CIR VS PROCTER AND GAMBLE PHILIPPINE MANUFACTURING CORPORATION (204 SCRA 377)

NON-RESIDENT FOREIGN CORPORATION- DIVIDENDS

Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend remittances to
non-resident corporate stockholders of a Philippine corporation. This rate goes down to 15% ONLY IF
the country of domicile of the foreign stockholder corporation “shall allow” such foreign corporation a
tax credit for “taxes deemed paid in the Philippines,” applicable against the tax payable to the
domiciliary country by the foreign stockholder corporation. However, such tax credit for “taxes deemed
paid in the Philippines” MUST, as a minimum, reach an amount equivalent to 20 percentage points

FACTS:

Procter and Gamble Philippines declared dividends payable to its parent company and sole stockholder,
P&G USA. Such dividends amounted to Php 24.1M. P&G Phil paid a 35% dividend withholding tax to the
BIR which amounted to Php 8.3M It subsequently filed a claim with the Commissioner of Internal
Revenue for a refund or tax credit, claiming that pursuant to Section 24(b)(1) of the National Internal
Revenue Code, as amended by Presidential Decree No. 369, the applicable rate of withholding tax on
the dividends remitted was only 15%.

MAIN ISSUE:

Whether or not P&G Philippines is entitled to the refund or tax credit.

HELD:

YES. P&G Philippines is entitled.

Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend remittances to
non-resident corporate stockholders of a Philippine corporation. This rate goes down to 15% ONLY IF he
country of domicile of the foreign stockholder corporation “shall allow” such foreign corporation a tax
credit for “taxes deemed paid in the Philippines,” applicable against the tax payable to the domiciliary
country by the foreign stockholder corporation. However, such tax credit for “taxes deemed paid in the
Philippines” MUST, as a minimum, reach an amount equivalent to 20 percentage points which
represents the difference between the regular 35% dividend tax rate and the reduced 15% tax rate.
Thus, the test is if USA “shall allow” P&G USA a tax credit for ”taxes deemed paid in the Philippines”
applicable against the US taxes of P&G USA, and such tax credit must reach at least 20 percentage
points. Requirements were met.

NOTES: Breakdown:

a) Deemed paid requirement: US Internal Revenue Code, Sec 902: a domestic corporation (owning 10%
of remitting foreign corporation) shall be deemed to have paid a proportionate extent of taxes paid by
such foreign corporation upon its remittance of dividends to domestic corporation.
b) 20 percentage points requirement: (computation is as follows)

P 100.00 -- corporate income earned by P&G Phils

x 35% -- Philippine income tax rate

P 35.00 -- paid by P&G Phil as corporate income tax

P 100.00

- 35.00

65. 00 -- available for remittance

P 65. 00

x 35% -- Regular Philippine dividend tax rate

P 22.75 -- regular dividend tax

P 65.0o

x 15% -- Reduced dividend tax rate

P 9.75 -- reduced dividend tax

P 65.00 -- dividends remittable

- 9.75 -- dividend tax withheld at reduced rate

P 55.25 -- dividends actually remitted to P&G USA

Dividends actually

remitted by P&G Phil = P 55.25

---------------------------------- ------------- x P35 = P29.75

Amount of accumulated P 65.00

profits earned

P35 is the income tax paid.

P29.75 is the tax credit allowed by Sec 902 of US Tax Code for Phil corporate income tax ‘deemed paid’
by the parent company. Since P29.75 is much higher than P13, Sec 902 US Tax Code complies with the
requirements of sec 24 NIRC. (I did not understand why these were divided and multiplied. Point is,
requirements were met)

Reason behind the law:

Since the US Congress desires to avoid or reduce double taxation of the same income stream, it allows a
tax credit of both (i) the Philippine dividend tax actually withheld, and (ii) the tax credit for the Philippine
corporate income tax actually paid by P&G Philippines but “deemed paid” by P&G USA.

Moreover, under the Philippines-United States Convention “With Respect to Taxes on Income,” the
Philippines, by treaty commitment, reduced the regular rate of dividend tax to a maximum of 20% of he
gross amount of dividends paid to US parent corporations, and established a treaty obligation on the
part of the United States that it “shall allow” to a US parent corporation receiving dividends from its
Philippine subsidiary “a [tax] credit for the appropriate amount of taxes paid or accrued to the
Philippines by the Philippine [subsidiary].

Note:

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

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

COMMISSIONER OF INTERNAL REVENUE V. PROCTER AND GAMBLE PHILIPPINE MANUFACTURING

CORPORATION (204 SCRA 377)- Tax on Dividends