G.R. No. 203346. September 09, 2020
CARGILL PHILIPPINES, INC., PETITIONER, VS. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
LEONEN, J.:
This Court resolves a Petition for Review on Certiorari[3] assailing the Decision[4] and Resolution[5] of the Court of Tax Appeals En Banc,
which denied Cargill Philippines, Inc.’s (Cargill) claim for refund or
tax credit worth P8,771,270.71, supposedly representing the erroneously
paid withholding taxes on royalties from June 1, 2005 to April 30, 2007.
The Court of Tax Appeals En Banc upheld the First Division’s Decision[6] and Resolution,[7]
holding that BIR Ruling No. DA-ITAD 60-07 is not binding because the
RP-Czech and RP-US tax treaties do not grant similar tax reliefs on
royalty payments in violation of the most favored nation clause.
Cargill is a domestic corporation primarily engaged in trading
commodities such as copra products, soybeans, and wheat, and in the
manufacturing of animal feeds and coconut oil.[8]
On June 1, 2002, Cargill entered into an Intellectual Property License
Agreement with United States company CAN Technologies, Inc.[9]
(CAN Technologies). The Agreement granted Cargill a “non-exclusive,
royalty bearing, and non-transferable license” to use CAN Technologies’
patent, technology, and copyrights “to produce, market, distribute,
sell, use and supply animal feeds in the Philippines.”[10]
In turn, Cargill would pay CAN Technologies a royalty fee equivalent to
1.25% of its net sales and 5.25% of its consulting revenues.[11]
From June 1, 2005 to April 2007, Cargill allegedly paid CAN
Technologies P175,425,414.12 as royalties, less withholding final taxes
at the rate of 15%, or P26,313,812.10.[12]
On December 21, 2005, Cargill wrote the Bureau of Internal Revenue,
requesting confirmation that the royalties it had paid CAN Technologies
were subject to the preferential tax rate of 10% in accordance with the
“most favored nation” clause of the RP-US Tax Treaty, in relation to the
RP-Bahrain Tax Treaty.[13]
In reply, the Bureau of Internal Revenue issued BIR Ruling No. DA ITAD
60-07 on May 11, 2007, confirming that a 10% tax rate may be applied to
the royalties Cargill had paid CAN Technologies since January 1, 2004.
It did clarify that this was not due to the RP-Bahrain Tax Treaty, which
was inapplicable, but Article 12[14] of the RP-Czech Tax Treaty, m relation to Article 13[15] of the RP-US Tax Treaty.[16]
Thus, on July 10, 2007, Cargill filed on behalf of CAN Technologies a
claim for refund of P8,771,270.71, which it alleged to be the overpaid
withholding tax on royalty payments. On the same date, Cargill also
filed a Petition before the Court of Tax Appeals, though later submitted
an amended Petition.[17]
On September 6, 2010, the Court of Tax Appeals First Division dismissed[18]
the Petition for insufficiency of evidence. It held that Cargill failed
to show that the taxes imposed on royalties in the RP-US and RP-Czech
tax treaties were “paid under similar circumstances” or that the tax
reliefs granted to United States residents under the RP-US Tax Treaty,
with respect to taxes imposable upon royalties earned from sources
within the Philippines, were similar to those allowed to Czech residents
under the RP-Czech Tax Treaty.[19]
The First Division noted that since Cargill failed to present the
relevant provisions of the United States law, it cannot be determined
for certain whether the limitation on tax credit under the United States
Law was similar to that under the RP-Czech Tax Treaty.[20]
The First Division found BIR Ruling No. DA-ITAD 60-07 infirm in
allowing Cargill to apply the 10% preferential tax rate on royalties. It
held that the BIR Ruling merely cited the relevant provisions of the
tax treaties without explaining how the mechanisms employed by the
United States and Czech Republic to mitigate the effects of double
taxation are the same.[21]
On September 23, 2010, Cargill filed an Omnibus Motion for
Reconsideration and To Reopen the Case for Presentation of Additional
Evidence.[22]
In its February 15, 2011 Resolution,[23] the Court of Tax Appeals First Division denied the Omnibus Motion. Citing Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc.,[24]
it explained that the most favored nation clause aims to grant
“equality of international treatment,” which entails that the tax burden
laid on the investor’s income be the “same” in the two
countries. To determine whether there is equality of treatment, the
limitations of credit on foreign taxes under the United States Law in
relation to Article 23(1) of the RP-US Tax Treaty must be compared with
the limitation in Article 22 of the RP-Czech Tax Treaty.[25]
As such, Cargill’s failure to present the United States Law was deemed
fatal to its refund claim. The First Division also reiterated that it
was not bound by the BIR Ruling, it being “judicially found to be
erroneous.”[26]
On March 25, 2011, Cargill filed its Petition for Review before the Court of Tax Appeals En Banc.[27]
In a May 24, 2012 Decision,[28] the Court of Tax Appeals En Banc
dismissed the Petition. It held that Cargill may not avail of the lower
10% tax rate for its failure to comply with the requirements of the
most favored nation clause embodied in S.C. Johnson,
particularly, its failure to show similarity in the circumstances in the
payment of taxes on royalties under the two treaties. It also sustained
the First Division’s holding that BIR Ruling No. DA-ITAD 60-07 cannot
be given weight.[29]
Cargill’s Motion for Reconsideration was likewise denied in an August 30, 2012 Resolution.[30] Rejecting the argument on its lack of jurisdiction to reverse BIR rulings, the Court of Tax Appeals En Banc
reasoned that it may pass upon the issue of the validity of an
administrative ruling or regulation if raised in refund or assessment
cases or other cases where it has jurisdiction.[31]
Hence, Cargill filed this Petition. In turn, the Commissioner of
Internal Revenue, through the Office of the Solicitor General, filed a
Comment.[32] Cargill subsequently filed its Reply.[33]
Petitioner submits that BIR Ruling No. DA-ITAD 60-07 had confirmed the
applicability of the 10% preferential tax rate on the royalties payable
by petitioner to CAN Technologies, pursuant to the RP-Czech Tax Treaty
in relation to the most favored nation clause of the RP-US Tax Treaty.[34]
It adds that, contrary to the holding of the First Division, the BIR
Ruling exhaustively explained why the most favored nation rate was
applicable,[35] and the ruling was arrived at after the Commissioner had considered all the appropriate laws,[36] supporting documents, and information[37] submitted by petitioner.
Petitioner contends that the BIR Ruling determined that the two conditions laid down in S.C. Johnson for the most favored nation clause to apply were met.[38]
These conditions were: (1) that royalties derived by a resident of the
United States and of Czech Republic are of the same kind;[39]
and (2) that the same mechanism must be employed by the United States
and Czech Republic in mitigating the effects of double taxation.[40]
Petitioner further stresses that before and after BIR Ruling No.
