t ' fUU"'OBUC OP llt£.-J.HU f'IN, et al.

DECISION -

CTA C~SE NO . L358 - 5 -· and the BOISE INTERNATIONAL , which contract provides tnat petitioner shall repay the above mentioned loan \>lithin one year aft.r demand is made, w1th inte r est · · at 8 J/4% per annum .

~ t this juncture, it is to be noted that pursuant to the existing Central Bank Rules & Regulat ions, the aforesaid three (3) .loans secured by petitioner were accepted and approved for registration as loans secured from the BOISE INTER.ATIONAL by petitioner. (Exh. J, petitioner's envelope).

The evidence chow that the aforesaid amount of ~6uo,uoo.oo·was later reloaned by petitioner to BATAAN (TSN. p. 86, Aug. 11, 1980) ~ while the amount of Pll,4UO,UOO.OO was later re1oanea to ZAMBOANGA (TSN.

p. 83, Aug . 11, lY80). However, the amount of ~1,920,200.00 (Exh . G) was merely held by petitioner as stand-by or reserve f nd which il can and may re1oan from time to time either to said BATAAN or ZAMBOANGA as the case may be, o a short term basis , whenever said companies will find themselves short of their operat ional expenses . (TSN, pp.87 - 88, Aug.

11, 198 OJ) It is further noLed that all these amounts loaned by petitioner 'l'lere re fleeted in its books of \ 121 ) co epee Po 4 ry & it wn hee &

PACIMeE

oho a x

HG

ate!

oa # t “ee 2 ™ ~~ ei a 46

DECISICIN -

CT~ C~SE NO. 2858 - 7 - interest d ue on tlle said loan fro.t November 5, 1965 to August 1970 on an ann•al basis. However, it was ·nly on September 5, 1970 that said petjticner was able t.o remit to the BOISE IN'I'ERNI\TIONJ\L 55% of the intere sts income earned.

It was also on that date that the 35' wittholding t x on such intGrest remitted was paid under Receipt No. 2323927. (E.xhs . AA , EE 1 EE-l, found in petitioner's big e1v lope~ Exh. T-1,

p. 187, Folder I~, BIR rec.; TSN, pp. 46-48, May 27, 1980 .. )

~s regards the loan in the amount of Pl,920,20U.OO , the pet1tioner starteC accruing the int~rest due ther eo~ from November 1965 en an a1 nual basis up to Dec~mber

1. 1968 wt ich amount~d to ~691,271.81. l\ddit1onal interests also accrued in the following years but it '1-MS on1·• on :")ctober 2, 1.970 thllt. pe·titioner vJai3 able to effect tne first partial remJttances o[ the 1nterest on Novernb·.r 1?.~ and Dec(~mber 12, 1Y70.

The corres- pending inte rests accrucls, and the 35% withholding taxes were paid by petitioner as at the ti.me when the remittances w~re made to BOISE INTER~ATIONAL. (Exhs ..

BB, FF, on petitioner's oig envelope; see also Exhs. T-2, T-J, 1-4 . T-5 & T-b, pp. lP6-187 DIR rec., \ 123

DECISION -

CTA CASE NO.

285~ - 8 ·- .. .

Folder II; YSN., pp. 49-54, May 27, 1980.} The same is true in the case of the petitioner's loan in the amount of ~11,400,000.00. The interest thereon was accrued on annual basis, but the remittances of tne interest thereon were made only beg i nning October 11, 1971, and the corresponding withholding taxes were paid as at the time tne remit- tances were made out to said BOISE INTERNATIONAL. (Exhs. CC, GG, found in petitioner's big envelope; Exhs. T-8, p . 185, BIR rec., Folder II; TSN ., pp. 55- 58, May 27, 1980.)

Sometime on J anuary 12, 1967, petitioner herein filed its amended income tax return for the year 1966.

(Exh. K, p. 80, BIR rec., Folder I). In a letter dated April 3, 1972 (Exh. C, pp. 194-196 BIR rec., Folder I), H~spc::,n.dent assessed petitioner for deficiency income and witnholding taxes covering fiscal years June 30, 1966 and June 30, 1Y67 as ~ell as calendar ye~r ended December 31 , 1967 , which asseas- ment appears to have been released by respondent on April lL, 1972 (Exhs. C-1, p. 194 BIR rec., Folder I.}, computed as follows:

\

OTA

iLO CASE Pe. 2696

Baianee

Add: foo. dnb. fe. 1L0~i6-66 tO LG Le G5 fee eee ee ee Potal omount duc and colieccinle Are atties on conn mde Ae: etn ae ae

UTratblowabile

nrterest mich.

Net Enessce per see Pax duc thereon a ave Add: oad. amt. fr. JO-L6-G7 to LO LO 70 cece ewe wa tee ee Total amount due and collectible

LheACR-GOO396/7 67

Per reburn veers eccan Jaellowaple decuction-- eyest exmense dividend 2 expense cdivic C Mot anuame per investigation Tax due tacieon amount alrcaay assessed, See et we ee ee ee ee ay So be ge ia = Qf “- mo. int. fx. o- ~Gh io an oe Mounts due £& col

PY+6~-30-65

sa ema aes sen cah Total &heunt remiss 30% withholeung

Adda:

"S Pa. AM LO hO-59 .

Total smouat ane 2 collooiiole we ’ neeme Per Lo Lue ee z a] » - Bas ,42liue 2 ° £,025,260.43 3 » 187,916.00 ,U24.83

DECISION --

·- 10 ·-

FY-· 30-6 7

_ .. ______ _ Total amount remitted ............... .

!Bl 30% withho.ldi.nq tax at source ..... .

Add:

25 % surcharge ............... . 1,02~ , 280.18 30 7 ,584.00 76,896.00 ~% mo . int. fr. 10-16-67 to 10-] ... 6-70 • =• ~ ..

~~' ••a•'l• n•• •"'•·""'"' • Total amount due & collectible 55,365 .12 ii--·439 1845 .-.. ~ Calendar Yea r 19 67 ·--·------·--- •rotal amount l.'emitted ....... .. ... .. . l?

30% withholding tax at source ..... .

Add:

25% surcharge ..•...... .. ... ..

~% mo . int. fr. 4-16-68 to 4-16-7 ]w ~. ~ #. ~ ... -... . ~. U • •• ~ ~.

Total amount due & collectible 638,96/. .0 0 191,688.60

4. 7 ,922.15 R· spondent.,. in anottwr Jette r dated Septembe r 15, 1972 , assessed petitioner for t he year 1968 holding the latter: liable for deficiency witr1holding income ta:K i.n the total amount of ~4jl,976.86 (Exh. X, p. 108, BIR rec., Folder II) , computed as follows: Interest income of Bo i se Cascade Interna- tional Inc., of New York, USA, mother company of Boise Cascade Ph ilippines, Inc. su bject to ~ithholding tax a nd claimed as an ~xpense in the income tax return of the local corporation ..... Total withholdi ng tax due for the yea.r 196.8 ••""•""""'" • *•" " """"t~e•~~"• • • • ••~*-" ~·

Add:

~% mo. int. fr. 4/16/69 to 4/1 .. 6/72 .. ·"' ~"··4····.,-··~····"·"tl Penalty for failure to file return and to pay tax ..... .. . .... .

TOTAL DEFICIENCY WITHH 1LDING INCOME TAX .. . \ 382,777 . 00 .

;

H

j l I .

I

I·

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I

I l !

; I ,

I

I

l 1

I

DECISION -

CTA CASE NO . 2858 ... l l - The income tax defic iency asse~sment i ssued by respOi'Jden t \:as based on the di s~ llm·J f~d i tem of in- terest expenses claimed by petitione in its income v.

tax r eturns for t he years in quest i on on the ground that the aforesaid in teres t expenses were considered dirguised d ividend distribution s . The withholding tax d~fi cie ncy assessment on the othe r hand was made by responden t on the ground that the duty to with- hold and pay the tax orises upon accrua l ci t he income in the books of acc ounts of petitioner and not at t hf.:'! time of actual payment or remittance thereof. In a le tter dated May 5 , 1972, which was received by r esponder t on May 8 , 1972 tExh. D, pp. 202-213 , BIR rec., Folder I) , pe titioner disput.ed the respondr2n t' s assessment dated April 3, 1972 on t he following grounds: contend ~.; that: the inte re s t p ayme nt. ~.

w=~re not disg ui sed dividends but were in re~li ty payme nts of interest on a bona-fide i ndebtedness by pet:tioner to the BOISE IN'l'EHNATIONAL ,, tioner contends that until an actu a l paymen t or \ DECI~?ION - CTA C"SE NG. 2858 - 12 -- remittance )f the interest income is actually made to BOISE INTERNATIOtAL, it cannot be cons"dered a~ J.ncome of a non-resident foreign corporation andt • therefore, when said interest income is not yet remitted, it is not subject to withhold'ng tax especial~y so where the rernitt~nce thereof is restrained by Central Bank restr1ctions.

