CIR VS PROCTER AND GAMBLE PHILS

NON-RESIDENT FOREIGN CORPORATION- DIVIDENDS

Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to
dividend remittances to non-resident corporate stockholders of a Philippine corporation.
This rate goes down to 15% ONLY 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. However, such tax credit for “taxes deemed paid in the
Philippines” MUST, as a minimum, reach an amount equivalent to 20 percentage points

FACTS:

Procter and Gamble Philippines declared dividends payable to its parent company and
sole stockholder, P&G USA. Such dividends amounted to Php 24.1M. P&G Phil paid a
35% dividend withholding tax to the BIR which amounted to Php 8.3M It subsequently
filed a claim with the Commissioner of Internal Revenue for a refund or tax credit,
claiming that pursuant to Section 24(b)(1) of the National Internal Revenue Code, as
amended by Presidential Decree No. 369, the applicable rate of withholding tax on the
dividends remitted was only 15%.

MAIN ISSUE:

Whether or not P&G Philippines is entitled to the refund or tax credit.

HELD:

YES. P&G Philippines is entitled.

Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to
dividend remittances to non-resident corporate stockholders of a Philippine corporation.
This rate goes down to 15% ONLY IF he country of domicile of the foreign stockholder
corporation “shall allow” such foreign corporation a tax credit for “taxes deemed paid in
the Philippines,” applicable against the tax payable to the domiciliary country by the
foreign stockholder corporation. However, such tax credit for “taxes deemed paid in the
Philippines” MUST, as a minimum, reach an amount equivalent to 20 percentage points
which represents the difference between the regular 35% dividend tax rate and the
reduced 15% tax rate. Thus, the test is if USA “shall allow” P&G USA a tax credit for
”taxes deemed paid in the Philippines” applicable against the US taxes of P&G USA,
and such tax credit must reach at least 20 percentage points. Requirements were met.

NOTES: Breakdown:

a) Deemed paid requirement: US Internal Revenue Code, Sec 902: a domestic

corporation (owning 10% of remitting foreign corporation) shall be deemed to have paid
a proportionate extent of taxes paid by such foreign corporation upon its remittance of
dividends to domestic corporation.

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

P 100.00 -- corporate income earned by P&G Phils
x 35% -- Philippine income tax rate
P 35.00 -- paid by P&G Phil as corporate income tax

P 100.00
- 35.00
65. 00 -- available for remittance

P 65. 00
x 35% -- Regular Philippine dividend tax rate
P 22.75 -- regular dividend tax

P 65.0o
x 15% -- Reduced dividend tax rate
P 9.75 -- reduced dividend tax

P 65.00 -- dividends remittable

- 9.75 -- dividend tax withheld at reduced rate
P 55.25 -- dividends actually remitted to P&G USA

Dividends actually
remitted by P&G Phil = P 55.25
---------------------------------- ------------- x P35 = P29.75
Amount of accumulated P 65.00
profits earned

P35 is the income tax paid.

P29.75 is the tax credit allowed by Sec 902 of US Tax Code for Phil corporate income
tax ‘deemed paid’ by the parent company. Since P29.75 is much higher than P13,
Sec 902 US Tax Code complies with the requirements of sec 24 NIRC. (I did not
understand why these were divided and multiplied. Point is, requirements were
met)

Reason behind the law:

Since the US Congress desires to avoid or reduce double taxation of the same
income stream, it allows a tax credit of both (i) the Philippine dividend tax actually
withheld, and (ii) the tax credit for the Philippine corporate income tax actually
paid by P&G Philippines but “deemed paid” by P&G USA.

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

Income,” the Philippines, by treaty commitment, reduced the regular rate of dividend
tax to a maximum of 20% of he gross amount of dividends paid to US parent
corporations, and established a treaty obligation on the part of the United States
that it “shall allow” to a US parent corporation receiving dividends from
its Philippine subsidiary “a [tax] credit for the appropriate amount of taxes paid
or accrued to the Philippines by the Philippine [subsidiary].

Note:
The NIRC does not require that the US tax law deem the parent corporation to have
paid the 20 percentage points of dividend tax waived by the Philippines. It only requires
that the US “shall allow” P&G-USA a “deemed paid” tax credit in an amount equivalent
to the 20 percentage points waived by the Philippines. Section 24(b)(1) does not create
a tax exemption nor does it provide a tax credit; it is a provision which specifies when a
particular (reduced) tax rate is legally applicable.

Section 24(b)(1) of the NIRC seeks to promote the in-flow of foreign equity investment
in the 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 by allowing the investor additional tax credits
which would be applicable against the tax payable to such home country. Accordingly
Section 24(b)(1) of the NIRC requires the home or domiciliary country to give the
investor corporation a “deemed paid” tax credit at least equal in amount to the 20
percentage points of dividend tax foregone by the Philippines, in the assumption that a
positive incentive effect would thereby be felt by the investor.