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COMMISSIONER OF INTERNAL REVENUE vs. SC JOHNSON AND SON, INC.

AND CA
Facts:
1. SC Johnson and Son, Inc., is a non-resident foreign corporation based in the US wherein
it was granted the following:

a. The right to use trademark, patents, and technology of the mother Company;
and
b. The right to manufacture, package and distribute products.

2. The Company was obligated to pay the mother company (based in the US) a percentage
of its net sales and pay the PH government 25% of withholding tax on the said royalty
payments amounting to a total of P1.603M from the period of July 92 to May 93.

3. The responded filed with the International Tax Affairs Division of the BIR to claim for
refund alleging overpayment of withholding tax. Since their business was filed under,
and approved by the Technology Transfer Board, a preferential tax of 10% should apply
to them pursuant to the RP-US Tax Treaty under the most favored clause; hence, they
should be refunded a total amount of P0.966M.

4. The Commissioner did not act; the Court of Tax Appeals rendered a favorable decision in
favor of the Company; and the Court of Appeals affirmed the decision of the Court of
Tax Appeals decision.
Issue: Whether SC Johnson and Son, Inc. is entitled to the most favored tax rate of 10% on
royalties as provided for the RP-US Tax Treaty in relation with the RP-West Germany Tax Treaty.
Held: No. There is nothing on record to support a claim that the tax royalties under the RP-US
Tax Treaty is paid under similar circumstances as the tax royalties under the RP-West Germany
Tax Treaty.
RELATED CONCEPTS DISCUSSED IN THE CASE:
Payment of Royalties tax rates are the same for all recipients.
Purpose of Tax Treaties to reconcile the national and fiscal legislations of the
contracting parties in order to aide them to avoid double taxation in two different
jurisdictions.
International juridical double taxation imposition of comparable taxes in two or more
states on the same taxpayer in respect to the same subject matter and for identical
periods.
o Rationale to encourage the free flow of goods and services and the movement
of capital, technology and persons between countries, conditions deemed vital in
creating a robust and dynamic economies.
Double Taxation a person is a resident of a contracting state and derives income from,
or owns capital in, the other contracting state and both state impose tax on that income
or capital.
o Methods to eliminate double taxation
It sets out the respective rights of tax of the state of source and of the
state of resident with regard to certain classes of income or capital.
The state of source is given a full or limited right to tax together with the
state of residence.
o Methods of Relief from double taxation
Exemption Method the income or capital which is taxable in the state
of source is exempted in the state of residence.
Credit Method the income or capital which is taxed in the state of
source is still taxable in the state of residence, the tax paid in the former
is credited against the tax levied in the latter.
NOTE: Exemption vs. Credit
o Exemption focused on income/capital
o Credit focused on tax