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EN BANC

[C.T.A. EB CASE NO. 313. January 30, 2008.]


(C.T.A. CASE NO. 6949)
AIR NEW ZEALAND, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent.
D E C I S I O N
UY, J p:
This is a Petition for Review before the Court of Tax Appeals En Banc filed on S
eptember 26, 2007 seeking a review of the Decision and Resolution dated June 19,
2007 and September 5, 2007, respectively, rendered by the First Division of thi
s Court 1 (Court in Division) in C.T.A. Case No. 6949 entitled "Air New Zealand,
petitioner, vs. Commissioner of Internal Revenue, respondent", pursuant to Sect
ion 18 of Republic Act No. 1125, as amended by Republic Act No. 9282. The dispos
itive portions of which read as follows: CaAIES
Decision in CTA Case No. 6949 promulgated on June 19, 2007:
"In conclusion, the petitioner as resident foreign corporation engaged in trade
or business in the Philippines on account of its sale of passage documents here
in the Philippines, is not taxable on its Gross Philippine Billings as provided
in Section 28(A)(3)(a) of the NIRC. However, it is still liable for income tax n
ot at the rate of 32% as generally imposed on resident foreign corporations, but
at the lower rate of 1 1/2% pursuant to the RP-New Zealand Tax Treaty on the pr
ofits derived from sources within the Philippines. Since petitioner already paid
its income tax liabilities for taxable year 2002 at the rate of 1 1/2% of gross
income, the payment is correct and therefore no refundable amount is due.
WHEREFORE, the instant Petition for Review is hereby DISMISSED for lack of merit
.
SO ORDERED."
Resolution denying petitioner's Motion for Reconsideration promulgated on Septem
ber 5, 2007:
"IN VIEW OF THE FOREGOING, petitioner's Motion for Reconsideration is hereby DEN
IED for lack of merit.
SO ORDERED." DcICEa
THE FACTS
As found by the Court in Division, these are the undisputed facts of the case:
Petitioner Air New Zealand is a foreign corporation organized and existing under
the laws of New Zealand with principal office at ANZ Level 21, Quay Tower, 29 C
ustoms Street, West Auckland I, New Zealand. As an off-line international air ca
rrier having no landing rights in the Philippines, petitioner does not maintain
flight operations to and from the Philippines. Likewise, it is not registered wi
th the Securities and Exchange Commission as a corporation, branch office or par
tnership, and, consequently, is not licensed to do business in the Philippines.
Petitioner, though, has a general sales agent in the Philippines, Aerotel Limite
d Corporation (Aerotel), which, among others, sells passage documents for compen
sation or commission covering off-line flights of petitioner.
Petitioner filed, through Aerotel, its Quarterly Income Tax Returns for the Firs
t and Second Quarters of taxable year 2002 and paid the amount due thereon as fo
llows:
Period Date Filed & Paid Amount Paid
1st Quarter May 30, 2002 P137,144.00
2nd Quarter August 29, 2002 P120,554.00

P257,698.00
==========
On February 5, 2003, petitioner filed a formal claim for refund with the respond
ent Commissioner of Internal Revenue, through Revenue District Office No. 47 of
the Bureau of Internal Revenue, for the recovery of the amount of P257,698.00 al
legedly representing erroneously paid tax on Gross Philippine Billings for the F
irst and Second Quarters of taxable year 2002. AcSIDE
In a letter dated March 9, 2004, respondent, through the Regional Director of Re
venue Region No. 8, categorically denied petitioner's claim for refund, which wa
s received by petitioner, through Aerotel, on March 19, 2004.
On April 16, 2004, petitioner filed a Petition for Review before the Court in Di
vision, docketed as C.T.A. Case No. 6949, seeking the cancellation of respondent
's final decision on the denial of its claim for refund.
On June 19, 2007, the Court in Division rendered a decision denying petitioner's
claim for refund for lack of merit. It ruled that petitioner, being a resident
foreign corporation engaged in trade or business in the Philippines, is not liab
le to pay tax on Gross Philippine Billings as provided in Section 28(A)(3)(a) of
the National Internal Revenue Code (NIRC) of 1997. However, it concluded by den
ying its claim for refund considering that petitioner it is still liable for inc
ome tax not at the rate of 32% as generally imposed on resident foreign corporat
ions, but at the lower rate of 1 1/2% pursuant to the RP-New Zealand Tax Treaty
on the profits derived from sources within the Philippines.
On July 13, 2007, petitioner filed its Motion for Reconsideration seeking recons
ideration of the aforesaid Decision. Subsequently, the Court in Division denied
the said motion for lack of merit in its Resolution dated September 5, 2007. 2
Hence, this recourse before the Court En Banc praying that: (a) the Decision dat
ed June 19, 2007 and the Resolution dated September 5, 2007 be reversed and set
aside; (b) petitioner be declared as a non-resident foreign corporation and thus
, not subject to either the thirty two percent (32%) regular income tax on taxab
le income under Section 28(A)(1) of the NIRC of 1997 or the 1 1/2% tax pursuant
to the RP-New Zealand Tax Treaty; (c) the income derived by petitioner from the
sale of passage documents covering its off-line flights in not Philippine-source
income and, consequently, not subject to Philippine income tax; and (d) petitio
ner be declared as entitled to a refund or tax credit in the amount of P257,698.
00 representing erroneously paid tax on Gross Philippine Billings for the First
and Second Quarters of taxable year 2002. HCSEIT
Accordingly, for failure of respondent to file his comment within the period pre
scribed by this Court, the case was deemed submitted for decision on December 5,
2007.
Hence, this Decision.
THE ISSUES
Petitioner submits the following issues for the resolution of the Court En Banc:
I. Whether or not petitioner, as an off-line international carrier selling
passage documents through an independent sales agent in the Philippines, is enga
ged in trade or business in the Philippines subject to the corporate income tax
on resident foreign corporations, either at 32% under Section 28(A)(1) of the NI
RC of 1997 or at 1 1/2% under the RP-New Zealand Tax Treaty;
II. Whether or not the income derived by petitioner from the sale of passage
documents covering petitioner's off-line flights is Philippine-source income su
bject to Philippine income tax; and THEDcS
III. Whether or not petitioner is entitled to the refund or tax credit of err
oneously paid tax on Gross Philippine Billings for the First and Second Quarters
of taxable year 2002 in the amount of P257,698.00.
THE COURT EN BANC'S RULING
The petition is bereft of merit.
A careful and closer look at the arguments set forth by the petitioner in the in
stant petition for review would readily reveal that the grounds relied upon and
the matters raised herein are mere restatements of petitioner's previous argumen
ts raised before the Court in Division which had already been exhaustively discu
ssed and passed upon by it in its assailed Decision and Resolution.
Be that as it may, with the end view of further clarifying the decision of the C
ourt in Division, We adhere to its findings on the focal issue as to whether or
not petitioner is a resident foreign corporation engaged in trade or business in
the country within the purview of our tax law and therefore subject to pay its
income derived from its sales of passage documents here in the Philippines.
No other than the Highest Court of the land sustained the validity of the afores
aid finding in several cases. 3 In the case of Commissioner of Internal Revenue
vs. British Overseas Airways Corporation, 4 the Supreme Court pronounced as foll
ows: ITScAE
"The Tax Code defines 'gross income' thus:
'Gross income' includes gains, profits, and income derived from salaries, wages
or compensation for personal service of whatever kind and in whatever form paid,
or from profession, vocations, trades, business, commerce, sales, or dealings i
n property, whether real or personal, growing out of the ownership or use of or
interest in such property; also from interests, rents, dividends, securities, or
the transactions of any business carried on for gain or profit, or gains, profi
ts, and income derived from any source whatever' (Sec. 29[3]; Italics supplied)
The definition is broad and comprehensive to include proceeds from sales of tran
sport documents. 'The words 'income from any source whatever' disclose a legisla
tive policy to include all income not expressly exempted within the class of tax
able income under our laws.' Income means 'cash received or its equivalent'; it
is the amount of money coming to a person within a specific time . . .; it means
something distinct from principal or capital. For, while capital is a fund, inc
ome is a flow. As used in our income tax law, 'income' refers to the flow of wea
lth.
The records show that the Philippine gross income of BOAC for the fiscal years 1
968-69 to 1970-71 amounted to P10,428,368.00.
Did such 'flow of wealth' come from 'sources within the Philippines'? TEDHaA
The source of an income is the property, activity or service that produced the i
ncome. For the source of income to be considered as coming from the Philippines,
it is sufficient that the income is derived from activity within the Philippine
s. In BOAC's case, the sale of tickets in the Philippines is the activity that p
roduces the income. The tickets exchanged hands here and payments for fares were
also made here in Philippine currency. The situs of the source of payments is t
he Philippines. The flow of wealth proceeded from, and occurred within, Philippi
ne territory, enjoying the protection accorded by the Philippine government. In
consideration of such protection, the flow of wealth should share the burden of
supporting the government.
A transportation ticket is not a mere piece of paper. When issued by a common ca
rrier, it constitutes the contract between the ticket-holder and the carrier. It
gives rise to the obligation of the purchaser of the ticket to pay the fare and
the corresponding obligation of the carrier to transport the passenger upon the
terms and conditions set forth thereon. The ordinary ticket issued to members o
f the travelling public in general embraces within its terms all the elements to
constitute it a valid contract, binding upon the parties entering into the rela
tionship.
True, Section 37 (a) of the Tax Code, which enumerates items of gross income fro
m sources within the Philippines, namely: (1) interest, (2) dividends, (3) servi
ce, (4) rentals and royalties, (5) sale of real property, and (6) sale of person
al property, does not mention income from the sale of tickets for international
transportation. However, that does not render it less an income from sources wit
hin the Philippines. Section 37, by its language, does not intend the enumeratio
n to be exclusive. It merely directs that the types of income listed therein be
treated as income from sources within the Philippines. A cursory reading of the
section will show that it does not state that it is an all-inclusive enumeration
, and that no other kind of income may be so considered." ECSHID
Moreover, in Commissioner of Internal Revenue vs. Baier-Nickel, 5 the Supreme Co
urt reiterated the ruling in Commissioner of Internal Revenue vs. British Overse
as Airways Corporation, 6 stating:
"In Commissioner of Internal Revenue v. British Overseas Airways Corporation (BO
AC), the issue was whether BOAC, a foreign airline company which does not mainta
in any flight to and from the Philippines is liable for Philippine income taxati
on in respect of sales of air tickets in the Philippines, through a general sale
s agent relating to the carriage of passengers and cargo between two points both
outside the Philippines. Ruling in the affirmative, the Court applied the case
of Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, and reiterated
the rule that the source of income is that 'activity' which produced the income
. It was held that the 'sale of tickets' in the Philippines is the 'activity' th
at produced the income and therefore BOAC should pay income tax in the Philippin
es because it undertook an income producing activity in the country.
Both the petitioner and respondent cited the case of Commissioner of Internal Re
venue v. British Overseas Airways Corporation in support of their arguments, but
the correct interpretation of the said case favors the theory of respondent tha
t it is the situs of the activity that determines whether such income is taxable
in the Philippines. The conflict between the majority and the dissenting opinio
n in the said case has nothing to do with the underlying principle of the law on
sourcing of income. In fact, both applied the case of Alexander Howden & Co., L
td. v. Collector of Internal Revenue. The divergence in opinion centered on whet
her the sale of tickets in the Philippines is to be construed as the 'activity'
that produced the income, as viewed by the majority, or merely the physical sour
ce of income, as ratiocinated by Justice Florentino P. Feliciano in his dissent.
The majority through Justice Ameurfina Melencio-Herrera, as ponente, interprete
d the sale of tickets as a business activity that gave rise to the income of BOA
C. Petitioner cannot therefore invoke said case to support its view that source
of income is the physical source of the money earned. If such was the interpreta
tion of the majority, the Court would have simply stated that source of income i
s not the business activity of BOAC but the place where the person or entity dis
bursing the income is located or where BOAC physically received the same. But su
ch was not the import of the ruling of the Court. It even explained in detail th
e business activity undertaken by BOAC in the Philippines to pinpoint the taxabl
e activity and to justify its conclusion that BOAC is subject to Philippine inco
me taxation. SIcEHD
xxx xxx xxx."
Applying the afore-cited decisions of the Supreme Court in the case at bench, We
affirm the Court in Division's ruling that since petitioner admitted that it se
lls passage documents in the Philippines through its sales agent, Aerotel, and t
hat it derives revenues from the conduct of its business activity regularly purs
ued within the Philippines, petitioner is a resident foreign corporation engaged
in trade or business in the Philippines and must be subject to income tax.
Considering, therefore, that petitioner is a resident foreign corporation doing
business in the Philippines, and applying Article 8(2) of the RP-New Zealand Tax
Treaty, 7 it shall be subject to an income tax equivalent to 1 1/2% on the prof
its derived from sources within the Philippines. Since, as found by the Court in
Division, petitioner already paid its income tax liabilities for taxable year 2
002 at the rate of 1 1/2% of its gross income, the payment is correct and theref
ore no refundable amount is due. It cannot escape tax liability from the clear p
rovisions of the Philippine tax laws.
To reiterate, the absence of flight operations to and from the Philippines is no
t determinative of the source of income for purposes of ascertaining income tax
liability. It is sufficient that the income is derived from activity within the
Philippine territory. Therefore, petitioner is a resident foreign corporation do
ing business in the Philippines within the purview of our tax law and the income
earned from its flight operations outside the Philippines is subject to income
tax. ITaCEc
Another issue worth mentioning is the matter raised by petitioner regarding the
applicability of Revenue Regulations No. 15-2002 which does not consider an off-
line airline having a branch office or sales agent in the Philippines selling pa
ssage documents, engaged in business as an international air carrier in the Phil
ippines. This has already been properly addressed by the Court in Division in th
e assailed Decision where it ruled that the aforesaid regulation is not applicab
le in the instant case considering that the same only took effect on October 26,
2002 while the transaction covered by the present claim is the First and Second
Quarters of taxable period 2002.
It is worthy to note that judicial decisions of the Supreme Court applying and i
nterpreting the law shall form part of the legal system of the Philippines. 8 An
d it bears stressing that the BOAC decision has not been reversed nor modified b
y the Supreme Court and was again applied by the Supreme Court in the recent cas
e of Commissioner of Internal Revenue vs. Baier-Nickel 9 promulgated on August 2
9, 2006.
The rule in this jurisdiction is that "[t]ax refunds are in the nature of tax ex
emptions. As such, they are regarded as in derogation of sovereign authority and
to be construed strictissimi juris against the person claiming the exemption".
10
In the light of the foregoing discussions, the Court En Banc finds no reversible
error committed by the Court in Division when it rendered its assailed Decision
and Resolution dated June 19, 2007 and September 5, 2006, respectively. HEDS
Cc
WHEREFORE, premises considered, the instant petition is hereby DENIED for lack o
f merit.
SO ORDERED.
(SGD.) ERLINDA P. UY
Associate Justice
Ernesto D. Acosta, P.J., Lovell R. Bautista, Caesar A. Casanova and Olga Palanca
-Enriquez, JJ., concur.
Juanito C. Castaeda, Jr., J., inhibited.
[C.T.A. CASE NO. 4141. November 17, 1993.]
COMPANIA GENERAL DE TABACOS DE FILIPINAS (Philippine Offices), petitioner, vs. T
HE COMMISSIONER OF INTERNAL REVENUE, respondent.
D E C I S I O N
Before this Court is a Petition for Review filed by the petitioner, a foreign co
rporation duly licensed by Philippine laws to engage in business through its bra
nch office, seeking a refund of the total amount of P1,768,931.05, representing
the alleged overpaid branch profit remittance during the years 1980 to 1985.
On February 4, 1986, petitioner filed a request before the respondent Commission
er of Internal Revenue for the refund of the sum of P1,447,295.62, as alleged ov
erpaid branch profit remittance taxes for the years 1980 to 1983, computed as fo
llows:
Income Correct Overpaid
Year Branch Remittance Date Branch Subjected to Remittan
ce Remittance
Earned Profits Tax Paid Paid Profits Final Tax
Tax Tax
(Gross) (Actually
Remitted)
1980 P11,266,175.31 P1,689,926.29 2/07/84 P9,576,249.02 P782,042
.92 P1,319,130.92 P370,795.37
1981 11,839,681.41 1,775,952.21 4/10/85 10,063,729.20 287,257.
74 1,466,470.72 309,481.49
1982 10,663,298.95 1,599,494.84 4/10/85 9,063,804.11 305,618.
33 1,313,727.86 285,766.98
1983 17,860,260.11 2,679,039.01 4/22/85 15,181,221.10 529,306.
23 2,197,787.23 481,251.78

