STEPHANIE LUZETTE M.

MACAPAGAL 1
TAXATION LAW DIGESTS FOR CASES SUGGESTED BY EXCELLENT

1. RUFINO TAN V. RAMON DEL ROSARIO, JR. (237 SCRA 324)

Topic: Taxation of general professional partnerships v. ordinary business partnerships

Facts:

Petitioners challenge the constitutionality of RA 7496, commonly known as the Simplified Net Income Taxation
Scheme (SNIT).

Issue and Ruling:

1. W/N the SNIT applies to partners in general professional partnerships.

YES. There is no distinction in income tax liability between a person who practices his profession alone or
individually and one who does it through a partnership (whether registered or not) with others in the exercise of a
common profession. Under the present income tax system, all individuals deriving income from any source
whatsoever are treated in almost invariably the same manner and under a common set of rules. Although the general
professional partnership is exempt from the payment of taxes (but it still has an obligation to file an income tax return
mainly for administration and data), the partners themselves are liable for the payment of income tax in their
individual capacity computed on their respective and distributive shares of profits.

Notes:

Differences between general professional partnerships and ordinary business partnerships:

a. A general professional partnership, unlike an ordinary business partnership (which is treated as a

corporation for income tax purposes and so subject to the corporate income tax), is not itself an income
taxpayer. The income tax is imposed not on the professional partnership, which is tax exempt, but on the
partners themselves in their individual capacity computed on their distributive shares of partnership profits.
b. Ordinary business partnerships, no matter how created or organized, are “taxable partnerships.” General
professional partnerships are “exempt partnerships.” Under the Tax Code on income taxation, the general
professional partnership is deemed to be no more than a mere mechanism or a flow-through entity in the
generation of income by, and the ultimate distribution of such income to, respectively, each of the individual
partners.

2. COMMISSIONER OF INTERNAL REVENUE V. BRITISH OVERSEAS AIRWAYS CORP. (149 SCRA 395)

Topic: Test of taxability of income of resident foreign corporations

Facts:

British Airways, a foreign company, is protesting a deficiency income tax assessment by the Commissioner of Internal
Revenue for the period covering the years 1959-1963. It contends that although it maintained a general sales agent in
the Philippines which was responsible for selling British Airways tickets covering passengers and cargoes, it did not
actually carry passengers and/or cargo to or from the Philippines within the stated period and thus should not have
bee assessed taxes.

Issues and Ruling:

1. W/N British Airways was a resident foreign corporation doing business in the Philippines during the stated
period.

YES. During the stated period, British Airways maintained a general sales agent in the Philippines which exercised
functions which are normally incident to, and are in progressive pursuit of, the purpose and object of its organization
as an international air carrier. In fact, its main activity, the regular sale of tickets, is the very lifeblood of the airline

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business, the generation of sales being the paramount objective. Accordingly, it is a resident foreign corporation
subject to tax upon its total net income received in the preceding taxable year from all sources within the Philippines,
according to Section 24(b)(2) of the same Code.

2. W/N the revenue of British Airways from ticket sales in the Philippines for air transportation constitute
income of British Airways subject to taxation in the Philippines, although they did not actually carry
passengers and/or cargo to or from the Philippines within the stated period.

YES. The absence of flight operations to and from the Philippines is not determinative of the source of income or the
site of income taxation. The test of taxability is the “source,” and the source of an income is that activity which
produced the income. Even if the British Airways tickets sold covered the “transport of passengers and cargo to and
from foreign cities,” it cannot alter the fact that income from the sale of tickets was derived from the Philippines. The
passage documentations in these cases were sold in the Philippines and the revenue therefrom was derived from an
activity regularly pursued within the Philippines. The word “source” conveys one essential idea, that of origin, and the
origin of the income herein is the Philippines.

Note:

Although there is no specific criterion as to what constitutes “doing” or “engaging in” or “transacting” business as
stated under Section 20(h) of the 1977 Tax Code, the terms imply a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some functions
normally incident to, and in progressive prosecution of, commercial gain or for the purpose and object of the business
organization.

3. FILIPINAS SYNTHETIC FIBER CORP. V. CA (316 SCRA 480)

Topic: When does the liability to hold tax at source on income payments accrue?

