Marubeni vs.
Commissioner o Effectively connected not necessary that the income be
September 14, 1989| Fernan, J| Kinds of Income Tax Payers
Digester: Ortega, Ige
DOCTRINE
The General Rule that a foreign corporation is the same juridical entity as its
branch office in the PH cannot apply in Marubenis case.
This rule is based on the premise that the business of the foreign corporation
is conducted through its branch office, following the principal agent
relationship theory. It is understood that a branch becomes its agent here.
Hence when a foreign corp transacts business in the PH independently of the
branch (i.e. investing in AG&P), such agency is set-aside. The transaction is
one made by the foreign corporation, not the branch.
FACTS
Marubeni Corporation, incorporated in Japan, has equity investments
in AG&P of Manila.
o Licensed to engage business in PH. Office in Intramuros.
o 1st Quarter of 1981 ending March 31, AG&P declared and
paid cash dividends to petitioner in the amount of P849,720
and withheld the corresponding 10% final dividend tax.
o 3rd Quarter of 19871 ending September 30, AG&P declared
the same. Same amounts and tax.
AG&P remitted the cash to Marubenis office in Tokyo, Japan.
However, the amount given was net not only of the final dividend
tax but also a 15% profit remittance tax based on the remittable
amount after deducting the final withholding tax of 10%.
o See: Schedule. Out of the 849,720 dividends declared, only
650,035 was received due to the two taxes
o The taxes were paid to the BIR by AG&P evidenced by two
receipts
o Total amount of branch profit remittance tax paid
229,424
Marubeni sought a ruling from the BIR whether or not the dividends
Marubeni received are effectively connected with its conduct or
business in the Philippines as to be considered branch profits,
subject to the 15% tax under 24(b)(2) of the NIRC as amended.
o Through the accounting firm Sycip, Gorres, Velayo, and Co.
BIR Acting Commissioner Ruben Ancheta ruled:
o Under that section, only profits remitted abroad by a branch
office to its head office which are effectively connected with
its trade or business in the PH are subject to the 15% tax.
derived from the actual operation of [Marubenis] trade or
business; it is sufficient that the income arises from the
business activity in which the corporation is engaged.
For example, if a resident foreign corp is engaged in buying
and selling machineries in the PH and invests shares of
stock on which dividends are subsequently received, the
dividends thus earned are not considered effectively
connected with its trade or business.
Marubeni filed for a refund/tax credit of P229,424 paid by AG&P.
o DENIED. Commissioner said that while it couldnt be
imposed the 15% tax because of the discussion above, and
because it cannot be taxed with 10% inter-corporate
dividend tax, being a non-resident stockholder.
o It could still be taxed with 25% tax pursuant to a tax treaty
between the PH and Japan.
o Paid 10% and 15% offsets the actual tax of 25%
CTA affirmed the denial on appeal.
o No doubt na taxable income. Said dividends were
distributions made by the Atlantic, Gulf and Pacific Company
of Manila to its shareholder out of its profits on the
investments of the Marubeni Corporation of Japan
o Direct investment and direct remittance to and from AG&P .
o Subject to certain exceptions not pertinent hereto, income is
taxable to the person who earned it. Admittedly, the
dividends under consideration were earned by the Marubeni
Corporation of Japan, and hence, taxable to the said
corporation. While it is true that the Marubeni Corporation
Philippine Branch is duly licensed to engage in business
under Philippine laws, such dividends are not the income of
the Philippine Branch and are not taxable to the said
Philippine branch.
o CTA refused to consider the principal-agent relationship
theory proposed by petitioner, who said that the dividends
are the income of and are taxable to the Philippine Branch.
Arguments
Marubeni: Following the principal-agent relationship theory, Marubeni
is likewise a resident foreign corporation subject only to the 10%
inter-corporate final tax on dividends received from a domestic corp.
