C I R v . P RO C T E R & G A M B L E P H I L I P P I N E M A N U F A C T U RI N G C O RP .

( 1 9 9 1 RE S O L U T I O N )
TOPIC: Kinds of Taxes;
02 Dec. 1991 Feliciano, J. [EN BANC] G.R. No. 66838
Taxes subject to corporate income tax
SUMMARY: In 1974 and 1975, P&G-Phil. withheld 35% from its dividend remittances to its parent company, P&G-USA.
P&G-Phil. then filed a claim for refund/tax credit, arguing that under the NIRC, the applicable rate was only 15%. In
nd
the 1989 SC 2 Division decision, SC ruled against P&G-PMC. In this 1991 resolution, the SC reversed itself after
a study of the pertinent provisions of the NIRC, and the US Tax Code.

For 1974 and 1975, P&GPhil. declared dividends payable to its parent company and sole stockholder, P&GUSA,
amounting to P24,164,946.30, from which dividends the amount of P8,457,731.21 representing the 35%
withholding tax at source was deducted.
Jan. 1977 - P&GPhil. filed with the CIR a claim for refund/tax credit in the amount of P4,832,989.26 claiming,
among others, that pursuant to Sec. 24(b)(1) of the NIRC as amended by PD No. 369, the applicable rate of
withholding tax on the dividends remitted was only 15% (and not 35%) of the dividends.
o CIR: No response. P&G-Phil. filed a petition for review with the CTA.
o CTA: In favor of P&G. Ordered CIR to give the refund.
nd
o SC 2 Division (1989): Reversed the CTA, holding that:
1) P&GUSA, and not P&GPhil., was the proper party to claim the refund or tax credit;
2) Nothing in the US Tax Code allows the lower rate of 15% provided in the NIRC to apply;
3) P&G Phil. failed to meet certain conditions necessary to entitle P&G-USA to the 15% rate.

(1) W/N P&G-Phil. is the proper party to claim the refund YES.
BIR raised this for the first time on appeal.
The government must follow the same rules of procedure which bind private parties.
More importantly, there arises here a question of fairness. Had the BIR raised this at the earliest opportunity,
P&GPhil. would have been able to secure and produce an authorization before filing the action.
P&G-Phil. falls within the definition of a taxpayer in the NIRC.
The withholding agent, P&GPhil., is directly and independently liable for the correct amount of the tax that
should be withheld from the dividend remittances.
A person liable for tax has been held to be a person subject to tax and properly considered a taxpayer."
P&G-Phil. has the implied authority to file the claim.
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 Governments 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.
o 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.
o This implied authority is especially warranted where, as 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.
(2) [MAIN ISSUE] What is the applicable rate? 35% or 15% 15%!
Proper interpretation of NIRC, Sec. 24(b)(1), as amended.
NIRC, Sec. 24 (b)(1) as amended: 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 Sec. 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 nonresident 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 reduced 15% dividend tax rate is applicable if the USA shall allow to P&GUSA a tax credit for taxes
deemed paid in the Philippines. Such tax credit for taxes deemed paid in the Philippines must reach a
mimimum amount equivalent to 20% which represents the difference between the regular 35% dividend tax
rate and the preferred15% dividend tax rate.
Close examination of the pertinent provisions in the US Tax Code (quoted in the case) shows the following:
a) US law (Section 901, Tax Code) grants P&GUSA a tax credit for the amount of the dividend tax
actually paid (i.e., withheld) from the dividend remittances to P&GUSA;
b) US law (Section 902, US Tax Code) grants to P&G USA a deemed paid tax credit for a
proportionate part of the corporate income tax actually paid to the Philippines by P&GPhil.

VILLARAMA, BIANCA DANICA S.

PAGE 1 OF 3

TAX CASE # 148

In other words, US tax law treats Phil. corporate income tax as if it came out of the pocket of P&GUSA as
a part of the economic cost of carrying on business operations in the Phils. through P&GPhil.
o What is, under US law, deemed paid by P&GUSA are not phantom taxes but instead Philippine
corporate income taxes actually paid here by P&GPhil., which are very real indeed.
Under US law, tax credits are available to P&G-USA for both Phil. dividend tax actually withheld and
income tax actually paid by P&G-Phils. These tax credits are allowed because of the US congressional
desire to avoid or reduce double taxation of the same income stream.

US tax law complies with the requirements for applicability of the reduced 15% dividend tax rate.
Before the reduced 15% rate can apply: Illustration/ Computation (using P100.00 net corporate income)
(a) Determine the amount of the 20
At the 35% regular corporate income tax rate (note: this is different
percentage points dividend tax waived
from the dividend tax), P&G-Phils will pay P35.00 to BIR. It can remit
by the Philippine govt under Sec.
the remaining P65.00 to P&G-USA, but must first pay dividend tax.
24(b)(1)
Regular dividend tax
Reduced dividend tax
= P13.00
P65.00 x 35% = P22.75
P65.00 x 15% = P9.75
Amount waived under Sec. 24(b)(a): P22.75 P9.75 = P13.00
(b) Determine the amount of the deemed
Dividends actually remitted Recall that P&G will pay P35.00
paid tax credit which US tax law must
(after paying 15% dividend tax)
to BIR for its corporate income
allow to P&GUSA;
P65.00 x P9.75 = P55.25
tax, leaving only P65.00.
= P29.75
As to amount of tax credit, the US Tax Code does not specify a
particular rate/amount. In. Sec. 902(A)(2) and (C)(1)(B), it only gives
a proportion expressed in this fraction:
dividends actually remitted by P&G-Phil. to P&G-USA
amount of profits of P&G-Phil. in excess of income tax
Applying the above formula to this case:
Dividends actually remitted P55.25
Profits after income tax
P65.00
This proportion will then be multiplied by the amount of corporate
income tax paid (P35.00), or [(P55.25/P65.00) x P35.00] = P29.75.
(c) Ascertain that the amount in (b) is at
least equal to the amount in (a)

(b) = P29.75
(a) = P13.00

Since P29.75 is much higher than the P13.00

waived by the Philippine government, US tax law
specifically and clearly complies with Sec. 24(b)(1).
This reading of Secs. 901 and 902 of the US Tax Code is identical with the reading of the BIR in its previous
rulings (1976 and 1981).
The concept of deemed paid tax credit in Sec. 902 is exactly the same deemed paid tax credit in the NIRC.