Facts:

Filipinas Synthetic Fiber Corp., a domestic corporation, is protesting part of the deficiency withholding tax assessed
upon it by the Commissioner of Internal Revenue which pertains to interest and compromise penalties for the alleged
late payment of withholding taxes due on interest loans, royalties, and guarantee fees paid by Filipinas Synthetic
Fiber Corp. to non-resident corporations.

Issue and Ruling:

1. Whether the liability to withhold tax at source on income payments to non-resident foreign corporations
arises upon remittance of the amounts due to the foreign creditors or upon accrual thereof.

The Tax Code is silent as to when the duty to withhold the taxes arise. Thus, to determine the same, an inquiry as to
the nature of the accrual method of accounting (which is the method used by the petitioner) must be made. Under the
accrual basis method, it is the right to receive income, and not the actual receipt, that determines when to include the
amount in gross income. Therefore, the liability arises UPON REMITTANCE OF THE AMOUNTS, and not upon
accrual thereof.

Notes:

Under the accrual basis method of accounting, income is reportable when all the events have occurred that fix the
taxpayer’s right to receive the income, and the amount can be determined with reasonable certainty.

Requisites of the accrual method of accounting:

a. That the right to receive the amount must be valid, unconditional and enforceable;
b. The amount must be reasonably susceptible of accurate estimate; and

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c. There must be a reasonable expectation that the amount will be paid in due course.

4. COMMISSIONER OF INTERNAL REVENUE V. ISABELA CULTURAL CORP. (515 SCRA 556)

Topic: The all-events test; when deductions from income taxes may be claimed

Facts:

When the Bureau of Internal Revenue disallowed Isabela Cultural Corporation’s claimed deductions for the years
1984-1986 in their 1986 taxes for expense deductions, to wit:

(1) Expenses for auditing services for the year ending 31 December 1985;
(2) Expenses for legal services for the years 1984 and 1985; and
(3) Expense for security services for the months of April and May 1986.

As such, the former charged the latter for deficiency income taxes. Isabela Cultural Corporation contests the
assessment.

Issues and Ruling:

1. For a taxpayer using the accrual method, when do the facts present themselves in such a manner that the
taxpayer must recognize income or expense?

The accrual of income and expense is permitted when the all-events test has been met. This test requires: (1) fixing of
a right to income or liability to pay; and (2) the availability of the reasonable accurate determination of such income
or liability. The test does not demand that the amount of income or liability be known absolutely, only that a taxpayer
has at his disposal the information necessary to compute the amount with reasonable accuracy. The all-events test is
satisfied where computation remains uncertain, if its basis is unchangeable; the test is satisfied where a computation
may be unknown, but is not as much as unknowable, within the taxable year.

2. W/N the deductions were properly claimed by Isabela Cultural Corporation.

The deductions for expenses for professional fees consisting of expenses for legal and auditing services are NOT
allowable. However, the deductions for expenses for security services were properly claimed by Isabela Cultural
Corporation. For the legal and auditing services, Isabela Cultural Corporation could have reasonably known the fees
of those firms that it hired, thus satisfying the “all-events test.” As such, per Revenue Audit Memorandum Order No.
1-2000, they cannot validly be deducted from its gross income for the said year and were therefore properly
disallowed by the BIR. As for the security services, because they were incurred in 1986, they could be properly
claimed as deductions for the said year.

Notes:

The requisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like expenses
paid for legal and auditing services, are:

a. The expense must be ordinary and necessary;

b. It must have been paid or incurred during the taxable year;
c. It must have been paid or incurred in carrying on the trade or business of the taxpayer; and
d. It must be supported by receipts, records, or other pertinent papers.

Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting, expenses not
being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed as deduction
from income for the succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses and other
allowable deductions for the current year but failed to do so cannot deduct the same for the next year.

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TAXATION LAW DIGESTS FOR CASES SUGGESTED BY EXCELLENT

The propriety of an accrual must be judged by the facts that a taxpayer knew, or could reasonably be expected to have
known, at the closing of its books for the taxable year. Accrual method of accounting presents largely a question of
fact; such that the taxpayer bears the burden of proof of establishing the accrual of an item of income or deduction.