DA-ITAD-60-07, the Bureau of Internal Revenue had issued several rulings
with the same conclusion.[41] These rulings were presumably supported by factual and legal bases, and petitioner argues that these must be respected.[42]
Moreover, petitioner submits that the Court of Tax Appeals had no jurisdiction to reverse BIR Ruling No. DA-ITAD-60-07.[43] It invokes British American Tobacco v. Camacho,[44]
which had ruled that the Court of Tax Appeals’ jurisdiction does not
include cases where the constitutionality of a law or rule is
challenged. It submits that the BIR Ruling remains valid until the
Commissioner of Internal Revenue or the regular courts revoke it.[45] Neither can it be attacked collaterally in the present tax refund case.[46]
Even if BIR Ruling No. DA-ITAD-60-07 were invalid, petitioner contends
that such invalidity cannot be applied retroactively to its prejudice.[47]
Petitioner then argues that the preferential 10% tax rate would still apply despite certain dissimilarities.[48] For one, even if the RP-Czech Tax Treaty allows tax credit to a resident, while the RP-US Tax Treaty allows tax credit to a resident and citizen,
the most favored nation clause still applies. What is important is that
residents of both states are entitled to the similar tax reliefs for
taxes paid in the Philippines.[49] Similarly, even if the RP-Czech Tax Treaty allows tax credit on royalties paid in the Philippines, while the RP-US Tax Treaty allows tax credit on royalties paid or accrued in the Philippines, the clause would still apply.[50]
Petitioner also submits that a reference to United States laws is not necessary for the most favored nation clause to apply.[51] It adds that in S.C. Johnson,
this Court did not consider the domestic laws of the United States and
Germany in determining if the taxes are “paid under similar
circumstances.”[52] In that
case, asserts petitioner, the tax credit allowed under the RP-US and
RP-Germany tax treaties were considered, and not the tax credit
ultimately granted under each country’s domestic law.[53]
Petitioner adds that “since the . . . royalties involved refer
to royalties in the Philippines, the taxes on royalties referred to . .
. pertains to the taxes paid in the Philippines based on the treaties
and not the taxes paid in the country where the recipient of the royalty
income is a resident.”[54] Petitioner submits that:
. . . the taxes on royalties under both the RP-US Tax Treaty and
the RP-Czech Tax Treaty are paid under similar circumstances,
considering that the taxes paid on such royalties in the Philippines are
allowed as tax credit from the tax due on such income imposed in the
United States and on the taxes due on such income imposed in the Czech
Republic.[55]
Finally, petitioner insists on being entitled to the refund of
P8,771,270.71, the amount it claims to represent the erroneously paid
final withholding taxes on royalties paid to CAN Technologies.[56]
In her Comment, respondent counters that the Court of Tax Appeals has
jurisdiction to pass upon the validity of BIR Ruling No. DA-ITAD 60-07,
as petitioner’s claim for refund hinges on this issue.[57]
Respondent goes on to claim that the Court of Tax Appeals correctly
ruled that BIR Ruling No. DA-ITAD 60-07 is not valid because the second
requirement of the most favored nation clause, per S.C. Johnson, was not met.[58]
Petitioner allegedly failed to show similarity in the circumstances in
the payment of taxes on royalties under the two treaties.[59]
Respondent also asserts that petitioner failed to present evidence to
establish the provisions of the United States law that determines the
limitation of the amount that may be credited, as referred to in Article
23(1) of the RP-US Tax Treaty.[60]
Finally, respondent claims that BIR Ruling No. DA-ITAD 60-07 must be struck down because it goes against the rule in S.C. Johnson for the most favored nation clause to apply.[61] She maintains that “administrative regulations ‘may not enlarge, alter, or restrict the provisions of the law it administers.”‘[62]
In its Reply, petitioner reiterates the arguments it raised in its
Petition. It maintains that even if BIR Ruling No. DA-ITAD 60-07 were
invalid, the ruling should not be retroactively applied to its
prejudice.[63]
Petitioner further avers that the differences on entities entitled to credit[64]
and on the timing of tax credit recognition do not amount to
dissimilarities in the circumstances of the payment of the tax, and
thus, would not render the most favored nation clause inapplicable.[65]
It also submits that limitations on tax credit are present in both the
RP-US Tax Treaty and RP-Czech Tax Treaty. It disagrees with respondent’s
position that reference to domestic laws on the determination of the
amount of foreign tax credit would result in a dissimilarity in the
circumstances of the payment of the taxes.[66]
Petitioner asserts that limitations on tax credit are common features
in tax treaties. Citing the OECD Model Tax Convention and its
commentaries, petitioner avers that a number of treaties usually refer
to the domestic laws of the contracting states for detailed rules on
foreign tax credit. This is permissible, adds petitioner, as long as the
general principle laid down in Article 23B of the OECD Model is not
altered. The general principle is that the tax credit of foreign income
taxes imposed on foreign source income is limited to the extent that
such taxes do not exceed the income tax of the other country on that
foreign source income.[67]
Petitioner submits that since both the RP-US and RP-Czech tax treaties
provide the general principle on limitation on tax credit, there is
similarity in the circumstances of payment of taxes.[68]
There is no need to delve into the details of the United States law,
which merely concerns the calculation of the limitation on tax credit.
Petitioner adds that the Philippines had likewise placed similar
conditions and references to domestic law in the tax treaties.[69]
Invoking the doctrine of processual presumption,
petitioner further argues that the United States income tax law is
presumed to be the same as Philippine tax law. It contends that Section
904(a) of the United States Internal Revenue Code is similar to Section
34(c)(4) of the National Internal Revenue Code of 1997, as amended.[70]
Finally, petitioner submits that tax treaties are governed by
international law, and they should be interpreted in good faith in light
of their object and purpose, pursuant to the general rules of
interpretation set forth in the Vienna Convention on the Law of
Treaties. It then asserts that the Court of Tax Appeals’ ruling—that the
second requisite of the most favored nation clause was not met—was not
made in good faith and does not serve the object and purpose of the tax
treaties. Petitioner argues that such strict construction negates the
essence of the most favored nation clause, which is to ensure equality
in international treatment, and the availment of the reliefs provided in
the tax treaties.[71]
For this Court’s resolution are the following issues:
First, whether or not the Court of Tax Appeals has jurisdiction to
determine the validity of BIR Ruling No. DA-ITAD 60-07. Related to this
is whether or not the validity of BIR Ruling No. DA-ITAD 60-07 can be
assailed in the present tax refund case;
Second, whether or not the Court of Tax Appeals erred in declaring BIR Ruling No. DA-ITAD 60-07 invalid and not binding;
Third, whether or not the Court of Tax Appeals’ ruling declaring BIR
Ruling No. DA-ITAD 60-07 to be invalid can be applied to petitioner; and
Finally, whether or not petitioner is entitled to a tax refund/credit
certificate in the amount of P8,771,270.71, representing erroneously
paid final withholding taxes on royalties paid to CAN Technologies from
June 1, 2005 to April 30, 2007.
The Petition is denied.
I
The Court of Tax Appeals has jurisdiction to review and nullify the rulings of the Commissioner of Internal Revenue.
Under Republic Act No. 1125, or An Act Creating the Court of Tax
Appeals, as amended by Republic Act No. 9282, the Commissioner of
Internal Revenue’s rulings on “other matters arising under the National
Internal Revenue or other laws administered by the Bureau of Internal
Revenue” are appealable to the Court of Tax Appeals, thus:
SECTION 7. Jurisdiction. — The CTA shall exercise:
in cases involving disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue or other laws administered by the Bureau of Internal Revenue[.]
Here, petitioner argues that the Court of Tax Appeals had no
jurisdiction to reverse or nullify BIR Ruling No. DA-ITAD-60-07, citing British American Tobacco v. Camacho,[72] which held:
While the above statute confers on the CTA jurisdiction to
resolve tax disputes in general, this does not include cases where
the constitutionality of a law or rule is challenged. Where what is
assailed is the validity or constitutionality of a law, or a rule or
regulation issued by the administrative agency in the performance of its
quasi-legislative function, the regular courts have jurisdiction to
pass upon the same. The determination of whether a specific rule or set
of rules issued by an administrative agency contravenes the law or the
constitution is within the jurisdiction of the regular courts. Indeed,
the Constitution vests the power of judicial review or the power to
declare a law, treaty, international or executive agreement,
presidential decree, order, instruction, ordinance, or regulation in the
courts, including the regional trial courts. This is within the
scope of judicial power, which includes the authority of the courts to
determine in an appropriate action the validity of the acts of the
political departments. Judicial power includes the duty of the courts of
justice to settle actual controversies involving rights which are
legally demandable and enforceable, and to determine whether or not
there has been a grave abuse of discretion amounting to lack or excess
of jurisdiction on the part of any branch or instrumentality of the
Government.[73] (Emphasis supplied)
We disagree.