And also, in a letter da ted October 16, 1972, petitioner equally contested respondent's deficiency vlit.hholding tax ass(~'-:;sment of ~:;eptember 15, 1972 , which was received by respondent on Octo· e r 17, 19 '/2 (E h. Y, pp. 119-123 BIR rec., Folder II) for the ye a r 1968, on the gJ:o·m.d that no actual remi.t. tanc f~ of interest was made in 19b8 and the ·emitta1ce s to BOISE INTEP- NATIONAL of the interest incomes in tne amount of Pl,215,903.99 were effected only in the years 1970- 1971.

And it was only upon the actual remittance of th~ interest income due to BOISE INTERNATIONAL can peti tio .e r withh0ld and remit to the government th~ cor. re spending 3~>% wi L1noJ.ri inog .ax on such. income and the mere accrual of interest expense in petitioner's books of account will not sub~ect such income t \ 128 -

I

I

I -

DECISION -

CTA CASE NO.

285~ - 13 - withholding tax if no actual remittance i: made thereof to the foreign corporation, such as the BOISE INTERNA~IONAL in this case.

.

.

In a letter dated January 25, 19/7 (Exh. Z, pp. l32-l3J, BIR rec., Folder II), respondent denied petitione r 's letter of protest dated October 16, 1972 pertaining to the amount ot ~451,976.86 as deficiency withholding tax-at-source for the year 1968; and also, respondent, in his letter dated January 28, 1977 (Exh. E, pp. 237-238, BIR rec., Folder I), denied petitioner 's letter of protest dated May 5, 1972; and that in these two separate letters of denial , respondent reiterated the payment of tne said def1ciency assessments.

Hence~

on February 22, lY77, petitioner appealed to this Court. On April 1, 1917, respondent filed his answer to the aforesa1d petition for review, and by way of special and affirmative defenses (pp. 15-16 , CTA rec.) asserted the following allegations: 6.

The alleged promissory notes that petitioner nas conveniently devised for Boise Cascade International , Inc., cannot give rise to a debtor-creditor rela ti onship between tnem because of the absence of a fixed maturity date for repayment (Alamoritas Cattle Corp. vs. Campbell, 9 AFTR 2 d 1446; Atlantic Acceptance Corp. vs. Tomlison, 2 AFTR 2d 5965); \ 128

- 14 - 7.

Petitioner hc~rein is 99.24% owned by Boise Cascade International, a foreign corpo- ration not authorized to engage in trade or business in the Philippinesi 8.

As the ~apital stock of petitioner is practic~ly owned by Boise Cascade International., the amounts paid by tb.e former to the latter allegedly in the form of interests were actually distribution of dividends; 9.

The assessments in the sums of PB70,4G4.73 and P451,976.86 representing with- holding tax at so1 r ce are not: dependent m remittance of the in.ome payable to the non- resident foreign corporaLlon.

The duty to lith- hold arises upon accrual thereof (BIR Ruling No. 71-003, February 26, 1971;

10.

The assessments were issued in accord- ance with law and regulations.

The issues presented before Us for determination are as follows:

1.

W ,ether or not pttitioner ' s payments of in- t erests to Boise CaacadE International under the three promissory notes are disguised dividends~ 2.

Whether or not re~pondent 1 s right to assess petitioner for Fiscal Year ended June 30 , 1966 has prescribed;

3.

Whether or not petitioner has already paid the withhol.ding income taxes that ar_ the subject of the de U.c ie cy wi thl old in'] tax a sse ssmen t.s; 4.

Whether or n t the obligation to withhold and pay income tax on interest payments dJe a non- reside. t recipient is upon accrual of such interest income or upon the actual remittance or paymen : thereof; ancl \

13Q

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- 15 - 5.

Whether or not petitioner is liable to 25% surcharge and interest i mposed upor1 it by the respondent. As regards th ~ fi.r~~ issu~, it is Lo be noted that .. the deficiency income tax assessment was the d'rect result of the disallowance of interest deductions claimed by petitioner in its income tax returns in the amount of P364,814.00 for fiscal year beginning June JO, 1966; Pl,025,280.18 for fiscal year beginning June 30, 1967; and PG38,962.00 for year ended December 31, 1967. The said disallowances were based on respondent's theory that the i1terest payments were actually dividend distributions to BOISE INTERNATIONAL for the reason that said Boise Cascade International owns 99.24% of the capital stock of the petitioner herein and that the promissory notes executed by petitioner in favor of Boise Cascade Inter- national has no fix ed maturity date. It is further con- tended that the transactions were actually investments made by Boise Cascade International in the guise of loans to petitioner and that it was deliberately done as part of its tax·saving scheme Ln the form of disguised dis- tribution of dividends designed to lessen its tax burden to the government.

We cannot subscribe to respondent's theory. The \ 131

DECISION -

CTA CASE NO.

28~8 - 16 - fact that petitioner was a-\,h l1.y-owned subsidiary of bOISE INTERNATIONAL, or that 99.24 % of the capital s tock of. petitione r is owned by said BOISE INTERNAT IONAL cannbt be a s ufficient basis to arrive at the conclusion that the in te rests due on th e loans acquired are dividend distribution; a nd that it could not be said tha t the r e were no val i d or bonafide loan transactions or true or bonaf ide indebtedness enter e d into between the parent company (BOISE INTERNATIONAL) and that of its subsidiary {BOISE CASCADE PHILIPP INES).

I n one Ame rican case e n- titled Van Clief e t. a . v s. Hdvering , Commissioner of Interhal Revenue, No. 8351, April 12, 1943, 135 F2d 1417, 1419, United States ~our t o f Appeals fer the District of Columbia, ruled:

"As stated above, we fi nd nothing in the r e cord to support the inference dr a wn by the Board tha t t he advancements inc l uded in the $97,496.83 wer e not intended as a loans to the corporation and did not give ris~ to an indebted- ne s s in that amount.

This infer ence that a loan wa s intended is the na tural and logica l inference, and the f act that Van Clief was the sole stock- holder of the corporat ion did not t e nd to rebUt i t.

If the sole stockholde r had been a corporation which made a n advanceme nt to its subsidiary , it would hardly be contended that the advancements did not give rise to an indebtedness as between the mselves , although a claim on account thereof would have bee n pos tponed in bankcrup tcy to the claims of other creditors.

SJmpsell v. Imperial Paper Co., 313 U.S . , 215, 219 S. Ct. 904 ,85 L . Ed. 1293; IO \

DECISION -

CTA CASE NO. 28S8 - 17 ,. .

Ed. 1293; In re Smith 2 Cir.., 36 F. 2d 697. 'I'hc=re is no reason to apply a different rule because the sole stockholder is an individual. The fact that Van Clief made the advances to keep the corporation afloat rather than to liquidate '· it, has no tendency to show that a voluntary addition to capital rather than a loan was intended.

See decisions of the Board in Harry T. Nicolai.

Com'r, 42 B.T.A. 899, affirmed 9 Cir. 126 F. 2d 927; William D.P. Jarvis v. Com'r, 43 B.T.A. 4J9, affirm d Helvering v. Jarvis 4 Cir., l2J F., 2d 742; Edward Katzinget Co. v. Com'r 44 B.T . A. 533,536 xxx."

(Underlining

Supplied.)

It further said in the same case of Van Clief et al . v. Helvering, ibid: p. 1419, that the - "xxx Advances are an additional contribution of capital if they are inteneed to enlarge the stock investment, but not if they are intended as a loan.

Daniel Gimbel (v. Com'r) , 36 B.T.A. 539; Jjermuth-Lembecke Co . {v. Com'r) , 17 B.T.A. 599; l\Tilliam D.P. Jarvis (v. Com'r), 43 B.T.A. 439. Here the parties intended the advances and loans. This is shown not only by the testimony of the officers, but by the entries on the book of the two companies are the consistent actions of the parties in regard to the advances, including their actions incident to the liquidation."

(Underlining

supplied._) In determining whether a particular transaction can be considered a bonafide loan or a dividend distribution, the question is one of intention between the parties thereto as shown in the aforesaid transaction.

This

question of intention is a factual one to be decided from all the assembled circumstanc_s. In one circumstance, \ 13 · ......

0

DECISION -

CTA CASE NO . 2858 -- 18 - where a promi ssory note wa s ~ctually executed and an it -m of note receivabl e was carried i n the books, th is cir- cumstance was cons ide red in .·' i.nd ing t he existence of a loan .

Chap . 9, pp. 70·-·72.)

It is, therefore, the p~rties' i ntent, ascertained t rom a ll the relevan t facts and ci r - cumstances, t hat is materi.a l in dete rmining the true nature of the particular loan transaction. In dis t inguish- ing whe the r one is payment of d i vidends on stock , or the payment of interest on i ndebtedness , this was d i s cu ssed clearly 1n a dec i sion of u.s . Di s trict Court of Kansas, in the case of Associated Investors 1 Inc . vs . U. S . (52 AFTR 1210, 1213-1214) , which we quote : The sole issue, as indicated by the stipulation, i s \-vhethe r tne advancement to the corporation by its shareholders, for which wer e i ssued its promi ssor y notes , r epresen ted a debt enti tling it to deduct the designated inte rest on sa i d notes from taxable income, or were contributions to capital and the payme nts we r e divic:endsor: d i stribution of capital.

Thi s same question has been passed upon by the Court of Appeals f or che Ten th Circuit r and thi s Court sees no particular re ason for goin g beyond those deci s ion s since t hey are binding upon this Court. What con s titutes inte r est and what constitutes dividends a r e questions that ·have had the attent ion of the courts almost without limi t .

