General Milling Corporation vs. Commissioner of Internal Revenue

DECISION

Before U for consideration issuance of tax credit in the Is a petition for the aggregate amount of P2,328,257.11 allegedly representing overpaid withholding .r-·· taxes on royalty and technical assistance fees covering various periods from January 1, 1993 to September 30, 1993.

Petitioner Is a domestic corporation organized and existing under and by virtue of Philippine laws.

It is principally engaged in the business of manufacturing and marketing flour, milk and other dairy products, yeasts, and other food products. This petition for review embraces three separate claims for refund which were all originally filed by the pet i t.i oner with the Bureau of I nterna I Revenue <BIR) none of which received any response from said office prompting 174 DECISION - C.T.A.

CASE NO. 5173 - 2 - herein petitioner to consolidate all these claims before this Court on November 15, 1994. The foremost claim for refund f i I ed by the petitioner with the BIR on September 29, 1993 <Exhibit "A"), embodied in a letter, pertains to alleged overpaid dated September 28, 1993, Income tax withheld on royalties remitted to Universal Foods Corporation (UFC), a business entity organized and based In Wisconsin, USA.

Petitioner is a licensee of UFC and In consideration of .

its right to manufacture yeast products through the use of the technology of UFC, it was obi iged to pay a royalty fee of 2% of the net sales of the I icensed .products . ..- it " was able to manufacture and sell. However, on August 27, 1992, the Licensing and Technical Assistance Agreement between petitioner and UFC was amended reducing the royalty fees from 2% to 1% of the net sales >f the I icensed products and correspondingly provided for a retroactive application of said reduction starting July 1 , 1992.

Petitioner alleged that since withholding tax based on the 2% royalty fees it had paid in the total sum of P455,206.32 for the period July 1, 1992 to December 31 , withholding tax the reduction 1992, there was an overpayment of in the sum of P227,603.32 on account of in royalty fees brought about by the amendment, reducing the royalty fees to 1%.

DECISION - C.T.A. CASE NO.

5173 - 3 - The other claim for refund, dated September 1, 1993 (Exhibit "B"), represents overpayment of withholding tax for the period January 1, 1992 to September, 1992 on royalty and technical assistance fees paid to Campina Melkunie BV United Dairymen (formerly Holland Canned Milk I nternat i ona I>, a foreign corporation based In Netherlands.

Under this I icensing agreement, petitioner pays 1% royalty to said corporation for the right to manufacture milk products by avai I ing of the latter 's .

trademarks and technology.

Petitioner alleges that it withheld and remitted 35% income tax on the royalty fees it paid to said foreign corporation from the period ,.--­ ,.

January 1, 1992 to September 30, 1992 in the total amount of P2,215,949.95.

Meanwh i I e, the tax treaty between the Phi I i pp i nes and the Netherlands came into force on January 1, 1992.

Under Article 12(2)(b) of said treaty, the withholding tax on royalty paid by a Phi I ipplne resident to a resident of Netherlands shal not exceed the 15% rate imposed under the Tax Code, as amended.

In the I ight of this provision, petitioner filed on behalf of Camplna Melkunie BV, a claim for tax credit of the overpaid ,r withholding taxes it had paid P1,266,257.11 with the International of the Bureau of I nterna I Revenue.

In the amount of Tax Affairs Division DECISION - C.T.A.

CASE NO. 5173 - 4 - The final claim for refund included in this petition was filed with respondent on November 24, 1993 <Exhibit " c " ) representing overpayment of withholding tax on royalty payments made to foreign I i censors who are residents of the United States in compl lance with Revenue Memorandum Circular provides:

(RMC) No.

39-92 which in "2.

Taxpayers who have rei ied on such ru I i ngs, but are not the recipients of such rulings directly providing for the "most favored nation" tax rate of 10% on their royalty payments, and accordingly have failed to withhold the correct taxes on royalties paid to recipients in the United States are deemed to be deficient in their tax payments beginning f r om s u c h d at e t h at t h e y h a v e s t a r t e d _.., p a y i n g the incorrect amount of taxes of 10%/ These taxpayers cannot claim that they have a vested right to such "most favored nation" tax treatment which cannot be given retroactive app I i cation.