In The City of Manila v. Hon. Grecia-Cuerdo,[74]
this Court recognized that the Court of Tax Appeals possessed all
inherent powers necessary to the full and effective exercise of its
appellate jurisdiction over tax cases:
A grant of appellate jurisdiction implies that there is included
in it the power necessary to exercise it effectively, to make all
orders that will preserve the subject of the action, and to give effect
to the final determination of the appeal. It carries with it the power
to protect that jurisdiction and to make the decisions of the court
thereunder effective. The court, in aid of its appellate jurisdiction,
has authority to control all auxiliary and incidental matters necessary
to the efficient and proper exercise of that jurisdiction. For this
purpose, it may, when necessary, prohibit or restrain the performance of
any act which might interfere with the proper exercise of its rightful
jurisdiction in cases pending before it.Lastly, it would not be amiss to point out that a court which is
endowed with a particular jurisdiction should have powers which are
necessary to enable it to act effectively within such jurisdiction.
These should be regarded as powers which are inherent in its
jurisdiction and the court must possess them in order to enforce its
rules of practice and to suppress any abuses of its process and to
defeat any attempted thwarting of such process.In this regard, Section I of RA 9282 states that the CTA
shall be of the same level as the CA and shall possess all the inherent
powers of a court of justice.Indeed, courts possess certain inherent powers which may be
said to be implied from a general grant of jurisdiction, in addition to
those expressly conferred on them. These inherent powers are such powers
as are necessary for the ordinary and efficient exercise of
jurisdiction; or are essential to the existence, dignity and functions
of the courts, as well as to the due administration of justice; or are
directly appropriate, convenient and suitable to the execution of their
granted powers; and include the power to maintain the court’s
jurisdiction and render it effective in behalf of the litigants.Thus, this Court has held that “while a court may be
expressly granted the incidental powers necessary to effectuate its
jurisdiction, a grant of jurisdiction, in the absence of prohibitive
legislation, implies the necessary and usual incidental powers essential
to effectuate it, and, subject to existing laws and constitutional
provisions, every regularly constituted court has power to do all things
that are reasonably necessary for the administration of justice within
the scope of its jurisdiction and for the enforcement of its judgments
and mandates. ” Hence, demands, matters or questions ancillary or
incidental to, or growing out of the main action, and coming within the
above principles, may be taken cognizance of by the court and
determined, since such jurisdiction is in aid of its authority over the
principal matter, even though the court may thus be called on to
consider and decide matters which, as original causes of action, would
not be within its cognizance.[75] (Emphasis supplied, citations omitted)
This Court underscored that the grant of appellate jurisdiction to
the Court of Tax Appeals includes the power necessary to exercise it
effectively. Deemed included in its jurisdiction is the authority to
resolve petitions for certiorari against interlocutory orders of the
Regional Trial Court in local tax cases.[76]
Furthermore, a split jurisdiction between the Court of Tax Appeals and
the Court of Appeals is “anathema to the orderly administration of
justice” and could not have been the legislative intent.[77]
In Banco De Oro v. Republic,[78] this Court abandoned British American Tobacco
and declared that the Court of Tax Appeals has exclusive jurisdiction
to determine the validity of tax laws, rules and regulations, and other
administrative issuances of the Commissioner of Internal Revenue.
Consistent with Commissioner of Internal Revenue v. Leal,[79] citing Rodriguez v. Blaquera[80] and Asia International Auctioneers, Inc. v. Hon. Parayno, Jr.,[81] we recognized the Court of Tax Appeals’ broad authority over tax-related cases. Thus:
The Court of Tax Appeals has undoubted jurisdiction to pass
upon the constitutionality or validity of a tax law or regulation when
raised by the taxpayer as a defense in disputing or contesting an
assessment or claiming a refund. It is only in the lawful exercise of
its power to pass upon all matters brought before it, as sanctioned by
Section 7 of Republic Act No. 1125, as amended.This Court, however, declares that the Court of Tax Appeals
may likewise take cognizance of cases directly challenging the
constitutionality or validity of a tax law or regulation or
administrative issuance (revenue orders, revenue memorandum circulars,
rulings).Section 7 of Republic Act No. 1125, as amended, is explicit
that, except for local taxes, appeals from the decisions of
quasi-judicial agencies (Commissioner of Internal Revenue, Commissioner
of Customs, Secretary of Finance, Central Board of Assessment Appeals,
Secretary of Trade and Industry) on tax-related problems must be brought
exclusively to the Court of Tax Appeals.In other words, within the judicial system, the law intends the
Court of Tax Appeals to have exclusive jurisdiction to resolve all tax
problems. Petitions for writs of certiorari against the acts and
omissions of the said quasi-judicial agencies should, thus, be filed
before the Court of Tax Appeals.Republic Act No. 9282, a special and later law than Batas
Pambansa Blg. 129 provides an exception to the original jurisdiction of
the Regional Trial Courts over actions questioning the constitutionality
or validity of tax laws or regulations. Except for local tax cases,
actions directly challenging the constitutionality or validity of a tax
law or regulation or administrative issuance may be filed directly
before the Court of Tax Appeals.Furthermore, with respect to administrative issuances (revenue
orders, revenue memorandum circulars, or rulings), these are issued by
the Commissioner under its power to make rulings or opinions in
connection with the implementation of the provisions of internal revenue
laws. Tax rulings, on the other hand, are official positions of the
Bureau on inquiries of taxpayers who request clarification on certain
provisions of the National Internal Revenue Code, other tax laws, or
their implementing regulations. Hence, the determination of the validity
of these issuances clearly falls within the exclusive appellate
jurisdiction of the Court of Tax Appeals under Section 7(1) of Republic
Act No. 1125, as amended, subject to prior review by the Secretary of
Finance, as required under Republic Act No. 8424.[82] (Emphasis supplied, citations omitted)
Banco de Oro stressed that such jurisdiction is exclusively
vested in the Court of Tax Appeals, whether raised by the taxpayer
directly or as a defense.
Thus, the Court of Tax Appeals has
jurisdiction to pass upon the validity of BIR Ruling No. DA-ITAD-60-07,
on which petitioner squarely relied to support its claim for refund. The
Court of Tax Appeals is not bound by the Bureau of Internal Revenue’s
interpretation or application of treaty provisions when it is found to
be clearly erroneous. As this Court held:
Even conceding that the construction of a statute by the CIR is
to be given great weight, the courts, which include the CTA, are not
bound thereby if such construction is erroneous or is clearly shown to
be in conflict with the governing statute or the Constitution or other
laws. “It is the role of the Judiciary to refine and, when necessary,
correct constitutional (and/or statutory) interpretation, in the context
of the interactions of the three branches of the government.”[83] (Citation omitted)
II
The main substantive issue raised in this case involves the
application of the most favored nation clause under Article
13(2)(b)(iii) of the RP-US Tax Treaty,[84] a convention between the Philippines and the United States. The provision states:
Article 13
Royalties
resident of one of the Contracting States from sources within the other
Contracting State may be taxed by both Contracting States.
royalties, where the royalties are paid by a corporation registered with
the Philippine Board of Investments and engaged in preferred areas of
activities; and
The most favored nation clause speaks of the “lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State.”
Therefore, the tax treatment of royalties to a United States entity may
be taken in relation to other tax treaties that provide a lower tax
rate on the same type of income.
