CTA Case No. 3725

DECISION -

amaunt of royalties due to a non-resident foreign corporation.

Fetitioner Nippon Faints (Fhilippines) Inc. is a domestic corporation engaged in the business of manufacturing paint duly organized and existing under the laws of the Fhilippines.

Fetitioner, as sich paint manufacturer, entered inte licensing agreement with several foreign based corporations, under which petitioner Nippon Faints (Fhil.) Inc. was obligated to pay royalties to the said foreign corporations. In a letter dated September 28, 1979, respondent assessed against and demanded from petitioner the total sum of F75,431.55, representing deficiency withholding tax for the four (4) quarters of 1975 as follows:

ist Quarter 1975 Foyalty 2. 2 « « er Pye, 586.07 Tax due thereon (252) . 2. 2 a 46,735.00) Add: 25% surcharge for late payment . «2 1 e eo ” 11,503.75 14% interest fr. 4/26/75 to S/21/75 oon we ee ae connate? AL Total tax due on late payment . FOS6, 235.00 Less: withholding tax paid on D/SL/79 « «ww we ee Balance . « « « 2 2 » we eo

DECISION ~

Add: 14% interest fr. 6/1/75 to 9/2B/79 nw wn . eo 5,129.54 Compromise late payment = eceereeereenthdd CHD Total amount due and collectible Ind Quarter Reaoyalty 2 2 2 nw ee we ee F141 249.40 Tax due thereon (35%) . 2. 2. . » 49,475.26 Add: 25% surcharge for late im. interest from 4/26/75 to S/ZL/75 2 wk we Oe 6 OO Total tax due on late payment . Ge 2420.27 Less: withholding tax paid om S/31/75 2 2 ww ee Add: 14% interest fr. 6/1/75 to DIINM TF «9 ww ee ee Compromise for late payment & FLIINgQ « « ww 8 we ew Total amount due ® collectible.

aed Quarter Royal ty ee F147, 220.50 Tax due thereon CBSA) 2. 2 «eo 51,520.67 fxd: m4 surcharge for late payment 8 " . 2,882.60 14% interest 1/25/76 to 4/19/76 eon we wm we ee 719.78 Total tax due on late of payment F 65,122.11 Less: withholding tax paid on AII9/76G 6 nw we we otal SHO » OD Balance . 2 6 se w nw we we ee 13,603.11 Add: 14% interest fr. 12/3/75 to 9/SB/7P ne 5,713.3 Compromise for late filing and payment . 2 « s 2 2 « Total amount due ® collectible.

4th Quarter Royalty . 6 se e a 8 et eh P126,371.52 Tax due thereon (35%) 2. 2 a « 47 7D) OR

DECISION ~

CTA CASE NO. 2725 Add: 25% surcharge for late payment . oo. . se ew ee 11,922.51 14% interest fr. 1/26/76 to 4/19/76 6 nw tk ag 4 77 Total amount due on date of PAYMENT «nw nw ee ew we we ee Fo61,197.31 Less: withholding tax paid on A/N9/76 6 we ew es cond Z 9 TAA 6 OO Ralance . 2 2 «© © se we we we ee Fo13,466.21 Add: 15% interest 4/20/76 toa Q/EB/T9 6 nn we ww Comareamise for late filing and mayment 2... 6 ee Total amount due & collectible 1976 deficiency estate dealers fixed tax in the amount of F1,670.00 as follows:

Real Estate dealer fixed tax .. FO 1,000.00 Add: 25% surcharge . ... . 200.00 14% interest for 1/31/76 & 9/23/79 ee 8 we ew ; 420.00 Total amoint due ® collectible .

Nippon Faints (Phil. ) Inc. protested said assessment in a letter dated October 29, 1979 and November 14, 1979, claiming that its duty to withhold and pay the withholding tax at source depends on actual remittance or payment thereof. (pp. 146, 168-174 BIR rec.) In a letter decision dated November 9, 1983, respondent denied the protest (pp. 173-174, BIR recs.) reiterating that the obligation of petitioner to withhold and pay the tax arises at the time of accrual of the royalties and not at the time of actual payment or remittance thereof.

DECISION CTA CASE NCl. 3725 ·- 5 -- H e nce~ this appeal. The i ssues posed o n this appeal are: 1.

Whether or not the obligation to withhold and pay income ta:·:-a t - source on the r-·oyal ties is upon the accrual of the royalties or upon the actual remittance or payment thereof; ·and 2.

Whether- or not petitioner- is liable for d e ficiency real estate dealers tax for 1976 in the a mo unt of F'.1,670.00 inclusive of interest~ s urcharges and c ompromise penalties. Pt'?ti tioner-· maintain s that there was no o b 1 ir:Ja t..i.on to deduct.~ withho ld and pay the withholding ta:: in .1975 . The royalties c ould not be remitted by petitioner due to Central Bank r-·~?s t 1,. . .i. c: t. .i. ons. The issues in thi s case is not one o·f fir-s t• impr· r~~;s i.cJn.

Thi s c ourt in the case of Baye r Pharmac eutical, Inc.

vs.

