Prospective Application of Doctrine in "CIR vs. S.C. Johnson & Son" Anent Most Favored Nation Clause

October 20, 1999 BIR RULING NO. 163-99 163-99 Department of the Treasury Internal Revenue Service 950 L'Enfant Plaza South, S.W. Washington, DC 20024 Attention: Mr . John T . Lyons Gentlemen : This refers to your letter dated September 23, 1999 requesting that the doctrine laid down by the Supreme Court in the case of Commissioner of Internal Revenue vs. S.C. Johnson & Son, Inc. and Court of Appeals, G.R. No. 127105 promulgated on June 25, 1999 be given prospective application. It appears that in the above-mentioned case, the Court ruled "xxx xxx xxx "We accordingly agree with petitioner that since RP-US Tax Treaty does not give a matching tax credit of 20 percent for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty, private respondent cannot be deemed entitled to the 10 percent tax rate granted under the latter treaty for the reason that there is no payment of taxes on royalties under similar circumstances. "It bears stress that tax refunds are in the nature of the exemptions. As such they are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming tax exemption. The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic or statute law. Private respondent is claiming for a refund of the alleged overpayment of tax on royalties; however, there is nothing on record to support a claim that on the tax on royalties under RP-US Tax Treaty is paid under similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty. LibLex "WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision dated May 7, 1996 of the Court of Tax Appeals and the decision dated November 7, 1996 of the Court of Appeals are hereby SET ASIDE. "SO ORDERED." and that you believe that the ordinary implementation of this decision will cause considerable hardship to the U.S. recipients which it impacts. In reply, please be informed that Article 8 of the Civil Code of the Philippines provides "Art. 8. Judicial decisions applying or interpreting the laws or the Constitution shall form a part of the legal system of the Philippines." It is clear that judicial decisions, though not laws, are evidence, however, of what the laws mean, and this is the reason why they are part of the legal system of the Philippines. It becomes a part of the law as of the date that was originally passed since the court's application or interpretation merely establishes the contemporaneous legislative intent that the construed law purports to carry into effect. However, a reversal of that interpretation cannot be given retroactive effect to the prejudice of parties who had relied on the first interpretation. Thus, in the case of People vs. Jabinal No. L-30061 dated February 7, 1974, the Court ruled that "xxx xxx xxx "Decisions of this Court, although in themselves not laws, are nevertheless evidence of what the laws mean, and this is the reason why under Article 8 of the New Civil Code, "Judicial decisions applying or interpreting the laws or the Constitution shall form a part of the legal system . . ." The interpretation upon a law by this Court constitutes, in a way, a part of the law as of the date that law was originally passed, since this Court's construction merely establishes the contemporaneous legislative intent that the law thus construed intends to effectuate. The settled rule supported by numerous authorities is a restatement of the legal maxim " legis interpretatio legis vim obtinet " the interpretation placed upon the written law by a competent court has the force of law. . . ., but when a doctrine of this Court is overruled and a different view is adopted, the new doctrine should be applied prospectively, and should not apply to parties who had relied on the old doctrine and acted on the faith thereof. . . ." Based on the foregoing, this Office is of the opinion and so holds that the doctrine laid down by the Supreme Court in the case of Commissioner of Internal Revenue vs. S.C. Johnson & Son, Inc. and Court of Appeals, G.R No. 127105 promulgated on June 25, 1999, anent the most favored nation clause, under Article 13(2)(b)(iii) of the RP-US Tax-Treaty would not entitle U.S. recipients of royalty income to the lower rate of tax enjoyed by German recipients under the RP-West Germany Tax Treaty, should be applied prospectively. cdlex Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue