tax digests set 2.docx

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CIR V SC JOHNSON INC. June 25, 1999

Facts:Respondent is a domestic corporation organized and operating

under the Philippine Laws, entered into a licensed agreement with the SCJohnson and Son, USA, a non-resident foreign corporation based in the USA

pursuant to which the respondent was granted the right to use the

trademar, patents and technolog! owned b! the later including the right to

manufacture, pacage and distribute the products co"ered b! the

Agreement and secure assistance in management, mareting and production

from SC Johnson and Son USA#

$or the use of trademar or technolog!, respondent was obliged to pa! SCJohnson and Son, USA ro!alties based on a percentage of net sales and

sub%ected the same to &'( withholding ta) on ro!alt! pa!ments which

respondent paid for the period co"ering Jul! *++& to a! *++ in the total

amount of P*,./,00#//#

1n 1ctober &+, *++, respondent filed with the 2nternational 3a)

Affairs 4i"ision 523A46 of the 72R a claim for refund of o"erpaid withholding

ta) on ro!alties arguing that, the antecedent facts attending respondents

case fall s8uarel! within the same circumstances under which said

ac9eorge and 9illette rulings were issued# Since the agreement was

appro"ed b! the 3echnolog! 3ransfer 7oard, the preferential ta) rate of */(

should appl! to the respondent# So, ro!alties paid b! the respondent to SC

Johnson and Son, USA is onl! sub%ect to */( withholding ta)#

3he Commissioner did not act on said claim for refund# Pri"ate respondent

SC Johnson : Son, 2nc# then filed a petition for re"iew before the C3A, to

claim a refund of the o"erpaid withholding ta) on ro!alt! pa!ments from Jul!

*++& to a! *++#

1n a! ;, *++., the C3A rendered its decision in fa"or of SC Johnson and

ordered the C2R to issue a ta) credit certificate in the amount of
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P*.,&..#// representing o"erpaid withholding ta) on ro!alt! pa!ments

beginning Jul! *++& to a! *++#

3he C2R thus filed a petition for re"iew with the CA which rendered the

decision sub%ect of this appeal on


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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 theUS taxes of P&G USA, and such tax credit must reach at least 20 percentage points. Requirements were

met.

NOTES: Breakdown:

a) Deemed paid requirement: US Internal Revenue Code, Sec 902: a domestic corporation (owning 10%

of remitting foreign corporation) shall be deemed to have paid a proportionate extent of taxes paid by such

foreign corporation upon its remittance of dividends to domestic corporation.

b) 20 percentage points requirement: (computation is as follows)

P 100.00 -- corporate income earned by P&G Phils

x 35% -- Philippine income tax rate

P 35.00 -- paid by P&G Phil as corporate income tax

P 100.00

- 35.00

65. 00 -- available for remittance

P 65. 00

x 35% -- Regular Philippine dividend tax rate

P 22.75 -- regular dividend tax

P 65.0o

x 15% -- Reduced dividend tax rate

P 9.75 -- reduced dividend tax

P 65.00 -- dividends remittable

- 9.75 -- dividend tax withheld at reduced rate

P 55.25 -- dividends actually remitted to P&G USA

Dividends actually


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remitted by P&G Phil = P 55.25

---------------------------------- ------------- x P35 = P29.75

Amount of accumulated P 65.00

profits earned

P35 is the income tax paid.

P29.75 is the tax credit allowed by Sec 902 of US Tax Code for Phil corporate income tax deemed paid

by the parent company. Since P29.75 is much higher than P13, Sec 902 US Tax Code complies with the

requirements of sec 24 NIRC. (I did not understand why these were divided and multiplied. Point is,

requirements were met)

Reason e!"nd #!e $aw:

Since the US Congress desires to avoid or reduce double taxation of the same income stream, it allows a

tax credit of both (i) the Philippine dividend tax actually withheld, and (ii) the tax credit for the Philippine

corporate income tax actually paid by P&G Philippines but deemed paid by P&G USA.

Moreover, under the Philippines-United States Convention With Respect to Taxes on Income, the

Philippines, by treaty commitment, reduced the regular rate of dividend tax to a maximum of 20% of he

gross amount of dividends paid to US parent corporations, and established a treaty obligation on the part

of the United States that it shall allow to a US parent corporation receiving dividends from its Philippine

subsidiary a [tax] credit for the appropriate amount of taxes paid or accrued to the Philippines by the

Philippine [subsidiary].

Note:

The NIRC does not require that the US tax law deem the parent corporation to have paid the 20

percentage points of dividend tax waived by the Philippines. It only requires that the US shall allow P&G-

USA a deemed paid tax credit in an amount equivalent to the 20 percentage points waived by the

Philippines. Section 24(b)(1) does not create a tax exemption nor does it provide a tax credit; it is a

provision which specifies when a particular (reduced) tax rate is legally applicable.

Section 24(b)(1) of the NIRC seeks to promote the in-flow of foreign equity investment in the Philippinesby reducing the tax cost of earning profits here and thereby increasing the net dividends remittable to the

investor. The foreign investor, however, would not benefit from the reduction of the Philippine dividend tax

rate unless its home country gives it some relief from double taxation by allowing the investor additional

tax credits which would be applicable against the tax payable to such home country. Accordingly Section

24(b)(1) of the NIRC requires the home or domiciliary country to give the investor corporation a deemed

paid tax credit at least equal in amount to the 20 percentage points of dividend tax foregone by the

Philippines, in the assumption that a positive incentive effect would thereby be felt by the investor.


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