SECOND DIVISION

G.R. No. L-66838 April 15, 1988

COMMISSIONER
OF
INTERNAL
REVENUE,
petitioner,
vs.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION & THE
COURT OF TAX APPEALS, respondents.

PARAS, J.:
This is a petition for review on certiorari filed by the herein petitioner, Commissioner of
Internal Revenue, seeking the reversal of the decision of the Court of Tax Appeals dated
January 31, 1984 in CTA Case No. 2883 entitled "Procter and Gamble Philippine
Manufacturing Corporation vs. Bureau of Internal Revenue," which declared petitioner
therein, Procter and Gamble Philippine Manufacturing Corporation to be entitled to the
sought refund or tax credit in the amount of P4,832,989.00 representing the alleged
overpaid withholding tax at source and ordering payment thereof.
The antecedent facts that precipitated the instant petition are as follows:
Private respondent, Procter and Gamble Philippine Manufacturing Corporation
(hereinafter referred to as 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, U.S.A. herein referred to as PMC-USA),
a non-resident foreign corporation in the Philippines, not engaged in trade and business
therein. As such PMC-U.S.A. is the sole shareholder or stockholder of PMC Phil., as PMCU.S.A. 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-U.S.A. (Rollo, pp. 122123).
For the taxable year ending June 30, 1974 PMC-Phil. realized a taxable net income of
P56,500,332.00 and accordingly paid the corresponding income tax thereon equivalent to
P25%-35% or P19,765,116.00 as provided for under Section 24(a) of the Philippine Tax
Code, the pertinent portion of which reads:
SEC. 24. Rates of tax on corporation. a) Tax on domestic corporations.
A tax is hereby imposed upon the taxable net income received during each
taxable year from all sources by every corporation organized in, or geting
under the laws of the Philippines, and partnerships, no matter how created
or organized, but not including general professional partnerships, in
accordance with the following:
Twenty-five per cent upon the amount by which the taxable net income does
not exceed one hundred thousand pesos; and
Thirty-five per cent upon the amount by which the taxable net income
exceeds one hundred thousand pesos.

After taxation its net profit was P36,735,216.00. Out of said amount it declared a
dividend in favor of its sole corporate stockholder and parent corporation PMC-U.S.A. in
the total sum of P17,707,460.00 which latter amount was subjected to Philippine taxation
of 35% or P6,197,611.23 as provided for in Section 24(b) of the Philippine Tax Code
which reads in full:
SECTION 1. The first paragraph of subsection (b) of Section 24 of the
National Bureau Internal Revenue Code, as amended, is hereby further
amended to read as follows:
(b) Tax on foreign corporations. 41) Non-resident
corporation. A foreign corporation not engaged in trade or
business in the Philippines, including a foreign life insurance
company not engaged in the life insurance business in the
Philippines, shall pay a tax equal to 35% of the gross income
received during its taxable year from all sources within the
Philippines, as interest (except interest on foreign loans which
shall be subject to 15% tax), dividends, rents, royalties,
salaries,
wages,
premiums,
annuities,
compensations,
remunerations for technical services or otherwise, emoluments
or other fixed or determinable, annual, periodical or casual
gains, profits, and income, and capital gains: Provided,
however, That premiums shall not include re-insurance
premium Provided, further, That cinematograpy film owners,
lessors, or distributors, shall pay a tax of 15% on their gross
income from sources within the Philippines: Provided, still
further That on dividends received from a domestic corporation
hable to tax under this Chapter, the tax shall be 15% of the
dividends received, which shall be collected and paid as
provided in Section 53(d) of this Code, subject to the condition
that the country in which the non-resident foreign corporation
is domiciled shall allow a credit against the tax due from the
non-resident foreign corporation, taxes deemed to have been
paid in the Philippines equivalent to 20% which represents the
difference between the regular tax (35%) on corporations and
the tax (15%) on dividends as provided in this section:
Provided, finally That regional or area headquarters established
in the Philippines by multinational corporations and which
headquarters do not earn or derive income from the Philippines
and which act as supervisory, communications and coordinating
centers for their affiliates, subsidiaries or branches in the AsiaPacific Region shall not be subject to tax.
For the taxable year ending June 30, 1975 PMC-Phil. realized a taxable net income of
P8,735,125.00 which was subjected to Philippine taxation at the rate of 25%-35% or
P2,952,159.00, thereafter leaving a net profit of P5,782,966.00. As in the 2nd quarter of
1975, PMC-Phil. again declared a dividend in favor of PMC-U.S.A. at the tax rate of 35%
or P6,457,485.00.
In July, 1977 PMC-Phil., invoking the tax-sparing credit provision in Section 24(b) as
aforequoted, as the withholding agent of the Philippine government, with respect to the
dividend taxes paid by PMC-U.S.A., filed a claim with the herein petitioner, Commissioner
of Internal Revenue, 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," computed as
follows:

Div
ide
nd
Inc
om
e

Ta
x
wi
th
he
ld

15
%
ta
x
un
de
r

All
eg
ed
of

PM
CU.S
.A.

at
so
ur
ce
at

ta
x
sp
ari
ng

ov
er

35
%

pr
ovi
so

pa
ym
en
t

P1
7,7
07,
46
0

P6
,1
96
,6
11

P2
,6
56
,1
19

P3
,5
41
,4
92

6,4
57,
48
5

2,
26
0,
11
9

96
8,
62
2

1,
29
1,
49
7

P2
4,1
64,
94
6

P8
,4
57
,7
31

P3
,6
24
,9
41

P4
,8
32
,9
89

There being no immediate action by the BIR on PMC-Phils' letter-claim the latter sought
the intervention of the CTA when on July 13, 1977 it filed with herein respondent court a
petition for review docketed as CTA No. 2883 entitled "Procter and Gamble Philippine
Manufacturing Corporation vs. The Commissioner of Internal Revenue," praying that it be
declared entitled to the refund or tax credit claimed and ordering respondent therein to
refund to it the amount of P4,832,989.00, or to issue tax credit in its favor in lieu of tax
refund. (Rollo, p. 41)
On the other hand therein respondent, Commissioner of qqqInterlaal Revenue, in his
answer, prayed for the dismissal of said Petition and for the denial of the claim for refund.
(Rollo, p. 48)
On January 31, 1974 the Court of Tax Appeals in its decision (Rollo, p. 63) ruled in favor
of the herein petitioner, the dispositive portion of the same reading as follows:
Accordingly, petitioner is entitled to the sought refund or tax credit of the
amount representing the overpaid withholding tax at source and the
payment therefor by the respondent hereby ordered. No costs.
SO ORDERED.
Hence this petition.
The Second Division of the Court without giving due course to said petition resolved to
require the respondents to comment (Rollo, p. 74). Said comment was filed on November
8, 1984 (Rollo, pp. 83-90). Thereupon this Court by resolution dated December 17, 1984
resolved to give due course to the petition and to consider respondents' comulent on the
petition as Answer. (Rollo, p. 93)
Petitioner was required to file brief on January 21, 1985 (Rollo, p. 96). Petitioner filed his
brief on May 13, 1985 (Rollo, p. 107), while private respondent PMC Phil filed its brief on
August 22, 1985.
Petitioner raised the following assignments of errors:
I
THE COURT OF TAX APPEALS ERRED IN HOLDING WITHOUT ANY BASIS IN FACT
AND IN LAW, THAT THE HEREIN RESPONDENT PROCTER & GAMBLE PHILIPPINE
MANUFACTURING CORPORATION (PMC-PHIL. FOR SHORT)IS ENTITLED TO THE
SOUGHT REFUND OR TAX CREDIT OF P4,832,989.00, REPRESENTING ALLEGEDLY
THE DIVIDED TAX OVER WITHHELD BY PMC-PHIL. UPON REMITTANCE OF DIVIDEND
INCOME IN THE TOTAL SUM OF P24,164,946.00 TO PROCTER & GAMBLE, USA (PMCUSA FOR SHORT).
II
THE COURT OF TAX APPEALS ERRED IN HOLDING, WITHOUT ANY BASIS IN FACT
AND IN LAW, THAT PMC-USA, A NON-RESIDENT FOREIGN CORPORATION UNDER
SECTION 24(b) (1) OF THE PHILIPPINE TAX CODE AND A DOMESTIC CORPORATION
DOMICILED IN THE UNITED STATES, IS ENTITLED UNDER THE U.S. TAX CODE
AGAINST ITS U.S. FEDERAL TAXES TO A UNITED STATES FOREIGN TAX CREDIT

EQUIVALENT TO AT LEAST THE 20 PERCENTAGE-POINT PORTION (OF THE 35

PERCENT DIVIDEND TAX) SPARED OR WAIVED OR OTHERWISE CONSIDERED OR
DEEMED PAID BY THE PHILIPPINE GOVERNMENT.
The sole issue in this case is whether or not private respondent is entitled to the
preferential 15% tax rate on dividends declared and remitted to its parent corporation.
From this issue two questions are posed by the petitioner Commissioner of Internal
Revenue, and they are (1) Whether or not PMC-Phil. is the proper party to claim the
refund and (2) Whether or not the U. S. allows as tax credit the "deemed paid" 20%
Philippine Tax on such dividends?
The petitioner maintains that it is the PMC-U.S.A., the tax payer and not PMC-Phil. the
remitter or payor of the dividend income, and a mere withholding agent for and in behalf
of the Philippine Government, which should be legally entitled to receive the refund if
any. (Rollo, p. 129)
It will be observed at the outset that petitioner raised this issue for the first time in the
Supreme Court. He did not raise it at the administrative level, nor at the Court of Tax
Appeals. As clearly ruled by Us "To allow a litigant to assume a different posture when he
comes before the court and challenges the position he had accepted at the administrative
level," would be to sanction a procedure whereby the Court-which is supposed to review
administrative determinations would not review, but determine and decide for the first
time, a question not raised at the administrative forum." Thus it is well settled that under
the same underlying principle of prior exhaustion of administrative remedies, on the
judicial level, issues not raised in the lower court cannot generally be raised for the first
time on appeal. (Pampanga Sugar Dev. Co., Inc. v. CIR, 114 SCRA 725 [1982]; Garcia v.
C.A., 102 SCRA 597 [1981]; Matialonzo v. Servidad, 107 SCRA 726 [1981]),
Nonetheless it is axiomatic that the State can never be in estoppel, and this is
particularly true in matters involving taxation. The errors of certain administrative
officers should never be allowed to jeopardize the government's financial position.
The submission of the Commissioner of Internal Revenue that PMC-Phil. is but a
withholding agent of the government and therefore cannot claim reimbursement of the
alleged over paid taxes, is completely meritorious. The real party in interest being the
mother corporation in the United States, it follows that American entity is the real party
in interest, and should have been the claimant in this case.
Closely intertwined with the first assignment of error is the issue of whether or not PMCU.S.A. a non-resident foreign corporation under Section 24(b)(1) of the Tax Code (the
subsidiary of an American) a domestic corporation domiciled in the United States, is
entitled under the U.S. Tax Code to a United States Foreign Tax Credit equivalent to at
least the 20 percentage paid portion (of the 35% dividend tax) spared or waived as
otherwise considered or deemed paid by the government. The law pertinent to the issue
is Section 902 of the U.S. Internal Revenue Code, as amended by Public Law 87-834, the
law governing tax credits granted to U.S. corporations on dividends received from foreign
corporations, which to the extent applicable reads:
SEC. 902 - CREDIT FOR CORPORATE STOCKHOLDERS IN FOREIGN
CORPORATION.