TOTAL P51,629,415.78 P7,744,412.35 P43,885,003.43 P1,904,225.22
P6,297,116.73 P1,447,295.62
=========== ========== =========== =======
=== ========== ==========
Thereafter or on April 8, 1987, petitioner filed another request for the refund
of P321,635.40, this time for the years 1984 and 1985, details of which are show
n below:
Correct Overpaid
Year Branch Profits Remittance Date Branch Profits Remittan
ce
Earned (Gross) Tax Paid Paid (Actually Remitted) Tax
1984 P4,614,723.34 P692,208.49 8/04/86 P3,922,514.85 P588,377
.24 P103,831.25
1985 9,680,184.96 1,452,027.75 8/04/86 8,228,157.25 1,234,22
3.60 217,804.15

TOTAL P14,294,908.30 P2,144,236.24 P12,150.672.10 P1,822,6
10.84 P321,635.40
=========== =========== =========== ========
== =========
Since respondent has not acted on petitioner's request, the latter filed the ins
tant petition on April 9, 1987 to interrupt the running of the prescriptive peri
od for claims for refund.
The issues raised before this Court are:
1. Whether or not the right to claim for refund of payments has already pre
scribed;
2. Whether or not the petitioner is legally entitled to the refund of the t
otal amount of P1,768,931.05 on alleged excess branch profit remittance taxes pa
id during the years 1980 to 1985.
Respondent, in his answer, and by way of special and affirmative defenses, alleg
es among others, that "the right to claim for refund of payments made prior to A
pril 9, 1985 has already prescribed." (Answer, p. 2; C.T.A. Records, p. 30).
Section 230 of the Tax Code provides:
"Recovery of tax erroneously or illegally collected No suit of proceeding shall
be maintained in any court for the recovery of any national internal revenue tax
hereafter alleged to have been erroneously or illegally assessed or collected,
or of any penalty claimed to have been collected without authority or of any sum
alleged to have been excessive or in any manner wrongfully collected, until a c
laim for refund or credit has been duly filed with the Commissioner; but such su
it 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 shall be begun after the expiration of t
wo years from the date of payment of the tax or penalty regardless of any superv
ening cause that may arise after payment. . . . (Emphasis supplied)
It is evident that payment made prior to April 9, 1985, had already prescribed.
The profit remittance tax corresponding to branch profit for 1980 was paid on Fe
bruary 7, 1984. When this case was filed on April 9, 1987, more than two years h
ave lapsed from the time the payment of the tax was made.
This Court is now left to decide on the correct branch profit remittance taxes p
aid during the period from 1981 to 1985.
Petitioner contends that the correct tax base for computing the branch profit re
mittance tax is the profit actually remitted abroad net of income already subjec
ted to final tax. To support its contention, petitioner brought to the attention
of this Court, B.I.R. ruling dated January 21, 1980 and the case of Commissione
r of Internal Revenue vs. Burroughs Limited (142 SCRA 324) wherein the Supreme C
ourt held that:
"In a Bureau of Internal Revenue ruling dated January 21, 1980 by then Acting Co
mmissioner of Internal Revenue Hon. Efren I. Plana the aforequoted provision had
been interpreted to mean that the 'tax base upon which the 15% branch profit re
mittance tax . . . shall be imposed . . . (is) the profit actually remitted abro
ad and not on the total branch profits out of which the remittance is to be made
. The said ruling is hereinbelow quoted as follows:
'In reply to your letter of November 3, 1987, relative to your query as to the t
ax base upon which the 15% branch profits remittance tax provided for under Sect
ion 24 (b)(2) of the 1977 Tax Code shall be imposed, please be advised that the
15% branch profit tax shall be imposed on the branch profits actually remitted a
broad and not on the total branch profits out of which the remittance is to be m
ade.
Please be guided accordingly.'
Applying, therefore, the aforequoted ruling, the claim of private respondent tha
t it made an overpayment in the amount of P172,058.90 which is the difference be
tween the remittance tax actually paid of P1,147,058.70 and remittance tax that
should have been paid of P974,999.89 computed as follows
Profits actually remitted P6,499,999.30
Remittance tax rate 15%

Remittance tax due P974,999.89


===========
is well taken."
Respondent, on the other hand, contends that the case of Burroughs (supra) is no
t applicable to the instant case because of Revenue Memorandum Circular No. 8-82
, dated March 17, 1982, which states that since the "tax is imposed and collecte
d at source, necessarily the tax base should be the amount actually applied for
by the branch with the Central Bank of the Philippines as profit to be remitted
abroad."
The applicable provision of the Tax Code is Section 24 (b)(2)(ii) (now section 2
5(a)(5)) which provides:
"Tax on branch profits remittances Any profit remitted by a branch to its head o
ffice shall be subject to a tax of 15% (except those registered with the Export
Processing Zone Authority): Provided, That any profit remitted by a branch to it
s head office authorized to engage in petroleum operations in the Philippines sh
all be subjected to tax at 7-%. In both cases, the tax shall be collected and pai
d in the same manner as provided in Sections 51 and 52 of this Code. . . ."
The question now lies on what particular B.I.R. Ruling on Circular is applicable
to the instant case. Whereas petitioner relies on B.I.R. Ruling dated January 2
1, 1980, respondent is of the opinion that Revenue Memorandum Circular No. 8-82
dated March 17, 1982 should apply.
Revenue Memorandum Circular No. 8-82 is quoted hereunder in full:
"Subject : Classification as to the proper tax base in the
computation of the 15% branch profit remittance tax.
To : All Internal Revenue Officers and Others Concerned.
In BIR Ruling No. 016-79 dated April 18, 1979 anent the 15% branch profit remitt
ance tax as an income tax imposed under Section 24 (b)(2), National Internal Rev
enue Code of 1977, as amended, this Office ruled that ". . . the 15% branch prof
it remittance tax should be based on the amount of P1,504,330.43 representing pr
ofit derived from the disposition of the shares, 15% of which is P225,649.57."
It will be noted that the basis of computation in accordance with the ruling is
profit without deduction for the 15% tax.
On January 21, 1980, this Office, in another ruling issued in answer to a query
as to the tax base upon which the 15% branch profit remittance tax should be imp
osed held that "the 15% branch profit remittance tax shall be imposed on the pro
fit actually remitted abroad and not on the total branch profit out of which the
remittance is to be made."
As the latter ruling seems to have given rise to some misconception that it modi
fied BIR Ruling No. 016-79 with respect to the manner of computation of the 15%
branch profit remittance tax, this Office issued a clarificatory ruling on Octob
er 23, 1981 explaining
The above ruling (of January 21, 1980) merely emphasized the distinction between
the total branch profit which is remittable and that portion of the branch prof
it actually remitted without deduction on account of the tax to be paid.
The phrase "any profit remitted abroad" should be construed to mean the profit t
o be remitted. Hence, there must be an actual remittance, as distinguished from
profit which is remittable.
To give an example: If the total branch profit is P115,000.00 but the amount to
be remitted is P100,000.00, then tax base should be P100,000.00.
Moreover, the 15% profit remittance tax imposed by Section 24 (b)(2) of the Tax
Code is an income tax, it is therefore clear that the same is non-deductible fro
m the gross (profit) income. Inasmuch as the tax is an exaction on profit realiz
ed for remittance abroad, the deduction thereof as an expense is not sustained b
y law nowhere in Section 30 of the Tax Code is it provided that the same is dedu
ctible. Besides deductions from gross income are masters of legislative grace, w
hat is not expressly granted by the law is deemed withheld.
Considering that the 15% branch profit remittance tax is imposed and collected a
t source, necessarily the tax base should be the amount actually applied for by
the branch with the Central Bank of the Philippines as profit to be remitted abr
oad.
It is desired that this Circular be given as wide publicity as possible.
(Sgd.) RUBEN B. ANCHETA
Acting Commissioner"
The Supreme Court, in the Burroughs case (supra) applied B.I.R. Ruling dated Jan
uary 21, 1980 and not Revenue Memorandum Circular No. 8-82. It was ruled that:
"Petitioner's aforesaid contention is without merit. What is applicable in the c
ase at bar is still the Revenue Ruling of January 21, 1980 because private respo
ndent Burroughs Limited paid the branch profit remittance tax in question on Mar
ch 14, 1979. Memorandum Circular No. 8-82 dated March 17, 1982 cannot be given r
etroactive effect in the light of Section 327 of the National Internal Revenue C
ode which provides:
'Section 327. Non-retroactivity of rulings. Any revocation, modification, or r
eversal of any of the rules and regulations promulgated in accordance with the p
receding section or any of the rulings or circulars promulgated by the Commissio
ner shall not be given retroactive application if the revocation, modification,
or reversal will be prejudicial to the taxpayer except in the following cases (a
) where the taxpayer deliberately misstates or omits material facts from his ret
urn or in any document required of him by the Bureau of Internal Revenue; (b) wh
ere the facts subsequently gathered by the Bureau of Internal Revenue are materi
ally different from the facts on which the ruling is based, or (c) where the tax
payer acted in bad faith." (ABS-CBN Broadcasting Corporation vs. Court of Tax A
ppeals, 108 SCRA 151-152).
The prejudice that would result to private respondent Burroughs Limited by a ret
roactive application of Memorandum Circular No. 8-82 is beyond question for it w
ould be deprived of the substantial amount of P172,058.90. And, insofar as the e
numerated exceptions are concerned, admittedly, Burroughs Limited does not fall
under any of them.
In the instant case, the branch profit remittance taxes were paid after the effe
ctivity of Memorandum Circular No. 8-82. What should therefore apply is Memorand
um Circular No. 8-82 as correctly advanced by the respondent.
This Court, in deciding early cases (CTA Case No. 445 dated August 23, 1993; CTA
Case No. 3827 dated October 14, 1988) involving the same parties and issues, ap
plied Revenue Memorandum Circular No. 8-82.
Furthermore, the Court of Appeals, in the recent case of Commissioner of Interna
l Revenue vs. Bank of America (CA-G.R. SP No. 22529 dated September 19, 1990) ha
d the occasion to explain the rationale of Revenue Memorandum Circular No. 8-82,
when it ruled:
"The use of the word remitted may well be understood as referring to that part o
f the said total branch profits which would be sent to the head office as distin
guished from the total profits of the branch (not all of which need be sent or w
ould be ordered remitted abroad). If the legislature indeed had wanted to mitiga
te the harshness of successive taxation, it would have been simpler to just lowe
r the rates without in effect requiring the relative novel and complicated way o
f computing the tax, as envisioned by the herein private respondent. The same re
sult would have been achieved.
The attempt to deduce legislative intent with regard to Section 24(b)(2)(ii) of
the Tax Code would only serve to allow a captious and strained intendment of the
law. NIMIA SUBTILITAS IN JURE REPROBATUR, ET TALIS CERTITUDO CERTITUDIMEM CONFU
NDIT (The laws does not allow of a captious and strained intendment, for such ni
ce pretense of certainty confounds true and legal certainty). As held in the cas
e of United States vs. Wurzbach, 280 U.S. 396, 398:
There is no warrant for seeking refined arguments to show that the statute does
not mean what it says.
In view of the foregoing, this Court finds that the clear import of Section 24(b
)(2)(ii) of the Tax Code mandates the imposition of the fifteen percent (15%) ta
x on the branch profits remittance, with in tax parlance is alluded to as the "t
ax handle", with the total amount remitted (not the total amount of the branch p
rofits) as base for the tax."
Having found that the questionable taxes were paid when the applicable ruling is
Revenue Memorandum Circular No. 8-82, "then what should apply as taxable base i
n computing the 15% branch profit remittance tax is the amount applied for with
the Central Bank as profit to be remitted abroad. . . ." (Compania General de Ta
bacos vs. The Commissioner of Internal Revenue, C.T.A. Case No. 4451).
With regard to the passive income already subjected to the final tax, the same S
ection 24 (b)(2)(ii) (now Section 25 (a)(5)) of the Tax Code provides:
". . . That interests, dividends, rents, royalties, including remunerations for
technical services, salaries, wages, premiums, annuities, emoluments or other fi
xed or determinable annual, periodical or casual gains, profits, income and capi
tal gains received by a foreign corporation during each taxable year from all so
urces within the Philippines shall not be considered as branch profits unless th
e same are effectively connected with the conduct of the trade or business in th
e Philippines. (Emphasis supplied)
Petitioner claims that only profits remitted abroad which are effectively connec
ted with the taxpayer's trade on business in the Philippines are subject to the
15% branch profit remittance tax. It cited B.I.R. Ruling No. 157-81 dated July 1
3, 1981, the pertinent provision of which reads as follows:
"In reply thereto, please be informed that pursuant to Section 24(b)(2) of the T
ax 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 Philip
pines are subject to the 15% profit remittance tax. To be "effectively connected
" it is not necessary that the income be derived from the actual operation of ta
xpayer-corporation's trade of business; it is sufficient that the income arises
from the business activity in which the corporation is engaged. For example, if
a resident foreign corporation is engaged in the buying and selling of machineri
es in the Philippines and invests in some shares of stock on which dividends are
subsequently received, the dividend thus earned are not considered "effectively
connected" with is trade or business in this country. (Revenue Memorandum Circu
lar No. 55-80.)
Respondent for his part argues that cash dividends and interest income of petiti
oner are effectively connected with the conduct of its trade and business in the
Philippines that should be subjected to branch profits remittance tax.
As found by this Court in a previous case:
"(T)he rule is interest and dividends received by a foreign corporation during e
ach taxable year form all sources within the Philippines shall not be considered
as branch profits unless the same are effectively connected with the conduct of
its trade or business. The phrase "effectively connected" was interpreted to me
an income derived from the business activity in which the corporation is engaged
.
In all the corporate quarterly income tax returns filed by petitioner with respo
ndent's office, it was indicated as it was shown that the petitioner is engaged
in the business as leaf tobacco dealer, exporter, importer and general merchants
. Petitioner claims that interests received from savings deposit with Philtrust,
interests received from money market placements and interest on Land Bank Bonds
and cash dividends received from Philippine Long Distance Telephone Company (PL
DT) and Tabacalera Industrial Development Corporation of the Phils. are not effe
ctively connected with its trade or business.
Furthermore, pursuant to Section 24(c) and (d) of NIRC, dividends and interest a
re subject to final tax. To include them again as subject to branch profit remit
tance tax under the same Section 24(b)(2)(ii) would be contrary to law. Rightful
ly so, petitioner has sufficiently established a right to be refunded the amount
of branch profit remittance tax paid on these interests and dividends which wer
e included as part of the branch profits. . . . (Compania General de Tabacos de
Filipinas vs. The Commissioner of Internal Revenue C.T.A. Case No. 4451, supra)
After considering the facts and issues of the case, this Court holds the petitio
ner entitled to a refund or tax credit in the amount of P152,690.61 correspondin
g to overpaid branch profit remittance taxes during the years from 1981 to 1983,
computed as follows:
Gross amount remittable (1981-1983) P40,363,240.47
Less: Income subjected to final tax
a) Dividends
1981 (Exhibits AC-1 to AC-20) P16,180.11
1982 (Exhibits AB-1 to AB-33) 10,357.11
1983 (Exhibits XX-1 to XX-33) 10,844.67
b) Interest on PTC savings account
1981 (Exhibits AD-1 to AD-6) P142,249.04
1982 (Exhibits ZZ-1 to ZZ-7) 211,689.59
1983 (Exhibits YY-1 to YY-12) 513,480.21
c) Interest on LBP bonds
1981 (Exhibits AD-11 and 12) 2,730.00
1982 (Exhibit ZZ-8) 2,730.00
d) Interest on money market
placements
1981 (Exhibits AD-8 to AD-10) 88,182.11
e) Capital gain
1982 (Exhibits WW-1 and WW-2) 19,494.66 1,017,937.50

