2. CIR v.

Marubeni
Doctrine: Branch Profit remit tax
Facts:
CIR assails the CA decision which affirmed CTA, ordering CIR to desist from collecting
the 1985 deficiency income, branch profit remittance and contractor’s taxes from
Marubeni Corp after finding the latter to have properly availed of the tax amnesty under
EO 41 & 64, as amended.
Marubeni, a Japanese corporation, engaged in general import and export trading,
financing and construction, is duly registered in the Philippines with Manila branch
office. CIR examined the Manila branch’s books of accounts for fiscal year ending March
1985, and found that respondent had undeclared income from contracts with NDC
and Philphos for construction of a wharf/port complex and ammonia storage complex
respectively.
On August 27, 1986, Marubeni received a letter from CIR assessing it for several
deficiency taxes. CIR claims that the income respondent derived were income from
Philippine sources, hence subject to internal revenue taxes. On Sept 1986, respondent
filed 2 petitions for review with CTA: the first, questioned the deficiency income, branch
profit remittance and contractor’s tax assessments and second questioned the
deficiency commercial broker’s assessment.
On Aug 2, 1986, EO 41 declared a tax amnesty for unpaid income taxes for 1981-85,
and that taxpayers who wished to avail this should on or before Oct 31, 1986. Marubeni
filed its tax amnesty return on Oct 30, 1986.
On Nov 17, 1986, EO 64 expanded EO 41’s scope to include estate and donor’s taxes
under Title 3 and business tax under Chap 2, Title 5 of NIRC, extended the period of
availment to Dec 15, 1986 and stated those who already availed amnesty under EO 41
should file an amended return to avail of the new benefits. Marubeni filed a
supplemental tax amnesty return on Dec 15, 1986.
CTA found that Marubeni properly availed of the tax amnesty and deemed cancelled the
deficiency taxes. CA affirmed on appeal.

ISSUE: W/N Marubeni is exempted from paying tax

Ruling: YES.

1. On date of effectivity
CIR claims Marubeni is disqualified from the tax amnesty because it falls under the
exception in Sec 4b of EO 41:
“Sec. 4. Exceptions.—The following taxpayers may not avail themselves of the amnesty
herein granted: xxx b) Those with income tax cases already filed in Court as of the
effectivity hereof;”
Petitioner argues that at the time respondent filed for income tax amnesty on Oct 30,
1986, a case had already been filed and was pending before the CTA and Marubeni
therefore fell under the exception. However, the point of reference is the date of
effectivity of EO 41 and that the filing of income tax cases must have been made before
and as of its effectivity.
EO 41 took effect on Aug 22, 1986. The case questioning the 1985 deficiency was filed
with CTA on Sept 26, 1986. When EO 41 became effective, the case had not yet been
filed. Marubeni does not fall in the exception and is thus, not disqualified from availing
of the amnesty under EO 41 for taxes on income and branch profit remittance.
The difficulty herein is with respect to the contractor’s tax assessment (business tax)
and respondent’s availment of the amnesty under EO 64, which expanded EO 41’s
coverage. When EO 64 took effect on Nov 17, 1986, it did not provide for exceptions to
the coverage of the amnesty for business, estate and donor’s taxes. Instead, Section 8
said EO provided that:
“Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to
or inconsistent with this amendatory Executive Order shall remain in full force and
effect.”
Due to the EO 64 amendment, Sec 4b cannot be construed to refer to EO 41 and its
date of effectivity. The general rule is that an amendatory act operates prospectively. It
may not be given a retroactive effect unless it is so provided expressly or by necessary
implication and no vested right or obligations of contract are thereby impaired.

2. On situs of taxation

Marubeni contends that assuming it did not validly avail of the amnesty, it is still not
liable for the deficiency tax because the income from the projects came from the
“Offshore Portion” as opposed to “Onshore Portion”. It claims all materials and
equipment in the contract under the “Offshore Portion” were manufactured and
completed in Japan, not in the Philippines, and are therefore not subject to Philippine
taxes.

(BG: Marubeni won in the public bidding for projects with government corporations NDC
and Philphos. In the contracts, the prices were broken down into a Japanese Yen
Portion (I and II) and Philippine Pesos Portion and financed either by OECF or by
supplier’s credit. The Japanese Yen Portion I corresponds to the Foreign Offshore
Portion, while Japanese Yen Portion II and the Philippine Pesos Portion correspond to
the Philippine Onshore Portion. Marubeni has already paid the Onshore Portion, a fact
that CIR does not deny.)

CIR argues that since the two agreements are turn-key, they call for the supply of both
materials and services to the client, they are contracts for a piece of work and are
indivisible. The situs of the two projects is in the Philippines, and the materials provided
and services rendered were all done and completed within the territorial jurisdiction of
the Philippines. Accordingly, respondent’s entire receipts from the contracts, including
its receipts from the Offshore Portion, constitute income from Philippine sources. The
total gross receipts covering both labor and materials should be subjected to
contractor’s tax (a tax on the exercise of a privilege of selling services or labor rather
than a sale on products).

Marubeni, however, was able to sufficiently prove in trial that not all its work was
performed in the Philippines because some of them were completed in Japan (and in
fact subcontracted) in accordance with the provisions of the contracts. All services for
the design, fabrication, engineering and manufacture of the materials and equipment
under Japanese Yen Portion I were made and completed in Japan. These services were
rendered outside Philippines’ taxing jurisdiction and are therefore not subject to
contractor’s tax. Petition denied.

Note: What is branch remittance tax?

A branch profit remittance tax is a tax on income.
Branch profit remittance tax is defined and imposed in Section 24 (b) (2) (ii), Title II,
Chapter III of the National Internal Revenue Code. In the tax code, this tax falls under
Title II on Income Tax. It is a tax on income. Respondent therefore did not fall under
the exception in Section 4 (b) when it filed for amnesty of its deficiency branch profit
remittance tax assessment.