(a) Treatment of Taxes Paid by Foreign Corporation - For purposes of this

subject, a domestic corporation which owns at least 10 percent of the voting
stock of a foreign corporation from which it receives dividends in any
taxable year shall(1) to the extent such dividends are paid by such foreign
corporation out of accumulated profits [as defined in subsection
(c) (1) (a)] of a year for which such foreign corporation is not a
less developed country corporation, be deemed to have paid the
same proportion of any income, war profits, or excess profits
taxes paid or deemed to be paid by such foreign corporation to
any foreign country or to any possession of the United States on
or with respect to such accumulated profits, which the amount
of such dividends (determined without regard to Section 78)
bears to the amount of such accumulated profits in excess of
such income, war profits, and excess profits taxes (other than
those deemed paid); and
(2) to the extent such dividends are paid by such foreign
corporation out of accumulated profits [as defined in subsection
(c) (1) (b)] of a year for which such foreign corporation is a lessdeveloped country corporation, be deemed to have paid the
same proportion of any income, war profits, or excess profits
taxes paid or deemed to be paid by such foreign corporation to
any foreign country or to any possession of the United States on
or with respect to such accumulated profits, which the amount
of such dividends bears to the amount of such accumulated
profits.
xxx xxx xxx
(c) Applicable Rules
(1) Accumulated profits defined - For purpose of this section, the term
'accumulated profits' means with respect to any foreign corporation.
(A) for purposes of subsections (a) (1) and (b) (1), the amount of
its gains, profits, or income computed without reduction by the
amount of the income, war profits, and excess profits taxes
imposed on or with respect to such profits or income by any
foreign country.... ; and
(B) for purposes of subsections (a) (2) and (b) (2), the amount of
its gains, profits, or income in excess of the income, was profits,
and excess profits taxes imposed on or with respect to such
profits or income.
The Secretary or his delegate shall have full power to determine from the
accumulated profits of what year or years such dividends were paid, treating
dividends paid in the first 20 days of any year as having been paid from the
accumulated profits of the preceding year or years (unless to his satisfaction
shows otherwise), and in other respects treating dividends as having been

paid from the most recently accumulated gains, profits, or earnings. .. (Rollo,
pp. 55-56)
To Our mind there is nothing in the aforecited provision that would justify tax return of
the disputed 15% to the private respondent. Furthermore, as ably argued by the
petitioner, the private respondent failed to meet certain conditions necessary in order
that the dividends received by the non-resident parent company in the United States may
be subject to the preferential 15% tax instead of 35%. Among other things, the private
respondent failed: (1) to show the actual amount credited by the U.S. government against
the income tax due from PMC-U.S.A. on the dividends received from private respondent;
(2) to present the income tax return of its mother company for 1975 when the dividends
were received; and (3) to submit any duly authenticated document showing that the U.S.
government credited the 20% tax deemed paid in the Philippines.
PREMISES CONSIDERED, the petition is GRANTED and the decision appealed from, is
REVERSED and SET ASIDE. SO ORDERED

EN BANC G.R. No. L-66838 December 2, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner, v. PROCTER & GAMBLE
PHILIPPINE MANUFACTURING CORPORATION and THE COURT OF TAX
APPEALS, respondents.
T.A. Tejada & C.N. Lim for private respondent.
RESOLUTION
FELICIANO, J.:p
For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975 ending 30
June 1975, private respondent Procter and Gamble Philippine Manufacturing Corporation
("P&G-Phil.") declared dividends payable to its parent company and sole stockholder,
Procter and Gamble Co., Inc. (USA) ("P&G-USA"), amounting to P24,164,946.30, from
which dividends the amount of P8,457,731.21 representing the thirty-five percent (35%)
withholding tax at source was deducted.
On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner of
Internal Revenue a claim for refund or tax credit in the amount of P4,832,989.26
claiming, among other things, that pursuant to Section 24 (b) (1) of the National Internal
Revenue Code ("NITC"), 1 as amended by Presidential Decree No. 369, the applicable
rate of withholding tax on the dividends remitted was only fifteen percent (15%) (and not
thirty-five percent [35%]) of the dividends.
There being no responsive action on the part of the Commissioner, P&G-Phil., on 13 July
1977, filed a petition for review with public respondent Court of Tax Appeals ("CTA")
docketed as CTA Case No. 2883. On 31 January 1984, the CTA rendered a decision

ordering petitioner Commissioner to refund or grant the tax credit in the amount of
P4,832,989.00.
On appeal by the Commissioner, the Court through its Second Division reversed the
decision of the CTA and held that:
(a) P&G-USA, and not private respondent P&G-Phil., was the
proper party to claim the refund or tax credit here involved;
(b) there is nothing in Section 902 or other provisions of the US
Tax Code that allows a credit against the US tax due from P&GUSA of taxes deemed to have been paid in the Philippines
equivalent to twenty percent (20%) which represents the
difference between the regular tax of thirty-five percent (35%)
on corporations and the tax of fifteen percent (15%) on
dividends; and
(c) private respondent P&G-Phil. failed to meet certain
conditions necessary in order that "the dividends received by its
non-resident parent company in the US (P&G-USA) may be
subject to the preferential tax rate of 15% instead of 35%."
These holdings were questioned in P&G-Phil.'s Motion for Re-consideration and we will
deal with them seriatim in this Resolution resolving that Motion.
I
1. There are certain preliminary aspects of the question of the capacity of P&G-Phil. to
bring the present claim for refund or tax credit, which need to be examined. This
question was raised for the first time on appeal, i.e., in the proceedings before this Court
on the Petition for Review filed by the Commissioner of Internal Revenue. The question
was not raised by the Commissioner on the administrative level, and neither was it raised
by him before the CTA.
We believe that the Bureau of Internal Revenue ("BIR") should not be allowed to defeat
an otherwise valid claim for refund by raising this question of alleged incapacity for the
first time on appeal before this Court. This is clearly a matter of procedure. Petitioner
does not pretend that P&G-Phil., should it succeed in the claim for refund, is likely to run
away, as it were, with the refund instead of transmitting such refund or tax credit to its
parent and sole stockholder. It is commonplace that in the absence of explicit statutory
provisions to the contrary, the government must follow the same rules of procedure
which bind private parties. It is, for instance, clear that the government is held to
compliance with the provisions of Circular No. 1-88 of this Court in exactly the same way
that private litigants are held to such compliance, save only in respect of the matter of
filing fees from which the Republic of the Philippines is exempt by the Rules of Court.

More importantly, there arises here a question of fairness should the BIR, unlike any
other litigant, be allowed to raise for the first time on appeal questions which had not
been litigated either in the lower court or on the administrative level. For, if petitioner
had at the earliest possible opportunity, i.e., at the administrative level, demanded that
P&G-Phil. produce an express authorization from its parent corporation to bring the
claim for refund, then P&G-Phil. would have been able forthwith to secure and produce
such authorization before filing the action in the instant case. The action here was
commenced just before expiration of the two (2)-year prescriptive period.
2. The question of the capacity of P&G-Phil. to bring the claim for refund has substantive
dimensions as well which, as will be seen below, also ultimately relate to fairness.
Under Section 306 of the NIRC, a claim for refund or tax credit filed with the
Commissioner of Internal Revenue is essential for maintenance of a suit for recovery of
taxes allegedly erroneously or illegally assessed or collected:
Sec. 306. Recovery of tax erroneously or illegally collected. No suit or
proceeding shall be maintained in any court for the recovery of any national
internal revenue tax hereafter alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to have been collected
without authority, or of any sum alleged to have been excessive or in any
manner wrongfully collected, until a claim for refund or credit has been duly
filed with the Commissioner of Internal Revenue; but such suit or
proceeding may be maintained, whether or not such tax, penalty, or sum has
been paid under protest or duress. In any case, no such suit or proceeding
shall be begun after the expiration of two years from the date of payment of
the tax or penalty regardless of any supervening cause that may arise after
payment: . . . (Emphasis supplied)
Section 309 (3) of the NIRC, in turn, provides:
Sec. 309. Authority of Commissioner to Take Compromises and
to Refund Taxes.The Commissioner may:
xxx xxx xxx
(3) credit or refund taxes erroneously or illegally received, . . . No credit or
refund of taxes or penalties shall be allowed unless the taxpayer files in
writing with the Commissioner a claim for credit or refund within two (2)
years after the payment of the tax or penalty. (As amended by P.D. No. 69)
(Emphasis supplied)
Since the claim for refund was filed by P&G-Phil., the question which arises is: is P&GPhil. a "taxpayer" under Section 309 (3) of the NIRC? The term "taxpayer" is defined in
our NIRC as referring to "any person subject to tax imposed by the Title [on Tax on
Income]." 2 It thus becomes important to note that under Section 53 (c) of the NIRC, the
withholding agent who is "required to deduct and withhold any tax" is made " personally

liable for such tax" and indeed is indemnified against any claims and demands which the
stockholder might wish to make in questioning the amount of payments effected by the
withholding agent in accordance with the provisions of the NIRC. The withholding agent,
P&G-Phil., is directly and independently liable 3 for the correct amount of the tax that
should be withheld from the dividend remittances. The withholding agent is, moreover,
subject to and liable for deficiency assessments, surcharges and penalties should the
amount of the tax withheld be finally found to be less than the amount that should have
been withheld under law.
A "person liable for tax" has been held to be a "person subject to tax" and properly
considered a "taxpayer." 4 The terms liable for tax" and "subject to tax" both connote
legal obligation or duty to pay a tax. It is very difficult, indeed conceptually impossible, to
consider a person who is statutorily made "liable for tax" as not "subject to tax." By any
reasonable standard, such a person should be regarded as a party in interest, or as a
person having sufficient legal interest, to bring a suit for refund of taxes he believes were
illegally collected from him.
In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, 5 this Court
pointed out that a withholding agent is in fact the agent both of the government and of
the taxpayer, and that the withholding agent is not an ordinary government agent:
The law sets no condition for the personal liability of the withholding agent
to attach. The reason is to compel the withholding agent to withhold the tax
under all circumstances. In effect, the responsibility for the collection of the
tax as well as the payment thereof is concentrated upon the person over
whom the Government has jurisdiction. Thus, the withholding agent is
constituted the agent of both the Government and the taxpayer. With
respect to the collection and/or withholding of the tax, he is the
Government's agent. In regard to the filing of the necessary income tax
return and the payment of the tax to the Government, he is the agent of the
taxpayer. The withholding agent, therefore, is no ordinary government
agent especially because under Section 53 (c) he is held personally liable for
the tax he is duty bound to withhold; whereas the Commissioner and his
deputies are not made liable by law. 6 (Emphasis supplied)
If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the
beneficial owner of the dividends with respect to the filing of the necessary income tax
return and with respect to actual payment of the tax to the government, such authority
may reasonably be held to include the authority to file a claim for refund and to bring an
action for recovery of such claim. This implied authority is especially warranted where, is
in the instant case, the withholding agent is the wholly owned subsidiary of the parentstockholder and therefore, at all times, under the effective control of such parentstockholder. In the circumstances of this case, it seems particularly unreal to deny the
implied authority of P&G-Phil. to claim a refund and to commence an action for such
refund.

