Republic of the Philippines P9,448.

94, respectively, pursuant to Section 24

SUPREME COURT
Manila
G.R. No. L-46029 June 23, 1988
N.V. REEDERIJ "AMSTERDAM" and ROYAL
INTEROCEAN LINES, petitioners,
vs.
COMMISSIONER OF INTERNAL REVENUE,
respondent.
GANCAYCO, J.:
The issue posed in this petition is the income tax
liability of a foreign shipping corporation which
called on Philippine ports to load cargoes for
foreign destination on two occasions in 1963 and
1964, respectively, and which collected freight
fees on these transactions.
(b) (2) in relation to Section 37 (B) (e) of the
National Internal Revenue Code and Section 163
of Revenue Regulations No. 2. On the same two
dates, petitioner Royal Interocean Lines as the
husbanding agent of petitioner N.V. Reederij
"AMSTERDAM" filed a written protest against the
abovementioned assessment made by the
respondent Commissioner which protest was
denied by said respondent in a letter dated March
3, 1969: On March 31, 1969, petitioners filed a
petition for review with the respondent Court of
Tax Appeals praying for the cancellation of the
subject assessment. After due hearing, the
respondent court, on December 1, 1976,
rendered a decision modifying said assessments
by eliminating the 50% fraud compromise
penalties imposed upon petitioners. Petitioners
filed a motion for reconsideration of said decision
but this was denied by the respondent court.

From March 27 to April 30, 1963, M.V. Hence, this petition for review where petitioners
Amstelmeer and from September 24 to October raised the following issues:
28, 1964, MV "Amstelkroon, " both of which are
vessels of petitioner N.B. Reederij A. WHETHER N.V. REEDERIJ
"AMSTERDAM," called on Philippine ports to "AMSTERDAM" NOT HAVING
load cargoes for foreign destination. The freight ANY OFFICE OR PLACE OF
fees for these transactions were paid abroad in BUSINESS IN THE PHILIPPINES,
the amount of US $98,175.00 in 1963 and US WHOSE VESSELS CALLED ON
$137,193.00 in 1964. In these two instances, THE PHILIPPINE PORTS FOR
petitioner Royal Interocean Lines acted as THE PURPOSE OF LOADING
husbanding agent for a fee or commission on said CARGOES ONLY TWICE-ONE IN
vessels. No income tax appears to have been 1963 AND ANOTHER IN 1964 —
paid by petitioner N.V. Reederij "AMSTERDAM" SHOULD BE TAXED AS A
on the freight receipts. FOREIGN CORPORATION NOT
ENGAGED IN TRADE OR
Respondent Commissioner of Internal Revenue, BUSINESS IN THE PHILIPPINES
through his examiners, filed the corresponding UNDER SECTION 24(b) (1) OF
income tax returns for and in behalf of the former THE TAX CODE OR SHOULD BE
under Section 15 of the National Internal TAXED AS A FOREIGN
Revenue Code. Applying the then prevailing CORPORATION ENGAGED IN
market conversion rate of P3.90 to the US $1.00, TRADE OR BUSINESS IN THE
the gross receipts of petitioner N.V. Reederij PHILIPPINES UNDER SECTION
"Amsterdam" for 1963 and 1964 amounted to 24(b) (2) IN RELATION TO
P382,882.50 and P535,052.00, respectively. On SECTION 37 (e) OF THE SAME
June 30, 1967, respondent Commissioner CODE; AND
assessed said petitioner in the amounts of
P193,973.20 and P262,904.94 as deficiency B. WHETHER THE FOREIGN
income tax for 1963 and 1964, respectively, as "a EXCHANGE RECEIPTS OF N.V.
non-resident foreign corporation not engaged in REEDERIJ "AMSTERDAM"
trade or business in the Philippines under Section SHOULD BE CONVERTED INTO
24 (b) (1) of the Tax Code. PHILI PINE PESOS AT THE
OFFICIAL RATE OF P2.00 TO US
On the assumption that the said petitioner is a $1.00, OR AT P3.90 TO US $1.00.
foreign corporation engaged in trade or business
in the Philippines, on August 28, 1967, petitioner Petitioners contend that respondent court erred in
Royal Interocean Lines filed an income tax return holding that petitioner N.V. Reederij
of the aforementioned vessels computed at the "AMSTERDAM" is a non-resident foreign
exchange rate of P2.00 to USs1.00 1 and paid the corporation because it allegedly disregarded
tax thereon in the amount of P1,835.52 and Section 163 of Revenue Regulations No. 2
1
(providing for the determination of the net income
of foreign corporations doing business in the
Philippines) and in holding that the foreign
exchange ang e receipts of said petitioner for
purposes of computing its income tax should be
converted into Philippine pesos at the rate of
P3.90 to US $1.00 instead of P2.00 to US $1.00.
The petition is devoid of merit.
Petitioner N.V. Reederij "AMSTERDAM" is a
foreign corporation not authorized or licensed to
do business in the Philippines. It does not have a
branch office in the Philippines and it made only
two calls in Philippine ports, one in 1963 and the
other in 1964. In order that a foreign corporation
may be considered engaged in trade or business,
its business transactions must be continuous. A
casual business activity in the Philippines by a
foreign corporation, as in the present case, does
not amount to engaging in trade or business in
the Philippines for income tax purposes.
The Court reproduces with approval the following
disquisition of the respondent court —
A corporation is itself a taxpaying
entity and speaking generally, for
purposes of income tax,
corporations are classified into (a)
domestic corporations and (b)
foreign corporations. (Sec. 24(a)
and (b), Tax Code.) Foreign
corporations are further classified
into (1) resident foreign
corporations and (2) non-resident
foreign corporations. (Sec. 24(b) (1)
and (2). Tax Code.) A resident
foreign corporation is a foreign
corporation engaged in trade or
business within the Philippines or
having an office or place of
business therein (Sec. 84(g), Tax
Code) while a non- resident foreign
corporation is a foreign corporation
not engaged in trade or business
within the Philippines and not
having any office or place of
business therein. (Sec. 84(h), Tax
Code.)
A domestic corporation is taxed on
its income from sources within and
without the Philippines, but a
foreign corporation is taxed only on
its income from sources within the
Philippines. (Sec. 24(a), Tax Code;
Sec. 16, Rev. Regs. No. 2.)
However, while a foreign
corporation doing business in the
Philippines is taxable on income
solely from sources within the
Philippines, it is permitted to
deductions from gross income but
only to the extent connected with
income earned in the Philippines.
(Secs. 24(b) (2) and 37, Tax Code.)
On the other hand, foreign
corporations not doing business in
the Philippines are taxable on
income from all sources within the
Philippines, as interest, dividends,
rents, salaries, wages, premiums,
annuities Compensations,
remunerations, emoluments, or
other fixed or determinable annual
or periodical or casual gains, profits
and income and capital gains" The
tax is 30% (now 35%) of such gross
income. (Sec. 24 (b) (1), Tax Code.)
At the time material to this case,
certain corporations were given
special treatment, namely, building
and loan associations operating as
such in accordance with Section
171 of the Corporation Law,
educational institutions, domestic
life insurance companies and for"
foreign life insurance companies
doing business in the Philippines.
(Sec. 24(a) & (c), Tax Code.) It
bears emphasis, however, that
foreign life insurance companies
which were not doing business in
the Philippines were taxable as
other foreign corporations not
authorized to do business in the
Philippines. (Sec. 24(c) Tax Code.)
Now to the case at bar. Here,
petitioner N.V. Reederij
"Amsterdam" is a non-resident
foreign corporation, organized and
existing under the laws of The
Netherlands with principal office in
Amsterdam and not licensed to do
business in the Philippines. (pp. 8-
81, CTA records.) As a non-
resident foreign corporation, it is
thus a foreign corporation, not
engaged in trade or business within
the Philippines and not having any
office or place of business therein.
(Sec. 84(h), Tax Code.) As stated
above, it is therefore taxable on
income from all sources within the
Philippines, as interest, dividends,
rents, salaries, wages, premiums,
annuities, compensations,
2
 remunerations, emoluments, or
other fixed or determinable annual
or periodical or casual gains, profits
and income and capital gains, and
the tax is equal to thirty per centum
of such amount, under Section
24(b) (1) of the Tax Code. The
accent is on the words of--`such
amount." Accordingly, petitioner N.
V. Reederij "Amsterdam" being a
non-resident foreign corporation, its
taxable income for purposes of our
income tax law consists of its gross
income from all sources within the
Philippines.
The law seems clear and specific. It
thus calls for its application as
worded as it leaves no leeway for
interpretation. The applicable
provision imposes a tax on foreign
corporations falling under the
classification of non-resident
corporations without any
exceptions or conditions, unlike in
the case of foreign corporations
engaged in trade or business within
the Philippines which contained (at
the time material to this case) an
exception with respect to foreign life
insurance companies. Adherence
to the provision of the law, which
specifies and determines the
taxable income of, and the rate of
income tax applicable to, non-
resident foreign corporations,
without mentioning any exceptions,
would therefore lead to the
conclusion that petitioner N.V.
Reederij "Amsterdam" is subject to
income tax on gross income from all
sources within the Philippines.
A foreign corporation engaged in trade or
business within the Philippines, or which has an
office or place of business therein, is taxed on its
total net income received from all sources within
the Philippines at the rate of 25% upon the
amount but which taxable net income does not
exceed P100,000.00, and 35% upon the amount
but which taxable net income exceeds
P100,000.00. 2 On the other hand, a foreign
corporation not engaged in trade or business
within the Philippmes and which does not have
any office or place of business therein is taxed on
income received from all sources within the
Philippines at the rate of 35% of the gross
income.3
Petitioner relies on Section 24 (b) (2) and Section
37 (B) (e) of the Tax Code and implementing
Section 163 of the Income Tax Regulations but
these provisions refer to a foreign corporation
engaged in trade or business in the Philippines
and not to a foreign corporation not engaged in
trade or business in the Philippines like petitioner-
ship-owner herein. Thus, the respondent court
aptly ruled:
It must be stressed, however, that
Section 37 (e) of the Code, as
implemented by Section 163 of the
Regulations, provides the rule of
the determination of the net income
taxable in the Philippines of a
foreign steamship company doing
business in the Philippines. To
assure that non-resident foreign
steamship companies not engaged
in business in the Philippines and
not having any office or place of
business herein are not covered
therein, the regulations explicitly
and clearly provide that "the net
income of a foreign steamship co
company doing business in or from
this country is ascertained," under
the formula contained therein, "for
the purpose of the income tax.! The
reason is easily discernible. As
stated above, the taxable income of
non-resident foreign corporations
consists of its gross income from all
sources within the Philippines.
Accordingly, a foreign steamgship
corporation derives income partly
from sources within and partly from
sources without the Philippines if it
is carrying on a business of
transportation service between
points in the Philippines and points
outside the Philippines. (Vol. 3,
1965, Federal Taxes, Par. 16389.)
Only then does Section 37 (e) of the
Tax Code, are implemented by
Section 163 of the Regulations,
apply in computing net income
subject to tax. There is no basis
therefore for an assertion "that
Section 37 (e) does not distinguish
between a foreign corporation
engaged in business in the
Philippines and a foreign
corporation not engaged in
business in the Philippines."" (p. 84,
CTA records.) (Decision, pp. 11-
12.)
3
The conversion rate of P2.00 to US $1.00 which the other hand, the present case
petitioners claim should be applicable to the refers to transactions that took
income of petitioners for income tax purposes place during the effectivity of
instead of P3.90 to s1.00 is likewise untenable. Republic Act 2609 when there was,
The transactions involved in this case are for the apart from the parity rate, a legal
taxable years 1963 and 1964. Under Rep. Act No. free market conversion rate for
2609, the monetary board was authorized to fix foreign exchange transactions,
the legal conversion rate for foreign exchange. which rate had been fixed in open
The free market conversion rate during those trading, such as those involved in
years was P3.90 to US $1.00. the case at bar.

