Smith, et al. vs. Commissioner of Internal Revenue, et al.

DECISION

oe This ais ahout the liability to «a4 deficiency withholding tax at source an royalty due aio nan- resident forsiaqn coarporation which have acerued in petitioner's 290aks.

OAs agek forth - petitioner foreian carpoaration incorporated under the laws of the United States and licensed ta do hugsiness ain the Fhilippines through its local branch was aggessed by the respondent Cammissioner of Internal Pevente uncer letter of demand dated July 9%, 1976 for deficiency Withholding tas -at source in the aggqreqate amount -

DECISION —

CTA CASE NO. 2915 ‘of PLSi1,384.72 inclusive of interest, broken dawn as follows:

Royalty payments Tas due thereon aaanwe eae neta ana me 7 eee s Tax paid per return - FPS,498.91 Tay overpaid for lst Qtr. enn wane rn AS OBS OO Bal an © 8B aanaena re F Adds U/2% int, fr. 7eBG-71 ta ie-i-72., LAA amt. fr. Lele?S ta 7-26-74 one Od TOTAL AMOUNT DUE 222 awe ee vee ne PZ.

Royalty payments * Tax due therean , lew. Aamaavuyt paid Balance nee ea wee we Ach: t/R% int. fron (UO-26-71 ta 14% ink. fr. 1-11-75 ta 10 TOTAL. AMMUNT DUE ae a Foyaity payments Tax due thereon Lesss Ammunt paid noe oy Boa Jam © RB annewe hee wwe wee FOOD, 961.04 Adds Lfe* int. fr. L-P6-72 to Lee F172 | Sa, OF 14% int. fr. e172 to 1-26-75 ..

TOTAL AMOUNT DUE 2. eee ene On Atiquet Ba, 1974 ‘petitioner pratested the agsessment but respondent Commissioner of Internal Revenie denied the same and reiterated the earlier demand for the payment of the amount of FIS1,284.72 AS deficiency withholding taxes at Source

DECISION —

CTA CASE NO. 2915 sponding to the three (2) quarters of IS71 in a letter dated October 24, L977 but receive hy the pekitioner on December 2, 1977.

Her

this petition for review.

Fatitioner holds an to the pronesitian that the withholding tax at source arises anly at the time of the remittance of the royalty to the nan- reeident licensor and nok upon the acral] thereat as the non-resident corporation deriveas mo ecanamic advantaqe wuntid the Inceame is actually or constructively remitted ta it, as explained in L.D. (1O53), “Rased on CUE cliank’ s records an royalties due to the non-resident Llicensearse ain Leri, the gross royalty amounted to FSTL.674, the a withholding tax on which amounts to FPAiBs,OBA,9O Le). Hooever, only a porkion of said gross rayakty of FPASL,674.90 has been remitted, and on such remittances, aur client has already paid FPRB,154.46 as withholding tax, on different dates under several official receipts, The unpaid withholding Lax 4 therefore, an - the unremitted royalties amaumnts toa F97,9%1,44," Furthermore, "The Central Bank restriction prohibiting herein

DECISION -

CTA CASE NO. 2915 ‘petitioner from remitting a part of the royalties (Flease see Requlations implementing CR Circular 289, copy attached as Annex "A") to the nan- resident foreign corporatian is undeniably a substantial limitation or restriction on such accrued royalties. Hence s onty that part which was allowed by the Central Bank toa he remitted abroad conatitutes income. Logically, therefore, the duty to withhold arises only when the Central Hank allows the neta: to remit the royalties accrued, because it is only at that point of time when these royalties may be considered income to the recipient. Before that, the would-be recipient cannot yet Subject these royalties to its will. In fact, it cannot as yet control them, neither can it’ also withdraw them from the Fhilippines."

Respondent Commissioner of Internal Revenue

does posit an unvarying assertion that "withholding tax 16 not dependent on remittance of the income payable to the non-resident foreign corporation but on the accrual thereof. Such being the case, although a portion of the amount due to the non- resident foreign corporation cannot be remitted on account of Central Bank restrictions, the tax due ~ 467

DECISION -

CTA CASE NO. 2915 ‘on said ‘portion shold be deducted and withheld as if there is no restrictions," (BIR Ruling No. 71i- O02, February 26, 1971) Suffice it, the issue now raised was squarely met in Bayer Pharmaceuticals, Ine. v. Commissioner a of Internal Revenue, CTA Case No. 2846, March 16, ‘dirt ttverereneeoanins eonsertenacseecoreensenenteavesasetswante htseeanennannobtesstenes onetentrst rated 1972: certiorari denied in Commissioner of Internal Revenue v, Court of Tax Appeals, et al., G.R. No. 72054, September 29, 19846, similar in many or soa in tenor and circumstances, where as there, =o here, the ruling equally applies, interalia, thus —- "Since the royalties could not be remitted to Bayer -due to Central Bank restrictions, as stated by respondent himself in his decision appealed from, surely, respondent’s counsel ' should not expect petitioner to make efforts, albeit unlawful, to remit the same. And oan respondent’ s point that since the royalties had been accrued in petitioner's hooks the income theresn became subject to withholding even if remittance was effected later, suffice it ta say that the accrual of the royalties in petitioner’s books, as held in the LL.D. Caulk, did not amount to ‘gains, profits and income’ on the part ar non-resident Rayer and, therefore, no necessity to withhold = tax devolved on petitioner.

"Wig accordingly, rule that since the royalties in question could net be paid or remitted in 1972 by petitioner Rayer Fharmaceuticals, Inc., to non-resident foreign corporation Rayer Aktiengesellschalft, Leverkusen Rayermerck 468 DECISION - .

CTA CASE NO. 2915 due ka Centreal Bank rastrictions, petitioner was wnder ome obligatian ta withhold and pay income taxrat-saurce on said royalties and . therefore, te not Jijable for the deficiency withholding tax- abegouwrce agsesament of respondent Cammissiorner af Internal Revenue »« ."

Going by the pronouncement ant insafar as the same is brought to bear upon the circumstances obtaining, there can be no occasian to further speculate when the chips must fall. so to speak, "The time of payment of the royalties is the ' maturation point af the withholding duty." (Bayer, We heasitate ta further fashion an issue inte a satis actorily settled legal situation.

WHEREFORE, resnondent’s deficiency agssessmant for the periad involved is hereby get aside. Noa moh

Associate Jud

. ._ --

DECISION

CTA CASE NO. 2915 - 7 - l•JE CDI\ICl..Jn =

AMANTE FI

Judqe

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c. ROAQUIN C E R T I F I C A T I 0 N

I

hereby certify that this deci s ion was r e a ched after due con s ultation among the members of the Cour t of Tax Appeals in accordanc e with Section 13, Article VII I of the Cbnstitution. 4 7~

AMANTE

Pr-esid inq Judge Court of Ta\ Appeal s