CTA Case No. 4288

DECISION

- 2 - royalty based on the total net sales of the former.

On July 2 ~ 1984~ petitioner likewise entered into another license~ technological and marketing agreement in the manufacture and sale of cigarettes~ pa per- and other fine products.

~amber 1 y - C 1 ark (F'hils.)

was obliged to pay Kimberly- Clark Corporation (USA) one and one- half ( 1 1/2/.) perc en tum roy a 1 ty based on the former ' s net sales of the licensed products and an additional one (1/.) percentum royalty based on the total net sales of cigarettes and other fine paper products.

Both licensing agreements were duly registered with the Technology Transfer Bo.:H-d of the Min istry of Trade and Industry. Pursuant to the said agreements peti. tionet- ~ ~<imber- 1 y-C 1 ad~ (Phils. > Inc.~ alleged that it withheld from the remittable royalties to for June 1986 to October 1987~ the total amount of P3~i58~670 which is equiva l ent to 25/.

of the royalties .

However~ on November 13~ 1987~ petitioner through its counse 1 ~ Bito~ Lozada~ obtained from Mr. Bienvenido A. Tan~ Jr.~ then Commissioner of Internal Revenue~ BIR Ruling 15

- 3 - No.

3 60 - 87~ holding the royalty payments by virtue of the afareme ~ tianed Licensing Agreements subjec t to 10/. vJi thhalding ta >: purs uant to the RF'- US Ta >: Treaty Agreement in relation to the RP- t..<Jest Ge rma ny Ta x Trea ty.

Accordingly~ in a letter date d December 19~ 1987~ duly stamped received by the Bureau of Internal Revenue an December 22 ~ 1987~ petitioner through its said counsel~ filed a Claim far Refund of the excess tax withheld in the a mount of P1~895~202.00.

To date respondent has nat rendered his decision an petitioners claim for refund and because the two year period within which a suit may be brought to enforce this claim was about to expire, petitioner filed this instant petition far review before this Court. Respondent on his part denies in general all material facts in the petition for review and as special and a ·ffirmative defenses alleged as follovJs:

a.

Petitioner, Kimberly-Clark~ Phils. Inc. is not the proper party to claim the refund but Kimberly- Clark Corporation U.S.A.;

b.

Petitioner l<imber 1 y-C 1 ark U.S.A.

Corporation has no legal capacity to sue.

In order to· maintain a suit in the 16

- 4 - Philipp i nes , petitioner corporation mus t be registered with the Securities and Exchange Commission pursuant to Section 69 of the Corporation law; c .

That the tax in question was paid in accordance with law;

The issues to be resolved are as follows: (1) Whether or not Kimberly- Clark (Phils.) Inc.

and Kimberly- Clark Corporation (U.S.A.)

have legal capacity to institute legal action to claim for refund;

(2) Whether or not petitioners have in fact overpaid the withholding tax or royalties.

It is noteworthy that the first issue has recently been resolved by the Supreme Court in the case of Co••issioner of In-ternal Revenue, Petitioner vs.

Procter Philippine Hanut"acturing Corp. et. al. Respondent, G.R. Ho. 66838 dated December 2 ~ 1991.

This settles the • original conflic ting decisions rendered by the Second Division of the SL1preme Court on the same .iss ue on April 15, 1988 and the case of Co••issioner of Internal Revenue, Petitioner vs. Uander Philippines, Inc.

and the Court of" Tax 17 - 5 - Appeals, Respondent, G. R. 68375, April 15, 1988 rendered by the Third Division of the Supreme Court on the same issue. The December 2, 1991 resolution by the Supreme Court, en bane, was a result of a motion for reconsideration by private respondent from the said original decision by the Second Division of the Supreme Court. These petitions for review instituted by the Commissioner of Internal Revenue before the Supreme Court were in turn the result of the favorable decisions rendered by this court in C.T.A ~ Case Nos. 2883 & 2884, declaring Procter & Gamble, PMC, and Wander Philippines, Inc., respectively, as the proper entity who should claim for refund or credit of overpaid withholding tax on dividends.