(24(c)(1)) of the tax code of 1977. Hence in that sense (principal-
agent), it is a resident foreign corporation
o Says na it engages in trade or business through its
Philippine Branch, which is one and the same entity as the
Japan branch.
 o Says na a single corporate entity cannot be both a resident
and non-resident corporation, depending on the nature of the
transactions involved.
Hence, whether the dividends are paid to the Japan
office or to a branch in Manila is not important,
because the head office and the branch
constitute just one corporate entity, the Marubeni
Corporation, which, under both PH tax and corporate
laws, IS A RESIDENT FOREIGN CORP because it
is transacting business in the Philippines.
Commissioner: Marubeni is a non-resident foreign corp and is not
engaged in trade or business in the Philippines. Hence tax as per the
special rate of 25% of the tax treaty between PH and Japan.
Solicitor General: The General Rule that a foreign corporation is the
same juridical entity as its branch office in the PH cannot apply here.
This rule is based on the premise that the business of the foreign
corporation is conducted through its branch office, following the
principal agent relationship theory. It is understood that a branch
becomes its agent here. Hence when a foreign corp transacts
business in the PH independently of the branch (i.e. investing in
AG&P), such agency is set-aside. The transaction is one made
by the foreign corp, not the branch.
Issues
(1) Is Marubeni a resident or non resident foreign corporation?
FOREIGN
Discussion
Tax Code: resident foreign corporation is one engaged in trade or
business within the Philippines.
Held #1
Non-resident considering the fact that the investment made by
Marubeni was made for purposes particularly germane to the
conduct of Marubeni-Japans corporate affairs, but not of the
branch in the Philippines
It is thus clear that petitioner, having made this independent
investment attributable only to the head office, cannot now claim the
increments as ordinary consequences of its trade or business in the
PH, and avail itself of the lower tax rate of 10%.
But
While CIR is correct in saying that Marubeni cannot be made to pay
the 10% and 15% taxes, di puwedeng no refund because of the
25% rate sa treaty.
To simply add the two is to disregard a basic rule in tax that each tax
has a different tax basis.
o Tax on dividends: directly levied on dividends received
o Tax on remittance: profit actually remitted abroad.
Another error the tax treaty text says that the 25% is actually the
maximum amount instead of a flat rate. not exceeding The proper
rate to be used is the one found in 24(b)(1) of the treaty copy pasted
below.
o Non-resident foreign corps taxed at 35% of the gross income from
all sources within the Philippines but a discounted rate of 15% is
given to Marubeni on dividends received from a domestic corp
(AG&P) on the condition that Japan gives Marubeni a tax credit of
not less than 20% of the dividends received (represents differenc
between 35% to 15%)
o ^the 15% of the be imposed is within the general ceiling of 25% as
mentioned in Art. 10(2)(b) of the tax treaty initially cited by the
CIR.
Notes
1. Japan-PH Tax Treaty of 1980
a. Art. 10(2)(b)
b. Sec. 24(b)(1)
Tax on foreign corporations. (1) Non-resident corporations ... (iii) On
dividends received from a domestic corporation liable to tax under this
Chapter, the tax shall be 15% of the dividends received, which shall be
collected and paid as provided in Section 53 (d) of this Code, subject to the
condition that the country in which the non-resident foreign corporation is
domiciled shall allow a credit against the tax due from the non-resident
foreign corporation, taxes deemed to have been paid in the Philippines
equivalent to 20 % which represents the difference between the regular tax
(35 %) on corporations and the tax (15 %) on dividends as provided in this
Section; ....
2. Tax Code
Tax on non-resident Foreign Corporations
(1) Non-resident corporations. A foreign corporation not engaged in trade
or business in the Philippines shall pay a tax equal to thirty-five per cent of
the gross income received during each taxable year from all sources within
the Philippines as ... dividends ....
Tax on resident foreign corporation
Dividends received by a domestic or resident foreign corporation liable to tax
under this Code (1) Shall be subject to a final tax of 10% on the total
amount thereof, which shall be collected and paid as provided in Sections 53
and 54 of this Code ....