Commissioner of In terna l Revenue , CTA Case No.

2846, March 16~ 19 79 ~ and affirmed by the Supr~~e Court in G.R. No. 72054 e ntitled Commissioner of Internal Revenue vs. CTA et. a l. , September-· 29, .1986, this Court held and we quote:

The lone ques tion tendered for l~ eso 1 u tion i s whether· or not the obligation .:.o l'-li th ho l d and pay income taH- a t.·-s ourc e o n the royalties is upon the 7( 0

DECISION ·-·

CTA CASE NO.

J 725

··-· 6 - accrual of the royalties or upon the actual remittance or payment thereof. F'E?ti tioner maintains that there \'las no obligation to deduct, withhold, and pay the withholding tax in 1972 since the royalties could not be remitted due to Central Bank restrictions. In submitting, however, that the liability to withhold and pay the income tax withheld at source from royalty payments to a non-resident foreign corporation, like Bayer Aktiengesellschaft, Leverkusen Bayermerk, is at the time of the accrual of said royalties and not at the time of the ac tua 1 r-·emi t tance or payment ther-eof, respondent relies mainly on Bureau of Internal Revenue Ruling No.

71. - 003, dated Febr-uar-y 26, .1971, the pertinent portions of which are quoted as follows: "This refet-s to your letter dated Febr-uary 16, 1971 requesting a ruling as to the basis of the withholding ta:-: due on film r-entals or royalties payable by you to non - resident foreign film corporations. II "In your-· letter, you c ontended that the 35% withholding tax should be based only on actually remittable amount under Central Bank regulations and not on the entire amount due and payable to the non - resident foreign corporation. This contention has no legal basis.

Withholding tax is not dependent on remittance of the income payable -to the non - rE?sic:lent foreign corpor-·ation but on accrual ther-eo ·f.

Such being the case, although a portion of the amount clue to the non- resident foreign corporation 701

DECISION ···

... 7 ·- cannot be remitted on account of Central Bdnk restriction, the tax due on said portion should be deducted and withheld as if there is no restriction.

· B§'.2 .t.r.::J_c; _t.~.c:! .. _ .. _ .. ...f~.~r:!g_§ .• - In connection with the restriction on the transfer of funds from U.S.

to persons in Norway, Denmark, the Netherlands, Belgium, Lu:·:embour·g and France, the tax should be withheld in the same manner as if no r·estriction e:dsted. In custodian accounts, the name of the foreign bank or· other foreign person ~; hou J. d be en t.e red on the owners hip certificate, and an ame nded owner·shi p c:er·ti ·fir.:,"\te ·filt=?d as s oon as the actual owner i s disc:loS€·?d.' .1969, Vdl.

5, 4875. 4·05) (CCH, par.

In view thereof, this Office bel .teves and so holds that the 35% withholding tax should be deducted and wi thhe 1 d on the enti1~e amount of film r·entals or royalties payable to the non - resident foreign film corporations including that portion which, on account of Central Bank restrictions, cannot ~:\s ret be remitted abroad." As e:·:pr·essly stated therein, the Bureau of Internal Revenue ruled that withholding ta:·:

is not dependent on renl.i t tanc:e of the income payab 1 e to the non - resident foreign corporation but on accr·ual ther·eo·f.

And as such, although 7C2

DECISION ~

CTA CASE NO. 2725 the inec, @ cannot be remitted on accaunt of Central Bank restrictions, the tax due thereon should be deducted and withheld as if there is no restriction.

The statute involved is Section Sa(b) (2) of the National Internal Revenue Code, the controlling provisions of which read as follows:

"Gec,. SS(b) (2) Non-resident Case af foreign corporations subject to tax under this Title, not engaged in trade or btsiness within the Fhilippines, there shall be deducted and withheld at the source in the same manner and wporn the same items as is provided in Subsection (b) (1) of this section, « & x , a tax equal to 35 per cent thereof. This shall be returned and paid the sane manner and subject to the same conditions as provided in Section 54. “ « «x " And Gection S2(b)(1) of the same Code pertinently provides:

' (b) Non-resident aliens and foreign corporations - (1) Non- Ss. a Every corporation, partner-— ship, or association, in whatever Capacity acting, including a lessee or mortgagor of real or personal property, trustee acting in any trust capacity, executor, administrator, receiver, conser- vator, fiduciary, employer, and avery officer or employee of the Government of the Republic of the Philippines having the control, receipt, custody, disposal, or payment of interest dividends, rents, royalties, salaries, WAGES, premiums, Annuities, tea) yea ‘

DECISION ····

- 9 -· compensation, remuneration s , emoluments, or other fixed or determinable annual, periodical, or casua 1 gains, pr·of its, and income, and capital gains, of any non - resident alien not engaged in trade or· business within the Phi 1 i ppines, sha 11 ( e:·:cept in the c a s e s provided in sub-section (a)(1) of this Section) deduct and withhold from the annual, periodical, or casual gains, profits, and income, and capita 1 gains, a tax equal to 30% thereof.

Thes e provisions, by the way, were merely imported and copied almost verbatim from similar withholding tax provisions of the United States Revenue Code [Section .14·3(b)].

