CTA Case No. 2883

DECISION -

- 2 - Code, the rates appiicable for the divi dend remit- tances should only be 15% ins.tead of 35%. As thus an overpaymen t of an amount of P4,832,989.00 (20% of ij~24,164, ,946 . 30) '· now sought in a claim for a refund or tax credit dated January 5, 1977 which has remaine d unacted by the respondent Commissioner of Internal Revenue.

Hence , the present petition filed on July I3,

1977 .

Section 24(b) ll) ?f the National Internal Revenue Code, as amended by P.D. 369, which allows a prefe- ' rential tax of 15% on dividends received from a domestic corporation by a non-resident foreign corporation, pro- vides in pertinent part:

"x x:

x:

on dividends received from a domestic c orporation liable to tax under this chapter the tax: shall be 15% of the dividends: rece,ive:d, which shall be collec:ted and p a id as provided in Section 53(d) of this Code subject to the condition th~t the country in which the non-resident foreign corporation is domiciled shall allow a cre- dit against the tax due from the nonresident for~n corpor.ation, taxes deemed to have _2een paid in the Philippines equivalent to 20% which .repr.esents the difference between 't'h'e re'gular tax: (35%) on corporations and the t ax: (15%) on divi~ends as provided in this section .· x:

x:

x:"(Emphasis supplied) Section 902 of the u.s. Internal Revenue ~ode, as amended by Public Law 87-834, the law governing tax cre:dits granted to u.s. c orporations on dividends re- c:eived from foreign corporations to the extent appli- cable reads:

22

DECISION -

CTA CASE NO . 2883 - 3 - "SECTION 902 .

CREDIT FOR CORPORATE

STOCKHOLDER IN FOREIGN

CORPORATION

(a) Treatment of Taxes Paid by For~ign Corporation.- . For purposes of this subject, a domestic corporation which owns at least 10 pe~r. cent of the voting stock of a foreign corporation from which it receives dividends in any t axable· year shall - (1) to the~ exte·nt such dividends are paid by iuch foreign corporation out of accumulated profits . [as defined in subsection

(c) (1) (Al7 of a ye~ar for which such foreign corporation is not a less developed country corporation, be deemed to have paid the same proportion of any income , war profits, or excess profits taxes paid or deemed to be paid by such foreign corporation to any foreig.n country or to any possession of the United States on or with respect to such accumulated profits, which the amount of such dividends (determined without regard to Section 78) bears to the amount of such accumulated profits in e·xc:ess of such income, war profits, and ex.cess profits taxe~s: (other than those deemed paid) i. and (2) to the extent such dividends are paid by iuch foreign corporation out of accumulat~;d profits [as defined in subsection

(c) (1) (Bl/ of a year for which such foreign corporation is a less:-de:ve·loped country corpo- ration, be deemed to have paid the same pr o- portion of any income, war profits, or e·x.cess profits t axes paid or deemed to be~ paid by such foreign corporation to any foreign country or to any possession of the~ United States on or with respect to such accumulated profits , which the· amount of such dividends be~ar. s to the amount of such accumulated pro- fits .

XXX

XXX

x.xx (c)

Applicable Rules

(1) Acc:umulate~d prbfits de~fined.- For purposes .of this section, the term ' accumu- l ate·d pr.ofits' means with respect to any foreign corporation - •

J

DECISION -

CTA CASE NO . 2883 - .4: -

(A)

for purposes of subsections (a ) (1) a~d (b) (1) , the amount of its gains, . ·profits.,· oi income computed with- out reduction by t he amount of the income , war pr of i ts, and e:xcess profits t axes imposed on or: with respect to such pro- fits or income by any forei9n country. x x x; and

(B)

for purposes of subsections

(a) (2) a~d (b) (2) , t he amount of its gai~s , ·profits,· oi income in e:xcess of the: i ncome·, war profits , and e:xce:ss pro- fits taxes i mposed on or with respect to such pr ofits or income.