We believe that, even now, there is nothing to preclude the BIR from requiring P&G-Phil.
to show some written or telexed confirmation by P&G-USA of the subsidiary's authority to
claim the refund or tax credit and to remit the proceeds of the refund., or to apply the tax
credit to some Philippine tax obligation of, P&G-USA, before actual payment of the
refund or issuance of a tax credit certificate. What appears to be vitiated by basic
unfairness is petitioner's position that, although P&G-Phil. is directly and personally
liable to the Government for the taxes and any deficiency assessments to be collected,
the Government is not legally liable for a refund simply because it did not demand a
written confirmation of P&G-Phil.'s implied authority from the very beginning. A
sovereign government should act honorably and fairly at all times, even vis-a-vis
taxpayers.
We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly
regarded as a "taxpayer" within the meaning of Section 309, NIRC, and as impliedly
authorized to file the claim for refund and the suit to recover such claim.
II
1. We turn to the principal substantive question before us: the applicability to the
dividend remittances by P&G-Phil. to P&G-USA of the fifteen percent (15%) tax rate
provided for in the following portion of Section 24 (b) (1) of the NIRC:
(b) Tax on foreign corporations.
(1) Non-resident corporation. A foreign corporation not
engaged in trade and business in the Philippines, . . ., shall pay
a tax equal to 35% of the gross income receipt during its
taxable year from all sources within the Philippines, as . . .
dividends . . . Provided, still further, that on dividends received
from a domestic corporation liable to tax under this Chapter,
the tax shall be 15% of the dividends, which shall be collected
and paid as provided in Section 53 (d) of this Code, subject to
the condition that the country in which the non-resident foreign
corporation, is domiciled shall allow a credit against the tax due
from the non-resident foreign corporation, taxes deemed to
have been paid in the Philippines equivalent to 20% which
represents the difference between the regular tax (35%) on
corporations and the tax (15%) on dividends as provided in this
Section . . .
The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to nonresident corporate stockholders of a Philippine corporation, goes down to fifteen percent
(15%) 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.
In other words, in the instant case, the reduced fifteen percent (15%) dividend tax rate is

applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes deemed paid in the
Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies that such
tax credit for "taxes deemed paid in the Philippines" must, as a minimum, reach an
amount equivalent to twenty (20) percentage points which represents the difference
between the regular thirty-five percent (35%) dividend tax rate and the preferred fifteen
percent (15%) dividend tax rate.
It is important to note that Section 24 (b) (1), NIRC, does not require that the US must
give a "deemed paid" tax credit for the dividend tax (20 percentage points) waived by the
Philippines in making applicable the preferred divided tax rate of fifteen percent (15%).
In other words, our NIRC does not require that the US tax law deem the parentcorporation to have paid the twenty (20) percentage points of dividend tax waived by the
Philippines. The NIRC only requires that the US "shall allow" P&G-USA a "deemed paid"
tax credit in an amount equivalent to the twenty (20) percentage points waived by the
Philippines.
2. The question arises: Did the US law comply with the above requirement? The relevant
provisions of the US Intemal Revenue Code ("Tax Code") are the following:
Sec. 901 Taxes of foreign countries and possessions of United States.
(a) Allowance of credit. If the taxpayer chooses to have the
benefits of this subpart, the tax imposed by this chapter shall,
subject to the applicable limitation of section 904, be credited
with the amounts provided in the applicable paragraph of
subsection (b) plus, in the case of a corporation, the taxes
deemed to have been paid under sections 902 and 960. Such
choice for any taxable year may be made or changed at any
time before the expiration of the period prescribed for making a
claim for credit or refund of the tax imposed by this chapter for
such taxable year. The credit shall not be allowed against the
tax imposed by section 531 (relating to the tax on accumulated
earnings), against the additional tax imposed for the taxable
year under section 1333 (relating to war loss recoveries) or
under section 1351 (relating to recoveries of foreign
expropriation losses), or against the personal holding company
tax imposed by section 541.
(b) Amount allowed. Subject to the applicable limitation of
section 904, the following amounts shall be allowed as the
credit under subsection (a):
(a) Citizens and domestic corporations. In the
case of a citizen of the United States and of a
domestic corporation, the amount of any income,
war profits, and excess profits taxes paid or

accrued during the taxable year to any foreign

country or to any possession of the United States;
and
xxx xxx xxx
Sec. 902. Credit for corporate stockholders in foreign
corporation.
(A) Treatment of Taxes Paid by Foreign Corporation. For
purposes of this subject, a domestic corporation which owns at
least 10 percent of the voting stock of a foreign corporation
from which it receives dividends in any taxable year shall
xxx xxx xxx
(2) to the extent such dividends are paid by such
foreign corporation out of accumulated profits [as
defined in subsection (c) (1) (b)] of a year for
which such foreign corporation is a less developed
country corporation, be deemed to have paid the
same proportion of any income, war profits, or
excess profits taxes paid or deemed to be paid by
such foreign corporation to any foreign country or
to any possession of the United States on or with
respect to such accumulated profits, which the
amount of such dividends bears to the amount of
such accumulated profits.
xxx xxx xxx
(c) Applicable Rules
(1) Accumulated profits defined. For purposes of this section,
the term "accumulated profits" means with respect to any
foreign corporation,
(A) for purposes of subsections (a) (1) and (b) (1),
the amount of its gains, profits, or income
computed without reduction by the amount of the
income, war profits, and excess profits taxes
imposed on or with respect to such profits or
income by any foreign country. . . .; and
(B) for purposes of subsections (a) (2) and (b) (2),
the amount of its gains, profits, or income in
excess of the income, war profits, and excess

profits taxes imposed on or with respect to such

profits or income.
The Secretary or his delegate shall have full power to
determine from the accumulated profits of what year or years
such dividends were paid, treating dividends paid in the first 20
days of any year as having been paid from the accumulated
profits of the preceding year or years (unless to his satisfaction
shows otherwise), and in other respects treating dividends as
having been paid from the most recently accumulated gains,
profits, or earning. . . . (Emphasis supplied)
Close examination of the above quoted provisions of the US Tax Code 7 shows the
following:
a. US law (Section 901, Tax Code) grants P&G-USA a tax credit
for the amount of the dividend tax actually paid (i.e., withheld)
from the dividend remittances to P&G-USA;
b. US law (Section 902, US Tax Code) grants to P&G-USA a
"deemed paid' tax credit 8 for a proportionate part of the
corporate income tax actually paid to the Philippines by P&GPhil.
The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine
corporate income tax although that tax was actually paid by its Philippine subsidiary,
P&G-Phil., not by P&G-USA. This "deemed paid" concept merely reflects economic reality,
since the Philippine corporate income tax was in fact paid and deducted from revenues
earned in the Philippines, thus reducing the amount remittable as dividends to P&G-USA.
In other words, US tax law treats the Philippine corporate income tax as if it came out of
the pocket, as it were, of P&G-USA as a part of the economic cost of carrying on business
operations in the Philippines through the medium of P&G-Phil. and here earning profits.
What is, under US law, deemed paid by P&G- USA are not "phantom taxes" but instead
Philippine corporate income taxes actually paid here by P&G-Phil., which are very real
indeed.
It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually
withheld, and (ii) the tax credit for the Philippine corporate income tax actually paid by
P&G Phil. but "deemed paid" by P&G-USA, are tax credits available or applicable against
the US corporate income tax of P&G-USA. These tax credits are allowed because of the
US congressional desire to avoid or reduce double taxation of the same income stream. 9
In order to determine whether US tax law complies with the requirements for
applicability of the reduced or preferential fifteen percent (15%) dividend tax rate under
Section 24 (b) (1), NIRC, it is necessary:

a. to determine the amount of the 20 percentage points

dividend tax waived by the Philippine government under
Section 24 (b) (1), NIRC, and which hence goes to P&G-USA;
b. to determine the amount of the "deemed paid" tax credit
which US tax law must allow to P&G-USA; and
c. to ascertain that the amount of the "deemed paid" tax credit
allowed by US law is at least equal to the amount of the
dividend tax waived by the Philippine Government.
Amount (a), i.e., the amount of the dividend tax waived by the Philippine government is
arithmetically determined in the following manner:
P100.00 Pretax net corporate
x
35%

Regular
Philippine

P35.00

Paid
to
the
BIR
corporate income tax.

income earned by P&G-Phil.

corporate
income
tax
rate
by

P&G-Phil.

as

Philippine

to
under

P&G-USA
Section 24
NIRC

P100.00
-35.00

P65.00 Available for remittance as dividends to P&G-USA

P65.00

Dividends
x 35% Regular Philippine

(b)
P22.75 Regular dividend tax

remittable
dividend tax rate
(1),

P65.00

Dividends
remittable
to
P&G-USA
x 15% Reduced dividend tax rate under Section 24 (b) (1), NIRC

P9.75 Reduced dividend tax

P22.75 Regular dividend tax under Section 24 (b) (1), NIRC
-9.75 Reduced dividend tax under Section 24 (b) (1), NIRC

P13.00

Amount
of
dividend
tax
waived
by
Philippine
===== government under Section 24 (b) (1), NIRC.
Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by
P&G-Phil. Amount (a) is also the minimum amount of the "deemed paid" tax credit that
US tax law shall allow if P&G-USA is to qualify for the reduced or preferential dividend
tax rate under Section 24 (b) (1), NIRC.

Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law
allows under Section 902, Tax Code, may be computed arithmetically as follows:
P65.00

Dividends
remittable
- 9.75 Dividend tax withheld at the

P55.25 Dividends actually remitted to P&G-USA

P35.00
to the BIR
Dividends
remitted
to

Amount
profits
P&G-Phil.
of income tax

Philippine

=
of

corporate

income

tax

to
reduced

paid

by
P&G-USA

x
P35.00
=
accumulated
P65.00
earned
in

P&G-USA
(15%) rate

by

P&G-Phil.

actually
P&G-Phil.
P55.25
P29.75
10
======
by
excess

Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of
15%) by P&G-Phil. to its US parent P&G-USA, a tax credit of P29.75 is allowed by Section
902 US Tax Code for Philippine corporate income tax "deemed paid" by the parent but
actually paid by the wholly-owned subsidiary.
Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the
Philippine government), Section 902, US Tax Code, specifically and clearly complies with
the requirements of Section 24 (b) (1), NIRC.
3. It is important to note also that the foregoing reading of Sections 901 and 902 of the
US Tax Code is identical with the reading of the BIR of Sections 901 and 902 of the US
Tax Code is identical with the reading of the BIR of Sections 901 and 902 as shown by
administrative rulings issued by the BIR.
The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by then Acting
Commissioner of Intemal Revenue Efren I. Plana, later Associate Justice of this Court, the
relevant portion of which stated:
However, after a restudy of the decision in the American Chicle Company
case and the provisions of Section 901 and 902 of the U.S. Internal Revenue
Code, we find merit in your contention that our computation of the credit
which the U.S. tax law allows in such cases is erroneous as the amount of tax
"deemed paid" to the Philippine government for purposes of credit against
the U.S. tax by the recipient of dividends includes a portion of the amount of
income tax paid by the corporation declaring the dividend in addition to the
tax withheld from the dividend remitted. In other words, the U.S.
government will allow a credit to the U.S. corporation or recipient of the

dividend, in addition to the amount of tax actually withheld, a portion of the

income tax paid by the corporation declaring the dividend. Thus, if a
Philippine corporation wholly owned by a U.S. corporation has a net income
of P100,000, it will pay P25,000 Philippine income tax thereon in accordance
with Section 24(a) of the Tax Code. The net income, after income tax, which
is P75,000, will then be declared as dividend to the U.S. corporation at 15%
tax, or P11,250, will be withheld therefrom. Under the aforementioned
sections of the U.S. Internal Revenue Code, U.S. corporation receiving the
dividend can utilize as credit against its U.S. tax payable on said dividends
the amount of P30,000 composed of:
(1) The tax "deemed paid" or indirectly paid on the
dividend arrived at as follows:
P75,000

100,000 **
(2)
The
P75,000

P30,000

P25,000

amount
withheld

of

P18,750

15%
=

of
11,250

The amount of P18,750 deemed paid and to be credited against the U.S. tax
on the dividends received by the U.S. corporation from a Philippine
subsidiary is clearly more than 20% requirement of Presidential Decree No.
369 as 20% of P75,000.00 the dividends to be remitted under the above
example, amounts to P15,000.00 only.
In the light of the foregoing, BIR Ruling No. 75-005 dated September 10,
1975 is hereby amended in the sense that the dividends to be remitted by
your client to its parent company shall be subject to the withholding tax at
the rate of 15% only.
This ruling shall have force and effect only for as long as the present
pertinent provisions of the U.S. Federal Tax Code, which are the bases of the
ruling, are not revoked, amended and modified, the effect of which will
reduce the percentage of tax deemed paid and creditable against the U.S.
tax on dividends remitted by a foreign corporation to a U.S. corporation.
(Emphasis supplied)
The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981 addressed to Basic
Foods Corporation and BIR Ruling dated 20 October 1987 addressed to Castillo, Laman,
Tan and Associates. In other words, the 1976 Ruling of Hon. Efren I. Plana was reiterated
by the BIR even as the case at bar was pending before the CTA and this Court.

