[G.R. No. 127105. June 25, 1999] COMMISSIONER OF INTERNAL REVENUE, e!"!"one#, $%. S.C.

JO&NSON AN' SON, INC., (n) COURT OF A**EALS, #e% on)en!%.

'ECISION
GON+AGA,RE-ES, J..

This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to set aside the decision of the Court of Appeals dated November 7, !!" in CA#$R %& No' 4()(* affirming the decision of the Court of Ta+ Appeals in CTA Case No' 5 ,"' The antecedent facts as found b- the Court of Ta+ Appeals are not disputed, to wit.

/0Respondent1, a domestic corporation organi2ed and operating under the &hilippine laws, entered into a license agreement with %C 3ohnson and %on, 4nited %tates of America 54%A6, a non#resident foreign corporation based in the 4'%'A' pursuant to which the 0respondent1 was granted the right to use the trademark, patents and technolog- owned b- the latter including the right to manufacture, package and distribute the products covered b- the Agreement and secure assistance in management, marketing and production from %C 3ohnson and %on, 4' %' A' The said 7icense Agreement was dul- registered with the Technolog- Transfer 8oard of the 8ureau of &atents, Trade 9arks and Technolog- Transfer under Certificate of Registration No' )("4 5:+h' /A;6' <or the use of the trademark or technolog-, 0respondent1 was obliged to pa- %C 3ohnson and %on, 4%A ro-alties based on a percentage of net sales and sub=ected the same to *5> withholding ta+ on ro-alt- pa-ments which 0respondent1 paid for the period covering 3ul- !!* to 9a- !!, in the total amount of & ,"(,,44,'(( 5:+hs' /8; to /7; and submarkings6' ?n ?ctober *!, !!,, 0respondent1 filed with the @nternational Ta+ Affairs Aivision 5@TAA6 of the 8@R a claim for refund of overpaid withholding ta+ on ro-alties arguing that, Bthe antecedent facts attending 0respondentCs1 case fall sDuarel- within the same circumstances under which said 9ac$eorge and $illete rulings were issued' %ince the agreement was approved b- the Technolog- Transfer 8oard, the preferential ta+ rate of (> should appl- to the 0respondent1' Ee therefore submit that ro-alties paid b- the 0respondent1 to %C 3ohnson and %on, 4%A is onl- sub=ect to (> withholding ta+ pursuant to the most#favored nation clause of the R&#4% Ta+ Treat- 0Article , &aragraph * 5b6 5iii61 in relation to the R&#Eest $erman- Ta+ Treat- 0Article * 5*6 5b61C 5&etition for Review 0filed with the Court of Appeals1, par' *6' 0RespondentCs1 claim for the refund of &!",,*""'(( was computed as follows.

$ross 9onthF Gear HHHHHH 3ul- !!* August %eptember ?ctober November Aecember 3an !!, <ebruar9arch April 9aRo-alt<ee HHHHHHH 55!,)7) 5"7,!,5 5!5,!5" ",4,4(5 "*(,))5 ,),,*7" "(*,45 5"5,)45 547,*5, ""(,) ( "(,,(7" &",4* ,77( IIIIIIII Eithholding Ta+ &aid HHHHHHHHHH ,!,!7( 4 ,!)4 4),!)! 5),"( 55,** !5,) ! 7(,",( 4 ,4" ,",) , "5,*(, 5(,7"! & ,"(5,44,

*5> Eithholding Ta+ HHHHHHHHHH 55,!)) 5",7!4 5!,5!" ",,44 "*,()! ,",,*) "),*45 5",5)5 54,7*5 "",() "(,,() &"4*, 77

(>

8alance HHHHHH ),,!)* )5, !( )!,,!, !5, " !,, ,, 57,4! (*,,") )4,)77 )*,()) !!, ** !(,4" &!",,*"";0 1 IIIIIII

IIIIIIII

IIIIIII

The Commissioner did not act on said claim for refund' &rivate respondent %'C' 3ohnson J %on, @nc' 5%'C' 3ohnson6 then filed a petition for review before the Court of Ta+ Appeals 5CTA6 where the case was docketed as CTA Case No' 5 ,", to claim a refund of the overpaid withholding ta+ on ro-alt- pa-ments from 3ul- !!* to 9a- !!,' ?n 9a- 7, !!", the Court of Ta+ Appeals rendered its decision in favor of %'C' 3ohnson and ordered the Commissioner of @nternal Revenue to issue a ta+ credit certificate in the amount of &!",,*""'(( representing overpaid withholding ta+ on ro-alt- pa-ments beginning 3ul-, !!* to 9a-, !!,'0*1 The Commissioner of @nternal Revenue thus filed a petition for review with the Court of Appeals which rendered the decision sub=ect of this appeal on November 7, !!" finding no merit in the petition and affirmingin toto the CTA ruling'0,1 This petition for review was filed b- the Commissioner of @nternal Revenue raising the following issue.