The Secretary or his delegate shall have fu l l power to determine from the accumulated profits of what year or years such d i vidends were paid ,, treating divi- dends paid in the first 60 days of any year as having been paid from the accumu- l ated profits of the preceding ye:a.r or years (unless to his satisfact i on shows othe rwise) , and in other respects treating dividends ~s having been paid from the most recently ac:c:umulate:d gains , profits, or e:arnings.

XXX

xxx .• " Petitioner contends that under Section ~2 of the u.s. Internal Revenue Code , supra, its parent corpo- ration is allowed t o a tax cre:dit equivalent to at least 20%: of tax.es deeme:d paid in the Philippines on d ividends re·ceive-d as thus illustr.ated in tactile de:tails:

The U.S .

n deeme:d paid .. tax credit allowed petitioner 's parent company on d i vidends paid to it. by petitioner in a year in which it is not a less developed corporation can be: determined by the following formula:

' 24

DECISION -

CTA CASE NO . 288l - 5 - Phil . income t ax paid on accumulated profits (gains, pro- fits, income without reduction by Phil .

income tax)

X

Dividends

Accumulated

profits in excess· of Phil . income t ax = U. S . de·emed paid credi t (Foreign tax under Sec.

902 (a) (1) of the u.s. Int.

Rev. Code The formula for computing the u.s. "deemed paid" tax c redit allowed Procter & Gamble Company on dividends paid to it by petitioner ou t of accumulated profits in a year i n ' whi c h petitioner is a less developed count r y corpo- ~2~ is as fo llows :

Phil . income t a x paid on accumulated profits (gains , pro- fits, inc ome in ex-

X

cess of Phil . income tax

Dividends

Accumulated

profits = u.s. deemed paid tax credit (foreign tax credit under Sec .

902 (a) (2) of the u.s. inter- nal Revenue

Code)

To arrive at the Philippine Income Tax paid on accumulated profits (ga ins, profits, income i n excess of Philippine: Income Tax) '· we compute :

Philippine

Income tax

X

Accumulated profits (gains , profits , = income less Phil .

income tax ) gains, profits, i ncome Phil . income tax paid on accumulated pro- fits (gains , profits, i ncome in exces s of Phil .

Income Tax)

In t he second quarter of t he calendar year 1975, petitioner declared and remitte d in favor of its parent company in the United States d ividends amounting to ~17,707 , 460 . 65 on which it paid withhold ing tax in t hE· c'TI!OUnt of P6 ,197 , 611.23 . Pursuan t to Section 902(a) of u.s. I nte r nal Revenue Code , su~, these dividends are deemed to have been paid out of petit i oner's most recently accumulated profits, namely, its profit$ for the fiscal year ended J une 30, 197 4 . For the said fi scal year , petitioner had taxable net income of ~56 , 500 , 3 32 on which it paid income t ax amounting to ~19 , 765 ,1 16. 25

J

DECISION -

CTA CASE NO. 288l -

6. - If petitioner is not considere~d a less-de~veloped corporation for its fi"S'Cal year ended J une 30 , 1974 , the tax credi t allowed Procter & Gamble Company , i ts parent company , in the Uni ted States amounts t o ~9 , 527 ,370 . 52 arrived at as follows : Gains , p r of i ts, and i ncome of petitionex: •• ~56 ,5 0 0 , 352 . 00 Philippine Income Tax imposed on or with re spect to gains, profits, and i ncome (Total Philipp i ne Income Tax) •• • • 1 9 , 765 ,116,00 Accumulated profits (ga i ns , profits, and income without reduct ion by

Philippine Income Tax

• • • • • . . . • 56,500 , 352.00 Dividends paid to U.S. parent c ompany ••• 17,707 , 460 . 65 Accumulated profits in excess of

Philippine Income Tax

(f:il 56,, 500,332 l ess ~19 ,76 5,116) .• . . Philippine I ncome Tax paid on

X

accumulated profits

Dividends

Accumulated =

profits in excess of

Philippine

income tax . . . • 36,7 35 ,216 . 00 u.s . deemed paid t a x credit (foreign tax c redi t under Sec. 902 (a) (1) of U ~ S . Internal Revenue

Code)

fill9,765,116

X

Pl7 ,707 , 460.65 = ~9 , 527 , 370.52 36, 735,, 216 The u.s. "deemed pa i d" tax credit of lii9 ,527 , 370 . 52 i s clearly more than 20% of the d i vidends remitted by pet i tioner to its parent company amounting to ~17 ,707 , 460 .65. As a matter of fact, it amounts t o almost 54% of such dividends .

