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CIR v. PROCTER

FACTS:

Procter and Gamble Philippine Manufacturing Corporation (P&G-Phil) declared dividends payable to its parent company, Procter and Gamble Co., Inc. (USA) (P&G-USA), for the taxable years 1974 and 1975. P&G-Phil deducted the 35% withholding tax at source. P&G-Phil filed a claim for refund or tax credit in January 5, 1977, arguing that the applicable rate of withholding tax should have been 15% instead of 35%. However, the Commissioner of Internal Revenue did not respond to the claim. P&G-Phil filed a petition for review with the Court of Tax Appeals (CTA) in July 1977. On January 31, 1984, the CTA ruled in favor of P&G-Phil and ordered the Commissioner to refund or grant tax credit in the claimed amount. The Commissioner appealed the CTA's decision to the Court of Appeals, which held that P&G-USA, and not P&G-Phil, was the proper party to claim the refund or tax credit. The Court also concluded that P&G-Phil failed to meet certain conditions needed for the preferential tax rate. P&G-Phil filed a motion for reconsideration challenging these conclusions.

The case also involves the interpretation of the National Internal Revenue Code (NIRC) in relation to P&G-Phil's claim for refund of taxes. P&G-Phil, as a withholding agent, is considered a taxpayer and has the authority to file a claim for refund on behalf of its parent company, P&G-USA. The withholding agent is personally liable for withholding taxes and has the obligation to pay the correct amount of tax that should be withheld. The government can require written confirmation of the withholding agent's authority, but it is unfair to deny the right to claim a refund solely based on the failure to demand such confirmation initially.

There is also a question of whether P&G-USA is entitled to the reduced 15% dividend tax rate provided under the NIRC. P&G-Philippines withheld a 35% dividend tax, but P&G-USA argues it should be subject to the reduced rate because the US law grants a tax credit for the actual dividend tax withheld. The court needs to analyze the relevant provisions of the NIRC and the US Internal Revenue Code to determine if P&G-USA is entitled to the reduced rate based on the tax credit provided under US law.

Additionally, P&G-USA was granted a "deemed paid" tax credit under Section 902 of the US Tax Code, which means it is considered to have paid a portion of the Philippine corporate income tax paid by its Philippine subsidiary, P&G-Philippines. This concept reflects the economic reality that the Philippine corporate income tax was indeed paid and deducted from revenues earned in the Philippines, reducing the amount remittable as dividends to P&G-USA.

ISSUES:

  1. Whether the "deemed paid" tax credit allowed by US tax law is at least equal to the amount of dividend tax waived by the Philippine Government.

  2. Whether US tax law complies with the requirements for applicability of the reduced or preferential fifteen percent (15%) dividend tax rate under Section 24 (b)(1), NIRC.

  3. Whether or not Section 902 of the US Tax Code complies with the requirements of Section 24(b)(1) of the National Internal Revenue Code (NIRC).

  4. Whether or not the BIR's interpretation of Sections 901 and 902 of the US Tax Code is in line with the administrative rulings issued by the BIR.

  5. Whether the applicable dividend tax rate in the case is the regular 35% rate or the reduced 15% rate.

  6. Whether the Philippine parent corporation is required to prove that its US parent corporation was given a "deemed paid" tax credit by the US tax authorities.

  7. Whether or not private respondent is entitled to a tax refund or tax credit in respect of dividends from a Philippine subsidiary.

RULING:

  1. The amount of the "deemed paid" tax credit allowed by US tax law is higher than the amount of dividend tax waived by the Philippine Government. Therefore, it is at least equal to the amount of dividend tax waived.

  2. US tax law complies with the requirements for applicability of the reduced or preferential fifteen percent (15%) dividend tax rate under Section 24 (b)(1), NIRC.

  3. Section 902 of the US Tax Code complies with the requirements of Section 24(b)(1) of the NIRC.

  4. The BIR's interpretation of Sections 901 and 902 of the US Tax Code is in line with the administrative rulings issued by the BIR.

  5. The court held that the applicable dividend tax rate in the case is the reduced 15% rate. The court stated that Section 24(b)(1) of the National Internal Revenue Code (NIRC) does not require the actual grant of the "deemed paid" tax credit by the US Internal Revenue Service (IRS) to the US parent corporation before the preferential 15% dividend rate becomes applicable. Section 24(b)(1) only specifies when a particular (reduced) tax rate is legally applicable.

  6. The court held that the Philippine parent corporation is not required to prove that its US parent corporation was given a "deemed paid" tax credit by the US tax authorities. The court stated that the determination or recognition of the applicability of the reduced tax rate is a matter of law and should not be conditioned on administrative requirements. However, the court noted that the Bureau of Internal Revenue (BIR) may issue implementing regulations requiring the Philippine parent corporation to submit certification of the amount of the "deemed paid" tax credit actually granted by the US tax authorities.

  7. The Court resolved to reinstate and affirm the decision of the Court of Tax Appeals, granting the tax refund or tax credit sought by private respondent P&G-Philippines.

PRINCIPLES:

  • Under US tax law, the concept of "deemed paid" tax credits reflects economic reality and treats Philippine corporate income taxes actually paid as coming from the pocket of the parent corporation.

  • The tax credits allowed under US tax law are aimed at avoiding or reducing double taxation of the same income stream.

  • In order for US tax law to comply with the reduced dividend tax rate under Section 24 (b)(1), NIRC, the "deemed paid" tax credit must be at least equal to the amount of dividend tax waived by the Philippine Government.

  • The concept of "deemed paid" tax credit, which is embodied in Section 902 of the US Tax Code, is the same "deemed paid" tax credit found in the NIRC and allows Philippine corporations to claim tax credits for taxes paid to foreign governments.

  • Section 30(c)(3)(a) of the NIRC provides that a Philippine corporation is entitled to a tax credit for taxes actually paid by it to the US government, which is equivalent to Section 901 of the US Tax Code.

  • Section 30(c)(8) of the NIRC is practically identical to Section 902 of the US Tax Code and allows a domestic corporation to be deemed to have paid the same proportion of any taxes paid by its foreign subsidiary, which is based on the proportion of the dividends received to the accumulated profits of the foreign subsidiary.

  • Section 24(b)(1) of the NIRC only specifies when a particular (reduced) tax rate is legally applicable and does not require the actual grant of a "deemed paid" tax credit by the US IRS.

  • The determination or recognition of the applicability of the reduced tax rate is a matter of law and should not be conditioned on administrative requirements.

  • The BIR may issue implementing regulations requiring the submission of certification of the "deemed paid" tax credit actually granted by the US tax authorities.

  • An interpretation of a tax statute that produces a revenue flow for the government is not necessarily the correct reading of the statute. The court's task is to give effect to the legislative design and objectives as written into the statute, even if it means foregoing some revenues.

  • The reduction of the dividend tax rate under Section 24(b)(1) of the NIRC aims to increase the net dividends remittable to foreign investors and promote foreign equity investment in the Philippines.

  • Foreign investors can benefit from the reduction of the dividend tax rate only if their home country gives them relief from double taxation through additional tax credits.

  • The Philippines, through a treaty commitment with the United States, reduced the regular rate of dividend tax to a maximum of 20%. The treaty also obligates the United States to provide a tax credit for the appropriate amount of taxes paid to the Philippines by its subsidiaries.

  • Private respondent is entitled to a tax refund or tax credit in respect of dividends from a Philippine subsidiary.