Commissioner of Internal Revenue v. Warner Lambert Phils., Inc.

NINTH DIVISION [CA-G.R. SP No. 45691. January 15, 1998.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . WARNER LAMBERT PHILS., INC., ET AL. , respondents . D E C I S I O N COSICO , J p : This is a Petition for Review filed by the Commissioner of Internal Revenue, seeking the reversal of the Decision dated August 25, 1997, and Resolution dated October 3, 1997 of the Court of Tax Appeals disposing of consolidated cases CTA Case No. 5163 and CTA Case No. 5169 in favor of the private respondent. The following facts are undisputed. Private respondent Warner Lambert Philippines, Inc. (Warner Lambert, Phils.) is the licensee of Parke Davis & Company, U.S.A. (Parke Davis) and Warner Lambert Company, U.S.A. (Warner Lambert, U.S.A.) under separate Licensing and Technical Assistance Agreements (LTAAs), duly approved by the Bureau of Patents, Trademarks and Technology Transfer (BPTTT) of the Department of Trade and Industry. Under such LTAAs, private respondent is obligated to remit to Parke Davis and Warner Lambert U.S.A. royalties ranging from 1% to 3% of the net sales of the various products licensed to the private respondent. From the remittance of such royalties, Warner Lambert, Phils. regularly withholds and pays to the Bureau of Internal Revenue (BIR) final taxes at a rate of 10%. On October 30, 1992, pursuant to Revenue Memorandum Circular No. 39-92, the respondent withheld and paid to the Bureau of Internal Revenue additional 15% withholding tax on the royalties paid to Parke Davis and Warner Lambert U.S.A. amounting to P1,668,039.00 for rights granted by the licensor companies over the period from January to September, 1992. On December 22, 1992, private respondent, through counsel, filed a written claim for refund or tax credit with the BIR for the alleged overpaid or erroneously remitted taxes withheld on royalties in excess of 10% corresponding to the additional 15% tax amounting to P1,668,039.00. Private respondent, meanwhile, continued to withhold 25% tax on the royalties paid to Parke Davis and Warner Lambert, U.S.A. For the period of October, 1992 to July, 1993, Warner Lambert, Phils. remitted the total amount of P3,770,685.00. On November 22, 1993, private respondent filed another claim for refund or tax credit with the BIR for the overpaid taxes amounting to P2,262,411.00 for the period covering October, 1992 to July, 1993. There being no responsive action on the part of the Commissioner of the BIR upon the claims for the refund or tax credit, private respondent filed with the Court of Tax Appeals (CTA), separate petitions for review; on October 24, 1994 (CTA Case No. 5163 for P1,688,039.00), and on November 3, 1994 (CTA Case No. 5169 for P2,262,411.00). Upon order of the Tax Court, the two petitions were consolidated. In its Decision dated August 25, 1997 the CTA found that Warner Lambert, Phils. had overpaid the tax on the royalties remitted to Parke Davis and Warner Lambert, U.S.A., and is, therefore, entitled to a refund of the amount paid in excess of the 10% rate of taxes. The dispositive portion of the CTA's decision reads: "WHEREFORE, in view of all the following, respondent is hereby ordered to refund to petitioner the aggregate amount of P3,930,450.00, representing overpaid taxes withheld on royalties from January 21, 1992 to July 1993. SO ORDERED." The Commissioner of Internal Revenue filed a motion for reconsideration of the said decision with the CTA on August 25, 1997, but the same was denied by the Tax Court in its October 3, 1977 Resolution, stating: "WHEREFORE, we find no merit in the argument of the respondent counsel insisting on the application of RMC No. 39-92 and hereby, dismissed the instant motion for reconsideration. SO ORDERED." The Commissioner of Internal Revenue is now before us on a Petition for Review, assailing the August 25, 1997 and October 3, 1997 issuances of the CTA granting the request for tax refund/tax credit of Warner Lambert, Phils. According to the petitioner, Warner Lambert, Phils. is obligated to withhold and pay royalty taxes at the rate of 25% of the amount of royalties remitted to Parke Davis and Warner Lambert, U.S.A. This is pursuant to Revenue Memorandum Circular No. 39-92 issued on July 1, 1992 by the BIR, setting the guidelines for the implementation of the "most favored nation" clause provided in Article 13, 2 (b) (iii) of the RP-US Tax Treaty. Petitioner recounts that the payment of 10% tax on royalties paid to U.S. residents, as advanced by the private respondent, based on Article 13, Paragraph 2 (b) (iii) of the RP-US Tax Treaty, in relation to Article 12 of the RP-West Germany Tax Treaty, has been allowed on the basis of BIR Ruling No. 456-88 dated September 16, 1988. However, the said BIR Ruling has been revoked by Revenue Memorandum Circular No. 39-92 dated July 1, 1992. The revocation of the privilege of paying just 10% tax on royalties is brought about by the allowance by Germany of a 20% credit for royalties derived from sources within the Philippines. The U.S. does not allow such credit. The payment of royalties to Germany is, thus, not under similar circumstances to the payment of royalties to the U.S. Under Article 13 (2) (b) (iii), the payment of the lowest rate of tax is allowable only if royalties are being paid under similar circumstances. In this case, the circumstances are dissimilar. Hence, the privilege under Article 13 (2) (b) (iii) cannot be availed of. In its Comment filed on December 11, 1997, respondent advocates the effectivity of the 10% tax rate prescribed by Article 13 (2) (b) (iii) of the RP-US Tax Treaty, or the "most favored nation" clause, in relation to Article 12 (2) (b) of the R.P.