Obv iously, t he 20% requ i rement under Section 24(b) (1) ?f the Tax Code is c ompl ied with. On the other hand, the u.s. tax c redit a llowed the par ent company if petitioner is deemed a less- developed C"ountry corporation for its fiscal year e nded June 30 , 1974 amounts to fil6 , 194 , 478 . 21, C'Omputed as follm-.'s :

Gains , profits , and income of petitioner • • f:il56 ,500 , 322. 00 Philippine Income Tax imposed on or with r espect to gains , prof i ts , and i nC"ome (Total Philippine Income Tax) 26 0 • • 19 ,765,116 . 00 ,.

DECISION -

CTA CASE NO . 2881 - 7 - Dividends paid to u.s . parent company • • Pl7 , 707,460 . 65

Philippine

Income Tax

X

. Ell9,76i5 , 116 X Accumulated profits Gains, profits, and income 3.6, 7 3.5, 216 S.6, S.00 , 322 = = Ph i l ippine I ncome Tax Paid on accu- mulated pr of i ts Ell2 , 8 50 , 8 2 5 • 9 7

Philippine Income

Tax Paid on Accu-

mulated profits

Dividends

X Acc:umu la ted Prof i ts u.s. deemed paid = tax c r edit (Foreign tax credi t unde r Sec. 902(a) (2) of the u.s. I nternal

Revenue Code)

Ell2 , 85i0 , 82S..97 X Ell7,707,460.65 16,, 73:5,216 El6 , 194,478 . 21 The amount of El6 , 194,478 is about 35% of the divide~nds amount ing to Ell7 ,707 , 4,60.65 remitted by petitioner td its paren t company . Hence , t he u.s.

"de:emed paid" tax c r ed i t is equival ent t o at l east 20% of the t axes de·emed paid on s uch d ividends i n the Phil i ppines.

•.

The dividends declared and remitted by peti- t ioner in favor of i t s parent company in the second quarte:.r of the: c:alendar year 1975 amoun t ed to Ell 7 , 70 7 , 460 . 65 on which petiti oner wi thheld taxes at t he rate of 35% in the: sum of El6.,197 , 6ll. 23 . Twenty (20 %) of such divide:nd which r epr esents the d iffer ence b~tween the l5% tax paid (P6 , 197,611 . 23) and the preferential rate of 15% (P2 , 6.56 , l l9 . 10) amounts to P3 , 541 . 492.13.

On the other hand , petitioner' s parent company is entitled to "deemed pa id" tax credit i n the United States of El9,527 , 370 ~ 52 or about 54% of such dividends if petitioner i s not considered a l ess- de·veloped country corporation , or a t ax credit of P6,194, 478 . 21 or about 35% of such divi dends i f petitioner is a les:s-de·veloped country corporation for its fiscal year ended June 3:0 , 1974 . Clearly , the United States allows petitioner ' s parent company a tax credit or more t han 20% of taxes de·emed paid in the Philippines on s uch dividends .

Thus , the: preferen t ial 15% tax r ate should be t he applicable Ph i lippine tax on such dividends .

27 •

DECISION -

CTA CASE NO ~ 2883

- 8 - In the fourth quarter of the calendar year 1975, petitioner declared and remitted in faber of its parent company in the United States d i vidend s amounti ng to ~6 , 457,485 . 65 on which i t paid withholding t a x in the amount of ~2 , 260 , 119.98 . These dividends are deemed to have been paid out of petitioner ' ~ most rece~ntly accumu l ated profits , namely, its prof i t s for the fiscal year ended June 30 , 1975 (See Sec tion 902(c) o f U.S. Internal Revenue Code, supra .) For the safd year , pet i tioner had a t axable net i ricome of ~8,738 , 125 on which it paid ~ 2, 952 , 159 (actual ly ~2 , 988,00 1 but ii35,842 was. refundable/ creditabl e as overpayment) •.