Here, the question is whether petitioner is entitled to the 10%
preferential tax rate, as provided in Article 12(2)(a) of the RP-Czech
Tax Treaty,[85] on royalties paid to CAN Technologies, a resident corporation of the United States:
Article 12
Royalties
also be taxed in the Contracting State in which they arise and
according to the laws of that State, but if the beneficial owner of the
royalties is a resident of the other Contracting State, the tax so charged shall not exceed –
arising from the use of, or the right to use, any copyright of
literary, artistic or scientific work, other than that mentioned in
sub-paragraph (b), any patent, trademark, design or model, plan, secret
formula or process, or from the use of, or the right to use, industrial,
commercial or scientific equipment, or for information concerning
industrial, commercial or scientific experience;
of the Contracting States shall by mutual agreement settle the mode of
application of these limitations. (Emphasis supplied)
In Commissioner of Internal Revenue v. S.C. Johnson & Sons,[86] this Court construed the phrase “paid under similar circumstances” under the most favored nation clause as referring to circumstances
that are tax-related. In other words, the similarity in the
circumstances of payment of taxes on the royalties derived from the
Philippines is a condition/or the enjoyment of the most favored nation
treatment.
This Court explained in S.C. Johnson that bilateral tax
treaties have been entered into by the Philippines with different
countries to avoid double taxation. It held:
The purpose of these international agreements is to reconcile
the national fiscal legislations of the contracting parties in order to
help the taxpayer avoid simultaneous taxation in two different
jurisdictions. More precisely, the tax conventions are drafted with a
view towards the elimination of international juridical double taxation,
which is defined as the imposition of comparable taxes in two or more
states on the same taxpayer in respect of the same subject matter and
for identical periods. The apparent rationale for doing away with double
taxation is to encourage the free flow of goods and services and the
movement of capital, technology and persons between countries,
conditions deemed vital in creating robust and dynamic economies.
Foreign investments will only thrive in a fairly predictable and
reasonable international investment climate and the protection against
double taxation is crucial in creating such a climate.[87] (Emphasis in the original, citations omitted)
This Court further explained that to eliminate double taxation, a tax treaty resorts to two methods: first, by allocating the right to tax between the contracting states; and second,
where the state of source is assigned the right to tax, by requiring
the state of residence to grant a tax relief either through exemption or
tax credit. Thus:
Double taxation usually takes place when a person is resident of
a contracting state and derives income from, or owns capital in, the
other contracting state and both states impose tax on that income or
capital. In order to eliminate double taxation, a tax treaty resorts to
several methods. First, it sets out the respective rights to tax of the
state of source or situs and of the state of residence with regard to
certain classes of income or capital. In some cases, an exclusive right
to tax is conferred on one of the contracting states; however, for other
items of income or capital, both states are given the right to tax,
although the amount of tax that may be imposed by the state of source is
limited.The second method for the elimination of double taxation applies
whenever the state of source is given a full or limited right to tax
together with the state of residence. In this case, the treaties make it
incumbent upon the state of residence to allow relief in order to avoid
double taxation. There are two methods of relief — the exemption method and the credit method. In the exemption
method, the income or capital which is taxable in the state of source
or situs is exempted in the state of residence, although in some
instances it may be taken into account in determining the rate of tax
applicable to the taxpayer’s remaining income or capital. On the other hand, in the credit
method, although the income or capital which is taxed in the state of
source is still taxable in the state of residence, the tax paid in the
former is credited against the tax levied in the latter. The basic
difference between the two methods is that in the exemption method, the
focus is on the income or capital itself, whereas the credit method
focuses upon the tax. [88] (Emphasis supplied, citations omitted)
The exemption and credit principles are the two leading principles
in eliminating double taxation that are being followed in existing
conventions between countries.[89]
Under the exemption principle, the income that may be taxed in the
state of source is not taxed in the state of residence. This may be
applied by two methods: full exemption, where the state of residence does not account for the income from the state of source for tax purposes; or with progression,
where the income taxed in the state of source is not taxed by the state
of residence, but the state of residence retains the right to consider
that income when determining the tax to be imposed on the rest of the
income.[90]
Under the
credit principle, the state of residence retains the right to tax the
taxpayer’s total income, but allows a deduction for the tax paid in the
state of source. It may be applied by two methods: a full credit, where the total amount of tax paid in the state of source is allowed as deduction; or an ordinary credit,
where the deduction allowed by the state of residence is restricted to
that part of its own tax appropriate to the income from the state of
source.[91]
Some states have also adopted the so-called “tax sparing“[92] provision, in relation to tax incentives granted under their respective domestic laws to attract foreign investments.[93] With tax sparing, taxes exempted or reduced are considered fully paid.[94] Consequently, a non-resident may obtain a tax credit for the taxes that have been “spared” under the incentive program of the state of source,[95] preserving the economic benefits granted by the state of source.
Another form of tax sparing the so-called “matching credit,”[96]
where the state of residence agrees, as a counterpart to the reduced
tax, to allow a deduction against its own tax of an amount fixed at a
higher rate.[97]
In S.C. Johnson,
this Court stated that “[i]n negotiating tax treaties, the underlying
rationale for reducing the tax rate is that the Philippines will give up
a part of the tax in the expectation that the tax given up for this
particular investment is not taxed by the other country.” [98] It expounded:
. . . the ultimate reason for avoiding double taxation is to
encourage foreign investors to invest in the Philippines — a crucial
economic goal for developing countries. The goal of double taxation
conventions would be thwarted if such treaties did not provide for
effective measures to minimize, if not completely eliminate, the tax
burden laid upon the income or capital of the investor. Thus, if the
rates of tax are lowered by the state of source, in this case, by the
Philippines, there should be a concomitant commitment on the part of the
state of residence to grant some form of tax relief, whether this be in
the form of a tax credit or exemption. Otherwise, the tax which could
have been collected by the Philippine government will simply be
collected by another state, defeating the object of the tax treaty since
the tax burden imposed upon the investor would remain unrelieved. If
the state of residence does not grant some form of tax relief to the
investor, no benefit would redound to the Philippines, i.e., increased
investment resulting from a favorable tax regime, should it impose a
lower tax rate on the royalty earnings of the investor, and it would be
better to impose the regular rate rather than lose much-needed revenues
to another country.[99] (Citations omitted)
In light of the purpose of tax treaties, the relevant treaty
provisions on the tax treatment of particular items of income, combined
with the provision on the elimination or avoidance of double taxation,
govern the allocation of the right to tax between the contracting
states.
In some tax treaties or international agreements, a most
favored nation clause is added to ensure the contracting states of the
benefit of concessions previously or subsequently to be made by either
contracting state. This provision guards against oversight during treaty
negotiation, and obviates the need for subsequent negotiations.[100] The clause aims to prevent discriminations[101] and to give assurance of the opportunity to enjoy equality of treatment.[102] In S.C. Johnson:
The purpose of a most favored nation clause is to grant to the
contracting party treatment not less favorable than that which has been
or may be granted to the “most favored” among other countries. The most
favored nation clause is intended to establish the principle of equality
of international treatment by providing that the citizens or subjects
of the contracting nations may enjoy the privileges accorded by either
party to those of the most favored nation. The essence of the principle
is to allow the taxpayer in one state to avail of more liberal
provisions granted in another tax treaty to which the country of
residence of such taxpayer is also a party provided that the subject
matter of taxation, in this case royalty income, is the same as that in
the tax treaty under which the taxpayer is liable. Both Article 13 of
the RP-US Tax Treaty and Article 12(2)(b) of the RP-West Germany Tax
Treaty, above-quoted, speaks of tax on royalties for the use of
trademark, patent, and technology. The entitlement of the 10% rate by
U.S. firms despite the absence of a matching credit (20% for royalties)
would derogate from the design behind the most favored nation clause to
grant equality of international treatment since the tax burden laid upon
the income of the investor is not the same in the two countries. The
similarity in the circumstances of payment of taxes is a condition for
the enjoyment of most favored nation treatment precisely to underscore
the need for equality of treatment.[103] (Citations omitted)
Per S.C. Johnson, two conditions must be met for the most favored nation clause to apply. First,
royalties derived from the Philippines by a resident of the United
States and of the third state must be of the same kind or class, in
order to avail of the lower tax enjoyed by the third state. Second,
the tax consequences of royalty payments under the two treaties must be
under similar circumstances. This requires a showing that the method
employed for eliminating or mitigating the effects of double taxation
under the treaty with the United States and the third state are the
same.
In that case, this Court found that the United States
resident was not entitled to the most favored nation tax rate of 10% on
royalty income derived from the Philippines because the payment of such
tax was not under similar circumstances. While Germany has a matching
credit of 20% of the gross amount of royalties paid in the Philippines,
there is no such similar credit granted by the United States.[104]
Here, there is no question as to compliance with the first condition.
It is undisputed that payments to CAN Technologies for the use or
entitlement to use its patent, technology, and copyrights on the
manufacture and sale of animal feeds are within the definition of
royalties under Article 13(3)[105] of the RP-US Tax Treaty and Article 12(2)[106] of the RP-Czech Tax Treaty.
On the second condition, this Court agrees with petitioner that
differences pertaining to the taxpayers entitled to tax credit (resident and citizen under RP-US Tax Treaty vs. resident under RP-Czech Tax Treaty) and to the timing of the recognition of the tax credit (taxes paid or accrued under
RP-US Tax Treaty vs. taxes paid under RP-Czech Tax Treaty) do not
amount to dissimilarities in the circumstances of the payment of the
tax, which would have rendered the most favored nation clause
inapplicable.[107]
As
petitioner argued, the inclusion of “citizens” under the RP-US Tax
Treaty is not a material distinguishing feature. What is important is
that residents of both the United States and the Czech Republic are
entitled to similar tax reliefs for taxes paid in the Philippines.
Similarly, that taxes “paid or accrued” are allowed as tax credit under
the RP-US Tax Treaty pertains merely to the timing of recognition of the
credit, which depends on when the tax was levied at the state of
source. Regardless, under the tax treaties, relief is required to be
granted by the state of residence where an item of income is taxed by
the state of source.
However, we find untenable petitioner’s
contention on the similarity of tax reliefs allowed by the United States
and the Czech Republic. Both the RP-US Tax Treaty and the RP-Czech Tax
Treaty were entered into “for the avoidance of double taxation and the
prevention of fiscal evasion with respect to taxes on income.”[108]
The articles for the elimination or avoidance of double taxation of
both countries are found in the following provisions in the RP-US Tax
Treaty and RP-Czech Tax Treaty:
RELIEF FROM DOUBLE TAXATIONDouble taxation of income shall be avoided in the following manner:
subject to the limitations of the law of
the United States ( as it may be
amended from time to time without changing the general principle hereof),
the United States shall allow to a
citizen or resident of the United States as a credit against the United States tax
the appropriate amount of taxes paid
or accrued to the Philippines and, in
the case of a United States corporation
owning at least 10 percent of the voting
stock of a Philippine corporation from which it receives dividends in any
taxable year, shall allow credit for the
appropriate amount of taxes paid or
accrued to the Philippines by the
Philippine corporation paying such
dividends with respect to the profits out
of which such dividends are paid. Such
appropriate amount shall be based upon
the amount of tax paid or accrued to the
Philippines, but the credit shall not
exceed the limitations (for the purpose
of limiting the credit to the United
States tax on income from sources
within the Philippines or on income from sources outside the United States)
provided by United States law for the
taxable year. For the purpose of
applying the United States credit in
relation to taxes paid or accrued to the
Philippines, the rules set forth in
Article 4 (Source of Income) shall be
applied to determine the source of
income. For purposes of applying the
United States credit in relation to taxes
paid or accrued to the Philippines, the
taxes referred to in paragraphs 1 (b) and
2 of Article I (Taxes Covered) shall be
considered to be income taxes.
subject to the limitations of the law of
the Philippines (as it may be amended
from time to time without changing the general principle hereof), the
Philippines shall allow to a citizen or
resident of the Philippines as a credit
against the Philippine tax the
appropriate amount of taxes paid or
accrued to the United States . . . Such
appropriate amount shall be based upon
the amount of tax paid or accrued to the
United States, but the credit shall not
exceed the limitations (for the purpose
of limiting the credit to the Philippine
tax on income from sources within the
United States, and on income from
sources outside the Philippines)
provided by Philippine law for the
taxable year[.] (Emphasis supplied)
ELIMINATION OF DOUBLE TAXATION
Philippines and the limitations thereof regarding the allowance of a
credit against the Philippine tax of tax paid in any country other than
the Philippines, the Czech tax paid in respect of income derived from
the Czech Republic shall be allowed as credit against the Philippine tax
payable in respect of that income.2.
imposing taxes on its residents, may include in the tax base upon which
such taxes are imposed the items of income which according to the
provisions of this Convention may also be taxed in the Philippines, but
shall allow as a deduction from the amount of tax computed on such a
base an amount equal to the tax paid in the Philippines. Such
deduction shall not, however, exceed that part of the Czech tax, as
computed before the deduction is given, which is appropriate to the
income which, in accordance with the provisions of this Convention, may
be taxed in the Philippines.b) Where in accordance with any
provision of the Convention income derived by a resident of the Czech
Republic is exempt from tax in the Czech Republic, the Czech Republic
may nevertheless, in calculating the amount of Czech tax on the
remaining income of such resident, take into account the exempted
income. (Emphasis supplied)
Indeed, both the United States and the Czech
Republic adopt the credit principle, where the taxes paid in the
Philippines on royalty income are allowed to be credited against the
United States tax or Czech tax, as the case may be. However, a closer
look at the treaty provisions would show that while the RP-Czech Tax
Treaty specifies how the tax credit is to be implemented and its
limitations, the RP-US Tax Treaty does not.
By looking at the RP-Czech Tax Treaty, we would already know how
the credit is applied and what the maximum deduction allowed is:
First,
the Czech tax is calculated based on the taxpayer’s total income,
including the income from the Philippines, but the tax paid in the
Philippines is allowed as deduction from the Czech tax; and
Second, the tax paid in the Philippines should not exceed the Czech tax appropriate to the Philippine-sourced income.
On the other hand, while the RP-US Tax Treaty does not provide details
on how the credit is to be applied and its limitations, it expressly
refers to the United States law in that the tax paid or accrued to the
Philippines shall be allowed as a credit against United States tax in accordance with, and subject to the limitations of United States law. Furthermore, the tax credit shall not exceed the limitations provided by the United States law for the taxable year.
Moreover, under the RP-Czech Tax Treaty, the limitation on credit is
already specified—that the Philippine tax should not exceed the Czech
tax payable for the same income. Under the RP-US Tax Treaty, the
limitation on credit is not determinable unless we look into the
internal tax law of the United States.
Therefore, the Court of
Tax Appeals was correct in ruling that the relevant provisions of the
United States law are necessary to determine for certain the similarity
in circumstances in the payment of taxes on royalty in the United States
and the Czech Republic.