4. We should not overlook the fact that the concept of "deemed paid" tax credit, which is
embodied in Section 902, US Tax Code, is exactly the same "deemed paid" tax credit
found in our NIRC and which Philippine tax law allows to Philippine corporations which
have operations abroad (say, in the United States) and which, therefore, pay income taxes
to the US government.
Section 30 (c) (3) and (8), NIRC, provides:
(d) Sec. 30. Deductions from Gross Income.In computing net
income, there shall be allowed as deductions . . .
(c) Taxes. . . .
xxx xxx xxx
(3) Credits against tax for taxes of foreign
countries. If the taxpayer signifies in his return
his desire to have the benefits of this paragraphs,
the tax imposed by this Title shall be credited
with . . .
(a) Citizen and Domestic Corporation. In the
case of a citizen of the Philippines and of domestic
corporation, the amount of net income, war profits
or excess profits, taxes paid or accrued during the
taxable year to any foreign country. (Emphasis
supplied)
Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a Philippine
corporation for taxes actually paid by it to the US governmente.g., for taxes collected
by the US government on dividend remittances to the Philippine corporation. This
Section of the NIRC is the equivalent of Section 901 of the US Tax Code.
Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US Tax Code, and
provides as follows:
(8) Taxes of foreign subsidiary. For the purposes of this subsection a
domestic corporation which owns a majority of the voting stock of a foreign
corporation from which it receives dividends in any taxable year shall be
deemed to have paid the same proportion of any income, war-profits, or
excess-profits taxes paid by such foreign corporation to any foreign country,
upon or with respect to the accumulated profits of such foreign corporation
from which such dividends were paid, which the amount of such dividends
bears to the amount of such accumulated profits: Provided, That the amount
of tax deemed to have been paid under this subsection shall in no case
exceed the same proportion of the tax against which credit is taken which
the amount of such dividends bears to the amount of the entire net income

of the domestic corporation in which such dividends are included. The term
"accumulated profits" when used in this subsection reference to a foreign
corporation, means the amount of its gains, profits, or income in excess of
the income, war-profits, and excess-profits taxes imposed upon or with
respect to such profits or income; and the Commissioner of Internal Revenue
shall have full power to determine from the accumulated profits of what year
or years such dividends were paid; treating dividends paid in the first sixty
days of any year as having been paid from the accumulated profits of the
preceding year or years (unless to his satisfaction shown otherwise), and in
other respects treating dividends as having been paid from the most
recently accumulated gains, profits, or earnings. In the case of a foreign
corporation, the income, war-profits, and excess-profits taxes of which are
determined on the basis of an accounting period of less than one year, the
word "year" as used in this subsection shall be construed to mean such
accounting period. (Emphasis supplied)
Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit to
a Philippine parent corporation for taxes "deemed paid" by it, that is, e.g., for taxes
paid to the US by the US subsidiary of a Philippine-parent corporation. The
Philippine parent or corporate stockholder is "deemed" under our NIRC to have
paid a proportionate part of the US corporate income tax paid by its US subsidiary,
although such US tax was actually paid by the subsidiary and not by the Philippine
parent.
Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be
allowed by US law to P&G-USA, is the same "deemed paid" tax credit that Philippine law
allows to a Philippine corporation with a wholly- or majority-owned subsidiary in (for
instance) the US. The "deemed paid" tax credit allowed in Section 902, US Tax Code, is
no more a credit for "phantom taxes" than is the "deemed paid" tax credit granted in
Section 30 (c) (8), NIRC.
III
1. The Second Division of the Court, in holding that the applicable dividend tax rate in
the instant case was the regular thirty-five percent (35%) rate rather than the reduced
rate of fifteen percent (15%), held that P&G-Phil. had failed to prove that its parent, P&GUSA, had in fact been given by the US tax authorities a "deemed paid" tax credit in the
amount required by Section 24 (b) (1), NIRC.
We believe, in the first place, that we must distinguish between the legal question before
this Court from questions of administrative implementation arising after the legal
question has been answered. The basic legal issue is of course, this: which is the
applicable dividend tax rate in the instant case: the regular thirty-five percent (35%) rate
or the reduced fifteen percent (15%) rate? The question of whether or not P&G-USA is in
fact given by the US tax authorities a "deemed paid" tax credit in the required amount,
relates to the administrative implementation of the applicable reduced tax rate.

In the second place, Section 24 (b) (1), NIRC, does not in fact require that the "deemed
paid" tax credit shall have actually been granted before the applicable dividend tax rate
goes down from thirty-five percent (35%) to fifteen percent (15%). As noted several times
earlier, Section 24 (b) (1), NIRC, merely requires, in the case at bar, that the USA "shall
allow
a
credit
against
the
tax due from [P&G-USA for] taxes deemed to have been paid in the Philippines . . ." There
is neither statutory provision nor revenue regulation issued by the Secretary of Finance
requiring the actual grant of the "deemed paid" tax credit by the US Internal Revenue
Service to P&G-USA before the preferential fifteen percent (15%) dividend rate becomes
applicable. Section 24 (b) (1), NIRC, 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.
In the third place, the position originally taken by the Second Division results in a severe
practical problem of administrative circularity. The Second Division in effect held that the
reduced dividend tax rate is not applicable until the US tax credit for "deemed paid"
taxes is actually given in the required minimum amount by the US Internal Revenue
Service to P&G-USA. But, the US "deemed paid" tax credit cannot be given by the US tax
authorities unless dividends have actually been remitted to the US, which means that the
Philippine dividend tax, at the rate here applicable, was actually imposed and collected.
11 It is this practical or operating circularity that is in fact avoided by our BIR when it
issues rulings that the tax laws of particular foreign jurisdictions (e.g., Republic of
Vanuatu 12 Hongkong, 13 Denmark, 14 etc.) comply with the requirements set out in
Section 24 (b) (1), NIRC, for applicability of the fifteen percent (15%) tax rate. Once such
a ruling is rendered, the Philippine subsidiary begins to withhold at the reduced dividend
tax rate.
A requirement relating to administrative implementation is not properly imposed as a
condition for the applicability, as a matter of law, of a particular tax rate. Upon the other
hand, upon the determination or recognition of the applicability of the reduced tax rate,
there is nothing to prevent the BIR from issuing implementing regulations that would
require P&G Phil., or any Philippine corporation similarly situated, to certify to the BIR
the amount of the "deemed paid" tax credit actually subsequently granted by the US tax
authorities to P&G-USA or a US parent corporation for the taxable year involved. Since
the US tax laws can and do change, such implementing regulations could also provide
that failure of P&G-Phil. to submit such certification within a certain period of time,
would result in the imposition of a deficiency assessment for the twenty (20) percentage
points differential. The task of this Court is to settle which tax rate is applicable,
considering the state of US law at a given time. We should leave details relating to
administrative implementation where they properly belong with the BIR.
2. An interpretation of a tax statute that produces a revenue flow for the government is
not, for that reason alone, necessarily the correct reading of the statute. There are many
tax statutes or provisions which are designed, not to trigger off an instant surge of
revenues, but rather to achieve longer-term and broader-gauge fiscal and economic
objectives. The task of our Court is to give effect to the legislative design and objectives

as they are written into the statute even if, as in the case at bar, some revenues have to
be foregone in that process.
The economic objectives sought to be achieved by the Philippine Government by reducing
the thirty-five percent (35%) dividend rate to fifteen percent (15%) are set out in the
preambular clauses of P.D. No. 369 which amended Section 24 (b) (1), NIRC, into its
present form:
WHEREAS, it is imperative to adopt measures responsive to the
requirements of a developing economy foremost of which is the financing of
economic development programs;
WHEREAS, nonresident foreign corporations with investments in the
Philippines are taxed on their earnings from dividends at the rate of 35%;
WHEREAS, in order to encourage more capital investment for large projects
an appropriate tax need be imposed on dividends received by non-resident
foreign corporations in the same manner as the tax imposed on interest on
foreign loans;
xxx xxx xxx
(Emphasis supplied)
More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of foreign equity
investment in the Philippines by 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 (i.e., second-tier taxation) (the home
country would simply have more "post-R.P. tax" income to subject to its own taxing
power) by allowing the investor additional tax credits which would be applicable against
the tax payable to such home country. Accordingly, Section 24 (b) (1), NIRC, requires the
home or domiciliary country to give the investor corporation a "deemed paid" tax credit
at least equal in amount to the twenty (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.
The net effect upon the foreign investor may be shown arithmetically in the following
manner:
P65.00

Dividends
remittable
to
P&G-USA
see
page
392
- 9.75 Reduced R.P. dividend tax withheld by

P55.25 Dividends actually remitted to P&G-USA

(please
above
P&G-Phil.

P55.25
x
46%

Maximum

P25.415US
corporate
without tax credits

US
tax

corporate

income

payable

tax

by

rate

P&G-USA

P25.415
- 9.75 US tax credit for RP dividend tax withheld by P&G-Phil.
at
15%
(Section
901,
US
Tax
Code)

P15.66 US corporate income tax payable after Section 901

tax credit.
P55.25

P39.59 Amount received by P&G-USA

===== taxes without "deemed paid" tax credit.
P25.415
- 29.75 "Deemed paid" tax credit
Tax Code (please see page 18 above)

15.66
net

under

of

R.P.

Section

and

902

U.S.