Accordingly, in consonance with s ettled rules of statutory constr··uction, the in teq1t-eta tion they have received in the United State s have authoritative e ff e c t i n the proper cons truction and i nterpreta tion of our law. Thu ~;

, pe t i t icm f:: tr· n 2s pond e n t:

a s c orre ctly and which .i:s not noted disputed by by .l.

In arriving at Bin Ruling No. 71 - 003, date d February 26, 1971, our· Bureau of Inte rnal Revenue quoted as authority the e:·:cer·pt of a United Sta tc~ s In tern a J. Revenue Service ruling which is found at par. 48nL 4·05 of CCH, 1969, Vo 1 ume 5. It appears that the said U.S.

ruling is actually Mimeograph Ruling No. 5075, which was i ssued by the Office of the Commiss ioner of Internal Revenue, WashirlfJtcm D.C., on July 8, 1940 and can be found at the CumulatiVE? Bulletin 1940-· 2, <:It page 141.

7 ('

·- 10 ·- 2.

The said 1"1irneogr·a ph Ruling No.

5075 h a s b E-?en d E~c 1 ar··e d gJ~ .? .c.!J.~ .t~ .

by the United Sta t es Inte rnal Revenue Service its e lf i n its F\even u e Ruling No .

70-· 29 ~3.

(U .S.

In h~r n a l Revenue Bulletin No . .1970- 23 ~ dated ,June 8 ~ 1.970) It is thus eviden t that in issuing its BIR Ruling No .

7.1 - 003 o n February 26 ~ 1971., o ur own Bureau of Internal Revenue has relied on a Un ited States Intern a l Revenue Service ruling that has already been overruled, t h e same havi ng been dec 1 an?d obso 1 ete as o·f June, 1970 .

3.

Following the decision of the Uni ted States Di s t ric t Cour·t in '==-~-.P .. ~ ..... ..G..9_t,IJJ.:;. h:..9.! ..... .Y.2 _._ ... W.IJJ.:t.~.9 ...... 9.t..8 .tg.2_.!J.. 11 6 F • Sup p .

8 3 5 ~ rendered on November 19~ 1953~ to the ef fect th a t corpora tion which he ld licen ses under patents owned by non - resi d e nt aliens whpo as a result of blocking proclamation were forbidden right to receive or di s pose of royalties was not bound to withhold ta:-: befor·e payme ndt of r·oyaltif?S , the rule that is now obser·ved in the Unite d States is that the obligation to wit hho ld a n d pay the ta x is upon pc"":l.y rne n t or- n -::?mi t tanct? of the income to a non - resident alien. In t.h e

~'" ·-~-P

.• ...... G.~uJ .t ...... ~~-9. · case , l"ihe r·e the factual setting, law involved a nd issue lit i g a t e d are practical ly on all four s with the case at bar, plaintiff, a De 1 awa r-e cor poration~ h e 1 d 1 icenses under patents o wned by t~~o non-resident a 1 iens, Robe r· t Do g e and Emmanue 1 de Trey.

Both patentees were Swiss. Under the l icensing ,'":\gr·eements, plaintiff obligated itself to pay r·oya 1 ties to Doge and de Trey. In its treatmr:mt of the impact of royal ties on its operation s , plaintiff, adhering to the ace: r·ua 1 method of accounting, entered net royalties and withheld taxes as accrued l.i. a bi 1 i ties of 1941 and 1942, the periods invo l ved in the c:ase. Thus, 194.1 and 1942 r·oya l ties a nd ta:-:es were set up as ~J.cco un t s payab 1 e on p 1 a·.ln tiff· s book s and 7C'

DECISION --

- .11 as part of its cost of doing business for those years.

No ~-.Ji thho 1 ding r·etut-ns for non - resident aliens Doge and de Trey were prepared for 1941 or 1942.

While the cr-·itic:al issue is when the~ r-·etun1s were due for royalties attributable to sales made by· ,:> 1 ;,:\in t.i. ·f ·f during the years 1941.

and

1. 942, the inquiry shifted from "when t"'a s the:! retur-r1 due" to "t-.Jhen, if at all, v~a s plaintiff r·equin,:d to t>.Jithhold on the r·oyalt.ies .

The "~-.Jhen" o ·f the matter, not thE? "who" or the "what" v~as the point of dispute and inquiry because, as result of blocking proclamation, nan - resident aliens were forbidden right to receive or dispose of royalties due them under contract with c: cwpora t.ion which he 1 d 1 icenses under alif.m s ' patents.

(L.D.

Caulk Ca.

vs.

United States, 116F.

835, 840.)