TK: C?4RT ?< A&&:A7% :RR:A @N R47@N$ TKAT %C 3?KN%?N ANA %?N, 4%A @% :NT@T7:A T? TK: /9?%T <AL?R:A NAT@?N; TAM RAT: ?< (> ?N R?GA7T@:% A% &R?L@A:A @N TK: R&#4% TAM TR:ATG @N R:7AT@?N T? TK: R&#E:%T $:R9ANG TAM TR:ATG'

&etitioner contends that under Article ,5*6 5b6 5iii6 of the R&#4% Ta+ Treat-, which is known as the /most favored nation; clause, the lowest rate of the &hilippine ta+ at (> ma- be imposed on ro-alties derived b- a resident of the 4nited %tates from sources within the &hilippines onl- if the circumstances of the resident of the 4nited %tates are similar to those of the resident of Eest $erman-' %ince the R&#4% Ta+ Treat- contains no /matching credit; provision as that provided under Article *4 of the R&#Eest $erman- Ta+ Treat-, the ta+ on ro-alties under the R&#4% Ta+ Treat- is not paid under similar circumstances as those obtaining in the R&#Eest $erman- Ta+ Treat-' :ven assuming that the phrase /paid under similar circumstances; refers to the pa-ment of ro-alties, and not ta+es, as held b- the Court of Appeals, still, the /most favored nation; clause cannot be invoked for the reason that when a ta+ treatcontemplates circumstances attendant to the pa-ment of a ta+, or ro-alt- remittances for that matter, these must necessaril- refer to circumstances that are ta+#related' <inall-, petitioner argues that since %'C' 3ohnsonCs invocation of the /most favored nation; clause is in the nature of a claim for e+emption from the application of the regular ta+ rate of *5> for ro-alties, the provisions of the treat- must be construed strictl- against it' @n its Comment, private respondent %'C' 3ohnson avers that the instant petition should be denied 5 6 because it contains a defective certification against forum shopping as reDuired under %C Circular No' *)#! , that is, the certification was not e+ecuted b- the petitioner herself but bher counselN and 5*6 that the /most favored nation; clause under the R&#4% Ta+ Treat- refers to ro-alties paid under similar circumstances as those ro-alties sub=ect to ta+ in other treatiesN that the phrase /paid under similar circumstances; does not refer to pa-ment of the ta+ but to the sub=ect matter of the ta+, that is, ro-alties, because the /most favored nation; clause is intended to allow the ta+pa-er in one state to avail of more liberal provisions contained in another ta+ treat- wherein the countr- of residence of such ta+pa-er is also a part- thereto, sub=ect to the basic condition that the sub=ect matter of ta+ation in that other ta+ treat- is the same as that in the original ta+ treat- under which the ta+pa-er is liableN thus, the R&#4% Ta+ Treat- speaks of /ro-alties of the same kind paid under similar circumstances;' %'C' 3ohnson also contends that the Commissioner is estopped from insisting on her interpretation that the phrase /paid under similar circumstances; refers to the manner in which the ta+ is paid, for the reason that said interpretation is embodied in Revenue 9emorandum Circular 5/R9C;6 ,!#!* which was alread- abandoned b- the CommissionerCs predecessor in !!,N and was e+pressl- revoked in 8@R Ruling No' (5*#!5 which stated that ro-alties paid to an American licensor are sub=ect onlto (> withholding ta+ pursuant to Art ,5*65b65iii6 of the R&#4% Ta+ Treat- in relation to the R&#Eest $erman- Ta+ Treat-' %aid ruling should be given retroactive effect e+cept if such is pre=udicial to the ta+pa-er pursuant to %ection *4" of the National @nternal Revenue Code' &etitioner filed Repl- alleging that the fact that the certification against forum shopping was signed b- petitionerCs counsel is not a fatal defect as to warrant the dismissal of this petition since Circular No' *)#! applies onl- to original actions and not to appeals, as in the instant case' 9oreover, the reDuirement that the certification should be signed b- petitioner and not bcounsel does not appl- to petitioner who has onl- the ?ffice of the %olicitor $eneral as statutorcounsel' &etitioner reiterates that even if the phrase /paid under similar circumstances; embodied in the most favored nation clause of the R&#4% Ta+ Treat- refers to the pa-ment of ro-alties and not ta+es, still the presence or absence of a /matching credit; provision in the said R&#4% Ta+ Treat- would constitute a material circumstance to such pa-ment and would be determinative of the said clauseCs application' Ee address first the ob=ection raised b- private respondent that the certification against forum shopping was not e+ecuted b- the petitioner herself but b- her counsel, the ?ffice of the %olicitor $eneral 5?'%'$'6 through one of its %olicitors, Att-' Tomas 9' Navarro' %C Circular No' *)#! provides.