If petitioner is not a less developed country c:orpora tion for i ts. fis:c.il ye~ar e·nde:d June 30 , 1975, the tax. credit a.llowe'<l Procter & Gamble, its parent company, in the United States amounts to ~3,294 , 786.80 , arr ived at as follows : Gains, profits., anddncome of pe:titione:r • • ii8 ,7 38 , 125 Philippine Income Tax imposed on or with respect to gains, p r ofi ts , and income (Total Phil . Income Tax) .• • •••••••• 2 , 952;153 ' Accumulated profits (Gains, profits , and income without reduction by

Philippine Income Tax)

• •••• • •••••••••• • • 8 , 738 ,125 Accumula te:d p:-of its in e:xcess of

Philippine Income Tax

(P2 , 738 , 125 - _ii2 , 952 ,159) . ••••• • •• • • •• ••• 5 , 785, 966 Di vidends paid to u.s . parent company

PHILIPPINE INCOME

TAX PAID ON ACCUMU- X

LATED PROFITS

DIVIDENDS

ACCUMULATED

PROFITS IN

EXCESS OF

PHILIPPINE

INCOME TAX

= . . . 6 , 457 ,4.85 . 65 U. S . DEEMED PAID

TAX CREDIT (For-

eign tax credit under Section 902

(a) ( 2) of the U. S . I nt: R~venu e Code) ii2 , 952 , 159 X ii6 , 457,485.65_ ii3 , 294 , 786 . 80 5 , 785 , 966 Obviously , the u.s. "deemed paid" tax cred i t of ii3 , 294 , 786. 80 is more than iil , 291 ,497 . 13 or 20% of the· dividends amounting to ii6 , 4:57 , 485 . 6S remitted by petitioner to its parent company in the United States.

As a matter of fact , it amounts ..

DECISION -

CTA CASE NO . 2883 -· '9 - to about 51% of such dividends . Hence, the 20% requirement under Se:ction 24(b) (1) of the Tax Code is thus easily met . · · On the dther hand, the u.s. tax credit allowed the parent company if petitioner is deemed a less-developed country corporation for its fiscal year ended June 3:0, 1975 amounts to ~1,954,777.67, computed as follows: Gains, profits, and income· of pet.itioner •• P8 ,738,125 Philippine: Income Tax imposed on or with respect to gains, profits , and income (Total Philippine Income Tax) Accumulated profits {Gains, profits, and inc:ome in excess of Philippine 2,952,159

Income Tax)

•••••••••••••••••••••••••••••• 5,785 ,966 Dividends: paid to u.s. parent company

PHILIPPINE

INCOME T.AX ii2, 952,159

X

X

ACCUMULATED PROFITS

GAINS, BROFITS, AND

INCOME

P5, 785,966 8, 738,125 = = ..... 6,4:57 , 485.65

PHILIPPINE INCOME

TAX PAID ON ACCU-

MULATED PROFITS

Pl,954 ,777.67

PHILIPPINE INCOME

TAX PAID ON ACCU-

MULATED PROFITS

X

ACCUHULATED PROFITS

GAINS, PROFITS, AND

+NCOME

U.S. DEEMED

= PAID TAX CREDIT

{Foreign tax c:redi t under ~ 1 , 9 54 , 7 7 7 • 67

X

ii6,457,486.65 5, 785,966 Sec. 9 0 2 {a) { 2) of the u.s. ·In~ ternal Rev. Code) = P2,181,649 .31 The amount of P2,181,649 . 31 is about 34% of the dividends amounting to P6,457,495.65 remitted by petitioner in favor of its u.s. p,arent company . Clear.ly, the U. S. "deemed paid" tax credit is more than 20% of the taxes deemed paid in the Philippines on such dividends.