5. COMMISSIONER OF INTERNAL REVENUE V. TMX SALES, INC. (205 SCRA 184)

Topic: Prescriptive period to claim refund of erroneously paid taxes

Facts:

TMX Sales, Inc., a domestic corporation, filed on 15 May 1981 a quarterly income tax return for the first quarter of
1981 and paid the corresponding income tax thereon. During the subsequent quarters, it suffered losses so that when
it filed its Annual Income Tax Return for the year that ended on 31 December 1981, it declared a net loss. It thereafter
filed a claim for refund, which was no acted upon by the Commissioner of Internal Revenue. On 14 March 1984, TMX
Sales, Inc. filed a petition for review with the Court of Tax Appeals to order the CIR to refund the amount overpaid as
income tax. The CIR raised the defense of prescription against TMX Sales, Inc., stating that more than two years had
already elapsed since TMX paid the contended income tax and the filing of the claim in court.

Issue and Ruling:

1. Does the two-year prescriptive period to claim a refund of erroneously collected tax provided for in Section
230 of the National Internal Revenue Code commence to run from the date the quarterly income tax was
paid, or from the date of filing of the Final Adjustment Return (final payment)?

The most reasonable and logical application of the law would be to compute the two-year prescriptive period at the
time of filing the Final Adjustment Return or the Annual Income Tax Return, when it can be finally ascertained if the
taxpayer has still to pay additional income tax or if he is entitled to a refund of overpaid income tax.

Notes:

The filing of quarterly income tax returns required in Section 68 of the Tax Code and implemented per BIR Form
1702-Q and payment of quarterly income tax should only be considered mere installments of the annual tax due.
These quarterly tax payments which are computed based on the cumulative figures of gross receipts and deductions in
order to arrive at a net taxable income, should be treated as advances or portions of the annual income tax due, to be
adjusted at the end of the calendar year or fiscal year. This is reinforced by Section 69 which provides for the filing of
adjustment returns and final payment of income tax. Consequently, the two-year prescriptive provided in Section 230
of the Tax Code should be computed from the time of the filing of the Adjustment Return or Annual Income Tax
Return and final payment of income tax.

7. COMMISSIONER OF INTERNAL REVENUE V. MISTUBISHI METAL CORPORATION (181 SCRA 214)

Topic: Tax exemption—loan from financing institutions owned, controlled, and financed by foreign
governments

Facts:

Atlas Consolidated Mining and Development Corporation, a domestic corporation, entered into a Loan and Sales
Contract with Mitsubishi Metal Corporation, a Japanese corporation licensed to engage in business in the Philippines.
To be able to extend the loan to Atlas, Mitsubishi entered into another loan agreement with Export-Import Bank
(Eximbank), a financing institution owned, controlled, and financed by the Japanese government. After making
interest payments to Mitsubishi, with the corresponding 15% tax thereon remitted to the Government of the
Philippines, Altas claimed for tax credit with the Commissioner of Internal Revenue based on Section 29(b)(7)(A) of

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the National Internal Revenue Code, stating that since Eximbank, and not Mitsubishi, is where the money for the loan
originated from Eximbank, then it should be exempt from paying taxes on its loan thereon.

Issues and Ruling:

1. W/N the interest income from the loans extended to Atlas by Mitsubishi is excludible from gross income
taxation.

NO. Mitsubishi secured the loan from Eximbank in its own independent capacity as a private entity and not as a
conduit of Eximbank. Therefore, what the subject of the 15% withholding tax is not the interest income paid by
Mitsubishi to Eximbank, but the interest income earned by Mitsubishi from the loan to Atlas. Thus, it does not come
within the ambit of Section 29(b)(7)(A), and it is not exempt from the payment of taxes.

Notes:

Findings of fact of the Court of Tax Appeals are entitled to the highest respect and can only be disturbed on appeal if
they are not supported by substantial evidence or if there is a showing of gross error or abuse on the part of the tax
court.

Laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the
taxing power. Taxation is the rule and exemption is the exception.

8. MACTAN CEBU INTERNATIONAL AUTHORITY V. MARCOS (261 SCRA 667)

Topic: Tax exemption—government-owned or controlled corporations

Facts:

Mactan Cebu International Airport Authority (MCIAA) was created by virtue of RA 6958. It enjoyed the privilege of
exemption from payment of taxes from the time of its creation until 1991, when the City of Cebu demanded payment
for realty taxes on several parcels of land belonging to MCIAA. MCIAA contests the assessment and claims exemption.