/%483:CT. AAA@T@?NA7 R:O4@%@T:% <?R &:T@T@?N% <@7:A E@TK TK: %4&R:9: C?4RT ANA TK: C?4RT ?< A&&:A7% T? &R:L:NT <?R49 %K?&&@N$ ?R 947T@&7: <@7@N$ ?< &:T@T@?N% ANA C?9&7A@NT% T? . +++ +++ +++

The attention of the Court has been called to the filing of multiple petitions and complaints involving the same issues in the %upreme Court, the Court of Appeals or other tribunals or agencies, with the result that said courts, tribunals or agencies have to resolve the same issues' 5 6 To avoid the foregoing, in ever- petition filed with the %upreme Court or the Court of Appeals, the petitioner aside from compl-ing with pertinent provisions of the Rules of Court and e+isting circulars, must certif- under oath to all of the following facts or undertakings. 5a6 he has not theretofore commenced an- other action or proceeding involving the same issues in the %upreme Court, the Court of Appeals, or an- tribunal or agenc-N +++ 5*6 An- violation of this revised Circular will entail the following sanctions. 5a6 it shall be a cause for the summar- dismissal of the multiple petitions or complaintsN +++;
The circular e+pressl- reDuires that a certificate of non#forum shopping should be attached to petitions filed before this Court and the Court of Appeals' &etitionerCs allegation that Circular No' *)#! applies onl- to original actions and not to appeals as in the instant case is not supported b- the te+t nor b- the obvious intent of the Circular which is to prevent multiple petitions that will result in the same issue being resolved b- different courts' Anent the reDuirement that the part-, not counsel, must certif- under oath that he has not commenced an- other action involving the same issues in this Court or the Court of Appeals or an- other tribunal or agenc-, we are inclined to accept petitionerCs submission that since the ?%$ is the onl- law-er for the petitioner, which is a government agenc- mandated under %ection ,5, Chapter *, title @@@, 8ook @L of the !)7 Administrative Code 041 to be represented onl- b- the %olicitor $eneral, the certification e+ecuted b- the ?%$ in this case constitutes substantial compliance with Circular No' *)#! ' Eith respect to the merits of this petition, the main point of contention in this appeal is the interpretation of Article , 5*6 5b6 5iii6 of the R&#4% Ta+ Treat- regarding the rate of ta+ to be imposed b- the &hilippines upon ro-alties received b- a non#resident foreign corporation' The provision states insofar as pertinent that#
6 Ro-alties derived b- a resident of one of the Contracting %tates from sources within the other Contracting %tate ma- be ta+ed b- both Contracting %tates' *6 Kowever, the ta+ imposed b- that Contracting %tate shall not e+ceed'

a6 @n the case of the 4nited %tates, 5 percent of the gross amount of the ro-alties, and b6 @n the case of the &hilippines, the least of.

5i6 *5 percent of the gross amount of the ro-altiesN 5ii6 5 percent of the gross amount of the ro-alties, where the ro-alties are paid b- a corporation registered with the &hilippine 8oard of @nvestments and engaged in preferred areas of activitiesN and 5iii6 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.
+++ +++ +++

5italics supplied6
Respondent %' C' 3ohnson and %on, @nc' claims that on the basis of the Duoted provision, it is entitled to the concessional ta+ rate of ( percent on ro-alties based on Article * 5*6 5b6 of the R&#$erman- Ta+ Treat- which provides.
5*6 Kowever, such ro-alties ma- also be ta+ed in the Contracting %tate in which the- arise, and according to the law of that %tate, but the ta+ so charged shall not e+ceed.