As such, these taxpayers are given not later than October 30, 1992 to amend their withholding tax returns and pay the corresponding taxes, without the penalties .... " part On July 21, 1993, this Court made the pronouncement in the case of IBM Phi llppines, Inc.

v.

Commissioner of Internal Revenue, CTA Case No.

4308, that royalty payments made to residents of the United States sha I I be sub j ect to only 10% withholding tax under the "most favored nation clause" of the R.P.

- U.S. Tax Treaty.

Petitioner then filed a claim for tax credit for excess withholding taxes it paid under protest In the total amount of P813,610.46, representing the difference in the DECISION - C.T.A. CASE NO. 5173 - 5 - amount of taxes paid at 35% and the amount of tax that should have been paid which was pegged at only 10% of the royalties remitted to residents of the United States. The consolidated claims of the petitioner may thus be summed up as follows: claim dated September 28, claim dated September 1, claim dated November 18, TOTAL 1993 - 1993 - 1993 - p 227,608.32 1,266,257.11 813,610.46 P2,328,257.11 In answer to the petition, respondent did not individually .tackle each claim of the petitioner but made a general statement that the claim for refund filed by the petitioner had already prescribed and that the amount ,/ of P2,328,257.11 sought to be refunded was 8ot properly documented.

For purposes of clarity, we shal I discuss each claim for refund separately.

The claim, dated September 28, 1993, in the amount of P227,608.32 was premised on the allegation of petitioner that the Licensing and Technical Assistance Agreement it entered into with Universal Foods Corporation <UFC) was amended, resulting in the reduction of royalty fees from 2% to 1% of the net sales of the I i censed products.

Said amendment also provided for a retroactive application of this reduction starting July DECISION - C.T.A. CASE NO.

5173 - 6 - 1 ' 1 992.

The corresponding decrease in the taxable base resulted in a lower withholding tax rate, thus an overpayment occurred which petitioner asserts to be refundable.

Petitioner was able to prove, among others, the reduction of the royalty fees from 2% to 1% by presenting the "Amended Licensing and Technical Assistance Agreement" which provided that royalty fees shal I be lowered from 2% to 1% of the net sales of the I i censed .

products manufactured and sold <Exhibits "A-1" and "A-1- a" > • Petitioner also presented the Monthly Remittance Returns of Income Taxes Withheld (BIR Form 1743W) for the ,.r· ,.

period Ju I y to December 1992 <Exhibits "A-3" to "A-16") to prove its remittance of the withholding taxes due to the Bureau of Internal Revenue.

However, in the face of the evidence presented by the petitioner, this Court is not inc I i ned to grant petitioner 's request for tax credit ll in the amount of P227,603.32.

This denial is predicated on its failure to show that the resulting overpaid royalties comprising the excess 1% royalty fees after the reduction and previously remitted to UFC, actually repatriated or remitted back to the herein petitioner.

have been icensee, DECISION - C.T.A.

CASE NO.

51 7 3 - 7 - No evidence whatsoever was presented to establish the return of the excess royalties if indeed the overpaid royalties were given back by UFC to the petitioner.

We cannot simply rely on the amended Licensing and Technical Assistance Agreement offered in evidence by the petitioner .

The agreement is only an expression of the wi I I of the parties.

Petitioner 's right to the claims can be required of the government only after it has proven, without doubt, that it was so reimbursed with the .

excess 1% royalty fees.

Evidence on record, however, does not bear this out.

The undisputed fact sti I I remains that petitioner actually paid 2% royalty fees ·" " despite the existence of the agreement which, to the mind of this Court, has not been properly demonstrated to have been implemented or consummated by the parties to the agreement.

It Is the paramount duty of this Court to guard against the possibi I ity of granting claims based on a I I eged reduced roya I ty fees founded on an amended agreement which, in truth, may reveal eventua II y the fact that no such real reduction ever transpired between the parties.

In such a situation, the government wi I I be at the losing end.

DECISION - C.T.A.

CASE NO.

5173 - 8 -

I I

The claim for refund, dated September 1 , 1 993, f i I ed by the petitioner in behalf of Campina Melkunie BV in the amount of P1,266,257.11 based on the reduced withholding tax rate on royalty fees dictated by Article 12{2){b) of the RP-Netherlands Tax Treaty, cannot be given credence as the same is considered to have prescribed accordance with Section 230 of the Tax Code, provides as follows:

Sec.

230.

Recovery of tax erroneously or i I legally collected.

No suit or proceeding sha I I be maintained in any court for the recovery of any national internal revenue tax hereafter a I I eged to have been erroneous I y or i I I e g a I I y a s s e s s e d o r c o I I e c t e d , o r _,-of a n y penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfu I I y collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or proceeding shal I be begun after the expiration of two years from the date of payment of ' the tax or penalty regardless of any supervening cause that may arisN after payment:

Provided, however, That the Commissioner may, even without a written claim therefore refund or credit any tax, where on face of the return upon which payment was made, such payment appears clearly to have been erroneously paid. In which •Withholding taxes on royalties are considered final taxes as provided in Section 50{a) of the Tax Code, thus:

Sec.

50.

Withholding of tax at source.

DECISION -

C.T.A. CASE NO. 5173 - 9 - (a) Withholding of final tax on certain incomes.

The tax imposed or prescribed by Sections 2Hc), 21(d)(2);

22(a)(2), (b), (c), (d), (e);

24(e)(1), (e)(2)(8), (e)(3);

and 25(a)(4), (a)(5), (a)(6)(A), (a)(6)(8), (a)(6)(C)(ii), (b)(1), (b)(2), (b)(3), (b)(4), (b)(5)(A), (b)(5)(8), (b)(5)(C)(ii) of this Code on specified items of income shall be withheld by payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided in Section 51 of the Nation a I I nterna I Revenue Code, as amended.

Section 25(b)(1) mentioned in the above-quoted provision refers to taxes on non-resident foreign corporations one of which pertains to withholding taxes on royalties as in the instant case.

The Tax Code also provides that the final withholding taxes mentioned in Section 50 shall be paid within 25 days from the close of ,..-­ ,.

each calendar quarter as seen from the provision of Section 51 (a) quoted hereunder as fo I I ows: Sec.

51.

Returns and payment of taxes withheld at source.

(a) Quarterly returns and payment of taxes withheld.

Taxes deducted and withheld under Section 50 shall be covered by a return and paid to the Revenue District Officer, Collection Agent, or duly authorized treasurer of the city or municipality where the withholding agent has his legal residence or principal place of business, or where the withholding agent is a corporation, where the principal office is located.

The taxes deducted and withheld by the withholding agent shal I be held as a special fund in trust for the Government until paid to the collecting officers.

Jhe Commissioner of Internal Revenue may, with the approval of the Secretary of Finance, require these withholding agents to pay or deposit the taxes deducted or withheld at more frequent intervals when necessary to protect the interest of the Government.

The return for DECISION - C.T.A. CASE NO.

5173 - 10 - final withholding tax shal be filed and the payment made within 25 days from the close of each ca I endar quarter, wh i I e the return for creditable withholding taxes shall be filed and the payment made not later than the last day of the month following the close of the quarter during which withholding was made. (as amended by B.P.

Big. 41}.

However, Revenue Regulations No. 5-85, particularly Section 2 provided for the synchronization of the time and manner of remitting certain taxes, among which are the final taxes mentioned in Section 50(a} <supra>.

Section 2 of said Revenue Regulation directs that the .

final taxes shall be remitted within ten (10} days after the end of each calendar month with the fi I ing of the appropriate returns.

Section 2 of Revenue __ Regulations ,....- No. 5-85 is quoted hereunder, thus:

Sec.

2.

Monthly Return and Remittance of Taxes Withheld Taxes deducted and withheld on:

< i > compensation income, ( i i} income payments subject to the creditable (expanded} withholding taxes, and ( i I} income subject to final withholding taxes (underscoring supp I i ed} shall be remitted within ten (10} days after the end of each calendar month with the fi I ing, of the appropriate returns as follows:

BIR FORM NO.

W-1a - For taxes withheld on Compensation Income BIR FORM NO.

1743-A1 -

For Creditable (expanded} withholding taxes DECISION - C.T.A. CASE NO.

5173 BIR FORM NO.

In conformance - 1 1 - to the For final income taxes withheld aforequoted Revenue Regulation, petitioner herein paid final taxes on the royalties it remitted to UFC covering the period January 1992 to September 1992 on the 10th day after the end of each calendar month.

