CTA Case No. 4308

REPURBLTC OF THE PITLIPOTNES

COURT TF TAX APPEALS

OUEPAN CUTY

IBM PHILIPPINES, INCORPORATED,

Petitoner,

Vereug ” C.T. A. CASE NO. 4308

COMMISSIONER OF INTERNAL. |

REVENUE, 2, [3) 1472

Respondent.

Ro er er er rr er eer eens “

YP E © mr S&S r © NO

This is a claim for the refund of the amount

of P29, 223,638.94 representing allegedly overpaid

withholding tax on royalties remitted by the

petitioner to IBM WORLD WORLD TRADE CORPORATION , 2

non-resident togeiad corporation, organized under

the laws of the state of New York, U.S.A.

Petitioner is a domestic — corporation

organized and existing under the laws of the

Philippines with principal office at IBM Building,

Paseo de Roxas, Makati, Metro Manila. For the tax

years 1986, 1987 and for the period January - July

1988, IBM World Trade has granted petitioner IBM

Phils., a License, including the right to

sublicense its (World Trade) suhsidiaries under all

patents, inventions, and copyrights and under all

So

ie

/-

TO CO

en

C.T.A. CASE No. 4308

D E C I

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2

proprietary

riqht.s

i .n

programs, wi ·th

respect to

which

patents,

inventions,

copyrights

and

propriet::try

thP-

r ·.qht to u s ~=> it. trade

names

and

trademarks

owned a nd/or registered in the name

o:f

World Trade.

IBM World Trade in an Agreement dated

Sep+.ember

1,

1982 ,

had

su h .licensed

to

its

r:;ubsidi.a ry

the s::tid rights and likewise agreed

to

provide

IBM

Phils., its technical

knowledge

and

know-how.

In

consideration o£ such

ag r eement,

herein

petitioner agreed to pay IBM World Trade

royalties

equivalent to 10% of the gross c harges less returns

and allowances, made dur i ng each calendar month

lby

petitioner to its customers :for the sale ,

service ,

lease

and/or

installat'on o:f IHS

Products.

The

'

World

Trade Agr eement expired on August 31,

1987,

extended

the period o:f the gran t :for another

:five

( 5)

years .

Th is second agreement was approved

by

the Central Bank <Annexes "LL" ,

"LL-1 "

a nd

" L L - 2>.

Petitioner

IBM

World Trade agreed

t o

de :fer

the

prov i sion

wi t h

respect t o

Programs

s ta r t ing

on

January 1 ,

1 988 <Annex " MM>.

3ULJ

.)

C.T.A.

D E C

CASE No.

4 3 08

I

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Hence ,

on Jl'"lnu8ry 1,1988 l'1 new agreemE?nt with

InM

Wor .ld

Trade, wi.t.h

Pspect to licensjng of IBM

Programs

and

acCF>SS

t.o

and

u se

of

technical

knowledge

and

know - how of

IBM

Programs,

<Annex

"NN" >.

Petitioner were likewise granted the

right

to use all of IBM's trademarks on or in association

with

IBM

programs

and to p ovide

the

pet. it ioner

with

available

technicRJ. knowJF>dge

and

know-how

relating

to the reproduction, use,

modif ication,

marketability,

education

o .f

us~=>rs,

servi.ces

and

maintenance

of

IBM

Programs.

For

and

in

consideration of such agreement, petitioner

agreed

to pay IBM World Trade royalties equivalent to

of all its reven u es ,

excluding discounts and

other

allowances, billed or accrued during each

calendar

month, on sale,

s~=>rvice, lease, or installation

of

an

IBM

Program

which

petitioner

authorized,

license, or distributed to any affiliated party, or

40% of the price of one unit that petitioner

would

bill a third party for the licensing or authorizing

to use IBM Programs for each copy of an IBM Program

that petitioner uses internally.

For

the tax years 1986, 1987 and during

the

period

from

January

to

July

1988,

petitioner

3U .1.

.)

C.T .A.

C AS E No.

4 3 CA

D E C I S I 0 N

4

remitted

royal tieR

to

IBM Worl d Trade thP sum of

P1 94,822, 459.77.

Th e

corresponrt ing

t.axes

on

royalties were withheld thereon ~t the rate of

25%

and

remitted

to

thP.