Amount subjected to 15% branch
profits remittance tax P39,345,302.97
===========
15% branch profit remittance tax P5,901,795.45
Less: Amount of branch profit
tax paid (1981-1983) 6,054,486.06

Amount refundable P152,690.61


===========
As to the 1984 and 1985 branch profit remittance taxes, no refund or tax credit
is due the petitioner since the latter did not present any proof of passive inco
me it received during the period. Hence, the correct branch profit remittance ta
xes are the exact amount of taxes paid by the petitioner as computed below:
Gross amount remittable (1984-1985) P14,294,908.30
Less: Income subject to final tax
a) Dividends nil
b) Interests nil
c) Other passive incomes nil

Amount subjected to 15% branch


profits remittance tax P14,294,908.30

15% Branch profits remittance tax P2,144,236.24


===========
WHEREFORE, IN VIEW OF THE FOREGOING, respondent Commissioner of Internal Revenue
is hereby ordered to refund in favor of petitioner, the amount of P152,690.61 r
epresenting overpaid 15% branch profit remittance taxes on dividends, interests
and capital gain received during the years 1981 to 1983. No pronouncement as to
cost.
SO ORDERED.
[C.T.A. CASE NO. 4451. August 23, 1993.]
COMPAIA GENERAL DE TABACOS DE FILIPINAS (Philippine Offices), petitioner, vs. THE
COMMISSIONER OF INTERNAL REVENUE, respondent.
D E C I S I O N
Petitioner is a foreign corporation duly licensed by Philippine laws to engage i
n business through its Branch Office.
On May 3, 1988, petitioner paid the 15% branch profit remittance tax for the yea
rs 1985 (partial) and 1986 in the amount of P3,148,267.96 (Exhs. R and R-1), com
puted as follows:
Net Income after tax per audited
Financial Statements for
the Year 1985 P11,051,098.00
Less: Amount approved for remittance
CB-Letter authority dated 7/24/86 9,680,184.96
Balance of remittance branch profits 1985 P 1,370,913.04
Add: Net Income after tax per audited
Financial Statements for the
year, 1986 19,617,540.00

Gross amount remittable P20,988,453.04


============
15% remittance tax P 3,148,267.96
============
On July 6, 1988, petitioner filed a claim for refund (Exhs. A and A-1) with resp
ondent in the amount of P593,948.61, representing alleged overpaid branch profit
remittance taxes, computed as follows: (p. 6, Petition for Review)
Branch profit actually remitted P17,840,185.08
Less: Income subject to final tax:
Dividends 1985 P590,008.64
1986 10,122.01
Interest on Savings
Account 1985 125,268.94
1986 56,285.37
Interest on
Money Market
Placement 1985 24,244.14
Interest on Land
Bank Bonds 1985 2,730.00
1986 1,730.00 811,389.43

Tax Base of Branch Profit
Remittance Tax P17,028,795.65
============
15% branch profit remittance tax
due thereon P2,554,319.35
Less: branch profit remittance tax
previously paid (3,148,267.96)

Overpaid Branch Profit Remittance Tax P 593,948.61


===========
Up to the filing of the petition for review on May 3, 1990, respondent has not a
cted on petitioner's claim.
The issues posed to this Court are:
(1) Whether or not the branch profits tax are computed based on the profits
actually remitted abroad or on the total branch profits out of which the remitta
nce is made; and
(2) Whether or not passive income which are already subjected to the final t
ax are still included for purposes of computing the branch profits remittance ta
x.
First. Petitioner contends that the 15% Branch Profit Remittance Tax should be b
ased on the profits actually remitted abroad. Petitioner cited as authority Sect
ion 24(b)(2)(ii) of the National Internal Revenue Code (NIRC for short); BIR Rul
ing dated January 21, 1980; and the case of Commissioner of Internal Revenue v.
Burroughs Limited and the Court of Tax Appeals, G.R. No. L-66653, June 19, 1986,
142 SCRA 324, where the Supreme Court held that "the tax base upon which the 15
% branch profit remittance tax shall be imposed on the profit actually remitted
abroad and not on the total branch profits out of which the remittance is to be
made."
Respondent for his part answered that the 15% branch profit remittance tax is im
posed and collected at source, necessarily the tax base should be the amount act
ually applied for by the branch with the Central Bank of the Philippines as prof
it to be remitted abroad pursuant to Revenue Memorandum No. 8-82, dated March 17
, 1982.
Section 24(b)(2) of the 1977 NIRC and Section 24(b)(2)(ii) of the 1986 NIRC both
provides for a 15% branch profit remittance tax on any profit remitted by a bra
nch to its mother company or head office.
Petitioner relies on BIR Ruling dated January 21, 1980, issued by then Acting Co
mmissioner Efren I. Plana, which provides:
"In reply to your letter of November 3, 1978, relative to your query as to the t
ax base upon which the 15% branch profits remittance tax provided for under Sect
ion 24(b)(2) of the 1977 Tax Code shall be imposed, please be advised that the 1
5% branch profit shall be imposed on the branch profits actually remitted abroad
and not on the total branch profits out of which the remittance is to be made.
While respondent stressed that what is applicable in this case is Revenue Memora
ndum Circular No. 8-82 (dated March 17, 1992), which reads:
"SUBJECT : Classification as to the proper tax base in the
computation of the 15% branch profit remittance
tax.
TO : All Internal Revenue Officers and Others
Concerned.
In BIR Ruling No. 016-79 dated April 18, 1979 anent the 15% branch profit remitt
ance tax as an income tax imposed under Section 24(b)(2), National Internal Reve
nue Code of 1977, as amended, this Office ruled that ". . . the 15% branch profi
t remittance tax should be based on the amount of P1,504,330.43 representing pro
fit derived from the disposition of the shares, 15% of which is P225,649.57."
It will be noted that the basis of computation in accordance with the ruling is
profit without deduction for the 15% tax.
On January 21, 1980, this Office, in another ruling issued in answer to a query
as to the tax base upon which the 15% branch profit remittance tax should be imp
osed held that "the 15% branch profit remittance tax shall be imposed on the pro
fit actually remitted abroad and not on the total branch profit out of which the
remittance is to be made."
As the latter ruling seems to have given rise to some misconception that it modi
fied BIR Ruling No. 016-79 with respect to the manner of computation of the 15%
branch profit remittance tax, this Office issued a clarificatory ruling on Octob
er 23, 1981 explaining
The above ruling (of January 21, 1980) merely emphasized the distinction between
the total branch profit which is remittable and that portion of the branch prof
it actually remitted without deduction on account of the tax to be paid.
The phrase 'any profit remitted abroad' should be construed to mean the profit t
o be remitted. Hence, there must be an actual remittance, as distinguished from
profit which is remittable.
To give an example: If the total branch profit is P115,000.00 but the amount to
be remitted is P100,000.00, then the tax base should be P100,000.00.
Moreover, the 15% profit remittance tax imposed by Section 24(b)(2) of the Tax C
ode is an income tax, it is therefore clear that the same is non-deductible from
the gross (profit) income. Inasmuch as the tax is an exaction on profit realize
d for remittance abroad, the deduction thereof as an expense is not sustained by
law nowhere in Section 30 of the Tax Code is it provided that the same is deduc
tible. Besides deductions from gross income are matters of legislative grace, wh
at is not expressly granted by the law is deemed withheld."
Considering that the 15% branch profit remittance tax is imposed and collected a
t source, necessarily the tax base should be the amount actually applied for by
the branch with the Central Bank of the Philippines as profit to be remitted abr
oad.
It is desired that this Circular be given as wide publicity as possible.
(Sgd.) RUBEN B. ANCHETA
Acting Commissioner
The case in question is readily distinguishable from the Burroughs Limited case
(supra.), where the Supreme Court upheld the application of BIR Ruling of Januar
y 21, 1980 because the branch profit remittance tax was paid on March 14, 1979.
The High Court added that Memorandum Circular No. 8-82, dated March 17, 1982, ca
nnot be given retroactive effect in the light of Section 327 of the NIRC. Sectio
n 327 provides for the non-retroactive application of rules and regulations revo
king, modifying or reversing prior ones if the revocation, modification or rever
sal is prejudicial to the taxpayers.
In an earlier case, involving the same parties and issue regarding the taxable b
ase for the imposition of the 15% branch profit remittance tax, this Court, in a
decision which has already become final and executory, has this to say:
"A fortiori, the holding in the Burroughs Limited case lends settling cognizance
to the validity of the Memorandum Circular No. 8-82, where as ruled by the Supr
eme Court
What was applicable in the case at bar is still the Revenue Ruling of January 21
, 1980 because the private respondent Burroughs Limited paid the branch profit r
emittance tax in question on March 14, 1982. Memorandum Circular No. 8-82 dated
March 17, 1982 cannot be given retroactive effect in the light of Section 327 of
the National Internal Revenue Code . . . ."
Stated otherwise, the circular must be prospective in application. Established a
t bar is a payment effected on August 16, 1982 subsequent to the issuance thereo
f. Hence petitioner's case falls within the compelling import and force of the R
evenue Memorandum Circular No. 8-82 dated March 17, 1982." [Compaia General De Ta
bacos De Filipinas (Philippine Branch), v. The Commissioner of Internal Revenue,
CTA Case No. 3827, October 14, 1988.]
In the recent case of Commissioner of Internal Revenue v. Bank of America NT & S
A and the Court of Tax Appeals, CA-G.R. SP No. 22529, September 19, 1990, the Co
urt of Appeals upheld the validity of Revenue Memorandum Circular No. 8-82. This
Court adopts the reasoning of the Court of Appeals when it ruled:
". . . . The use of the word remitted may well be understood as referring to tha
t part of the said total branch profits which would be sent to the head office a
s distinguished from the total profits of the branch (not all of which need be s
ent or would be ordered remitted abroad). If the legislature indeed had wanted t
o mitigate the harshness of successive taxation, it would have been simpler to j
ust lower the rates without in effect requiring the relatively novel and complic
ated way of computing the tax, as envisioned by the herein private respondent. T
he same result would have been achieved.
The attempt to deduce legislative intent with regard to Section 24(b)(2)(ii) of
the Tax Code would only serve to allow a captious and strained intendment of the
law. NIMIA SUBTILITAS IN JURE REPROBATUR, ET TALIS CERTITUDO CERTITUDIMEM CONFU
NDIT (The law does not allow of a captious and strained intendment, for such nic
e pretense of certainty confounds true and legal certainty). As held in the case
of United States vs. Wurzbach, 280 U.S. 396, 398:
There is no warrant for seeking refined arguments to show that the statute does
not mean what it says.
In view of the foregoing, this Court finds that the clear import of Section 24(b
)(2)(ii) of the Tax Code mandates the imposition of the fifteen per cent (15%) t
ax on the branch profits remittance, which in tax parlance is alluded to as the
"tax handle", with the total amount remitted (not the total amount of the branch
profits) as base for the tax." [cited in Commercial Union Assurance Company v.
The Commissioner of Internal Revenue, CTA Case No. 4189, September 8, 1992.]
Thus, in view of the fact that petitioner's branch profit remittance tax for 198
5 (partial) and 1986 were paid on May 3, 1988, after the effectivity of Revenue
Memorandum Circular No. 6-82 (March 17, 1982), then what should apply as taxable
base in computing the 15% branch profit remittance tax is the amount applied fo
r with the Central Bank as profit to be remitted abroad and not the total amount
of branch profits.
Second. Petitioner argues that passive income already subjected to the final tax
should not be included in the tax base for computing the 15% branch profits rem
ittance tax. Emphasis was made on Section 24(b)(2)(ii) of the NIRC of 1986, whic
h provides:
"(ii) Tax on branch profits remittances. Any profit remitted by a branch to it
s head office shall be subject to a tax of 15% [except those registered with the
Export Processing Zone Authority] Provided, That any profit remitted by a branc
h to its head office authorized to engage in petroleum operations in the Philipp
ines shall be subject to tax at 7-%. In both cases, the tax shall be collected an
d paid in the same manner as provided in Sections 51 and 52 of this Code and Pro
vided, further, That interest, dividends, rents, royalties, including remunerati
ons for technical services, salaries, wages, premiums, annuities, emoluments or
other fixed or determinable annual, periodical or casual gains, profits, income
and capital gains received by a foreign corporation during each taxable year fro
m all sources within the Philippines shall not be considered as branch profits u
nless the same are effectively connected with the conduct of trade or business i
n the Philippines. (as amended by P.D. 1705, P.D. 1773 and P.D. 1994.)"
Petitioner likewise invoked BIR Ruling No. 032-79, dated June 6, 1979, and BIR R
uling 157-81, dated July 13, 1981, pertinent portions of said rulings are quoted
hereunder:
BIR Ruling No. 032-79
Dated June 6, 1979
". . . , I have the honor to confirm your opinion that the 15% remittance tax im
posed by Section 24(b)(2) of the Tax Code of 1977 on profits remitted abroad by
a branch office to its mother company is an income tax.
The above conclusion can be drawn from the fact that the 15% remittance tax is i
mposed under 'Title II Income Tax' of the Tax Code and that it is based on profi
ts derived by the branch.
Moreover, while dividends remitted by Philippine subsidiaries to their head offi
ces abroad are subject to the withholding income tax at the rate of 15% under ce
rtain conditions, P.D. No. 778 which took effect on August 24, 1975, subjected p
rofits remitted by a branch to its mother company abroad to remittance tax at a
higher rate of 20%. Pursuant to P.D. No. 1158-A, said remittance tax was reduced
to 15% so as to place the taxation of the profits of a branch at par with the d
ividend remittances of foreign subsidiary. Such reduction also supports the conc
lusion that the 15% remittance tax is income tax.
July 13, 1981
Bureau of Internal Revenue Ruling
024(b)(2) 000-00 157-81
"In reply thereto, please be informed that pursuant to Section 24(b)(2) of the T
ax 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 Philip
pines are subject to the 15% profit remittance tax. To be "effectively connected
" it is not necessary that the income be derived from the actual operation of ta
xpayer-corporation's trade of business; it is sufficient that the income arises
from the business activity in which the corporation is engaged. For example, if
a resident foreign corporation is engaged in the buying and selling of machineri
es in the Philippines and invests in some shares of stock on which dividends are
subsequently received, the dividend thus earned are not considered "effectively
connected" with its trade or business in this country. (Revenue Memorandum Circ
ular No. 55-80.)
Respondent rejected the arguments of petitioner and pointed that "under Section
24(b)(2)(ii) of the Tax Code, interest and dividends, as a rule, are considered
branch profits except when the same are not effectively connected with the trade
or business of the foreign corporation in the Philippines." It is incumbent upo
n petitioner to prove that interest and dividends are not effectively connected
with the trade or business of the foreign corporation.
More credible is the stand of petitioner. As worded in Section 24(b)(2)(ii), the
rule is interest and dividends received by a foreign corporation during each ta
xable year from all sources within the Philippines shall not be considered as br
anch profits unless the same are effectively connected with the conduct of its t
rade or business. The phrase "effectively connected" was interpreted to mean inc
ome derived from the business activity in which the corporation is engaged.
In all the corporate quarterly income tax returns filed by petitioner with respo
ndent's office, it was indicated as it was shown that the petitioner is engaged
in the business as leaf tobacco dealer, exporter, importer and general merchants
. Petitioner claims that interests received from savings deposit with PhilTrust,
interests received from money market placements and interest on Land Bank Bonds
and cash dividends received from Philippine Long Distance Telephone Company (PL
DT) and Tabacalera Industrial Development Corporation of the Phils. are not effe
ctively connected with its trade or business.
Furthermore, pursuant to Section 24(c) and (d) of the NIRC, dividends and intere
st are subject to final tax. To include them again as subject to branch profit r
emittance tax under the same Section 24(b)(2)(ii) would be contrary to law. Righ
tfully so petitioner has sufficiently established a right to be refunded the amo
unt of branch profit remittance tax paid on these interests and dividends which
were included as part of the branch profits for 1985 (partial) and 1986.
Consequently, following Revenue Memorandum Circular No. 8-82 and the jurispruden
ce cited, the tax base should be the amount applied for with the Central Bank fo
r remittance without prior deduction of the 15% branch profit remittance tax. He
nce, the tax refund should be computed as follows:
Gross Amount Remittable P20,988,453.04
Less: Income subjected to final tax:
Dividends
1985 (Exhs. S-1 to S-17) P590,008.64
1986 (Exhs. W-1 to W-16) 10,041.51
Interest on Savings Account-Philtrust
1985 (Exhs. T-1 to T-12) 125,268.97
1986 (Exhs. X-1 to X-12) 56,285.37
Interest on Money Market Placements
1985 (Exhs. U-1 and U-2) 24,244.44
Interest on Land Bank Bonds
1985 (Exhs. V-1 and V-2) 2,730.00
1986 (Exh. Y-1) 2,730.00 811,308.93

