China Banking Corporation vs. The Commissioner of Internal Revenue

DECISION

This petition seeks for tlle refund of alleged overpaid ~Nithlwlding taxes on cash dividends due to petitioner's non- resident stod:holders in the amount of P4f\6:i6 .. 30. J>etitioner is a commercial banking corporation organized a.nd existing under .t=:·hilippine la.ws. Anwng its st1.)Ck1wlders are non -resident American ancl British citizens vlho received cash dividends net of the .30% final ~llithholding tax under Section 2 2 (a)(2) of the National Internal Revenue Code/ V-lhicli provides:

DECISION-

C.LA . CASE BO. 4414 - 2 - ·sec. 22.

Tax on non-resident alien individuals. - (a) Non -resident alien engaged in trade or business within the Philippines. ( l} In generaL - x x x

(2) Dividends, share in the net profits of a taxable partnership, interest, royalties, prizes and other winnings. - Dividends from a domestic corporation, share in the net profits of a partnership taxable under Section 2 4(a), interest, royalties (in any form) and prizes (except prizes amounting to PJ.OOO or le::s V·T11ic11 shall t>e subject to tax under paragrc:tph (a) of Section 2 1) atKl other ~.\ril111 1. 11Cr·- { ~ '-~r~p· t Pl11.11· pr 1· 11~ i~l1a1·1· tv <:'~.·T~opctak pc ,,' 1 b.j ~. ···"':..·.··.· -· -· ..-1) ·-· ·~ _ 7 ._-. o'V '..,-.;:t _...; r :L.v..J ~Ninnings), :::hall be subject to a tax of thirty percent (30;t) on the t~.)tal a.mount thereof.· On July 2 f>, 1969_. petitioner filed \'Y'ith the respondent a cla.im ior refund oi alleged overpaid vvithholding tax on cash dividend::: paid to its Arnerican ::md nrit.ish stockholders (Exh. Y, pp. 1 5· 0-15~), CT.e.. record). During the years 1908 and 1989, it is the contention oi petitioner that by virtue of certain t3.X treaties entered into bv our !2·overmnent T1.vith the United States of f ·-· America (US.A.) and the United Kingdom oi Great Britain, it should have onlv TNithlleld 2 c)% oi the cash dividends due to its , -- Americ::m and British stJ)<::kllolders. Consequently, it sought for the refund of the amount oi P46,6~)6._30, :+: computed as iollovvs: (pp. 3-4, CTA record) 426

DECISION -

C.T.4. CASE NO. 4414

Re: American Citizens

Neroe of

Stockholders

Steiner Sei

Hwya Huang

Haine of

Stockholders

- Mary Feng

Ling Huang

Clotilde

Hyndman

Date of. Gross W/HTax W/H Tax

Payment Amount 30% 25%

8 P6,690.00 P2,007.00 P167250 9 6,690.00 2,007.00 1.67250 9 669000 2,007.00 1,672.50

Total

Dateof Gross W/HTax W/H Tax

Payment Amount 30% 25%

7-07-23 P9.604.00 P2,881.20 P2,401.00 1-26-89 960400 2,881.20 2,401.00 4-21-89 960400 2.88120 2,401.00

Total

7-07-88 PF 5600 P 1650 P 14.00 1-26-89 56.00 16.80 14.00 4-21-89 56.00 _ 16.80 14.00

Total

Amount Refundable

Re: British Citizens

Hame of

Stockholders

Cheng

Yung Li

Carmen Fuo

Date of Gross W/HTax W/H Tax

Payment Amount 30% 2%

7-07-89 P 12,040.00 P3,612.00 P3,010.00 1-26-89 1204000 361200 3,010.00 4-21-89 §=12,040.00 3,612.00 3.010.00 . Total 1 s

Amount to

be Refunded

Po 33450

334.50 334.50 FP 1,003.50

Amount to

be Refunded P 480.20 460.20 $80.20 P_ 1,440.60 y 2.80 2.80 2.80 P 8.40 P 2,452.50

Amount to

be Refunded P 602.00 602.00 602.00 P_ 1,806.00 7-07-88 P299,002.00 P89,700.60 P74,750.50 P14,950.10 -26-89 «299,002.00 89,700.60 74,750.50 14,950.10 -21-89 299,002.00 89,700.60 74,750.50 _14,950.10 Total P44850.30 Amount Pefundable P46.656.30* (Note: The total amount refundable should be P49,108.80, but petitioner opted to claim for refund only the amount of 46,656.30 in the instant petition.)