+++
b6 ( percent of the gross amount of ro-alties arising from the use of, or the right to use, anpatent, trademark, design or model, plan, secret formula or process, or from the use of or the right to use, industrial, commercial, or scientific eDuipment, or for information concerning industrial, commercial or scientific e+perience'

<or as long as the transfer of technolog-, under &hilippine law, is sub=ect to approval, the limitation of the ta+ rate mentioned under b6 shall, in the case of ro-alties arising in the Republic of the &hilippines, onl- appl- if the contract giving rise to such ro-alties has been approved b- the &hilippine competent authorities'
4nlike the R&#4% Ta+ Treat-, the R&#$erman- Ta+ Treat- allows a ta+ credit of *( percent of the gross amount of such ro-alties against $erman income and corporation ta+ for the ta+es pa-able in the &hilippines on such ro-alties where the ta+ rate is reduced to ( or 5 percent under such treat-' Article *4 of the R&#$erman- Ta+ Treat- states#
6 Ta+ shall be determined in the case of a resident of the <ederal Republic of $erman- as follows.

+++

+++

+++

b6 %ub=ect to the provisions of $erman ta+ law regarding credit for foreign ta+, there shall be allowed as a credit against $erman income and corporation ta+ pa-able in respect of the following items of income arising in the Republic of the &hilippines, the ta+ paid under the laws of the &hilippines in accordance with this Agreement on.
+++ +++ +++

dd6 ro-alties, as defined in paragraph , of Article *N

+++ +++ +++

c6 <or the purpose of the credit referred in subparagraph b6 the &hilippine ta+ shall be deemed to be
+++ +++ +++

cc6 in the case of ro-alties for which the ta+ is reduced to ( or 5 per cent according to paragraph * of Article *, *( percent of the gross amount of such ro-alties'
+++ +++ +++

According to petitioner, the ta+es upon ro-alties under the R&#4% Ta+ Treat- are not paid under circumstances similar to those in the R&#Eest $erman- Ta+ Treat- since there is no provision for a *( percent matching credit in the former convention and private respondent cannot invoke the concessional ta+ rate on the strength of the most favored nation clause in the R&#4% Ta+ Treat-' &etitionerCs position is e+plained thus.

/4nder the foregoing provision of the R&#Eest $erman- Ta+ Treat-, the &hilippine ta+ paid on income from sources within the &hilippines is allowed as a credit against $erman income and corporation ta+ on the same income' @n the case of ro-alties for which the ta+ is reduced to ( or 5 percent according to paragraph * of Article * of the R&#Eest $erman- Ta+ Treat-, the credit shall be *(> of the gross amount of such ro-alt-' To illustrate, the ro-alt- income of a $erman resident from sources within the &hilippines arising from the use of, or the right to use, an- patent, trade mark, design or model, plan, secret formula or process, is ta+ed at (> of the gross amount of said ro-alt- under certain conditions' The rate of (> is imposed if credit against the $erman income and corporation ta+ on said ro-alt- is allowed in favor of the $erman resident' That means the rate of (> is granted to the $erman ta+pa-er if he is similarl- granted a credit against the income and corporation ta+ of Eest $erman-' The clear intent of the Bmatching creditC is to soften the impact of double ta+ation b- different =urisdictions' The R&#4% Ta+ Treat- contains no similar Bmatching creditC as that provided under the R&#Eest $erman- Ta+ Treat-' Kence, the ta+ on ro-alties under the R&#4% Ta+ Treat- is not paid under similar circumstances as those obtaining in the R&#Eest $erman- Ta+ Treat-' Therefore, the Bmost favored nationC clause in the R&#Eest $erman- Ta+ Treat- cannot be availed of in interpreting the provisions of the R&#4% Ta+ Treat-';051
The petition is meritorious' Ee are unable to sustain the position of the Court of Ta+ Appeals, which was upheld b- the Court of Appeals, that the phrase /paid under similar circumstances in Article , 5*6 5b6, 5iii6 of the R&#4% Ta+ Treat- should be interpreted to refer to pa-ment of ro-alt-, and not to the pa-ment of the ta+, for the reason that the phrase /paid under similar circumstances; is followed b- the phrase /to a resident of a third state;' The respondent court held that /Eords are to be understood in the conte+t in which the- are used;, and since what is paid to a resident of a third state is not a ta+ but a ro-alt- /logic instructs; that the treat- provision in Duestion should refer to ro-alties of the same kind paid under similar circumstances'

