Marubeni Corporation v. Commissioner of Internal Revenue
NEW DOCTRINEFacts
The Antecedents: Marubeni Corporation, a Japanese foreign corporation licensed to do business in the Philippines, held equity investments in Atlantic Gulf and Pacific Co. of Manila (AG&P). For the first and third quarters of 1981, AG&P declared and paid cash dividends to Marubeni Corporation's head office in Tokyo. AG&P withheld a 10% final dividend tax and a 15% branch profit remittance tax on these dividends before remitting the net amount to Marubeni's head office. The total amount of branch profit remittance tax withheld and paid by AG&P was P229,424.40. Procedural History: Marubeni Corporation, through its tax consultants, sought a ruling from the Bureau of Internal Revenue (BIR) regarding the taxability of these dividends. The BIR, citing Revenue Memorandum Circular No. 55-80, initially ruled that the dividends were not effectively connected with the Philippine branch's business and thus not subject to the 15% profit remittance tax. Consequently, Marubeni filed a claim for refund or tax credit of the P229,424.40 paid as branch profit remittance tax. The Commissioner of Internal Revenue denied this claim, asserting that while the dividends were not subject to the 15% profit remittance tax or the 10% intercorporate dividend tax, they were subject to a 25% tax under the Philippine-Japan Tax Treaty. Marubeni appealed to the Court of Tax Appeals (CTA), which affirmed the Commissioner's denial. The CTA reasoned that the dividends were income of the Japanese head office, not the Philippine branch, and thus taxable to the head office. The Petition: Marubeni Corporation filed a petition for review with the Supreme Court, arguing that as a single corporate entity engaged in business in the Philippines, it should be considered a resident foreign corporation subject only to a 10% intercorporate final tax on dividends. The Solicitor General countered that the investment and dividend receipt were independent transactions of the Japanese head office, not the Philippine branch, thus treating Marubeni Japan as a non-resident foreign corporation. The Supreme Court, however, found that while the dividends were not subject to the 15% profit remittance tax or the 10% intercorporate dividend tax, the Commissioner and CTA erred in automatically applying the 25% treaty rate and in denying any refund. The Court ruled that the applicable tax under Section 24(b)(1)(iii) of the Tax Code, in conjunction with the Tax Treaty, should be 15% of the dividends received, leading to an overpayment of P144,452.40, for which a refund was ordered.
Issue(s)
Whether the appeal was perfected within the reglementary period. Whether the dividends received by Marubeni Corporation of Japan from AG&P are subject to the 15% branch profit remittance tax. Whether the dividends received by Marubeni Corporation of Japan from AG&P are subject to the 10% intercorporate dividend tax. Whether the 25% tax rate under the Philippines-Japan Tax Treaty was correctly applied, and what the correct tax base is. Whether petitioner is entitled to a refund or tax credit for the taxes paid.
Ruling
The Supreme Court reversed the decision of the Court of Tax Appeals. The Commissioner of Internal Revenue was ordered to refund or grant as tax credit to petitioner the amount of P144,452.40, representing overpayment of taxes on dividends received.
Ratio Decidendi
On the perfection of the appeal: The Court held that the appeal was perfected within the reglementary period. The Court clarified that Batas Pambansa Blg. 129 does not apply to the Court of Tax Appeals, which was created under Republic Act No. 1125. Under Section 18 of R.A. No. 1125, a party has thirty (30) days to appeal. The petitioner filed a motion for reconsideration within the 30-day period, and the subsequent filing of the notice of appeal and petition for review after the denial of the motion for reconsideration was also within the extended period, thus perfecting the appeal. On the applicability of the 15% branch profit remittance tax: The Court affirmed the BIR's ruling that the dividends received by Marubeni Corporation of Japan from AG&P were not income arising from the business activity of Marubeni's Philippine branch. The investment in AG&P was made by Marubeni Japan's head office, and the dividends were directly remitted to it. Therefore, these dividends were not considered "branch profits" subject to the 15% profit remittance tax imposed under Section 24(b)(2) of the National Internal Revenue Code (NIRC). On the applicability of the 10% intercorporate dividend tax: The Court agreed with the public respondents that the dividends were not subject to the 10% intercorporate dividend tax because the recipient, Marubeni Corporation of Japan, was a non-resident foreign corporation, not a domestic or resident foreign corporation liable to tax under Section 24(c)(1) of the Tax Code. On the applicability of the 25% tax rate under the Tax Treaty and the correct tax base: The Court found that public respondents erred in automatically imposing the 25% rate under Article 10(2)(b) of the Tax Treaty and in simply adding the withheld taxes. The Court clarified that the 25% rate is a maximum ceiling. The applicable provision for dividends received by a non-resident foreign corporation from a domestic corporation is Section 24(b)(1)(iii) of the NIRC, which imposes a 15% tax, subject to conditions regarding tax credit in the country of domicile. This 15% rate is within the 25% maximum limit of the Tax Treaty. The Court also pointed out that the tax bases for the 10% dividend tax and the 15% profit remittance tax are different, and they cannot be simply added. The tax base for the 15% profit remittance tax is the profit actually remitted abroad, while the dividend tax is on the dividends received. On the entitlement to a refund: Based on the correct application of Section 24(b)(1)(iii) of the NIRC, the Court determined that petitioner was entitled to a refund. The total cash dividends paid were P1,699,440.00. Applying the 15% tax under Section 24(b)(1)(iii) resulted in a tax of P254,916.00. The net amount remitted was P1,300,071.60. The difference between the cash dividend net of the correct tax (P1,444,524.00) and the net amount actually remitted (P1,300,071.60) was P144,452.40, which represented the overpayment of taxes.
Main Doctrine
Dividends received by a foreign corporation from a domestic corporation, where the investment was made by the foreign corporation's head office and not through its Philippine branch, are not considered branch profits subject to the 15% profit remittance tax. Such dividends are subject to the Philippine-Japan Tax Treaty rate, which should not exceed 25%, and the applicable rate under the Tax Code for non-resident foreign corporations receiving dividends from domestic corporations, which is 15% under Section 24(b)(1)(iii), provided the conditions for the reduced rate are met.