In this regard, the Court of Tax Appeals First Division, as reiterated by the En Banc, made the following findings:
Records show that petitioner failed to present evidence to prove
or establish the provisions of the United States law which would
determine the limitation being referred to in Article 23(1) of the RP-US
Tax Treaty. Thus, We cannot say for certain that the RP-US Tax Treaty
grants similar tax reliefs to residents of the United States with
respect to taxes imposable upon royalties earned from sources within the
Philippines as those allowed to Czech residents under the RP-Czech Tax
Treaty.The limitation of the amount that may be credited under the
RP-US Tax Treaty must be clearly established. This must be so because
the similarity in the circumstances of payment of taxes is a condition
for the enjoyment of most favored nation treatment, precisely to
underscore the need for equality of treatment.[109] (Citation omitted)
Petitioner, however, invokes the doctrine of processual presumption,
which provides that “in the absence of pleading and proof, the laws of
the foreign country or state will be presumed to be the same as our
local or domestic law.”[110]
It argues that the limitation on credit may then be clearly established
by referring to our domestic law, which is presumed to be the same as
the United States law on the matter. It adds that Section 904(a) of the
United States Internal Revenue Code is similar to Section 34(c)(4) of
the National Internal Revenue Code of 1997, as amended.[111]
This Court is not convinced.
The International law doctrine of processual presumption or presumed-identity approach comes into play when a party invoking the application of a foreign law to a dispute fails to prove the foreign law.[112] While the doctrine has been applied in cases involving common carriers, [113] property relations of spouses,[114] maritime [115] and labor,[116] it is not applicable in this case.
It is a fundamental taxation principle that a state may tax persons, property, income, or business within its territorial limits.[117]
Royalty income derived by a non-resident foreign corporation in the
Philippines are generally taxed at 35% (for payments before January 1,
2009) pursuant to Section 28(B)(1)[118]
of the National Internal Revenue Code of 1997. However, such royalties
may be exempt or partially exempt (if subject to a reduced rate only) to
the extent required by any treaty obligation binding on the
Philippines. Section 32(B)(5) of the National Internal Revenue Code of
1997, as amended, provides:
SECTION 32. Gross Income. —
. . . .
(B) Exclusions from Gross Income. — The following items shall
not be included in gross income and shall be exempt from taxation under
this Title:. . . .
(5) Income Exempt under Treaty. — Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines.
Thus, a foreign corporation may avail of the benefits of a tax
treaty concluded by the Philippines with its country of residence by
invoking the treaty provisions and proving that they apply to it. In
other words, unless clearly proven that the treaty provisions apply to
it, a non-resident foreign corporation, like CAN Technologies, shall be
taxed according to the National Internal Revenue Code of 1997, as
amended.
Petitioner’s claim on behalf of CAN Technologies for
refund of “erroneously paid withholding tax on royalty income” is
anchored on the 10% preferential tax rate under the RP-Czech Tax Treaty,
in relation to the most favored nation clause of the RP-US Tax Treaty.
Consequently, compliance with the conditions for the applicability of
the most favored nation clause must be proven as a fact. It is necessary
to show the similarity in tax reliefs accorded by the United States and
the Czech Republic under their respective treaties with the
Philippines.
With regard to the RP-US Tax Treaty, a specific
reference was made to the United States law for the limitation on
allowable tax credit. This requires that the pertinent provisions of the
United States law be presented in evidence. Whether the United States
law imposes the same restrictions on tax credit as those imposed in the
RP-Czech Tax Treaty is a question of fact that petitioner must prove.
Petitioner misapplies the doctrine of processual presumption in a bid to escape the consequences of its failure to present the pertinent provisions of the United States law.
A tax refund hinged on a lower tax rate under the RP-Czech Tax
Treaty, in relation to the RP-US Tax Treaty, is akin to a tax
exemption, and is strictly construed against the taxpayer.[119] Petitioner bears the burden of proving its claim indubitably. It cannot be permitted to rest on vague implications.[120] As this Court held:
This Court has laid down the rule that “as the power of taxation
is a high prerogative of sovereignty, the relinquishment is never
presumed and any reduction or diminution thereof with respect to its
mode or its rate, must be strictly construed, and the same must be
coached in clear and unmistakable terms in order that it may be
applied.” More specifically stated, the general rule is that any claim
for exemption from the tax statute should be strictly construed against
the taxpayer.[121]
All told, the most favored nation clause cannot apply. Petitioner
cannot avail of the lower 10% tax rate under the RP-Czech Tax Treaty for
its failure to prove that the tax on royalties under the RP-US Tax
Treaty was paid under circumstances similar to the tax on royalties
under the RP-Czech Tax Treaty. Accordingly, there is no overpayment of
tax on royalties from June 1, 2005 to April 30, 2007. The Court of Tax
Appeals correctly denied petitioner’s claim for refund of P8,771,270.71.
WHEREFORE, the Petition for Review on Certiorari is DENIED. The assailed May 24, 2012 Decision and August 30, 2012 Resolution of the Court of Tax Appeals En Banc in CTA EB No. 734 are AFFIRMED.
SO ORDERED.
Gesmundo, Carandang, Zalameda, and Gaerlan, JJ., concur.
[1] Id. at 23.
[2] Id. at 25.
[3] Rollo, pp. 10-69.
[4] Id. at 89-114. The
May 24, 2012 Decision in CTA EB Case No. 734 was penned by Associate
Justice Juanito C. Castañeda, Jr. and concurred in by Presiding Justice
Ernesto D. Acosta and Associate Justices Erlinda P. Uy, Caesar A.
Casanova, Olga Palanca-Enriquez, Esperanza R. Pabon-Victorino and Amelia
R. Cotangco-Manalastas of En Banc, Court of Tax Appeals.
[5] Id. at 76-87. The
August 30, 2012 Resolution in CTA EB No. 734 was penned by Associate
Justice Juanito C. Castañeda, Jr. and concurred in by Presiding Justice
Ernesto D. Acosta and Associate Justices Lovell R. Bautista, Erlinda P.
Uy, Caesar A. Casanova, Olga Palanca-Enriquez, Esperanza R.
Pabon-Victorino, Cielito N. Mindaro-Grulla and Amelia R.
Cotangco-Manalastas of En Banc, Court of Tax Appeals, Quezon City.
[6] Id. at 116-132. The
September 6, 2010 Decision in CTA Case No. 7656 was penned by Associate
Justice Erlinda P. Uy and concurred in by Presiding Justice Ernesto D.
Acosta and Associate Justice Esperanza R. Pabon-Victorino of the First
Division, Court of Tax Appeals, Quezon City.
[7] Id. at 134-143. The
February 15, 2011 Resolution in CTA Case No. 7656 was penned by
Associate Justice Erlinda P. Uy and concurred in by Presiding Justice
Ernesto D. Acosta of the First Division, Court of Tax Appeals, Quezon
City.
[8] Id. at 14.
[9] The company was formerly known as AGX Services, Inc.
[10] Id. at 15-16.
[11] Id. at 16.
[12] Id.
[13] Id. at 118. See
Convention Between the Government of the Republic of the Philippines
and the State of Bahrain for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income and on
Capital (2001), available at <https://www.bir.gov.ph/images/bir_files/international_tax_affairs/Bahrain%20treaty.pdf> (last accessed on September 15, 2020).
[14] Convention Between
the Czech Republic and the Republic of the Philippines for the Avoidance
of Double Taxation and the Prevention of Fiscal Evasion with Respect to
Taxes on Income (2000), art. 12 provides:
Article 12
Royalties
1) Royalties arising in a Contracting State and paid to a
resident of the other Contracting State may be taxed in that other
State.
2) However, the royalties may also be taxed in the Contracting State
in which they arise and according to the laws of that State, but if the
beneficial owner of the royalties is a resident of the other
Contracting State, the tax so charged shall not exceed:
a. 10 per cent of the gross amount of the royalties arising from the
use of, or the right to use, any copyright of literary, artistic or
scientific work, other than that mentioned in sub-paragraph (b), any
patent, trademark, design or model, plan, secret formula or process, or
from the use of, or the right to use, industrial, commercial or
scientific equipment, or for information concerning industrial,
commercial or scientific experience;
. . . .