US

US
corporate
income
tax
payable
on
======
remitted
by
P&G-Phil.
to
P&G-USA
Section 902 tax credit.

dividends
after

P55.25 Amount received by P&G-USA

====== taxes after Section 902 tax credit.

and

net

of

RP

US

It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax Code,
could offset the US corporate income tax payable on the dividends remitted by P&G-Phil.
The result, in fine, could be that P&G-USA would after US tax credits, still wind up with
P55.25, the full amount of the dividends remitted to P&G-USA net of Philippine taxes. In
the calculation of the Philippine Government, this should encourage additional
investment or re-investment in the Philippines by P&G-USA.
3. It remains only to note that under the Philippines-United States Convention "With
Respect to Taxes on Income," 15 the Philippines, by a treaty commitment, reduced the
regular rate of dividend tax to a maximum of twenty percent (20%) of the gross amount
of dividends paid to US parent corporations:
Art 11. Dividends
xxx xxx xxx

(2) The rate of tax imposed by one of the Contracting States on

dividends derived from sources within that Contracting State by
a resident of the other Contracting State shall not exceed
(a) 25 percent of the gross amount of the dividend; or
(b) When the recipient is a corporation, 20 percent of the gross
amount of the dividend if during the part of the paying
corporation's taxable year which precedes the date of payment
of the dividend and during the whole of its prior taxable year (if
any), at least 10 percent of the outstanding shares of the voting
stock of the paying corporation was owned by the recipient
corporation.
xxx xxx xxx
(Emphasis supplied)
The Tax Convention, at the same time, 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] .16 This is, of course, precisely the
"deemed paid" tax credit provided for in Section 902, US Tax Code, discussed above.
Clearly, there is here on the part of the Philippines a deliberate undertaking to reduce the
regular dividend tax rate of twenty percent (20%) is a maximum rate, there is still a
differential or additional reduction of five (5) percentage points which compliance of US
law (Section 902) with the requirements of Section 24 (b) (1), NIRC, makes available in
respect of dividends from a Philippine subsidiary.
We conclude that private respondent P&G-Phil, is entitled to the tax refund or tax credit
which it seeks.
WHEREFORE, for all the foregoing, the Court Resolved to GRANT private respondent's
Motion for Reconsideration dated 11 May 1988, to SET ASIDE the Decision of the and
Division of the Court promulgated on 15 April 1988, and in lieu thereof, to REINSTATE
and AFFIRM the Decision of the Court of Tax Appeals in CTA Case No. 2883 dated 31
January 1984 and to DENY the Petition for Review for lack of merit. No pronouncement
as to costs.

THIRD DIVISION
G.R. No. L-68375 April 15, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner, v. WANDER PHILIPPINES,
INC. AND THE COURT OF TAX APPEALS, respondents.
The Solicitor General for petitioner. Felicisimo R. Quiogue and Cirilo P. Noel for
respondents.
BIDIN, J.:
This is a petition for review on certiorari of the January 19, 1984 Decision of the Court of
Tax Appeals * in C.T.A. Case No.2884, entitled Wander Philippines, Inc. vs. Commissioner
of Internal Revenue, holding that Wander Philippines, Inc. is entitled to the preferential
rate of 15% withholding tax on the dividends remitted to its foreign parent company, the
Glaro S.A. Ltd. of Switzerland, a non-resident foreign corporation.
Herein private respondent, Wander Philippines, Inc. (Wander, for short), is a domestic
corporation organized under Philippine laws. It is wholly-owned subsidiary of the Glaro
S.A. Ltd. (Glaro for short), a Swiss corporation not engaged in trade or business in the
Philippines.
On July 18, 1975, Wander filed its withholding tax return for the second quarter ending
June 30, 1975 and remitted to its parent company, Glaro dividends in the amount of
P222,000.00, on which 35% withholding tax thereof in the amount of P77,700.00 was
withheld and paid to the Bureau of Internal Revenue.
Again, on July 14, 1976, Wander filed a withholding tax return for the second quarter
ending June 30, 1976 on the dividends it remitted to Glaro amounting to P355,200.00, on
wich 35% tax in the amount of P124,320.00 was withheld and paid to the Bureau of
Internal Revenue.
On July 5, 1977, Wander filed with the Appellate Division of the Internal Revenue a claim
for refund and/or tax credit in the amount of P115,400.00, contending that it is liable only
to 15% withholding tax in accordance with Section 24 (b) (1) of the Tax Code, as
amended by Presidential Decree Nos. 369 and 778, and not on the basis of 35% which
was withheld and paid to and collected by the government.
Petitioner herein, having failed to act on the above-said claim for refund, on July 15,
1977, Wander filed a petition with respondent Court of Tax Appeals.
On October 6, 1977, petitioner file his Answer.
On January 19, 1984, respondent Court of Tax Appeals rendered a Decision, the decretal
portion of which reads:

WHEREFORE, respondent is hereby ordered to grant a refund and/or tax

credit to petitioner in the amount of P115,440.00 representing overpaid
withholding tax on dividends remitted by it to the Glaro S.A. Ltd. of
Switzerland during the second quarter of the years 1975 and 1976.
On March 7, 1984, petitioner filed a Motion for Reconsideration but the same was denied
in a Resolution dated August 13, 1984. Hence, the instant petition.
Petitioner raised two (2) assignment of errors, to wit:
I
ASSUMING THAT THE TAX REFUND IN THE CASE AT BAR IS ALLOWABLE AT ALL,
THE COURT OF TAX APPEALS ERRED INHOLDING THAT THE HEREIN RESPONDENT
WANDER PHILIPPINES, INC. IS ENTITLED TO THE SAID REFUND.
II
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT SWITZERLAND, THE HOME
COUNTRY OF GLARO S.A. LTD. (THE PARENT COMPANY OF THE HEREIN
RESPONDENT WANDER PHILIPPINES, INC.), GRANTS TO SAID GLARO S.A. LTD.
AGAINST ITS SWISS INCOME TAX LIABILITY A TAX CREDIT EQUIVALENT TO THE 20
PERCENTAGE-POINT PORTION (OF THE 35 PERCENT PHILIPPINE DIVIDEND TAX)
SPARED OR WAIVED OR OTHERWISE DEEMED AS IF PAID IN THE PHILIPPINES
UNDER SECTION 24 (b) (1) OF THE PHILIPPINE TAX CODE.
The sole issue in this case is whether or not private respondent Wander is entitled to the
preferential rate of 15% withholding tax on dividends declared and remitted to its parent
corporation, Glaro.
From this issue, two questions were posed by petitioner: (1) Whether or not Wander is
the proper party to claim the refund; and (2) Whether or not Switzerland allows as tax
credit the "deemed paid" 20% Philippine Tax on such dividends.
Petitioner maintains and argues that it is Glaro the tax payer, and not Wander, the
remitter or payor of the dividend income and a mere withholding agent for and in behalf
of the Philippine Government, which should be legally entitled to receive the refund if
any.
It will be noted, however, that Petitioner's above-entitled argument is being raised for the
first time in this Court. It was never raised at the administrative level, or at the Court of
Tax Appeals. To allow a litigant to assume a different posture when he comes before the
court and challenge the position he had accepted at the administrative level, would be to
sanction a procedure whereby the Courtwhich is supposed to review administrative
determinationswould not review, but determine and decide for the first time, a question
not raised at the administrative forum. Thus, it is well settled that under the same
underlying principle of prior exhaustion of administrative remedies, on the judicial level,

issues not raised in the lower court cannot be raised for the first time on appeal
(Aguinaldo Industries Corporation vs. Commissioner of Internal Revenue, 112 SCRA 136;
Pampanga Sugar Dev. Co., Inc. vs. CIR, 114 SCRA 725; Garcia vs. Court of Appeals, 102
SCRA 597; Matialonzo vs. Servidad, 107 SCRA 726,
In any event, the submission of petitioner that Wander is but a withholding agent of the
government and therefore cannot claim reimbursement of the alleged overpaid taxes, is
untenable. It will be recalled, that said corporation is first and foremost a wholly owned
subsidiary of Glaro. The fact that it became a withholding agent of the government which
was not by choice but by compulsion under Section 53 (b) of the Tax Code, cannot by any
stretch of the imagination be considered as an abdication of its responsibility to its
mother company. Thus, this Court construing Section 53 (b) of the Internal Revenue Code
held that "the obligation imposed thereunder upon the withholding agent is compulsory."
It is a device to insure the collection by the Philippine Government of taxes on incomes,
derived from sources in the Philippines, by aliens who are outside the taxing jurisdiction
of this Court (Commissioner of Internal Revenue vs. Malayan Insurance Co., Inc., 21
SCRA 944). In fact, Wander may be assessed for deficiency withholding tax at source,
plus penalties consisting of surcharge and interest (Section 54, NLRC). Therefore, as the
Philippine counterpart, Wander is the proper entity who should for the refund or credit of
overpaid withholding tax on dividends paid or remitted by Glaro.
Closely intertwined with the first assignment of error is the issue of whether or not
Switzerland, the foreign country where Glaro is domiciled, grants to Glaro a tax credit
against the tax due it, equivalent to 20%, or the difference between the regular 35% rate
of the preferential 15% rate. The dispute in this issue lies on the fact that Switzerland
does not impose any income tax on dividends received by Swiss corporation from
corporations domiciled in foreign countries.
Section 24 (b) (1) of the Tax Code, as amended by P.D. 369 and 778, the law involved in
this case, reads:
Sec. 1. The first paragraph of subsection (b) of Section 24 of the National
Internal Revenue Code, as amended, is hereby further amended to read as
follows:
(b) Tax on foreign corporations. 1) Non-resident corporation.
A foreign corporation not engaged in trade or business in the
Philippines, including a foreign life insurance company not
engaged in the life insurance business in the Philippines, shall
pay a tax equal to 35% of the gross income received during its
taxable year from all sources within the Philippines, as interest
(except interest on foreign loans which shall be subject to 15%
tax),
dividends,
premiums,
annuities,
compensations,
remuneration for technical services or otherwise, emoluments
or other fixed or determinable, annual, periodical or casual
gains, profits, and income, and capital gains: ... Provided, still

further That on dividends received from a domestic corporation

liable to tax under this Chapter, the tax shall be 15% of the
dividends received, which shall be collected and paid as
provided in Section 53 (d) of this Code, subject to the condition
that the country in which the non-resident foreign corporation
is domiciled shall allow a credit against the tax due from the
non-resident foreign corporation taxes deemed to have been
paid in the Philippines equivalent to 20% which represents the
difference between the regular tax (35%) on corporations and
the tax (15%) dividends as provided in this section: ...
From the above-quoted provision, the dividends received from a domestic corporation
liable to tax, the tax shall be 15% of the dividends received, subject to the condition that
the country in which the non-resident foreign corporation is domiciled shall allow a credit
against the tax due from the non-resident foreign corporation taxes deemed to have been
paid in the Philippines equivalent to 20% which represents the difference between the
regular tax (35%) on corporations and the tax (15%) dividends.
In the instant case, Switzerland did not impose any tax on the dividends received by
Glaro. Accordingly, Wander claims that full credit is granted and not merely credit
equivalent to 20%. Petitioner, on the other hand, avers the tax sparing credit is applicable
only if the country of the parent corporation allows a foreign tax credit not only for the 15
percentage-point portion actually paid but also for the equivalent twenty percentage
point portion spared, waived or otherwise deemed as if paid in the Philippines; that
private respondent does not cite anywhere a Swiss law to the effect that in case where a
foreign tax, such as the Philippine 35% dividend tax, is spared waived or otherwise
considered as if paid in whole or in part by the foreign country, a Swiss foreign-tax credit
would be allowed for the whole or for the part, as the case may be, of the foreign tax so
spared or waived or considered as if paid by the foreign country.
While it may be true that claims for refund are construed strictly against the claimant,
nevertheless, the fact that Switzerland did not impose any tax or the dividends received
by Glaro from the Philippines should be considered as a full satisfaction of the given
condition. For, as aptly stated by respondent Court, to deny private respondent the
privilege to withhold only 15% tax provided for under Presidential Decree No. 369,
amending Section 24 (b) (1) of the Tax Code, would run counter to the very spirit and
intent of said law and definitely will adversely affect foreign corporations" interest here
and discourage them from investing capital in our country.
Besides, it is significant to note that the conclusion reached by respondent Court is but a
confirmation of the May 19, 1977 ruling of petitioner that "since the Swiss Government
does not impose any tax on the dividends to be received by the said parent corporation in
the Philippines, the condition imposed under the above-mentioned section is satisfied.
Accordingly, the withholding tax rate of 15% is hereby affirmed."

