CIR v. PROCTER & GAMBLE PHIL. MFG. CORP. & CTA (1988, J.

Paras) FACTS: Procter and Gamble Philippine Manufacturing Corporation (PMC-Phil.), a corporation duly organized and existing under and by virtue of the Philippine laws, is engaged in business in the Philippines and is a wholly owned subsidiary of Procter and Gamble, USA. (PMC-USA), a non-resident foreign corporation in the Philippines, not engaged in trade and business therein. PMC-USA is the sole shareholder or stockholder of PMC-Phil., as PMC-USA owns wholly or by 100% the voting stock of PMC Phil. and is entitled to receive income from PMC-Phil. in the form of dividends, if not rents or royalties. In addition, PMC-Phil has a legal personality separate and distinct from PMC-USA. For the taxable years ending June 30, 1974 and June 30, 1975, PMC-Phil. paid income tax of 25%-35% of its taxable net income, as provided for under Sec. 24(a) of the Phil. Tax Code. Based on the net profit (after taxation), PMC-Phil. declared a dividend in favor of its sole corporate stockholder and parent corporation PMC-USA, which amount was subjected to taxation of 35%, as provided for in Sec. 24(b) of the Phil. Tax Code. In July, 1977 PMC-Phil., invoking the tax-sparing credit provision in Sec. 24(b), as the withholding agent of the Philippine government, with respect to the dividend taxes paid by PMC-USA, filed a claim with the herein petitioner, CIR, claiming that the applicable rate of withholding tax on the dividends remitted was only 15% (and not 35%). for the refund of the 20 percentage-point portion of the 35 percentage-point whole tax paid, arising allegedly from the alleged "overpaid withholding tax at source or overpaid withholding tax in the amount of P4,832,989.00. There being no immediate action by the BIR on PMC-Phils' letter-claim the latter sought the intervention of the CTA. CTA: PMC-Phils is entitled to the sought refund or tax credit ISSUE: WON PMC-Phil is entitled to the sought refund or tax credit on dividends declared and remitted to its parent corporation HELD/RATIO: NO Sec 24 (b) (1) of the Phil. Tax Code states that an ordinary 35% tax rate will be applied to dividend remittances to non-resident corporate stockholders of a Philippine corporation. This rate goes down to 15% ONLY IF the country of domicile of the foreign stockholder corporation shall allow such foreign corporation a tax credit for taxes deemed paid in the Philippines, applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. However, such tax credit for taxes deemed paid in the Philippines MUST, as a minimum, reach an amount equivalent to 20 percentage points which represents the difference between the regular 35% dividend tax rate and the reduced 15% tax rate. Thus, the test is if USA shall allow P&G USA a tax credit for taxes deemed paid in the Philippines applicable against the US taxes of P&G USA, and such tax credit must reach at least 20 percentage points. The tax return of the disputed 15% is not justified because PMC-Phil failed to meet certain conditions: (1) To show the actual amount credited by the US Government against the income tax due from PC-USA on the dividends received from PMC-Phil (2) To present the income tax return of its mother company for 1975 (3) To submit any duly authenticated document showing that the US Government credited the 20% tax

deemed paid in the Philippines DISPOSITIVE: Petition is GRANTED and the decision appealed from, is REVERSED and SET ASIDE