Stated othe rwi s e, the question as to when to w.i thha 1 d the ta:·:

·from the 1941 and 1942 ray a 1 ties arose becaLis e, although the r·aya l ties were ace r .. ued in the p J. a inti f f' s books in 1.941 and 1942 as liability to the n o n - r esident li c en s ors , the same could nat be paid or-· t-emitb-::!d to tilE?

latter-· as a result of a blocking proclamation. The United States Federal Court ruled that where, a s re s ult of blocking pi'··oc 1 a ma tian, non --resident a 1 iens wer··e forb.iddf.m r-·ight to receive or dispose of royalties due them under contract with cor-poration which h&~ld licenses under aliens' patents , such aliens had no "gains, profits and income" within internal revenue statute requiring all persons having con tral, rece.i pt, custody, disposal or payment of ·fi:·:ed or deter-·minab 1 e annua 1 or per iad ica 1 gains, profits, and income of any non-resident al i.en to t-.Ji thhold ta:·: and, therefore, no necessity of filing withholding tax return devolved an corporation while corporation n=~tained blacked r·oyal. ties.

The net res ult i.s that the obligation to withhold a nd pay the tax is upon payment or remittance of the United States derived 7 0t) DECISION CTA CASE NO. 27285 incame to the non-resident recipient. Because of its strong persuasive force, if not cantrolling effects, on the present case, we will quote at length from the decision. - "The anus of the withholding requirement qn plaintiff is imposed by S$ 143¢b), I.R.C.s "ALI PersansS , in whatever capacity acting, * * k having the control, receipt, custody, disposal, or payment of * -k xX fised oor determinable annual ar perrodical gains, profits, and income K€ & kK of any non-residant alien %*& & & shall deduct and withhold from such annual or periodical QALMNS . profits, ane income a tax kk k& kL" On the whole, this provision does not concern itself with "when" the withhalding should take place. Ratner, it simply specifies "who" shall da “what". However, this much light at does shed. The duty to withhold presupposes the existence of "annual or periLadical gains, profits, and Lneamne". The section directs the ’ withholding from such sums as are identifiable as "gains, profits, and income" af the nonresident alien. Obviously, aif there are no such "gains, profits, and incame"’, the duty to withhold is nanexistent. Qn the other hand, if there are such sums available, the statutory language is inconclusive in deciding "when" the withholding duty arose.

Toda not ground my decision on any subtlety of construction, but Io do advert, in fact, to it.

Were the royalties "gains, prerits, ane incame" to the Aliens Doge and de Trey while DECISION

CTA CASE

NO. 2725 plaintiff retained them under these circumstances? I think not upor a realistic view of the matter. The blocking proctla~ mation plucked every element of control aver the funds from the Alien’ s theoretical bundle aft awnership rights. This loss of eSSsence af private ownership occurred while the royalties were still ain plaintiff's possession, since the blocking freeze applied to individual debtors of Swiss nationals. AS soon as royalties accrued to the aliens under the eonmteract, this crazy predicament faced thems they had theoretical right to collect the royalties but were forbidden right to receive them or dispose af them. Neo economic advantage was theirs. Such aio hallow "right" does not have the care of benefit sufficient to constitute "gains, prafits, and incame", Even the Wo Leted taus dactrine cof cans troctive receipt of income has no tontacle lang enough to reach these royalties. Cf. Reg. 103, § LP~A4AS AS said with reference ta S$ me-(b) (2), TLR. y in Industrial Trust Co. Vos Braderick, 1 Cir., 94 F.2d 927, at page S04 “Thraughout the Revenue Laws the words gain, profit, or income mean an actual, not fietitious gain or profit ¥ kK kL" Certainly, these were not “income" and, if “gains, or profit", were unrealized and highly artificial. Further, the aliens here had no power to command payment to themselves or Others, unlike the donor of the interest coupans in Helvering v. Horst, T1ii U.S. lis, at page 118, 61 S.Ct. 144, 147, 85 L.Ed. 75, where it is said: "The power to DEC I !3 I Clt'l ··- 14 --- dispose of in c ome is the equivalent of m>.Jners hip of it."

It waul d seem, then, ther·e being no "gains, pr··ofits, or· income" of the aliens at least during the time plaintiff retained their blocked royalties, no withholding duty devolved on plaintiff and no penal ties ar·e pr·oper·." Ag a inst this bac kdr·op, the s ituation hE~n?.

pn:,~s en ted, ~>.Jhi 1 e the r·oya l ty in th E) a mount of P69,529.00 (although was set up in the books of petitioner as a liability to Baye1"· ) cou 1 d not be n=.~ mi t ted to Bayer due to Centr·al Bank rest r-i c tion s at that time, wou l c:l not c r· r::>a te "gains, profits or· income" to non --n?sident foreign corpo- r·,:d : ion Ba yer ...

No economic benefits were deri ved by Bayer;

hence, there was no income s ubj ect: to withholding of ta:-:--a t - s ource.

Accordingly, petitioner had no duty to withhold and pay the tax. Even more, a dopte d basis for the decision of the United States Court is the l c-?gislative hi s tor·y of Section 143( b) of Unite d States Ta x Code, from which Section 53(b) of our Na tional Internal Revenue Code was practi ca lly copied, and hints d<:: r i VE'd f nJm the pub l i s hE~ d pr··onouncemen t s o f the United States Bur·eau of Internal Revenue and Courts, which disclose that duty of withholding arises at .tJ.r.!:!~- - - - - -P.f.

P~Y_fi! g iJj:._ .

l-<Je quote fr·om '=---~-. R .! ..... G.S\_l,,tL:

"PresentS 143(b), I.FLC., is traced back to the Act of October· 3, 19.13.