This conversion rate issue was definitely settled Indeed, in the course of the investigation
by this Court in the case of Commissioner of conducted by the Commissioner on the
Internal Revenue vs. Royal Interocean Lines and accounting records of petitioner Royal Interocean
the Court of Tax Appeals 4 to wit: Lines, it was verified that when said petitioner
paid its agency fees for services rendered as
It should be noted that on July 1 6, husbanding agent of the said vessels, it used the
1959, the policy incorporated in conversion rate of P3.90 to US $1.00. 5 It is now
Circular No. 20 and implemented in estopped from claiming otherwise in this case.
subsequent circulars was relaxed WHEREFORE, the petition is DENIED with costs
with the enactment of Republic Act against petitioners. This decision is immediately
No. 2609 which directed the executory and no extension of time to file motion
monetary authorities to take steps for reconsideration shall be entertained. SO
for the adoption of a four-year ORDERED.
program of gradual decontrol,
during which the Monetary Board,
with the approval of the President,
could and did fix the conversion rate
of the Philippine peso to the US
dollar at a ratio other than that
prescribed in Section 48 of
Republic Act 265. During the period
involved in the case at bar, the free
market conversion rate ranged from
P3.47 to P3.65 to a US dollar at
which rate the freight fees in
question were computed in the
contested assessment. Inasmuch
said frees were revenues derived
from foreign exchange
transactions, it follows necessarily
that the petitioner was fully justified
in computing the taxpayer's
receipts at Id free market rates.

xxx xxx xxx

The case of the United States

Lines, on which the appealed
decision of the Court of Tax
Appeals is anchored, refers to
transactions that took place before
the approval of Republic Act 2609
on July 16, 1959 when the only
legal rate of exchange obtaining in
the Philippines was P2 to US $1,
and all foreign exchange had to be
surrendered to the Central Bank
subject to its disposition pursuant to
its own rules and regulations. Upon
4

Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 103092 July 21, 1994
BANK OF AMERICA NT & SA, petitioner,
vs.
HONORABLE COURT OF APPEALS, AND
THE COMMISSIONER OF INTERNAL
REVENUE, respondents.
G.R. No. 103106 July 21, 1994
BANK OF AMERICA NT & SA, petitioner,
vs.
THE HONORABLE COURT OF APPEALS
AND THE COMMISSIONER OF INTERNAL
REVENUE, respondents.
Sycip, Salazar, Hernandez & Gatmaitan and
Agcaoili & Associates for petitioner.
VITUG, J.:
Section 24(b) (2) (ii) of the National Internal
Revenue Code, in the language it was worded in
1982 (the taxable period relevant to the case at
bench), provided, in part, thusly:
Sec. 24. Rates of tax on
corporations. . . .
(b) Tax on foreign corporations. . . .
(2) (ii) Tax on branch profit and
remittances. —
Any profit remitted abroad by a
branch to its head office shall be
subject to a tax of fifteen per cent
(15%) . . . ."
Petitioner Bank of America NT & SA argues that
the 15% branch profit remittance tax on the basis
of the above provision should be assessed on the
amount actually remitted abroad, which is to say
that the 15% profit remittance tax itself should not
form part of the tax base. Respondent
Commissioner of Internal Revenue, contending
otherwise, holds the position that, in computing
the 15% remittance tax, the tax should be
inclusive of the sum deemed remitted.
The statement of facts made by the Court of Tax
Appeals, later adopted by the Court of Appeals,
and not in any serious dispute by the parties, can
be quoted thusly:
Petitioner is a foreign corporation
duly licensed to engage in business
in the Philippines with Philippine
branch office at BA Lepanto Bldg.,
Paseo de Roxas, Makati, Metro
Manila. On July 20, 1982 it paid
15% branch profit remittance tax in
the amount of P7,538,460.72 on
profit from its regular banking unit
operations and P445,790.25 on
profit from its foreign currency
deposit unit operations or a total of
P7,984,250.97. The tax was based
on net profits after income tax
without deducting the amount
corresponding to the 15% tax.
Petitioner filed a claim for refund
with the Bureau of Internal
Revenue of that portion of the
payment which corresponds to the
15% branch profit remittance tax,
on the ground that the tax should
have been computed on the basis
of profits actually remitted, which is
P45,244,088.85, and not on the
amount before profit remittance tax,
which is P53,228,339.82.
Subsequently, without awaiting
respondent's decision, petitioner
filed a petition for review on June
14, 1984 with this Honorable Court
for the recovery of the amount of
P1,041,424.03 computed as
follows:
Net Profits After Profit Tax Due
Alleged
Income Tax But Remittance
Alleged by Overpayment
Before Profit Tax Paid Petitioner
Item 1-2
Remittance Tax _________
_________ ___________
A. Regular Banking
Unit Operations
(P50,256,404.82)
1. Computation of BIR
15% x P50,256,404.82 -
P7,538,460.72
5
 2. Computation of Hence, these petitions for review in G.R. No.
Petitioner 103092 and G.R.
- P50,256,404.82 x 15% No. 103106 (filed separately due to inadvertence)
P6,555,183.24 — P983,277.48 by the law firms of "Agcaoili and Associates" and
1.15 of "Sycip, Salazar, Hernandez and Gatmaitan" in
representation of petitioner bank.
B. Foreign Currency
Deposit Unit We agree with the Court of Appeals that not much
Operations reliance can be made on our decision in
(P2,971,935) Burroughs Limited vs. Commission of Internal
Revenue (142 SCRA 324), for there we ruled
1. Computation of BIR against the Commissioner mainly on the basis of
15% x - P2,971,935.00 what the Court so then perceived as his position
P445,790.25 in a 21 January 1980 ruling the reversal of which,
by his subsequent ruling of 17 March 1982, could
2. Computation of not apply retroactively against Burroughs in
Petitioner conformity with Section 327 (now Section 246, re:
- P2,971,935.00 x 15% non-retroactivity of rulings) of the National
P387,643.70 P58,146.55 Internal Revenue Code. Hence, we held:

T O T A L. . P7,984,250.97 Petitioner's aforesaid contention is

P6,942,286.94 P1,041,424.02"1 without merit. What is applicable in
the case at bar is still the Revenue
The Court of Tax Appeals upheld petitioner bank Ruling of January 21, 1980
in its claim for refund. The Commissioner of because private respondent
Internal Revenue filed a timely appeal to the Burroughs Limited paid the branch
Supreme Court (docketed G.R. No. 76512) which profit remittance tax in question on
referred it to the Court of Appeals following this March 14, 1979. Memorandum
Court's pronouncement in Development Bank of Circular
the Philippines vs. Court of Appeals, et al. (180 No. 8-82 dated March 17, 1982
SCRA 609). On 19 September 1990, the Court of cannot be given retroactive effect in
Appeals set aside the decision of the Court of Tax the light of Section 327 of the
Appeals. Explaining its reversal of the tax court's National Internal Revenue Code
decision, the appellate court said: which
provides —
The Court of Tax Appeals sought to
deduce legislative intent vis-a-vis Sec. 327. Non-
the aforesaid law through an retroactivity of rulings.
analysis of the wordings thereof, Any revocation,
which to their minds reveal an intent modification, or
to mitigate at least the harshness of reversal of any of the
successive taxation. The use of the rules and regulations
word remitted may well be promulgated in
understood as referring to that part accordance with the
of the said total branch profits which preceding section or
would be sent to the head office as any of the rulings or
distinguished from the total profits circulars promulgated
of the branch (not all of which need by the Commissioner
be sent or would be ordered shall not be given
remitted abroad). If the legislature retroactive
indeed had wanted to mitigate the application if the
harshness of successive taxation, it revocation,
would have been simpler to just modification, or
lower the rates without in effect reversal will be
requiring the relatively novel and prejudicial to the
complicated way of computing the taxpayer except in the
tax, as envisioned by the herein following cases (a)
private respondent. The same where the taxpayer
result would have been achieved.2 deliberately misstates
or omits material facts
6
 from his return or in
any document
required of him by the
Bureau of Internal
Revenue; (b) where
the facts
subsequently
gathered by the
Bureau of Internal
Revenue are
materially different
from the facts on
which the ruling is
based, or (c) where
the taxpayer acted in
bad faith. (ABS-CBN
Broadcasting Corp. v.
CTA, 108 SCRA 151-
152)
The prejudice that would result to
private respondent Burroughs
Limited by a retroactive application
of Memorandum Circular No. 8-82
is beyond question for it would be
deprived of the substantial amount
of P172,058.90. And, insofar as the
enumerated exceptions are
concerned, admittedly, Burroughs
Limited does not fall under any of
them.
The Court of Tax Appeals itself
commented similarly when it observed
thusly in its decision:
In finding the Commissioner's
contention without merit, this Court
however ruled against the
applicability of Revenue
Memorandum Circular No. 8-82
dated March 17, 1982 to the
Burroughs Limited case because
the taxpayer paid the branch profit
remittance tax involved therein on
March 14, 1979 in accordance with
the ruling of the Commissioner of
Internal Revenue dated January
21, 1980. In view of Section 327 of
the then in force National Internal
Revenue Code, Revenue
Memorandum Circular No. 8-82
dated March 17, 1982 cannot be
given retroactive effect because
any revocation or modification of
any ruling or circular of the Bureau
of Internal Revenue should not be
given retroactive application if such
revocation or modification will,
subject to certain exceptions not
pertinent thereto, prejudice
taxpayers.3
The Solicitor General correctly points out that
almost invariably in an ad valorem tax, the tax
paid or withheld is not deducted from the tax
base. Such impositions as the ordinary income
tax, estate and gift taxes, and the value added tax
are generally computed in like manner. In these
cases, however, it is so because the law, in
defining the tax base and in providing for tax
withholding, clearly spells it out to be such. As so
well expounded by the Tax Court —
. . . In all the situations . . . where
the mechanism of withholding of
taxes at source operates to ensure
collection of the tax, and which
respondent claims the base on
which the tax is computed is the
amount to be paid or remitted, the
law applicable expressly,
specifically and unequivocally
mandates that the tax is on the total
amount thereof which shall be
collected and paid as provided in
Sections 53 and 54 of the Tax
Code. Thus:
Dividends received
by an individual who
is a citizen or resident
of the Philippines
from a domestic
corporation, shall be
subject to a final tax
at the rate of fifteen
(15%) per cent on the
total amount thereof,
which shall be
collected and paid as
provided in Sections
53 and 54 of this
Code. (Emphasis
supplied; Sec. 21,
Tax Code)
Interest from
Philippine Currency
bank deposits and
yield from deposit
substitutes whether
received by citizens
of the Philippines or
by resident alien
individuals, shall be
subject to a final tax
as follows: (a) 15% of
the interest or savings
deposits, and (b) 20%
7
 of the interest on time unambiguously provided therein, is
deposits and yield on the gross rental. Revenue
from deposits Regulations No. 13-78 was
substitutes, which promulgated pursuant to Section
shall be collected and 53(f) of the then in force National
paid as provided in Internal Revenue Code which
Sections 53 and 54 of authorized the Minister of Finance,
this Code: . . . upon recommendation of the
(Emphasis supplied; Commissioner of Internal Revenue,
Sec. 21, Tax Code to require the withholding of income
applicable.) tax on the same items of income
payable to persons (natural or
And on rental payments payable by judicial) residing in the Philippines
the lessee to the lessor (at 5%), by the persons making such
also cited by respondent, Section 1, payments at the rate of not less
paragraph (C), of Revenue than 2 1/2% but not more than 35%
Regulations No. 13-78, November which are to be credited against the
1, 1978, provides that: income tax liability of the taxpayer
for the taxable year.
Section 1. Income
payments subject to On the other hand, there is
withholding tax and absolutely nothing in Section 24(b)
rates prescribed (2) (ii), supra, which indicates that
therein. — Except as the 15% tax on branch profit
therein otherwise remittance is on the total amount of
provided, there shall profit to be remitted abroad which
be withheld a shall be collected and paid in
creditable income tax accordance with the tax withholding
at the rates herein device provided in Sections 53 and
specified for each 54 of the Tax Code. The statute
class of payee from employs "Any profit remitted abroad
the following items of by a branch to its head office shall
income payments to be subject to a tax of fifteen per cent
persons residing in (15%)" — without more. Nowhere is
the Philippines. there said of "base on the total
amount actually applied for by the
xxx xxx xxx branch with the Central Bank of the
Philippines as profit to be remitted
(C) Rentals — When abroad, which shall be collected
the gross rental or the and paid as provided in Sections 53
payment required to and 54 of this Code." Where the law
be made as a does not qualify that the tax is
condition to the imposed and collected at source
continued use or based on profit to be remitted
possession of abroad, that qualification should not
property, whether real be read into the law. It is a basic
or personal, to which rule of statutory construction that
the payor or obligor there is no safer nor better canon of
has not taken or is not interpretation than that when the
taking title or in which language of the law is clear and
he has no equity, unambiguous, it should be applied
exceeds five hundred as written. And to our mind, the
pesos (P500.00) per term "any profit remitted abroad"
contract or payment can only mean such profit as is
whichever is greater "forwarded, sent, or transmitted
— five per centum abroad" as the word "remitted" is
(5%). commonly and popularly accepted
and understood. To say therefore
Note that the basis of the 5% that the tax on branch profit
withholding tax, as expressly and remittance is imposed and
8
 collected at source and necessarily the payor, is the real taxpayer, the rule on
the tax base should be the amount constructive remittance (or receipt) can be easily
actually applied for the branch with rationalized, if not indeed, made clearly manifest.
the Central Bank as profit to be It is hardly the case, however, in the imposition of
remitted abroad is to ignore the the 15% remittance tax where there is but one
unmistakable meaning of plain taxpayer using its own domestic funds in the
words.4 payment of the tax. To say that there is
constructive remittance even of such funds would
In the 15% remittance tax, the law specifies its be stretching far too much that imaginary rule.
own tax base to be on the "profit remitted abroad." Sound logic does not defy but must concede to
There is absolutely nothing equivocal or uncertain facts.
about the language of the provision. The tax is
imposed on the amount sent abroad, and the law We hold, accordingly, that the written claim for
(then in force) calls for nothing further. The refund of the excess tax payment filed, within the
taxpayer is a single entity, and it should be two-year prescriptive period, with the Court of Tax
understandable if, such as in this case, it is the Appeals has been lawfully made.
local branch of the corporation, using its own local
funds, which remits the tax to the Philippine WHEREFORE, the decision of the Court of
Government. Appeals appealed from is REVERSED and SET
ASIDE, and that of the Court of Tax Appeals is
The remittance tax was conceived in an attempt REINSTATED. SO ORDERED.
to equalize the income tax burden on foreign
corporations maintaining, on the one hand, local
branch offices and organizing, on the other hand,
subsidiary domestic corporations where at least a
majority of all the latter's shares of stock are
owned by such foreign corporations. Prior to the
amendatory provisions of the Revenue Code,
local branches were made to pay only the usual
corporate income tax of 25%-35% on net income
(now a uniform 35%) applicable to resident
foreign corporations (foreign corporations doing
business in the Philippines). While Philippine
subsidiaries of foreign corporations were subject
to the same rate of 25%-35% (now also a uniform
35%) on their net income, dividend payments,
however, were additionally subjected to a 15%
(withholding) tax (reduced conditionally from
35%). In order to avert what would otherwise
appear to be an unequal tax treatment on such
subsidiaries vis-a-vis local branch offices, a 20%,
later reduced to 15%, profit remittance tax was
imposed on local branches on their remittances
of profits abroad. But this is where the tax pari-
passu ends between domestic branches and
subsidiaries of foreign corporations.