Pet'itione:r decla red. and remitted to its parent c:ompany in the fourth quar te:r of the calendar ye·ar 1975 divide:nds amounting to P6 ,457 , 485.6.S on which pe:ti tioner withhe·ld taxes at the· rate of 35% in

- 10 - the amount of P2,26>0,119.98.

Twenty per cent (20%) of such dividends, which re:presents the diffe:I:.ence betwe·en the' l5% tax paid (P2,260,119.98) and the preferential rate of 15% (P968,622.85) amounts to Pl,291,497.13.

Petitioner 's. parent company is allowed a "de:emed paid" tax credit in the Unite~d State·s of Pl,294,786. 80 or about 51% of such dividends if pe:ti tioner is ~ a le:ss deve·loped c_ountry corporation for its fiscal year ended June 30, 1975, or a tax credit of Pl, 954,,777.67 or aboL.t 34% of s uch dividends if petitioner is consi- dered a les. s- deve· l op e~d country corporation in t he: sa id year.

Obviously, the United States allows peti- tioner'• parent company a tax credit of more than 20% of taxes dee:med paid in the Philippines on such dividends.

Hence, the Philippine with- holding tax rate i mposab1e is 15%, not 35%. Respondent avers that the petitioner failed to meet certain conditions ne:ce·s s ary in order that the dividends received by the nonresident parent company in the United Sta tes be subject to the preferential 15% tax instead of 35%, thus - Under u.s. law, the amount of foreign tax paid for which the U.S. taxpayer Pr:octe·r & Gamble, U.s .A. is entitled to credit, depends upon the proportion which the amount of dividends r eceived bears to the accumu- lated profits of Procter & Gamble, Philippines with I:e:spect t o which tax: was paid. The pr i- vilege of tax credit is not automatically · available because only a proportionate part of the income tax paid by Procter & Gamble Philippines to the Philippine Government is credited agai nst the income tax: due to t he Unite·d States government upon dividends re- ceived fr om Procte:r ·& Gambl e Philippines. In other words, the foreign tax creditable under u.s. law should be' at least 20% of the taxe·s deemed paid in the Philippines following this formula, assuming that the Philippines is categorized a less deve·loped country: 30

- 11 -

Philippine Income Tax

X

D i v ide:nds:

Accumulc.ted Profits·.

=

Tax Cre-

ditable Consequently, petitioner should pr ove: 1)

The Philippine Income Tax:

2) Dividends

pa fd to Pr octer & Gamble u.s.A.: j ) Accumu- late'd profits as of the end of fis:.cal year s ending 30 June 1974 and 1975:

4) ~he amount actually credited against the income ta~ due in the U.s .

Petitioner, however , adduced evidence only with respect to the Philippine income tax payments and dividend payments made. No evi- de·nce was presented to show the actual 'amoun t credited by the u . s . government against the income tax due Procter & Gamble, U.S .A .

Neither

did petitioner prove· the accumulated profits as of the end of fiscal years 1974 and 1975. Petitioner did not collafe t he accumulated profits but projected on the net income for the fiscal year ended June 30, 1974 in the amount of P5G,500,332.0 0 as divisor in ascer- taining the' u.s. dee,med paid tax credit. And further , that t he refund sought would negate t he intendlne:nt of PD No . 369 because t he amount of P4,8l2,989.00 or its equivalent in dollar will be declared as income of the recipient foreign investor and ultimately s ubjected to income tax by the u.s. government. Hence the u . s.

government will benefii from the law supposed to be in- tended for the foreign investor . And, such is not the philosophy of the Decree to subsidize f oreign government through tax. sparing syste·m.

The r:e:cord raises the issue as to whether the peti- tioner is entitled to the preferential 15% tax rate on dividends declared and remitted to its parent foreign cor:poration.

