Commissioner of Internal Revenue v. Philippine Tire & Rubber Corp.

SIXTH DIVISION [CA-G.R. SP No. 42300. April 11, 1997.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . PHILIPPINE TIRE & RUBBER CORPORATION , respondent . D E C I S I O N MARTINEZ , A.M. , J p : In this petition for review, petitioner Commissioner of Internal Revenue assails the decision of the Court of Tax Appeals in CTA Case No. 5117, entitled "Philtread Tire & Rubber Corporation, Petitioner vs. Commissioner of Internal Revenue, Respondent", ordering a tax credit in favor of the private respondent Philippine Tire and Rubber Corporation in the amount of P8,071,496.00 representing overpaid withholding taxes for the period July 1992 to December 1993. aisadc The facts giving rise to this petition is summarized by the Court of Tax Appeals as follows: "Petitioner, a domestic corporation organized and operating under Philippine laws, entered into a Trademark License Agreement and Technical Service Agreement with Firestone Tire and Rubber Company (Firestone), a non-resident foreign corporation, based, organized and existing under the laws of the United States of America pursuant to which the petitioner was granted the right to use and exploit various Firestone trademarks and the right to take advantage of Firestone's technology in the manufacture of tires and rubber products utilizing Firestone's patents and technical know-how. Said trademark License Agreement and Technical Service Agreement and their amendments were registered with the Bureau of Patents, Trademarks and Technology Transfer of the Department of Trade and Industry. (Exhibits C and F). lexlib Prior to July 1992, Petitioner withheld and remitted to the Bureau of Internal Revenue ten percent (10%) of the royalty payments it had remitted to Firestone in accordance with Article 13, paragraph 2(b)(iii) of the RP-US Treaty in relation to Article 12, paragraph 2(b) of the RP-West Germany Treaty. However, on July 1, 1992, the BIR issued Revenue Memorandum Circular No. 39-92 (RMC No. 39-92) where it held that the applicable withholding tax rate on royalty payments under the RP-US Tax treaty should be twenty-five percent (25%). To forestall assessment of deficiency taxes by the BIR, the petitioner, for the period of July 1992 to December 1993, applied the twenty-five percent (25%) tax rate on its royalty payments to Firestone, amounting to P13,452,495 [Exhibits, "G" to "W"]. Petitioner, however, maintains that the correct and applicable withholding tax rate is 10% in accordance with the RP-US Tax Treaty. Thus, Petitioner, in a letter dated, April 11, 1994, filed with the Bureau of Internal Revenue a claim for tax refund or tax credit in the amount of P8,071,496 [Exhibit "Y"] representing the difference between the total withholding taxes actually remitted to the BIR for the months of July 1992 to December 1993 (P13,452,495) and the tax that should have been withheld and remitted which is P5,380,999 using the correct tax rate of ten percent (10%) [Exhibit "X"]." Petitioner did not act on said claim for refund. Hence, respondent filed a petition for review before the Court of Tax Appeals (CTA for brevity) to judicially claim a refund or credit of the overpaid income taxes withheld at source on royalties it paid to Firestone Tire and Rubber Company from July 1992 to December 1993 amounting to P8,071,496.00. Respondent claims that pursuant to Article 13 (2) (b) (iii) of the RP-US Tax Treaty, the royalties are only subject to the preferential tax rate of 10% but petitioner erroneously applied a 25% tax rate. In her answer, the petitioner, through the Solicitor General, alleged inter alia : that the petition is premature because the claim for refund of petitioner is still pending investigation and consideration by the BIR and no decision has yet been rendered which could be elevated for review to the respondent court; that the petition does not clearly state a cause of action as it failed to allege with particularity the dates when the taxes sought to be refunded were actually paid; that the action is not being prosecuted in the name of the real party in interest considering that the party entitled to claim for refund on the amount withheld as tax is the recipient or the royalties, that is, Firestone Tire and Rubber Company of the USA and not petitioner; that the total amount withheld as tax on royalties is no longer refundable after it was collected and paid in accordance with law and pertinent BIR implementing rules and regulations; that the RP-West Germany Tax Treaty is not applicable but the RP-US Tax Treaty which imposes a 25% tax on the gross amount of royalties as provided in Article 13 (2) (a) (i) thereof; that the "most favored nation" of the RP-US Tax Treaty which was applied in the case of IBM Phil., Inc. vs. CIR can no longer be invoked by petitioner after the passage of Revenue Memorandum Circular No. 39-92 on July 1, 1992 which revoked the availment of the benefits under it; and that claims for refund are construed strictly against the claimant, the same being in the nature of an exemption from taxes. cdt On 12 September 1996 the Court of Tax Appeals rendered a decision, the dispositive portion of which reads: "WHEREFORE, in view of all the foregoing, Respondent is hereby ordered to issue a tax credit