G.R. No.

127105 June 25, 1999

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
S.C. JOHNSON AND SON, INC., and COURT OF APPEALS, respondents.
GONZAGA-REYES, J.:
Facts:
[Respondent], a domestic corporation organized and operating under the Philippine laws,
entered into a license agreement with SC Johnson and Son, United States of America (USA), a nonresident foreign corporation based in the U.S.A. pursuant to which the [respondent] was granted the right
to use the trademark, patents and technology owned by the latter including the right to manufacture,
package and distribute the products covered by the Agreement and secure assistance in management,
marketing and production from SC Johnson and Son, U. S. A.
For the use of the trademark or technology, [respondent] was obliged to pay SC Johnson and
Son, USA royalties based on a percentage of net sales and subjected the same to 25% withholding tax on
royalty payments which [respondent] paid for the period covering July 1992 to May 1993 in the total
amount of P1,603,443.00.
On October 29, 1993, [respondent] filed with the International Tax Affairs Division (ITAD) of the
BIR a claim for refund of overpaid withholding tax on royalties arguing that, "the antecedent facts
attending [respondent's] case fall squarely within the same circumstances under which said MacGeorge
and Gillete rulings were issued. Since the agreement was approved by the Technology Transfer Board,
the preferential tax rate of 10% should apply to the [respondent]. We therefore submit that royalties paid
by the [respondent] to SC Johnson and Son, USA is only subject to 10% withholding tax pursuant to the
most-favored nation clause of the RP-US Tax Treaty [Article 13 Paragraph 2 (b) (iii)] in relation to the RPWest Germany Tax Treaty [Article 12 (2) (b)]" (Petition for Review [filed with the Court of Appeals], par.
12).
The Commissioner did not act on said claim for refund. Private respondent S.C. Johnson & Son,
Inc. (S.C. Johnson) then filed a petition for review before the Court of Tax Appeals (CTA) to claim a refund
of the overpaid withholding tax on royalty payments from July 1992 to May 1993.
On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C. Johnson and
ordered the Commissioner of Internal Revenue to issue a tax credit certificate in the amount of
P963,266.00 representing overpaid withholding tax on royalty payments, beginning July, 1992 to May,
1993. 2
The Commissioner of Internal Revenue thus filed a petition for review with the Court of Appeals which
rendered the decision subject of this appeal on November 7, 1996 finding no merit in the petition and
affirming in toto the CTA ruling. 3
Issue:

The court of appeals erred in ruling that sc johnson and son, usa is entitled to the "most favored
nation" tax rate of 10% on royalties as provided in the rp-us tax treaty in relation to the rp-west germany
tax treaty.
Held: The petition is meritorious.
We are unable to sustain the position of the Court of Tax Appeals, which was upheld by the Court of
Appeals, that the phrase "paid under similar circumstances in Article 13 (2) (b), (iii) of the RP-US Tax
Treaty should be interpreted to refer to payment of royalty, and not to the payment of the tax, for the
reason that the phrase "paid under similar circumstances" is followed by the phrase "to a resident of a
third state". The respondent court held that "Words are to be understood in the context in which they are
used", and since what is paid to a resident of a third state is not a tax but a royalty "logic instructs" that the
treaty provision in question should refer to royalties of the same kind paid under similar circumstances.
In this case, the treaties make it incumbent upon the state of residence to allow relief in order to
avoid double taxation. There are two methods of relief the exemption method and the credit method. In
the exemption method, the income or capital which is taxable in the state of source or situs is exempted in
the state of residence, although in some instances it may be taken into account in determining the rate of
tax applicable to the taxpayer's remaining income or capital. On the other hand, in the credit method,
although 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. The basic difference
between the two methods is that in the exemption method, the focus is on the income or capital itself,
whereas the credit method focuses upon the tax. 15
In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will give
up a part of the tax in the expectation that the tax given up for this particular investment is not taxed by
the other
country. 16 Thus the petitioner correctly opined that the phrase "royalties paid under similar circumstances"
in the most favored nation clause of the US-RP Tax Treaty necessarily contemplated "circumstances that
are tax-related".
In the case at bar, the state of source is the Philippines because the royalties are paid for the right to use
property or rights, i.e. trademarks, patents and technology, located within the Philippines. 17 The United
States is the state of residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based there.
Under the RP-US Tax Treaty, the state of residence and the state of source are both permitted to tax the
royalties, with a restraint on the tax that may be collected by the state of source. 18 Furthermore, the
method employed to give relief from double taxation is the allowance of a tax credit to citizens or
residents of the United States (in an appropriate amount based upon the taxes paid or accrued to the
Philippines) against the United States tax, but such amount shall not exceed the limitations provided by
United States law for the taxable year. 19 Under Article 13 thereof, the Philippines may impose one of
three rates 25 percent of the gross amount of the royalties; 15 percent when the royalties are paid by a
corporation registered with the Philippine Board of Investments and engaged in preferred areas of
activities; or the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid
under similar circumstances to a resident of a third state.
Given the purpose underlying tax treaties and the rationale for the most favored nation clause, the
concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty should apply only if the
taxes imposed upon royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid under