\

- 19 - .·· In Crawford Drug Stores v. United States, 220F.2d 292, 295, Judge Bratton speaking for the court said:

"* * * But in distinguishing between payment of dividends on stock .and payment of interest on indebtedness the determining elements usually r ecognized for appropriate consideration are the name given to the certificates, the presence or absence of a maturity date, the source of the payments, the status of the holders in respect to being equal or inferior to that of regular cor- porate creditors, and the inten tion of the purties."

(Emphasis supplied.)

This case is clearly distinguishable from the instant case as disclosed by the facts. The certificate s in the Crawford Case were denominated perferred stock, payments were to be made only out of net earnings, on dissolution the rights of the holders were to be subordinate to the rights of ordinary creditors, the charter of the corporation provided for common and preferred stock, and the annual franchise returns reported shares of preferred as well as common stoc k .

In the instant case the certificates were denominated promissory notes and they were so designated in the corpo r ation tax returns.

The minutes of the first meeting of the board of directors of the plaintiff corporation referred to the certificates to be i ssued as promis- sory notes, and in a l l of the corporation records , including its financial statements, the certificates •were designated and treated as promissory notes. There was a fixed maturity date and the notes provided that interest should be payable semiannually .

It

was provided that the notes were to be treated on the same basis as claims of any other creditors of the corporation.

In other words, the holders of these notes were to have no advantage whatever over common credi tors , and the holder of any individual note was to receive no advantage over the holders of the other notes.

The corporation unconditionally bound itself to pay a definite ascertainable sum regardless of earnings or surpluses, and the payment was not limited \ 135

- 20 - ~ .. ' to t he i ncome of the corporation. There was nothing in t he form of the promissory notes, their his tory and execution which ind ica ted anyth i ng but a creditor rela tion ship t o the corporat i on, and under the stipulation , the • holders of these notes treated t hem as promis- sory notes .

Nor wa s t here a1yt hing to indicate t hat they we re t o be treated as prefe rr ed stock or stock of any character . In Bowe r sock Mill s & Power Company v. Comm i ssioner of Internal Revenue, 172 F . 2d 9 04 /37 AFTR 960/, 90 7, the Court in an opi ion

by Judge Murrah-stated:

"* * * Although eve r y case turns on its own facts, the courts have pointed out some of the indi c i a which mark the dis- tinction between the debtor and credi~or and stockholder re l ationship , such as the name given to the obl1gation; whether the holders have voting p~wers, and whether there is a fixed rate of interest .

All of

the courts agr ee that the most important, if not the controlling f actor, is whether the obligation provides for certainty of paymen t of a fixed sum on definitely fixed datf~ S."

And in the conc lu s ion , although there existed preferred stock secur ed by a mortgage, the Court said:

"When the whole tr ansaction is v i ewed in the light of actualities, it is clear that the preferred stockholders remain c red itors of the corporation , and t ha t the payment on the obligation was deductibl e as inte r est."

Under the stipulation of facts, these stock- holders holding the notes in question "advanced " to R.K. Stiles, as t rustee , the s um of $25 ,00 0 . 00 to be used to purchase a designated 76-acre tract 1 of land, which wa s sol d at a sheriff ' s sale

After

1 -) ~~ ...LUV

- 21 - / ' the trustee had rece ived title to the property, then it was that he organized the corporation and these noteholders agreed to take their pro- portionate part of the issued stock and the promissory notes of the corporation for the remainder of the amount each "advanced." Certainly the entire transaction met the requirements of the Kansas statutes and the mere fact that this money was advanced for the purpose of enabling the immediate purchase of this land under the particular circumstances under which it was purchased, does not mean that those advancing the money were under obligation to take stock in the corporation for the full amount of their advancement.

There is nothing irregular in the organization of the corporation and the fact that all of the se notes were paid before the maturity date indicates that the corporate structure and the operation were in good faith. The most controlling element in determining whether the amounts in controversy are interests or dividends is the intention of the parties, i.e., the corporation and the noteholders. As herein- after stated, in all of the proceedings of the corporation there appears the clear intention to treat that portion of the advancement made by each of the noteholders as a temporary loa n rather than a definite contribution to capital. To be more specific, in determining whether payment made are interests on indebtedness, hence deductible in the income tax returns, or disguished dividend dis- tribution which is a capital item and is not deductible, the real intention of the parties must be sought and must turn upon the facts and circumstances surrounding each \ 1 3 .

..a.

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- 22 - case.

(Philippine Trust Co. vs. Comm., C.T . A. 367, Jan. JO, 1961; U.S. vs. Title Guarantee & Trust Co., 133 F 2d 990,993.)

Where payments are made by a corporation on its shares of stock, these are dividend~, but when the payments were made on evidence of indebtedness, these are interest payments and are deductible as expense. The intent of the parties are determit ed from all the facts and circumstances and once the intent of the parties be- comes clear that controls.

The characteristics of a loans are:

a definite ascertainable obligation; a time of maturity, either definite or that will become definite.

It may, of course, possessother features as well.

(Par. 1902, PH. Fed. Tax Handbook, 1955) LHotel Filipinas, Inc. vs. Comm., CTA. 1912, Nov. 26, 1971~/ The que stion now for Us to determine is whether the circumstances and/or the factors in the abovequoted case of Associated Investors v. U.S., £E cit., and the Hotel Filipinas, Inc. vs. Comm, £E· cit., are present in the case at bar, so as to arrive at the conclusion that the said transaction is considered a bonafiae loan . A close scrutiny of the records of this case reveals that substantial factors cited in the aforequoted cases are \ 138 --- -

DECISION -

CTA CASE NO. 285 8 - 23 - presen t in the case at ba r CGncerning the transactions e nte r ed into between petitioner and BOISE INTERNATIONAL to br i ng us to t he co e l usion that they are more in ..

the nature of interest income from loani than dividend distr i.butions.

Fi£.§..!:. 1 it is noted that:. the al l eged loan investments were characterized by the exis ence of promissory not s. (see Exhibits F~ pp. 25-26 , BIR rec. Folder I; G and H, found i n pe t itioner •s envelope) While it may be t · ue that the name g i ven in an in str ument may not be conclusive of its true nature, it is however a strong injication of the true inten t of the parties in entering into a contracts of loan especially when other additional c ircumst nc .s or fa c tors , taken altog e the r a re present. In this Vol. 4A, Se c 26 . 10 , pp . 58·-59 } has this to s ay : "l.

Di d the pa ties intend at the i· ime of the issuance of the or i ginal docume nts to create a de b t or-creditor r elationsh ip? Both st cks and bonds evidence a contract between their ho l ders and the issuing corporation; hence, in construing a contract the Lmguage used in red c i ng it to wri ti ng will normally be indicative o f the intention of the parties . H2.

Al though not conclusive, what nome n- c lature and l abels have-"6-eer=l'-u sed'? Inte res t is not changed i nto a d' v idend by merely calling .it a dividend , and vic_ versa; like wi se , a pe r son · who is a creditor is not changed into a stoc k- holder by merely ca llin9 him one , and vice versa .

Although , a s sta ted, the name of ~n \ 133

DECISION -

CTA CASE NO. L85U ·- 2 4.

- §.~ond_, the sub j ect. promissory notes have provided for the rna tu r· i ty dates of the loans ' payrnen t.s and their mode of payments , contr ary to allegation of respondent. A c lose sc ru tiny of the .:E.i£s~_.}.o ~.!l in t he .::unount of Pl ,920,20 U.OO, s hows hat it was covered by a prom i ssory note of pe ti tioner dated November 1 , l9b5 (Exh. G, found in petitioner's enve l ope) which prorides that petitioner ' s payments of s2id loan should be made on or before September 1, 19/0, with interest at 12% .e.~.E.

~li!J...:!!.~ · The sec ond_lQ_~ in the amount of Ei600,000.00 , which is covered by a p r omissory note of pe titioner dated November 6, 1965 (p. 35 BIR. · re-. Folder II ), provides that said petitioner shall pay t he loan, at 12% interest E££ ~11 .. ~.~ , within thirty d ays from date of demand. The third and last loan, in the amount of Pll,400,000.00 , evidenced by a promissor y note of petitioner dated January 3, 196 7 (Exh. F, pp. 25- 26, BIR rec. Folder I), provides that said pe titioner s ha l l pay the same within one yea r after de mand, with in terest at 8 3;4 % £~.£ ~!:!_nt:!.f!! .

Definitely, \ ..J

DECI 310N -

- 25 - there is a defini te time fr~me in which the interests on the various loans of petitioner should be paid to its princ ipal , the BOISE INTERNATIONAL. Again, these factors will efinitely show that there exist a situation oi creditor and debtor r elation- ship because the promissory notes pr ovide for payment of a de~inite sum and a fixed time to repay the same. In this connection, Mertens (2£· cit . , pp. 60-6l} again, has this to say:

"Does the obligation have a definite maturity date fixed or ascertainable?

That feature is ordinarily tl e essenti l element of a creditor in- vestment .

The fact that ultimately there must be paid a definite sum at a fixed time marks the relationship to the corporation as that of creditor rather than shareholder."