F'ar·agr·aphs D and E of that Act al·-e pertinent. Pat-agraph D provid.ed: "* * * all persons * * * having the control, r- E~ce.i pt, d i s posa 1, Ol".

payment of fixed or determinable annual or per· iod ica 1 gain s , pr-ofits, and income of another pers on subject. to ta:-: , shall in behalf o·f such person deduct and withhold from 7 ('- r the payment a n a mount equi v,':\ 1 e n t. to the nor·ma 1 income ta:-: * * *." P .:.H 1 gr· ~:\ ph E of the same Act in par·· t.

specified:

"All p e r-son s * * * hav ing the c ontrol, n:-?c~:::ipt, custody, di s pos al, or·· p i: \yme n t o f * * * other- ·f i :-:ed a t- determinable annual gain s , p rof its , and income of another p er-·scm, e:-:ceed ing $3,000 for· a ny taxable year * * * who are required to ma ke and render a n??t.un1 in b e ha l ·f of another, as provi d e d here in, * * * a re here by au thorized a nd required to deduct a nd withhold from s u c h annu a l gains, profits, and income such s um as will b e su·fficient to p ay the normal tax * * * a nd they are eac h here b y made person a lly li a bl e fen'"· suc h ta:-: ." F'a.r·a graph D is ex plicit in d irecti ng withholding ·fr-r.Jm the "payme nt" whil e its compan ion sect ion aut horizes t h e deduction a nd irnpo ~;ec:.; person a 1 1 iabi l i. ty on the withholding agent.

In its Report.

to the Hous e o f RepresentativPs on the Bill, the Committee o n l·Ja ys and 1'1ean s ~;aid, "F'r-obab 1 y t~o..Jo -- t. hi r·d s of t h e i n c o rne t.a :-:

pr··oposed as to ind ivid u a l s would be d e du c ted and withhe ld at the sour··c:e of the income and paid in full to the Government. * * * By thi s method the amount of ta:-: due or- to bec:orn~:-: due upon every fixed or determinable annual income i s withheld and paid to the Gover·nrnen t before the income r··eac hes the ta:-:pa yer" .

Nonresi -· d e nt alien s as ~<~ell as citizens wer-e subject to thi s withholding sy~; tem.

In par··agr·aph sect ion the 1.9.16 D ~o..Jas 8(d) Mio ( j.

-.

Act, quoted n ?. pea ted as under the

DEC I ~3 I ON

CTA CASE NO. 3 7 2 5 -- 16 ·- s .i.gnific c:mt hea ding "Re tur-·n s " .

Par a graph E , a s quoted, was r e peated as section 9(b) und e r the ~·l e<::\ d ing "A s~:;e ss m e n t a nd Admini ~:; tr· ation" .

By the Revenue Ac t of .19 .17, p a ragr a ph 8(d) of the 1916 Ac t (pa r.

D of the 191 3 Act) wa s r .. ·::: p eCI.l ed so i:\S to render u v~ ece ss at- y any 11 ~-.Ji thholding at t.ht?

sou1'·ce of t h e t.a:·:

due on p ro fit s or in c omes of r esid e nt t a: · : abl E·~ p e r·son s ".

Inf o r·ma tion at.

the source was s ubs tituted.

Acc ording to the House Re port, thi s ch a nge ~-.Ja s ma de for· "a mot- e e ff e cti v e a dmini s tration of the 1.::1.1"1" and the s a v ing o ·f a nnoyan cE!

.::md e :-: p e nse to the ta:·: p a yer·s a nd withholding agent s " . By the same Ac t, p a r· a gr·a ph 9(b) of the 1916 Ac t (par. E of the 1913 Act) was a me nd e d to limit withholding a t the s ource t o nonresi d e nt a lien s . The Ac t further in c lud e d interes t fr o m t ax - free coven a nt bond s a s a s ubj ec t of withholding. The Revenue Act of 1 9 18 mad e n o c h a ng e in the pertin e nt l a ngua g e of the a me nded S 9(b) but did in c t·· easr::? the-?

withholding r c"?.te and r e numbered the section s a~:;

2 2 .1.

However, the Report of the Wc':\ys and f'1eans Committee o ·f the House aids s earch in its c omments on "Coll ec tion at the Source":

"The pr-oposed bi 11, as under e x isting law, requires only the withholding of income in the cas e of payments by ind i v idua 1 s, c orporations, and partnerships of f i :-:ed and deter-·minab 1 e annual or per iodica 1 gains, profits, and in c ome to nonresident alien individuals c tH"por·ations".

71 or nonresident This comment is DEC IS I !JN ·-· CTA CASE N!J. 3725 - 1 7 ·- an indication the intent.

of Ccmgr·es s ~-.~ as as e: -~ pr- esse d in p<':\r·ag r-aph D of the .1. 913 Act and 1t~as ccm tinued in S 9 (b) of the .1.917 Act when the for-mer· provision wa s repea led.