similar circumstances. This would mean that private respondent must prove that the RP-US Tax Treaty
grants similar tax reliefs to residents of the United States in respect of the taxes imposable upon royalties
earned from sources within the Philippines as those allowed to their German counterparts under the RPGermany Tax Treaty.
The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting.
Article 24 of the RP-Germany Tax Treaty, supra, expressly allows crediting against German income and
corporation tax of 20% of the gross amount of royalties paid under the law of the Philippines. On the other
hand, Article 23 of the RP-US Tax Treaty, which is the counterpart provision with respect to relief for
double taxation, does not provide for similar crediting of 20% of the gross amount of royalties paid.

We accordingly agree with petitioner that since the RP-US Tax Treaty does not give a matching tax credit
of 20 percent for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany
Tax Treaty, private respondent cannot be deemed entitled to the 10 percent rate granted under the latter
treaty for the reason that there is no payment of taxes on royalties under similar circumstances.
It bears stress that tax refunds are in the nature of tax exemptions. As such they are regarded as in
derogation of sovereign authority and to be construed strictissimi juris against the person or entity
claiming the exemption. 27The burden of proof is upon him who claims the exemption in his favor and he
must be able to justify his claim by the clearest grant of organic or statute law. 28 Private respondent is
claiming for a refund of the alleged overpayment of tax on royalties; however, there is nothing on record to
support a claim that the tax on royalties under the RP-US Tax Treaty is paid under similar circumstances
as the tax on royalties under the RP-West Germany Tax Treaty.
WHEREFORE, for all the foregoing, the instant petition is GRANTED.

N.V. REEDERIJ "AMSTERDAM" and ROYAL INTEROCEAN LINES, petitioners,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
Facts:
From March 27 to April 30, 1963, M.V. Amstelmeer and from September 24 to October 28, 1964,
MV "Amstelkroon, " both of which are vessels of petitioner N.B. Reederij "AMSTERDAM," called on
Philippine ports to load cargoes for foreign destination. The freight fees for these transactions were paid
abroad in the amount of US $98,175.00 in 1963 and US $137,193.00 in 1964. In these two instances,
petitioner Royal Interocean Lines acted as husbanding agent for a fee or commission on said vessels. No
income tax appears to have been paid by petitioner N.V. Reederij "AMSTERDAM" on the freight receipts.
Respondent Commissioner of Internal Revenue, through his examiners, filed the corresponding
income tax returns for and in behalf of the former under Section 15 of the National Internal Revenue
Code. Applying the then prevailing market conversion rate of P3.90 to the US $1.00, the gross receipts of
petitioner N.V. Reederij "Amsterdam" for 1963 and 1964 amounted to P382,882.50 and P535,052.00,
respectively. On June 30, 1967, respondent Commissioner assessed said petitioner in the amounts of
P193,973.20 and P262,904.94 as deficiency income tax for 1963 and 1964, respectively, as "a nonresident foreign corporation not engaged in trade or business in the Philippines under Section 24 (b) (1) of
the Tax Code.
On the assumption that the said petitioner is a foreign corporation engaged in trade or business in
the Philippines, on August 28, 1967, petitioner Royal Interocean Lines filed an income tax return of the
aforementioned vessels computed at the exchange rate of P2.00 to USs1.00 1 and paid the tax thereon in
the amount of P1,835.52 and P9,448.94, respectively, pursuant to Section 24 (b) (2) in relation to Section
37 (B) (e) of the National Internal Revenue Code and Section 163 of Revenue Regulations No. 2. On the
same two dates, petitioner Royal Interocean Lines as the husbanding agent of petitioner N.V. Reederij
"AMSTERDAM" filed a written protest against the abovementioned assessment made by the respondent
Commissioner which protest was denied by said respondent in a letter dated March 3, 1969: On March
31, 1969, petitioners filed a petition for review with the respondent Court of Tax Appeals praying for the
cancellation of the subject assessment. After due hearing, the respondent court, on December 1, 1976,
rendered a decision modifying said assessments by eliminating the 50% fraud compromise penalties
imposed upon petitioners. Petitioners filed a motion for reconsideration of said decision but this was
denied by the respondent court.