Issue and Ruling:

1. W/N MCIAA is liable to pay taxes to the City of Cebu.

YES. Since MCIAA is a government-owned or controlled corporation, its exemption from payment of property taxes
granted by Section 14 of its charter has been withdrawn, by virtue of Section 234 of the Local Government Code.
MCIAA cannot claim that it was never a “taxable person” under its Charter. It was only exempted from the payment of
real property taxes. The grant of the privilege only in respect of this tax is conclusive proof of the legislative intent to
make it a taxable person subject to all taxes, except real property tax.

Notes:

The power to tax, which was called by Justice Marshall as the “power to destroy,” cannot be allowed to defeat an
instrumentality or creation of the very entity which has the inherent power to wield it.

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very
nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which
imposes the tax on the constituency who are to pay it. Nevertheless, effective limitations thereon may be imposed by
the people through their Constitutions.

Taxation is a destructive power which interferes with personal property for the support of the government.
Accordingly, tax statutes must be construed strictly against the government and liberally in favor of the taxpayer.

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Since taxes are what we pay for civilized society, or are the lifeblood of the nation, the law frowns against exemptions
from taxation and statutes granting tax exemptions from taxation and statutes granting tax exemptions are thus
construed strictissimi juris against the taxpayers and liberally in favor of the taxing authority. However, if the grantee
of the exemption is a political subdivision or instrumentality, the rigid rule of construction does not apply because the
practical effect of the exemption is merely to reduce the amount of money that has to be handled by the government
in the course of its operations.

The power to tax is the most effective instrument to raise needed revenues to finance and support myriad activities of
local government units for the delivery of basic services essential to the promotion of the general welfare and the
enhancement of peace, progress, and prosperity of the people.

Nothing can prevent Congress from decreeing that even instrumentalities or agencies of the government performing
governmental functions may be subject to tax.

9. COMMISSIONER OF INTERNAL REVENUE V. CA (298 SCRA 83)

Topic: Tax exemption—charitable institutions

Facts:

Young Men’s Christian Association of the Philippines, Inc. (YMCA), a non-stock, non-profit institution, which
conducts various programs and activities that are beneficial to the public pursuant to its religious, educational, and
charitable objectives, is contesting the tax assessment made upon it by the Commissioner of Internal Revenue, citing
Article VI, Section 28, paragraph 3 of the 1987 Constitution.

Issue and Ruling:

1. W/N YMCA is exempt from the payment of taxes.

NO. What is exempted by Article VI, Section 28, paragraph 3 of the 1987 Constitution is not the institution itself; the
exemption pertains only to property taxes. Moreover, Section 27 of the National Internal Revenue Code expressly
disallows the exemption claimed by YMCA, as it mandates that the income of exempt organizations from any of their
properties, real or personal, be subject to the tax imposed by the same Code. Thus, YMCA is exempt from the payment
of property tax, but not income tax on the rentals from its property. The bare allegation alone that it is a non-stock,
non-profit educational institution is insufficient to justify its exemption from the payment of income tax.

Notes:

A claim of statutory exemption from taxation should be manifest, and unmistakable from the language of the law on
which it is based.

10. MARUBENI CORPORATION V. COMMISSIONER OF INTERNAL REVENUE (177 SCRA 500)

Topic: Tax on dividends remitted to foreign corporations

Facts:

Marubeni Corporation is a Japanese corporation licensed to engage in business in the Philippines. When the profits
on Marubeni’s investments in Atlantic Gulf and Pacific Co. of Manila were declared, a 10% final dividend tax was
withheld from it, and another 15% profit remittance tax based on the remittable amount after the final 10%
withholding tax were paid to the Bureau of Internal Revenue. Marubeni Corp. now claims for a refund or tax credit for
the amount which it has allegedly overpaid the BIR.

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Issues and Ruling:

1. W/N the dividends Marubeni Corporation received from Atlantic Gulf and Pacific Co. are effectively
connected with its conduct or business in the Philippines as to be considered branch profits subject to 15%
profit remittance tax imposed under Section 24(b)(2) of the National Internal Revenue Code.