(I t alics our s. )

It is to be noted that petitioner, under the said r, promissory notes executed in f avor of BOISE INTERNATIONAL are payable unconditionally to the latter regardless of whether there is or there is no profit or surplus.

These

categorical and unconditional obligation of petitioner, under the said promissory notes, clearly establishes the existence of a creditor and debtor relationship, i.e. , between pet i tioner, as debtor, BOISE INTERNATI0NAL, as creditor.

In the instant case , the alleged advances made :by the BOISE I NTERNATIONAL to petilioner supports \ 14 .·

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- 26 - ...

s trongly a finding which ~e so hold that said alleged amounts o f advances are cons i dered ri htly and legally as loans.

Again,. to this holding, Me rtens (.ibid .. , ,,

p. 65) says as f ol lows: Is the obligation to pay posit i ve and unconditional or subjec t t o a con tingency? The f act tha t fund s were ad vanced with -r e ~son al?.l e ·-e ~~Cti9D:- o·t_ .. i E a yrt1'"~£!_f_,g_li PEO ..Us. _?_Un_~ i t].SL. th.? t:-~ til£._ advance §.-~~-~f.LJ. OdD_~ . Ordinarily, indebtedness i s founded upon a positive ob li~Ja t ion to pay.

:f_l_!_'!;._g,editor must be e n t i tled i n al l events to the return of th'e.mone.,Yl':Oan e]:-.-·"-Ti1e--s hare h o lcferis-·enrr t 1 e d to nothing prior to l iquidat ion , 2xcept ou t of earnings .

The ~red itor is entitled to payment of inte r es t and principal f rom the corpus of a de btor ' s Jrope rty, r egardless of whether the re is a ~urplus of earnings.

In compensation f6r no t sharing the profits, the credi t or i s to be paid indep ndently of the risk of s uccess.

T1 i s dis t inction marks a vital difference between t he shareholde r and the cr =>d i tor .

(Y.D.££.E.li rring_ SUE£..1 :i..e.~_::..) ,Thi,rd, the said loans we re approved b y the Central Ba nk as f ore ign loan s.

Central Bank Ci rcular No . 289 provides t at existing foreign obligations, not regis- t~ red with th e Central Ba1k be for e November 26, 19 69 , shall not be allowed the remittances of interest abro d, except on l y upon the registra tion and approval of the l oans by the Centr a l Bank.

Petitioner, in cornpli nee with aforesaid requirements, had submitted all its promissor y notes and suppor t i ng papers to the Foreign \

- 27 - Exchange Depa~tment of the Cen tral Bank and after a thorough verification, the latter accepted and r e gis - tered the same as foreign loans. (see Exhs. I and J, found on petitioner's big envelope.) The approval of said promissory notes and their consideration as fore'gn loans by the Central Bank is a clear indication of the true nature of the said transactions, which is a distinct factor showing the existence of the relationship of BOISE INTERNATIONAL as creditor and that of petitioner the BOISE PHILIPPINES, as debtor.

Fourth, the aforesaid loans were all considered and treated by petitioner in its cor porate books and financial tatements as loans and liabilities, (T.S.N. p. 117, Oct. 2, 1980; see also Ibid . pp . 18-23, April 11, 1980; LXhs. N, N- 1-a, 0, 0-l-a, P, P-1-a) Interest payments were likewise reflected in petitioner's books of account (TSN.

p. 17, April ll, 1980}. This treatment of the transac- tions is a factor again indicative of the existence of creditor and debtor relationship between petitioner and that of BOISE INTERNATIONAL.

Fifth and lastly, the said loans secured by peti- tioner from the BOISE INTERNATIONAL were ultimately \

DECISION -

CTA CASE NO.

28~8 paid.

In accordance with the te r ms of the promissory notes , the aforesaid loans we re late r finally paid by petitioner.

The balance sheet for the year ended 1973 of pet'tioner shows that there exists n~ more liability of petitioner from the BOISE INTERNATIONAL ari s ing from said loans.

As testified to by petitione r's wi tness, Mrs. Luz Bitong, the loan in the amount of P600,000.00 was paid in 1970; th Iil, 920,200.00 loan was paid in 197l: and the Pll,400,000.00 was paid in 1972.(TSN. pp. 75-77, August 11 , 1980: see Exh. 0-1-a). Considering all these above factors, and taken altoge t her, i t points to no other conclusion than t:h · t there exists i n truth, in fact, and in law, a creditor- debtor r elationship between pe titioner and the BOISE INTERNATIONAL and , hence, the accrued interests claimed by petitioner as expense deduc tions in its income tax retJrns, are valid and legal and are deductible. We will now dis pose of the I:!.~.£:~.!!.£_ is§_~ a :; to whether or not respondent's right to assess petitione r for the fiscal year ended June 30, 1966 has alre ady prescribed. Petitioner contends that the ame nded income tax retu r n for 1966 was filed by it on January 12 , 1967. However, the demand or a s sessment l e tte r wh i c h was dated \ ..

J

- 29 -· ...

April 3, 1972 (Exh. C, pp . 194-196 BIR rec. Folder I) was released by respondent on Apri l 12, 1972 (Exh. C-1, p . 194, BIR rec. Folder I), 111hich date of r~lease of •.

the assessment is five years and three months counted from the date of filing of the petitioner's income tax return for 1966.

Therefore , petitioner concluded that the right of respondent to as s ess petitioner's deficiency income tax for said year 1966 has al ready prescribed pursuant to Se ction 331 of the 1972 Tax Code a nd there was no valid waiver of the statute of limitat i on signed by the Commissioner of Internal Reverue which may suspend the running of the period of prescription. On the other h a nd, respondent contends that the assessment in question was filed within the prescribed period because petitioner had executed and signed a waiver of statute of limitation unde r Section 332(b) of the Nationa l Internal Revenue Code and said Wdiver was signed by the Revenue Distr i ct Officer of Makati. The mai n point therefor e to be determined is whether or not there was a prope r filing of a valid waiver of the statute of limitation which was actually signed by petitioner and Revenue District Officer in pursuance to \ -

- :~o - Section 332 (bj (n0\,'1 Sec. 319 ! of the Tcx Code, wbich reads as follows:

SEC •

3 3 2 • fi~.9.L~):.2D .~·.-a ~_j:..2._£~_!;_l£i_.S~f. .!..i!!l-..t ~ .

.t~~S:'!~ . ....9.L.i'i:~~~~:§..~l!!.SD .. ~."-i~J9._ .. _~gl:.:--~S.:; ... ~?L_..££ tuxes. ·- ---.. --

XKX

XXX

X :X. X (b ) Where before the expir~tion of the time prescribed in the p r eceding sec:ion for the assessment of the tax 1 bot.h the Cornmis-· sioner of ·:nt.o)rnal Revenu ..

'cmc:.i'-·the-t.,~·;,.-:J~av-0r E§\1-e· ~~ o.:) se.-1t~;;-cr=:Ei-_"J-:i'i:lt...f17J~I2::·r~q;--;,;-s ~iq js !Tie r:t· _ after suet time, the tax may be assessed at an y-··i:Gne·p-rTa·r-···to the expiration of t ne per..i.od agreed upon.

The period §..£.. .. 2:9I~.ed ~:P. o.E!.....2.l.!.<::.Y .. _l~e e .:~t:.:££~ e _<?_.!~ ..... ~! b §!'-:.9:2.e n t. ...£9 .r ~~ ­ ments in wr i t i na made before the expiration _ ____ ,_., _____ ... _ ._.._,,r ___ "-J..._ .. ..._,...._ .. ,.-- ,--- -L·---'"·--~-••IIo•" .-...-.. •·--"''"' ? f t b_~_J::s:.r i .?.2.....£f_~ v i o ~ s l L0..!;ll!! e c?.~EQ.!~ . (Undetlining supplied.)

The law is ~ l ear and explicit that a valid waiver of the sta t ute of limitation provided for in the above- quoted provision of tbe J.avr requ i.r.e s tl1a t the said statute of J.imitatior!

ust , .. ,e i.n writ.:.i.ng .:t~ ld must be both signed by the Commission :,:r o f Internal Revenue and the taxpayer .

A close scrutiny of the aforesaid waiver of t he statu te of limi tation (Exh. L., p . l73r BIR rec., Folder I ) shmlS .ha t Revenue Distri.c'· )fficer S i xto J . Javier bad merely attested the aforesaid waiver; that aforesaid officer did not s1011 the waiver either for or b y virtle of t he authority of the Co~missioner of Inte~na l Revenue.

Clearly, for all legal intent s and \

14G

- ' ~

DECISION -·

CTA CASL NO. 2858 -- 3 1. ·-· p rposes of the above law, S 3 ction 332 of the National I nter na l Revenue Code, there was no valid waiver exe- cuted LY herein Commissioner of Internal Revenue and •· pet i tioner to stop t he r unnl.n9 of tt-l <'.:! reriod within wbicil t o validly a s sess the tax in question. In the instant c~se , the 1 nguage of said statute of limitat i on being pl.ain and unambiguous, it conveys a clear and definite meani ng, and, t hereforo, said statute must simply be applied and n c· ver t-o }e int(~rpreted .

2 25.