No c h a ng e was intended ~-Jhen the withholding pr-ovision s wer-e delim i ted to apply only to n o nn-?s ident aliens. The time of payme nd wa s the time when the withholding duty arose. The Revenue Ac t of 1921 made n o a me ndme nts to the Secticm pertinent to inqu ir-y~ nor did the (let of

1924 .

How eve t·· ~ bo:th the House Repor-t and the Senate Re por· t. on the 192 4 Ac t.

have this comme nt:

Section 22 .1:

Su bdi - v ision ( a ) of this section of the pr·· e~:; e nt l a ~-.~ pr·ovides for- the with h o ld ing of a t a x ~ o n fi xed or determinable income paid to a PnrH·esident a l ien i ndi vi du a l~ or· a p artn ers h ip composed in who l e or i n part of nonresi d ent a l ien r::.; . "

Both a l s o r·e f er- to "r·-r.0qui ri ng t h e 1-J.it.hholding o f L::\:-~ f r·o m pay me n t.s " to a partner-s hip. Rates of withholding wer-e i.nc:n:?ased by the F\evenue Act of 1926~ and the Conferen ce Report of the Committees of the House <-:i nd Senate r-efE~rs to the effect of the hike in rat£?.s:

"Thi s <·:11m~ ndmen t r .. equi r·"es th E?

1-.1i thho 1 d - ing of a ta:·( of 12 1/2 per· cent in r-espect of all payment of income made befor-e the enactment of this Ac:t to foreign cor-po- r-ations specified below. * * * Because the per-sons making payment s * * * had no notice that t ilE' c:o r·por·ation income ta:~ would b .

incr·eased ~ thE::> 1-.1i thholding r- a te is not incn::>a•;ed 1-.1ith r·e s·-·

DEC ISTON

CTA CASE

NO. 3725

~ 1B -

Ie to payments made hefore the enactment of this Acts KK KN, Although reference is to foreign corporatians, the withhalding an payments to them is but as part cf the Same syatem embracing individuals.

In the Revenue Act of 1928 a wholesale departure was made fram the arrangement of prior Acts. S ced hecame GS 144, In comment~ jng an part (a) of the Sectian, both the House Report and the Senate Report stated: “The pre- cert law pravides for the withholding at source in the se oof bonds, of a tax of S per ant af the interest when paid to nonresident aliens. ¥ KK," 4s t of ~ Under the Revenue Ack arf 1832, the section was renumbered 142 and the rates were increased Without affecting the aspect af the provision under consider atvan, The Revenue Act of 1924 mada ne changes bearing Upon aur inquiry, but again in the House Report and in Sanate Report references ta withholding of tax on interest abligatioans were couched in terms of payment.

The 1936 Act did mot change the terms of GS 143 as they affect the problem under investigation. Hawever, a comment in the Senate Report confirms the prior statements: "Section 322 of the axisting law provides that the tax withheld at the source under section 143 fram payments to an individual taxpayer shall be a credit against such taxpayer's tax". Reference is also made a DECI TA STON CASE i?

“sithholding in the case af pay~ menks to foreign corporatians”.

The House Repearkt, which the Ser ote adapted, on the Revente AcE af G37 is equivocal in theocge in & @lita)s: "There wild hes withheld from the ameannyvels receivable hy a nonrosident alien tarred under the new provisions Lhe Amour bs required to be wikhbheld under section 145 of the present law", "Receivable, of corpse, i5 deseriptive of minute divisions of time from the first moameark af acertiial to the last secand before receipt af payment.

The House Report cy the Revenue Ach of USSR appears to reaffirm the earlier interpret ations even aif the 197 Repart be viewed as aio deviation. In referring ta consenh dividends, the Committee on Ways and Means reported: "Tr case any share holder making a coarmsenk is oa parson subject to the provisians of eec tian LAS (ly) and seachkion AA4, relahing to the deduction and withholding of tax at the saurce, seekion 2O6(d)5 requires that such cansent filed by the corparation with ite return shall he accompanied by cash k* k& *k epital to the amount which the corporation would have heen required to deduct and withhold by such section 143(b) ar 144 if thea amaunt specified in stich consent had heen paid to such shareholder, on the last day oaf the taxable year aft the corporation, in cash as a taxable dividend." The Senate Report used same language in referring toa S L42(b).

pat @ a r

DECISION --

-· 20 _, No pet-tinent comment was fou ~ d in the Committee Reports on the other Revenue Acts down to 1941 and 194·2, the ta:·: years in question.

However, one further reference is made to a later committee report ref lecting cur-r-ent thinking.

The House Report on the Revenue Act of 1950 in referring to a proposed S 13.11.(a) states:

"This subsection alsu provides that any person required to deduct and withhold a tax under section 143 or 144 * * * on the payment of a dividend s hall not be required to deduct. and withhold a ta:·: under ..

this section upon such payment". Regu 1 ations pr·omul gated by the Commissioner contain abundant references to payment as indicating the crystallization of the wi thho J. ding duty. Treasury RE:"?gulations 111, S 29 . .143·-1 (a) s t.ab:"?s:

"Withholding of a ta:·: of 30 per cent * * * is required in the case of fixed or d€terminable annual or periodic:alo income paid to a nonresident alien individual * * *".