NO. Pursuant to Section 24(b)(2) of the Tax Code, as amended, only profits remitted abroad by a branch office to its
head office which are effectively connected with its trade or business in the Philippines are subject to the 15% profit
remittance tax. The dividends received by Marubeni Corporation from Atlantic Gulf and Pacific Co. are not income
arising from the business activity in which Marubeni Corporation is engaged. Accordingly, said dividends if remitted
abroad are not considered branch profits for purposes of the 15% profit remittance tax imposed by Section 24(b)(2) of
the Tax Code, as amended.

2. Whether Marubeni Corporation is a resident or non-resident foreign corporation.

Marubeni Corporation is a non-resident foreign corporation, with respect to the transaction. Marubeni Corporation’s
head office in Japan is a separate and distinct income taxpayer from the branch in the Philippines. The investment on
Atlantic Gulf and Pacific Co. was made for purposes peculiarly germane to the conduct of the corporate affairs of
Marubeni Corporation in Japan, but certainly not of the branch in the Philippines.

3. At what rate should Marubeni be taxed?

15%. The applicable provision of the Tax Code is Section 24(b)(1)(iii) in conjunction with the Philippine-Japan Tax
Treaty of 1980. As a general rule, it is taxed 35% of its gross income from all sources within the Philippines. However,
a discounted rate of 15% is given to Marubeni Corporation on dividends received from Atlantic Gulf and Pacific Co. on
the condition that Japan, its domicile state, extends in favor of Marubeni Corporation a tax credit of not less than
20% of the dividends received. This 15% tax rate imposed on the dividends received under Section 24(b)(1)(iii) is
easily within the maximum ceiling of 25% of the gross amount of the dividends as decreed in Article 10(2)(b) of the
Tax Treaty.

Notes:

Each tax has a different tax basis.

Under the Philippine-Japan Tax Convention, the 25% rate fixed is the maximum rate, as reflected in the phrase “shall
not exceed.” This means that any tax imposable by the contracting state concerned should not exceed the 25%
limitation and said rate would apply only if the tax imposed by our laws exceeds the same.

11. COMMISSIONER OF INTERNAL REVENUE V. PROCTER AND GAMBLE PHILIPPINE MANUFACTURING

CORPORATION (160 SCRA 560)

Topic: Tax on dividends remitted to foreign corporations

Facts:

Procter and Gamble Philippines, a domestic corporation wholly owned by Procter and Gamble USA, is invoking the
tax-sparing credit provision in Section 24(b) and is claiming a refund or tax credit of the 20 percentage-point portion
of the 35 percentage-point whole tax on dividends that it had previously paid to the Bureau of Internal Revenue.

Issue and Ruling:

1. W/N Procter and Gamble Philippines is entitled to the preferential 15% tax rate on dividends declared and
remitted to its parent corporation.

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NO. Procter and Gamble Philippines failed to meet certain conditions necessary in order that the dividends received
by the non-resident parent company in the US may be subject to the preferential 15% tax instead of 35%, among
which are:

(a) To show the actual amount credited by the US government against the income tax due from Procter and
Gamble USA;
(b) To present the income tax return of its mother company for the years the dividends were received; and
(c) To submit any duly authenticated document showing that the US government credited the 20% tax deemed
paid in the Philippines.

Notes:

The State can never be in estoppel, and this is particularly true in matters involving taxation. The errors of certain
administrative officers should never be allowed to jeopardize the government’s financial position.

12. COMMISSIONER OF INTERNAL REVENUE V. WANDER PHILIPPINES (160 SCRA 573)

Topic: Tax on dividends remitted to foreign corporations

Facts:

Wander Philippines, a domestic corporation, is a wholly-owned subsidiary of Glaro S.A. Ltd., a Swiss corporation not
engaged in trade or business in the Philippines. It had been remitting 35% of its earnings to the Bureau of Internal
Revenue when it claimed a tax refund, stating that it was only liable for 15% withholding tax in accordance with
Section 24(b)(1) of the Tax Code, as amended by Presidential Decree Nos. 369 and 778.

Issues and Ruling:

1. W/N Wander is the proper party to claim the tax refund.

YES. Wander is, first and foremost, a wholly owned subsidiary of Glaro. As the Philippine counterpart, Wander is the
proper entity who should file for the refund or credit of overpaid withholding tax on dividends paid or remitted by
Glaro.

