COMMISSIONER

OF
INTERNAL
REVENUE, petitioner, vs. PROCTER &
GAMBLE
PHILIPPINE
MANUFACTURING
CORPORATION
&
THE
COURT
OF
TAX
APPEALS, respondents.
Facts:
Procter and Gamble Philippine Manufacturing Corporation, a corporation duly
organized and existing under and by virtue of the Philippine laws, is engaged in business in
the Philippines and is a wholly owned subsidiary of Procter and Gamble, U.S.A, a nonresident foreign corporation in the Philippines, not engaged in trade and business therein. As
such PMC-U.S.A. is the sole shareholder or stockholder of PMC-Phil., as PMC-U.S.A. owns
wholly or by 100% the voting stock of PMC-Phil. and is entitled to receive income from PMCPhil. in the form of dividends, if not rents or royalties. In addition, PMC-Phil. has a legal
personality separate and distinct from PMC-U.S.A.
For the taxable year ending June 30, 1974 PMC-Phil. realized a taxable net income of
P56,500,332.00 and accordingly paid the corresponding income tax thereon equivalent to
P25%-35% or P19,765,116.00 as provided for under Section 24(a) of the Philippine Tax Code,
the pertinent portion of which states that a domestic corporation is taxable at a rate of 35%
upon the amount by which the taxable net income exceeds one hundred thousand pesos.
After taxation its net profit was P36,735,216.00. Out of said amount it declared a dividend in
favor of its sole corporate stockholder and parent corporation PMC-U.S.A. in the total sum of
P17,707,460.00 which latter amount was subjected to Philippine taxation of 35% or
P6,197,611.23 as provided for in Section 24(b) of the Philippine Tax Code which states that A foreign corporation not engaged in trade or business in the Philippines, including a foreign
life insurance company not engaged in the life insurance business in the Philippines, shall
pay a tax equal to 35% of the gross income received during its taxable year from all sources
within the Philippines, Provided, still further That on dividends received from a domestic
corporation liable to tax under this Chapter, the tax shall be 15% of the dividends received,
which shall be collected and paid as provided in Section 53(d) of this Code, subject to the
condition that the country in which the nonresident foreign corporation is domiciled shall
allow a credit against the tax due from the nonresident foreign corporation, taxes deemed to
have been paid in the Philippines equivalent to 20% which represents the difference
between the regular tax (35%) on corporations and the tax (15%) on dividends as provided
in this section
For the taxable year ending June 30, 1975 PMC-Phil. realized a taxable net income
P8,735,125.00 which was subjected to Philippine taxation at the rate of 25%-35%
P2,952,159.00, thereafter leaving a net profit of P5,782,966.00. As in the 2nd quarter
1975, PMC-Phil. again declared a dividend in favor of PMC-U.S.A. at the tax rate of 35%
P6,457,485.00.

of
or
of
or

In July, 1977 PMC-Phil., invoking the tax-sparing credit provision in Section 24(b) as
aforequoted, as the withholding agent of the Philippine government, with respect to the
dividend taxes paid by PMC-U.S.A., filed a claim with the herein petitioner, Commissioner of
Internal Revenue, for the refund of the 20 percentage-point portion of the 35 percentagepoint whole tax paid, arising allegedly from the alleged "overpaid withholding tax at source
or overpaid withholding tax in the amount of P4,832,989.00.
There being no immediate action by the BIR on PMC-Phils' letter-claim the latter
sought the intervention of the CTA when it filed with herein respondent court a petition for
review praying that it be declared entitled to the refund or tax credit claimed and ordering
respondent therein to refund to it the amount of P4,832,989.00, or to issue tax credit in its

favor in lieu of tax refund. On the other hand therein respondent, Commissioner of Internal
Revenue, in his answer, prayed for the dismissal of said petition and for the denial of the
claim for refund. The CTA rendered judgment in favour of PMC-Phil.
Issue:
Whether or not private respondent is entitled to the preferential 15% tax rate on
dividends declared and remitted to its parent corporation.
Ruling:
No, PMC-Phil is not entitled to the preferential 15% tax rate. PMC-Phil. is but a
withholding agent of the government and therefore cannot claim reimbursement of the
alleged over paid taxes. The real party in interest being the mother corporation in the United
States, it follows that American entity is the real party in interest, and should have been the
claimant in this case. Also, as ably argued by the petitioner, the private respondent failed to
meet certain conditions necessary in order that the dividends received by the non-resident
parent company in the United States may be subject to the preferential 15% tax instead of
35%. Among other things, the private respondent failed: (1) to show the actual amount
credited by the U.S. government against the income tax due from PMC-U.S.A. on the
dividends received from private respondent; (2) to present the income tax return of its
mother company for 1975 when the dividends were received; and (3) to submit any duly
authenticated document showing that the U.S. government credited the 20% tax deemed
paid in the Philippines.
MARUBENI
CORPORATION
(formerly
Marubeni