certificate in the amount of P8,071,496.00 representing overpaid withholding taxes for the period July 1992 to December 1993." Aggrieved by the said decision, petitioner instituted this present petition arguing that the cases cited by the respondent court, i . e . General Electric Philippines Meter and Instrument Co., Inc., vs. Commissioner of Internal Revenue, CTA Case No. 4158, December 5, 1991 and IBM Philippines Inc. vs. Commissioner of Internal Revenue, CTA Case No. 4308, March 31, 1993, where the most favored nation clause" doctrine was applied is not applicable to the case at bar since in the General Electric case, the claim for refund covered taxable years 1984 and 1985 while the IBM case covered taxable years 1986, 1987 and 1988. The taxable year involved in the instant petition covers the period of July 1992 to December 1993 and as provided for in Revenue Memorandum Circular No. 39-92, rulings previously issued by the BIR allowing the availment of the benefits of the "most favored nation" clause on payments of royalties to recipients/residents of United States are revoked effective January 21, 1992. Petitioner further asserts that the respondent court failed to touch the applicability of Revenue Memorandum No. 39-92 which was issued pursuant to the power of the Commissioner of Internal Revenue to make rulings or opinions in connection with the implementation of the provisions of internal revenue laws statutorily recognized under Section 245 of the Tax Code. cdta Article 13 of the RP-US Tax Treaty provides that: Article 13 (1) Royalties derived by a resident of one of the Contracting States from sources within the Other Contracting State may be taxed by both Contracting States. (2) However, the tax imposed by that other Contracting State shall not exceed (a) In the case of the United States, 15 percent of the gross amount of the royalties; and (b) In the case of the Philippines, the least of: (i) 25 percent of the gross amount of the royalties; (ii) 15 percent of the gross amount of the royalties where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities; and (iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a Third State ." (Emphasis Ours) It is clear from the foregoing provision that residents of the US granted preferential treatment by allowing them to pay a tax rate lower than the usual rates imposed on royalties derived from sources within the Philippines if a similar lower rate is granted by Philippine taxing authorities to a resident of another state by virtue of a tax treaty. On 1 January 1985, the RP-West Germany Tax Treaty took effect. Article 12(2)(b) of the said treaty imposes a lower tax rate of 10% on the gross amount of royalties derived from sources within the Philippines. The said provision in part provides as follows: cd "2. . . ., such royalties may also be taxed in the Contracting State in which they arise and according to the law of that state, but the tax so charged shall not exceeds: xxx xxx xxx (b) 10% of the gross amount of royalties arising from the use of, or the right to use, any patent, trademark, design or model plan, secret formula or process, or from the use of, or the right to use, industrial, commercial, or scientific equipment or for information concerning industrial, commercial or scientific experience. For as long as the transfer of technology, under Philippine law, is subject to approval, the limitation of tax rate mentioned under (b) shall, in case of royalties arising in the Republic of the Philippines, only apply if the contract giving rise to such royalties had been approved by the Philippine competent authorities." The royalties paid by respondent to its foreign licensor, are paid under similar circumstances specified in Art. 12(2)(b) of the RP-West Germany Tax Treaty. The royalty payments to Firestone involves the use of or right to use various Firestone trademarks, technical know-how, and technology which are covered by the type of agreements enumerated in the aforesaid treaty. The Trademark License Agreement and Technical Service Agreement between the respondent and Firestone, were duly registered and approved by the Technology Transfer Board of the Department of Trade and Industry. Having complied therefore with the requirements under the two treaty, We find no reason why respondent should not be entitled to the preferential rate of ten percent (10%) on royalty remittances in accordance with the " most favored nation clause " of the RP-US Tax Treaty. It is important to stress that the applicability of the said clause has already been settled in the cases of General Electric Philippines Meter and Instrument Co., Inc. vs. Commissioner of Internal Revenue, CTA Case No. 4158, 5 December 1991 and reiterated in IBM Phil., Inc. vs. The Commissioner of Internal Revenue, CTA Case No. 4308, 31 March 1993, where the CTA ruled: "On the second issue, whether or not petitioner should be taxed at the reduced rate of 10% withholding tax on royalties in accordance with Article 12 (2) (b) of the RP-West Germany Tax Treaty and not 25% withholding tax on royalties under Article 13 (2) (b) (iii) of the RP-US Tax Treaty. This Court is of the persuasion that petitioner's stand is correct and concurs with the opinion rendered by then Commissioner of Internal Revenue, Bienvenido Tan, (BIR Ruling No . 