Amount subject to 15% branch
profit remittance tax P20,177,144.11
============
15% branch profit remittance tax P3,026,571.62
Less: Amount of branch profit tax paid 3,148,267.96

Amount refundable to petitioner


representing overpaid 15% branch
profit remittance tax on interest
and dividends P121,696.34
==========
WHEREFORE, respondent, Commissioner of Internal Revenue, is ordered to refund in
favor of petitioner, Compaia General De Tabacos Filipinas, the amount of P121,69
6.34, representing overpaid 15% branch profit remittance tax on interest and div
idends received. No costs.
SO ORDERED.
June 23, 2009
ITAD BIR RULING NO. 018-09
Articles 4 (Resident), 10 (Dividends) and 25 (Non-Discrimination); Philippines-N
orway tax treaty
Det Norske Veritas AS Philippine Branch
Maritime SEA & ANZ
Ground Floor, G-5, Velco Center
Corner Ocampo and Delgado Streets
Port Area, Manila
Attention: Mr. Antonio C. Leosala
Country Manager
Gentlemen :
This refers to your letter dated August 1, 2006, 1 requesting confirmation that
branch profits remitted by Det Norske Veritas AS Philippine Branch (Det Norske P
hilippine Branch) to Det Norske Veritas AS (Det Norske) 2 are exempt from the 15
percent branch profits remittance tax (BPRT) pursuant to paragraphs 1 and 2, Ar
ticle 25 of the Convention between the Republic of the Philippines and the Kingd
om of Norway for the Avoidance of Double Taxation and the Prevention of Fiscal E
vasion with Respect to Taxes on Income and on Capital (Philippines-Norway tax tr
eaty). 3
Basic Facts
It is represented that Det Norske is a corporation organized and existing under
the laws of Norway with given address at Veristasveien 1, N-1322 Hvik, Norway; th
at Det Norske is a tax resident of Norway based on a Certificate of Residence No
. 945748931 dated August 10, 2006, issued by the Directorate of Taxes of Norway;
and that based on the Certification issued by the Securities and Exchange Commi
ssion dated September 5, 1996, Det Norske is licensed to establish a branch offi
ce in the Philippines (that is, Det Norske Philippine Branch) under SEC License
No. F-1334 dated October 5, 1990, and the said branch office is located at the G
round Floor, G-5, Velco Center, corner Ocampo and Delgado Streets, Port Area, Ma
nila, Philippines. CAcEaS
It is also represented that Det Norske Philippine Branch had remitted branch pro
fits to Det Norske for taxable years 1998 to 2004, based on the relevant copies
of BIR Form Nos. 1601 and 1601-F submitted for the said taxable years; and that
the amount of the branch profits and the amount of the BPRT withheld thereon are
as follows:
Taxable Year Branch Profits Applied BPRT Withheld
for Remittance
2004 PHP10,789,599.96 PHP1,618,440.00
2003 16,482,540.00 2,472,381.00
2002 15,534,149.00 2,330,122.35
2000 11,128,536.00 1,669,280.40
1999 2,500,550.00 375,082.50
1998 1,310,642.00 196,596.30
However, it is your opinion that the imposition of the BPRT is contrary to the p
rovisions of paragraphs 1 and 2, Article 25 of the Philippines-Norway tax treaty
, which provide: cADEIa
''Article 25
NON-DISCRIMINATION
1. Nationals of a Contracting State shall not be subjected in the other Con
tracting State to any taxation or any requirement connected therewith, which is
other or more burdensome than the taxation and connected requirements to which n
ationals of that other State in the same circumstances are or may be subjected.
2. The taxation on a permanent establishment which an enterprise of a Contr
acting State has in the other Contracting State shall not be less favourably lev
ied in that other State than the taxation levied on enterprises of that other St
ate carrying on the same activities. This provision shall not be construed as ob
liging a Contracting State to grant to residents of the other Contracting State
any personal allowances, reliefs and reductions for taxation purposes on account
of civil status or family responsibilities which it grants to its own residents
."
You assert that under the domestic tax laws of the Philippines, no withholding t
ax is imposed on the remittance of the after-tax profits of a branch of a domest
ic corporation in the Philippines to its head office in the Philippines, and tha
t applying the principles of non-discrimination in the tax treaty, no BPRT shoul
d likewise be imposed on the remittance of the after-tax profits of a branch of
a Norwegian corporation in the Philippines to its head office in Norway. Otherwi
se stated, it is your opinion that with the BPRT imposed on the remittance of br
anch profits by a local branch of a Norwegian corporation to its head office in
Norway, the tax treatment on such local branch is more burdensome (or less favor
able) than the tax treatment on the local branch of a domestic corporation whose
remittance of profits is not subject to the BPRT. Thus, it is your position tha
t branch profits being remitted by Det Norske Philippine Branch to Det Norske in
Norway should be exempt from the 15 percent BPRT. AIDSTE
Ruling
In reply please be informed as follows.
A. History of the BPRT
To trace back its history, the (first) National Internal Revenue Code (Tax Code)
of 1939 4 did not contain a provision on the BPRT. The BPRT was introduced only
in 1975 under Presidential Decree No. 778 5 as an amendment to the Tax Code of
1939. Section 1 of Presidential Decree No. 778 provides:
"SECTION 1. Section 24 of the National Internal Revenue Code is hereby amend
ed to read as follows:
'Sec. 24. Rates of tax on corporations.
xxx xxx xxx
(b) Tax on foreign corporations.
xxx xxx xxx
(2) Resident corporations. A corporation organized, authorized, or existing
under the laws of any foreign country, engaged in trade or business within the P
hilippines, shall be taxable as provided in subsection (a) of this section upon
the total net income received in the preceding taxable year from all sources wit
hin the Philippines: . . . Provided, further, That any profit remitted abroad by
a branch office to its mother company shall be subject to tax of twenty per cen
t (except those registered with the Export Processing Zone Authority).'"
Under the National Internal Revenue Code of 1977, 6 the rate of the BPRT was red
uced to 15 percent for branch profits in general and 7 1/2 percent for branch pr
ofits relating to petroleum operations in the Philippines; branch profits relati
ng to activities registered with the Export Processing Zone Authority (EPZA) con
tinued to be exempt from the BPRT. Section 25 of the Tax Code of 1977 provides:
ISDCHA
"SECTION 25. Rates of tax on foreign corporation.
(a) Tax on resident foreign corporations
xxx xxx xxx
(5) Tax on branch profits remittances. Any profit remitted by a branch to it
s head office shall be subject to a tax of 15% (except those registered with the
Export Processing Zone Authority): Provided, That any profit remitted by a bran
ch to its head office authorized to engage in petroleum operations in the Philip
pines shall be subject to tax at 7 1/2%. In both cases, the tax shall be collect
ed and paid in the same manner as provided in Sections 51 and 52 of this Code: a
nd Provided, further, That interests, dividends, rents, royalties, including rem
uneration, for technical services, salaries, wages, premiums, annuities, emolume
nts or other fixed or determinable annual, periodical or casual gains, profits,
income and capital gains received by a foreign corporation during each taxable y
ear from all sources within the Philippines shall not be considered as branch pr
ofits unless the same are effectively connected with the conduct of its trade or
business in the Philippines."
The same provision of the BPRT in the Tax Code of 1977 was retained in the Natio
nal Internal Revenue Code of 1993. CTHDcE
Under the National Internal Revenue Code of 1997, 7 the rate of the BPRT is simp
lified to 15 percent and branch profits relating to activities registered with t
he Philippine Economic Zone Authority 8 are exempt from the BPRT. Section 28 (A)
(5) of the Tax Code of 1997 provides:
"SEC. 28. Rates of Income Tax on Foreign Corporations.
(A) Tax on Resident Foreign Corporations.
xxx xxx xxx
(5) Tax on Branch Profits Remittances. Any profit remitted by a branch to it
s head office shall be subject to a tax of fifteen percent (15%) which shall be
based on the total profits applied or earmarked for remittance without any deduc
tion for the tax component thereof (except those activities which are registered
with the Philippine Economic Zone Authority). The tax shall be collected and pa
id in the same manner as provided in Sections 57 and 58 of this Code: Provided,
That interests, dividends, rents, royalties, including remuneration for technica
l services, salaries, wages, premiums, annuities, emoluments or other fixed or d
eterminable annual, periodic or casual gains, profits, income and capital gains
received by a foreign corporation during each taxable year from all sources with
in the Philippines shall not be treated as branch profits unless the same are ef
fectively connected with the conduct of its trade or business in the Philippines
."
The same provision of the BPRT in Section 28 (A) (5) of the Tax Code of 1997 has
been retained even with the passage of Republic Act No. 9337, 9 which amended
certain sections of the Tax Code of 1997 including Section 28. aECSHI
B. Purpose of the BPRT
Former Commissioner of Internal Revenue Efren I. Plana 10 made the following rem
arks on why the BPRT was introduced:
"Before, Philippine branches of foreign corporations were subject only to the no
rmal corporate income tax of 25%-35%. The remittance of profit realized by the b
ranch from Philippine sources was not subject to income tax. On the other hand,
Philippine subsidiaries of non-resident foreign corporations are subject to the
corporate income tax on their net taxable income and their dividend declaration
to the parent company is subject to a withholding tax. Taxwise, there used to be
a decided advantage in favor of local branches of foreign corporations because
they were liable to only one layer of income taxation, that is, when income is r
ealized in the Philippines. On the other hand, the net income of a domestic subs
idiary of a foreign corporation is subject to two layers of taxation: (1) when t
he income is realized by the local subsidiary and (2) when the income is declare
d as dividends by the local subsidiary to its parent company abroad. In order to
neutralize the tax situation as between a local branch of a foreign corporation
and a domestic subsidiary of another foreign corporation, the 20% branch profit
remittance tax was imposed. However, it was realized that under certain conditi
ons the dividends remittance by a local subsidiary to its foreign parent corpora
tion is subject to withholding tax of 15% as against the 20% branch profit remit
tance tax. This partially negates the attempt to place a branch and subsidiary o
n the same footing. It was therefore deemed necessary to reduce the branch profi
t tax from 20% to 15%." 11
According to the Commissioner, the reason why the BPRT was introduced is to put
into the same or similar footing the tax treatment of foreign corporations engag
ed in trade or business in the Philippines through local branches with foreign c
orporations not engaged in trade or business in the Philippines but maintaining
ownership in domestic corporations in the Philippines (subsidiaries). Without th
e BPRT, the first type of foreign corporations might have an undue advantage ove
r the second type of foreign corporations because dividends remitted to the latt
er corporations by their subsidiaries would be subjected to a second layer of in
come taxation even if the profits of the subsidiaries out of which the dividends
were paid were already subjected to a first layer of income taxation (corporate
income tax). Thus the BPRT was introduced. STIcaE
Further, the Commissioner noted that the rate of the BPRT was then reduced from
20 percent to 15 percent by reason that dividends paid by a domestic subsidiary
to a foreign corporation not engaged in trade or business in the Philippines cou
ld, under certain conditions, be subject to a lower income tax rate of 15 percen
t instead of the regular 35 percent imposed on such foreign corporation. The 15
percent income tax on dividends would apply if the country of domicile of the fo
reign corporation would allow that corporation a tax deemed paid credit equivale
nt to (or at the minimum of) 20 percent, which is the difference between the reg
ular corporate income tax of 35 percent and the 15 percent lower income tax on d
ividends. This tax deemed paid credit would correspond to the amount or percenta
ge of the corporate income tax imposed on the taxable profits of the domestic su
bsidiary out of which the dividends are paid. 12
C. The BPRT is permitted under the Philippines-Norway tax treaty
Despite it being an additional income tax, it is noteworthy that the Philippines
-Norway tax treaty recognizes the BPRT and gives way to its imposition, as Artic
le 10 (Dividends), paragraph 7 thereof, provides: TSIEAD
"7. Nothing in this Convention shall be construed as preventing a Contractin
g State from imposing in accordance with its internal law, a tax apart from the
corporate income tax on remittances of profits by a branch to its head office pr
ovided that the tax so imposed shall not exceed fifteen per cent of the amount r
emitted."
According to paragraph 7, branch profits remitted by a branch office of a Norweg
ian corporation in the Philippines to its head office in Norway may be subject t
o an additional tax like the BPRT at a rate not to exceed 15 of the amount remit
ted.
D. The BPRT in relation to Article 25 of the tax treaty
On the other hand, assuming that a provision on the BPRT is lacking in the Phili
ppines-Norway tax treaty (like in case of the Philippines-United Kingdom tax tre
aty), 13 the question arises if paragraphs 1 and 2, Article 25 of the Philippine
s-Norway tax treaty, as you invoked, would suffice to justify the non-imposition
of this tax. Paragraphs 1 and 2 provide:
"1. Nationals of a Contracting State shall not be subjected in the other Con
tracting State to any taxation or any requirement connected therewith, which is
other or more burdensome than the taxation and connected requirements to which n
ationals of that other State in the same circumstances are or may be subjected."
(emphasis supplied)
"2. The taxation on a permanent establishment which an enterprise of a Contr
