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Marubeni v.

CIR (1989):  AG&P directly remitted the cash dividends to


petitioner’s head office in Tokyo, net not only of
DOCTRINE the 10% final dividend tax, but also net of the
 A foreign corporation is the same juridical entity withheld 15% profit remittance tax based on the
as its branch office remittable amount after deducting the 10%
 BUT, if the foreign corporation transacts business dividend tax.
in the Philippines independently of its branch, the  Thus, for first and third quarters of 1981, AG&P
principal-agent relationship is set aside. The as withholding agent paid 15% branch profit
transaction becomes one of the foreign remittance tax of P229,424.40.
corporation, not of the branch. Consequently, the  Petitioner, through accounting firm SGV, sought a
taxpayer is the foreign corporation, not the branch ruling from the BIR on whether the dividends it
or the resident foreign corporation. received from AG&P are connected with its
business in the Philippines as to be considered
SUMMARY branch profits subject to the 15% profit remittance
(There are 2 entities here, Marubeni PH and Marubeni tax. Acting Comm of IR ruled that only profits
Japan). Marubeni Corp is a foreign corporation organized in remitted abroad by a branch office to its head
Japan. Marubeni Japan has equity investments in AG&P of office which are effectively connected with its
Manila. AG&P paid dividends to petitioner, and withheld trade or business in the Philippines are subject to
dividend taxes with the rate of 10%. AG&P directly the 15% profit remittance tax.
remitted the cash dividends to petitioner’s head office in  When they sought to collect their tax credit, the
Tokyo, Japan, net not only of the 10% final dividend tax in CIR denied on the ff grounds:
the amounts of P764,748 for the first and third quarters of o While it is true that said dividends
1981, but also of the withheld 15% profit remittance tax remitted were not subject to the 15%
based on the remittable amount after deducting the final profit remittance tax as the same were
withholding tax of 10%. Marubeni, through accounting firm not income earned by a Philippine
SGV, sought a ruling from the BIR on whether the dividends Branch of Marubeni Corporation of
it received from AG&P are connected with its business in the Japan; and neither is it subject to the
Philippines as to be considered branch profits subject to the 10% intercorporate dividend tax, the
15% profit remittance tax. The CIR ruled that their dividend recipient of the dividends, being a
income is subject to the 25% tax pursuant to Article 10 (2) non-resident stockholder, nevertheless,
(b) of the Tax Treaty dated February 13, 1980 between the said dividend income is subject to the
Philippines and Japan. The relevant issue is whether 25% tax pursuant to Article 10 (2) (b) of
Marubeni Corp is a resident foreign corp or a non-res. the Tax Treaty dated February 13, 1980
foreign corp. between the Philippines and Japan.
 Issue:
SC held that the dividends were paid to Marubeni Japan. The 1) WON the dividends received are to
alleged overpaid taxes were incurred for the remittance of be considered branch profits
dividend income to the head office in Japan which is a subject to 15% profit remittance
separate and distinct income taxpayer from the branch in the tax.
Philippines. There can be no other logical conclusion 2) 2) WON Marubeni PH is entitled to
considering the undisputed fact that the investment was a refund or tax credit.
made for purposes peculiarly germane to the conduct of the a. Is Marubeni PH a
corporate affairs of Marubeni Japan, but certainly not of the resident foreign
branch in the Philippines. Petitioner, being a non-resident corporation subject
foreign corporation with respect to the transaction in only to the 10 %
question, as a general rule, is taxed 35% of its gross income intercorporate final tax
from all sources within the Philippines. But a discounted rate on dividends received
of 15% is given to petitioner based on the treaty bet. Ph and from a domestic
Japan. corporation; or is it a
non-resident foreign
 Petitioner Marubeni Corp is a foreign corporation corporation and not
organized in Japan and licensed to do business engaged in trade or
under Philippine laws. business in the
 Marubeni Japan has equity investments in AG&P Philippines, subject to
of Manila. For the first quarter of 1981, AG&P tax on income earned
paid cash dividends to petitioner worth P849,720 from Philippine sources
and withheld the corresponding 10% final at the rate of 35 % of its
dividend tax. Similarly, for the third quarter of gross income?
1981, AG&P paid P849,720 as cash dividends to  Decision: NO.
petitioner and withheld the corresponding 10% 1) Pursuant to Section 24 (b) (2) of the Tax
final dividend tax thereon. Code, as amended, only profits remitted
abroad by a branch office to its head office
that are effectively connected with its trade or increments as ordinary consequences of its
business in the Philippines are subject to the trade or business in the Philippines and avail
15% profit remittance tax. In this case, itself of the lower tax rate of 10 %.
investments in AG&P by Marubeni were  Petitioner, being a non-resident foreign
directly made by Marubeni and the dividends corporation with respect to the transaction
on the investments were likewise directly in question, as a general rule, is taxed 35%
remitted to and received by Marubeni. of its gross income from all sources within
Marubeni Corporation Philippine Branch has the Philippines. However, a discounted rate
no participation or intervention, directly or of 15% is given to petitioner on dividends
indirectly, in the investments and in the received from a domestic corporation
receipt of the dividends. And it appears that (AG&P) on the condition that its domicile
the funds invested in the Atlantic Gulf & state (Japan) extends in favor of petitioner a
Pacific Company did not come out of the tax credit of not less than 20 % of the
funds infused by the Marubeni Corporation dividends received. This 20 % represents the
of Japan to the Marubeni Corporation difference between the regular tax of 35 % on
Philippine Branch. non-resident foreign corporations which
2) YES. Marubeni is entitled to a refund or petitioner would have ordinarily paid, and the
issuance of a tax credit. 15 % special rate on dividends received from
a. Public respondents likewise erred a domestic corporation. Consequently,
in automatically imposing the 25% petitioner is entitled to a refund on the
rate under Article 10(2)(b) of the transaction in question to be computed as
Tax Treaty. follows:
b. BUT: The general rule that a
foreign corporation is the same Total cash dividend paid P 1,699,440
juridical entity as its branch office Less: 15% under Sec. 24 (254,916)
in the Philippines cannot apply (b) (1) (iii)
here. This rule is based on the Cash dividend net of 15 % 1,444,524
premise that the business of the tax due petitioner
foreign corporation is conducted Less: net amount actually (1,300,072)
through its branch office, following remitted
the principal agent relationship Amount to be refunded to P 144,452
theory. It is understood that the petitioner representing
branch becomes its agent here. So overpayment of taxes on
that when the foreign corporation dividends remitted
transacts business in the
Philippines independently of its
branch, the principal-agent
relationship is set aside. The
transaction becomes one of the
foreign corporation, not of the
branch. Consequently, the taxpayer
is the foreign corporation, not the
branch or the resident foreign
corporation.
c. Corollarily, if the business
transaction is conducted through
the branch office, the latter
becomes the taxpayer, and not the
foreign corporation
 The alleged overpaid taxes were incurred for
the remittance of dividend income to the head
office in Japan which is a separate and
distinct income taxpayer from the branch in
the Philippines. There can be no other logical
conclusion considering the undisputed fact
that the investment was made for purposes
peculiarly germane to the conduct of the
corporate affairs of Marubeni Japan, but
certainly not of the branch in the Philippines.
It is thus clear that petitioner, having made
this independent investment attributable only
to the head office, cannot now claim the
CIR v. Procter & Gamble: the applied deduction of 15%) given by the
Philippine government.