Issue:
A. Whether n.v. reederij "amsterdam" not having any office or place of business in the philippines,
whose vessels called on the philippine ports for the purpose of loading cargoes only twice-one in 1963
and another in 1964 should be taxed as a foreign corporation not engaged in trade or business in the
philippines under section 24(b) (1) of the tax code or should be taxed as a foreign corporation engaged in
trade or business in the philippines under section 24(b) (2) in relation to section 37 (e) of the same code;
and
Held:
Petitioners contend that respondent court erred in holding that petitioner N.V. Reederij
"AMSTERDAM" is a non-resident foreign corporation because it allegedly disregarded Section 163 of
Revenue Regulations No. 2 (providing for the determination of the net income of foreign corporations
doing business in the Philippines) and in holding that the foreign exchange ang e receipts of said
petitioner for purposes of computing its income tax should be converted into Philippine pesos at the rate
of P3.90 to US $1.00 instead of P2.00 to US $1.00.
The petition is devoid of merit.
Petitioner N.V. Reederij "AMSTERDAM" is a foreign corporation not authorized or licensed to do business
in the Philippines. It does not have a branch office in the Philippines and it made only two calls in
Philippine ports, one in 1963 and the other in 1964. In order that a foreign corporation may be considered
engaged in trade or business, its business transactions must be continuous. A casual business activity in
the Philippines by a foreign corporation, as in the present case, does not amount to engaging in trade or
business in the Philippines for income tax purposes.
The Court reproduces with approval the following disquisition of the respondent court
A corporation is itself a taxpaying entity and speaking generally, for purposes of income
tax, corporations are classified into (a) domestic corporations and (b) foreign
corporations. (Sec. 24(a) and (b), Tax Code.) Foreign corporations are further classified
into (1) resident foreign corporations and (2) non-resident foreign corporations. (Sec.
24(b) (1) and (2). Tax Code.) A resident foreign corporation is a foreign corporation
engaged in trade or business within the Philippines or having an office or place of
business therein (Sec. 84(g), Tax Code) while a non- resident foreign corporation is a
foreign corporation not engaged in trade or business within the Philippines and not
having any office or place of business therein. (Sec. 84(h), Tax Code.)
A domestic corporation is taxed on its income from sources within and without the
Philippines, but a foreign corporation is taxed only on its income from sources within the
Philippines. (Sec. 24(a), Tax Code; Sec. 16, Rev. Regs. No. 2.) However, while a foreign
corporation doing business in the Philippines is taxable on income solely from sources
within the Philippines, it is permitted to deductions from gross income but only to the
extent connected with income earned in the Philippines. (Secs. 24(b) (2) and 37, Tax
Code.) On the other hand, foreign corporations not doing business in the Philippines are
taxable on income from all sources within the Philippines, as interest, dividends, rents,
salaries, wages, premiums, annuities Compensations, remunerations, emoluments, or