The Solicitor General suggests that the analogy

should extend to the ordinary application of the
withholding tax system and so with the rule on
constructive remittance concept as well. It is
difficult to accept the proposition. In the operation
of the withholding tax system, the payee is the
taxpayer, the person on whom the tax is imposed,
while the payor, a separate entity, acts no more
than an agent of the government for the collection
of the tax in order to ensure its payment.
Obviously, the amount thereby used to settle the
tax liability is deemed sourced from the proceeds
constitutive of the tax base. Since the payee, not
9
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-66838 December 2, 1991
COMMISSIONER OF INTERNAL REVENUE,
petitioner,
vs.
PROCTER & GAMBLE PHILIPPINE
MANUFACTURING CORPORATION and THE
COURT OF TAX APPEALS, respondents.
T.A. Tejada & C.N. Lim for private respondent.
RESOLUTION
FELICIANO, J.:
For the taxable year 1974 ending on 30 June
1974, and the taxable year 1975 ending 30 June
1975, private respondent Procter and Gamble
Philippine Manufacturing Corporation ("P&G-
Phil.") declared dividends payable to its parent
company and sole stockholder, Procter and
Gamble Co., Inc. (USA) ("P&G-USA"), amounting
to P24,164,946.30, from which dividends the
amount of P8,457,731.21 representing the thirty-
five percent (35%) withholding tax at source was
deducted.
On 5 January 1977, private respondent P&G-Phil.
filed with petitioner Commissioner of Internal
Revenue a claim for refund or tax credit in the
amount of P4,832,989.26 claiming, among other
things, that pursuant to Section 24 (b) (1) of the
National Internal Revenue Code ("NITC"), 1 as
amended by Presidential Decree No. 369, the
applicable rate of withholding tax on the dividends
remitted was only fifteen percent (15%) (and not
thirty-five percent [35%]) of the dividends.
There being no responsive action on the part of
the Commissioner, P&G-Phil., on 13 July 1977,
filed a petition for review with public respondent
Court of Tax Appeals ("CTA") docketed as CTA
Case No. 2883. On 31 January 1984, the CTA
rendered a decision ordering petitioner
Commissioner to refund or grant the tax credit in
the amount of P4,832,989.00.
On appeal by the Commissioner, the Court
through its Second Division reversed the decision
of the CTA and held that:
(a) P&G-USA, and not private
respondent P&G-Phil., was the
proper party to claim the refund or
tax credit here involved;
(b) there is nothing in Section 902
or other provisions of the US Tax
Code that allows a credit against
the US tax due from P&G-USA of
taxes deemed to have been paid in
the Philippines equivalent to twenty
percent (20%) which represents the
difference between the regular tax
of thirty-five percent (35%) on
corporations and the tax of fifteen
percent (15%) on dividends; and
(c) private respondent P&G-Phil.
failed to meet certain conditions
necessary in order that "the
dividends received by its non-
resident parent company in the US
(P&G-USA) may be subject to the
preferential tax rate of 15% instead
of 35%."
These holdings were questioned in P&G-Phil.'s
Motion for Re-consideration and we will deal with
them seriatim in this Resolution resolving that
Motion.
I
1. There are certain preliminary aspects of the
question of the capacity of P&G-Phil. to bring the
present claim for refund or tax credit, which need
to be examined. This question was raised for the
first time on appeal, i.e., in the proceedings
before this Court on the Petition for Review filed
by the Commissioner of Internal Revenue. The
question was not raised by the Commissioner on
the administrative level, and neither was it raised
by him before the CTA.
We believe that the Bureau of Internal Revenue
("BIR") should not be allowed to defeat an
otherwise valid claim for refund by raising this
question of alleged incapacity for the first time on
appeal before this Court. This is clearly a matter
of procedure. Petitioner does not pretend that
P&G-Phil., should it succeed in the claim for
refund, is likely to run away, as it were, with the
refund instead of transmitting such refund or tax
credit to its parent and sole stockholder. It is
commonplace that in the absence of explicit
statutory provisions to the contrary, the
10
government must follow the same rules of
procedure which bind private parties. It is, for
instance, clear that the government is held to
compliance with the provisions of Circular No. 1-
88 of this Court in exactly the same way that
private litigants are held to such compliance, save
only in respect of the matter of filing fees from
which the Republic of the Philippines is exempt
by the Rules of Court.
More importantly, there arises here a question of
fairness should the BIR, unlike any other litigant,
be allowed to raise for the first time on appeal
questions which had not been litigated either in
the lower court or on the administrative level. For,
if petitioner had at the earliest possible
opportunity, i.e., at the administrative level,
demanded that P&G-Phil. produce an express
authorization from its parent corporation to bring
the claim for refund, then P&G-Phil. would have
been able forthwith to secure and produce such
authorization before filing the action in the instant
case. The action here was commenced just
before expiration of the two (2)-year prescriptive
period.
2. The question of the capacity of P&G-Phil. to
bring the claim for refund has substantive
dimensions as well which, as will be seen below,
also ultimately relate to fairness.
Under Section 306 of the NIRC, a claim for refund
or tax credit filed with the Commissioner of
Internal Revenue is essential for maintenance of
a suit for recovery of taxes allegedly erroneously
or illegally assessed or collected:
Sec. 306. Recovery of tax
erroneously or illegally collected. —
No suit or proceeding shall be
maintained in any court for the
recovery of any national internal
revenue tax hereafter alleged to
have been erroneously or illegally
assessed or collected, or of any
penalty claimed to have been
collected without authority, or of
any sum alleged to have been
excessive or in any manner
wrongfully collected, until a claim
for refund or credit has been duly
filed with the Commissioner of
Internal Revenue; but such suit or
proceeding may be maintained,
whether or not such tax, penalty, or
sum has been paid under protest or
duress. In any case, no such suit or
proceeding shall be begun after the
expiration of two years from the
date of payment of the tax or
penalty regardless of any
supervening cause that may arise
after payment: . . . (Emphasis
supplied)
Section 309 (3) of the NIRC, in turn, provides:
Sec. 309. Authority of
Commissioner to Take
Compromises and to Refund
Taxes.—The Commissioner may:
xxx xxx xxx
(3) credit or refund taxes erroneously or illegally
received, . . . No credit or refund of taxes or
penalties shall be allowed unless the taxpayer
files in writing with the Commissioner a claim for
credit or refund within two (2) years after the
payment of the tax or penalty. (As amended by
P.D. No. 69) (Emphasis supplied)
Since the claim for refund was filed by P&G-Phil.,
the question which arises is: is P&G-Phil. a
"taxpayer" under Section 309 (3) of the NIRC?
The term "taxpayer" is defined in our NIRC as
referring to "any person subject to tax imposed by
the Title [on Tax on Income]." 2 It thus becomes
important to note that under Section 53 (c) of the
NIRC, the withholding agent who is "required to
deduct and withhold any tax" is made " personally
liable for such tax" and indeed is indemnified
against any claims and demands which the
stockholder might wish to make in questioning the
amount of payments effected by the withholding
agent in accordance with the provisions of the
NIRC. The withholding agent, P&G-Phil., is
directly and independently liable 3 for the correct
amount of the tax that should be withheld from the
dividend remittances. The withholding agent is,
moreover, subject to and liable for deficiency
assessments, surcharges and penalties should
the amount of the tax withheld be finally found to
be less than the amount that should have been
withheld under law.
A "person liable for tax" has been held to be a
"person subject to tax" and properly considered a
"taxpayer." 4 The terms liable for tax" and
"subject to tax" both connote legal obligation or
duty to pay a tax. It is very difficult, indeed
conceptually impossible, to consider a person
who is statutorily made "liable for tax" as not
"subject to tax." By any reasonable standard,
such a person should be regarded as a party in
interest, or as a person having sufficient legal
interest, to bring a suit for refund of taxes he
believes were illegally collected from him.
11
In Philippine Guaranty Company, Inc. v.
Commissioner of Internal Revenue, 5 this Court
pointed out that a withholding agent is in fact the
agent both of the government and of the
taxpayer, and that the withholding agent is not an
ordinary government agent:
The law sets no condition for the
personal liability of the withholding
agent to attach. The reason is to
compel the withholding agent to
withhold the tax under all
circumstances. In effect, the
responsibility for the collection of
the tax as well as the payment
thereof is concentrated upon the
person over whom the Government
has jurisdiction. Thus, the
withholding agent is constituted the
agent of both the Government and
the taxpayer. With respect to the
collection and/or withholding of the
tax, he is the Government's agent.
In regard to the filing of the
necessary income tax return and
the payment of the tax to the
Government, he is the agent of the
taxpayer. The withholding agent,
therefore, is no ordinary
government agent especially
because under Section 53 (c) he is
held personally liable for the tax he
is duty bound to withhold; whereas
the Commissioner and his deputies
are not made liable by law. 6
(Emphasis supplied)
If, as pointed out in Philippine Guaranty, the
withholding agent is also an agent of the
beneficial owner of the dividends with respect to
the filing of the necessary income tax return and
with respect to actual payment of the tax to the
government, such authority may reasonably be
held to include the authority to file a claim for
refund and to bring an action for recovery of such
claim. This implied authority is especially
warranted where, is in the instant case, the
withholding agent is the wholly owned subsidiary
of the parent-stockholder and therefore, at all
times, under the effective control of such parent-
stockholder. In the circumstances of this case, it
seems particularly unreal to deny the implied
authority of P&G-Phil. to claim a refund and to
commence an action for such refund.
We believe that, even now, there is nothing to
preclude the BIR from requiring P&G-Phil. to
show some written or telexed confirmation by
P&G-USA of the subsidiary's authority to claim
the refund or tax credit and to remit the proceeds
of the refund., or to apply the tax credit to some
Philippine tax obligation of, P&G-USA, before
actual payment of the refund or issuance of a tax
credit certificate. What appears to be vitiated by
basic unfairness is petitioner's position that,
although P&G-Phil. is directly and personally
liable to the Government for the taxes and any
deficiency assessments to be collected, the
Government is not legally liable for a refund
simply because it did not demand a written
confirmation of P&G-Phil.'s implied authority from
the very beginning. A sovereign government
should act honorably and fairly at all times, even
vis-a-vis taxpayers.
We believe and so hold that, under the
circumstances of this case, P&G-Phil. is properly
regarded as a "taxpayer" within the meaning of
Section 309, NIRC, and as impliedly authorized
to file the claim for refund and the suit to recover
such claim.
II
1. We turn to the principal substantive question
before us: the applicability to the dividend
remittances by P&G-Phil. to P&G-USA of the
fifteen percent (15%) tax rate provided for in the
following portion of Section 24 (b) (1) of the NIRC:
(b) Tax on foreign corporations.—
(1) Non-resident corporation. — A
foreign corporation not engaged in
trade and business in the
Philippines, . . ., shall pay a tax
equal to 35% of the gross income
receipt during its taxable year from
all sources within the Philippines,
as . . . dividends . . . 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,
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 non-
resident foreign corporation, is
domiciled shall allow a credit
against the tax due from the non-
resident 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
12
 dividends as provided in this
Section . . .
The ordinary thirty-five percent (35%) tax rate
applicable to dividend remittances to non-
resident corporate stockholders of a Philippine
corporation, goes down to fifteen percent (15%) if
the country of domicile of the foreign stockholder
corporation "shall allow" such foreign corporation
a tax credit for "taxes deemed paid in the
Philippines," applicable against the tax payable to
the domiciliary country by the foreign stockholder
corporation. In other words, in the instant case,
the reduced fifteen percent (15%) dividend tax
rate is applicable if the USA "shall allow" to P&G-
USA a tax credit for "taxes deemed paid in the
Philippines" applicable against the US taxes of
P&G-USA. The NIRC specifies that such tax
credit for "taxes deemed paid in the Philippines"
must, as a minimum, reach an amount equivalent
to twenty (20) percentage points which
represents the difference between the regular
thirty-five percent (35%) dividend tax rate and the
preferred fifteen percent (15%) dividend tax rate.
sections 902 and 960. Such choice
for any taxable year may be made
or changed at any time before the
expiration of the period prescribed
for making a claim for credit or
refund of the tax imposed by this
chapter for such taxable year. The
credit shall not be allowed against
the tax imposed by section 531
(relating to the tax on accumulated
earnings), against the additional tax
imposed for the taxable year under
section 1333 (relating to war loss
recoveries) or under section 1351
(relating to recoveries of foreign
expropriation losses), or against the
personal holding company tax
imposed by section 541.
(b) Amount allowed. — Subject to
the applicable limitation of section
904, the following amounts shall be
allowed as the credit under
subsection (a):