The subsections of S 29.143 are replete with references to withholding upon payment, suc h as "The ta:·: must be 1-'Ji thhe 1 d at the source from the gnJss amount of any c:listr·ibution made by a corporation" ( 29. 143- 1); "* * * an annual retLtr·n * * * s howing the amount.

of tax required to be withheld from each nont··esident alien * * * to which income other than interest was pai d during the previous taxable year" (29.143-7 );

"Ta:·:

~>.~ithheld at the source upon * * * income 71v.

-

21. - paid to nonresident alien fiduciaries***" (29.143-·9).

And even on the question of whether withholding should be at the rate in ef feet at the time paym~;m t.s ~<Jere ~ -"'-~-~ or at. the rate in effect at the time payments were actually made.

the United States Court r uled that the time paymens is m~~g govern s the rate.

We again quote from the G_9..!JJJ.:; d e c i s .i on ; "Dn the .issue of whether withholding should be at the rate .in effect at the time payments were due or at the rate when payments wer-e ac tua ll y made~ the Bureau has ruled the time of p ~3 ym e n t govern s the rate.

0. D. 1.67~ 1 C.B.

192;

I.T.

1521~

I - 2

C.B .

.197;

I.T. 3020, XV - 2~ C.B.

106; I.T. 3291, 1939 - 1.~ C.B .

.140, Cf. I.T. 3535, 1942 -· .1~ C.B .

.129;

I . T.

3~) 4 2 ~

1. 940-- 1 ~ C. B.

58.

In fact~ l a nguage s ufficiently br-oad to e ncompass the pr-·ob 1. e m was em ploye d .in G.C.M. 2467~ 7 - 2 C.B.

188 (modified on other grounds .in G. C.M.

8594, 9 - 1.

C.B.

354):

"* * * w.i.thhold.i.ng .is only required when * ~ * .income is pc3.id to a nonresid e nt.

a lien and at the rate in force at the time o·f payment."

As in the above~ s o Southern Pacific Railroad Co.

v.

C.I.R., 21 B.T.A.

990~ held rate of withholding was that which was efi ":'ctive on the date of actual payf'len t..

In that case~ the petitioning company contended unseuccessfully for a result similar to the one here sought by the Government.

Bo~d interest due and payable Cturing 1914-1917 could not then be paid to nonresident aliens because of war

DECISION -··

·- 22 -· r··es tr-i c tion s . It was~ in fact, paid in 1921 and 1923. after the withholding rates had been increas ed.

The company argued the former, lower rates shbuld apply because the interest was the n due;

sufficient fund s were a v .:1i lable at all times for- its pa yment;

and the date of con s tructive receipt by the bondho lders gave ri s e to the duty of ~o.Jit.hholding.

The Boc>rd of Ta :-:

Appea ls rejected these arguments , s aying, 21 B.T.A; · at pages 995 <:1nd 996:

"The petitioners did not a nd wel'-e not c alled upon to

P•" Y

t.hr~ int:en·-:!s t until 1923~ and the nonres id e nt ali e n s did not a nd for all that appea rs could not.

r eceive the intere st until the n * * *.

When the inter-e s t ~·J a~ ac tua 11 y paid to and received by ':. he bondholders they r-eceived in c o me t a :-:abl e at the r-ate the n e ff pc ti ve , c.'\nd the pet i tioners ~'' E'n;? under- the duty of paying s o muc h the r e of a s by the s tatute the n in effect they we re required to ~·-Ji thhold a nd pa y."

Oblique s upport i s thus give n to adoption o f the time of payment as the ma turation po i nt of the withholding duty, payment being both an eas ily recognizable act of obj ec ti ve s ignificance and a s t a ndard s afeguarding the co 11 ec tion o ·f the proper· amount of t<3.:·:."

What possible ground can there be for u s not to app 1 y to pet.i tioner the ru 1 ing of the United States Feder-al Court in !::,_!!>_~- C..?..\,\.lt., supra~ for which Bayer Pharmaceuticals, Inc..

is similarly situated?

A decision buttressed by the law~ which is closely if not exactly s imilar to our law, reason and logic is not.

to be simply brushed aside to DEC I!:3 ION acc ommodate a ruling of our own Bureau of Internal Revenue which merely quoted as a uthority the e:.:c:er-·pt of a United States Int.er-r1al Revenue r·ul ing but which e:·:cerpt has bee::~n dc~c lan~d 9.P?PJ~J:..~.

by the same United States Inter·nal Revenue Service as <":1.

n=~sul t of the k.-.JL! ........ t;:;~t,.tJ.J:::. deci s ion.

As we v iew this legal problem~ we find no cogent and valid reason to modify~ much less depart fromt he conclusion reached in l,., .~n. ~ ... G .~. \.,t.LL ~ as e:·: pr-·essed in the above-· quoted opinion of the United States Court th ere ~ and the same should re s olve the identical issue now brought befor .. e us in this proceeding.