These payments are shown by Exhibit B-20 which contains an itemized list of the payments made by petitioner and the dates when these amounts were paid.

Shown hereunder Is the I ist aforementioned: .

Date 02-10-92 03-10-92 04-10-92 05-13-92 06-09-92 07-09-92 08-07-92 09-08-92 10-09-92 Unfortunately, all Check No.

005303 005683 006108 006489 006976 007768 008898 010078 010691 Amount 5,109,640.71 1,970,885.38 2,300,885 .. 81 3 ' 1 2 1 ' g'§ 8 • 0 6 3,263,859.82 3,021,509.24 4,960,271.33 4,874,151.45 2,893,119.37 such claims for refund have alI prescribed as correctly pointed out by the respondent.

The present petition for review was f i I ed on November 15 , , 1994 and when reckoned from the last date of payment of the tax for the instant claim for refund which was on October 9, 1992 (see above list), the total period of two

(2) years, one

(1) month and six

(6) days have elapsed, wei I beyond the two-year prescriptive period provided for in Section 230 of the Tax Code, (supra).

DECISION - C.T.A.

CASE NO.

5173 - 12 - Section 230 of the Tax Code assigns a two-year period within which to institute a claim for refund both in the administrative as wei I as in the j udicial I eve I, and this was clearly explained by the Supreme Court In the case entitled Commissioner of Internal Revenue v.

Victorias Mi II ing Co. , Inc. , 22 SCRA 12, when it ruled:

"We have repeatedly held that the claim for refund with the Bureau of Internal Revenue and the subsequent appeal to the Court of Tax Appeals must be filed within the two-year period.

If however, the Collector takes time in dec ding the claim and the period of two years is about to end, the suit or proceeding must be started in the Court of Tax Appeals before the end of the two-year period without awaiting the decision of the Collector."

Thus , i n the i n stan t case the c I a i m f'b .

r ref u n d i n the total amount of P1, 266,257. 11 cannot be granted on the ground of prescription.

The

I I I

last claim for refund in the tota I amount of P813,610.46 representing overpaid withholding taxes is premised on petitioner 's theory that royalties paid to US I i censors is sub j ect to only a 10% withholding tax in accordance with this Court's ruling in the case entitled IBM Phi I ippines, Inc .

Revenue, CTA Case No.

v.

Commissioner of 4308, dated July 21, Internal 1993.

The amount of P813,610.46 represents the a I I eged excess payments made by the petitioner covering the periodO DECISION - C.T.A.

CASE NO. 5173 - 13 - January 1, 1983 to July 31, 1992 and July 1, 1992 to September 30, 1993, broken down as fo I I ows: Excess Withholding Tax payments made for the period Jan. 1, 1983 to July 31, 1992 P678,675.51 Excess Withholding Tax payments made for the period July 1, 1992 to September 30, 1993 P134,934.95 TOTAL P813,610.46 A review of the evidence presented by the petitioner leads this Court to conclude that the claims for refund of taxes paid during the period covering January 1, 1983 to October 30, 1992 have already prescribed pursuant to Section 230 of the Tax Code as earlier discussed.

It -­ ,, should again be noted that the judicial cliim for refund via this petition for review was filed on November 15, 1994 which date is beyond the two-year prescriptive period when reckoned from the dates of payment of the two monthly remittance returns for the month of October, 1992 (Exhibit "C-14") and November 11, 1992 <Exhibits

"C - 15 "

and "A-10").

Therefore, the claims for refund pertaining to payments made outside the two-year period, having the date of November prescribed.

1 5, 1994 as reference, have a I I 'It was also observed by this Court that the payment allegedly made during the month of September, 1 993 is not 'I ' DECISION - C.T.A. CASE NO.

5173 - 14 - substantiated by the evidence submitted by the petitioner and consequently denied for lack of proof of payment.

As to the rest of the claims that fal I within the two-year prescriptive period, this Court finds them with sufficient legal basis and properly supported by the evidence submitted.

In the case entitled IBM Phi I ippines, Inc.

v.

Commissioner of Internal Revenue, CTA Case No. 4308, July 21 1 1 993 1 this Court ruled that royalties remitted by a resident of the Phi I ippines to a resident of the United States shal I be sub j ect to a reduced withholding tax rate of 10% and not 25% ear I i er imposed in accprdance with / .,.