31 .•

- 12 - It se:ems to be in plac:e to state that to a c:ertain extent the diverging diale:ctics in almost every aspect of the exeJCcise are no less diffe·r:ent than they mig.ht seem, being more of me·thod and emphas is than substance . It might be, and indeed, we think it should be that under Section 9 02 of the u.s. Internal Revenue Code , supra, petitioner's parent corporation is entitled td a tax. credit equivalent to at le:ast 20% of the taxes deemed to have been paid in the Philippines on dividends remit- ted to i t by petitioner.

Such being the case petitioner , commends itself to this Court that it should be: subject to only 15% and not the 35% tax rate on dividends paid to its non- resident parent company in the: United States pursuant to Section 24(b) (1) ?f the Tax Code, supra. Ii i s urged upon us by the respondent that peti- tioner failed to show the actual amount credited by the u.s. government against the income tax due Procter & Gamble, u . s.A. on the d i vidends received. Likewise, petitioner failed to present the income tax return of Procte r & Gamble, U.S . A. for 1975 when the dividends were re:ce·ived nor any duly authent icated document showing that the u. s. government credited the 20 % tax _deemed paid in the Phil ippines.

Let it suffice, however, that Section 24(b) (1) ?f the Tax Code does not require that • an actual tax credit be granted but merely requires that- the "country in which the non-resident foreign cor poration 32 - 13 - is domiciled shall allow a credit against the tax due from the non-resident foreign corporation, taxes deemed to have been paid in the Philippines." As aptly noted, the law refers to a"deemed paid" tax credit of 20% which set the quibble at rest.

We likewise find illogic the impression precipitately broached by the~ re·spondent that the grant of refund would be violative of the purpose of PD No. 369 since the reci- pient parent corporation will be taxed by the u.s . govern- ment anyway.

The records, howe:ve·r, does not show that the u.s . gover.nment will tax such refunded amount; but even on the assumption tha t it will, there is no require- ment nor condition in Section 24:(b) (1) .of the Tax Code that the country of domicile (United States) .should not tax th~ recipient of the dividends on the amount repre- senting the difference between the 35% and 15% prefe- rential tax rate.

In adding up to a logical reasoning petitioner puts is upon the simple proposition that, "Moreover, the intention of the l aw would still be served even i f the recipient were taxed on the refund stnce it would still be benefited to the extent of that portion in excess of the tax paid on the refunded amount.

What

is important i s that the re·cipient receives a tax benefit since the purpose of the law is to encourage recipient to bring more capital investment." Just so and aptly enough we share such view.

33

- 14 - We therefore reach a conclusion no different from the· November 15, 1976. ruling of the respondent Commissioner himself c onceding to the herein peti- tioner a preferential rate of a l S% withholding tax at source, quoted in part:

"Considering t hat under Sect i ons 901 and 902 of t he u.s. I nte rnal Revenue Code, the u. s . parent company will be entitled to a tax credit equivalent to at l east 20% of the taxes deemed to have bee n paid in the Philippines, in addition to the 15% withholding t ax , on the said inter-company dividend the condi t ions provided in t he above-cited Section is (sic) fulfilled. (BIR Ruling No . 7 6- 004 1 July .19 1 1976..} . "Accordingly, Procter & Gamble Phil ip- . pine .Manufacturing Corporation, as withholding agent, may wi thhold 15% only on the dividend declared and remitted to its parent c ompany , Procter & Gamble Company, U.S. A." Far be it from a theoretical gobbledygook t he ruling. lends se·ttling e l oquence to the precise issue in the case at bar.

We see no reason for respondent ' s quick shuttl e of a posture by no l onger holding the same as. his "cup of tea " , so to s:peak. We do not read ily uproot a• ruling for speculative p ur pose or simply to gratify idle curiosity . Accordingly , petitioner is entitled to the sought refund or tax cr edit of the amount representing the overpaid withholding tax at source and the paymen t 34 , ' '

DECISION -

CTA CASE NO . 2883 - 15 - therefor by the respondent hereby ordered.

No

cos.ts.

WE CONCUR:

' ~~$~'

CONSTANTE C

ROAQUIN

{Associat Judge

•