456-88, supra . , that under the most favored nation provision of the RP-US Tax Treaty (Article 13 paragraph 2 (b) (iii), the tax imposable on royalties derived by a resident of the United States from sources within the Philippines shall be the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third state . Article 12, paragraph 2 (b) of the RP-West Germany Tax Treaty, provides that royalties arising in the Philippines and paid to a resident of West Germany may also be taxed in the Philippines, but the tax so charged shall not exceed 10% of the gross amount of royalties . Said treaty also provides that for as long as the transfer of technology under Philippine law, is subject to approval, the limitation of the tax rate in case of royalties arising in the Philippines, apply if the contract giving rise to such royalties has been approved by Philippine competent authorities . cd Thus, inasmuch as the Agreement between World Trade and IBM Phil. as well as the Agreement between IBM and IBM Phil. had been approved by the Central Bank of the Philippines, royalties arising in the Philippines and payable to World Trade as well as to IBM by IBM Phils. should be taxed at the rate of 10% because said rate is indicated in the RP-West Germany Tax Treaty and pursuant to Article 13, paragraph 2 (b) (iii), of the RP-US Tax Treaty." Petitioner contends that the said cases are not applicable to the case at bar because the "most favored nation" clause on payments of royalties to recipients/residents of the United States has been revoked on 1 January 1992 pursuant to RMC No. 39-92, which provides in part: ". . . Accordingly, a resident of a third State (in particular IBM case, the United States) is not entitled to the "most favored nation" tax rate of 10% on royalty income derived from the Philippines because the payment of such tax is not under similar circumstances since there is a matching credit in Germany (20% for royalties), while there is no such similar credit granted by the United States ." The phrase "under similar circumstances" referred to Article 13(2)(iii) of the RP-US Tax Treaty, was interpreted by the Court of Tax Appeals in its resolution of the petitioner's motion for reconsideration in the case of IBM Phil., Inc. vs. Commissioner of Internal Revenue, supra : "To settle once and for all the legal issue involved in this case, this Court deems it wise to decide on the proper interpretation of the phrase 'paid under similar circumstances'. Does this phrase refer to the tax paid as claimed by respondent or does it refer to royalties paid as advanced by petitioner? A cursory perusal of the provision makes this Court to agree with the petitioner's interpretation. The phrase 'paid under similar circumstances' is followed by the phrase 'to a resident of a third state." It is clear that what is paid to a resident of a third state is royalty and not tax. aisadc Petitioner succinctly put in its "Opposition to Motion for Reconsideration that: Respondent is in effect amending the provision of the R.P.-U.S. tax treaty. Article 13(2)(b)(ii) speaks of ' royalties of the same kind paid under similar circumstances to a resident of a third state'. Nowhere does it speak of, whether express or implied, of tax paid under similar circumstances. Respondent is reading into the R.P.-U.S. tax treaty something that is clearly not there. The requirement of 'similar circumstances' is in relation to the payment of royalty , not payment of the tax. Thus, for instance, the royalty in question paid to a U.S. resident by petitioner (which is neither BOI registered enterprises nor engaged in a preferred pioneer activity) is not paid under similar circumstances as a royalty paid to an Australian resident by a Philippine company that is BOI-registered and engaged in a preferred pioneer activity. Also, a royalty paid to a resident of Denmark or Sweden in respect of motion picture films and tapes is not paid under similar circumstances as the royalty herein paid by petitioner to its U.S. licensors. Clearly the phrase 'similar circumstances' is used in reference to the payment of the royalty, and not in reference to the payment of Tax." (Opposition, CTA Records, pp. 363-364). The royalties paid, as correctly pointed out by respondent, are paid under similar circumstances specified in Article 12 (2) (b) of the RP-West Germany Tax Treaty. The royalty payments to Firestone, as earlier stated, involves the use of or right to use various trademarks as evidenced by the Trademark License Agreement where respondent and Firestone agreed: "xxx xxx xxx 1.2 Firestone hereby grants to Licensee the right to use: 1.2.1. for the term of this Agreement Trademarks in relation to all Products covered by the existing or eventual registration thereof, but only so long as such Products are manufactured and sold in the Territory and only in relation to such Products and not other products. 