other fixed or determinable annual or periodical or casual gains, profits and income and
capital gains" The tax is 30% (now 35%) of such gross income. (Sec. 24 (b) (1), Tax
Code.)
At the time material to this case, certain corporations were given special treatment, namely,
building and loan associations operating as such in accordance with Section 171 of the Corporation Law,
educational institutions, domestic life insurance companies and for" foreign life insurance companies
doing business in the Philippines. (Sec. 24(a) & (c), Tax Code.) It bears emphasis, however, that foreign
life insurance companies which were not doing business in the Philippines were taxable as other foreign
corporations not authorized to do business in the Philippines. (Sec. 24(c) Tax Code.)
Now to the case at bar. Here, petitioner N.V. Reederij "Amsterdam" is a non-resident foreign
corporation, organized and existing under the laws of The Netherlands with principal office in Amsterdam
and not licensed to do business in the Philippines. (pp. 8-81, CTA records.) As a non-resident foreign
corporation, it is thus a foreign corporation, not engaged in trade or business within the Philippines and
not having any office or place of business therein. (Sec. 84(h), Tax Code.) As stated above, it is therefore
taxable on income from all sources within the Philippines, as interest, dividends, rents, salaries, wages,
premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual
or periodical or casual gains, profits and income and capital gains, and the tax is equal to thirty per
centum of such amount, under Section 24(b) (1) of the Tax Code. The accent is on the words of--`such
amount." Accordingly, petitioner N. V. Reederij "Amsterdam" being a non-resident foreign corporation, its
taxable income for purposes of our income tax law consists of its gross income from all sources within the
Philippines.
The law seems clear and specific. It thus calls for its application as worded as it leaves
no leeway for interpretation. The applicable provision imposes a tax on foreign
corporations falling under the classification of non-resident corporations without any
exceptions or conditions, unlike in the case of foreign corporations engaged in trade or
business within the Philippines which contained (at the time material to this case) an
exception with respect to foreign life insurance companies. Adherence to the provision of
the law, which specifies and determines the taxable income of, and the rate of income tax
applicable to, non-resident foreign corporations, without mentioning any exceptions,
would therefore lead to the conclusion that petitioner N.V. Reederij "Amsterdam" is
subject to income tax on gross income from all sources within the Philippines.
A foreign corporation engaged in trade or business within the Philippines, or which has an office or place
of business therein, is taxed on its total net income received from all sources within the Philippines at the
rate of 25% upon the amount but which taxable net income does not exceed P100,000.00, and 35% upon
the amount but which taxable net income exceeds P100,000.00. 2 On the other hand, a foreign
corporation not engaged in trade or business within the Philippmes and which does not have any office or
place of business therein is taxed on income received from all sources within the Philippines at the rate of
35% of the gross income. 3
Petitioner relies on Section 24 (b) (2) and Section 37 (B) (e) of the Tax Code and implementing Section
163 of the Income Tax Regulations but these provisions refer to a foreign corporation engaged in trade or
business in the Philippines and not to a foreign corporation not engaged in trade or business in the
Philippines like petitioner-ship-owner herein.

WHEREFORE, the petition is DENIED with costs against petitioners. This decision is immediately
executory and no extension of time to file motion for reconsideration shall be entertained.

COMMISSIONER OF INTERNAL REVENUE,

Petitioner,

G.R. No. 139786

- versus CITYTRUST INVESTMENT PHILS., INC.,

Respondent.
x---------------------------------------------x
ASIANBANK CORPORATION,
Petitioner,

G.R. No. 140857

Present:

- versus COMMISSIONER OF INTERNALREVENUE,

Respondent.

PUNO, J., Chairperson,

SANDOVAL-GUTIERREZ,
CORONA,
AZCUNA, and
GARCIA, JJ.
Promulgated:

September 27, 2006

SANDOVAL-GUTIERREZ, J.:
I - G.R. No. 139786

Citytrust, respondent, is a domestic corporation engaged in quasi-banking activities. In 1994,

Citytrust reported the amount of P110,788,542.30 as its total gross receipts and paid the amount
of P5,539,427.11 corresponding to its 5% GRT.

Meanwhile, on January 30, 1996, the CTA, in Asian Bank Corporation v. Commissioner of
Internal Revenue[7] (ASIAN BANK case), ruled that the basis in computing the 5% GRT is the gross
receipts minus the 20% FWT. In other words, the 20% FWT on a banks passive income does not form
part of the taxable gross receipts.

On July 19, 1996, Citytrust, inspired by the above-mentioned CTA ruling, filed with the
Commissioner a written claim for the tax refund or credit in the amount of P326,007.01. It alleged that its
reported

total

gross

receipts

included

the

20%

FWT

on

its

passive

income

amounting

to P32,600,701.25. Thus, it sought to be reimbursed of the 5% GRT it paid on the portion of 20% FWT or
the amount of P326,007.01.

On the same date, Citytrust filed a petition for review with the CTA, which eventually granted its
claim.[8]

On appeal by the Commissioner, the Court of Appeals affirmed the CTA Decision, citing as main
basesCommissioner of Internal Revenue v. Tours Specialist Inc.[9] and Commissioner of Internal Revenue
v. Manila Jockey Club,[10] holding that monies or receipts that do not redound to the benefit of the taxpayer
are not part of its gross receipts.