As affirmed in the aforementioned Supreme Court resolution en bane, the highest court concluded that by any reasonable standard Procter & Gamble (Phils.) should be regarded as a party in interest ot- as a person having sufficient legal interest, to bring suit for refund of taxes it believes were illegally collected from it. This conclusion is arrived at by the Supreme Court after ana 1 yz ing Section 306 in re 1 a tion to Sections 309 of the National Internal Revenue Code 18 -

- 6 - which requires the filing of a claim for refund by the ta x payer with the Commissioner of Internal Revenue within two (2) years after the payment of the ta>: or penalty.

The ultimate issue to be r·esolved is whether or not P & G Phils. is a ta x payer under Section 309 (a) of the NIRC. We quote below the discussion made by the Supreme Court on the issue:

"The Term "tax.r;@Yer:." is defined in our NIRC as referring to "~IJ:i.._persqn _ su..!2..L€Lc;_Lt.Q.._ ... J.E.Ji imposed by the Title (on Ta>:

on Income)." 2 It thus becomes important to note that under Section 53

(c) of the NIRC~ the withholding agent who is "required to deduct and withhold any t a >: " is made " t!§..!:.!?..QD.~..!lY.. __ !..i_C!Q.l e _fQ.r.:. §.1,-.!.!;.tL_...t._~.-0- " and indeed is indemnified against any claims and demands which the stockholder might wish to make in questioning the amount of payments effected by the withholding agent in accordance with the provisions of the NIRC.

The withholding agent, P S1.

G -

Phi 1 s • , i s d i r~!;

__ t.l.Y_ .. .E.m:t ___ ..!JJQ_tg_pen_d e_n tty .l!.~ .

.!?Jg~ for the correct amount of the tax that should be withheld from the dividend t-emittances.

The withholding agent is moreover~ subject to and liable for defi c iency assessments~ surcharges a nd penal ties should the amount of the ta x withheld be finally found to be less than the amount that should have been withheld under law.

A "person liable for tax" has been held to be a "person subject to ta>:" and properly considered a "taxpayer."

The terms "liable for tax" and "subject to tax" both connote legal obligation or duty to pay a ta x .

It is very difficult~ indeed conceptually impossible~ to consider a person who is 19 the statutory made "liable for tax" as not "subject to tax". "By any reasonable standard, such a person should be regarded as a party in interest, or as a him." (Underscoring supplied. )

The high court continues its discussion of issue by citing the case of Philippine Guaranty Company, Inc. Vs. Commissioner Internal Revenue, 15 SCRA 1! (19695), where Supreme Court pointed out that a withholding agent is in fact the agent both of the government and of the taxpayer, not an ordinary government agent:

"The law sets no condition for the agent. to attach. The reason is to compel the withholding agent to withhold the tax under all circumstances. In effect, the responsibility for the collection of the tax as well as the payment thereof is concentrated upon the person over whom the Government as jurisdiction. Thus, the withholding the Government and the taxpayer. With respect to the collection and/or withholding of the tax, he is the Government’s agent. In regard to the filing of the necessary income tax return and the payment of the tax to the Government, he is the agent of the he is duty bound to withhold: whereas not made liable by law." (Underscoring supplied.)

20 and that the withholding agent is

- 8 - If, a s pointed out in Phi 1 ippine Guaranty case, the withholding agent is also an agent of the beneficial owner of the dividends with respect to the filing of the necessary income tax return and wi th res pect to ac tual payment of the tax to the government, such authority may reasonably be held to inc lude the authority to file a claim for refund and to bring an action for recovery of such claim.

