Cir vs goodyear

Facts:
Respondent is a domestic corporation duly organized and existing under the laws of the Philippines. On
August 19, 2003, the authorized capital stock of respondent was increased from P400,000,000.00 divided
into 4,000,000 shares with a par value of P100.00 each, to P1,731,863,000.00 divided into 4,000,000
common shares and 13,318,630 preferred shares with a par value of P100.00 each. n May 30, 2008, the
Board of Directors of respondent authorized the redemption of GTRC's 3,729,216 preferred shares on
October 15, 2008 at the redemption price of P470,653,914.00, broken down as follows: P372,921,600.00
representing the aggregate par value and P97,732,314.00, representing accrued and unpaid dividends.
Respondent filed an application for relief from double taxation before the International Tax Affairs Division
of the BIR to confirm that the redemption was not subject to Philippine income tax, pursuant to the
Republic of the Philippines (RP) - US Tax Treaty.[9] This notwithstanding, respondent still took the
conservative approach, and thus, withheld and remitted the sum of P14,659,847.10 to the BIR on
November 3, 2008, representing fifteen percent (15%) FWT, computed based on the difference of the
redemption price and aggregate par value of the shares.[10]

BIR did not agree with Goodyear and thus did not respond, it was raised to the CTA for protest and then
to the SC.

Issue:
whether or not the CTA En Banc correctly ruled that the gain derived by GTRC was not subject to 15%
FWT on dividends.

Ruling:
The imposition of 15% FWT on intercorporate dividends received by a non-resident foreign corporation is
found in Section 28 (B) (5) (b) of the Tax Code which reads:
SEC. 28. Rates of Income Tax on Foreign Corporations. –

xxxx

(B) Tax on Nonresident Foreign Corporation. –

xxxx

(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;

xxxx (Emphasis and underscoring supplied)

It must be noted, however, that GTRC is a non-resident foreign corporation, specifically a resident of the
US. Thus, pursuant to the cardinal principle that treaties have the force and effect of law in this
jurisdiction,[40] the RP-US Tax Treaty complementarily governs the tax implications of respondent's
transactions with GTRC.

Under Article 11 (5)[41] of the RP-US Tax Treaty, the term "dividends" should be understood according to
the taxation law of the State in which the corporation making the distribution is a resident, which, in this
case, pertains to respondent, a resident of the Philippines. Accordingly, attention should be drawn to the
statutory definition of what constitutes "dividends," pursuant to Section 73 (A)[42] of the Tax Code which
provides that "[t]he term 'dividends' x x x means any distribution made by a corporation to its shareholders
out of its earnings or profits and payable to its shareholders, whether in money or in other property."

In light of the foregoing, the Court therefore holds that the redemption price representing the amount of
P97,732,314.00 received by GTRC could not be treated as accumulated dividends in arrears that could
be subjected to 15% FWT. Verily, respondent's AFS covering the years 2003 to 2009 show that it did not
have unrestricted retained earnings, and in fact, operated from a position of deficit.[43] Thus, absent the
availability of unrestricted retained earnings, the board of directors of respondent had no power to issue
dividends.[44] Consistent with Section 73 (A) of the Tax Code, this rule on dividend declaration – i.e., that
it is dependent upon the availability of unrestricted retained earnings – was further edified in Section 43 of
The Corporation Code of the Philippines[45] which reads:

Section 43. Power to Declare Dividends. – The board of directors of a stock corporation may declare
dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock
to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due
on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and
expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid
subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of
stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or
special meeting duly called for the purpose.

"The distinction between a distribution in liquidation and an ordinary dividend is factual; the result in each
case depending on the particular circumstances of the case and the intent of the parties. If the distribution
is in the nature of a recurring return on stock it is an ordinary dividend. However, if the corporation is
really winding up its business or recapitalizing and narrowing its activities, the distribution may properly be
treated as in complete or partial liquidation and as payment by the corporation to the stockholder for his
stock. The corporation is, in the latter instances, wiping out all parts of the stockholders' interest in the
company * * * ." (Montgomery, Federal Income Tax Handbook [1938-1939], 258 x x x)[49] (Emphases
and underscoring supplied)

All told, the amount of P97,732,314.00 received by GTRC from respondent for the redemption of its
3,729,216 preferred shares were not accumulated dividends in arrears. Contrary to petitioner's claims, it
is therefore not subject to 15% FWT on dividends in accordance with Section 28 (B) (5) (b) of the Tax
Code.