Moreover, as a matter of principle, this Court will not set aside the conclusion reached by
an agency such as the Court of Tax Appeals which is, by the very nature of its function,
dedicated exclusively to the study and consideration of tax problems and has necessarily
developed an expertise on the subject unless there has been an abuse or improvident
exercise of authority (Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, which
is not present in the instant case. WHEREFORE, the petition filed is DISMISSED for lack
of merit. SO ORDERED.

FIRST DIVISION
[G.R. No. 137377. December 18, 2001]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MARUBENI CORPORATION,
respondent.
DECISION
PUNO, J.:
In this petition for review, the Commissioner of Internal Revenue assails the decision
dated January 15, 1999 of the Court of Appeals in CA-G.R. SP No. 42518 which affirmed
the decision dated July 29, 1996 of the Court of Tax Appeals in CTA Case No. 4109. The
tax court ordered the Commissioner of Internal Revenue to desist from collecting the
1985 deficiency income, branch profit remittance and contractors taxes from Marubeni
Corporation after finding the latter to have properly availed of the tax amnesty under
Executive Orders Nos. 41 and 64, as amended.
Respondent Marubeni Corporation is a foreign corporation organized and existing under
the laws of Japan. It is engaged in general import and export trading, financing and the
construction business. It is duly registered to engage in such business in the Philippines
and maintains a branch office in Manila.
Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a
letter of authority to examine the books of accounts of the Manila branch office of
respondent corporation for the fiscal year ending March 1985. In the course of the
examination, petitioner found respondent to have undeclared income from two (2)
contracts in the Philippines, both of which were completed in 1984. One of the contracts
was with the National Development Company (NDC) in connection with the construction
and installation of a wharf/port complex at the Leyte Industrial Development Estate in
the municipality of Isabel, province of Leyte. The other contract was with the Philippine
Phosphate Fertilizer Corporation (Philphos) for the construction of an ammonia storage
complex also at the Leyte Industrial Development Estate.
On March 1, 1986, petitioners revenue examiners recommended an assessment for
deficiency income, branch profit remittance, contractors and commercial brokers taxes.
Respondent questioned this assessment in a letter dated June 5, 1986.
On August 27, 1986, respondent corporation received a letter dated August 15, 1986
from petitioner assessing respondent several deficiency taxes. The assessed deficiency
internal revenue taxes, inclusive of surcharge and interest, were as follows:
I. DEFICIENCY INCOME TAX
FY ended March 31, 1985

Undeclared gross income (Philphos and

and NDC construction projects). . . . . . . . . . . . P 967,269,811.14
Less: Cost and expenses (50%) . . . . . . . . . . . . . . . 483,634,905.57
Net undeclared income . . . . . . . . . . . . . . . . . . . . . . . 483,634,905.57
Income tax due thereon . . . . . . . . . . . . . . . . . . . . . . . 169,272,217.00
Add: 50% surcharge . . . . . . . . . . . . . . . . . . . . . . . 84,636,108.50
20% int. p.a. fr. 7-15-85 to
to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 36,675,646.90
TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . . . P 290,583,972.40
II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX
FY ended March 31, 1985
Undeclared net income from
Philphos and NDC construction projects . . . . . P 483,634,905.57
Less: Income tax thereon . . . . . . . . . . . . . . . . . . . . . 169,272,217.00
Amount subject to Tax . . . . . . . . . . . . . . . . . . . . . . . 314,362,688.57
Tax due thereon . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,154,403.00
Add: 50% surcharge . . . . . . . . . . . . . . . . . . . . . . 23,577,201.50
20% int. p.a. fr. 4-26-85
to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 12,305,360.66
TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . . . P 83,036,965.16
III. DEFICIENCY CONTRACTORS TAX
FY ended March 31, 1985
Undeclared gross receipts/ gross income from
Philphos and NDC construction projects . . . . P 967,269,811.14

Contractors tax due thereon (4%). . . . . . . . . . . . . . . 38,690,792.00

Add: 50% surcharge for non-declaration. . . . . . 19,345,396.00
25% surcharge for late payment . . . . . . . . . 9,672,698.00
Sub-total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,708,886.00
Add: 20% int. p.a. fr. 4-21-85 to
to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 17,854,739.46
TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . . . P 85,563,625.46
IV. DEFICIENCY COMMERCIAL BROKERS TAX
FY ended March 31, 1985
Undeclared share from commission income
(denominated as subsidy from Home
Office). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 24,683,114.50
Tax due thereon . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 1,628,569.00
Add: 50% surcharge for non-declaration. . . . . . . 814,284.50
25% surcharge for late payment . . . . . . . . . 407,142.25
Sub-total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 2,849,995.75
Add: 20% int. p.a. fr. 4-21-85
to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 751,539.98
TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . P 3,600,535.68
The 50% surcharge was imposed for your clients failure to report for tax purposes the
aforesaid taxable revenues while the 25% surcharge was imposed because of your clients
failure to pay on time the above deficiency percentage taxes.
xxxxxxxxxxx
Petitioner found that the NDC and Philphos contracts were made on a turn-key basis and
that the gross income from the two projects amounted to P967,269,811.14. Each contract
was for a piece of work and since the projects called for the construction and installation

of facilities in the Philippines, the entire income therefrom constituted income from
Philippine sources, hence, subject to internal revenue taxes. The assessment letter
further stated that the same was petitioners final decision and that if respondent
disagreed with it, respondent may file an appeal with the Court of Tax Appeals within
thirty (30) days from receipt of the assessment.

On September 26, 1986, respondent filed two (2) petitions for review with the Court of
Tax Appeals. The first petition, CTA Case No. 4109, questioned the deficiency income,
branch profit remittance and contractors tax assessments in petitioners assessment
letter. The second, CTA Case No. 4110, questioned the deficiency commercial brokers
assessment in the same letter.

Earlier, on August 2, 1986, Executive Order (E.O.) No. 41[2] declaring a one-time
amnesty covering unpaid income taxes for the years 1981 to 1985 was issued. Under this
E.O., a taxpayer who wished to avail of the income tax amnesty should, on or before
October 31, 1986: (a) file a sworn statement declaring his net worth as of December 31,
1985; (b) file a certified true copy of his statement declaring his net worth as of
December 31, 1980 on record with the Bureau of Internal Revenue (BIR), or if no such
record exists, file a statement of said net worth subject to verification by the BIR; and (c)
file a return and pay a tax equivalent to ten per cent (10%) of the increase in net worth
from December 31, 1980 to December 31, 1985.

In accordance with the terms of E.O. No. 41, respondent filed its tax amnesty return
dated October 30, 1986 and attached thereto its sworn statement of assets and liabilities
and net worth as of Fiscal Year (FY) 1981 and FY 1986. The return was received by the
BIR on November 3, 1986 and respondent paid the amount of P2,891,273.00 equivalent
to ten percent (10%) of its net worth increase between 1981 and 1986.

The period of the amnesty in E.O. No. 41 was later extended from October 31, 1986 to
December 5, 1986 by E.O. No. 54 dated November 4, 1986.

On November 17, 1986, the scope and coverage of E.O. No. 41 was expanded by
Executive Order (E.O.) No. 64. In addition to the income tax amnesty granted by E.O. No.
41 for the years 1981 to 1985, E.O. No. 64[3] included estate and donors taxes under
Title III and the tax on business under Chapter II, Title V of the National Internal
Revenue Code, also covering the years 1981 to 1985. E.O. No. 64 further provided that
the immunities and privileges under E.O. No. 41 were extended to the foregoing tax
liabilities, and the period within which the taxpayer could avail of the amnesty was
extended to December 15, 1986. Those taxpayers who already filed their amnesty return

under E.O. No. 41, as amended, could avail themselves of the benefits, immunities and
privileges under the new E.O. by filing an amended return and paying an additional 5%
on the increase in net worth to cover business, estate and donors tax liabilities.

The period of amnesty under E.O. No. 64 was extended to January 31, 1987 by E.O No. 95
dated December 17, 1986.

On December 15, 1986, respondent filed a supplemental tax amnesty return under the
benefit of E.O. No. 64 and paid a further amount of P1,445,637.00 to the BIR equivalent
to five percent (5%) of the increase of its net worth between 1981 and 1986.

On July 29, 1996, almost ten (10) years after filing of the case, the Court of Tax Appeals
rendered a decision in CTA Case No. 4109. The tax court found that respondent had
properly availed of the tax amnesty under E.O. Nos. 41 and 64 and declared the
deficiency taxes subject of said case as deemed cancelled and withdrawn. The Court of
Tax Appeals disposed of as follows:

WHEREFORE, the respondent Commissioner of Internal Revenue is hereby ORDERED to

DESIST from collecting the 1985 deficiency taxes it had assessed against petitioner and
the same are deemed considered [sic] CANCELLED and WITHDRAWN by reason of the
proper availment by petitioner of the amnesty under Executive Order No. 41, as
amended.[4]

Petitioner challenged the decision of the tax court by filing CA-G.R. SP No. 42518 with
the Court of Appeals.

On January 15, 1999, the Court of Appeals dismissed the petition and affirmed the
decision of the Court of Tax Appeals. Hence, this recourse.

Before us, petitioner raises the following issues:

(1) Whether or not the Court of Appeals erred in affirming the Decision of the Court of
Tax Appeals which ruled that herein respondents deficiency tax liabilities were
extinguished upon respondents availment of tax amnesty under Executive Orders Nos. 41
and 64.

(2) Whether or not respondent is liable to pay the income, branch profit remittance, and
contractors taxes assessed by petitioner.[5]

The main controversy in this case lies in the interpretation of the exception to the
amnesty coverage of E.O. Nos. 41 and 64. There are three (3) types of taxes involved
herein income tax, branch profit remittance tax and contractors tax. These taxes are
covered by the amnesties granted by E.O. Nos. 41 and 64. Petitioner claims, however,
that respondent is disqualified from availing of the said amnesties because the latter falls
under the exception in Section 4 (b) of E.O. No. 41.

Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the amnesty granted
thereunder, viz:

Sec. 4. Exceptions.The following taxpayers may not avail themselves of the amnesty
herein granted:

a) Those falling under the provisions of Executive Order Nos. 1, 2 and 14;

b) Those with income tax cases already filed in Court as of the effectivity hereof;

c) Those with criminal cases involving violations of the income tax law already filed in
court as of the effectivity hereof;

d) Those that have withholding tax liabilities under the National Internal Revenue Code,
as amended, insofar as the said liabilities are concerned;

e) Those with tax cases pending investigation by the Bureau of Internal Revenue as of the
effectivity hereof as a result of information furnished under Section 316 of the National
Internal Revenue Code, as amended;

f) Those with pending cases involving unexplained or unlawfully acquired wealth before
the Sandiganbayan;

g) Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions and
Transactions) and Chapter Four (Malversation of Public Funds and Property) of the
Revised Penal Code, as amended.