This implied authority is especially warranted where, as in the instant case, the withholding agent is the ~holly owned subsidiary of the pa .re.n._t .- ~:tgckholder and therefore at all In the circumstances of this case, it seems particularly unreal to deny the implied authority of P & G Phil. to claim a refund and to commence an action for such refund. On the bas is of the above discussions, P & G Phil. is properly regarded as a "taxpayer" within the meaning of Section 30 of the NIRC and as impliedly author ized to file the claim for ~efund and the suit to recover such claim. On the s econd issue, whether or not petitioners have in fact overpaid the withholding tax on royalties.

21

- 9 - The cl ai m for refund amounting to P1~895~ 2 0 2 .00 represents the difference between the 25% ta>: "Ji thhe 1 d and the correct 10/. ta>: on roy a l ties arising in the Phi 1 i ppines and payable to a U. S. corporation pursuant to the RP-US Tax Treaty.

Th i s court concurs with the opinion rendered by then Commissioner of Internal Revenue, Bienvenido A.

Tan Jr., (BIR Opinion No.

360-87 dated November 13 , 1987 ~ Exh. RR.) that pursuant to Article 13, paragraph 2 <b > (iii) of the R.P.- U.S.

Ta >:

Treaty, the taH imposable on royalties de rived by a r esident of the United States from sourc e s within the Philippines shall be the lowest rate of Phi 1 ippine ta>: that may be imposed on royalties of the same kind paid under similar c ircumstances to a resident of a third state. In as mLIC h as under Artie 1 e 12 ~ paragraph ( 2) (b) of the RP-West Germany Treaty the tax on royalties impos able to a resident of West Germany s hall not e xceed 10/.

of the gross amount of royalties~ this lower rate shall apply as well to a resident of the United States. To prove its claim, petitioners presented its evidenc es on the alleged amount sought to be refunded.

It submitted its monthly remittances to the BIR as well as its corresponding official 22

DECISION —

CTA CASE NO.

receipts.

4288 It also submitted the corresponding vouchers charged by affiliated company to prove that royalties were actually paid.

The amount of FP1,895,202.00 is proven by the presentation the following computed as follows:

AMOUNT F893, 318.00 710,319.00 747 , 287.00 744,776.00 488,242.00 654,129.00 473,051.00 G30, 483.00 801, 685.00 819,058.00 663,459.00 390 966.00 771 4164.00 962,068.00 908, 286.00 941,081.00 Q5 1,033,294.00 19786

MONTH EXHIBIT

June A-F to A-S July B= to BS Aug. CS to C-5 Sept. D-= to D-S Oct. E-= to E-S Nov. F-3 to F-5 Dec. GG to G-5 1987 Jan. HS to HS Feb. I-3% to I-5 Mar. J-= to J-S April K-S to K-8 May L-= to L-5 June MS to MS July N= to N-S Aug. O35 to O-5 Sep. F-3 to FCS Oct. G3 to TOTAL exhibits and is Tax _at 25% Tax at. 10% OVERFAYVENT PR2s, 350.00 PRI, 382.00 PiSS,998.00 177,580.00 71,082.00 106,548.00 186,822.00 74,727.00 112,093.00 186,194.00 74,478.00 111,716.00 122,061.00 48,824.00 73,237.00 144,022.00 65,613.00 98,419.00 118,263.00 47,305.00 70,958.00 157,621.00 63,048.00 94,973.00 200,421.00 80,169.00 120,252.00 204,765.00 81,906.00 122,859.00 168,865.00 66,346.00 99,819.00 97 742.0) = 39,097.00 58,645.00 193,771.00 77,116.00 115,678.00 240,517.00 96,207.00 144,310.00 227,072.00 90,829.00 136,243.00 220,270.00 94,108.00 141,162.00 256,524.00 103,529.00 154,998.00 Petitioners have substantiated its claim for refund and thus entitled to the amount sought to be refunded.

WHEREFORE , respondent is petitioners in view of hereby ordered the amount of the foregoing, to refund to P1,895, 202.00 representing excess payments of withholding taxes 23

• - 11 - on royal ties paid to petitioner, Kimberly-Clark Corporation (U.S.A.)

from June 1986 to October 1987.