Dependence of Construction upon Ambiguity. - A st tute is not o~en to construction as a matter of course. It. i..::.:;

open to construction only where the larguage used in the sLatute requires interpretati -n, t hat i s , where the st..:•.t,.tte .L s arnb i quous, or wi ll bear two or ~ore cunstructions, or i s of s uch doubtful o r obscure me ahing~ that r easonable minds might be uncertain or dis- ag r ee as to its mean i ng .

Where the lan~uag e of a statute is p:lai.n and unambiguous and conveys a clear and definite mea n ing , there is no occasion for r esorti g to the rules of s ta tutory interpretation , and the court has no :i.gh t. to l ook for or impose another meaning. I n the case of such unamb'gu i ty, it i.s the establ i s hed policy of t he courts to regard t.e s t a t ut e as meaning what l t says, and to avoid g i ving it any o ther construction than thot wh ich its word s demand.

Tho pl.Lin and obv1ous me anin o f the l anguaqe used is not only t.he safest guide to follow in construing it, but it has bee n pres0med conclusively that the ~le a r and explicit terms of a statute expresses the legis- l ative intention, so thQt such plain and obvious provisions must constrol .

A plain and unambi- guous s atute is to be applied 1 and not inter- r eted , since such a statute speaks for i self, \ 14''"' ..£.

. (

·- 32 - an ;:my attempt to make 1t. clearer is :t vain labor and tendE o~l~ ~o oosc~rit¥~ ,xxx xxx.

U\rn • .Jur. 1 Vol. ':!0, 1.')4." [d •• pp. L0l~-'-lll.J In the case at bar, the law is clear and definite that it is only the Cornmi~>sioner of Internal Revenue, who is specially named by said provision ot s~ction J 3 2 (b) of the Tax Code , a:s the one v;.lo can sign thE' waiver of the statute of limitation, and since the Commissioner has not signed the waiver, there is, there- fore, no consummated or valid waiver •111hich may suspend tr·.e runr1i.ng of the ·period within which to .:::~sse:.:;s the~ tax .

.. .

1n ques..:J.on.

(Coll. vs . Solano, GRL-1147~, July 31 , 1958, p .. 6 . } Consequently, respon~ent's assessment which was made more than fi ve years ~rom th0 fjling of p~ti- tio. er s amended i ncome t2x return on January 12, 1967 for the taxable year 1966 has prescribed . ~e will now corsider -he tt ird iss 1e ;::s to lvhether ....... , ..._ ... ~ • ..- .~#, __ .,, -··-•# ......... _, .. or uot petitioner has alre<:1dy paid Lhe \¥i!:ilbo.lding taxes in ques t ion.

Respolldent admits that +.:herE wer(~ indeed payments lade by pet.:' tione' r but such payme. t.s w12re actually payments for otter taxabJ.e years and not for t he pe r iod covered by the assessment in que tion. A close scrutiny of pay-men s rnade by the petitioner as shown in the exhibits presented, ant which corrobora t e the testimony of petitioner's witness Luz Bitong, will \ 14 Z:i ' ·

DC '~ISION ·-

CTA CASE tO

28~8 -

J3

~ bring out the fact that there were different amounts of inte r est income remi ·ted whjch show Lhe date~ of remittances and the amou •. t s of income taxt~.s vl i thhe l.d ..

therefrom and •.vh'ch we r~~ and r.ctu::tlly pc-:iic .{'I'.S.N., pp. 45 - 66, t1ay 27, 1980 ;

E:x1.1 ~·> .. lA, BB, CC :. und .)0 :found in pet i tione r 's enve l ope.) Petitioner was able t establish by s ufficient evidence through the efforta of Luz Bitong, who verified thL amoun ts of interests which accrued during the years in quest ion, an(' "''h ich t:a .ll ied with t ho~e appe a ring in petitioner ' s books of accoLnt. 'l'he wi thholdinq taxes were .:.dso tallied, an(. except in thl~ difference o f ta:x: ra tes cf \v.i.thholc'. i.ng tax applied, whic h i~ 30% by res ponden t fo r years 1966, 1967 and 1968, wbile pe':i tione r bad cornpu'h?d, applied and pai.d the correct 35% wi thho l ding taxe s i n the years 1970 , 1971 and 19 /2 .

Exhs . AA, BB , CC and DD, in petitioner's big envelope .. It is note d f ur ther that tt e former Deputy Commissioner Conrado Diaz i s sued a r.e rnorandun to the ·ffect that a ·er ification fr om responden t ' s Accou tting Di ision showed that petitioner paid more than two million pesos in withho l ding taKes.

t .:?-~.£ Ex h • !\ , r~ . J 0 0 , B I H. r e c • F o 1 d e r I I ) • \

14 J

pha gS J Cy ~ rr rare ave yok CA CATH ens Respondent, aa the os wetoh to Us ope satistaelory und eonvins any. Pre Cy OPAL ANG Go mata a fey whoatber op net the ecbiagabien to eithboar. ane pey the a Someame tax abt eource shoe OY upd: c@mithaneas bao Fhe vapes eargoration HDISE tii 1 Respondent catbesds that Por bas purogues, whenaved beterest Pocewes ape cue fe @ Poreiagy carpayeatiorn root OOCSE GNTERNAPITONAL, the jinmitity af the ep be withhold and poy Leone mae cige Po hao gave rite nt an fhe 3 ameone Ghoul be ac Giese Fame of the acerual of caad interest tn pehitis Pe book nt arenunt, and not at whe tame of ae 4 _ ced payment tf bo fie pesaodood Poee ian cerporatduny find sven though the amouat of tetereato drai Stanger Ge remibbed due be ae;

mo festerebasn of abl pursuant ta the Pty Cuban Fos di Wis J j POT APOT v é & i ? !

Petitioner, on be othep fiomi., otvonaiyv contends rhat i

I

' i I

DLCJSION -

-

y. ·- /' the ob liga tion to withhold and pay taxes at source should be on the dates of actual remittance or payment of the interest incomes and which cann ot be made at the time of ncerual since such interest incomes CR JH1ot be remittable beca use of Ce ntral Bnnk restrictions. We concur with the petitioner.

This issue is no l onger one of first impression. In the case of Bayer Pharmaceuticals, Inc., vs. Commissioner of Internal Revenue, CTA Case No . 2846 , March 16, 1979, deciderl by this court~ it wa s held as follows: The lone question tendered for resolution is whether or not the ob liga tion to withhold a nd pay income tax-at-source on th royalties is upon th e accrual of the royalties or upon the actual remittance or payment thereof .

Petitioner mainta ins that there was no obli- gation to deduct, vdthiloJd, and poy the \'4it.hho1d- ing tax in 1972 since the royalties could not be remitt ed due to Central Bank restrictions. In s u bill i t t i n g , h o 1-1 e v e r , t h a t. t h e 1 i a b i l i t y to v! i t h - hold and pay the income tax withheld at s urce "rom royalty payments to a non-resid ent foreign corporation, like Bayer Aktiengesellschaft, Lever- kusen Bayermerk, is at the tim e of the accrual of said royalties and not at the time of the actual remittance or payment thereof, res ponde n. relies mainly on Bureau of lnt.e rn a l nevenue Ruling No. 71-Q03, dated February 26, 1971, the p rtinent portions of which are quoted as follow s : "This refe rs to your letter dated February 16, 1971 requesting a rulin as to the bas is of the withholding tax due on film rentols or royalties payable by you to non-resident foreign film corporations.

"xxx

XXX

XXX

\ 151

- 36 - "In your letter, you contended tha t the 35% withholding tax should be based only on actually remittable amount under Central Bank r egulations and not on the entire amount due and payable to the non- resident foreign cor poration.

This con- •.

ten tion has no legal basis.

Withholding

tax is not dependent on remittance of the income payable to the non-resident foreig n corporation but on accrual thereof.

Such

being the case, although a portion of the amount due to the non-resident foreign corporation cannot be remitted on account o f Central Bank restrictions, the tax due on said portion should be deducted and withheld as if there is no restriction. 'Restricted fu nds. - In connection with the restriction on the transfe r of funds from U.S. to persons in Nor- way, Denmark, the Netherlands, Belgium, Luxembourg and France, the tax shou ld 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- te red on the ownership certificate, and an amended ownersh ip certificate filed as soon as the actual owner is disclosed.' (CCH , 1969, Vol. 5, par.

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 payabl e to the non-resident foreign film corporations including that portion which, on account of Centra l Bank restrictions, cannot as yet be remitted abroad."

As expressly stated therein, the Bureau of Internal Revenue ruled that withholding tax is not dependent on remittance of the income pay- able to the non-resident foreign corporation \ 152 -

DECISiml ·-

CTA C SB NO . 28j8 - .J 7 ·- but on ~ccrual thereof.

And as such , althoug h the income cannot be remit ted em ac oun t of. Cent ·bl Ban k r estr i ctions, the tax due thereon should be deduc ted and withheld as if there is no r estri.ct.ioh .