acting State has in the other Contracting State shall not be less favourably lev
ied in that other State than the taxation levied on enterprises of that other St
ate carrying on the same activities. This provision shall not be construed as ob
liging a Contracting State to grant to residents of the other Contracting State
any personal allowances, reliefs and reductions for taxation purposes on account
of civil status or family responsibilities which it grants to its own residents
."
To answer this question, we examine the pertinent commentaries of the Organisati
on for Economic Co-operation and Development (OECD) Model Tax Convention on Inco
me and on Capital (Condensed Version, July 2005 Edition). ECaSIT
On paragraph 1, the OECD Model Convention states:
"1. This paragraph establishes the principle that for purposes of taxation d
iscrimination on the grounds of nationality is forbidden, and that subject to re
ciprocity, the nationals of a Contracting State may not be less favourably treat
ed in the other Contracting State than nationals of the latter State in the same
circumstances.
xxx xxx xxx
3. The expression 'in the same circumstances' refers to taxpayers (individu
als, legal persons, partnerships and associations) placed from the point of view
of the application of the ordinary taxation laws and regulations, in substantia
lly similar circumstances both in law and in fact. The expression 'in particular
with respect to residence' makes clear that the residence of the taxpayer is on
e of the factors that are relevant in determining whether taxpayers are placed i
n similar circumstances. The expression 'in the same circumstances' would be suf
ficient by itself to establish that a taxpayer who is a resident of a Contractin
g State and one who is not a resident of that State are not in the same circumst
ances . . ." 14 (emphasis supplied)
Paragraph 1, Article 25 of the Philippines-Norway tax treaty provides that natio
nals of Norway shall not be subjected in the Philippines to any taxation, or any
requirement connected therewith, which is other or more burdensome than the tax
ation and connected requirements to which nationals of the Philippines in the sa
me circumstances are or may be subjected. According to the OECD Model Convention
, with the phrase "in the same circumstances" in paragraph 1, the scope of this
paragraph would be limited to residents of the Philippines only. The term "resid
ent" is defined in paragraph 1, Article 4 (Resident) of the Philippines-Norway t
ax treaty below: DTSaHI
"1. For the purposes of this Convention, the term 'resident of a Contracting
State' means any person who, under the laws of that State, is liable to tax the
rein by reason of his domicile, residence, place of management or any other crit
erion of a similar nature. But this term does not include any person who is liab
le to tax in that State in respect only of income from sources in that State or
capital situated therein."
Under this definition, Det Norske is a resident of the State where it is liable
to tax by reason of its domicile, residence, place of management, or any other s
imilar criterion of a similar nature. By the fact that Det Norske is organized a
nd existing under the laws of Norway, that its head office is in Norway, and tha
t it is issued a certificate of residence by the Norwegian Directorate of Taxes
of Norway, it follows that Det Norske's domicile, residence, or place of managem
ent is in Norway and as such is a resident of Norway for purposes of the Philipp
ines-Norway tax treaty. While Det Norske is licensed by the Securities and Excha
nge Commission to establish a branch office in the Philippines (that is, Det Nor
ske Philippine Branch), this alone will not suffice to say that Det Norske's dom
icile, residence, or place of management is also in the Philippines thereby not
making Det Norske a resident of the Philippines for purposes of the tax treaty.
Relative thereto, paragraph 1, Article 25 of the Philippines-Norway tax treaty d
oes not provide a legal basis for the non-imposition of the BPRT. IHcSCA
On paragraph 2, the OECD Model Convention states:
"19. Strictly speaking, the type of discrimination which this paragraph is de
signed to end is discrimination based not on nationality but on the actual situs
of an enterprise. It therefore affects without distinction, and irrespective of
their nationality, all residents of a Contracting State who have a permanent es
tablishment in the other Contracting State.
xxx xxx xxx
21. By the terms of the first sentence of paragraph [2], the taxation of a p
ermanent establishment shall not be less favourably levied in the State concerne
d than the taxation levied on enterprises of that State carrying on the same act
ivities. The purpose of this provision is to end all discrimination in the treat
ment of permanent establishments as compared with resident enterprises belonging
to the same sector of activities, as regards taxes based on business activities
, and especially taxes on business profits.
xxx xxx xxx
23. As regards the first sentence, experience has shown that it was difficul
t to define clearly and completely the substance of the principle of equal treat
ment and this has led to wide differences of opinion with regard to the many imp
lications of this principle. The main reason for difficulty seems to reside in t
he actual nature of the permanent establishment, which is not a separate legal e
ntity but only part of an enterprise that has its head office in another State.
The situation of the permanent establishment is different from that of a domesti
c enterprise, which constitutes a single entity all of whose activities, with th
eir fiscal implications, can be fully brought within the purview of the State wh
ere it has its head office. The implications of the equal treatment clause will
be examined under several aspects of the levying of tax." 15
Paragraph 2 of the Philippines-Norway tax treaty provides that the taxation on a
permanent establishment which an enterprise of Norway has in the Philippines sh
all not be less favourably levied in the Philippines than the taxation levied on
enterprises of the Philippines carrying on the same activities. According to th
e OECD Model Convention, the purpose of paragraph 2 is to end all discrimination
in the treatment of permanent establishments as compared with resident enterpri
ses belonging to the same sector of activities, as regards taxes based on busine
ss activities, and especially taxes on business profits. However, the Convention
likewise noted that the experience of the OECD member countries have shown that
there was a difficulty in defining clearly and completely the substance of the
principle of equal treatment envisaged in paragraph 2, which has led to wide dif
ferences of opinion with regard to the many implications of this principle. The
main reason for the difficulty seems to reside in the actual nature of the perma
nent establishment, which is not a separate legal entity but only part of an ent
erprise that has its head office in another State. The situation of the permanen
t establishment is different from that of a domestic enterprise, which constitut
es a single entity all of whose activities, including its fiscal affairs, can be
fully brought within the purview of the State where it has its head office. The
implications of the equal treatment clause will be examined under several aspec
ts of the levying of tax. cTCEIS
The United States of America, being an OECD member country, interprets the phras
e "less favourably levied" in relation to the taxation of a permanent establishm
ent in the following manner, as contained in the Income Tax Treaties of the Unit
ed States 16 where it is explained:
"Less favorably levied. The standard of 'less favorably levied', on its face, di
ffers from the standard 'other or more burdensome' that in certain treaties is u
sed in the nationality provision [in paragraph 1 of Article 25] and the foreign-
controlled enterprise provision [in paragraph 5 of Article 25], including the 19
81 U.S. Model Treaty. The permanent establishment provision clearly does not pre
vent the imposition of different ('other') taxes on a permanent establishment th
an those imposed on a domestic business, as long as the taxes in the aggregate o
n the permanent establishment are not greater than those on the domestic busines
s. In effect, the focus is on the result of the taxation, irrespective of the me
thod."
Consistent with the foregoing, this Office is of the opinion and so holds that,
as far as the Philippines is concerned, as long as the aggregate taxes imposed b
y the Philippines on a permanent establishment of a foreign enterprise in the Ph
ilippines are not greater than the taxes imposed by the Philippines on a domesti
c enterprise, it cannot be said that the permanent establishment is treated less
favorably in the Philippines than the domestic enterprise. Thus, the BPRT, the
corporate income tax on taxable profits, the withholding tax on certain types of
income, and other similar taxes on income, can be imposed by the Philippines on
a permanent establishment without going against the principle of equal treatmen
t envisaged in paragraph 2, Article 25 of the Philippines-Norway tax treaty prov
ided that the aggregate taxes levied on the permanent establishment are not grea
ter than the taxes levied on a domestic enterprise. DCIAST
E. Taxation of permanent establishments in the form of a branch and taxatio
n of domestic enterprises
In most cases, and in relation to Philippines tax treaties and the Tax Code of 1
997, a foreign enterprise is considered to have a permanent establishment in the
Philippines when it is engaged in trade or business in the Philippines through
a branch or branches. For this type of permanent establishment, a foreign enterp
rise (like Det Norske) is registered with and licensed by the Securities and Exc
hange Commission to establish a branch office and engage in trade or business in
the Philippines.
In terms of tax liability alone, a foreign enterprise, whether or not engaged in
trade or business in the Philippines, is in a more advantageous position as com
pared to a domestic enterprise because it is taxable only on income derived from
sources within the Philippines. A domestic enterprise is, on the other hand, ta
xable on income derived from sources within and without the Philippines. Section
23 (E) and (F) of the Tax Code of 1997 provides:
"SEC. 23. General Principles of Income Taxation in the Philippines. Except
when otherwise provided in this Code:
xxx xxx xxx
(E) A domestic corporation is taxable on all income derived from sources wit
hin and without the Philippines."
(F) A foreign corporation, whether engaged or not in trade or business in th
e Philippines, is taxable only on income derived from sources within the Philipp
ines."
Also, in terms of rate and structure of tax, there are preferential tax regimes
that are or can be enjoyed only by foreign enterprises engaged in trade or busin
ess in the Philippines and which are not available to domestic enterprises. Unde
r Section 28 (A) of the Tax Code of 1997, as amended by Republic Act No. 9337, t
hese preferential tax regimes are: TIDcEH
1. International carriers (shipping and air transport) doing business in th
e Philippines are subject to 2 1/2 percent income tax on their Gross Philippine
Billings. 17
2. Offshore banking units authorized by the Bangko Sentral ng Pilipinas (BS
P) are exempt from income tax on income derived from nonresidents, other offshor
e banking units, local commercial banks, and branches of foreign banks authorize
d by the BSP.
3. Regional or area headquarters are exempt from income tax. A regional or
area headquarters means a branch established in the Philippines by multinational
companies, which does not earn or derive income from the Philippines, and which
act as supervisory, communications and coordinating center for their affiliates
, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets
. 18
4. Regional operating headquarters are subject to 10% income tax on their t
axable income. A regional operating headquarters means a branch established in t
he Philippines by multinational companies which are engaged in any of the follow
ing services: general administration and planning; business planning and coordin
ation; sourcing and procurement of raw materials and components; corporate finan
ce advisory services; marketing control and sales promotion; training and person
nel management; logistics services; research and development services; and produ
ct development; technical support and maintenance; data processing and communica
tions; and business development. 19
Further, in terms of rate and structure of tax, a foreign enterprise engaged in
trade or business in the Philippines are subject to the same taxes, under the sa
me conditions as domestic enterprises, under Sections 27 and Section 28 (A) of t
he Tax Code of 1997, as amended by Republic Act No. 9337, as follows: THIcCA
1. Both are subject to corporate income tax of 35 percent of their taxable
income, to be reduced to 30 percent beginning January 1, 2009. The term taxable
income means the pertinent items of income specified in the Tax Code, less the d
eductions for such types of income under the Tax Code or other special laws. 20
2. Both have the option to be taxed at 15 percent of their gross income beg
inning January 1, 2000, provided the following conditions are satisfied:
a. A tax effort ratio of 20 percent of Gross National Product (GNP);
b. A ratio of 40 percent of income tax collection to total tax revenues;
c. A VAT tax effort of 4 percent of GNP; and
d. A 0.9 percent ratio of the Consolidated Public Sector Financial Position
(CPSFP) to GNP.
3. Both have the option to be taxed at the minimum corporate income tax of
2 percent of their gross income beginning on the fourth taxable year immediately
following the year in which the enterprise commenced its business operations an
d after satisfying certain other conditions.
4. Both are exempt from income tax on dividends derived from another domest
ic enterprise.
5. Both are subject to 20 percent income tax on interest from any currency
bank deposit and yield or any other monetary benefit from deposit substitutes an
d from trust funds and similar arrangements, and on royalties, and to 7 1/2 perc
ent income tax on income from a depository bank under the expanded foreign curre