~ 427

DECISION -

C.T.A. CASE NO. 4414 - 4 - Petitioner made a follow-up letter, dated November 28, 1989, on its previous claim for refund, dated July 28, 1989 (Exh. BB, p. 232, CTA record). In the absence of any response from the respondent, the petitioner filed the instant petition on December 26, 1989.

While admitting the foregoing basic facts, the respondent, in her answer, refuted the claim for refund and alleged among others: that the petitioner is not the real party in interest instead it is the non-resident stockholder who should file the instant petition because it was the latter whose dividend income was allegedly excessively taxed, citing the case of Commissioner of Internal Revenue ¥. Procter & Gamble, et. al, GR. No. 66838, April 15, 1988; that the aforementioned tax treaties does not apply to the present case; and that the taxpayer has the burden to show that the taxes paid were indeed erroneously paid.

Petitioner . presented testimonial and documentary evidence to support its case. Respondent, after having been deemed to have waived her right to cross-examine petitioner's witness, merely submitted the case for decision on the basis of the pleadings and evidence submitted by the petitioner.

Thus, the issues to be resolved in this case are:

1. Whether or not the petitioner has the legal personality to bring this suit for claiming a refund of alleged overpaid withholding taxes on dividends on behalf of its non- resident US stockholders and British stockholders; and

2. Whether or not the petitioner is entitled to the réfund claimed for.

428

DECISIOH-

C.I.A. CASE HO. 44:14:

- 5 - 'Ne rule in favor of petitioner.

The first issue is not one of first impres~;ion. The Supretne Court in a resolution en bane has resolved in favor of the right of a ~Nithholding agent (domestic corporation) to file a suit to claim fc·r a reftuid in behalf of its non-resident foreign stockholders in the c:::tse of Commissioner of Internal Revenue v . Procter & Gamble Philippine Manufacturing Corp .. et. aL. G.R. No. 66383. December 2. · 1991. ~Nhere it had the occasion to reconsider a prev"i<:)us dec:ision (by the Second Division),, dated April 15, 19.:w, and rule as iollov'Ts: "x x x. It thus becomes important tf) note t11at under Section 5.3 ((:) of the NIRC, the ~l·Titllholcling agent 'Nlw is ·required tf) cledu.ct awl V·lit.llllold any tax· is made 'personally liable f•:)r such t:1x' and indeed is indemnified 3.e-ain::;t anv claims and demands V·Thich •.J ' t11e stockholder might wish to make in questioning the amount of pa.yment; effected by t11e V.fit.llholding agent in accord;:.mce T ... vith the provisi()ns of the NIRC. The Vlitllholding agent, .P8{G-Phi1., is directly and itl(lependent.lv liaNe for the correct amount of t11e tax that should be v ... Titlllwld from the clividel)(l remittan(es.

The Vlithholding agent, is moreover, ~; ubje(:t. tf.) and liable f•:)f deficiency assessments, surcharges and penalties should the amount of tlw tax ~Nithheld be finallv found t1.) be less than the anwunt ' th;:~_ t ::Jwuld have been withheld under la'i·\oT. A ·person liable for tax· lias t·een held to l)e a 'person subject to tax· aw:l properly considered a 'taxpayer'. The terms 'liable for tax· and 'subject to tax· both connote legal obligation or duty to pay a tax. It is very difficult, indeed conceptually impossible, to consider a person >Nho is st3.tutorily made 'liable for t3_x· as not ·subject to t:1x. · B)r any reasonable standard, such a person should be regarded as a party in interest or as a per:3on having sufficient legal ~ 429 .

-'

DECISIOH-

C.I.A. CASE HO_ 1414 - 6 - interest_. to bring a suit for refuncl of taxes he believes ~h'ere illes'a.llv collected from him . • _r 1- In Philippine Guarantv Company.

Inc.

v.

Conuni~;::;ioner ()f ·Internal Revenue. this Court pointecl out t11at a witllllolcling agent is in fact tlle agent l)Ot1l of the government a.w:i of t11e taxpayer_. and tllat the V'l'itllholding a.gent is not an ordinary government agent:

~::r 't7 ~,.