(3) W/N P&G Phil. must prove that P&G-USA was in fact given the deemed paid tax credit No.
This is already a question of administrative implementation (beyond the legal questions the Court must answer).
The legal issue only pertains to the applicable tax rate. This has already been answered.
Sec. 24(b)(1) does NOT require that the deemed paid tax credit should have been actually granted. It only
requires that the USA shall allow a credit against the tax due.
This will create a severe practical problem of administrative circularity.
o The 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 applicable rate, must
first be actually imposed and collected.
o BIR avoids this practical or operating circularity by first issuing rulings on the issue of W/N the
reduced 15% dividend tax rate applies vis--vis the tax laws of another country so that the the
Philippine subsidiary can begin to withhold at the reduced rate.
Nothing prevents the BIR from issuing implementing regulations that would require P&GPhil.,
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&GUSA
or a US parent corporation for the taxable year involved.
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.
VILLARAMA, BIANCA DANICA S.

PAGE 2 OF 3

TAX CASE # 148

Interpretation of tax statutes does not always have to be in favor of revenue generation.
There are many tax statutes or provisions which are designed, not to trigger off an instant surge of revenues,
but rather to achieve longerterm and broadergauge fiscal and economic objectives.
Preambular clauses of P.D. No. 369 which amended Section 24 (b) (1), NIRC: financing of economic
development programs, encourage more capital investment for large projects, etc.
Section 24 (b) (1), NIRC, seeks to promote the inflow 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 Philippines, by treaty commitment, has reduced the regular rate to a maximum of 20% of the gross dividends.
Pursuant to the PhilippinesUS Tax Convention signed on 1 October 1976 and effective on 16 October 1982
upon ratification by both Governments and exchange of instruments of ratification
o At the same time established a treaty obligation on the part of the US 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]
o Since, however, the treaty rate of twenty percent (20%) is a maximum rate, there is still an additional
reduction of 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.
SEPARATE OPINIONS

Cruz, J., concurring

o This is the price we have to offer to persuade foreign companies to invest in our country. The benefit to us may
not be immediately available in instant revenues but it will be realized later, and in greater measure, in terms of a
more stable and robust economy.
nd

Paras, J., dissenting (Note: He was the ponente of the 2 Divisions decision which was overturned by this resolution).
o Being a mere withholding agent of the government and the real party in interest being the parent company in the
United States, private respondent cannot claim refund of the alleged overpaid taxes. Such right properly belongs
to PMCU.S.A.
o BIRs failure to raise issue relating to the real party in interest to claim the refund cannot, and should not, prejudice
the government. Such is merely a procedural defect. It is axiomatic that the government can never be in estoppel,
particularly in matters involving taxes.
o While the mathematical computations in Justice Felicianos separate opinion appear to be correct, the
computations suffer from a, basic defect: We have no way of knowing or checking the figure used. In view of the
ambiguity of Sec. 902 , we can conclude that no real tax credit was really intended.

It would be far better, in the absence of definitive guidelines, to favor the national interest.
o P&G-Phil. failed: (1) to show the actual amount credited by the U.S. government; (2) to present the ITR of its
parent company for 1975; and (3) to submit any duly authenticated document showing that the U.S. government
credited the 20% tax deemed paid in the Philippines.
o The granting of a preferential right (i.e. the reduced 15% rate) is premised on reciprocity, without which there is
clearly a derogation of our countrys financial sovereignty. No such reciprocity has been proved, nor does it
actually exist.
o In summary:
1. The Wander decision cannot serve as precedent under stare decisis. It was promulgated on the same
nd
day as the 2 Divisions decision in this case.
2. Assuming stare decisis applies, erroneous decisions must not be perpetuated by blind adherence to the
doctrine.
3. Wander deals with our tax relations with Switzerland, with whom we have a tax treaty. We had no tax
treaty with the US when the taxes in question were collected.
4. BIR charged P&G with 35% tax. This shows it has had a change of heart since Wander.
5. Wander imposed a 15% rate regardless of reciprocity. Without reciprocity, the desired effect of PD 369
would be unattainable.
6. The pertinent financial data was not presented. We are unable to compute the proper amount.
7. P&G-Phil. is not the proper party to bring up the case.

Bidin, J., concurring (as the ponente of Wander)

o The issue involved is not merely one of procedure but also one of fairness.
o To require private respondent to show documentary proof of its parent corporation having actually received the
deemed paid tax credit from the proper tax authorities, would be like putting the cart before the horse (or
circular as J. Feliciano put it).
o No statutory requirement of reciprocity imposed as a condition for grant of the reduced dividend tax rate of 15%.
(PH is a capital importingnot exportingcountry. How can we impose reciprocity?)
o The administrative rulings issued by the BIR from 1976 until as late as 1987, recognized the deemed paid credit
referred to in Section 902 of the U.S. Tax Code. To date, no contrary ruling has been issued by the BIR.

VILLARAMA, BIANCA DANICA S.

PAGE 3 OF 3

TAX CASE # 148