Petitioner argues that at the time respondent filed for income tax amnesty on October 30,
1986, CTA Case No. 4109 had already been filed and was pending before the Court of Tax
Appeals. Respondent therefore fell under the exception in Section 4 (b) of E.O. No. 41.

Petitioners claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very clear and
unambiguous. It excepts from income tax amnesty those taxpayers with income tax cases
already filed in court as of the effectivity hereof. The point of reference is the date of
effectivity of E.O. No. 41. The filing of income tax cases in court must have been made
before and as of the date of effectivity of E.O. No. 41. Thus, for a taxpayer not to be
disqualified under Section 4 (b) there must have been no income tax cases filed in court
against him when E.O. No. 41 took effect. This is regardless of when the taxpayer filed for
income tax amnesty, provided of course he files it on or before the deadline for filing.

E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning the 1985
deficiency income, branch profit remittance and contractors tax assessments was filed by
respondent with the Court of Tax Appeals on September 26, 1986. When E.O. No. 41
became effective on August 22, 1986, CTA Case No. 4109 had not yet been filed in court.
Respondent corporation did not fall under the said exception in Section 4 (b), hence,
respondent was not disqualified from availing of the amnesty for income tax under E.O.
No. 41.

The same ruling also applies to the deficiency branch profit remittance tax assessment. A
branch profit remittance tax is defined and imposed in Section 24 (b) (2) (ii), Title II,
Chapter III of the National Internal Revenue Code.[6] In the tax code, this tax falls under
Title II on Income Tax. It is a tax on income. Respondent therefore did not fall under the
exception in Section 4 (b) when it filed for amnesty of its deficiency branch profit
remittance tax assessment.

The difficulty herein is with respect to the contractors tax assessment and respondents
availment of the amnesty under E.O. No. 64. E.O. No. 64 expanded the coverage of E.O.
No. 41 by including estate and donors taxes and tax on business. Estate and donors taxes
fall under Title III of the Tax Code while business taxes fall under Chapter II, Title V of
the same. The contractors tax is provided in Section 205, Chapter II, Title V of the Tax

Code; it is defined and imposed under the title on business taxes, and is therefore a tax
on business.[7]

When E.O. No. 64 took effect on November 17, 1986, it did not provide for exceptions to
the coverage of the amnesty for business, estate and donors taxes. Instead, Section 8 of
E.O. No. 64 provided that:

Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to
or inconsistent with this amendatory Executive Order shall remain in full force and effect.

By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41 not contrary to or

inconsistent with the amendatory act were reenacted in E.O. No. 64. Thus, Section 4 of
E.O. No. 41 on the exceptions to amnesty coverage also applied to E.O. No. 64. With
respect to Section 4 (b) in particular, this provision excepts from tax amnesty coverage a
taxpayer who has income tax cases already filed in court as of the effectivity hereof. As to
what Executive Order the exception refers to, respondent argues that because of the
words income and hereof, they refer to Executive Order No. 41.[8]

In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot be construed
to refer to E.O. No. 41 and its date of effectivity. The general rule is that an amendatory
act operates prospectively.[9] While an amendment is generally construed as becoming a
part of the original act as if it had always been contained therein,[10] it may not be given
a retroactive effect unless it is so provided expressly or by necessary implication and no
vested right or obligations of contract are thereby impaired.[11]

There is nothing in E.O. No. 64 that provides that it should retroact to the date of
effectivity of E.O. No. 41, the original issuance. Neither is it necessarily implied from E.O.
No. 64 that it or any of its provisions should apply retroactively. Executive Order No. 64
is a substantive amendment of E.O. No. 41. It does not merely change provisions in E.O.
No. 41. It supplements the original act by adding other taxes not covered in the first.[12]
It has been held that where a statute amending a tax law is silent as to whether it
operates retroactively, the amendment will not be given a retroactive effect so as to
subject to tax past transactions not subject to tax under the original act.[13] In an
amendatory act, every case of doubt must be resolved against its retroactive effect.[14]

Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general
pardon or intentional overlooking by the State of its authority to impose penalties on
persons otherwise guilty of evasion or violation of a revenue or tax law.[15] It partakes of

an absolute forgiveness or waiver by the government of its right to collect what is due it
and to give tax evaders who wish to relent a chance to start with a clean slate.[16] A tax
amnesty, much like a tax exemption, is never favored nor presumed in law.[17] If granted,
the terms of the amnesty, like that of a tax exemption, must be construed strictly against
the taxpayer and liberally in favor of the taxing authority.[18] For the right of taxation is
inherent in government. The State cannot strip itself of the most essential power of
taxation by doubtful words. He who claims an exemption (or an amnesty) from the
common burden must justify his claim by the clearest grant of organic or state law. It
cannot be allowed to exist upon a vague implication. If a doubt arises as to the intent of
the legislature, that doubt must be resolved in favor of the state.[19]

In the instant case, the vagueness in Section 4 (b) brought about by E.O. No. 64 should
therefore be construed strictly against the taxpayer. The term income tax cases should be
read as to refer to estate and donors taxes and taxes on business while the word hereof,
to E.O. No. 64. Since Executive Order No. 64 took effect on November 17, 1986,
consequently, insofar as the taxes in E.O. No. 64 are concerned, the date of effectivity
referred to in Section 4 (b) of E.O. No. 41 should be November 17, 1986.

Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. No. 64 took
effect on November 17, 1986, CTA Case No. 4109 was already filed and pending in court.
By the time respondent filed its supplementary tax amnesty return on December 15,
1986, respondent already fell under the exception in Section 4 (b) of E.O. Nos. 41 and 64
and was disqualified from availing of the business tax amnesty granted therein.

It is respondents other argument that assuming it did not validly avail of the amnesty
under the two Executive Orders, it is still not liable for the deficiency contractors tax
because the income from the projects came from the Offshore Portion of the contracts.
The two contracts were divided into two parts, i.e., the Onshore Portion and the Offshore
Portion. All materials and equipment in the contract under the Offshore Portion were
manufactured and completed in Japan, not in the Philippines, and are therefore not
subject to Philippine taxes.

Before going into respondents arguments, it is necessary to discuss the background of

the two contracts, examine their pertinent provisions and implementation.

The NDC and Philphos are two government corporations. In 1980, the NDC, as the
corporate investment arm of the Philippine Government, established the Philphos to
engage in the large-scale manufacture of phosphatic fertilizer for the local and foreign
markets.[20] The Philphos plant complex which was envisioned to be the largest

phosphatic fertilizer operation in Asia, and among the largest in the world, covered an
area of 180 hectares within the 435-hectare Leyte Industrial Development Estate in the
municipality of Isabel, province of Leyte.

In 1982, the NDC opened for public bidding a project to construct and install a modern,
reliable, efficient and integrated wharf/port complex at the Leyte Industrial Development
Estate. The wharf/ port complex was intended to be one of the major facilities for the
industrial plants at the Leyte Industrial Development Estate. It was to be specifically
adapted to the site for the handling of phosphate rock, bagged or bulk fertilizer products,
liquid materials and other products of Philphos, the Philippine Associated Smelting and
Refining Corporation (Pasar),[21] and other industrial plants within the Estate. The
bidding was participated in by Marubeni Head Office in Japan.

Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and respondent entered
into an agreement entitled Turn-Key Contract for Leyte Industrial Estate Port
Development Project Between National Development Company and Marubeni
Corporation.[22] The Port Development Project would consist of a wharf, berths,
causeways, mechanical and liquids unloading and loading systems, fuel oil depot, utilities
systems, storage and service buildings, offsite facilities, harbor service vessels,
navigational aid system, fire-fighting system, area lighting, mobile equipment, spare
parts and other related facilities.[23] The scope of the works under the contract covered
turn-key supply, which included grants of licenses and the transfer of technology and
know-how,[24] and:

x x x the design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning of the WharfPort Complex as set forth in Annex I of this Contract, as well as the coordination of tie-ins
at boundaries and schedule of the use of a part or the whole of the Wharf/Port Complex
through the Owner, with the design and construction of other facilities around the site.
The scope of works shall also include any activity, work and supply necessary for,
incidental to or appropriate under present international industrial port practice, for the
timely and successful implementation of the object of this Contract, whether or not
expressly referred to in the abovementioned Annex I.[25]

The contract price for the wharf/ port complex was Y12,790,389,000.00 and
P44,327,940.00. In the contract, the price in Japanese currency was broken down into
two portions: (1) the Japanese Yen Portion I; (2) the Japanese Yen Portion II, while the
price in Philippine currency was referred to as the Philippine Pesos Portion. The Japanese
Yen Portions I and II were financed in two (2) ways: (a) by yen credit loan provided by the

Overseas Economic Cooperation Fund (OECF); and (b) by suppliers credit in favor of
Marubeni from the Export-Import Bank of Japan. The OECF is a Fund under the Ministry
of Finance of Japan extended by the Japanese government as assistance to foreign
governments to promote economic development.[26] The OECF extended to the
Philippine Government a loan of Y7,560,000,000.00 for the Leyte Industrial Estate Port
Development Project and authorized the NDC to implement the same.[27] The other type
of financing is an indirect type where the supplier, i.e., Marubeni, obtained a loan from
the Export-Import Bank of Japan to advance payment to its sub-contractors.[28]

Under the financing schemes, the Japanese Yen Portions I and II and the Philippine Pesos
Portion were further broken down and subdivided according to the materials, equipment
and services rendered on the project. The price breakdown and the corresponding
materials, equipment and services were contained in a list attached as Annex III to the
contract.[29]

A few months after execution of the NDC contract, Philphos opened for public bidding a
project to construct and install two ammonia storage tanks in Isabel. Like the NDC
contract, it was Marubeni Head Office in Japan that participated in and won the bidding.
Thus, on May 2, 1982, Philphos and respondent corporation entered into an agreement
entitled Turn-Key Contract for Ammonia Storage Complex Between Philippine Phosphate
Fertilizer Corporation and Marubeni Corporation.[30] The object of the contract was to
establish and place in operating condition a modern, reliable, efficient and integrated
ammonia storage complex adapted to the site for the receipt and storage of liquid
anhydrous ammonia[31]and for the delivery of ammonia to an integrated fertilizer plant
adjacent to the storage complex and to vessels at the dock.[32] The storage complex was
to consist of ammonia storage tanks, refrigeration system, ship unloading system,
transfer pumps, ammonia heating system, fire-fighting system, area lighting, spare parts,
and other related facilities.[33] The scope of the works required for the completion of the
ammonia storage complex covered the supply, including grants of licenses and transfer of
technology and know-how,[34] and:

x x x the design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning of the
Ammonia Storage Complex as set forth in Annex I of this Contract, as well as the
coordination of tie-ins at boundaries and schedule of the use of a part or the whole of the
Ammonia Storage Complex through the Owner with the design and construction of other
facilities at and around the Site. The scope of works shall also include any activity, work
and supply necessary for, incidental to or appropriate under present international
industrial practice, for the timely and successful implementation of the object of this
Contract, whether or not expressly referred to in the abovementioned Annex I.[35]