..:·:.. .c\.

~)..

XXX

IC as pointecl out in Philippine Guarantv. the ~Hitlilwlding agent is al~;o an agent of t11e t)eneficial ovlner of the dividends with respect to the filing of the nece::;::;ary income tax return and V·lith respect to actual payment of the tax to the govenunent, such authority· may reasonal:;ly be held to include' the authority to file a claim for refund and to bring ;::m action fr.:;.r recovery of such claim. This implied authority is espedall>7 VY'arra.ntecl ~Nhere_. as in the instant case, the Vlitl1t1okling agent is the -.;Nhollv (YV·.rned subsidiarv of the parent-st::>ctholder and therefore, at all time:::;, under the effective control of c·ll·--1-1 n --. !- .-. t·lt-c·t .-1.---1_. 1-l.--)I·-l"'-t- I 1·1 t11P <~1-1· f'l11 "Ilc-t""tl<~ "'-c- t1f th1· S ·-' - '-~· s: CJ.

t;' ·-· ,)._. ..., ....

·- .. ~ t;' .

J

....

'J'

.... !J.l.J •.J /J..

,... "\;" ·-· ·~· -· .

casE?, it sE?ems particularly unreal to deny the implied ::;_uthoritv of p;}{G-.Phil. to claim a refund and to ' commence an action for such refund.

Vie believe t11at. even nov.J, tl1ere is nothing t[) preclude the EHR from requiring P&G-.Phil. to show ·=-r•tllA ~~.~1- 1- ttPtl nt· tPl,::,•.T.:=>rl ("·rltlfl·t-t·r·l·:.tl.rlf-1 t1~· F=· ~.r, -TJ~A <•f ·-· ·-· · - ·

I

I

... ,.......

...

-··-· •J ~ :... -_. ·- . _....

.:, • .,.,

• I

0:: J

.

a..)

·- · the subsidiary''3 a.uthc•rity t () claim the refund or tax credit and to remit the proceeds of the refund. or to :::tpply the tax c:redit to some Philippine tax obligation r·,f n ·<:.t.-TF'C. b•Pfr·,r,::, ar·t 1'la1 pa~rt-"'lf->1-lt r·f t11A +"f->fllti!l Or ._. .• r c.-.. J .... ... ,J. .... , ~- v 'V' c. .... ·t. c.

c. + 1~ .., .

~) ""' .1 ....

~ i:;:::uanc:e of a. tax cre(lit certificate. Vi,711at appears to be vitiate(! by basic unfairness is petitioner's position that. although Pf{(r-Phil. is directly and personally liable b:) the Government for the taxes _and any deficiency :::tssessments to be collected, the G·:::overmnent is not legally liable for a refund simply be(:ause it did not demand a Vv'ritten (:onfirmation of I\:5-:G-Phil.'s implied authority frorn the very beginning. 430 .

DECISION-

C.LA. CASE HO. 4111 - 1 - A sovereh2·n !Iovernment should act honorabl',l and ._,.

._, fairly at all tirnes, even vis-a-vis taxpayers. '#e believe and so hold that, under the circumstances of thi:; case_.

PC>~G-Pllil. is properly regarde(l as a 'taxpayer· V·Tit.hin the meaning of Section .30. NIRC, anrj as impliedly authorized to file the claim for refund and tlle suit to recover such claim." (Emphases in the original.)

The Procter and Gamble case (supra.) ~vas likewise cited in the case of Commissioner of Internal Revenue v _ The Court of Tax Appeals, et. aL, G .R. No. 93901, February 11, 1992 reiterating its ruling that the '"Tithholding agent has sufficient 1eq3.1 interest to bring an ac:t.icm to recover tax ·-· ._l overpayment.

.e..nent the second issue, a referra.l to the trt?a.ties rnentioned 1-, ., tl1 ··· n -. tt· tt· ··- t"l'"'t- 1 .. -. 1. r· -. •· ·1-"t· •· ) .· !:" 1 .. ~ .. .. \_} '='" ·=· 1 <.-'1 u'='" .

Articlt? 11 of the Tax Treaty dated January 1_. 19f·.3 entered into bet"\.veen the Philippines and tlle United States of America provides: (Exh. Z-l. p. 1 (32.. CTA record.) "i·.rtide 11 ( 1) Dividends derived from sources V·Tithin one of the Contracting- St .. atet; bv a resident of the other ·-· , C:.::mt.ra(:ting State may br,;; taxed by bot.l:l Contracting St:;.tes.