The above construction is based principall- on s-nta+ or sentence structure but fails to take into account the purpose animating the treat- provisions in point' To begin with, we are not aware of an- law or rule pertinent to the pa-ment of ro-alties, and none has been brought to our attention, which provides for the pa-ment of ro-alties under dissimilar circumstances' The ta+ rates on ro-alties and the circumstances of pa-ment thereof are the same for all the recipients of such ro-alties and there is no disparit- based on nationalit- in the circumstances of such pa-ment'0"1 ?n the other hand, a cursor- reading of the various ta+ treaties will show that there is no similarit- in the provisions on relief from or avoidance of double ta+ation 071 as this is a matter of negotiation between the contracting parties' 0)1 As will be shown later, this dissimilarit- is true particularl- in the treaties between the &hilippines and the 4nited %tates and between the &hilippines and Eest $erman-' The R&#4% Ta+ Treat- is =ust one of a number of bilateral treaties which the &hilippines has entered into for the avoidance of double ta+ation' 0!1 The purpose of these international agreements is to reconcile the national fiscal legislations of the contracting parties in order to help the ta+pa-er avoid simultaneous ta+ation in two different =urisdictions'0 (1 9ore precisel-, the ta+ conventions are drafted with a view towards the elimination of "n!e#n(!"on(/ 0u#")"1(/ )ou2/e !(3(!"on, which is defined as the imposition of comparable ta+es in two or more states on the same ta+pa-er in respect of the same sub=ect matter and for identical periods' 0 1, citing the Committee on <iscal Affairs of the ?rgani2ation for :conomic Co#operation and Aevelopment 5?:CA6' The apparent rationale for doing awa- with double ta+ation is to encourage the free flow of goods and services and the movement of capital, technolog- and persons between countries, conditions deemed vital in creating robust and d-namic economies' 0 *1 <oreign investments will onl- thrive in a fairl- predictable and reasonable international investment climate and the protection against double ta+ation is crucial in creating such a climate'0 ,1 Aouble ta+ation usuall- 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 ta+ on that income or capital' @n order to eliminate double ta+ation, a ta+ treat- resorts to several methods' <irst, it sets out the respective rights to ta+ of the state of source or situs and of the state of residence with regard to certain classes of income or capital' @n some cases, an e+clusive right to ta+ is conferred on one of the contracting statesN however, for other items of income or capital, both states are given the right to ta+, although the amount of ta+ that ma- be imposed b- the state of source is limited'0 41 The second method for the elimination of double ta+ation applies whenever the state of source is given a full or limited right to ta+ together with the state of residence' @n this case, the treaties make it incumbent upon the state of residence to allow relief in order to avoid double ta+ation' There are two methods of relief# the e+emption method and the credit method' @n the e+emption method, the income or capital which is ta+able in the state of source or situs is e+empted in the state of residence, although in some instances it ma- be taken into account in determining the rate of ta+ applicable to the ta+pa-erCs remaining income or capital' ?n the other hand, in the credit method, although the income or capital which is ta+ed in the state of source is still ta+able in the state of residence, the ta+ paid in the former is credited against the ta+ levied in the latter' The basic difference between the two methods is that in the e+emption method, the focus is on the income or capital itself, whereas the credit method focuses upon the ta+'0 51 @n negotiating ta+ treaties, the underl-ing rationale for reducing the ta+ rate is that the &hilippines will give up a part of the ta+ in the e+pectation that the ta+ given up for this particular investment is not ta+ed b- the other countr-' 0 "1 Thus the petitioner correctl- opined that the phrase /ro-alties paid under similar circumstances; in the most favored nation clause of the 4%#R& Ta+ Treat- necessaril- contemplated /circumstances that are ta+#related;'