2. W/N Switzerland allows as tax credit the “deemed paid” 20% Philippine tax on such dividends.

YES. As a matter of fact, Switzerland does not even impose any income tax on dividends received by Swiss
corporations domiciled in foreign countries. Thus, it should be deemed that the condition in Section 24(b)(1) of the
Tax Code requiring at least 20% tax be credited by the foreign government is fully satisfied. Thus, Wander is entitled
to the tax refund.

Notes:

Domestic corporations which are wholly-owned by foreign corporations become the withholding agents of the
government is not by choice but by compulsion under Section 53(b) of the National Internal Revenue Code. It is a
device to insure the collection by the Philippine Government of taxes on incomes, derived from sources in the
Philippines, by aliens who are outside the taxing jurisdiction of the Court. In fact, the former may be assessed for
deficiency withholding tax at source, plus penalties consisting of surcharge and interest.

13. COMMISSIONER OF INTERNAL REVENUE V. PROCTER AND GAMBLE PHILIPPINE MANUFACTURING

CORPORATION (204 SCRA 377)

Topic: Tax credits granted to foreign corporations by their home countries; principles.

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Facts:

Procter and Gamble Philippines declared dividends payable to its parent company and sole stockholder, P&G USA,
and deducted 35% withholding tax at source. It then filed a claim with the Commissioner of Internal Revenue for a
refund or tax credit, claiming that pursuant to Section 24(b)(1) of the National Internal Revenue Code, as amended by
Presidential Decree No. 369, the applicable rate of withholding tax on the dividends remitted was only 15%.

Issues and Ruling:

1. W/N P&G Philippines is entitled to the refund or tax credit.

YES. The ordinary 35% tax rate applicable to dividend remittances to non-resident corporate stockholders of a
Philippine corporation goes down to 15% if the country of domicile of the foreign stockholder corporation “shall
allow” such foreign corporation a tax credit for “taxes deemed paid in the Philippines,” applicable against the tax
payable to the domiciliary country by the foreign stockholder corporation. Such tax credit for “taxes deemed paid in
the Philippines” must, as a minimum, reach an amount equivalent to 20 percentage points which represents the
difference between the regular 35% dividend tax rate and the preferred 15% tax rate. Since the US Congress desires to
avoid or reduce double taxation of the same income stream, it allows a tax credit of both (i) the Philippine dividend
tax actually withheld, and (ii) the tax credit for the Philippine corporate income tax actually paid by P&G Philippines
but “deemed paid” by P&G USA. Moreover, under the Philippines-United States Convention “With Respect to Taxes
on Income,” the Philippines, by treaty commitment, reduced the regular rate of dividend tax to a maximum of 20% of
the gross amount of dividends paid to US parent corporations, and established a treaty obligation on the part of the
United States that it “shall allow” to a US parent corporation receiving dividends from its Philippine subsidiary “a
[tax] credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine [subsidiary].

Notes:

The law sets no condition for the personal liability of the 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 the payment thereof is concentrated upon the person over whom the Government has jurisdiction.

The withholding agent is the agent of both the Government and the taxpayer. With respect to the collection and/or
withholding of tax, he is the Government’s agent. With 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 taxpayer.

The NIRC does not require that the US tax law deem the parent corporation to have paid the 20 percentage points of
dividend tax waived by the Philippines. It only requires that the US “shall allow” P&G-USA a “deemed paid” tax credit
in an amount equivalent to the 20 percentage points waived by the Philippines. Section 24(b)(1) does not create a tax
exemption nor does it provide a tax credit; it is a provision which specifies when a particular (reduced) tax rate is
legally applicable.

An interpretation of a tax statute that produces a revenue flow for the government is not, for that reason alone,
necessarily the correct reading of the statute.

Section 24(b)(1) of the NIRC seeks to promote the in-flow of foreign equity investment in the Philippines by reducing
the tax cost of earning profits here and thereby increasing the net dividends remittable to the investor. The foreign
investor, however, would not benefit from the reduction of the Philippine dividend tax rate unless its home country
gives it some relief from double taxation by allowing the investor additional tax credits which would be applicable
against the tax payable to such home country. Accordingly Section 24(b)(1) of the NIRC requires the home or
domiciliary country to give the investor corporation a “deemed paid” tax credit at least equal in amount to the 20
percentage points of dividend tax foregone by the Philippines, in the assumption that a positive incentive effect would
thereby be felt by the investor.