2. Use of Trademarks License shall actually use Trademarks and identify Products with one or more Trademarks in accordance with the laws of the Territory relating to the marking of goods for the purpose of giving adequate trademark notice. At Firestone's request, Licensee shall furnish to Firestone without cost copies of all labels and signs, as well as advertising and promotional literature using trademarks." (Exh. "A", pp. 100-101, Records). cdt The agreement between respondent and Firestone also involves the use of various Firestone technical know-how and technology, which are, to repeat, the types of agreement enumerated in the RP-West Germany Tax Treaty. Thus, the Technical Services Agreement provides, viz : "WHEREAS, Firestone is engaged in an extensive, continuing program of research and development for the design, construction and manufacture of tire and rubber products, and has the right, title and proprietary interest in certain patents and know-how; and WHEREAS, Licensee desired to be able to take advantage of the continuous updating of Firestone's technology and to be licensed by Firestone under certain of its patents and know-how, and to exploit the same in the manufacture in the Philippines and the use and sale of certain products. xxx xxx xxx 1.2 License Firestone hereby grants to Licensee an exclusive, nontransferable license (without the right to sublicense) under Patents and Know-how to manufacture Products in the Territory and a nonexclusive, nontransferable license (without right to sublicense) to use and sell Products. 1.3 Supply of Licensed Technology Firestone shall supply Licensee with all information and technology, including Patents and Know-how, reasonably necessary for the production by Licensee of Products on a commercial scale. 2. Quality Control Firestone shall station at the facilities of Licensee one qualified technician (hereinafter referred to as "Coordinator") to give technical assistance in the application of the Patents and know-how and to assist Licensee in controlling the quality of Products." The aforesaid agreements are also registered with and duly approved by the Bureau of Patents, Trademark and Technology Transfer (Exh. "C", p. 134, Records) in compliance with the registration requirements of the said treaty. cd From the foregoing, there is no doubt that the royalties are paid by the respondent under the "similar circumstances" referred to in the RP-US Tax Treaty. It is important to point here that on 8 March 1995, petitioner issued BIR Ruling No. 52-95 revoking the very RMC-39-92 it used as a basis for denying respondent's claim for refund. In said ruling, the BIR said that royalties paid to an American licensor was subject only to 10% withholding tax pursuant to Article 13(2)(iii) of the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty following the ruling in the case of IBM Phil., Inc. vs. CIR, supra : "Based on the foregoing representations, you are now requesting for a ruling that your company be similarly allowed to avail of the benefits in Art. 13(2)(iii) of the RP-US Tax Treaty for the royalties payable to your US franchisor, Guess?, Inc. (U.S.A.), by applying the 10% tax rate. In reply, please be informed that your request is hereby granted. Under the most favored nation provision of the RP-US Tax Treaty, [Article 13, paragraph 2 (b) (iii)] the tax imposable on royalties derived by a resident of the United States from sources within the Philippines shall be the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third state . Article 12, paragraph (2) (b) of the RP-West Germany Tax Treaty, effective January 1, 1995, provides that royalties arising in the Philippines and paid to a resident of West Germany may also be taxed in the Philippines, but the tax so charged shall not exceed 10% of the gross amount of royalties arising form the use of; or the right to use any patent, trademark, design or model, plan, secret formula, or process, or from the use of, or the right to use industrial, commercial or scientific experience. The said treaty also provides that "for as long as the transfer of technology under Philippine law; is subject to approval, the limitation of the tax rate mentioned under (b) shall, in the case of royalties arising in the Republic of the Philippines, only apply if the contract giving rise to such royalties have been approved by the Philippine competent authorities. Such being the case, and inasmuch as the licensing agreement between you and Guess?, Inc. (USA) has been approved by the Transfer Technology Board of the Department of Trade and Industry, royalties arising in the Philippines tax at the rate of 10% because this rate appears in the RP-West Germany Tax Treaty and pursuant to Article 13, paragraph 2(b)(iii) of the RP-US Tax Treaty. The said tax shall be withheld and paid in the same manner and subject to the same conditions so provided in Section 50(a) of the Tax Code, as amended. (BIR Ruling No. 359087 dated November 13, 1987) cdta This ruling revokes BIR Ruling No. 003-93 dated January 14, 1993 in view of the Decision of the Court of Tax in the case of IBM Philippines, Inc . vs . Commissioner of Internal Revenue, CTA Case No . 4308 dated July 21, 1993 .)" We don not see any reason why said ruling cannot be applied to the case at bench especially so when the BIR recognizes the settled doctrine enunciated in the IBM case. Petitioner cannot revoke the "most favored nation" clause in one instance and apply the same in another. This is in violation of the equal protection clause of the Constitution. WHEREFORE, the petition is DENIED, the decision of the Court of Tax Appeals is hereby AFFIRMED in toto . SO ORDERED. Tayao-Jaguros and Brawner, JJ . , concur.