@n the case at bar, the state of source is the &hilippines because the ro-alties are paid for the right to use propert- or rights, i'e' trademarks, patents and technolog-, located within the &hilippines'0 71 The 4nited %tates is the state of residence since the ta+pa-er, %' C' 3ohnson and %on, 4' %' A', is based there' 4nder the R&#4% Ta+ Treat-, the state of residence and the state of source are both permitted to ta+ the ro-alties, with a restraint on the ta+ that ma- be collected b- the state of source'0 )1 <urthermore, the method emplo-ed to give relief from double ta+ation is the allowance of a ta+ credit to citi2ens or residents of the 4nited %tates 5in an appropriate amount based upon the ta+es paid or accrued to the &hilippines6 against the 4nited %tates ta+, but such amount shall not e+ceed the limitations provided b- 4nited %tates law for the ta+able -ear'0 !1 4nder Article , thereof, the &hilippines ma- impose one of three rates# *5 percent of the gross amount of the ro-altiesN 5 percent when the ro-alties are paid b- a corporation registered with the &hilippine 8oard of @nvestments and engaged in preferred areas of activitiesN or the lowest rate of &hilippine ta+ that ma- be imposed on ro-alties of the same kind paid under similar circumstances to a resident of a third state' $iven the purpose underl-ing ta+ treaties and the rationale for the most favored nation clause, the concessional ta+ rate of ( percent provided for in the R&#$erman- Ta+ Treatshould appl- onl- if the ta+es imposed upon ro-alties in the R&#4% Ta+ Treat- and in the R&# $erman- Ta+ Treat- are paid under similar circumstances' This would mean that private respondent must prove that the R&#4% Ta+ Treat- grants similar ta+ reliefs to residents of the 4nited %tates in respect of the ta+es imposable upon ro-alties earned from sources within the &hilippines as those allowed to their $erman counterparts under the R&#$erman- Ta+ Treat-' The R&#4% and the R&#Eest $erman- Ta+ Treaties do not contain similar provisions on ta+ crediting' Article *4 of the R&#$erman- Ta+ Treat-, supra, e+pressl- allows crediting against $erman income and corporation ta+ of *(> of the gross amount of ro-alties paid under the law of the &hilippines' ?n the other hand, Article *, of the R&#4% Ta+ Treat-, which is the counterpart provision with respect to relief for double ta+ation, does not provide for similar crediting of *(> of the gross amount of ro-alties paid' %aid Article *, reads.

/Article *, Relief from double ta+ation Aouble ta+ation of income shall be avoided in the following manner.
6 @n accordance with the provisions and sub=ect to the limitations of the law of the 4nited %tates 5as it ma- be amended from time to time without changing the general principle thereof6, the 4nited %tates shall allow to a citi2en or resident of the 4nited %tates as a credit against the 4nited %tates ta+ the appropriate amount of ta+es paid or accrued to the &hilippines and, in the case of a 4nited %tates corporation owning at least ( percent of the voting stock of a &hilippine corporation from which it receives dividends in an- ta+able -ear, shall allow credit for the appropriate amount of ta+es paid or accrued to the &hilippines b- the &hilippine corporation pa-ing such dividends with respect to the profits out of which such dividends are paid' %uch appropriate amount shall be based upon the amount of ta+ paid or accrued to the &hilippines, but the credit shall not e+ceed the limitations 5for the purpose of limiting the credit to the 4nited %tates ta+ on income from sources within the &hilippines or on income from sources outside the 4nited %tates6 provided b- 4nited %tates law for the ta+able -ear' +++;'

The reason for construing the phrase /paid under similar circumstances; as used in Article , 5*6 5b6 5iii6 of the R&#4% Ta+ Treat- as referring to ta+es is anchored upon a logical reading of the te+t in the light of the fundamental purpose of such treat- which is to grant an incentive to

