CIR v.

Proctor & Gamble

GR No. 66838, 2 December 1991

Facts:

For two successive taxable years, P&G Phil. declared dividends payable to its parent
company and sole stockholder, P&G-USA, from which thirty-five percent (35%)
withholding tax at source was deducted.

P&G Phil. filed for tax refund claiming that that rate applicable is 15% not 35%.

CTA allowed refund. This was reversed on the ground that:

a P&G-USA was the proper party to claim the refund.

b There is no provision that allows a credit against the tax due from P&G-USA of taxes
deemed to have been paid in the Philippines equivalent to 20% which represents the
difference between the regular tax of 35% on corporations and the tax of 15% on
dividends; and

c P&G-Phil. failed to meet certain conditions necessary in order that "the dividends
received by its non-resident parent company in the US may be subject to the
preferential tax rate of 15% instead of 35%.

Issues:

WON P&G Phil is entitled to the tax refund. YES

Ruling w/ Doctrine:

1st Issue:

NIRC defines taxpayer "any person subject to tax imposed by the Title on Tax on
Income.
 It is significant to note that, the withholding agent who is "required to deduct and withhold
any tax" is made personally liable for such tax. The withholding agent, P&G-Phil.,
is directly and independently liable for the correct amount of the tax that should be
withheld from the dividend remittances.

A "person liable for tax" has been held to be a "person subject to tax". It is conceptually
impossible then to consider a person who is statutorily made "liable for tax"
as not "subject to tax." By any reasonable standard, such a person should be regarded
as a party in interest, or as a person having sufficient legal interest, to bring a suit for
refund of taxes he believes were illegally collected from him.

In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, it is pointed

out that a withholding agent is in fact the agent both of the government and of the
taxpayer, and that the withholding agent is not an ordinary government agent:

Thus, P&G-Phil. is properly regarded as a "taxpayer" and as such is impliedly authorized

to file the claim for refund and the suit to recover such claim.

2nd and 3rd Issues:

NIRC provides that a foreign corporation not engaged in trade and business in the
Philippines shall pay a tax equal to 35% of the gross income from all sources within the
Philippines, as dividends. However, for dividends received from a domestic corporation
liable to tax, the tax shall be 15% of the dividends, subject to the condition that the
country in which the non-resident foreign corporation, is domiciled shall allow a credit
against the tax due from the non-resident foreign corporation, taxes deemed to have
been paid in the Philippines equivalent to 20% which represents the difference between
the regular tax 35% on corporations and the tax 15% on dividends.

Therefore, the reduced fifteen percent 15% dividend tax rate is applicable if the USA
"shall allow" to P&G-USA a tax credit for "taxes deemed paid in the Philippines"
applicable against the US taxes of P&G-USA. The NIRC specifies that such tax credit for
"taxes deemed paid in the Philippines" must, as a minimum, reach an amount equivalent
to twenty 20% which represents the difference between the 35% dividend tax rate and
the preferred fifteen percent 15% dividend tax rate.

The question arises: Did the US law comply with the above requirement? The US
Intemal Revenue Code grants P&G-USA a tax credit for the amount of the dividend tax
actually paid (i.e., withheld) from the dividend remittances to P&G-USA; In short, it
 grants to P&G-USA a "deemed paid' tax credit for a proportionate part of the corporate
income tax actually paid to the Philippines by P&G-Phil.

US tax law treats the Philippine corporate income tax as if it came out of the pocket, of
P&G-USA as a part of the economic cost of carrying on business operations in the
Philippines through the medium of P&G-Phil.

To determine whether it meets the conditions the amount of 20% dividend tax waived by
Philippine Govt must be at least equal to the amount of the deemed paid tax credit
allowed by USA.

Following long computation, it was found out that a tax credit of P29.75 is allowed by US
Tax Code for Philippine corporate income tax "deemed paid" by the parent but actually
paid by the wholly-owned subsidiary. Since P29.75 is much higher than P13.00 (the
amount of dividend tax waived by the Philippine government), US Tax Code, specifically
and clearly complies with the requirements of NIRC.

Moreover, the concept of "deemed paid" tax credit, which is embodied in the US Tax
Code, is exactly the same "deemed paid" tax credit found in our NIRC and which
Philippine tax law allows to Philippine corporations which have operations abroad (say, in
the United States) and which, therefore, pay income taxes to the US government.

Purpose of the reduction:

The economic objectives sought to be achieved by the Philippine Government by reducing the
thirty-five percent (35%) dividend rate to fifteen percent (15%) is to promote the in-flow of
foreign equity investment in the Philippines by reducing the tax cost of earning profits here and
thereby increasing the net dividends remittable to the investor. The foreign investor, however,
would not benefit from the reduction of the Philippine dividend tax rate unless its home country
gives it some relief from double taxation (i.e., second-tier taxation) (the home country would
simply have more "post-R.P. tax" income to subject to its own taxing power) by allowing the
investor additional tax credits which would be applicable against the tax payable to such home
country. Accordingly, NIRC requires the home or domiciliary country to give the investor
corporation a "deemed paid" tax credit at least equal in amount to the twenty (20) percentage
points of dividend tax foregone by the Philippines, in the assumption that a positive incentive
effect would thereby be felt by the investor.