Commissioner of Internal Revenue v. Unisys Australia Limited (Philippine Branch)

ELEVENTH DIVISION [CA-G.R. SP No. 45406 1 . February 28, 2006.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . UNISYS AUSTRALIA LIMITED (PHILIPPINE BRANCH) , respondent . D E C I S I O N PERLAS-BERNABE, E ., J p : Before the Court is a Petition for Review seeking to reverse and set aside the Decision 2 dated June 24, 1997 of the Court of Tax Appeals (CTA) in CTA Case No. 5151 which ordered petitioner Commissioner of Internal Revenue (hereinafter Commissioner) to refund to respondent Unisys Australia Limited (Philippine Branch) [hereinafter Unisys] the amount of P1,814,689.20 representing erroneously remitted taxes withheld on royalties from October 1, 1991 to June 30, 1993. 3 The facts are undisputed. Unisys, a foreign corporation duly licensed to do business in the Philippines, entered into an EDP Software and Technical Information License Agreement (hereinafter first agreement)concerning the use and sub-licensing of software with Unisys Corporation (hereinafter UniCorp), a non-resident foreign corporation. The first agreement which was duly registered and approved by the Bureau of Patents, Trademarks and Technology Transfer (BPTTT) on April 25, 1991, was valid for a period of five (5) years from June 1, 1990 to May 31, 1995. Under the first agreement, Unisys is obliged to pay UniCorp royalty equivalent to thirty-five percent (35%) of net sales of programs reproduced and sold. On March 15, 1993, however, this first agreement was preterminated 4 and a new agreement, viz ., EDP Software and Technical Information Renewal License Agreement (hereinafter second agreement) was forged between the parties which increased the royalty rate to fifty percent (50%) effective on such date. The second agreement was likewise registered and approved by the BPTTT. Between the period from October 1, 1991 to June 30, 1993, Unisys withheld taxes equivalent to twenty-five percent (25%) of the royalties payable to UniCorp or a total of P3,637,304.00 and remitted the same to the Bureau of Internal Revenue (BIR) between the period from July 10, 1992 to November 10, 1993. On April 22, 1993 and January 26, 1994, Unisys filed with the Commissioner written claims for refund in the amounts of P1,412,523.15 and P769,868.25, respectively, alleging that it had erroneously remitted taxes withheld on royalties paid to UniCorp for the above period at the rate of 25% when it is entitled to the 10% preferential tax rate under the "most favored nation" clause of the RP-US Tax Treaty. The claims not having been acted upon within the two-year reglementary period, it filed a petition before the CTA on September 22, 1994, docketed as CTA Case No. 5151 seeking for the refund of the amount of P2,182,391.40 representing overpaid withholding taxes on royalties as aforestated. It claimed to be entitled to the 10% preferential tax rate on royalties under the "most favored nation" provision provided for in Article 13(2)(b)(iii) of the RP-US Tax Treaty in relation to Article 12(2)(b) under the RP-West Germany Tax Treaty which latter treaty taxes royalties 5 arising in the Philippines and paid to a resident of West Germany at a rate not exceeding 10% of the gross amount of royalties. After due proceedings, the CTA rendered the assailed Decision, hence, the instant petition on the sole ground that the "CTA erred in holding that private respondent is entitled to the lower tax rate of 10% under the "most favored-nation" clause of the RP-US Tax Treaty." 6 There is a merit in the petition. Article 13 of the RP-US Tax Treaty provides: "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 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) Petitioner contends that under the above-quoted Article 13(2)(b)(iii) which is known as the "most favored nation" clause, "the lowest rate of the Philippines (sic) tax at 10% may be imposed on royalties derived by a resident of the United States from sources within the Philippines if the circumstances of the resident of the United States are similar to those of the resident of West Germany." 7 However, since the RP-US Tax Treaty contains no "matching credit" provision as the provided under Article 24 of the RP-West Germany Tax Treaty, the tax on royalties under the RP-US Tax Treaty is not "paid under similar circumstances" as those obtaining in the RP-West Germany Treaty. Hence, Unisys is not entitled to the lower tax rate of 10%. We agree . The pertinent provisions of Article 24 of the RP-West Germany Tax Treaty on "Relief from the Double Taxation" states: "1) The Tax shall be determined in the case of a resident of the Federal Republic of Germany as follows: xxx xxx xxx b) Subject to the provisions of German tax law regarding credit for foreign tax, there shall be allowed as a credit against German income and corporation tax payable in respect of the following items of income arising in the Republic of the Philippines , the tax paid under the laws of the Philippines in accordance with this Agreement on: xxx xxx xxx dd) royalties as defined in paragraph 3 of Article 12; c) For the purposes of the credit referred in subparagraph b ) the Philippine tax shall be deemed to be: xxx xxx xxx cc) in the case of royalties for which the tax is reduced to 10 or 15 percent according to paragraph 2 of Article 12, 20 percent of the gross amount of such royalties. xxx xxx xxx." On the other hand, Article 23 of the RP-US Tax Treaty 8 on "Relief from Double Taxation" which is the counterpart of the above-quoted Article 24 does not provide for similar crediting of 20% of the gross amount of royalties paid. Consequently, since the RP-US Tax Treaty and the RP-West Germany Tax Treaty do not contain similar provisions on tax crediting, Unisys cannot invoke the "most favored nation" clause of the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty to justify entitlement to the 10% rate as "there is no payment of taxes on royalties under similar circumstances," 9 as required under Article 13(2)(b)(iii) thereof. The interpretation of the afore-quoted Article 13(2)(b)(iii) had already been passed upon by the Supreme Court in the case of Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc ., 10 which is on all fours with the instant case. The Supreme Court ruled therein that bilateral tax treaties have been entered into by the Philippines with different countries for the purpose of avoiding double taxation, thus, "(i)n negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will give up a part of the tax in the expectation that the tax given up for this particular investment is not taxed by the other country." It further enunciated that: "The purpose of a most favored nation clause is to grant to the contracting party treatment not less favorable than that which has been or may be granted to the "most favored" among other countries. The most favored nation clause is intended to establish the principle of equality of international treatment by providing that the citizens or subjects of the contracting nations may enjoy the privileges accorded by either party to those of the most favored nation. The essence of the principle is to allow the taxpayer in one state to avail of more liberal provisions granted in another tax treaty to which the country of residence of such taxpayer is also a party provided that the subject matter of taxation, in this case, royalty income, is the same as that in the tax treaty under which the taxpayer is liable. Both Article 13 of the RP-US Tax Treaty and Article 12 (2) (b) of the RP-West Germany Tax Treaty, above-quoted, speaks of tax on royalties for the use of trademark, patent and technology. The entitlement of the 10% rate by U.S. firms despite the absence of a matching credit (20% for royalties) would derogate from the design behind the most favored nation clause to grant equality of international treatment since the tax burden laid upon the income of the investor is not the same in the two countries. The similarity in the circumstances of payment of taxes is a condition for the enjoyment of most favored nation treatment precisely to underscore the need for equality of treatment ." Moreover, the general rule is that claimants of tax refunds, being in the nature of tax exemptions, bear the burden of proving the factual basis of their claims. 11 As such, statutes that allow exemptions are construed strictly against the grantee and liberally in favor of the government. 12 It thus behooved upon Unisys to prove that the RP-US Tax Treaty grants similar tax reliefs to residents of the United States in respect of the taxes imposable upon royalties earned from the Philippines as those allowed to their German counterparts under the RP-West Germany Tax Treaty. There is nothing on record to support such claim. That the S.C. Johnson case , even if applicable, should only be given prospective application 13 deserves scant consideration. As a rule, judicial decisions applying or interpreting the laws or the Constitution form part of the legal system of the Philippines. 14 The legal maxim " stare decisis et non quieta movere " (follow past precedents and do not disturb what has been settled) states that where the same questions relating to the same event have been put forward by parties similarly situated as in a previous case litigated and decided by a competent court, the rule of stare decisis is a bar to any attempt to relitigate the same issue. 15 "It requires our courts to follow a rule already established in a final decision of the Supreme Court. That decision becomes a judicial precedent to be followed in subsequent cases by all courts in the land. The doctrine of stare decisis is based on the principle that once a question of law has been examined and decided, it should be deemed settled and closed to further argument." 16 In the instant case, the cause of action, the issue and the applicable law are essentially the same as that decided in the S.C. Johnson case . Hence, the issue has been settled and the Supreme Court's final decision in the said case must be respected. This Court's hands are now tied by the finality of the said judgment. WHEREFORE, premises considered, the instant petition is hereby GRANTED. The assailed Decision dated June 24, 1997 of the CTA is SET ASIDE and CTA Case No. 5151 is DISMISSED. SO ORDERED. Salazar-Fernando and Abdulwahid, JJ., concur. Footnotes 1. Part of the initial caseload assigned to the Ponente pursuant to Office Order No. 16-05-RB dated February 17, 2005. 2. Rollo , pp. 23-24. 3. Id . at 33. 4. Via the Agreement to Pre-terminate the EDP Software and Technical Information License Agreement. 5. 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. 6. Rollo , p. 13. 7. Id . at 14. 8. Double taxation of income shall be avoided in the following manner: 1) In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle thereof), the United States shall allow to a citizen or resident of the United States as a credit against the United States tax the appropriate amount of taxes paid or accrued to the Philippines and, in the case of a United States corporation owning at least 10 percent of the voting stock of a Philippine corporation from which it receives dividends in any taxable year, shall allow credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine corporation paying such dividends with respect to the profits out of which such dividends are paid. Such appropriate amount shall be based upon the amount of tax paid or accrued to the Philippines, but the credit shall not exceed the limitations (for the purpose of the limiting the credit to the United States tax on income from sources within the Philippines or on income from sources from the Philippines. . . . " 9. Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc ., G.R. No. 127105, 25 June 1999 (309 SCRA 87). 10. G.R. No. 127105, 25 June 1999 (309 SCRA 87). 11. Commissioner of Internal Revenue vs. Seagate Technology , G.R. No. 153866, 11 February 2005. 12. Davao Gulf Lumber Corp. vs. Commissioner of Internal Revenue , G.R. No. 117359, 23 July 23, 1998 (293 SCRA 76, 77). 13. Memorandum for Respondent, Rollo , pp. 115-119. 14. Article 8, Civil Code. 15. Office of the Ombudsman vs. Court of Appeals , G.R. No. 146486, 04 March 2005. 16. Amelia D. de Mesa, et al. vs. Pepsi Cola Products Phils. Inc., et al ., G.R. Nos. 153063-70, 19 August 2005.