ncy deposit system.
6. When the enterprise (foreign or domestic) is a depository bank, it is ex
empt from income tax on income derived under the expanded foreign currency depos
it system from foreign currency transactions with nonresidents, offshore banking
units in the Philippines, local commercial banks, and branches of foreign banks
authorized by the BSP to transact business with foreign currency deposit system
units and other depository banks under the expanded foreign currency deposit sy
stem.
7. Both are subject to 10 percent income tax on interest income from foreig
n currency loans granted by depository banks under the expanded foreign currency
deposit system.
8. Both are subject to income tax on capital gains from the sale of shares
of stock not traded in the stock exchange in the following manner: (a) for capit
al gains amounting to PHP100,000.00 or below, the tax is 5 percent, and (b) for
capital gains in excess of PHP100,000.00, the tax is 10 percent.
In fine, this Office is of the opinion and so holds that: TaDAHE
1. The Philippines-Norway tax treaty recognizes the BPRT and gives way to i
ts imposition as paragraph 7, Article 10 of the tax treaty provides that branch
profits remitted by a branch office of a Norwegian corporation in the Philippine
s to its head office in Norway may be subject to an additional tax like the BPRT
at a rate not to exceed 15 percent.
2. Paragraph 1, Article 25 of the Philippines-Norway tax treaty does not pr
ovide a legal basis for the non-imposition of the BPRT. The principle of equal t
reatment intended by this paragraph is limited to nationals of the Philippines a
nd of Norway who are both residents of the Philippines. While Det Norske is a na
tional of Norway, it is not, however, a resident of the Philippines under paragr
aph 1, Article 4 of the tax treaty.
3. Paragraph 2, Article 25 of the Philippines-Norway tax treaty lays down a
principle of equal treatment between a permanent establishment of a Norwegian e
nterprise in the Philippines and a domestic enterprise. Similar with the United
States, the Philippines is of the view that as long as the aggregate taxes impos
ed by the Philippines on a permanent establishment are not greater than the taxe
s imposed by the Philippines on a domestic enterprise, it cannot be considered t
hat the permanent establishment is treated less favorably in the Philippines tha
n the domestic enterprise. In this connection, while the BPRT is imposed only on
permanent establishments and not on domestic enterprises, the burden of this ta
x upon a permanent establishment is, however, mitigated by the current tax regim
es which greatly favor the permanent establishment over the domestic enterprise.
In view of the foregoing, your request for confirmation that the branch profits
remitted by Det Norske Philippine Branch (the branch office of Det Norske in the
Philippines) to Det Norske (the Norwegian corporation) is exempt from the 15 pe
rcent BPRT is hereby DENIED for lack of legal basis. DaAIHC
Very truly yours,
(SGD.) SIXTO S. ESQUIVIAS IV
Commissioner of Internal Revenue
March 8, 2007
BIR RULING [DA-145-07]
208-89
SM Investment Corporation
SM Corporate Offices, Building A
1000 Bay Boulevard
SM Central Business Park
Bay City, Pasay City
Attention: Ms. Cecille R. Patricio
Vice President
Corporate Tax Division
Gentlemen :
This refers to your letter dated December 27, 2006 requesting for confirmation o
f your opinion that the cash dividends declared by SM Investment Corporation (SM
Investments), a Philippine domestic corporation whose shares of stock are trade
d and listed in the Philippine Stock Exchange (PSE), to Asia Opportunities Limit
ed (Asia Opportunities), a corporation organized and existing under the laws of
the British Virgin Island (BVI), are subject to 15% preferential withholding tax
pursuant to Section 28 (B) (5) (b) of the Tax Code of 1997, as amended by Repub
lic Act (R.A.) No. 9337. CSaITD
In reply thereto, please be informed that Section 2 of R.A. No. 9337 reads as fo
llows:
"SEC. 2. Section 28(A)(1) and (B)(1) and (5)(b) of the same Code, as amen
ded, are hereby further amended to read as follows:
SEC. 28. Rates of Income Tax on Foreign Corporations.
xxx xxx xxx
(B) Tax on Nonresident Foreign Corporation.
xxx xxx xxx
(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation.
xxx xxx xxx
(b) Intercorporate Dividends. A final withholding tax at the rate of fifteen
percent (15%) is hereby imposed on the amount of cash and/or property dividends
received from a domestic corporation, which shall be collected and paid as prov
ided in Section 57(A) of this Code, subject to the condition that the country in
which the nonresident foreign corporation is domiciled, shall allow a credit ag
ainst the tax due from the nonresident foreign corporation taxes deemed to have
been paid in the Philippines equivalent to twenty percent (20%), which represent
s the difference between the regular income tax of thirty-five percent (35%) and
the fifteen percent (15%) tax on dividends as provided in this subparagraph: Pr
ovided, That effective January 1, 2009, the credit against the tax due shall be
equivalent to fifteen percent (15%), which represents the difference between the
regular income tax of thirty percent (30%) and the fifteen percent (15%) tax on
dividends;
xxx xxx xxx"
This Office had already occasioned to rule on the matter, when it said in BIR Ru
ling No. 208-89 dated September 28, 1989, as follows:
"Generally, under the above-quoted Section 24(b)(5)(B) of the Tax Code, as amend
ed, dividend paid to a non-resident foreign corporation is subject to withholdin
g tax at the rate of 35%. However, if the country where the non-resident foreign
corporation is domiciled allows a credit against the tax due from the non-resid
ent corporation taxes deemed to have been paid in the Philippines in an amount e
quivalent to 20% of such dividend, or does not subject such dividend to taxation
, then dividend paid to such non-resident foreign corporation are taxed only at
the rate of 15%. TAEDcS
Thus, since the International Business Companies Ordinance of the Territory of t
he British Virgin Islands . . . does not impose any tax on dividend received fro
m foreign sources, which logically would include those received from Philippine
corporations by foreign corporations domiciled therein, then said cash dividend
. . . is subject only to the preferential withholding tax rate of 15% imposed un
der then Section 25(B)(5)(B) of the Tax Code, as amended (now Section 28(B)(5)(b
) of the Tax Code of 1997)."
SUCH BEING THE CASE, this Office hereby confirms your opinion that the cash divi
dends received by Asia Opportunities from SM Investments, a Philippine domestic
corporation are subject to the 15% preferential withholding tax rate imposed und
er Section 28(B)(5)(b) of the Tax Code of 1997, as amended by R.A. No. 9337.
SaCIDT
This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation, it will be disclosed that the facts are differen
t, then this ruling shall be considered null and void. CSEHIa
Very truly yours,
(SGD.) JAMES H. ROLDAN
Assistant Commissioner
Legal Service
SPECIAL FIFTH DIVISION
[CA-G.R. SP No. 72992. December 16, 2003.]
FILINVEST DEVELOPMENT CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVE
NUE, respondent.
D E C I S I O N
GOZO-DADOLE, J p:
This is a Petition filed under Rule 43 of the 1997 Rules of Civil Procedure (as
amended) for review of the Decision 1 dated September 10, 2002 rendered by the C
ourt of Tax Appeals in CTA Case No. 6182, entitled "Filinvest Development Corpor
ation and Filinvest Alabang, Inc. vs. Commissioner of Internal Revenue", insofar
as the afore-mentioned Decision directs petitioner Filinvest Development Corpor
ation to pay the amount of P5,691,972.03, representing deficiency income tax on
allegedly undeclared interest income for the taxable year 1997, plus 20% delinqu
ency interest computed from February 16, 2000 until full payment thereof. The di
spositive portion of the assailed Decision reads: CAcIES
"WHEREFORE, in view of all the foregoing, the court finds the instant petition p
artly meritorious. Accordingly, Assessment Notice No. SP-INC-96-00018-2000 impos
ing deficiency income tax on FDC for taxable year 1996, Assessment Notice No. SP
-DST-96-00020-2000 and SP-DST-97-00021-2000 imposing deficiency documentary stam
p tax on FDC for taxable years 1996-1997, respectively and Assessment Notice No.
SP-INV-97-0027-2000 imposing deficiency income tax on FAI for the taxable year
1997 are hereby CANCELLED and SET ASIDE. However, petitioner is hereby ORDERED t
o PAY the amount of P5,691,972.03 as deficiency income tax for taxable year 1997
. In addition, petitioner is also ORDERED to PAY 20% delinquency interest comput
ed from February 16, 2000 until full payment thereof pursuant to Section 249(c)(
3) of the Tax Code.
SO ORDERED." (emphasis supplied)
The antecedent facts of the case are as follows:
On November 29, 1996, Filinvest Development Corporation (FDC), Filinvest Alabang
, Inc. (FAI) and, Filinvest Land Incorporated (FLI) entered into a Deed of Excha
nge 2 whereby FDC and FAI both transferred to FLI certain parcels of land with a
total appraised value of P4,306,777,000.00 in exchange for 463,094,301 shares o
f stock in FLI. The transfer is intended to facilitate the development of medium
-rise residential and commercial building. As a result of the Deed of Exchange,
FDC's ownership over FLI increased by almost 7%. On January 13, 1997, FLI wrote
to the Bureau of Internal Revenue (BIR) requesting for a ruling that no gain or
loss would be recognized in such transfer of real properties. This was acted upo
n favorably by the BIR on February 3, 1997, with a ruling that the transaction f
alls squarely within the Tax Code provision of a tax-free exchange. 3
Meanwhile, FDC extended to its affiliates advances on various dates during the y
ears 1996 and 1997. In November 1996, FDC entered into a Shareholder's Agreement
with Reco Herrera PTE Ltd. (RHPL) for the formation of a joint venture company
named Filinvest Asia Corporation (FAC). The latter was tasked to manage 50% owne
rship interest of FDC in its project with the Philippine Bank of Communications.
Pursuant to this agreement, FDC assigned to FAC a portion of its rights in the
said project in payment of a subscription amounting to P500.7M worth of shares o
f stock in FAC. As a result, FDC reported a net loss of P190,695,061.00 in its A
nnual Income Tax Return for the taxable year 1996.
On January 3, 2000, FDC received from the BIR a Formal Notice of Demand 4 with a
ccompanying four Assessment Notices, all dated January 3, 2000, informing FDC th
at after investigation, the following taxes were found due: a deficiency income
tax of P150,074,066.27 for 1996, a deficiency documentary stamp tax of P10,425,4
87.06 for the same year, a deficiency income tax of P5,716,972.03 for 1997, and
a deficiency documentary stamp tax of P5,796,699.40, also for 1997. The said def
iciency income tax assessments were based upon the examiner's findings that FDC
failed to reflect in its income tax returns several interest income, gains on pr
operty and, advances to its affiliates. Likewise, FDC was found not to have refl
ected its taxable income resulting from the exchange of property for shares of s
tock in FLI.
On January 26, 2000, FDC filed with the BIR a Request for Reconsideration/Protes
t 5 of the assessments against it. On March 24, 2000, FDC submitted all relevant
documents in support thereof. The request/protest had not been acted upon, henc
e, FDC sent to the BIR Appellate Division a letter, dated September 11, 2000, se
eking an early resolution of the same. On September 19, 2000, FDC filed with the
Commissioner of Internal Revenue a letter 6 reiterating this previous request.
However, the BIR failed to take any action on FDC's request.
FDC and FAI claim that the deficiency income tax assessments issued against them
are improper because the transaction under the Deed of Exchange is tax-free. Mo
reover, the imputation of interest income on inter-company advances has no factu
al and legal basis because the prospective gain resulting from the alleged appre
ciation in the value of FDC's shareholdings in FAC is not taxable income. Finall
y FDC and FAI both postulate that the assessment of deficiency documentary stamp
tax is erroneous for the reason that instructional letters or cash vouchers cov
ering the advances given by FDC to its subsidiaries are not subject to any stamp
tax. In contrast, the BIR defends its assessments by claiming that the exchange
of property between FDC and FAI, on one hand, and FLI, on the other, is a taxab
le gain on the part of the former. Furthermore, the imposition of documentary st
amp tax (DST) is warranted because loan transactions are, under the law, subject
to DST.
Consequently, on October 17, 2000 FDC and FAI, as petitioners, filed with the Co
urt of Tax Appeals a Petition for Review 7 against the Commissioner of Internal
Revenue (CIR), as respondent. The case was docketed as CTA Case No. 6182. TAac
HE
In its petition, FDC and FAI alleged that the exchange of their property for sha
res of stock in FLI under the Deed of Exchange is not considered taxable gain be
cause the exchange meets all the requisites for the non-recognition of taxable g
ain, considering the fact that FAI and FDC collectively gained further control o
f FLI after the exchange. To bolster their contention, petitioner sought solace
in BIR Ruling No. S-34-046-97 8 where the BIR explicitly stated that FDC, FAI an
d, FLI are not required to recognize a taxable gain or a deductible loss from th
e exchange. They, further, argued that there is no law which empowers the CIR to
impute a theoretical interest on interest-free advances made by one taxpayer to
another, even though they are related parties. Since FDC cannot demand the paym
ent of interest from its affiliates in the absence of stipulation to this effect
, neither could the BIR assess against FDC income tax on such unrealizable incom
e. Moreso, income tax may not be imposed on a prospective gain from an alleged a
ppreciation in the value of FDC's shareholdings in FAC because the same has not
yet been realized through sale or conversion of the property. Finally, documenta
ry stamp tax may not be imposed on mere instructional letters or cash vouchers e
videncing advances extended by FDC to its affiliates because they are not catego