The contract price for the project was Y3,255,751,000.00 and P17,406,000.00. Like the
NDC contract, the price was divided into three portions. The price in Japanese currency
was broken down into the Japanese Yen Portion I and Japanese Yen Portion II while the
price in Philippine currency was classified as the Philippine Pesos Portion. Both Japanese
Yen Portions I and II were financed by suppliers credit from the Export-Import Bank of
Japan. The price stated in the three portions were further broken down into the
corresponding materials, equipment and services required for the project and their
individual prices. Like the NDC contract, the breakdown in the Philphos contract is
contained in a list attached to the latter as Annex III.[36]

The division of the price into Japanese Yen Portions I and II and the Philippine Pesos
Portion under the two contracts corresponds to the two parts into which the contracts
were classifiedthe Foreign Offshore Portion and the Philippine Onshore Portion. In both
contracts, the Japanese Yen Portion I corresponds to the Foreign Offshore Portion.[37]
Japanese Yen Portion II and the Philippine Pesos Portion correspond to the Philippine
Onshore Portion.[38]

Under the Philippine Onshore Portion, respondent does not deny its liability for the
contractors tax on the income from the two projects. In fact respondent claims, which
petitioner has not denied, that the income it derived from the Onshore Portion of the two
projects had been declared for tax purposes and the taxes thereon already paid to the
Philippine government.[39] It is with regard to the gross receipts from the Foreign
Offshore Portion of the two contracts that the liabilities involved in the assessments
subject of this case arose. Petitioner argues that since the two agreements are turn-key,
[40] they call for the supply of both materials and services to the client, they are
contracts for a piece of work and are indivisible. The situs of the two projects is in the
Philippines, and the materials provided and services rendered were all done and
completed within the territorial jurisdiction of the Philippines.[41] Accordingly,
respondents entire receipts from the contracts, including its receipts from the Offshore
Portion, constitute income from Philippine sources. The total gross receipts covering both
labor and materials should be subjected to contractors tax in accordance with the ruling
in Commissioner of Internal Revenue v. Engineering Equipment & Supply Co.[42]

A contractors tax is imposed in the National Internal Revenue Code (NIRC) as follows:

Sec. 205. Contractors, proprietors or operators of dockyards, and others.A contractors

tax of four percent of the gross receipts is hereby imposed on proprietors or operators of
the following business establishments and/or persons engaged in the business of selling
or rendering the following services for a fee or compensation:

(a) General engineering, general building and specialty contractors, as defined in

Republic Act No. 4566;

xxxxxxxxx

(q) Other independent contractors. The term independent contractors includes persons
(juridical or natural) not enumerated above (but not including individuals subject to the
occupation tax under the Local Tax Code) whose activity consists essentially of the sale of
all kinds of services for a fee regardless of whether or not the performance of the service
calls for the exercise or use of the physical or mental faculties of such contractors or
their employees. It does not include regional or area headquarters established in the
Philippines by multinational corporations, including their alien executives, and which
headquarters do not earn or derive income from the Philippines and which act as
supervisory, communications and coordinating centers for their affiliates, subsidiaries or
branches in the Asia-Pacific Region.

x x x x x x x x x.[43]

Under the afore-quoted provision, an independent contractor is a person whose activity

consists essentially of the sale of all kinds of services for a fee, regardless of whether or
not the performance of the service calls for the exercise or use of the physical or mental
faculties of such contractors or their employees. The word contractor refers to a person
who, in the pursuit of independent business, undertakes to do a specific job or piece of
work for other persons, using his own means and methods without submitting himself to
control as to the petty details.[44]

A contractors tax is a tax imposed upon the privilege of engaging in business.[45] It is

generally in the nature of an excise tax on the exercise of a privilege of selling services or
labor rather than a sale on products;[46] and is directly collectible from the person
exercising the privilege.[47] Being an excise tax, it can be levied by the taxing authority
only when the acts, privileges or business are done or performed within the jurisdiction
of said authority.[48] Like property taxes, it cannot be imposed on an occupation or
privilege outside the taxing district.[49]

In the case at bar, it is undisputed that respondent was an independent contractor under
the terms of the two subject contracts. Respondent, however, argues that the work
therein were not all performed in the Philippines because some of them were completed
in Japan in accordance with the provisions of the contracts.

An examination of Annex III to the two contracts reveals that the materials and
equipment to be made and the works and services to be performed by respondent are
indeed classified into two. The first part, entitled Breakdown of Japanese Yen Portion I
provides:

Japanese Yen Portion I of the Contract Price has been subdivided according to discrete
portions of materials and equipment which will be shipped to Leyte as units and lots. This
subdivision of price is to be used by owner to verify invoice for Progress Payments under
Article 19.2.1 of the Contract. The agreed subdivision of Japanese Yen Portion I is as
follows:

x x x x x x x x x. [50]

The subdivision of Japanese Yen Portion I covers materials and equipment while Japanese
Yen Portion II and the Philippine Pesos Portion enumerate other materials and equipment
and the construction and installation work on the project. In other words, the supplies for
the project are listed under Portion I while labor and other supplies are listed under
Portion II and the Philippine Pesos Portion. Mr. Takeshi Hojo, then General Manager of
the Industrial Plant Section II of the Industrial Plant Department of Marubeni
Corporation in Japan who supervised the implementation of the two projects, testified
that all the machines and equipment listed under Japanese Yen Portion I in Annex III
were manufactured in Japan.[51] The machines and equipment were designed,
engineered and fabricated by Japanese firms sub-contracted by Marubeni from the list of
sub-contractors in the technical appendices to each contract.[52] Marubeni subcontracted a majority of the equipment and supplies to Kawasaki Steel Corporation which
did the design, fabrication, engineering and manufacture thereof;[53] Yashima & Co. Ltd.
which manufactured the mobile equipment; Bridgestone which provided the rubber
fenders of the mobile equipment;[54] and B.S. Japan for the supply of radio equipment.
[55] The engineering and design works made by Kawasaki Steel Corporation included the
lay-out of the plant facility and calculation of the design in accordance with the
specifications given by respondent.[56] All sub-contractors and manufacturers are
Japanese corporations and are based in Japan and all engineering and design works were
performed in that country.[57]

The materials and equipment under Portion I of the NDC Port Project is primarily
composed of two (2) sets of ship unloader and loader; several boats and mobile
equipment.[58] The ship unloader unloads bags or bulk products from the ship to the port
while the ship loader loads products from the port to the ship. The unloader and loader
are big steel structures on top of each is a large crane and a compartment for operation

of the crane. Two sets of these equipment were completely manufactured in Japan
according to the specifications of the project. After manufacture, they were rolled on to a
barge and transported to Isabel, Leyte.[59] Upon reaching Isabel, the unloader and
loader were rolled off the barge and pulled to the pier to the spot where they were
installed.[60] Their installation simply consisted of bolting them onto the pier.[61]

Like the ship unloader and loader, the three tugboats and a line boat were completely
manufactured in Japan. The boats sailed to Isabel on their own power. The mobile
equipment, consisting of three to four sets of tractors, cranes and dozers, trailers and
forklifts, were also manufactured and completed in Japan. They were loaded on to a
shipping vessel and unloaded at the Isabel Port. These pieces of equipment were all on
wheels and self-propelled. Once unloaded at the port, they were ready to be driven and
perform what they were designed to do.[62]

In addition to the foregoing, there are other items listed in Japanese Yen Portion I in
Annex III to the NDC contract. These other items consist of supplies and materials for
five (5) berths, two (2) roads, a causeway, a warehouse, a transit shed, an administration
building and a security building. Most of the materials consist of steel sheets, steel pipes,
channels and beams and other steel structures, navigational and communication as well
as electrical equipment. [63]

In connection with the Philphos contract, the major pieces of equipment supplied by
respondent were the ammonia storage tanks and refrigeration units.[64] The steel plates
for the tank were manufactured and cut in Japan according to drawings and
specifications and then shipped to Isabel. Once there, respondents employees put the
steel plates together to form the storage tank. As to the refrigeration units, they were
completed and assembled in Japan and thereafter shipped to Isabel. The units were
simply installed there.[65] Annex III to the Philphos contract lists down under the
Japanese Yen Portion I the materials for the ammonia storage tank, incidental equipment,
piping facilities, electrical and instrumental apparatus, foundation material and spare
parts.

All the materials and equipment transported to the Philippines were inspected and tested
in Japan prior to shipment in accordance with the terms of the contracts.[66] The
inspection was made by representatives of respondent corporation, of NDC and Philphos.
NDC, in fact, contracted the services of a private consultancy firm to verify the
correctness of the tests on the machines and equipment[67]while Philphos sent a
representative to Japan to inspect the storage equipment.[68]

The sub-contractors of the materials and equipment under Japanese Yen Portion I were
all paid by respondent in Japan. In his deposition upon oral examination, Kenjiro
Yamakawa, formerly the Assistant General Manager and Manager of the Steel Plant
Marketing Department, Engineering & Construction Division, Kawasaki Steel
Corporation, testified that the equipment and supplies for the two projects provided by
Kawasaki under Japanese Yen Portion I were paid by Marubeni in Japan. Receipts for
such payments were duly issued by Kawasaki in Japanese and English.[69] Yashima & Co.
Ltd. and B.S. Japan were likewise paid by Marubeni in Japan.[70]

Between Marubeni and the two Philippine corporations, payments for all materials and
equipment under Japanese Yen Portion I were made to Marubeni by NDC and Philphos
also in Japan. The NDC, through the Philippine National Bank, established letters of
credit in favor of respondent through the Bank of Tokyo. The letters of credit were
financed by letters of commitment issued by the OECF with the Bank of Tokyo. The Bank
of Tokyo, upon respondents submission of pertinent documents, released the amount in
the letters of credit in favor of respondent and credited the amount therein to
respondents account within the same bank.[71]

Clearly, the service of design and engineering, supply and delivery, construction, erection
and installation, supervision, direction and control of testing and commissioning,
coordination[72]of the two projects involved two taxing jurisdictions. These acts occurred
in two countries Japan and the Philippines. While the construction and installation work
were completed within the Philippines, the evidence is clear that some pieces of
equipment and supplies were completely designed and engineered in Japan. The two sets
of ship unloader and loader, the boats and mobile equipment for the NDC project and the
ammonia storage tanks and refrigeration units were made and completed in Japan. They
were already finished products when shipped to the Philippines. The other construction
supplies listed under the Offshore Portion such as the steel sheets, pipes and structures,
electrical and instrumental apparatus, these were not finished products when shipped to
the Philippines. They, however, were likewise fabricated and manufactured by the subcontractors in Japan. All services for the design, fabrication, engineering and
manufacture of the materials and equipment under Japanese Yen Portion I were made
and completed in Japan. These services were rendered outside the taxing jurisdiction of
the Philippines and are therefore not subject to contractors tax.

Contrary to petitioners claim, the case of Commissioner of Internal Revenue v.

Engineering Equipment & Supply Co[73]is not in point. In that case, the Court found that
Engineering Equipment, although an independent contractor, was not engaged in the
manufacture of air conditioning units in the Philippines. Engineering Equipment
designed, supplied and installed centralized air-conditioning systems for clients who
contracted its services. Engineering, however, did not manufacture all the materials for
the air-conditioning system. It imported some items for the system it designed and

installed.[74] The issues in that case dealt with services performed within the local taxing
jurisdiction. There was no foreign element involved in the supply of materials and
services.
With the foregoing discussion, it is unnecessary to discuss the other issues raised by the
parties. IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP No. 42518
is affirmed. SO ORDERED.