-West Germany Tax Treaty, both of which are hereby reproduced: RP-US TAX TREATY, 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 case of the United States, 15 percent of the gross amount of the royalties, and (b) In 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) RP-WEST GERMANY TAX TREATY, Article 12 (1) . . . (2) However, such royalties may also be taxed in the contracting State in which they arise, and according to the law of the State, but the tax so charged shall not exceed; (a) 15 percent of the gross amount of royalties arising from the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films or tapes for television or broadcasting or (b) 10 percent 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 equipment . (Emphasis Ours) Respondent cites rulings of the Court of Appeals (CIR v. S.C. Johnson, Inc., CA-G.R. SP No. 40802 [1996]) and the BIR (BIR Ruling No. 28 (b) (6) 000-003-96 [1996], BIR Ruling No. 35 (a) (4) 087-88-53-97 [1997], subsequent to the issuance of Revenue Memorandum Circular No. 39-92. These rulings had allegedly abandoned the imposition of 25% tax on royalties remitted to residents of the U.S., in favor of the 10% rate embodied in the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty. Considering that Revenue Memorandum Circular No. 39-92 was issued in implementation of the state policy on tax rates for royalties paid to residents of the U.S., resort to the provisions of the pertinent tax treaties is required. A reading of Section 13 (2) (b) (iii) of the RP-US Treaty reveals that the requirement of "similar circumstances" is in relation to the payment of royalty, not payment of the tax. Stated differently, the tax rate payable upon royalties remitted by Philippine residents to their American licensors shall be the same as that imposed upon royalties that are the same kind, and paid under similar circumstances to licensors resident of a third State, provided that such rate is less than that provided under (i) and (ii) of Article 13 (2) (b) of the RP-US Tax Treaty. LLpr We quote with approval, the submission of the private respondent in its comment, relying on this Court's pronouncement in the S.C. Johnson case: "The BIR Commissioner's interpretation of Article 13 (2) (b) (iii) of the RP-US Tax Treaty, supra, which is the principal basis of her position in the issue at bench is incorrect. The phrase "paid under similar circumstances" is followed by the phrase "to a resident of a third state." Since what is paid to a resident of a third state is not a tax but a royalty, logic instructs that said provision of the treaty refers to royalties of the same kind paid under similar circumstances to a resident of a third state. Verba accipiendo aunt secundum materiar. Words are to be understood in the context in which they are used. Article 13, paragraph 2 (b) (iii) has nothing to do with the payment of taxes under similar circumstances." The royalties arising within the Philippines and remitted to Parke Davis and Warner Lambert, U.S.A. are subject only to the 10% final tax, the said rate being the lowest Philippine tax imposed on royalties of the same kind paid under similar circumstances to a resident of a third state, i.e., Germany. This is as it should be, in view of the principle that administrative issuances must not override but must remain consistent and in harmony with the law they seek to apply and implement (Commissioner of Internal Revenue v. Court of Appeals, 240 SCRA 368 [1995]). For the purpose of taxation, Section 13, (2) (b) (iii) of the RP-US Tax Treaty in relation to Article 12 (2) (b) of the RP-West Germany Tax Treaty is the embodiment of the policy of the State with regard to taxation of royalties remitted from within the Philippines to residents of the U.S.A., and the BIR, as the executive and implementing arm of the national government, has no authority to vary the tenor of such policy. Moreover, on March 8, 1995, the BIR issued a ruling (BIR Ruling No. 28 (b) (6) 000-00-052-95 [1995]) stating that: "Under the most favored nation clause 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, 1985, 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 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 experience. The said treaty also provides that "for as long as the transfer of technology under Philippine law, is subject to the 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 and payable to Guess?, Inc. (USA) by your company are subject to Philippine 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 as provided in Section 50 (b) of the Tax Code, as amended, (BIR Ruling No. 359-87 dated November 13, 1987). "This ruling revokes BIR Ruling No. 002-93 dated January 14, 1993 in view of the Decision of the Court of Tax Appeals in the case of IBM Philippines, Inc. v. Commissioner of Internal Revenue, CTA Case No. 4305 dated July 21, 1993." Consistency in law is one of the cornerstones of judicial stability. The uniform implementation of tax laws and tax rates is, therefore, indispensable for the continued feasible maintenance of government, under the time honored requirement of equal protection of laws. The BIR is therefore well-advised to apply the tax rates and policies regularly such that no injustice is meted upon the country's, as well as non-resident, taxpayers. WHEREFORE, premises considered, the instant petition for review is hereby DISMISSED. The decision and resolution of the Court of Tax Appeals dated August 25, 1997 and October 3, 1997, respectively, are hereby AFFIRMED in toto. LLjur SO ORDERED. Montoya and Vidallon-Magtolis, JJ . , concur.