rized as promissory notes nor certificates of obligations. Hence, petitioners pr
ayed that the deficiency income tax and documentary stamp tax assessments levied
against FDC for the taxable years 1996 and 1997 and, the deficiency income tax
assessments against FAI for taxable year 1997 be cancelled and annulled.
The CIR filed its Answer 9 on November 28, 2000 claiming that the transfer of pr
operty for shares of stocks should not be considered as tax-free since FDC's int
erest in FLI was eroded after the exchange. Also, the transfer leading to the co
rporate re-organization did not result in further control for FDC. According to
the respondent, petitioner FDC realized a taxable gain on dilution arising from
the Shareholder's Agreement with Reco Herrera PTE Ltd. for the formation of a jo
int venture company. The deficiency assessments were justified by respondent on
the basis of Section 50, 1997 Tax Code which vests upon the CIR the power to all
ocate or distribute income or deductions between or among organizations in order
to prevent evasion of taxes, as well as, to place a controlled taxpayer on a ta
x parity with an uncontrolled taxpayer. Further, the respondent defended the imp
ugned assessments by stating that loan transactions, such as those entered into
by FDC with its affiliates, whether or not evidenced by formal agreement or by m
ere office memo, shall be subject to documentary stamp tax. Thus, respondent pra
yed that the instant petition be denied and that petitioners be ordered to pay t
he amount of taxes as assessed.
During the pre-trial conference, the petitioners and respondent filed a Stipulat
ion of Facts, Documents and Issues. 10 In a Resolution 11 promulgated on Februar
y 16, 2001, the Court of Tax Appeals (CTA) approved the same. Meanwhile, the For
mal Offer of Documentary Evidence 12 filed by petitioners on August 10, 2001 was
admitted by the CTA subject to a final evaluation as regards their probative va
lue. Afterwhich, trial ensured where the petitioners presented the oral testimon
y of Susana Macabelda for the purpose of proving the type of documentation cover
ing the advances granted by FDC which became the subject of the impugned deficie
ncy tax assessment. For its part, respondent presented neither testimonial nor d
ocumentary evidence.
On September 10, 2002, the CTA rendered its Decision 13 finding the petition par
tly meritorious. It cancelled and set aside the assessed deficiency income taxes
for the years 1996 and 1997, as well as, the documentary stamp tax for 1997 aga
inst petitioners. Nevertheless, the court ordered petitioner FDC to pay P5,691,9
72.03 representing deficiency income tax on undeclared interest income for the t
axable year 1997, plus 20% delinquency interest computed from February 16, 2000
until full payment thereof. According to the CTA, the exchange of properties bet
ween FDC and FAI, on one hand, and FLI, on the other, resulted in the further co
ntrol of FDC and FAI, as far as stock ownership in FLI is concerned. Evidence di
sclosed that, after the exchange, new shares of stock were issued and, as a resu
lt FDC owned 61.03% and FAI had 9.96% stockholdings. Since the law contemplates
as collective increase of equity participation in the transferee corporation, th
e court found that the seeming reduction in the number of shares owned by FDC, a
fter the exchange, should be viewed together with the increase of ownership of F
AI. Hence, any again or loss derived from the transaction is a tax-free exchange
.
Anent the alleged interest income on the advances made by petitioner FDC to its
affiliates, the court found dubious FDC's act of extending several cash advances
to its affiliates (FLI. FAI and Davao Sugar Central Co.) with no stipulation on
interest. Thus, the court invoked the CIR's power, under Section 43 (now Sectio
n 50) of the Tax Code, to make necessary adjustments by rectifying any distortio
ns on income, through the adoption of reasonable standards in order to determine
the true net income of each of the parties. The CTA posits that the said provis
ion of law is intended to place a controlled taxpayer on a tax parity with an un
controlled taxpayer by determining the true net income from the property and bus
iness of a controlled taxpayer. Thus, the court ruled that in case of understate
ment of the true taxable net income, the CIR shall intervene by making distribut
ions, apportionments, or allocations of gross income or deductions for the purpo
se of forestalling tax evasion.
Furthermore, the CTA ruled that the increase in value of shares in FAC owned by
the petitioner FDC did not result to any economic advantage on the part of the l
atter. It held that in the absence of sale or conversion of the property, a mere
increase in the value of the shares purchased is not income, but merely an unre
alized increase in capital. On this score, the assessment by the BIR of deficien
cy income tax on the joint venture transaction was struck down by the CTA. Final
ly, the CTA ruled that the instructional letters or vouchers issued by petitione
r FDC cannot be considered loan agreements as to warrant the imposition of docum
entary stamp tax. These documents do not embody an express stipulation between t
he parties where one is obliged to deliver and the other to re-pay. It is merely
an internal document, unilaterally prepared by petitioner FDC for the purpose o
f recording the advance it made to its affiliates and, to avoid the co-mingling
of funds of the corporate affiliates. As such, the imposition by the respondent
of documentary stamp tax on instructional letters or vouchers was set aside by t
he CTA.
Not satisfied by the above-stated Decision of the CTA, insofar as it orders FDC
to pay deficiency income tax on allegedly undeclared interest income for the tax
able year 1997, plus 20% delinquency interest thereon, FDC filed the instant pet
ition 14 on October 11, 2002, assigning the following errors committed by the ta
x court, to wit:
"I.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONER IS LIABLE FOR DEFICIEN
CY INCOME TAX ON ALLEGEDLY UNDECLARED INTEREST INCOME FROM ADVANCES WHICH IT EXT
ENDED TO AFFILIATES FOR THE TAXABLE YEAR 1997, NOTWITHSTANDING THAT PETITIONER D
ID NOT ACTUALLY EARN ANY INTEREST INCOME ON SAID ADVANCES.
II.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT AN "ARM'S-LENGTH" INTEREST RATE,
OR THEORETICAL INTEREST INCOME, MAY BE IMPUTED ON PETITIONER ON THE BASIS OF SEC
TION 43 OF THE OLD NATIONAL INTERNAL REVENUE CODE (NOW SECTION 50 OF THE 1997 NA
TIONAL INTERNAL REVENUE CODE) AND SECTION 179(B) OF REVENUE REGULATIONS NO. 2 IM
PLEMENTING SECTION 43;
III.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE 1965-69 REGULATIONS ON THE LA
W OF FEDERAL INCOME TAXATION OF THE UNITED STATES, PARTICULARLY SECTION 1.482-2
THEREOF, HAVE "PERSUASIVE EFFECT" IN THE PHILIPPINES;
IV.
THE COURT OF TAX APPEALS ERRED IN TAKING COGNIZANCE OF THE AFORESAID REGULATIONS
, NOTWITHSTANDING THAT RESPONDENT DID NOT PRESENT EVIDENCE TO PROVE THE EXISTENC
E THEREOF;
V.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONER IS LIABLE FOR DEFICIEN
CY INCOME TAX ON ALLEGEDLY UNDECLARED INTEREST INCOME UNDER SECTION 43 OF THE OL
D NATIONAL INTERNAL REVENUE CODE, NOTWITHSTANDING THE LACK OF FACTUAL AND EVIDEN
TIARY BASIS THEREFOR;
VI.
THE COURT OF TAX APPEALS ERRED IN UPHOLDING THE COMPUTATION MADE BY RESPONDENT C
OMMISSIONER OF PETITIONER'S SUPPOSED INTEREST INCOME BASED ON THE ALLEGED SCHEDU
LE OF INTEREST RATES OF THE BANGKO SENTRAL NG PILIPINAS, DESPITE THE NON-PRESENT
ATION BY RESPONDENT OF ANY EVIDENCE ON SUCH ALLEGED SCHEDULE;
VII.
THE COURT OF TAX APPEALS ERRED IN FINDING THAT IT WAS "QUITE DUBIOUS" FOR PETITI
ONER TO ADVANCE MONEY TO ITS AFFILIATES WITHOUT INTEREST;
VIII.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONER IS LIABLE FOR DEFICIEN
CY INCOME TAX ON ALLEGEDLY UNDECLARED INTEREST INCOME, NOTWITHSTANDING ITS FINDI
NG THAT THERE WAS "NO STIPULATION ON INTEREST" WITH REGARD TO THE CASH ADVANCES
EXTENDED BY PETITIONER TO ITS AFFILIATES and;
IX.
THE COURT OF TAX APPEALS ERRED IN ORDERING PETITIONER TO PAY THE AMOUNT OF P5,69
1,972.03, REPRESENTING DEFICIENCY INCOME TAX ON ALLEGEDLY UNDECLARED INTEREST IN
COME FOR THE TAXABLE YEAR 1997, PLUS 20% DELINQUENCY INTEREST COMPUTED FROM FEBR
UARY 16, 2000 UNTIL FULL PAYMENT THEREOF. 15
Petitioner in its first and second assigned errors contends that there is no sta
tutory authority for the CTA's decision affirming the imputation by respondent C
IR of an "arm's-length" interest rate or a theoretical interest income on petiti
oner. Petitioner claims that the power of the CIR under Section 43 of the old Ta
x Code is merely to distribute, apportion or allocate gross income or deductions
between or among organizations, trades or business owned or controlled directly
or indirectly by the same interests. According to petitioner, the CIR has no au
thority to make an imputation of an imaginary interest income because his power
to distribute, apportion and allocate do not include the power to impute an "arm
s-length" interest rate or imaginary interest income. Moreover, Section 43 is di
rected only against controlled taxpayers and not against the mother or holding c
orporation. Thus, the CTA erred in imputing interest income to FDC, the parent c
ompany and in failing to distribute any gross income or deductions among the aff
iliates of FDC, under Section 43.
Parenthetically, petitioner, in its fifth, sixth and seventh assigned errors, cl
aims that there is no factual and evidentiary basis for the application of Secti
on 43 of the old NIRC and of Section 170(b) of Revenue Regulations No. 2. This i
s because such statute can only be invoked where the taxable net income of the c
ontrolled taxpayer is understated or where there is a clear case of tax evasion.
According to petitioner, respondent has not established that there had been an
understatement of income of any taxpayer controlled by FDC or that the latter ha
d resorted to any fraudulent scheme of tax evasion. Accordingly, petitioner argu
ed that the respondent should not use a theoretical interests based on the sched
ule of interest rates implemented by the Bangko Sentral ng Pilipinas (BSP) since
the same was not proven in the trial.
To further bolster its assertions, petitioner, in its eighth assigned error, pos
its that the BIR's imputation of an "arm's-length" interest rate on FDC's advanc
es violates Article 1956 which prohibits the imposition of interest in the absen
ce of express stipulation therefor. Petitioner argues that it could not legally
recognize and collect interest income for advances to its affiliates because the
re is no written agreement for this purpose. As such, there is absolutely no bas
is for the BIR to assess against petitioner an income tax on such unrealizable a
nd unrealized interest income.
Petitioner's contentions are meritorious. ATDHSC
To provide proper perspective, it would be wise to state the law prevailing at t
he time the subject transaction took place. Section 43 of the National Internal
Revenue Code (now Section 50, Republic Act No. 8424, Tax Reform Act of 1997) pro
vides:
"In any case of two or more organizations, trades or businesses, whether or not
incorporated and whether or not organized in the Philippines, owned or controlle
d directly or indirectly by the same interests, the Commissioner of Internal Rev
enue is authorized to distribute, apportion, or allocate gross income or deducti
ons between or among such organizations, trades or business, if he determines th
at such distribution, apportionment, or allocation is necessary in order to prev
ent evasion of taxes or clearly to reflect the income of any of such organizatio
ns, trade or businesses."
Section 43 empowers the Commissioner of Internal Revenue to rectify abnormalitie
s and distortions in income brought about by common control through the adoption
of standards considered fair, reasonable or at arm's-length. 16 According to Re
venue Memorandum Order No. 63-99 17, Section 43 does not apply to alleged indebt
edness which was in fact a contribution of capital. In the instance case, the su
bject transaction from which deficiency income tax was assessed involves cash ad
vances made by petitioner to its affiliates. A perusal of the record at hand rev
eals that petitioner borrows money from a bank with interest and later re-lends
(or advances) the same to its affiliates without payment of interest. 18 In the
course of the trial, it was proven that such advances were extended by FDC to it
s affiliates and subsidiaries to give the latter financial assistance for operat
ional and capital expenditures. 19 Such advances are evidence by instructional l
etters or cash vouchers issued by the petitioner. Hence, this Court is of the co
nsidered opinion that Section 43 of the old Tax Code finds no application in the
case at bar, for the reason that the subject transaction distinctly relates to
cash advances made by petitioner (mother company) in favor of its affiliates to
enable the latter to sustain its operational and capital expenditures. Responden
t Commissioner of Internal Revenue miserably failed to controvert this fact.
Further, the peculiar feature of the subject transaction, in no wise, indicates
a loan agreement between petitioner and its affiliates. In fact, the cancellatio
n of the deficiency documentary stamp tax assessment against petitioner was prem
ised on the absence of a stipulation between the parties requiring one to delive
r and the other to re-pay. Notably, the CTA categorically declared that the inst
ructional letters and cash vouchers containing petitioner's advances to its affi
liates, are not loan agreements. 20 An eminent authority on Taxation once declar
ed that documentary stamp tax is a privilege tax because it is really imposed on
the transaction rather than on the document. 21 In short, the law taxes the doc
ument because of the transaction. If in the tax court's view, the instructional
letters and cash vouchers issued by petitioner are not taxable because they are
not loan agreements, we find no cogent reason why a tax should now be imposed on
the transaction from which these documents were issued. In view of the foregoin
g, we agree with petitioner in claiming that the application of Section 43 of th
e old Tax Code is misplaced.
Moreover, respondent went beyond its authority and utterly disregarded the evide