The competent authorities of the Contracting States shall by mutual
agreement settle the mode of application of these limitations.
[15] Convention Between
the Government of the Republic of the Philippines and the Government of
the United States of America with Respect to Taxes on Income (1976),
art. 13 provides:
Article 13
Royalties
resident of one of the Contracting State from sources within the other
Contracting State may be taxed by both Contracting States.ii. 15 per cent of the gross amount of the royalties, where
the royalties are paid by a corporation registered with the Philippine
Board of Investments and engaged in preferred areas of activities; and
iii. The lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. (Emphasis supplied)
[16] Id. at 118-119.
[17] Id. at 17-18.
[18] Id. at 116-132.
[19] Id. at 125.
[20] Id. at 130.
[21] Id. at 131.
[22] Id. at 134.
[23] Id. at 134-143.
[24] 368 Phil. 388 (1999) [Per J. Gonzaga-Reyes, Third Division].
[25] Rollo, pp. 137-138.
[26] Id. at 138-141.
[27] Id. at 89 and 92.
[28] Id. at 89-114.
[29] Id. at 112.
[30] Id. at 76-87.
[31] Id. at 85.
[32] Id. at 510-538.
[33] Id. at 546-572. In compliance with this Court’s June 23, 2014 Resolution in relation to the October 22, 2012 Resolution.
[34] Id. at 22.
[35] Id. at 27-28.
[36] Id. at 28.
[37] Id. at 31.
[38] Rollo, p. 22.
[39] Id. at 23.
[40] Id. at 25.
[41] Id. at 29-31. DA
ITAD BIR Ruling No. 127-06 dated October 23, 2006; ITAD BIR Ruling No.
152-12 dated March 4, 2012; ITAD BIR Ruling No. 073-12 dated February
16, 2012; ITAD BIR Ruling No. 126-11 dated April 5, 2011; ITAD BIR
Ruling No. 070-11 dated March 1, 2011; ITAD BIR Ruling No. 045-10 dated
March 5, 2010; ITAD BIR Ruling No. 041-10 dated September 21, 2010; ITAD
BIR Ruling No. 019-10 dated August 20, 2010.
[42] Id. at 31-32.
[43] Id. at 32.
[44] 584 Phil. 489 (2008) [Per J. Ynares-Santiago, En Banc].
[45] Rollo, p. 32.
[46] Id. at 33 34.
[47] Id. at 35.
[48] Id. at 39.
[49] Id. at 40-41.
[50] Id. at 42-43.
[51] Id. at 44.
[52] Id. at 50.
[53] Id. at 49-50.
[54] Id. at 50-51.
[55] Id. at 54.
[56] Id.
[57] Id. at 517.
[58] Id. at 522.
[59] Id. at 525.
[60] Id. at 528.
[61] Id. at 531.
[62] Id.
[63] Id. at 547-548.
[64] Id. at 549.
[65] Id. at 551-552.
[66] Id. at 552.
[67] Id. at 552-554.
[68] Id. at 556.
[69] Id. at 556-558.
[70] Id. at 561-563.
[71] Id. at 564-566.
[72] 584 Phil. 489 (2008) [Per J. Ynares-Santiago, En Banc].
[73] Id. at 511.
[74] 726 Phil. 9 (2014) [Per J. Peralta, En Banc].
[75] Id. at 26-28.
[76] Id. at 28.
[77] Id. at 25.
[78] 793 Phil. 97 (2016) [Per J. Leonen, En Banc].
[79] 440 Phil. 477 (2002) [Per Sandoval-Gutierrez, Third Division].
[80] 109 Phil. 598 (1960) [Per J. Concepcion, En Banc].
[81] 565 Phil. 255 (2007) [Per C.J. Puno, First Division].
[82] Banco De Oro v. Republic, 793 Phil. 97, 123-125 (2016) [Per J. Leonen, En Banc].
[83] Commissioner of Internal Revenue v. Philippine Airlines, Inc., 609 Phil. 695, 724 (2009) [Per J. Chico-Nazario, Third Division].
[84] The Convention
between the Government of the Republic of the Philippines and the
Government of the United States of America with respect to Taxes on
Income was signed in Manila on October 1, 1976. It entered into force on
October 16, 1982, the 30th day following the exchange of the relevant
instruments of ratification in Washington, United States on September
16, 1982. Its provisions on taxes apply on income derived or which
accrued beginning January 1, 1983.
[85] The Convention
between the Czech Republic and the Republic of the Philippines for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
respect to Taxes on Income was signed in Manila on November 13, 2000. It
became effective on January 1, 2004.
[86] 368 Phil. 388 (1999) [Per J. Gonzaga-Reyes, Third Division].
[87] Id. at 404-405.
[88] Id. at 405-406.
[89] Commentary on
Article 23A and 23B of the OECD Model: Concerning the Methods for
Elimination of Double Taxation, 8, available at <https://read.oecd-ilibrary.org/taxation/model-tax-convention-on-income-and-on-capital-2017-full-version_59d66429-en#page9> (last accessed on September 8, 2020). The Organization for
Economic Cooperation and Development (OECD) Model Double Taxation
Conventions constituted as the principal bases for bilateral treaty
negotiations among developed nations. The US’ model income tax
convention was also based to a large degree on the OECD Model. See Robert Thornton Smith, Tax Treaty Interpretation by the Judiciary,
49 THE TAX LAWYER 845-891 (1996), available at <https://www.jstor.org/stable/20771815
?refreqid=excelsior%3Af1e1bc19b78581d03babe8c48d68a7eb&seq=1>
(last accessed on September 8, 2020).
[90] Commentary on
Article 23A and 23B of the OECD Model: Concerning the Methods for
Elimination of Double Taxation, 8, available at <https://read.oecd-ilibrary.org/taxation/model-tax-convention-on-income-and-on-capital-2017-full-version_59d66429-en#page9> (last
accessed on September 8, 2020).
[91] Id.
[92] See for instance
Article 24 of RP-India Tax Treaty; Article 23(3) of the RP-Vietnam Tax
Treaty. An example of tax sparing is found in the TAX CODE, Section
28(B)(5)(b), in relation to dividend income earned by a foreign investor
in the Philippines. The provision states:
SEC. 28. Rates of Income Tax on Foreign Corporations. –
. . . .
(B) Tax on Nonresident Foreign Corporation. –
. . . .
(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. –
. . . .
(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 provided 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
against the tax due from the nonresident foreign corporation taxes
deemed to have been paid in the Philippines equivalent to twenty percent
(20%), which represents 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: Provided, 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[.]
See Commissioner of Internal Revenue v. Procter & Gamble Phil. Manufacturing Corp., 243 Phil. 703 (1988) [Per J. Paras, Second Division].
[93] Commentary on
Article 23A and 23B of the OECD Model: Concerning the Methods for
Elimination of Double Taxation, p. 8, available at <https://read.oecd-ilibrary.org/taxation/model-tax-convention-on-income-and-on-capital-2017-full-version_59d66429-en#page9> (last accessed on September 8, 2020).
[94] J. Paras, Dissenting Opinion in Commissioner of Internal Revenue v. Procter & Gamble Philippines Manufacturing Corp., 281 Phil. 425, 465-476 (1991) [Per J. Feliciano, En Banc].