Iida,
Co.,
Ltd.), petitioner, vs. COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX
APPEALS, respondents.
Facts:
Marubeni Corporation of Japan has equity investments in Atlantic Gulf and Pacific Co.
of Manila (AG&P) of Manila. For the first quarter of 1981 ending March 31, AG&P declared
and paid cash dividends to petitioner in the amount of P849,720 and withheld the
corresponding 10% final dividend tax thereon. Similarly, for the third quarter of 1981 ending
September 30, AG&P declared and paid P849,720 as cash dividends to petitioner and
withheld the corresponding 10% final dividend tax thereon. AG&P directly remitted the cash
dividends to petitioner's head office in Tokyo, Japan, net not only of the 10% final dividend
tax in the amounts of P764,748 for the first and third quarters of 1981, but also of the
withheld 15% profit remittance tax based on the remittable amount after deducting the final
withholding tax of 10%.
The 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of
P114,712.20 for the first quarter of 1981 were paid to the Bureau of Internal Revenue by
AG&P on April 20, 1981 under Central Bank Receipt No. 6757880. Likewise, the 10% final
dividend tax of P84,972 and the 15% branch profit remittance tax of P114,712 for the third
quarter of 1981 were paid to the Bureau of Internal Revenue by AG&P on August 4, 1981
under Central Bank Confirmation Receipt No. 7905930. Thus, for the first and third quarters
of 1981, AG&P as withholding agent paid 15% branch profit remittance on cash dividends
declared and remitted to petitioner at its head office in Tokyo in the total amount of
P229,424.40 on April 20 and August 4, 1981. petitioner, through the accounting firm Sycip,
Gorres, Velayo and Company, sought a ruling from the Bureau of Internal Revenue on
whether or not the dividends petitioner received from AG&P are effectively connected with

its conduct or business in the Philippines as to be considered branch profits subject to the
15% profit remittance tax imposed under the NIRC.
Acting Commissioner Ruben Ancheta ruled that only profits remitted abroad by a
branch office to its head office which are effectively connected with its trade or business in
the Philippines are subject to the 15% profit remittance tax. To be 'effectively connected' it is
not necessary that the income be derived from the actual operation of taxpayercorporation's trade or business; it is sufficient that the income arises from the business
activity in which the corporation is engaged. In the instant case, the dividends received by
Marubeni from AG&P are not income arising from the business activity in which Marubeni is
engaged. Accordingly, said dividends if remitted abroad are not considered branch profits for
purposes of the 15% profit remittance tax.
Petitioner claimed for the refund or issuance of a tax credit of P229,424.40
"representing profit tax remittance erroneously paid on the dividends remitted by Atlantic
Gulf and Pacific Co. of Manila (AG&P) on April 20 and August 4, 1981 to . . . head office in
Tokyo. Respondent Commissioner of Internal Revenue denied petitioner's claim for
refund/credit stating that Inasmuch as the cash dividends remitted by AG&P to Marubeni
Corporation, Japan is subject to 25% tax, and that the taxes withheld of 10% as
intercorporate dividend tax and 15% as profit remittance tax totals (sic) 25%, the amount
refundable offsets the liability, hence, nothing is left to be refunded.
Issue:
(1) Whether the dividends Marubeni Corporation received from Atlantic Gulf and
Pacific Co. are effectively connected with its conduct or business in the Philippines
as to be considered branch profits subject to 15% profit remittance tax imposed
under Section 24(b)(2) of the National Internal Revenue Code.
(2) Whether Marubeni Corporation is a resident or non-resident foreign corporation.
(3) At what rate should Marubeni be taxed?
Ruling:
(1) NO. Pursuant to Section 24(b)(2) of the Tax Code, as amended, only profits
remitted abroad by a branch office to its head office which are effectively
connected with its trade or business in the Philippines are subject to the 15%
profit remittance tax. The dividends received by Marubeni Corporation from
Atlantic Gulf and Pacific Co. are not income arising from the business activity in
which Marubeni Corporation is engaged. Accordingly, said dividends if remitted
abroad are not considered branch profits for purposes of the 15% profit
remittance tax imposed by Section 24(b)(2) of the Tax Code, as amended.
(2) Marubeni Corporation is a non-resident foreign corporation, with respect to the
transaction. Marubeni Corporations head office in Japan is a separate and distinct
income taxpayer from the branch in the Philippines. The investment on Atlantic
Gulf and Pacific Co. was made for purposes peculiarly germane to the conduct of
the corporate affairs of Marubeni Corporation in Japan, but certainly not of the
branch in the Philippines.
(3) 15%. The applicable provision of the Tax Code is Section 24(b)(1)(iii) in
conjunction with the Philippine-Japan Tax Treaty of 1980. As a general rule, it is
taxed 35% of its gross income from all sources within the Philippines. However, a
discounted rate of 15% is given to Marubeni Corporation on dividends received
from Atlantic Gulf and Pacific Co. on the condition that Japan, its domicile state,

extends in favor of Marubeni Corporation a tax credit of not less than 20% of the
dividends received. This 15% tax rate imposed on the dividends received under
Section 24(b)(1)(iii) is easily within the maximum ceiling of 25% of the gross
amount of the dividends as decreed in Article 10(2)(b) of the Tax Treaty.