BIR

in

the

sum

of

P4 8 , 705,614 .92.

However,

on

SP.pt.Pmbe r

16, 1988,

petitioner

through

i t s

counR <=> l

Romulo

Mabanta,

Buenaventura Sayoc and De Los Angeles obtained from

then ,

Commissioner of Internal Revenue

Bienvenid o

A.

Tan,

Jr., BIR ruling No. 456-88

hold i ng

that

"royal t .ies

ar ising in the Philippines and

payable

to World Trade as we ll as to IBM by IBM Phi s.

are

subject

to the Philippine tax at the rate

of

10%

beca u se this rat e appears in th e

RP -

West

Tax

Treaty and pursuant to Arti c le

13,

Germa1ny

paragraph

2<b><iii), of RP

-

US Tax

Tr~?a ty .

"<Annex

"HH", pp.

73 - 76, C.T. A.

RPcords>.

Subsequently,

in a letter dated October

15,

1988,

p etitione r

through counsel , filed a claim for

refund

of excess taxes withheld in the

amount

of

P29,223,368.94.

No responsive action on said claim,having been

made by respondent and to interrupt the running

of

the

2

year

period

of

prescription,

petitioner

appealed to this Court on November 2, 1988.

3.,

LJ r...,

C.T.A.

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CASE No. 4308

I

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5

Re Ppo nden 1: on

h F:?

o the r

hrind,

j _n

h i:=:

Answer,

g~=>nerally denie s

thf? mr1terj a l

f:=~ct.

allegP.d i n

the

petition for review a nd os

s pe ci~ l and

af:firmative

defenses alleged, among others:

1.

That

pet.itioner

i s

n ot

the

real

party in interest;

2.

That BIR Ruling dated

S ptembe r

16,

1988

invoked by petitioner does

not

in any way provide for the refund

of

the alleged overpaid tax

withholding

on the royalties; and

3.

That

petitioner

has the

burd e n

of

proving

th~t it is entitled

to

the

amount

sought

to be

refunded,

the

claim

being

in

the

nature

of

an

exempt ion from taxati on ,

which cannot

be made to rest on vAgue implications

and

must

be

construed

strictly

aga in:=:t petitioner.

The issues to be resolved in this case are as

follows:

1.

2.

Whether

or not

legal capacity to

petitioner

has

the

in s titute this suit;

Wheth e r

or

not petitioner should

·be

taxed

at the rate of 10%

withholding

tax

on

royalties in accordance

with

Article

12<2>

of

the

R.P.-

West

Germany

Tax

Treaty

and

not

25%

withholding

tax

on

royalties

under

Article

13<2><b><iii>

of

the

R.P.-

U.S. Tax Treaty; and

3.

Whether

or n ot petitioner is entitled

to

the

refund

of

P29,223,638.94,

allegedly

representing

overpaid

withholding tax on royalties.

3U0

C.T.A .

CASE No. 4308

D E C I S I 0 N

I ·t-.

may

not

-

6

Rm:i s s

t. n

at.

junct u re,

that

thP £irst. issue i ..

not

new .

Supreme

Co u rt

in

t. he

case

o:f

Co mmisRioner

thi..s

The

o£

Internal Revenue

vs. Procter

&

Gamble

PMC ,

G. R.

No. 66838,

through

a

Res o l u t :i. on

En

Bane, dated

December

2,

1991,

in

e££ect

ru .led

that

by

a

reasonable standard , the withhold i ng agent,

should

be

regarded

a s

a party in interest, to bring

suit

£or

re£und

o£ t axes he

believes

were

illegally

co llect e d

£rom him.

We quote at leng th

£ro m

said Resol ution, to wit:

"The

term • tax payer' is defined in

our

NIRC

as

re£erring to

a~ person

subject to tax imposed by the Title

<on

Tax

on

income). •

It

t hus

b ecomes

important to note that unde r

Section

53

(c)

o£ the NIRC, the withholding

agent

wh o

is req u ired to dedu c t

and

withh o ld

any

tax is mad e

'perso n ally li~ble £or

such

ta x"

and

indeed

is

i ndemni£ied

against any claims and d emands which the

stoc kholder

might

wis h

to

make

in

quest ion ing

the

amo unt

o£

pa y ments ·

e££ected

by

the wit h hold:ng

agent

in

accordance

wi th th e provisions

o£

the

NIRC.

