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Author: Kycia Cue

part of any expenses, losses, or other deductions which cannot definitely be


CIR v. CTA and Smith Kline & French Overseas Co. (1984) allocated to some item or class of gross income. The remainder, if any, shall be
Petitioner: Commissioner on Internal Revenue included in full as net income from sources within the Philippines.
Respondent: CTA, Smith Kline & French Overseas Co.
Ponente: Aquino, J. REV REG 2, SEC. 160. Apportionment of deductions. —….The ratable part is
based upon the ratio of gross income from sources within the Philippines to the total
DOCTRINE: gross income.
A company’s local branch may claim overhead expenses as deductions
based on the ratio of the local branch’s gross income to the total gross RULING + RATIO: YES
income of its parent company
1. Smith Kline’s claim for deduction based on the ratable portion of the overhead
FACTS: expenses is correct. The amount of P1,427,484 represents the correct ratable
share, the same having been computed pursuant to section 37(b) and section 160.
1. Smith Kline and French Overseas Company, is a multinational firm domiciled in
Philadelphia, Pennsylvania, which is licensed to do business in the Philippines. It is 2. The Tax Court correctly held that the refund or credit of the resulting
engaged in the importation, manufacture and sale of pharmaceuticals drugs and overpayment is in order.
chemicals.
3. RULE: Deductions on Gross income from sources in the Phil include
2. In its 1971 original income tax return, Smith Kline claimed as deductions, a - apportioned or allocated expenses, losses, and other deductions
proportion of the overhead expenses of the head office (P501,040), pursuant to
their service agreement. - AND a ratable part of any expenses, losses, or other deductions which
cannot definitely be allocated to some item or class of GI
3. Smith Kline however amended its income returns in March 1973 claiming that it
had made an overpayment of P324,255 "arising from under-deduction of home - The ratable part is based upon the ratio of gross income from sources
office overhead" as determined by Smith Kline’s independent auditors, Peat, within the Philippines to the total gross income.
Marwick, Mitchell and Company where they determined that the unallocated
overhead expenses of the main office for the year 1971 was actually P1,427,484 - The remainder, if any, shall be included in full as net income from
and that, the allocation was made based on the percentage of gross income in the sources within the Philippines.
Philippines to gross income of the corporation as a whole (pursuant to tax laws).
4. Overhead expenses are expenses incurred by the parent company in connection
4. By reason of the new adjustment, Smith Kline's tax liability should only be with finance, administration, and research and development, all of which direct
P186,992 instead of P511,247 to P186,992 resulting in an overpayment benefit its branches all over the world.
of P324,255.
DISPOSITION: WHEREFORE, the decision of the Tax Court is hereby affirmed. No
5. Smith Kline then filed a petition for review with CTA, without waiting for the action costs.
of the CIR on it’s claim.
EXTRA INFO
6. CTA ordered CIR to refund to Smith Kline. CIR appealed. CIR claims that allowing Smith to claim more than the deduction agreed upon in the
service contract would violate the cardinal rule that a contract is the law between
ISSUES: WON there was overpayment by Smith Kline contracting parties.
Smith Kline was saying that the contract cannot amend existing tax laws and
regulations.
PROVISION: NIRC SEC. 37
Peat, Marwick, Mitchell and Company certification and Sycip audit report
SEC. 37. Income form sources within the Philippines. — GI (all soures) = P44,812,766
GI (phil source) = P7,143,155
(b) Net income from sources in the Philippines. — From the items of gross income Ratio: 15.94%
specified in subsection (a) of this section there shall be deducted the expenses, Smith Kline’s share of the home office overhead expenses = 15.94% of the total
losses, and other deductions properly apportioned or allocated thereto and a ratable expenses= P1,427,484.