Article 12(2)(b) of the R.P.-West Germany Tax Treaty.

Portions of said decision are quoted hereunder, thus:

"This Court is of the persuasion that petitioner's stand is correct and concurs with the opinion rendered by then Commissioner b f Internal Revenue, Bienvenido Tan, Jr.

(BIR

Ruling

No. 456-88, supra., that under the most favored nation provision of the R.P.-U.S.

Tax Treaty (Article 13, paragraph 2(b)( iii), the tax imposable on royalties derived by a resident of the United States from sources within the Phi I ippines shall be the lowest rate of Phi I i pp i ne tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third, state.

Article 12, paragraph 2(b) of the R.P.-West , Germany Tax Treaty, provides that royalties arising in the Philippines and paid to a resident of West Germany may also be taxed in the Phi I ippines, but the tax so charged shall not exceed 10% of the gross amount of royalties.

Said treaty also provides that for

I I

DECISION - C.T.A.

CASE NO.

5173 - 15 - as long as the transfer of technology under Phi lppine law, is subject to approval, the I imitation of the tax rate in case of royalties arising In the Philippines, apply if the contract giving rise to such royalties has been approved by Phi I i pp i ne competent authorities." T h i s a f ore c i t e d r u I i n g was ado p t'e d by t h i s Co u r t i n similar other cases such as: 1) Abbot Commissioner of 5119, September 2) S.C.

Laboratories <Ph I I i pp i nes) Internal Revenue, CTA Case 9' 1 996;

Johnson Commissioner of Internal 5136, May 7, 1996;

and Son, Inc.

Revenue, CTA Case 3) Armco Commissioner of 5115, February 6, Marstee I A I I oy Corporation Internal Revenue, CTA Case 1996;

and v.

No.

v.

No.

v.

No.

4 l G i 1 1 e t t e < Ph i 1 i p p i n e s l , 1 n·c·.

v.

Commissioner of Internal Revenue, CTA Case No.

4248, February 8, 1995.

In support of its claim, petitioner has submitted, among others, its application for Rei ief from Double Taxation {BIR Form No.

TC-001), the corresponding Monthly Remittance Returns of Income Taxes Withheld {BIR Form 1743W) and the Technical Assistance Agreement duly approved and registered with the Bureau of Patents, Trademarks and Technology Transfer (Exhibits "C-1", "C- 5", "C-16" to "C-35" and "A-1").

In summary, the monthly claims that are to be granted to the petitioner are enumerated hereunder, to wit:

DECISION -

C.T.A. CASE NO. 5173 16 = Payments made at 25% withholding tax:

Exhibit Amount November 1992 C-16, 17 P85 , 322.78 December 1992 C-18, 19 99,162.70 January 1993 C-21 25,054.97 February 1993 C-23 7,646.69 March 1993 C-24, 25 40,799.69 April 1993 C-26, 27 11,410.44 May 1993 C-29 7,528.47 June 1993 C-31 4,066.29 July 1993 C-33 8,451.02 August 1993 C-35 1,512.42 Total P290, 955.47 Less: 10% Withholding tax on Royalties under the "Most Favored Nation Clause”:

November 1992 P 341,291.12 December 1992 396 ,650. 78 January 1993 77,119.94 February 1993 105,537.92 March 1993 163,200.77 April 1993 93,335.75 a May 1993 49,698.87 June 1993 37,296.17 July 1993 56,695.08 August 1993 29,041.70 Total P1,349,868.10 Multiply by 10% 134,986.81 Overpayment/Amount available for tax credit P155 , 968.66

WHEREFORE, in view of the foregoing premises, only the claim for refund, dated November 18, 1993, referring to overpaid income taxes on royalties remitted to U.S. Licensors is hereby PARTIALLY GRANTED. The two other claims for refund dated September 28, 1993 and September 1, 1993 are both DENIED for lack of merit.

ACCORDINGLY, respondent is ORDERED to {SSUE a_ Tax Credit Certificate in the amount of P155,968.66 in favor of the petitioner.

DECISION - C.T.A.

CASE NO.

5173

VI I I

of the Constitution.

. .--· ,.

Q- ERNESTO D.

ACOSTA Presiding Judge Court of Tax Appeals .-