We cannot ignore the welJ. .. ·set t.led principle of c onstruction that si n ce or_w income ta:·:

law was prac ti ca lly copied from"that of the United States~ the interpretation s it has received in the United States have a uthoritative effect in the proper c:cm s t r uction and applic<:\tion t'J'f our la!.'J.

t1cH"e so in the c~::\se of our· l.'Ji thholding tax-at-source prov ision embodied in Sec tion 53(b) of our Nati onal Internal Revenue Code wh.i.c h ~ a~;

s hown a bove~ ~t-Jas men=:.• 1 y .i )Or ted a nd c:opiec:l a 1 mos t ver-·ba tim fr .. o m Section l43 (b) o·f the United States Ta :< Code dur· ing the·?

year· involved in the L . ~J?. .. ~ ........ G..~t,!J .. L. d f'~C i ~;.io n .

Ac: cord .i. n g l y ~ the c GJn c:: 1 u ~:; ion r .. eac h e d .in L, .. d?. .. ~ ....... G.§.L.-~ .. J .. b. ~ \.'1 hi c h is followe d by the United States Internal Revenue Service - that the time of payment o f the royal ties is the matur-·ation point of the wi thho J. ding duty should govern thi s pt .. · oc~:~eding.

Not much need be sa id on respondent's assertion that~ based on the report of the investigating e:·:aminer~ nothing is stated that petitioner attempted to remit the r·oya 1 tic~s to Bayer, By respon dent· s own deci s ion, it is e:·:plicitly declar·ed "that the royalties in the amount of P69,529.00 ~-.J e l~ e not rem.i. t ted by BPI (petitioner here in) to Bayer due to Central Bank ,~es tric:tions."

(E:<h. "5," E:·:h.

"E- 1"," p.

30~ BIR records) Since the royalties ~ 18 !-.

DEC IS I Dl\1 CTA CASE ND . 3725 - 2 4 - cou ld not be remitted to Bayer due to Central Bank restriction s , as stated by re s pondent himself in hi s decision appealed from, surely, respondent's counse l s hould not expect petitioner to make efforts, a lbeit unlawful, to remit the sam£;>.

And on r·esponclent · s point that s ince the royal ties had been ace: rue d in peti tic>nf?r- · s book s the income thereon became s ubject to withholding even if n c:>mit.ta nc e was effected late r· , suffice it to say t.ha t the ac:c r-·ua l of the r·c>ya 1 ti es in p e tit ioner's books, as held in the k~P· ~.f:1,_L..\.1J:_ , cl icl not amount to 11 gains, profits <:l.ncl income 11 on the par-·t o'f non --r--es ident B ~::\ye r· a nd, thE:?refo,~ e , no nc..,~cess i ty to withhold tax devolved on petitioner. t.JP, i::"\c:cor-clingly, n .1le that s ince the r-·oyal ties in question c ould f.}.9. .. t.. be paid or-· r··emi t ted in

1. 972 by p E:>t i tic.me1~ Bayer F'har-·mac:E!uti c:a l s, Inc., to non -- r-esident foreig n cor poration Bayer Aktiengese ll - sc: h a lft , Leverkusen Bayermerk clue to CP.nt.r--al Bank r-·estric:tion s, petiti oner· vias undr~,.- no obli.gatiion to withhold ,:\nd pay i n come tax - at - source on c:ll"lfi, t 1·1(·? r··e f orE', it is not d e fi cien cy wit hho ld i ng ;,:\ sf"> ('?s sm£~ n t o f r·es ponden t I.n t<=.-~ r·· n a 1 Rc;>ven u e :-:

:-:

:-: . "

Si:t.i.cl roy a 1 ties 1 iab.l e for· the ta:-:-·a t - sour·ce Commissioner of In view of the above rule that since the roya lti e s in q u estion c ould not b e paid or remitted i n 1975 b y p e titioner Nippon Paints (Philippines ), In c: .

to non -·· n '·?sident: for-e ign c:or·por-·ations due to Central Bank restrictions, petitioner was under no ob lig a tion to withhold and pay income tax - at-source on said ,·-oy;::\1 ti(;?S and, therro:?fore, it is not 1 iable ·fo,~· thE·~ d e ficien cy ~~~.i. thho 1 ding ta:-: - a t ·-··source DECTISTON assessment of respondent Commissioner of Internal Reventie in the sum of F75,431.55 for the year 1975.

Anent the issue of the alleged deficiency real estate dealers tax “for 1976 in the amount of FL,650.00 inclusive of interest, pursuant to Sec. 192 of Tax Code of 1977, petitioner submitted to this court Lts evidence af payments the canfirmation receipts (Exh. C) in the amount of P2,997,12 dated April 4, 1985 (p. 746, CTA rec.), Order of Fayment (Exh. D, p. 77, CTA rec.), and confirmation of the collection agent, BIR, Quezon Mity (Exhs. E, E-l, & E~?, p. 72, CTA rec.}.

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

C E R T I F

I

C A T I 0

N I that this decision was reached after due consultation among the members of the Cnur·t of Ta: ·~ Appea 1 ~-;

.in accordance with Section 13~ Articl e VIII of the Constitution. 7:_1 AMANTE F'n::.?s.i.d ing cJudge Court of Tax Appeals