the foreign investor b- lowering the ta+ and at the same time crediting against the domestic ta+ abroad a figure higher than what was collected in the &hilippines' @n one case, the %upreme Court pointed out that laws are not =ust mere compositions, but have ends to be achieved and that the general purpose is a more important aid to the meaning of a law than an- rule which grammar ma- la- down'0*(1 @t is the dut- of the courts to look to the ob=ect to be accomplished, the evils to be remedied, or the purpose to be subserved, and should give the law a reasonable or liberal construction which will best effectuate its purpose' 0* 1 The Lienna Convention on the 7aw of Treaties states that a treat- shall be interpreted in good faith in accordance with the ordinar- meaning to be given to the terms of the treat- in their conte+t and in the light of its ob=ect and purpose'0**1 As stated earlier, the ultimate reason for avoiding double ta+ation is to encourage foreign investors to invest in the &hilippines # a crucial economic goal for developing countries' 0*,1 The goal of double ta+ation conventions would be thwarted if such treaties did not provide for effective measures to minimi2e, if not completel- eliminate, the ta+ burden laid upon the income or capital of the investor' Thus, if the rates of ta+ are lowered b- the state of source, in this case, b- the &hilippines, there should be a concomitant commitment on the part of the state of residence to grant some form of ta+ relief, whether this be in the form of a ta+ credit or e+emption'0*41 ?therwise, the ta+ which could have been collected b- the &hilippine government will simpl- be collected b- another state, defeating the ob=ect of the ta+ treat- since the ta+ burden imposed upon the investor would remain unrelieved' @f the state of residence does not grant some form of ta+ relief to the investor, no benefit would redound to the &hilippines, i'e', increased investment resulting from a favorable ta+ regime, should it impose a lower ta+ rate on the ro-alt- earnings of the investor, and it would be better to impose the regular rate rather than lose much#needed revenues to another countr-' At the same time, the intention behind the adoption of the provision on /relief from double ta+ation; in the two ta+ treaties in Duestion should be considered in light of the purpose behind the most favored nation clause' The purpose of a most favored nation clause is to grant to the contracting part- treatment not less favorable than that which has been or ma- be granted to the /most favored; among other countries'0*51 The most favored nation clause is intended to establish the principle of eDualit- of international treatment b- providing that the citi2ens or sub=ects of the contracting nations ma- en=o- the privileges accorded b- either part- to those of the most favored nation' 0*"1 The essence of the principle is to allow the ta+pa-er in one state to avail of more liberal provisions granted in another ta+ treat- to which the countr- of residence of such ta+pa-er is also a part- provided that the sub=ect matter of ta+ation, in this case ro-alt- income, is the same as that in the ta+ treat- under which the ta+pa-er is liable' 8oth Article , of the R&#4% Ta+ Treat- and Article * 5*6 5b6 of the R&#Eest $erman- Ta+ Treat-, above#Duoted, speaks of ta+ on ro-alties for the use of trademark, patent, and technolog-' The entitlement of the (> rate b- 4'%' firms despite the absence of a matching credit 5*(> for ro-alties6 would derogate from the design behind the most favored nation clause to grant eDualit- of international treatment since the ta+ burden laid upon the income of the investor is not the same in the two countries' The similarit- in the circumstances of pa-ment of ta+es is a condition for the en=o-ment of most favored nation treatment precisel- to underscore the need for eDualit- of treatment' Ee accordingl- agree with petitioner that since the R&#4% Ta+ Treat- does not give a matching ta+ credit of *( percent for the ta+es paid to the &hilippines on ro-alties as allowed under the R&#Eest $erman- Ta+ Treat-, private respondent cannot be deemed entitled to the ( percent rate granted under the latter treat- for the reason that there is no pa-ment of ta+es on ro-alties under similar circumstances'

@t bears stress that ta+ refunds are in the nature of ta+ e+emptions' As such the- are regarded as in derogation of sovereign authorit- and to be construed strictissimi juris against the person or entit- claiming the e+emption' 0*71 The burden of proof is upon him who claims the e+emption in his favor and he must be able to =ustif- his claim b- the clearest grant of organic or statute law'0*)1 &rivate respondent is claiming for a refund of the alleged overpa-ment of ta+ on ro-altiesN however, there is nothing on record to support a claim that the ta+ on ro-alties under the R&#4% Ta+ Treat- is paid under similar circumstances as the ta+ on ro-alties under the R&# Eest $erman- Ta+ Treat-' 4&EREFORE, for all the foregoing, the instant petition is $RANT:A' The decision dated 9a- 7, !!" of the Court of Ta+ Appeals and the decision dated November 7, !!" of the Court of Appeals are hereb- %:T A%@A:' SO OR'ERE'. Vitug, Panganiban, and Purisima JJ., concur. Romero !hairman", J., abroad, on official business leave'

0 1 0*1 0,1 041 051 0"1 071

&etition, pp' ,#5N Rollo, pp' (# *' Rollo, p' "7'* &enned b- 3ustice Kilarion 7' ADuino, concurred in b- 3ustices 3ainal A' Rasul, Chairman, and Kector 7' KofilePa', Reiterated under 9emorandum Circular No' 5* dated 9a- 7, !!*'4 &etition, pp' (# N Rollo, pp' 7# )'5 %ee :' A' :' ?rtuoste, Ta+ Treat- Rates. A %ummar-, &hil' Revenue 3ournal, vol' ,4, No'* 9arch#April !!7'"

Article *4 R&#Australia, Article *, R&#8elgium, Article *, R&#8ra2il, Article ** R&#Canada, Article *, R&#Aenmark, Article **, R&# <inland, Article *, R&#<rance, Article *4, R&#$erman-, Article *4, R&#@ndia, %ection , R&#@ndonesia, Article ** R&#@tal-, Article *, R&# 3apan, Article *, R&#%outh Qorea, Article ** R&#9ala-sia, Article ** R& Netherland, Article *, R&#New Realand, Article *, R&#&akistan, %ection *! R&#%ingapore, Article *, R&#%pain, Article ) R&#%weden, Article *, R&#Thailand, Article * R&#4nited Qingdom, Article *, R&# 4%'7
0)1 0!1

%ee Toledo, @nternational Aspects of Ta+ation, &roceedings of the :leventh Annual @nstitute on Ta+ 7aw 5 !7"6 S p' !')