'1'he st.c;.tute invo .ved is Section 53(b) (2) of the Nation~l Internal RevGnue Code, the con- trolling provisions of which read as follows: " sec . 5 3 \ b ) ( 2 } ~'~5~.!l.:E..~E-~9~:.L_.f:..<2E..~J.3!:. ~0.££2ra . .tl.~ . .§.· - I 1 t be case of foreign corpor ation s subject to tax under ttis TitJ e; not engaged in trade or business within the Philippin c~ s , t here shall be deduc ted and withhe ld at t1e s ource in the same manner and up::Jn the samE~ iternE a.::. 1s provided in Subsect i on (b} (l) of this section, x x x x, a tax equal to 35 per cent thereof.

This shall be retu r ned and paid in the same manner and subject to the same conditions a~ provided in Sect i on 54.

X X

X X"

And Section 53 (b) (] ) of the same Code pe ·- ti nen tly provides:

( b J ~<:~.~-::!~~§..ide .D t -~-~-~.Q.§.._D-22~0 o_r e i g n. £2 r P.o r at L9}2.~. -

( J )

~-2.!:~::~;~!.0.:?..!2~~1 ~~~.. - Every ind iv idual, corporation , part1 ership, or association , in whatever capacity acting , i ncluding a le 0 see or ~ortgagor of real or pe r sonal prope r ty, trustee ac t i ng in cny trust capa city ~ executor, admi r is- trator, r eceiver , conservator, fiduciary, employe r, and every o ff i cer or employee o f t he Governne n t of the Republic of the Philippine s ha ving the control, receipt, custody , disposal, or paymenL of interest :ividends , re n ts , r~yalt ie st s2laries , 111/agef:;, premiums , annuities, c:ompensat ion , remunerat i ons, emoluments, or othe.r fixed or dete rmin able an nual , per i od i cal , or casual gain s, profits , and income# and capital gains, of any non-r esident alie n not engaged in trade or business within the Ph:lippines, shal l (e xcept in t he \ 153 -

DECISION -

CTA CASE NO. 285B - 38 - cases provided in sub-section (aJ (1) of this Section) deduct and withhold from the annual, periodical, or casual gain s , profits, and income, and capital gains, a tax equal to 30% thereof.

X X X X X

These provisions, by t he way, were merely imported and copied almost verbatim from similar withholding tax provisions of the United States Revenue Code LSection l43(bl/· Accordingly, in consonance with settled rules of statutory cons- truction, the interpretation they have received in the United States have authoritative effect in the proper construction and interpreta tion of our law.

Thus, as c o rrectly noted by petitioner and which is not disputed by respondent: 1.

In arriving at BIR Ruling No. 71-003, dated February 26, 1971, our Bureau of Internal Revenue quoted as authority the excerpt of a United States Internal Revenue Service ruling which is found at par. 4875.405 o f CCH, 1969, Volume 5, It appears that the said u.s. ruling is actually Mimeograph Ru ling No . 5075, wh i ch was issued by the Office of the Commissioner of Internal Revenue, Washington, D.C. on July 8, 1940 and can be found at the Cumulative Bulletin 1940-2, at page 141.

2.

The said Mimeograph Ruling No. 5u75 has been declared obsolete by the United States In- ternal Revenue Serv 1ce itse lf in its Revenue Ruling No. 70-293.

(U.S. Internal Revenue Bul- letin No. 1970-23, dated June 8 , 1970) It is thus evident that in issuing its BIR Ruling No. 71-003 on February 26, 1971, our own Bureau of Inter nal Revenue has relied on a United States Internal Revenue Se rvice ruling that has already been overruled , the same having been declared obsolete as of J une, 1970.

3.

Following the decision of the United States District Court in L.D. Caulk Co. vs. \

D1~CIS I O

CTh CASE NO. 2858 -· 39 - ..

United S t ates , 116 F. Supp. 835, r ende red on No- vember--rg;-lg-53' to the effect that corporation which held licenses under patents owned by non- r es ident aliens who as result of blocking vroc- l ama t ion were forbidden r ight to r ece ive or dis- pose of royalties was not bound to withhold tax befor e payme n t of royalties, the ru;e that is now observed i n the Un ited States is th~c the obligation to wi thhold and pay the tax is upon paymen t or remittance of the income to a non-re- sident alien.

In the L.D. Caulk Co. C3se, where the fac tual setting, law-·Tnvolved anci issue litigated are pract i cally on al l fours with the case at bar , plaintiff , a Delaware corporation, held licenses under paten t s owned by lwo non-res ident aliens, Robert Doge and Emmanuel de Trey. Both patentees were Swiss.

Under the licensing ac::Jreements, plain- t iff obligated itself to pay royalties to Doge and de T'rey .

In its tr ea trnen t of the i.mpac t of royalties on its operations, plaintiff 1 adherin 3 to the accrua l "1lethod of accountir:g , entered net r oyalties and withheld taxes as accrued liabili- ties of 1941 and 1942, the per iod s involved in t he case .

Thus~ 1941 and 1942 royalties and taxes were set up as iccounts payable on plain- t iff1s books and a s pa r t of i t s ccst of doing business for t hose years .

No withholding return s for non- resi dent aliens Doge and de Trey were pre- pared for 1941 or 1~42 .

While the critical issue is when the retu r ns wer due for royalties attri- butable to sa l es made by plaintiff during the years 1941 and 1942, the inquiry shifted from "when '.Vas the r€'turn due" to "when, if at all , was plaintiff required to withh .ld the t ax from the royaltl.es. "

'rhere was no question ra1sed by p l ai n t1ff as to existence of its Juty to withhold o n the roya l ties.

The "\vhen " of the rrwtter, not thr2 "'1¥ho" or the~ "wnat" \vas the po1nt of di spute and inquiry because, as resul t of blocking proc- lamation , non-resident aliens were forbidden right to receive or dispose of royalties due them under contract witn corporat1on whicr held Licenses un - der. aliens' patents.

(L.D. Caulk L·o . vs. united S t ates ·, llo F . 1535r 84u . ) ::.:itated otherw1se, the:

question as t o wnen to w1ihnold the tax from tne 1~41 and 194L roy2lties arose because, althougn t he royalties were accruQd it the pl.aint.iff' s books1 in 1~41 and 1942 as liability to tne non- • - 155

DECISION -

CTA CAS~ NO. 2858 ·- 40 -· resident ~icensors, the same coula not be paia or rem1tted to the latter as a result of a block1ng proclamat1on.

The Un1tea States Feaeral Court ruled that wnare , as result of clocking proclamation, non- resident aliens were forbidden right to rece11e or dispore of royalties due tnem under contract with corporation wh ich held licenses under aliens' patents, such a1jens nad no "ga in s, protits ana i ncome" vllth1n internal re1lenue statute requi.r1ng all persons having control , receipt , custody, di sposal or payment of f1xea or aeterm1nable an- nual or pe riod1cal ga1ns, profits, and 1ncome of any non-res1dent alien t o withhold tax and, there- fore1 no necessity of tiling withholding tax re- turn devolved on corporation while corporation retained blocked royalties The net r esult is that the obligation to withhold and pay tne tax is upon pa yme nt. or remittance of UH-; United St<1tes derived ~ncome to U"te non-·res1dent rec i- pient.

Because ot its strong persuasive force, i f no t controlling effects, on the present case, we will quote at length from the ctec1sion . "The onus <)t the 'v·Jithholdl ng re- qulrement on pla1nt1f f 1s imposed oy § 1.4j (b), I.H.C . :

"A.ll persons, in ~hatever ·capacit y act ing , * • * having the control, r eceipt , custody , dlspo- sal, or payment of * * * fixed or de- terminable annual or periodical gains, profits , and income ~ * * of any ncn- resldent alien * * w shall deJuct and witnhold from such annual or pcrlo- aical gains, prof1ts , and income a tax *· , .....

un tne wnole, tnis provis1on does not concern itself with "when" the withholding snould take place .

Ra-

ther, it simply specifies "wno" shall do "what".

However, this much light it does shed.

The duty to withhold presupposes the ex is t.ence of "annual or periodical gains, profits, and in- come" .

The section d1rects the witn- hold l ng from such sums as are identifi- al)le as "gains, pro.t its , and income" of the nonresident allen.

Obviously, \ •

Dt:CISION -

CTA CASE NO.

L8 5l:f - 41 - it there are no such "gains , profits, and Income", tne duty to withhold is nonexistent.

On the other hand, if there are such sums available, th e statutory language is inconclusive in deciding "when" the withholding duty a rose .

1 do not ground my decision on an y subtlety ot construction , but I do ad - vert, in tact, to it.

Were tne royal- ties "gains, profits, and income" to the aliens Doge and de Trey while plaintiff retained them under these c ircumstances? I think not upon a realistic view of the matter.

The blocking p roclamation plucked every element of control over the funds from the alien's theoretical bundle ot owner- ship rights.

This loss 01 the essence of private ownership occurred while the royal- ties were still in plaintiff' s possession, since the bloc k i ng treeze applied to In- dividual debtors of Swiss nationals. As soon as royaltie s accrued to the aliens under the contract, this crazy predicament taced them:

the y h d theoretical right to collect the royalt ie s but were forbid- den right to receive them or dispose of them .

No economic advantage was theirs. Such a hollow •tright" does not nave the core of benefit sufficient to constitute "gains, profits, and Income".

Even the

ubiquitous doctrine ot constructive re- ceipt of i ncome has no tentacle long enough to reach these royalties.