(2) T11e rate of t.:1.x irnposed t·y one of t11e Contracting States on divic:lena::. derived from sources 'V\Tit.hin tlE.l.t Contra.ctitw State by a resident of the '-' other Contrad.in•;.r State shall not exceed - - ,_, . I 431

DECISION -

C.T.A. CASE NO. 4414 -~ § -

(a) 25 percent of the gross amount of the dividend; or (Underscoring supplied.)

4 ry a - 1s A similar provision is embodied in Article 9 of the Tax Treaty, effective January 29, 1978, entered into between the Philippines and the United Kingdom of Great Britain, to wit: (Exh. AA-I1, pp. 222-223, CTA record.)

“Article 1X

DIVIDENDS

i. Dividends derived from a company which is a resident of the Philippines by a resident of the United Kingdom may be taxed in the United Kingdom. Such dividends may also be taxed in the Philippines but where such dividends are beneficially owned by a resident of the United Kingdom the {a} 15% of the gross amount of the dividends if the beneficial owner is a company which controls directly or indirectly at least 10 per cent of the voting power in the company paying the dividends;

{b) in all other cases 25% of the gross amount of the dividends.” (Emphasis supplied.)

Tax treaties are accepted limitations to the power of taxation. In the above-mentioned treaties, the Contracting States had recognized that cash dividends may be taxed in both countries where they derive such dividends or where the recipients are citizens. It is Anypsser to avoid the rigors of double

DECISIOH-

C.I.A. CASE HO. 4414 - 9 - t3.~-~ation that the abov·e provi~;ion vvTere incorporated in the said

Respondent

does not deny that the petitioner's stocklK~lders include both non -resident American and British citizens enumerated in the petition for revie~t~l, vvTho received cash dividends fror-n petitioner herein. On the other hand . petitioner submitte(l the Ivlonthly Rernittance Returns of Income Taxes Withheld, Sdwdu.les (;f Taxe~; Vvitl1held on cash dividends due on

I

its non-resident stocl~holders, BIR Payment Orders and CB Confirmation Receipts . ~A.pplications to Purchase Foreign Exchange, Sr:::hedules of Remitta.nce of

Dividends

to Non-Resident .

, St(iCkholders, Central Bank Authorization to transmit the Dollar equivalent of the ca.sh dividends remitted by petitioner to its non -resident Arnerican and Bristish stockholders all of V'lhich C·jj f1·1· (·1· P-t1tl~T p.c·t'> l")ll. C·11 tt· p. t~ f··t ()1- ~-\ Tl. t1· 1· l'il(ll. !"irY ~ n ~1 r· :A ~;r~-1-1"!"1t (lf tt-. P ·-• -· ·~ ·-· -· i ·-· ·-• .•:• .. · ·-' ~ 1-.· d.·-· .· ·-·

VI

J 1 1...

O CJ. '·- I)v.1

<J

J

v .il ·J 30~: final t3.X imposed under Section 22(a)(2) in the years 1988 and 19t/} and the rernitt3.nce of cash dividends to its non- resident stod~holders .

This Court has no other recourse bu.t to hold that. the cash dividends due to petitioner's non -resident American and British stx:l:holders are (.lllly subject to a final ~..vithholding tax of 2 5% by virtue of the Tax Tre;:t.ties enterecl into by the Philippine G-overnment 1hTitll the United St:t.tes of America and the United Kingdom of Great Brita.in. The ~ .. \lit111wlding t:ni payrnents made in amount due to the re~;pondent.

433

DECISION -

C.T.A. CASE NO. 4414

- 1Q -

WHEREFORE, in view of the foregoing, the petition is hereby GRANTED. Respondent is hereby ordered to refund in favor of petitioner the amount of P46,656.30, representing étroneously paid withholding taxes on cash dividends due to petitioner's non-resident American and British stockholders for the years 1983 and 1989.

No pronouncement as to cost.

Qe Roh

7 L? Peck RAMON 0. DE VEFRA

/ Associate Judge

uv CERTIFICATION I hereby certify that this decision was reached after due consultation among the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution.

Ce

ERNESTO D. ACOSTA

Presiding Judge

Court of Tax Appeals

434