As of 3une *!, !!7, the following countries have entered into ta+ treaties with the &hilippines for the avoidance of double ta+ation. Aenmark, %ingapore, Canada, <rance, 4nited Qingdom, &akistan, Australia, 3apan, 8elgium, New Realand, <inland, @ndonesia, Austria, 4nited %tates of America, Thailand, $erman-, 9ala-sia, Qorea, %weden, @tal-, Netherlands, 8ra2il, %pain, @ndia, and @srael'!
0 (1 0 1 0 *1 0 ,1 0 41 0 51

&' 8aker, Aouble Ta+ation Conventions and @nternational Ta+ 7aw 5 !!46, "' ( #bid, #bid' * #bid' , #bid, 7(' 4 #bid, 7(#7*' 5
0 "1

T' Toledo, #bid, S p' )# !'

/Take the case of a hundred pesos dividend to be remitted to, let us sa- a stockholder of 4nited %tates of America' The hundred peso dividend, if -ou appl- the withholding ta+ assuming that there is no sparing credit, we ta+ed ,5>' %o, out of & (('((, -ou are ta+ed &,5'((' The &hilippines under this law is willing to ta+ him onl- at & 5'(( so his net dividends is &)5'((' @f the 4nited %tates will ta+ the full &)5'((, there is no reason wh- we should reduce our ta+' @f we collected from him &,5'(( ta+ out of the& (('(( dividend, then his net dividend is onl- &"5'((' %o, instead of transferring the collections from the &hilippines Treasur- to the 4'%' Treasur-, we might =ust as well retainer ta+ because we need these revenues' This is alwa-s true when it comes to a developing countr- such as ours entering into a treat- with developed countr- like 4' %, what do we do in ta+ treatiesT ?ne or two things' <irst, we give consideration to investments especiall- where the investor controls either (> of the voting shares of the compan- in the &hilippines or *5> of its capital' Ehen the investment e+ceeds this proportion @Cve =ust mentioned, we reduce the rate of ta+ from 5 to (> on condition that on the ta+ credit provision in the same treat- we asked the developed countr- to credit this investor with the ta+ actuall- at a higher rate and was paid in the &hilippines' @n other words, there would be some incentives on the part of the foreigners to invest in the &hilippines because the rates of ta+ are lowered and at the same time the- are credited against the domestic ta+ abroad a figure higher than what was collected in the &hilippines' +++; "

0 71

4nder Article 4 5,6 of the R&#4% Ta+ Treat-, ro-alties for the use of, or the right to use, propert- or rights shall be treated as income from sources within a Contracting %tate onl- to the e+tent that such ro-alties are for the use of, or the right use, such propert- or rights within that Contracting %tate' 7
0 )1 0 !1 0*(1 0* 1

R&#4% Ta+ Treat-, Article ,' ) ! #d, Article *,' ! 7ite+ :mplo-ees Association $s. :duvala, 7! %CRA )), %eptember **, !77'*(

&aras, $s. Commission on :lections, $' R' No' *, "!, November 4, !!"N %an 9iguel Corporation :mplo-ees 4nion# &T$E? $s. Confesor, $' R' No' *"*, %eptember !, !!"N Agu=itas $s. Court of Appeals, $' R' No' ("5"(, August *,, !!"N %a=onas $s. Court of Appeals, $' R' No' (*,77, 3ul- 5, !!"N :scribano $s. Avila, )5 %CRA *45, %eptember *, !7)N Komes @ns' Co' $s. :astern %hipping 7ines, *, %CRA 4*4, 3ul- *(, !),'*
0**1 0*,1 0*41 0*51 0*"1 0*71

Lienna Convention on the 7aw of Treaties, Article , '** Toledo, supra, at p' 7'*, #bid, !'*4 %alonga, Gap, &ublic @nternational 7aw, *55'*5 8lackCs 7aw Aictionar- 5th ed', ! ,'*"

Commissioner of @nternal Revenue $s. Tok-o %hipping Co', 7td', *44 %CRA ,,*N &rovince of Tarlac $s. Alcantara, * " %CRA 7!(N 9agsa-sa- 7ines, @nc' $s. Court of Appeals, *"( %CRA 5 ,'*7
0*)1

Eonder 9echanical :ngineering Corporation $s. CTA, "4 %CRA 555'*)