.-r s) inc . the· roy .ti s could not :.> r mi t d to ay r due to c ntral n re trictiona, s stat·d by respon- den him elf in . is d .ciaion p al d rom, surely.

res~oncent's c 1ng shoul not ex ct ti ion r to m ke fort~ , lb it unl wful, to rendt the me.

nd on r ~pon d nt •s point th t 67 / ~s a ae

DECISION ~

CTA CASE NO. 2845 - 22 - / since the royalties had been accrued in petitioner's books the income thereon became subject to with- holding even if remittance was effected later, suffice it to say that the accrual of the royal- ties in petitioner's books, as held in the L.D. Caulk, did not amount to B nmenanedl practise and income” on the part o of non-resident Bayer and, therefore, no necessity tc withhold tax devolved | on petitioner. .

We, accordingly, rule that since the royal- ties in question could not be paid or remitted in 1972 by petitioner Sayer Pharmaceuticals, a to non-resident foreign corporation Bayer Aktiengesellschalft, Leverkusen sevesinadh due to Central Bank restrictions, petitioner was under no obligation to withhold and pay income tax-at-source on said royalties and, therefore, it is not liable for the deficiency withholding tax-at-source ccna, of respondent Commissioner Sac i of tetera) Revenue ie amount of P36, 834,73 for the year 1972.

WHEREFORE, the decision appealed from should as it is hereby reversed. No costs.

B

DECISION ~

CTA CASE NO. 2845 Quezon City, March 16, 1979.

I CCNCUR:

y fees, ad

AMANTE YILLER

Acting Presiding Judge

CONSTANTE C. ROAQUIN

Associate Judge

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