Cf ~eg. 103, § 1~-42-2.

As said with reference to 3 12- tb) t2), I.~.C., in Industrial Trust 3 Co. v . Broderick, l Cir., 94 F.2d 927, at page ~30, "Throughout the Revenue Laws the words gain, profit, or income mean a~ actual , not a f icti tious gain or pro- fit**><."

Ce rtainly, these were not "income" and , if "gains, o r profit", were unre a lized and highly ar titic1al. Further, the aliens here had no power to command payment to themselves or othe rs, unlike \ 1 5 '---~ .....

f ---~-------_.... ___

- 42 - the donor of the interest coupons in Hel- vering v. Horst , 311 u.s. 112, at page 118, 118, 61 s.ct. 144, 147, 85 L.Ed. 75, where it is said:

"The power to dispose of income is the equivalent of. ownership of it. "

It would seem, the., there being no 'gai .s, profits, or income" of the aliens at least during the time plaintiff r etained their blocked royalties , no withholding duty devolved on plaintiff and no penalties are proper."

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 remitte d to Bayer due to entral Bank restrictions at that time, would not create "gains, profits or income" to non-resiaent foreign corporation Bayer.

No economic benefits were derived by Bayer; hence, there was no income subJect to withholding ot tax-at-source.

Accordingly, pet1- t1oner had no duty to withhold and pay the tax. Even more , adopted basis for the decision of the United States Court is the legislative history of Section L43tb ) of United States Tax Code, from wnicn Section ~3(b) of our National Internal Revenue Code wa s 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 t_ime of payment.

We

quote from L. D. Caulk:

"Present § 143 (o), I.R.C., is traced oack to the Act of October J, 1913.

Para-

graphs D and E of that Act are pertinent. Paragraph D provided:

"* * 1e all persons * ~ * having tne control, receipt, dis- posal, or payment ot fixed or determin- able annual or periodical gains, protits, and 1ncome of anotner person subJect to tax, shal l in behalf ot such person deduct and withhold from the payment an amount equivalent to the normal income \ 15 <3

DECISION -

CTA CASE !0. 285H - 4 3 -- •.

tax ·~<: * *."

Paragraph E of the same -~ct in p.:u:t Gpecif :i.ed:

"l\11 persons ·k k .,..

having the control, receipt, cus tody, disp'.)sc..l., Ol' pa.yrnent of ·~< * * ot.ber . · fixed ~r determinable annual gains, pro- fitsp and income of another person~ ex- ceeding $3,000 for any taxable year * * * who are required to make and render a return in behc.lf of another r as provided herein, * * * are hereby authorized and required to deduct and uithhold from such annual gains, profits, and income such sum as will be cufficient to pay the nor mal tax * ~ * and they are each hereby made personally liatle for such tax. " Paragraph D is explicit in directing with- holding from the "payment" ·whi e its corn .. - panion section authorizes the deduction and imposes persona l liability on the withholding agent.

In its Repo .. t to the House of Representatives on the Dill, the Committee on Ways and Means said, "Pro- bably two-thirds of the income tax pro- posed Glfi to indivicnals 1vould be deducted and w'thheJ.d at the source of the income and paid ·.n full to the Government. * * * By this method the arrmunt of tax due or t become due upon every fixed or determi- nable annual income is withheld and paid to the Government before the income re ch- es the taxpayer".

Nonresident aliens as well as cit:zens were subject to this wi thholdinlj syste.1.

In the 1916 Act , quoted par~graph D was repeated as section B(d) under the sign:L.ficant: heading "Re t.urrw" . Par<::tg:r:aph E, as quoted, wa s repeated as rec~ion 9 (b) unde1~ the hea.cHn<;r nAssessmer t ::md Administration".

By the Revenue 1.ct of 1917, para- gc aph B{d) of the 1916 Act {par. D of the 1913 Act) was repealed so as to ren- der unnecessary any ">vithholc i ng at the 159 ,, -· 44 - source of the ta due on profits or in- comes of resident taxable persons". In- formation at the source was substituted. According to t he House Report, this ~.

hange was made for "a more ef~ective administration of the law" and the "sav- ing of annoyance and expense to the tax- payers and withholding agents".

By the same Act 1 paragraph 9(b) of the 1916 Act (par . E of the 1913 Ac t) was amended to limit witnholding at the source to nonresident aliens.

The Act further in- cluded interest fran t a -free covenant bonds as a subj e ct of withholding. The Revenue Act of 191H made no change in the pertinent l anguage ot the amended § 9(b) but did increa~e the withholding rate and renumbered the sec- tion as 221.

However, the Report of the Ways and Means Committee of the fouse aid~, sea.rch in its comments on "Collection

at the Source":

"The proposed bill, as under existing law, requires only the withholding of income in ihe case of pay- ments by individuals, corporations, and partnerships of fixed and determinable annual or periodical gains , profits , and income to nonresident alien individuals or nonresident corporations".

This Com-

ment is an indication the intent of Congress was as expr essed in paragraph D of the 1913 Act and was cont inued in § 9(b) of the 1917 Act when the fo r mer prov:sion was repealed.

No change was intended when the withholding provisions were delimited to apply only to nonresi- dent aliens.

The time of payment \IJas the time when the withhold:ng duty arose. The Revenue Ac t of 1921 made no amendments to the Section pertinent to inquiry, nor did the Act of 1924.

How-

ever, both the House Report and the Senate Report on the 1924 Act have this \ Dr:>.:CISION -

- 45 ..

comment:

"Section 221:

Subdivi!'.d.on (a.)

of this section of the present law pro- rides for the withholding of a tax, equal to the 1.ormal tax, on fixed or determi- nable income paid to a nonresi~ent alien individual 1 or- a par tr,ership composed in whole or in part of nonresident aliens.~ Both also refer to "requiring the with- holding of tax from payrnellts" to a partnership.

Rates of withholding were increased by the Revenue Act of !926, and the Conference Report of t1e Committees of the

House

and Senate refers to the effect of the hike in rates;

"This amendmt:·nt re- quires the withholding of a tax of 12~ per cent in respect of all payments of i lCO!nl:! made before the enactment. of this Ac~ anc ~~ per ctnt in respect of such payments mcde after the enactm~nt of this Act to for.e.i.(]n corporations specified below. * * * Because the persons making payments * * * had ~o n~t1ce that. the corporation income tax wouJ.d be increased, the withholding rate is not increased with respect to payments made before the enact- ment of this Actr * * *".

Although refe- renc8 is to foreign corporations, the wittholding on payments to them is but a part of the same system embracing indi- vid als.

In the Revenue Act of 1928 a whole- sale departure was made from the arrange- ment of prior Acts.

g 221 became § 144o In cornme1ting on part. (a., ·f the Section 1 both the House Report and the Sen~te Report stated:

'The present .law provides for the withholding at the source, ir the case of bonds, of a tax of 5 pe· cent of the int~rest when paid to nonresident a 1 ien s. * * ,· .. "

Under the Revenue Act of 1932, the section was renumbered 143 and the rates \ 16

DEC IS IOtJ -

..

. .. 46 - were increased without affecting the as- pect of the provision under colsideration. The Revenue Act of 1934 made no changes bearing upon our inquiry, but again in the House Report a nd in Senate Report refe1:ences to withhold ing of t.ax on interest obligations were couched in terms of payment.

The 1936 Act did not change the terms of § 143 as they affect the problem under investigation.

However, a comment in t1e Senate Repcrt confirms the prior statements: "Section 32 of the existing law provides that the tax withheld at the source under section 1 43 from pay- ments to an individual taxpayer shall be ac.redi.t against such taxpayer's tax". Reference is also made to "wi thholding in the case of payments to f oreign cor- porations".

The House Report; which the Senate adopted, on the Revenue Act of 1937 is equivocal in stating with reference to a change in § 211 (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 presen law".

":Receivable", of course, is des- criptive o f minute divisions of time from t he first moment of accrual to the last second before eceipt of payment.

The House Report on the Revenue Act

of 1938 appears to reaffirm the earlier interpretations even ~f the 1937 Report be viewed as a deviation.

In referring to consent d i vidends, the Committee . .

\ - 47 - on Ways and Means reported:

"In case any shareholder making a consent is a person subject to the provisions of section 143

(b) and section 144, relating to the de- duction 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 to 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 su ~ h consent had been paid to such share- holder, on the last day of the taxable year of the corporation, in cash as a taxable dividend."

The Senate Report

used same language in referring to s 143(b).

No pertinent comment was found in the Committee Reports on the other Re- venue Acts down to 1941 and 1942, the tax years i question.

However, one fur- ther reference is made to a later com- mittee report reflecting current thinking.

The House Report on the Revenue Act

of 1950 in referring to a proposed § 13ll(a) states:

"This subsection a'fso provides that any person required to de- duct and withhold a tax under section 143 or 144 * * * on the payment of a dividend shall not be required to deduct and withhold a tax under this section upon such payment".

Regulations promulgated by the Com- missioner contain abundant references to payment as indicating the crystalliza- tion of the withholding duty .

Treasury

Regulations 111, § 29.143-l(a) states: "W i thholding of a tax of 30 percent * * * is required in the case of fixed or determinable annual or periodical in- come paid to a nonresident alien in- dividual * * *".