II - G.R. No. 140857

Asianbank, petitioner, is a domestic corporation also engaged in banking business. For the
taxable quarters ending June 30, 1994 to June 30, 1996, Asianbank filed and remitted to the Bureau of
Internal Revenue (BIR) the 5% GRT on its total gross receipts.

On the strength of the January 30, 1996 CTA Decision in the ASIAN BANK case, Asianbank filed
with the Commissioner a claim for refund of the overpaid GRT amounting to P2,022,485.78.

To toll the running of the two-year prescriptive period for filing of claims, Asianbank also filed a
petition for review with the CTA.

On February 3, 1999, the CTA allowed refund in the reduced amount of P1,345,743.01,
[11]

the amount proven by Asianbank. Unsatisfied, the Commissioner filed with the Court of Appeals a

petition for review.

On November 22, 1999, the Court of Appeals reversed the CTA Decision and ruled in favor of the
Commissioner.

Issue: The imposition of the 20% FWT on the banks passive income and the 5% GRT on
its taxable gross receipts, which include the banks passive income, does not constitute
double taxation;

The Commissioner contends that the imposition of the 20% FWT and 5% GRT does not
constitute double taxation.
We agree.
Double taxation means taxing for the same tax period the same thing or activity twice, when it
should be taxed but once, for the same purpose and with the same kind of character of tax. [26] This is not
the situation in the case at bar. The GRT is a percentage tax under Title V of the Tax Code ([Section 121],
Other Percentage Taxes), while the FWT is an income tax under Title II of the Code (Tax on Income). The
two concepts are different from each other. In Solidbank Corporation,[27] this Court defined that a
percentage tax is a national tax measured by a certain percentage of the gross selling price or gross
value in money of goods sold, bartered or imported; or of the gross receipts or earnings derived by any
person engaged in the sale of services. It is not subject to withholding. An income tax, on the other hand,
is a national tax imposed on the net or the gross income realized in a taxable year. It is subject to

withholding. Thus, there can be no double taxation here as the Tax Code imposes two different kinds of
taxes.

Now, both Asianbank and Citytrust rely on Manila Jockey Club[28] in support of their positions. We
are not convinced. In said case, Manila Jockey Club paid amusement tax on its commission in the total
amount of bets called wager funds from the period November 1946 to October 1950. But such payment
did not include the 5 % of the funds which went to the Board on Races and to the owners of horses and
jockeys. We ruled that the gross receipts of the Manila Jockey Club should not include the 5 % because
although delivered to the Club, such money has been especially earmarked by law or regulation for other
persons.

The Manila Jockey Club[29] does not apply to the cases at bar because what happened there is
earmarking and not withholding. Earmarking is not the same as withholding. Amounts earmarked do not
form part of gross receipts because these are by law or regulation reserved for some person other than
the taxpayer, although delivered or received. On the contrary, amounts withheld form part of gross
receipts because these are in constructive possession and not subject to any reservation, the withholding
agent being merely a conduit in the collection process. [30] The distinction was explained
in Solidbank, thus:

The Manila Jockey Club had to deliver to the Board on Races, horse owners and
jockeys amounts that never became the property of the race track (Manila Jockey
Club merely held that these amounts were held in trust and did not form part of gross
receipts). Unlike these amounts, the interest income that had been withheld for the
government
became
property
of
the
financial
institutions
upon constructive possession thereof. Possession was indeed acquired, since it
was ratified by the financial institutions in whose name the act of possession had
been executed. The money indeed belonged to the taxpayers; merely holding it in
trust was not enough (A trustee does not own money received in trust.) It is a basic
concept in taxation that such money does not constitute taxable income to the trustee
[China Banking Corp. v. Court of Appeals, supra, p. 27]).
The government subsequently becomes the owner of the money when the
financial institutions pay the FWT to extinguish their obligation to the
government. As this Court has held before, this is the consideration for the
transfer of ownership of the FWT from these institutions to the government (Ibid.,
p. 26). It is ownership that determines whether interest income forms part of
taxable gross receipts (Ibid., p. 27). Being originally owned by these financial
institutions as part of their interest income, the FWT should form part of their
taxable gross receipts.

In fine, let it be stressed that tax exemptions are highly disfavored. It is a governing principle in
taxation that tax exemptions are to be construed in strictissimi juris against the taxpayer and liberally in
favor of the taxing authority and should be granted only by clear and unmistakable terms.