nt purpose of the law when he issued the deficiency tax assessment against petit
ioner for interest income allegedly derived by the latter. Concededly, the purpo
se of Section 43 is to place a controlled taxpayer on a tax parity with an uncon
trolled taxpayer, by determining, according to the standard of an uncontrolled t
axpayer, the true net income from the property and business of a controlled taxp
ayer. If this has not been done and the taxable net incomes are thereby understa
ted, the statute grants the CIR the authority to intervene by making distributio
ns, apportionments or allocations of gross income or deductions among the contro
lled taxpayers to determine the true net income of each controlled taxpayer. 22
A presumption of control arises if income or deductions have been arbitrarily sh
ifted. 23 Emphatically, transactions between the controlled taxpayer and another
will be subjected to special scrutiny to ascertain whether the common control i
s being used to reduce, avoid or escape taxes.
Indubitably, an exercise of the Commissioner's power under this statute is premi
sed on evidence of fraud or evasion in the payment of taxes. Such circumstance i
s not present in the case at bar, since there is no evidence that the income of
petitioner had been arbitrarily shifted to evade or avoid the payment of taxes.
Otherwise stated, there is no showing that petitioner's advances to its affiliat
es are designed to evade the payment of taxes, or that petitioner deliberately d
evised a scheme to avoid the payment thereof. the intention to minimize taxes, w
hen used in the context of fraud, must be proven by clear and convincing evidenc
e amounting to more than mere preponderance. Mere understatement of tax, in itse
lf, does not prove fraud. 24 As previously discussed, the grant of advances are
considered legitimate business undertakings intended to give financial assistanc
e to its affiliates.
The non-imposition of interest by petitioner for advance to its affiliates is no
t an indicia of fraud. Moreover, the net income of petitioner has not, in any wa
y, been understated as there is no interest income realized from the advances, w
hich necessitate a declaration in petitioner's income tax return. As correctly p
ointed out by petitioner, no interest shall be due unless it has been expressly
stipulated in writing. 25 The right to interest arises only by virtue of a contr
act or by virtue of damages for delay and failure to pay the principal on which
interest is demanded. 26 In the present case, respondent failed to show that pet
itioner and its affiliates agreed on the payment of interest for its advances. L
ikewise, we could not impute the payment of interest on a mere conjecture that p
etitioner's affiliates would, eventually, be unable to pay the principal amount
on which interest is demanded. Corollarily, the schedule of interest rates presc
ribed by the Bangko Sentral ng Pilipinas (BSP) may not be used in the instant ca
se due to the absence of an "arm's-length" transaction warranting its imposition
.
In its third and fourth assigned errors, petitioner reiterates its previous argu
ment that there is no implementing revenue regulation authorizing the CIR to imp
ute a theoretical or imaginary interest income. In the absence of a Philippine S
upreme Court decision upholding the authority of the BIR to collect a deficiency
tax on account of a theoretical or imaginary interest on such advances, petitio
ner argued that the imputation cannot be sustained. The tax court's adoption of
a foreign rule or regulation allowing the imputation of interest income on an "a
rm's-length" or theoretical interest rate, despite the absence of a similar rule
or regulation in this jurisdiction constitutes an amendment to the National Int
ernal Revenue Code (NIRC) without the benefit of congressional action. Petitione
r claimed that the American regulation clashes with existing Philippine law whic
h disallows interest unless expressly stipulated in writing. Moreso, there is no
basis for the CTA to take cognizance of the U.S. income tax regulation because
respondent failed to adduce evidence to prove the existence thereof.
We agree.
Foreign laws do not prove themselves in our jurisdiction and our courts are not
authorized to take judicial notice of them. Well-settled is the principle that f
oreign laws must be alleged and proved. 27 Nevertheless, respondent did not alle
ge in his Answer, nor did he prove in the course of the trial, the existence of
Section 482 of the Internal Revenue Code of the United States. Apparently, this
American law allows the imputation of interest income based on an "arm's-length"
interest rate. Surprisingly, the CTA took cognizance of the same. This is an ap
parent transgression of a settled rule that courts shall consider no evidence wh
ich has not been formally offered. 28 While the absence of local laws and jurisp
rudence does not per se prevent our courts from making reference of foreign stat
utes, this practice must be exercised with due care and prudence, having in mind
the superiority of domestic rules over foreign statutes.
Finally, petitioner in its ninth assigned error argues that respondent cannot ho
ld it liable to pay deficiency income tax based on allegedly undeclared interest
income. In the formal demand letter dated January 3, 2000, no provision in the
NIRC or regulation issued thereunder is cited by the BIR as legal basis for the
assessment. Also, there is no jurisprudential basis for the theoretical interest
income being imputed to FDC. For these reasons, petitioner posits that its non-
payment of the alleged deficiency income tax was in good faith and no delinquenc
y interest may be charged against it. Likewise, petitioner impugns the CTA decis
ion which used P5,691,972.03 as basis for the imposition of the 20% delinquency
interest per annum because the deficiency income tax as computed is only P4,164,
756.00.
Petitioner's arguments are partly tenable.
The law is explicit. Section 228 of the Tax Reform Act (R.A. 8424) provides that
the taxpayer shall be informed in writing of the law and the facts on which the
assessment is made, otherwise the assessment shall be void. In the same vein, t
he demand letter calling for payment of the taxpayer's deficiency tax shall stat
e the law, rules and regulations, or jurisprudence upon which the assessment is
made. A perusal of the formal demand letter 29 dated January 3, 2000 reveals tha
t the complete details covering the discrepancies as found by the respondent are
shown in an accompanying schedule attached to such letter. However, for reasons
discussed above, we, still, cannot uphold the respondent's view finding the pet
itioner liable for deficiency income tax on undeclared interest income. Conseque
ntially, the imposition of delinquency interest has no leg to stand on.
WHEREFORE, premises considered, the instant petition is hereby GRANTED. The assa
iled Decision dated September 10, 2002 rendered by the Court of Tax Appeals in C
TA Case No. 6182, directing petitioner Filinvest Development Corporation to pay
the amount of P5,691,972.03, representing deficiency income tax on allegedly und
eclared interest income for the taxable year 1997, plus 20% delinquency interest
computed from February 16, 2000 until full payment thereof, is REVERSED and SET
ASIDE and, a new one entered annulling Assessment Notice No. SP-INC-97-00019-20
00 imposing deficiency income tax on petitioner for taxable year 1997. No pronou
ncement as to costs.
SO ORDERED. HSacEI
Labitoria and Vidallon-Magtolis, * JJ ., concur.
December 14, 2000
REVENUE REGULATIONS NO. 10-00
SUBJECT : Further Amendments to Revenue Regulations No. 2-98 and 3-98, as
Last Amended by Revenue Regulations No. 8-2000
TO : All Internal Revenue Officials and Others Concerned
Pursuant to Sections 244 and 4 of the Tax Code of 1997 , in relation to the prov
isions of Executive Order No. 291 , these Regulations are hereby promulgated to
further amend Revenue Regulations No. 2-98 and Revenue Regulations No. 3-98 , a
s last amended by Revenue Regulations No. 8-2000 , with respect to the exemption
of Monetized Leave Credits of Government Officials and Employees and the enumer
ation of "De Minimis" benefits which are exempt from the income tax on compensat
ion as well as from the fringe benefits tax. AEDISC
SECTION 1. Section 2.78.1(A)(3), (6)(b)(ii) and (7) of Revenue Regulations
No. 2-98, as last amended by Revenue Regulations No. 8-2000, is hereby further a
mended to read as follows:
"Sec. 2.78.1. Withholding of Income Tax on Compensation Income.
"(A) . . .
"(1) Compensation paid in kind. . . .
"xxx xxx xxx
"(3) Facilities and privileges of relatively small value.
"xxx xxx xxx
"The following shall be considered as "de minimis" benefits not subject to INCOM
E TAX AS WELL AS withholding tax on compensation income of both managerial and r
ank and file employees:
(a) Monetized unused vacation leave credits of PRIVATE employees not exceedi
ng ten (10) days during the year AND THE MONETIZED VALUE OF LEAVE CREDITS PAID T
O GOVERNMENT OFFICIALS AND EMPLOYEES; AEcTCD
(b) Medical cash allowance to dependents of employees not exceeding P750.00
per employee per semester or P125 per month;
(c) Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per month amoun
ting to not more than P1,000.00;
(d) Uniform and clothing allowance not exceeding P3,000 per annum; EDcIAC
(e) Actual yearly medical benefits not exceeding P10,000 per annum;
(f) Laundry allowance not exceeding P300 per month;
(g) Employees achievement awards, e.g., for length of service or safety achi
evement, which must be in the form of a tangible personal property other than ca
sh or gift certificate, with an annual monetary value not exceeding P10,000 rece
ived by the employee under an established written plan which does not discrimina
te in favor of highly paid employees;
(h) Gifts given during Christmas and major anniversary celebrations not exce
eding P5,000 per employee per annum;
(i) Flowers, fruits, books, or similar items given to employees under specia
l circumstances, e.g., on account of illness, marriage, birth of a baby, etc., a
nd
(j) Daily meal allowance for overtime work not exceeding twenty five percent
(25%) of the basic minimum wage." IASEca
"xxx xxx xxx
"(6) Fixed or variable transportation, representation and other allowances
"xxx xxx xxx
"(b) . . .
"(i) . . .
"(ii) The employee is required to account/liquidate for the expenses in accord
ance with the specific requirements of substantiation for each category of expen
ses pursuant to Sec. 34 of the Code. The excess of ADVANCES MADE over ACTUAL EXP
ENSES shall constitute taxable income if such amount is not returned to the empl
oyer. Reasonable amounts of reimbursements/advances for travelling and entertain
ment expenses which are pre-computed on a daily basis and are paid to an employe
e while he is on an assignment or duty need not be subject to the requirements o
f substantiation and to withholding."
"(iii) . . .
"(7) Vacation and sick leave allowances. Amounts of "vacation allowances or s
ick leave credits" which are paid to an employee constitute compensation. Thus,
the salary of an employee on vacation or on sick leave, which IS paid notwithsta
nding his absence from work constitutes compensation. However, the monetized val
ue of unutilized vacation leave credits of ten (10) days or less which ARE paid
to PRIVATE employees during the year AND THE MONETIZED VALUE OF LEAVE CREDITS PA
ID TO GOVERNMENT OFFICIALS AND EMPLOYEES SHALL NOT BE SUBJECT TO INCOME TAX AND
CONSEQUENTLY TO WITHHOLDING TAX." aTEScI
"xxx xxx xxx
SECTION 2. Section 2.33 (C) of Revenue Regulations No. 3-98, as last amende
d by Revenue Regulations No. 8-2000, is hereby further amended to read as follow
s:
"Sec. 2.33. Special Treatment of Fringe Benefits
(A) Imposition of Fringe Benefits Tax
xxx xxx xxx
(B) Definition of Fringe Benefit
xxx xxx xxx
(C) Fringe Benefits Not Subject to Fringe Benefits Tax In general, the fring
e benefits tax shall not be imposed on the following fringe benefits:
(1) . . .
(2) . . .
(3) . . .
(4) De minimis benefits as defined in these Regulations;
(5) . . .
(6) . . .
xxx xxx xxx
The term "DE MINIMIS" benefits which are exempt from the fringe benefits tax sha
ll, in general, be limited to facilities or privileges furnished or offered by a
n employer to his employees that are of relatively small value and are offered o
r furnished by the employer merely as a means of promoting the health, goodwill,
contentment, or efficiency of his employees such as the following:
(a) Monetized unused vacation leave credits of PRIVATE employees not exceedi
ng ten (10) days during the year AND THE MONETIZED VALUE OF LEAVE CREDITS PAID T
O GOVERNMENT OFFICIALS AND EMPLOYEES; CcaDHT
(b) Medical cash allowance to dependents of employees not exceeding P750.00
per employee per semester or P125 per month;
(c) Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per month amoun
ting to not more than P1,000.00;
(d) Uniform and clothing allowance not exceeding P3,000 per annum;
(e) Actual yearly medical benefits not exceeding P10,000 per annum; DTSIE
c
(f) Laundry allowance not exceeding P300 per month;
(g) Employees achievement awards, e.g., for length of service or safety achi
evement, which must be in the form of a tangible personal property other than ca
sh or gift certificate, with an annual monetary value not exceeding P10,000 rece
ived by the employee under an established written in which does not discriminate
in favor of highly paid employees;
(h) Gifts given during Christmas and major anniversary celebrations not exce
eding P5,000 per employee per annum;
(i) Flowers, fruits, books, or similar items given to employees under specia
l circumstances, e.g., on account of illness, marriage, birth of a baby, etc., a
nd
(j) Daily meal allowance for overtime work not exceeding twenty-five percent
(25%) of the basic minimum wage."
"xxx xxx xxx"
SECTION 3. Transitory Provision. The benefits under Executive Order No. 291
as incorporated in these regulations shall apply to income earned for the year
2000.
SECTION 4. Repealing Clause. All existing rules and regulations or parts th
ereof which are inconsistent with the provisions of these regulations are hereby
revoked, repealed or modified accordingly.
SECTION 5. Effectivity Clause. These Regulations shall take effect immediat
ely upon approval. IEAacT
(SGD.) JOSE T. PARDO
Secretary of Finance