Commissioner of Internal Revenue v. Goodyear Philippines
REITERATIONFacts
The Antecedents: Respondent Goodyear Philippines, Inc. (Goodyear PH) is a domestic corporation. Its authorized capital stock was increased, with preferred shares solely subscribed by Goodyear Tire and Rubber Company (GTRC), a foreign company. Goodyear PH authorized the redemption of GTRC's preferred shares at a redemption price comprising the aggregate par value and accrued unpaid dividends. Procedural History: Goodyear PH filed an application for relief from double taxation with the BIR, seeking confirmation that the redemption was not subject to Philippine income tax under the RP-US Tax Treaty. Despite this, Goodyear PH withheld and remitted 15% Final Withholding Tax (FWT) on the difference between the redemption price and the aggregate par value. Subsequently, Goodyear PH filed an administrative claim for refund with the BIR and, thirteen days later, a judicial claim with the Court of Tax Appeals (CTA). The CTA Division granted the refund, ruling that the redemption was not subject to Philippine income tax and the amount paid was not considered dividends subject to FWT. The CTA En Banc affirmed this ruling. The Commissioner of Internal Revenue (CIR) elevated the case to the Supreme Court. The Petition: The CIR assailed the CTA En Banc's decision, arguing that Goodyear PH failed to exhaust administrative remedies by filing the judicial claim prematurely and that the gain derived by GTRC was subject to 15% FWT on dividends.
Issue(s)
Whether the judicial claim for refund should be dismissed for non-exhaustion of administrative remedies. Whether the gain derived by GTRC from the redemption of its preferred shares is subject to 15% Final Withholding Tax (FWT) on dividends.
Ruling
The petition is denied. The Decision dated August 14, 2014 and the Resolution dated January 5, 2015 of the Court of Tax Appeals En Banc in C.T.A. EB No. 1041 are affirmed.
Ratio Decidendi
On the issue of exhaustion of administrative remedies: The Court held that the respondent correctly and timely sought judicial redress. Section 229 of the Tax Code requires that an administrative claim for refund be filed before a judicial claim can be maintained. However, it does not mandate that the taxpayer must await the final resolution of the administrative claim. The purpose of the administrative claim is to serve as a notice of warning to the Commissioner that court action will follow. To await the CIR's action could lead to the forfeiture of the taxpayer's right to seek judicial recourse if the two-year prescriptive period expires. In this case, both claims were filed within the two-year period, and the respondent filed the judicial claim to avoid losing its right to appeal as the prescriptive period was nearing its end. Therefore, the filing of the judicial claim thirteen days after the administrative claim did not violate the principle of exhaustion of administrative remedies. On the issue of the taxability of the redemption gain: The Court affirmed the CTA's ruling that the net capital gain derived by GTRC from the redemption of its preferred shares was not subject to Philippine income tax. While Section 28(B)(5)(c) of the Tax Code generally subjects capital gains of non-resident foreign corporations to tax, Article 14 of the RP-US Tax Treaty exempts gains from the alienation of property by a US resident, such as GTRC, from Philippine tax, unless the domestic corporation's assets principally consist of real property. The evidence showed that Goodyear PH's real property assets were less than 50% of its total assets, thus falling outside the exception. Furthermore, the Court held that the portion of the redemption price representing ₱97,732,314.00, which petitioner claimed as accumulated dividends in arrears, was not subject to the 15% FWT on dividends under Section 28(B)(5)(b) of the Tax Code. This is because, under Section 73(A) of the Tax Code and Section 43 of the Corporation Code, dividends can only be declared out of unrestricted retained earnings. The records showed that Goodyear PH had no unrestricted retained earnings during the relevant period and operated at a deficit. Therefore, the payment for the redemption of shares could not be considered dividends in arrears.
Main Doctrine
The redemption of preferred shares by a domestic corporation from a non-resident foreign corporation, where the assets of the domestic corporation do not principally consist of real property, is not subject to Philippine income tax. Furthermore, the portion of the redemption price representing accrued dividends is not subject to final withholding tax on dividends if there are no unrestricted retained earnings from which to declare such dividends.