[95] Commentary on
Article 23A and 23B of the OECD Model: Concerning the Methods for
Elimination of Double Taxation, p. 8, available at <https://read.oecd-ilibrary.org/taxation/model-tax-convention-on-income-and-on-capital-2017-full-version_59d66429-en#page9> (last accessed on September 8, 2020). An example of a tax sparing
provision is found in Article 23 in relation to Article 12 of the
R.P-New Zealand Tax Treaty, which provides:
Article 12
ROYALTIES
Contracting State and paid to a resident of the other Contracting State
may be taxed in that other State.
also be taxed in the Contracting State in which they arise, and
according to the law of that State, but if the recipient is the
beneficial owner of the royalties, the tax so charged shall not exceed:
the royalties where the royalties are paid by an enterprise registered
with the Philippine Board of Investments and engaged in preferred areas
of activities; andArticle 23
RELIEF FROM DOUBLE TAXATIONDouble taxation shall be avoided in the following manner:
. . . .
2. In the case of New Zealand:
Subject to any provisions of the law of New Zealand which may from
time to time be in force and which relate to the allowance of a credit
against New Zealand tax of tax paid in a country outside New Zealand
(which shall not affect the general principle hereof), Philippine tax
paid under the law of the Philippines and consistently with this
Convention, whether directly or by deduction, in respect of income
derived by a New Zealand resident from sources in the Philippines
(excluding, in the case of a dividend, tax paid in respect of the
profits out of which the dividend is paid) shall be allowed as a credit
against New Zealand tax payable in respect of that income. . . Where,
in terms of paragraph 2(b)(i) of Article 12, a resident of New Zealand
derives income from royalties which are paid by an enterprise registered
with the Philippine Board of Investments and engaged in preferred areas
of activity he shall be deemed to have paid in addition to the
Philippine tax actually paid, Philippine tax in an amount equal to 10
percent of the gross amount of the royalties. (Emphasis supplied)
[96] For instance, Article 23(2) of the RP-Brazil Tax Treaty provides:
Article 23
METHODS FOR THE ELIMINATION OF DOUBLE TAXATION
Contracting State derives income which, in accordance with the
provisions of this Convention, may be taxed in the other Contracting
State, the first Contracting State shall allow as a deduction from the
tax on the income of that resident, an amount equal to the income tax
paid in the other Contracting State. The deduction shall not, however,
exceed that part of the income tax as computed before the deduction is
given, which is appropriate to the income which may be taxed in the
other Contracting State.
paragraph I, the Brazilian tax and the Philippine tax shall always be
deemed to have been paid at the rate of 25 per cent in the following
cases:
b) interest referred to in paragraph 2 of Article 11; and
c) royalties referred to in paragraph 2 of Article 12.
[97] Commentary on
Article 23A and 23B of the OECD Model: Concerning the Methods for
Elimination of Double Taxation, p. 8, available at <https://read.oecd-ilibrary.org/taxation/model-tax-convention-on-income-and-on-capital-2017-full-version_59d66429-en#page9> (last accessed on September 8, 2020).
[98] Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., 368 Phil. 388, 406 (1999) [Per J. Gonzaga-Reyes, Third Division].
[99] Id. at 409-410.
[100] The Most Favoured Nation Clause,
22 THE AMERICAN JOURNAL OF INTERNATIONAL LAW, 133-156 (1928). Available
at <https://www.jstor.org/stable/2213313> (last accessed on
September 8, 2020).
[101] See Commissioner of Internal Revenue v. Philippine Ace Lines, Inc., 134 Phil. 874 (1968) [Per J. Angeles, En Banc].
[102] See Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., 368 Phil. 388 (1999) [Per J. Gonzaga-Reyes, Third Division].
[103] Id. at 410-411.
[104] Id. at 411.
[105] Convention
Between the Government of the Republic of the Philippines and the
Government of the United States of America with Respect to Taxes on
Income (1976), art. 13 provides:
Article 13
Royalties
. . . .
(3) The term “royalties” as used in this article means payments
of any kind received as a consideration for the use of, or the right to
use, any copyright of literary, artistic or scientific work, including
cinematographic films or films or tapes used for radio or television
broadcasting, any patent, trademark, design or model, plan, secret
formula or process, or other like right or property, or for information
concerning industrial, commercial, or scientific experience. The
term “royalties” also includes gains derived from the sale, exchange or
other disposition of any such right or property which are contingent on
the productivity, use, or disposition thereof. (Emphasis supplied)
[106] Convention Between
the Czech Republic and the Republic of the Philippines for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
Respect to Taxes on Income (2000), art. 12 provides:
Article 12
Royalties
also be taxed in the Contracting State in which they arise and
according to the laws of that State, but if the beneficial owner of the
royalties is a resident of the other Contracting State, the tax so
charged shall not exceed –
the royalties arising from the use of, or the right to use, any
copyright of literary, artistic or scientific work, other than that
mentioned in sub-paragraph (b), any patent, trademark, design or
model, plan, secret formula or process, or from the use of, or the right
to use, industrial, commercial or scientific equipment, or for
information concerning industrial, commercial or scientific
experience[.] (Emphasis supplied)
[107] Rollo, pp. 40-43.
[108] The prefatory clauses of both treaties uniformly state this.
[109] Rollo, p. 130.
[110] Id. at 561.
[111] Id. at 561-562.
[112] EDI-Staffbuilders International, Inc. v. National Labor Relations Commission, 563 Phil. 1, 22 (2007) [Per J. Velasco, Jr., Second Division].
[113] See Nedlloyd Lijnen B. V. Rotterdam v. Glow Laks Enterprises, Ltd., 747 Phil. 170 (2014) [Per J. Perez, First Division] and International Harvester Co. in Russia v. Hamburg-American Line, 42 Phil. 845 (1918) [Per J. Street, Second Division].
[114] See Collector of Internal Revenue v. Fisher, 110 Phil. 686 (1961) [Per J. Barrera, En Banc] and Beam v. Yatco, 82 Phil. 30 (1948) [Per J. Perfecto, Second Division].
[115] See Wildvalley Shipping Co., Ltd v. Court of Appeals, 396 Phil. 383 (2000) [Per J. Buena, Second Division].
[116] See ATCI Overseas Corporation v. Echin, 647 Phil. 43 (2010) [Per J. Carpio Morales, Third Division] and EDI-Staffbuilders International, Inc. v. National Labor Relations Commission, 563 Phil. 1 (2007) [Per J. Velasco, Jr., Second Division].
[117] Manila Gas Corp. v. Collector of Internal Revenue, 62 Phil. 895, 900 (1936) [Per J. Malcolm, En Banc].
[118] TAX CODE, sec. 28 provides:
Section 28. Rates of Income Tax on Foreign Corporations. —
. . . .
(B) Tax on Nonresident Foreign Corporation. —
(1) In General. — Except as otherwise provided in this Code, a
foreign corporation not engaged in trade or business in the Philippines
shall pay a tax equal to thirty-five percent (35%) of the gross income
received during each taxable year from all sources within the
Philippines, such as interests, dividends, rents, royalties, salaries,
premiums (except reinsurance premiums), annuities, emoluments or other
fixed or determinable annual, periodic or casual gains, profits and
income, and capital gains, except capital gains subject to tax under
subparagraph 5 (c): Provided, That effective January 1, 2009, the rate
of income tax shall be thirty percent (30%).
. . . .
[119] See Commissioner of Internal Revenue v. Mitsubishi Metal Corp., 260 Phil. 224 (1990) [Per J. Regalado, Second Division] and PLDT v. City of Davao, 415 Phil. 764 (2001) [Per J. Mendoza, Second Division].
[120] See Davao Light & Power Co., Inc. v. Commissioner of Customs, 150 Phil. 940 (1972) [Per J. J.B.L. Reyes, First Division]; Asiatic Petroleum Co., Ltd v. Llanes, 49 Phil. 466 (1926) [Per J. Street, En Banc].
[121] Luzon Stevedoring Corp. v. Court of Tax Appeals, 246 Phil. 666, 671 (1988) [Per J. Paras, Second Division].