Th e

withholding agent ,

P &

G

Phil., is d i rectly and indepently liable

£o r

the co r rect amount o£ the tax

that

should

be

withheld

£rom

dividend

remittances.

The withholding agent

is ,

moreover,

subject

to

and

liable

£or

de£iciency

a sses sme nts, surcharges

a nd

penalties

should the amount o£ the

tax

withheld

be

finally £ound to

be

less

than

the amount that should

have

been

the

.)

C.T.A.

D E C

CASE No. 4308

I S I

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withheld

be

finally

~ou1rl to

be

than

the amount that s h o ulrl

h~ve

withheld under the law.

] PSS

heE=?n

A

person liable for tax h an b ee n h eld ~o be a

person

subject

to tax and pr opPr l y

considered

a

'taxpayer . '

Th e

t er m 'liable for tax '

~nd "subj ec t

to

tax' both connote legal

o b li . g~1 . ion or

duty

to

pay

a

tax.

It

is

very

difficu J.t,

indeed

conce ptually

impossible, to conRider a person

who

is

statutorily

made

'liable

£or

tax'

as

'subject to tax.'

~y ~~ re~~on~~~e standard ,

such

a

~erson should pe regarded as ~ ~ar ty in interest,

~~ ~ a person hav~ sufficient leg2~ interest , to

were

ille92~ collected from him.

In

Guaranty_

Inc.

o£

this

Court

pointed out that a withholding agent is in fact the

agent

both of the government and of the

taxpayer,

and

that the withholding agent 's not an

ordinary

government agent:

'The law sets no

condition for the

personal

liability

of

!,he

withholding

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 th e payment

thereof

3uo

.)

C.T.A. CASE No. 4308

D E C I S I 0 N

I :f,

8

concentr a t ed

up on the p ersnn

over

whom

the

Government h as jur ~s dj _ ct~o n.

Thus,

the withhold~ ~ent is constituted

the

agent

o:f

both the

Government

and

the

taxpayer.

With r e spect to the collection

and/or withholding o:f the tax, he is

t~e

Government's

agent.In

r egard

to

the

:filing o:f the necessar_y_ in_come tax return

and

the

payment

o:f

the

tax

to

the

Government,

he

is

the

aqent

o:f

the

taxpayer.

The

wi thholqing

agent,

therefore,

~s

no

ord inary

government

a~en~ especially pecause

under

Section

53(c)

he is held personally

liable

:for

the

tax

he is duty bound

to

withhold;

wher~as the Commissioner and his deputies

~ not

made liable

~ law'. <Emphasis

supplied)

as

pointed out in

Philippine

Guaranty,

withholding

agent

is

also

an

agent

o:f

the

the

beneficial

owner o:f the dividends with respect

to

the

:filing o:f the necessary inc o me tax return

with

res pect to actual nayment o:f the t ax

to

the

government,

such authority may

reaso~a bly be

.held

to

bring

an action :for recovery

o:f

such

claim.

This

implied

authority

is

especially

warranted

where,

as

in the instant

case ,

the

withholding

agent is the wholly owned subsidiary o:f the parent-

stockholder and therefore, at all times ,

under

~:f:fective

control o:f such parent-stockholder.

In

the

circumstances

o:f

this

case,

it

seems

particularly

unreal to deny the

implied authority

C.T.A. CASE No.

4 3 08

D E C I S I 0 N

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g

of P &. G

Ph~l. to cla~m a refund a nd to

commence

~n action for Ru c h r@funo.

We

beli e v e thRt, e ven n o w, there

s

noth~ng

to preclude the BIR from requ~r~ng P & G

Ph~l. to

show some written

or

telexed

confirmation

by

P & G -

USA of the subsidiary's authority to

claim

the refund or tax

cred~t and to remit the proceeds

of the refund, or

to

apply th e tax credit to some

Ph~lipp~ne tax

obl~gation of, P & G -

USA, before

actual

Q_ayment of the refund or ~sauance of a

credit certificate.

What appears to be vitiated by

basic

unfairness

~s pet~tioner'a position

although

l~able

to

def~c~ency

Government

P & G -

Ph~l. is d~rectly and

peraona~ly

the Government for the

assessmPnts

to

b e

~s

not

leg~lly l ~ab l e

taxes

and

any

collected,

the

: for

a

refund

simply because ~t did d e mand a

w r ~tten confirmation

of P & G -

Phil. 'a ~mplied auth o r~ty from the · very

beg~nning.