It is important to note that Section 24 (b) (1), (a) Citizens and domestic
NIRC, does not require that the US must give a corporations. — In the case
"deemed paid" tax credit for the dividend tax (20 of a citizen of the United
percentage points) waived by the Philippines in States and of a domestic
making applicable the preferred divided tax rate corporation, the amount of
of fifteen percent (15%). In other words, our NIRC any income, war profits, and
does not require that the US tax law deem the excess profits taxes paid or
parent-corporation to have paid the twenty (20) accrued during the taxable
percentage points of dividend tax waived by the year to any foreign country
Philippines. The NIRC only requires that the US or to any possession of the
"shall allow" P&G-USA a "deemed paid" tax credit United States; and
in an amount equivalent to the twenty (20)
percentage points waived by the Philippines. xxx xxx xxx

2. The question arises: Did the US law comply
with the above requirement? The relevant
provisions of the US Intemal Revenue Code
("Tax Code") are the following:
Sec. 901 — Taxes of foreign countries and
possessions of United States.
(a) Allowance of credit. — If the
taxpayer chooses to have the
benefits of this subpart, the tax
imposed by this chapter shall,
subject to the applicable limitation
of section 904, be credited with the
amounts provided in the applicable
paragraph of subsection (b) plus, in
the case of a corporation, the taxes
deemed to have been paid under
Sec. 902. — Credit for
corporate stockholders in
foreign corporation.
(A) Treatment of Taxes Paid
by Foreign Corporation. —
For purposes of this subject,
a domestic corporation
which owns at least 10
percent of the voting stock of
a foreign corporation from
which it receives dividends
in any taxable year shall —
xxx xxx xxx
(2) to the extent such
dividends are paid by such
foreign corporation out of
accumulated profits [as
defined in subsection (c) (1)
13
 (b)] of a year for which such power to determine from the
foreign corporation is a less accumulated profits of what
developed country year or years such dividends
corporation, be deemed to were paid, treating dividends
have paid the same paid in the first 20 days of
proportion of any income, any year as having been
war profits, or excess profits paid from the accumulated
taxes paid or deemed to be profits of the preceding year
paid by such foreign or years (unless to his
corporation to any foreign satisfaction shows
country or to any possession otherwise), and in other
of the United States on or respects treating dividends
with respect to such as having been paid from the
accumulated profits, which most recently accumulated
the amount of such gains, profits, or earning. . . .
dividends bears to the (Emphasis supplied)
amount of such accumulated
profits.

xxx xxx xxx Close examination of the above

quoted provisions of the US Tax
(c) Applicable Rules Code 7 shows the following:

(1) Accumulated profits a. US law (Section 901, Tax

defined. — For purposes of Code) grants P&G-USA a
this section, the term tax credit for the amount of
"accumulated profits" means the dividend tax actually paid
with respect to any foreign (i.e., withheld) from the
corporation, dividend remittances to
P&G-USA;
(A) for purposes of
subsections (a) (1) b. US law (Section 902, US
and (b) (1), the Tax Code) grants to P&G-
amount of its gains, USA a "deemed paid' tax
profits, or income credit 8 for a proportionate
computed without part of the corporate income
reduction by the tax actually paid to the
amount of the Philippines by P&G-Phil.
income, war profits,
and excess profits
taxes imposed on or
with respect to such The parent-corporation P&G-USA
profits or income by is "deemed to have paid" a portion
any foreign country. . of the Philippine corporate income
. .; and tax although that tax was actually
paid by its Philippine subsidiary,
(B) for purposes of P&G-Phil., not by P&G-USA. This
subsections (a) (2) "deemed paid" concept merely
and (b) (2), the reflects economic reality, since the
amount of its gains, Philippine corporate income tax
profits, or income in was in fact paid and deducted from
excess of the income, revenues earned in the Philippines,
war profits, and thus reducing the amount
excess profits taxes remittable as dividends to P&G-
imposed on or with USA. In other words, US tax law
respect to such profits treats the Philippine corporate
or income. income tax as if it came out of the
pocket, as it were, of P&G-USA as
The Secretary or his a part of the economic cost of
delegate shall have full carrying on business operations in
14
the Philippines through the medium
of P&G-Phil. and here earning
profits. What is, under US law,
deemed paid by P&G- USA are not
"phantom taxes" but instead
Philippine corporate income taxes
actually paid here by P&G-Phil.,
which are very real indeed.
It is also useful to note that both (i)
the tax credit for the Philippine
dividend tax actually withheld, and
(ii) the tax credit for the Philippine
corporate income tax actually paid
by P&G Phil. but "deemed paid" by
P&G-USA, are tax credits available
or applicable against the US
corporate income tax of P&G-USA.
These tax credits are allowed
because of the US congressional
desire to avoid or reduce double
taxation of the same income
stream. 9
In order to determine whether US
tax law complies with the
requirements for applicability of the
reduced or preferential fifteen
percent (15%) dividend tax rate
under Section 24 (b) (1), NIRC, it is
necessary:
a. to determine the amount
of the 20 percentage points
dividend tax waived by the
Philippine government under
Section 24 (b) (1), NIRC,
and which hence goes to
P&G-USA;
b. to determine the amount
of the "deemed paid" tax
credit which US tax law must
allow to P&G-USA; and
c. to ascertain that the
amount of the "deemed
paid" tax credit allowed by
US law is at least equal to
the amount of the dividend
tax waived by the Philippine
Government.
Amount (a), i.e., the amount of the
dividend tax waived by the
Philippine government is
arithmetically determined in the
following manner:
P100.00 — Pretax net
corporate income earned by
P&G-Phil.
x 35% — Regular Philippine
corporate income tax rate
———
P35.00 — Paid to the BIR
by P&G-Phil. as Philippine
corporate income tax.
P100.00
-35.00
———
P65.00 — Available for
remittance as dividends to
P&G-USA
P65.00 — Dividends
remittable to P&G-USA
x 35% — Regular Philippine
dividend tax rate under
Section 24
——— (b) (1), NIRC
P22.75 — Regular dividend
tax
P65.00 — Dividends
remittable to P&G-USA
x 15% — Reduced dividend
tax rate under Section 24
(b) (1), NIRC
———
P9.75 — Reduced dividend
tax
P22.75 — Regular dividend
tax under Section 24 (b) (1),
NIRC
-9.75 — Reduced dividend
tax under Section 24 (b) (1),
NIRC
———
P13.00 — Amount of
dividend tax waived by
Philippine
===== government under
Section 24 (b) (1), NIRC.
Thus, amount (a) above is P13.00
for every P100.00 of pre-tax net
income earned by P&G-Phil.
Amount (a) is also the minimum
amount of the "deemed paid" tax
credit that US tax law shall allow if
P&G-USA is to qualify for the
reduced or preferential dividend tax
rate under Section 24 (b) (1), NIRC.
15
Amount (b) above, i.e., the amount
of the "deemed paid" tax credit
which US tax law allows under
Section 902, Tax Code, may be
computed arithmetically as follows:
P65.00 — Dividends
remittable to P&G-USA
- 9.75 — Dividend tax
withheld at the reduced
(15%) rate
———
P55.25 — Dividends
actually remitted to P&G-
USA
P35.00 — Philippine
corporate income tax paid
by P&G-Phil.
to the BIR
Dividends actually
remitted by P&G-Phil.
to P&G-USA P55.25
——————— = ——— x
P35.00 = P29.75 10
Amount of accumulated
P65.00 ======
profits earned by
P&G-Phil. in excess
of income tax
Thus, for every P55.25 of dividends
actually remitted (after withholding
at the rate of 15%) by P&G-Phil. to
its US parent P&G-USA, a tax credit
of P29.75 is allowed by Section 902
US Tax Code for Philippine
corporate income tax "deemed
paid" by the parent but actually paid
by the wholly-owned subsidiary.
Since P29.75 is much higher than
P13.00 (the amount of dividend tax
waived by the Philippine
government), Section 902, US Tax
Code, specifically and clearly
complies with the requirements of
Section 24 (b) (1), NIRC.
3. It is important to note also that
the foregoing reading of Sections
901 and 902 of the US Tax Code is
identical with the reading of the BIR
of Sections 901 and 902 of the US
Tax Code is identical with the
reading of the BIR of Sections 901
and 902 as shown by administrative
rulings issued by the BIR.
The first Ruling was issued in 1976,
i.e., BIR Ruling No. 76004,
rendered by then Acting
Commissioner of Intemal Revenue
Efren I. Plana, later Associate
Justice of this Court, the relevant
portion of which stated:
However, after a restudy of
the decision in the American
Chicle Company case and
the provisions of Section 901
and 902 of the U.S. Internal
Revenue Code, we find
merit in your contention that
our computation of the credit
which the U.S. tax law allows
in such cases is erroneous
as the amount of tax
"deemed paid" to the
Philippine government for
purposes of credit against
the U.S. tax by the recipient
of dividends includes a
portion of the amount of
income tax paid by the
corporation declaring the
dividend in addition to the
tax withheld from the
dividend remitted. In other
words, the U.S. government
will allow a credit to the U.S.
corporation or recipient of
the dividend, in addition to
the amount of tax actually
withheld, a portion of the
income tax paid by the
corporation declaring the
dividend. Thus, if a
Philippine corporation wholly
owned by a U.S. corporation
has a net income of
P100,000, it will pay
P25,000 Philippine income
tax thereon in accordance
with Section 24(a) of the Tax
Code. The net income, after
income tax, which is
P75,000, will then be
declared as dividend to the
U.S. corporation at 15% tax,
or P11,250, will be withheld
therefrom. Under the
16
aforementioned sections of
the U.S. Internal Revenue
Code, U.S. corporation
receiving the dividend can
utilize as credit against its
U.S. tax payable on said
dividends the amount of
P30,000 composed of:
(1) The tax "deemed
paid" or indirectly
paid on the dividend
arrived at as follows:
P75,000 x P25,000 =
P18,750
———
100,000 **
(2) The amount of
15% of
P75,000 withheld =
11,250
———
P30,000
The amount of P18,750
deemed paid and to be
credited against the U.S. tax
on the dividends received by
the U.S. corporation from a
Philippine subsidiary is
clearly more than 20%
requirement of Presidential
Decree No. 369 as 20% of
P75,000.00 the dividends to
be remitted under the above
example, amounts to
P15,000.00 only.
In the light of the foregoing,
BIR Ruling No. 75-005 dated
September 10, 1975 is
hereby amended in the
sense that the dividends to
be remitted by your client to
its parent company shall be
subject to the withholding tax
at the rate of 15% only.
This ruling shall have force
and effect only for as long as
the present pertinent
provisions of the U.S.
Federal Tax Code, which are
the bases of the ruling, are
not revoked, amended and
modified, the effect of which
will reduce the percentage of
tax deemed paid and
creditable against the U.S.
tax on dividends remitted by
a foreign corporation to a
U.S. corporation. (Emphasis
supplied)
The 1976 Ruling was reiterated in,
e.g., BIR Ruling dated 22 July 1981
addressed to Basic Foods
Corporation and BIR Ruling dated
20 October 1987 addressed to
Castillo, Laman, Tan and
Associates. In other words, the
1976 Ruling of Hon. Efren I. Plana
was reiterated by the BIR even as
the case at bar was pending before
the CTA and this Court.
4. We should not overlook the fact
that the concept of "deemed paid"
tax credit, which is embodied in
Section 902, US Tax Code, is
exactly the same "deemed paid" tax
credit found in our NIRC and which
Philippine tax law allows to
Philippine corporations which have
operations abroad (say, in the
United States) and which,
therefore, pay income taxes to the
US government.
Section 30 (c) (3) and (8), NIRC,
provides:
(d) Sec. 30. Deductions from
Gross Income.—In
computing net income, there
shall be allowed as
deductions — . . .
(c) Taxes. — . . .
xxx xxx xxx
(3) Credits against tax for
taxes of foreign countries. —
If the taxpayer signifies in his
return his desire to have the
benefits of this paragraphs,
the tax imposed by this Title
shall be credited with . . .
(a) Citizen and Domestic
Corporation. — In the case
of a citizen of the Philippines
and of domestic corporation,
the amount of net income,
war profits or excess profits,
taxes paid or accrued during
the taxable year to any
17
 foreign country. (Emphasis
supplied)
Under Section 30 (c) (3) (a), NIRC,
above, the BIR must give a tax
credit to a Philippine corporation for
taxes actually paid by it to the US
government—e.g., for taxes
collected by the US government on
dividend remittances to the
Philippine corporation. This Section
of the NIRC is the equivalent of
Section 901 of the US Tax Code.
Section 30 (c) (8), NIRC, is
practically identical with Section
902 of the US Tax Code, and
provides as follows:
(8) Taxes of foreign
subsidiary. — For the
purposes of this subsection
a domestic corporation
which owns a majority of the
voting stock of a foreign
corporation from which it
receives dividends in any
taxable year shall be
deemed to have paid the
same proportion of any
income, war-profits, or
excess-profits taxes paid by
such foreign corporation to
any foreign country, upon or
with respect to the
accumulated profits of such
foreign corporation from
which such dividends were
paid, which the amount of
such dividends bears to the
amount of such accumulated
profits: Provided, That the
amount of tax deemed to
have been paid under this
subsection shall in no case
exceed the same proportion
of the tax against which
credit is taken which the
amount of such dividends
bears to the amount of the
entire net income of the
domestic corporation in
which such dividends are
included. The term
"accumulated profits" when
used in this subsection
reference to a foreign
corporation, means the
amount of its gains, profits,
or income in excess of the
income, war-profits, and
excess-profits taxes
imposed upon or with
respect to such profits or
income; and the
Commissioner of Internal
Revenue shall have full
power to determine from the
accumulated profits of what
year or years such dividends
were paid; treating dividends
paid in the first sixty days of
any year as having been
paid from the accumulated
profits of the preceding year
or years (unless to his
satisfaction shown
otherwise), and in other
respects treating dividends
as having been paid from the
most recently accumulated
gains, profits, or earnings. In
the case of a foreign
corporation, the income,
war-profits, and excess-
profits taxes of which are
determined on the basis of
an accounting period of less
than one year, the word
"year" as used in this
subsection shall be
construed to mean such
accounting period.
(Emphasis supplied)
Under the above quoted Section 30
(c) (8), NIRC, the BIR must give a
tax credit to a Philippine parent
corporation for taxes "deemed
paid" by it, that is, e.g., for taxes
paid to the US by the US subsidiary
of a Philippine-parent corporation.
The Philippine parent or corporate
stockholder is "deemed" under our
NIRC to have paid a proportionate
part of the US corporate income tax
paid by its US subsidiary, although
such US tax was actually paid by
the subsidiary and not by the
Philippine parent.
Clearly, the "deemed paid" tax credit which,
under Section 24 (b) (1), NIRC, must be allowed
by US law to P&G-USA, is the same "deemed
paid" tax credit that Philippine law allows to a
Philippine corporation with a wholly- or majority-
owned subsidiary in (for instance) the US. The
18
"deemed paid" tax credit allowed in Section 902,
US Tax Code, is no more a credit for "phantom
taxes" than is the "deemed paid" tax credit
granted in Section 30 (c) (8), NIRC.
III
1. The Second Division of the Court, in holding
that the applicable dividend tax rate in the instant
case was the regular thirty-five percent (35%)
rate rather than the reduced rate of fifteen percent
(15%), held that P&G-Phil. had failed to prove
that its parent, P&G-USA, had in fact been given
by the US tax authorities a "deemed paid" tax
credit in the amount required by Section 24 (b)
(1), NIRC.
We believe, in the first place, that we must
distinguish between the legal question before this
Court from questions of administrative
implementation arising after the legal question
has been answered. The basic legal issue is of
course, this: which is the applicable dividend tax
rate in the instant case: the regular thirty-five
percent (35%) rate or the reduced fifteen percent
(15%) rate? The question of whether or not P&G-
USA is in fact given by the US tax authorities a
"deemed paid" tax credit in the required amount,
relates to the administrative implementation of
the applicable reduced tax rate.
In the second place, Section 24 (b) (1), NIRC,
does not in fact require that the "deemed paid" tax
credit shall have actually been granted before the
applicable dividend tax rate goes down from
thirty-five percent (35%) to fifteen percent (15%).
As noted several times earlier, Section 24 (b) (1),
NIRC, merely requires, in the case at bar, that the
USA "shall allow a credit against the
tax due from [P&G-USA for] taxes deemed to
have been paid in the Philippines . . ." There is
neither statutory provision nor revenue regulation
issued by the Secretary of Finance requiring the
actual grant of the "deemed paid" tax credit by the
US Internal Revenue Service to P&G-USA before
the preferential fifteen percent (15%) dividend
rate becomes applicable. Section 24 (b) (1),
NIRC, does not create a tax exemption nor does
it provide a tax credit; it is a provision which
specifies when a particular (reduced) tax rate is
legally applicable.
In the third place, the position originally taken by
the Second Division results in a severe practical
problem of administrative circularity. The Second
Division in effect held that the reduced dividend
tax rate is not applicable until the US tax credit for
"deemed paid" taxes is actually given in the
required minimum amount by the US Internal
Revenue Service to P&G-USA. But, the US
"deemed paid" tax credit cannot be given by the
US tax authorities unless dividends have actually
been remitted to the US, which means that the
Philippine dividend tax, at the rate here
applicable, was actually imposed and collected.
11 It is this practical or operating circularity that is
in fact avoided by our BIR when it issues rulings
that the tax laws of particular foreign jurisdictions
(e.g., Republic of Vanuatu 12 Hongkong, 13
Denmark, 14 etc.) comply with the requirements
set out in Section 24 (b) (1), NIRC, for
applicability of the fifteen percent (15%) tax rate.
Once such a ruling is rendered, the Philippine
subsidiary begins to withhold at the reduced
dividend tax rate.
A requirement relating to administrative
implementation is not properly imposed as a
condition for the applicability, as a matter of law,
of a particular tax rate. Upon the other hand, upon
the determination or recognition of the
applicability of the reduced tax rate, there is
nothing to prevent the BIR from issuing
implementing regulations that would require P&G
Phil., or any Philippine corporation similarly
situated, to certify to the BIR the amount of the
"deemed paid" tax credit actually subsequently
granted by the US tax authorities to P&G-USA or
a US parent corporation for the taxable year
involved. Since the US tax laws can and do
change, such implementing regulations could
also provide that failure of P&G-Phil. to submit
such certification within a certain period of time,
would result in the imposition of a deficiency
assessment for the twenty (20) percentage points
differential. The task of this Court is to settle
which tax rate is applicable, considering the state
of US law at a given time. We should leave details
relating to administrative implementation where
they properly belong — with the BIR.
2. An interpretation of a tax statute that produces
a revenue flow for the government is not, for that
reason alone, necessarily the correct reading of
the statute. There are many tax statutes or
provisions which are designed, not to trigger off
an instant surge of revenues, but rather to
achieve longer-term and broader-gauge fiscal
and economic objectives. The task of our Court is
to give effect to the legislative design and
objectives as they are written into the statute
even if, as in the case at bar, some revenues
have to be foregone in that process.
The economic objectives sought to be achieved
by the Philippine Government by reducing the
thirty-five percent (35%) dividend rate to fifteen
percent (15%) are set out in the preambular
19
clauses of P.D. No. 369 which amended Section
24 (b) (1), NIRC, into its present form:
WHEREAS, it is imperative to adopt
measures responsive to the
requirements of a developing
economy foremost of which is the
financing of economic development
programs;
WHEREAS, nonresident foreign
corporations with investments in
the Philippines are taxed on their
earnings from dividends at the rate
of 35%;
WHEREAS, in order to encourage
more capital investment for large
projects an appropriate tax need be
imposed on dividends received by
non-resident foreign corporations in
the same manner as the tax
imposed on interest on foreign
loans;
xxx xxx xxx
(Emphasis supplied)
More simply put, Section 24 (b) (1), NIRC, seeks
to promote the in-flow of foreign equity
investment in the Philippines by reducing the tax
cost of earning profits here and thereby
increasing the net dividends remittable to the
investor. The foreign investor, however, would
not benefit from the reduction of the Philippine
dividend tax rate unless its home country gives it
some relief from double taxation (i.e., second-tier
taxation) (the home country would simply have
more "post-R.P. tax" income to subject to its own
taxing power) by allowing the investor additional
tax credits which would be applicable against the
tax payable to such home country. Accordingly,
Section 24 (b) (1), NIRC, requires the home or
domiciliary country to give the investor
corporation a "deemed paid" tax credit at least
equal in amount to the twenty (20) percentage
points of dividend tax foregone by the Philippines,
in the assumption that a positive incentive effect
would thereby be felt by the investor.
The net effect upon the foreign investor may be
shown arithmetically in the following manner:
P65.00 — Dividends remittable to
P&G-USA (please
see page 392 above
- 9.75 — Reduced R.P. dividend
tax withheld by P&G-Phil.
———
P55.25 — Dividends actually
remitted to P&G-USA
P55.25
x 46% — Maximum US corporate
income tax rate
———
P25.415—US corporate tax
payable by P&G-USA
without tax credits
P25.415
- 9.75 — US tax credit for RP
dividend tax withheld by P&G-Phil.
at 15% (Section 901, US Tax
Code)
———
P15.66 — US corporate income
tax payable after Section 901
——— tax credit.
P55.25
- 15.66
———
P39.59 — Amount received by
P&G-USA net of R.P. and U.S.
===== taxes without "deemed
paid" tax credit.
P25.415
- 29.75 — "Deemed paid" tax
credit under Section 902 US
——— Tax Code (please see page
18 above)
- 0 - — US corporate income tax
payable on dividends
====== remitted by P&G-Phil. to
P&G-USA after
Section 902 tax credit.
P55.25 — Amount received by
P&G-USA net of RP and US
====== taxes after Section 902
tax credit.
It will be seen that the "deemed paid" tax credit
allowed by Section 902, US Tax Code, could
offset the US corporate income tax payable on
the dividends remitted by P&G-Phil. The result, in
fine, could be that P&G-USA would after US tax
credits, still wind up with P55.25, the full amount
of the dividends remitted to P&G-USA net of
Philippine taxes. In the calculation of the
Philippine Government, this should encourage
additional investment or re-investment in the
Philippines by P&G-USA.
3. It remains only to note that under the
Philippines-United States Convention "With
20
Respect to Taxes on Income," 15 the Philippines,
by a treaty commitment, reduced the regular rate
of dividend tax to a maximum of twenty percent
(20%) of the gross amount of dividends paid to
US parent corporations:
Art 11. — Dividends
xxx xxx xxx
(2) The rate of tax imposed by one
of the Contracting States on
dividends derived from sources
within that Contracting State by a
resident of the other Contracting
State shall not exceed —
WHEREFORE, for all the foregoing, the Court
Resolved to GRANT private respondent's Motion
for Reconsideration dated 11 May 1988, to SET
ASIDE the Decision of the and Division of the
Court promulgated on 15 April 1988, and in lieu
thereof, to REINSTATE and AFFIRM the
Decision of the Court of Tax Appeals in CTA
Case No. 2883 dated 31 January 1984 and to
DENY the Petition for Review for lack of merit. No
pronouncement as to costs.
Narvasa, Gutierrez, Jr., Griño-Aquino,
Medialdea and Romero, JJ., concur.
Fernan, C.J., is on leave.

