Commissioner of Internal Revenue v. Gestetner, Limited

EIGHTH DIVISION [CA-G.R. SP No. 23979. August 7, 1992.] (C.T.A Case No. 3549) THE COMMISSIONER OF INTERNAL REVENUE , petitioner , vs .GESTETNER, LIMITED AND THE COURT OF TAX APPEALS , respondents . D E C I S I O N JAVELLANA , J p : This is a petition for review of the decision of the Court of Tax Appeals dated 29 November 1990 in C.T.A Case No. 3549, granting the petition and ordering the withdrawal, cancellation and revocation of the assessment of P1,013,772.99 issued by petitioner against private respondent on 31 October 1981. The antecedent facts are: Private respondent is a foreign corporation organized and existing under the laws of the United Kingdom and licensed to do business in the Philippines. It was operating in the Philippines through a branch during the taxable years 1976 and 1977. An investigation of petitioner Bureau of Internal Revenue allegedly showed that the branch in the Philippines had accumulated earnings during the aforementioned taxable years which it invested in short-term investments which were not deemed to be for the reasonable needs of its business instead of remitting said earnings as profit to Gestetner Limited of London. As a result, petitioner assessed a 25% surcharge against private respondent in the amount of P1,013,772.99, pursuant to Section 25 of the National Internal Revenue Code (NIRC) of 1977, 1 which reads: "SEC. 25. Additional tax on corporations improperly accumulating profits or surplus . (a) imposition of tax . If any corporation is formed or availed of for the purpose of preventing the imposition of the tax upon its shareholders or members of another corporation, through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there is levied and assessed against such corporation, for each taxable year, a tax equaled to 25% of the undistributed portion of its accumulated profits or surplus which shall be in addition to the tax imposed by Section 24, and shall be computed, collected and paid in the same manner and subject to the same provisions of law, including penalties, as that tax. "(b) Prima facie evidence . That fact that any corporation is a mere holding company shall be prima facie evidence of a purpose to avoid the tax upon its share-holders or members. Similar presumption will lie in the case of an investment company where at any time during the taxable year more than fifty per centum in value of its outstanding stock is owned, directly or indirectly, by one person. "(c). Evidence determinative of purpose . The fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders of members unless the corporation, by clear preponderance of evidence, shall prove the country. "(d) Exception . The provisions of this section shall not apply to banks, non-bank financial intermediaries, corporations organized primarily, and authorized by the Central Bank of the Philippines to hold shares of stock of banks, insurance companies, or personal holding companies, whether domestic or foreign (As amended by PD 1739)." The issue presented for out resolution is whether or not the Honorable respondent Court of Tax Appeals was correct in sustaining private respondent's view that it is not liable for the surcharge tax under the aforequoted provision and discarding petitioner's contrary view. We uphold public respondent's ruling. A careful reading of the provision of law invoked clearly discloses that the 25% surcharge is leviable only against holding companies which allow their profits to accumulate and do not distribute them to their stockholder or members in order that the latter not be made to pay their respective taxes on said incomes or dividends. In other words, the accumulation and non-distribution of profits to stockholders and members is made for the purpose of preventing the Philippine Government from collecting the necessary taxes which would be due from the stockholders and members and members who should have received their share of the profits. However, where the recipients of the profits to be distributed are not subject to taxation by the Philippine Government, the section will not apply because the evil sought to be prevented by the law does not exist. In short, there can be no violation of the invoked provision of law if the intended distributes are not subject to tax by the Philippine Government with respect to said income. This is private respondent's posture. It maintains that its stockholders who will eventually benefit from the distribution of its profits are not taxable by the Philippine Government. This contention is not disputed by petitioner. Consequently, private respondent cannot be penalize under Section 25 of the NIRC no matter how mush profit it had accumulated and had not distributed its stockholders and members because the Philippine Government is not being deprived of any revenue thereby as it has no power to tax the income of the intended recipients of the profit. Petitioner, however, asserts that the surcharge in Section 25 of the NIRC is also imposable in cases where a branch of a foreign corporation fails to pay the tax on its profit remittance abroad, pursuant to PD No. 778, promulgated on 24 August 1975. This assertion has no merit because, as correctly pointed out by the Honorable respondent Court off Tax Appeals, it is inconceivable that Section 25 of the NIRC which first appeared in the Philippine Tax Code in 1939 could have contemplated the violation of the branch profits remittance tax which came into being only in 1975. As pointed out by the Honorable respondent Court: "When the accumulated earnings tax under Section 25 first appeared in our Tax Code in 1939 there was as yet no branch profits remittance tax being imposed since the latter is to appear only in 1975. It could not be conceived therefore that the accumulated earnings tax can be linked to the non-remittance of branch profits as respondent would have it. The accumulated earnings tax is a penalty for improper accumulation of surplus or profits (Mertens, ibid, p. 3, citing New Oakmont Corp. v. US, 86 F. Supp. 897) Such tax however, considering the time lag between it and the branch profits remittance tax, cannot be said to have been formed in anticipation of the latter, so that even with the two eventually con-existing during the taxable years in question, it cannot be ventured that this accumulated earnings tax is also a penalty for non-remittance of branch profits as the co-existence is apparently merely coincidental. We see also that following this proposition of respondent would make for a penalty preceding the tax proper. We will have an instance then, as some would put it, of a horse placed before the carriage." (pp. 40-41, Rollo). WHEREFORE, finding no reversible error, the judgment under review is hereby affirmed. No. pronouncement as to costs. SO ORDERED. Bengzon and Abad Santos Jr.,JJ .,concur. Footnotes 1. Rollo, pp. 33-34