A

sovere~gn

governme nt

should

act

honorably

and

fa~rly at all times, even

v~s-a-vis

taxpayers.

We believe

and so hold that, under

the

circumstances

o:f

this

case, P &

G

Phil.

is

properly

regarded

as

•taxpayers'

within

the

30·

C.T.A. CASE No.

4308

-

D E C I S I 0 N -

10 -

meaning

of

Section 309 ,

NIRC,

and

as

i mpJ_iedly

authorized

to

file the claim for refund

and

the

suit

to

recover

such

claim."

<Underscoring

supplied)

The ruling is reiterated by the

Supreme

Court

in

the

recent

case

of

Commissioner

o£

Internal

Revenue vs. The Court o£ Tax Appeals,

e>t

al., G.R.

No. 93901, February 11, 1992.

We

fi nd no cogent reason to deviate :from

the

conclusion reached in the above - c i ted cases and the

same> should resolve the similar question

presented

in this appeal.

On

the>

second

issue,

whether

or

not

petitioner

lo£

10% withholding tax on royaltie• in accordance with

s~ould be taxed at the reduced rate

Article>

12(2) (b)

o:f the R.P. -

West

Germany

Tax

Treaty

and

not 25% withholding tax

on

royalties

under

Article 1 3 <2><b><iii) o£ the R.P. -

U.S.

Tax

Treaty.

This

Court

is

of

the

persuasion

that

petitioner's stand is correct and concurs with

the>

opinion rendered

by

then Commissioner o:f Internal

Revenue, Bienvenido Tan, Jr.

<BIR Ruling No.456-88 ,

s upra.,

that

under

the

most

:favored

nation

C.T.A. CASE No. 4308

-

D E C I S I 0 N -

11

prov~s~on of the R.P.-

U.S. Tax Treaty

<Art~cle 13,

paragraph 2<b><~~~>, the tax ~mposable on royalt~es

der~ved

by

a

res~dent of the Un~ted States

from

sources w~th~n the Ph~l~pp~nes shall be the

lowest

rate

of

Ph~l~pp~ne tax that !flay

be

~mposed

on

royalt~es of

·the

same k~nd

pa~d

under

s~m~lar

cj.rcumstances

to

a

res~dent of

a

th~rd state.

Art~cle

12,

paragraph

2<b> of the

R.

p.

West

Germany Tax Treaty,

prov~des that royalties aris~ng

~n

th e

Ph~lipp~~es and pa~d to a

res~dent of

West

Germany

may also be taxed ~n the Phil~ppines,

but

the

tax

so charged shall not excee d

lO'Y.

of

the

gross

amount

of

royalt~es.

Sa~d treaty

prov~des that

for

as long

a s

the

transfer

o:f

technology

under

P. h~l~pp~ne .law,

~s subject

to

i

approval, the l~m~tat~on o:f the tax rate ~n case o:f

royalties arising in the Ph~lippines, apply if

the

contract

giving

rise to such royalt~es has

"been

approved by Ph~ l~ ppine competent authorit~es.

Thus,

~nasmuch as the Agree ment between

World

Trade

and

IBM

Phils. as well

as

the

Agreement

between IBM and IBM Phils. had been approved by the

Central Bank of the Ph~l~pp~nes, royalties

aris~ng

~n

the

Phil~pp~nes and payable to World Trade as

C.T.A. CASE No. 4308

-

D E C I S I

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12 -

well as to IBM by IBM

Ph~ls. should be taxed at the

rate

o£ 10% because sa~d rate is indicated ~n

the

R.P.

-

West Germany

Tax Treat.y

and

pursuant

to

Article 1:J,

p aragraph 2(b )( ~~i

>

,

o£

the

RP -

US

Tax Treaty .

We now come to the third issue, whether or not

pet~tioner

~s

ent~tled to

a

tax

refund

o£

P29,223,638.94

representing

the

overpaid

w~thholding tax on royalt~es.

To

su ppor t

~ts cla ~m,

petit~o n er

presented

evidences

on

t h e

alleged

amount

sought

to

be

re:funded

by

submitting dur~ng the trial

of

th~s

case, xerox cop~es of

~ts monthly remittances,

Payment

Orders

and

correspond~ng

Con:firma t ~on

Rece~pts

~ssued

by

the Central

Bank.

It

also

subm~tted the corresponding vouchers c ha rged by the

affi l ~ated company to prove that the royalties were

actual ly pa~d.

A:fter going over the ev~dences and

evaluating

the

same,

th ~s Cou rt :finds

that

petit~oner has

i ndeed,

overpa~d the w~thhold~ng tax on

royalties,

in the amount o f P29,223,368.94, hence,

ent~tled to

the refund thereof, computed as :follows:

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

1987

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

June

July

6, 727, 309. 32

3, 328, 769. 82

3, 600, 960. 80

4, 512,731.60

5S, 611, 346. 52

13,616, 114. 25

P 2,649,659. 28

3, 287, 762. 49

2, 877, 533.16

5,557, 488. 07

4, 517, 231. 57

8, 519, 056.65

9, 089, 402. 58

4, 487, 046. 17

2, 411, 699. 60

7,201, 796. 59

3, 396,659. 14

16, 064, 846. 72

P 7,369,014.68

6, 087, 162. 88

14, 065, 961. 98

5, 385, 411.59

6, 635, 729. 60

19, 133, 298. 89

6, 977, 465. 80

194, 882, 459. 77

- CASE No. 4308

CcCIrIstirmoNn _-

-~ 13

Amount of Tax at

Royalties 20%

P 3,279,429.79 P 819, 857.45

4,075, 596. 30 1,018, 899. 08

3, 452, 590. 26 863, 147.57

3, 939, 978.08 984, 994.52

3, 493, 334.63 873, 333.65

3, 470, 970. 96 867; 742.73

1,681, 827.33

832, 192.45

900, 240. 20

1,128, 182.90

1, 402, 836.63

3, 404, 028. 56

662, 414. 82

821, 940.62

719, 383. 29

1, 389, 372. 02

1, 129, 307. 89

2, 129, 764. 16

2, 272, 350.65

1,121, 761.54

602, 924. 90

1, 800, 449.15

849, 164.78

4,016, 211.68

1, 842, 253. 67

1,521,790. 72

3,516, 265. 49

1, 346, 352.90

1,658, 932. 40

4, 783, 324.73

1,744, 366. 45

48, 708, 614.32

b1i

Tax at

10%

P 327,942.98

407,559. 63

345, 259. 03

393, 997.81

349, 333. 46

347,097.10

672, 730. 93

332, 876. 98

360, 096. 08

451, 273.16

561, 134.65

1, 361,611.43

P 264,965.93

328, 776. 25

287, 753. 32

555, 748. 81

451, 723. 16

851, 905. 67

908, 940. 26

448, 704. 62

241, 169.96

720, 179. 66

239, 665.9

1, 606, 484.6

P 736,901.47

608, 716.29

1, 406, 506. 20

538, 541.16

663, 572. 96

1,913, 329. 89

697, 746. 58

Overpayment

P 491,914.47

611, 339. 45

517, 888. 54

590, 996. 71

524, 000. 19

520, 645.64

1, 009, 096. 40

499, 315. 47

540, 144. 12

676, 909. 74

841, 701.98

2, 042, 417.14

P 397, 448. 89

493, 164. 37

431,629.97

833, 623. 21

677, 584. 74

1,277, 858.5

1,363, 410.3

673, 056. 93

361, 754. 94

1, 080, 269. 49

509, 498. 87

2, 409, 727.01

1, 105, 352. 20

913, 074. 43

2, 109, 759. 30

807, 811.74

995, 359. 44

2, 869, 994. 83

1, 046, 619. 87

19, 482, 245.98 P29, 223, 368.94

'I

C.T.A. CASE No. 4308

-

D E C I S I 0 N -

-

14 -

WHEREFORE,

respondent

is h e reby

orde red

to

r~fund to petitioner the amount of

P29,223,368.94,

representing

excess payments of withholding

taxes

on

royalties,

for the tax years

1986,

1987

during the period from January to July 1988.

SO ORDERED

Quezon City, Metro Manila, March 31, 1993.

WE CONCUR :

<{._..:xc tQ ~ ~

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CERTIFICATION

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Judge