The subsections of ~ 29.143 are replete with references to t.}ithholding upon payment, such as "The tax must be withheld at the source from 16 ' .......

0

DECISION ·-

- 413 - the gross amount of any di~ ·ribution mad<~ by a corporation" (29.1.43·-l); "* * * .;~n ann al rct.urn "'' "' * showing the amount of tax required to be with- held from each nonreside nt alien * * * to which income other than in t erest was p<: id during the previous · taxabJ.e year" (29 .143--7): "Tax ·, · tbheld at the source upon * * * income paid to on- resident alien fiduciar i es * * *" (29.143 .. ·9).

And eJen on the question of whether with- holding should be at the rate in effect at the time payments were du"t en: at tbe rate when pay- ments were actually made , the Uni ted States Court ruled that the tinie pavme r.t is lnade gove rns the rate.

V'Je again quote froin-"'t'he Caulk decision:

\ "On the tssue of whet.her wi thhold.i.ng should ' be at the tate in ~ffect a t the time payments w_re ~ue or at the rate when payments we re actually made, the Bureau has ruled the time of payment governs the rate .

O.D. 167, l C.B. 192;

I.T. 1521;

l-~2 C.B. 197; T.T. 3020, XV-2, C . B. 10 6 ; I . 'r. 3;:911 1939-1, C.B. 140. Cf. LT. 3535 , 1942-1, C.B .. 129; I.'r. 3342 , 1940-1, C.B. 58.

In factv language sufficiently broad to encorn ass the prcblem was employed in G.C.M . 2467 , 7-2 C.B . 188 (modified on other grounds in r: . C • 1\il.

8 ~) 9 4 , 9- J. C , B • 3 5 4 ) : " ·k " * ~ithholding is only required when * * * 'ncome is paid to a nonres·Ldent aJ.1en and at the rate in force at the time ot payrnen t. "

As ir the above, so Southern Pacific Railroad Co. v. C.I . R. t 21 B.T.A. 990, held rate of withholding was t hat which was effective on the date of actual pay- ment.

In that caset the petitioning com- pany contented unsuccess(ully for a re- sult simila r to the one here sought by 1' ,

9 - /' 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 f ct, paid in 1921 and 1923, after the withholding rates had been increased.

The company argued the former, lower rates should apply because the interest was then due: s ufficient funds were available at all times for its payment; and t he 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 no t and were not called upon to pay the interest until 1923, and the nonresident aliens did not and for all that appea rs 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 petitioners were under the duty of paying so much there- of as by the statute then in effect they were required to withhold and pay." Oblique support is thus given to adop- tion of the time of payment as the mat- uration point of the withholding duty, payment being both an easily recogniz- able act of objective significance and a standard safeguarding the c ollection of the proper amount of tax."

What possible ground can there be for us not to apply to petitioner the ru ling of the Un ited States Federal Court in L.D. Caulk, supra, for which Bayer Pharmaceuticals-,-Inc., is simi- larly situated?

A decision buttressed by the law, which is closely if not 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 United States In- ternal Revenue ruling but which excerpt has been \ 165 ''

DECISION -

CTA CASE NO.

28~8 - 50 -

I '

declared obsolete by the same Unite d States In- ternal Revenue Service as a result of the L.D. Caulk decision.

As we view this legal problem, we find no cogent and valid reason to modify, much less depart from the conclusion re ache d in L.D. Ca ulk, as expressed in the above -quoted opinion •.

of the United States Court there,· and the same should reso l ve the identical issue now br ought before us in this proceeding.

We canno t ignore the well-settled principle of construction that since our income tax law was practical l y copied from that of the United States , the inte r preta tions it ha s received in the United State s have autho - ritative effect in the proper construction and application of our law.

Mor e so in the case of our withholding t ax-at-source provision embodie d in Section 53(b ) of our National Inte rnal Revenue Code which , as shown above , was me re ly imported and copied almost verbatim from Section 143(b) of the-United States Tax Code du ring the year involved in the L.D. Caulk decision. Accordingly, the conclusion r eached in L.D. Caulk, which is followed by the Uni t ed States Inte rn a l Revenue

Service -

that the tiroe of payme nt of the royal- ties is the maturation point of the withholding duty - s hould govern this proceeding.

Not much need be said on respondent's asser- tion that, based on the report of the investigating examiner, nothing is state d that petitione r at- tempted to remit the royalties to Bayer. By res- pondent's own decision , it is explicitly decla r ed "that the royalties in the amount of 1?69,529.00 we re not remitted by BPI (petitione r herein ) to Bayer due to Central Ba n k estr i ctions."

(Exh.

" 5 ," Exh . "E-1," p. 30, BIR records )

Since the

r oyalties could not be remitted t o Baye r due to Ce ntral Bank restrictions, as stated by r espon- dent himself in his decision appea led f rom, surely, respondent's counsel should not expect pe titioner to make effo rts, albeit unlawful, to remit the s ame.

And on respondent' s point that since the royalties had been acc r ue d i n petitione r 1 s books the income thereon became subject to with- \ 16o

DECISION --

CTA CASE NO.

~858 -·· 51 - holding even if remitt~nce was effected later, suffice it to say that the accrual of the royal- ties in petitioter's books, as held in t.he _!:-,-.1.? . .:.. Caull~: did not: amount. to "~Jains, profits and Tncome" on the part cf non-·resi.dcnt Bayer and, therefore, no necessity to withhold tax devolved ,, o.n petitioner.

\ 1e, accorc1inglyr t·ule that sine~~.:~ tl·1e royal- ties in question could not be caid or r~mitted in 1972 by pet i tioner B·ayC:.;r Ph'an.aceutic;:\J.s, Inc.~" to non-resident foreign corpor~lion Bayer Aktiengesel~schalft, Leverkusen Bayermerk due to Central Bank restrictions, petitioner was under no obl.i.g~. t i on to with 10ld and pay income ax-at-source on said royalties and, therefore, it is ot liable for the deficiency withholding t ax-at-s~ urce assessment of respondent Commissioner of Internal Revenue x x x".

(Appeal den.'.ed in Bayer Phnrm., Inc . vs. Comm. of Int.

ev., GR L-72054, on Sept. 29, 1986.)

We will now consider the fina l and las~ issue __ ...... __ _.....,_ ...... _____ _ as to ~net.tv.~r or not 25% sur:charger interes~;and compro- mise penalty are i mposable on the petitioner. The 25% surcharge, as provided in Sec ion 72 of the Tax Code, in imposed in case of failure to file a retur·n with i n the time prescr i bed b:y law and '1-lhich failure to file was not due to willful neglect. In the case at bar 8 there exists no failure on the part of the petitioner in filing its requ ired returns. It is sufficiently established by evidence that p~.::titio ne r paid and re·- mitted the interests due on the loans secured during the years 1970, 1971 and 1972 and it was only during these said yea s that petitioner was required to ard . I

DEClSlON -

CTA CASE NO.

28~8 - 52 - did in fact filed the corresponding returns. (Exhs.

EE, EE-l , FF, FF-1,, FF-2, GG , GG-1 and G~-2p found on petitioner's big envelope).

As we have said ieretofore, v' t e obligations to withhold and pay the corresponding withholding tax arises only upon the actual paymen t or remittance of the interest income to the non-resident foreign taxpayer, in pursua..nc:a t J tbe doctrine laid down in the case of Bayer Pharmaceuticals Inc. vs. Commissioner of Internal Revenue case aforesaid. Besides, petitioner filed its returns voluntarily w1thout previous notice or order to do so by the respondent ; for which reason, the filing of the re turns by petitioner can not be said to be due to a willful or intentional neglect with the intention to evade payment of income tax.

Therefore, no such 25% surcharge is imposable under Section 72 of the Tax Code. The deficiency interests should r ot also b . imposed inasmuch as petitioner is not liable for deficiency income tax and withtoJ.ding income tax as previous ly found by Us.

Equally so, the compromise penalty is likewise not imposable.

It is enough to state that a compromise penalty cannot be imposed by respondent Commissioner of Internal revenue without petitioner's conformity \ 1E:' .. ~ .

..A;.U u -

DECISION -

CTA CASE NO . 2ti58 - 53 - thereto .

(Phil. Int. Fair Inc. vs. Coll. of nt. Re- venue, 4 SCRA , 774, 781-782; Cell. of Int. Rev. vs . University of Sto. Tomas e t. al., G.R. No. L-112 74 and L-1128, November 28, 1958; Rizal Motors Inc. vs. Comm. of Int. Rev., C.T.A. Case No. 1985, December 27, 1972; Liberty Insu rance Corpor&tion vs. Comm . of Int. Rev ., C.T.A. Cases No s . 3551 & 3599, Oct. 15, 1986.)

WHEREFORE, the dec1sions of the Commissioner of Internal Revenue appealed from dated Janu ary 25 , 19 77 and J a nuary 28 , 1977 are hereby accordingly r eversed and s e t aside .

No pronouncement as to costs.

50 ORDERED.

Quezon City, Metro Man ila, Mar

WE CONCUR:

AMANTE

ILLE

Presidi g Judge 1/kv>. RE~E ~~ te Ju \