DOCTRINE  Basically what this means is that the 15% tax rate
The ordinary thirty-five percent (35%) tax rate applicable to shall only be applicable if the non-resident foreign
dividend remittances to non-resident corporate stockholders corporation received its dividends from a domestic
of a Philippine corporation, goes down to fifteen percent corporation and when the tax laws of the said
(15%) if the country of domicile of the foreign stockholder foreign corporation allows a tax credit which is
corporation "shall allow" such foreign corporation a tax equal to amount of 20% that the Philippine
credit for "taxes deemed paid in the Philippines," applicable government has deemed waived.
against the tax payable to the domiciliary country by the  CONSIDER: A Non-Resident Foreign
foreign stockholder corporation. Corporation is not here in the Philippines and does
not do business here directly. Take note, the
SUMMARY income being talked about here are only the
In 1977, Proctor & Gamble Philippines (P&G-PHIL) dividends received as a stockholder from a
declared dividends payable to its parent company and sole domestic corporation.
stockholder, Proctor & Gamble USA (P&G-USA), which  Issue:
was based in USA. The total amount was reduced by 35% o WON P&G-USA, and not P&G-PHIL,
withholding tax. Now, P&G-PHIL seeks to refund such paid was the proper party to claim the refund.
withheld tax. They claim that under Sec 24(b)(1), the tax that o WON P&G-USA is entitled to a refund
should be applied is 15% and not 35%. In order to determine  WON the US Tax Code
what rate shall apply, NIRC Sec 24(b)(1) states that “A allows a credit against the US
foreign corporation not engaged in trade and business in the Tax due from P&G-USA of
Philippines shall pay a tax of 35% of the gross income taxes derived from the
received from sources within the Philippines (including Philippines, and that it is
dividends). Provided, that for dividends received from a equivalent to the 20%
domestic corporation, the tax shall be 15% of the required by the Philippine
dividends This is subject to the condition that the country in government
which the non-resident foreign corporation is domiciled,  Decision: YES.
shall allow a credit against the tax due from the non- 1) P&G-USA is considered in the NIRC as a
resident foreign corporation and that this tax credit incentive taxpayer. As such, it may assign an agent, in
of the foreign government must equal the amount of the 20% this case, P&G-PHIL, to transact, pay, and
(the difference of the supposed 35% and the applied claim refunds through it. A taxpayer is
deduction of 15%) given by the Philippine government. The defined as referring to “any person subject to
SC held that US Tax Code Sec. 901 and 902 shows that a tax imposed.” It is important to note that
tax credit is given to income derived by P&G-USA from under Sec 53(c), the withholding agent
P&G-PHIL. This entitles the P&G-PHIL to the 15% (P&G-PHIL) who is required to deduct and
withholding tax instead of the 35%, which was imposed. withhold any tax is made personally liable for
such tax and indeed is indemnified against
any claims and demands which the
 1977: P&G-PHIL paid dividends to its sole stockholder (P&G-USA) might with to make
stockholder, P&G-USA. The total amount was in questioning such amount.
reduced by 35% withholding tax. 2) The ordinary thirty-five percent (35%) tax
 P&G-PHIL seeks to refund such paid withheld rate applicable to dividend remittances to
tax. They claim that the tax that should be applied non-resident corporate stockholders of a
is 15% and not 35%. Philippine corporation, goes down to fifteen
 The provision reads: Non-resident Corporation — percent (15%) if the country of domicile of
A foreign corporation not engaged in trade and the foreign stockholder corporation "shall
business in the Philippines shall pay a tax of 35% allow" such foreign corporation a tax credit
of the gross income received from sources within for "taxes deemed paid in the Philippines,"
the Philippines (including dividends). Provided, applicable against the tax payable to the
that for dividends received from a domestic domiciliary country by the foreign
corporation, the tax shall be 15% of the stockholder corporation. In other words, in
dividends: the instant case, the reduced fifteen percent
1) This is subject to the condition that the (15%) dividend tax rate is applicable if the
country in which the non-resident foreign USA "shall allow" to P&G- USA a tax credit
corporation is domiciled, shall allow a credit for "taxes deemed paid in the Philippines"
against the tax due from the non-resident applicable against the US taxes of
foreign corporation P&G-USA.
2) This tax credit incentive of the foreign a. The NIRC specifies that such tax
government must equal the amount of the credit for "taxes deemed paid in the
20% (the difference of the supposed 35% and 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.
b. 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.
c. US Tax Code Sec. 901 and 902
shows that a tax credit is given to
income derived by P&G-USA
from P&G-PHIL. This entitles the
P&G-PHIL to the 15% withholding
tax instead of the 35%, which was
imposed. Courts should be
“lenient” in interpreting the tax
laws of other countries to further
encourage foreign corporations to
invest in the Philippines.
CIR vs ST LUKE’S MEDICAL CENTER tax assessments, but the latter did not act on it. Thus, St.
DOCTRINE: Luke’s appealed to the CTA, who ordered St. Luke’s to pay
 Section 27(B) of the NIRC imposes a 10% the income deficiency tax expanded withholding tax.
preferential tax rate on the income of (1) BIR’s Arguments:
proprietary non-profit educational institutions and Section 27(B) of the NIRC, which imposes a 10%
(2) proprietary non-profit hospitals. The only preferential tax rate on the income of proprietary non-profit
qualifications for hospitals are that they must be hospitals, should be applicable to St. Luke's. Said section "is
a new provision intended to amend the exemption on non-
proprietary and non-profit.
profit hospitals that were previously categorized as non-
 To be exempt from income taxes, Section 30(E) of stock, non-profit corporations under Section 26 of the 1997
the NIRC requires that a charitable institution must Tax Code." It is a specific provision which prevails over the
be "organized and operated exclusively" for general exemption on income tax granted under Section
charitable purposes. Likewise, to be exempt from 30(E) and (G) for non-stock, non-profit charitable
income taxes, Section 30(G) of the NIRC requires institutions and civic organizations promoting social
that the institution be "operated exclusively" for welfare.
social welfare. The BIR claimed that St. Luke's was actually operating for
 St. Luke's is a corporation that is not "operated profit in 1998 because only 13% of its revenues came from
exclusively" for charitable or social welfare charitable purposes. Moreover, the hospital's board of
purposes insofar as its revenues from paying trustees, officers and employees directly benefit from its
profits and assets. St. Luke's had total revenues of
patients are concerned.
₱1,730,367,965 or approximately ₱1.73 billion from patient
 However, it remains a proprietary non-profit services in 1998.
hospital under Section 27(B) of the NIRC as long St. Luke’s Arguments:
as it does not distribute any of its profits to its The BIR should not consider its total revenues, because its
members and such profits are reinvested pursuant free services to patients was 65.20% of its 1998 operating
to its corporate purposes. St. Luke's, as a income (i.e., total revenues less operating expenses) of
proprietary non-profit hospital, is entitled to the ₱334,642,615. St. Luke's also claimed that its income does
preferential tax rate of 10% on its net income from not inure to the benefit of any individual.
its for-profit activities. St. Luke's maintained that it is a non-stock and non-profit
institution for charitable and social welfare purposes under
RECIT-READY: Section 30(E) and (G) of the NIRC. It argued that the making
St. Luke's Medical Center, Inc. (St. Luke's) is a hospital of profit per se does not destroy its income tax exemption.
organized as a non-stock and non-profit corporation. The WHETHER ST. LUKE’S IS LIABLE FOR
BIR assessed St. Luke’s as having a deficiency income tax, DEFICIENCY INCOME TAX IN 1998 UNDER
among others. BIR claims that Section 27(B) of the NIRC, SECTION 27(B) OF THE NIRC – YES
which imposes a 10% preferential tax rate on the income of SEC. 27. Rates of Income Tax on Domestic Corporations. -
proprietary non-profit hospitals, should be applicable to St. (B) Proprietary Educational Institutions and
Luke's. On the other hand, St. Luke's maintained that it is a Hospitals. - Proprietary educational institutions
non-stock and non-profit institution for charitable and social and hospitals which are non-profit shall pay a tax
welfare purposes under Section 30(E) and (G) of the NIRC of ten percent (10%) on their taxable income
and therefore exempt form income tax. The Court ruled in except those covered by Subsection (D) hereof . .
favor of BIR, ruling that To be exempt from income taxes, .
Section 30(E) requires that a charitable institution must be On the other hand, Section 30(E) and (G) provide:
"organized and operated exclusively" for charitable SEC. 30. Exemptions from Tax on Corporations. - The
purposes. Likewise, Section 30(G) requires that the following organizations shall not be taxed under this Title in
institution be "operated exclusively" for social welfare. In respect to income received by them as such:
the case at bar, St. Luke's is a corporation that is not (E) Nonstock corporation or association organized
"operated exclusively" for charitable or social welfare and operated exclusively for religious, charitable,
purposes insofar as its revenues from paying patients are scientific, athletic, or cultural purposes, or for the
concerned. However, it remains a proprietary non-profit rehabilitation of veterans, no part of its net income
hospital under Section 27(B) of the NIRC as long as it does or asset shall belong to or inure to the benefit of
not distribute any of its profits to its members and such any member, organizer, officer or any specific
profits are reinvested pursuant to its corporate purposes. person;
Therefore, it is entitled to the preferential tax rate of 10% on (G) Civic league or organization not organized
its net income from its for-profit activities. for profit but operated exclusively for the
FACTS: promotion of social welfare;
St. Luke's Medical Center, Inc. (St. Luke's) is a hospital Notwithstanding the provisions in the preceding
organized as a non-stock and non-profit corporation. The paragraphs, the income of whatever kind and
BIR assessed St. Luke’s as having a deficiency income tax, character of the foregoing organizations from any
value-added tax, withholding tax on compensation and of their properties, real or personal, or from any of
expanded withholding tax for 1998. St. Luke’s filed an their activities conducted for profit regardless of
administrative protest with the BIR against the deficiency
the disposition made of such income, shall be laws and other constitutive documents. Section 30(E) of the
subject to tax imposed under this Code. NIRC specifically requires that the corporation or
Section 27(B) on one hand, and Section 30(E) and (G) on the association be non-stock, which is defined by the
other hand, can be construed together without the removal of Corporation Code as "one where no part of its income is
such tax exemption. The effect of the introduction of Section distributable as dividends to its members, trustees, or
27(B) is to subject the taxable income of two specific officers" and that any profit "obtain[ed] as an incident to its
institutions, namely, proprietary non-profit educational operations shall, whenever necessary or proper, be used for
institutions and proprietary non-profit hospitals, among the the furtherance of the purpose or purposes for which the
institutions covered by Section 30, to the 10% preferential corporation was organized." However, under Lung Center,
rate under Section 27(B) instead of the ordinary 30% any profit by a charitable institution must not only be plowed
corporate rate under the last paragraph of Section 30 in back "whenever necessary or proper," but must be "devoted
relation to Section 27(A)(1). or used altogether to the charitable object which it is
Section 27(B) of the NIRC imposes a 10% preferential tax intended to achieve."
rate on the income of (1) proprietary non-profit educational There is no dispute that St. Luke's is organized as a non-stock
institutions and (2) proprietary non-profit hospitals. The only and non-profit charitable institution. However, this does not
qualifications for hospitals are that they must be proprietary automatically exempt St. Luke's from paying taxes. This
and non-profit. "Proprietary" means private, following the only refers to the organization of St. Luke's. Even if St.
definition of a "proprietary educational institution" as "any Luke's meets the test of charity, a charitable institution is not
private school maintained and administered by private ipso facto tax exempt. To be exempt from real property
individuals or groups" with a government permit. "Non- taxes, Section 28(3), Article VI of the Constitution requires
profit" means no net income or asset accrues to or benefits that a charitable institution use the property "actually,
any member or specific person, with all the net income or directly and exclusively" for charitable purposes. To be
asset devoted to the institution's purposes and all its activities exempt from income taxes, Section 30(E) of the NIRC
conducted not for profit. requires that a charitable institution must be "organized and
However, “Non-profit" does not necessarily mean operated exclusively" for charitable purposes. Likewise, to
"charitable." In Lung Center of the Philippines v. Quezon be exempt from income taxes, Section 30(G) of the NIRC
City, the Court defined “charity” as "a gift, to be applied requires that the institution be "operated exclusively" for
consistently with existing laws, for the benefit of an social welfare.
indefinite number of persons, either by bringing their minds However, the last paragraph of Section 30 of the NIRC
and hearts under the influence of education or religion, by qualifies the words "organized and operated exclusively". It
assisting them to establish themselves in life or [by] provides that if a tax exempt charitable institution conducts
otherwise lessening the burden of government." "any" activity for profit, such activity is not tax exempt even
Charitable institutions are not ipso facto entitled to a tax as its not-for-profit activities remain tax exempt. This
exemption. The requirements for a tax exemption are paragraph qualifies the requirements in Section 30(E) that
specified by the law granting it. The power of Congress to the "[n]on-stock corporation or association [must be]
tax implies the power to exempt from tax. Congress can organized and operated exclusively for x x x charitable x x x
create tax exemptions, subject to the constitutional provision purposes x x x." It likewise qualifies the requirement in
that "[n]o law granting any tax exemption shall be passed Section 30(G) that the civic organization must be "operated
without the concurrence of a majority of all the Members of exclusively" for the promotion of social welfare.
Congress." The requirements for a tax exemption are strictly Thus, even if the charitable institution must be "organized
construed against the taxpayer. and operated exclusively" for charitable purposes, it is
As a general principle, a charitable institution does not lose nevertheless allowed to engage in "activities conducted for
its character as such and its exemption from taxes simply profit" without losing its tax exempt status for its not-for-
because it derives income from paying patients, whether out- profit activities. The only consequence is that the "income of
patient, or confined in the hospital, or receives subsidies whatever kind and character" of a charitable institution
from the government, so long as the money received is "from any of its activities conducted for profit, regardless of
devoted or used altogether to the charitable object which it the disposition made of such income, shall be subject to tax."
is intended to achieve; and no money inures to the private The tax rate on such income from for-profit activities is now
benefit of the persons managing or operating the institution. 10%.
Section 30(E) of the NIRC provides that a charitable In the case at bar, St. Luke's is a corporation that is not
institution must be: "operated exclusively" for charitable or social welfare
(1) A non-stock corporation or association; purposes insofar as its revenues from paying patients are
(2) Organized exclusively for charitable purposes; concerned. This ruling is based not only on a strict
(3) Operated exclusively for charitable purposes; interpretation of a provision granting tax exemption, but also
and on the clear and plain text of Section 30(E) and (G). An
(4) No part of its net income or asset shall belong institution under Section 30(E) or (G) does not lose its tax
to or inure to the benefit of any member, organizer, exemption if it earns income from its for-profit activities.
officer or any specific person. Such income from for-profit activities, under the last
Thus, both the organization and operations of the charitable paragraph of Section 30, is merely subject to income tax.
institution must be devoted "exclusively" for charitable However, it remains a proprietary non-profit hospital under
purposes. The organization of the institution refers to its Section 27(B) of the NIRC as long as it does not distribute
corporate form, as shown by its articles of incorporation, by- any of its profits to its members and such profits are
reinvested pursuant to its corporate purposes. St. Luke's, as
a proprietary non-profit hospital, is entitled to the
preferential tax rate of 10% on its net income from its for-
profit activities.
A tax exemption is effectively a social subsidy granted by
the State because an exempt institution is spared from
sharing in the expenses of government and yet benefits from
them. Tax exemptions for charitable institutions should
therefore be limited to institutions beneficial to the public
and those which improve social welfare. A profit-making
entity should not be allowed to exploit this subsidy to the
detriment of the government and other taxpayers.