(a) 25 percent of the gross amount

of the dividend; or

(b) When the recipient is a

corporation, 20 percent of the gross
amount of the dividend if during the
part of the paying corporation's
taxable year which precedes the
date of payment of the dividend and
during the whole of its prior taxable
year (if any), at least 10 percent of
the outstanding shares of the voting
stock of the paying corporation was
owned by the recipient corporation.

xxx xxx xxx

(Emphasis supplied)

The Tax Convention, at the same time,

established a treaty obligation on the part of the
United States that it "shall allow" to a US parent
corporation receiving dividends from its
Philippine subsidiary "a [tax] credit for the
appropriate amount of taxes paid or accrued to
the Philippines by the Philippine [subsidiary] —.
16 This is, of course, precisely the "deemed paid"
tax credit provided for in Section 902, US Tax
Code, discussed above. Clearly, there is here on
the part of the Philippines a deliberate
undertaking to reduce the regular dividend tax
rate of twenty percent (20%) is a maximum rate,
there is still a differential or additional reduction of
five (5) percentage points which compliance of
US law (Section 902) with the requirements of
Section 24 (b) (1), NIRC, makes available in
respect of dividends from a Philippine subsidiary.

We conclude that private respondent P&G-Phil, is

entitled to the tax refund or tax credit which it
seeks.

21
 Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-68375 April 15, 1988
COMMISSIONER OF INTERNAL REVENUE,
petitioner,
vs.
WANDER PHILIPPINES, INC. AND THE
COURT OF TAX APPEALS, respondents.
The Solicitor General for petitioner.
Felicisimo R. Quiogue and Cirilo P. Noel for
respondents.
BIDIN, J.:
This is a petition for review on certiorari of the
January 19, 1984 Decision of the Court of Tax
Appeals * in C.T.A. Case No.2884, entitled
Wander Philippines, Inc. vs. Commissioner of
Internal Revenue, holding that Wander
Philippines, Inc. is entitled to the preferential rate
of 15% withholding tax on the dividends remitted
to its foreign parent company, the Glaro S.A. Ltd.
of Switzerland, a non-resident foreign
corporation.
Herein private respondent, Wander Philippines,
Inc. (Wander, for short), is a domestic corporation
organized under Philippine laws. It is wholly-
owned subsidiary of the Glaro S.A. Ltd. (Glaro for
short), a Swiss corporation not engaged in trade
or business in the Philippines.
On July 18, 1975, Wander filed its withholding tax
return for the second quarter ending June 30,
1975 and remitted to its parent company, Glaro
dividends in the amount of P222,000.00, on
which 35% withholding tax thereof in the amount
of P77,700.00 was withheld and paid to the
Bureau of Internal Revenue.
Again, on July 14, 1976, Wander filed a
withholding tax return for the second quarter
ending June 30, 1976 on the dividends it remitted
to Glaro amounting to P355,200.00, on wich 35%
tax in the amount of P124,320.00 was withheld
and paid to the Bureau of Internal Revenue.
On July 5, 1977, Wander filed with the Appellate
Division of the Internal Revenue a claim for
refund and/or tax credit in the amount of
P115,400.00, contending that it is liable only to
15% withholding tax in accordance with Section
24 (b) (1) of the Tax Code, as amended by
Presidential Decree Nos. 369 and 778, and not
on the basis of 35% which was withheld and paid
to and collected by the government.
Petitioner herein, having failed to act on the
above-said claim for refund, on July 15, 1977,
Wander filed a petition with respondent Court of
Tax Appeals.
On October 6, 1977, petitioner file his Answer.
On January 19, 1984, respondent Court of Tax
Appeals rendered a Decision, the decretal portion
of which reads:
WHEREFORE, respondent is
hereby ordered to grant a refund
and/or tax credit to petitioner in the
amount of P115,440.00
representing overpaid withholding
tax on dividends remitted by it to the
Glaro S.A. Ltd. of Switzerland
during the second quarter of the
years 1975 and 1976.
On March 7, 1984, petitioner filed a Motion for
Reconsideration but the same was denied in a
Resolution dated August 13, 1984. Hence, the
instant petition.
Petitioner raised two (2) assignment of errors, to
wit:
I
ASSUMING THAT THE TAX REFUND IN THE
CASE AT BAR IS ALLOWABLE AT ALL, THE
COURT OF TAX APPEALS ERRED INHOLDING
THAT THE HEREIN RESPONDENT WANDER
PHILIPPINES, INC. IS ENTITLED TO THE SAID
REFUND.
II
THE COURT OF TAX APPEALS ERRED IN
HOLDING THAT SWITZERLAND, THE HOME
COUNTRY OF GLARO S.A. LTD. (THE PARENT
COMPANY OF THE HEREIN RESPONDENT
WANDER PHILIPPINES, INC.), GRANTS TO
SAID GLARO S.A. LTD. AGAINST ITS SWISS
INCOME TAX LIABILITY A TAX CREDIT
EQUIVALENT TO THE 20 PERCENTAGE-
POINT PORTION (OF THE 35 PERCENT
PHILIPPINE DIVIDEND TAX) SPARED OR
WAIVED OR OTHERWISE DEEMED AS IF PAID
IN THE PHILIPPINES UNDER SECTION 24 (b)
(1) OF THE PHILIPPINE TAX CODE.
22
The sole issue in this case is whether or not
private respondent Wander is entitled to the
preferential rate of 15% withholding tax on
dividends declared and remitted to its parent
corporation, Glaro.
From this issue, two questions were posed by
petitioner: (1) Whether or not Wander is the
proper party to claim the refund; and (2) Whether
or not Switzerland allows as tax credit the
"deemed paid" 20% Philippine Tax on such
dividends.
by the Philippine Government of taxes on
incomes, derived from sources in the Philippines,
by aliens who are outside the taxing jurisdiction
of this Court (Commissioner of Internal Revenue
vs. Malayan Insurance Co., Inc., 21 SCRA 944).
In fact, Wander may be assessed for deficiency
withholding tax at source, plus penalties
consisting of surcharge and interest (Section 54,
NLRC). Therefore, as the Philippine counterpart,
Wander is the proper entity who should for the
refund or credit of overpaid withholding tax on
dividends paid or remitted by Glaro.

Petitioner maintains and argues that it is Glaro Closely intertwined with the first assignment of
the tax payer, and not Wander, the remitter or error is the issue of whether or not Switzerland,
payor of the dividend income and a mere the foreign country where Glaro is domiciled,
withholding agent for and in behalf of the grants to Glaro a tax credit against the tax due it,
Philippine Government, which should be legally equivalent to 20%, or the difference between the
entitled to receive the refund if any. regular 35% rate of the preferential 15% rate. The
dispute in this issue lies on the fact that
It will be noted, however, that Petitioner's above- Switzerland does not impose any income tax on
entitled argument is being raised for the first time dividends received by Swiss corporation from
in this Court. It was never raised at the corporations domiciled in foreign countries.
administrative level, or at the Court of Tax
Appeals. To allow a litigant to assume a different Section 24 (b) (1) of the Tax Code, as amended
posture when he comes before the court and by P.D. 369 and 778, the law involved in this
challenge the position he had accepted at the case, reads:
administrative level, would be to sanction a
procedure whereby the Court—which is Sec. 1. The first paragraph of
supposed to review administrative subsection (b) of Section 24 of the
determinations—would not review, but determine National Internal Revenue Code, as
and decide for the first time, a question not raised amended, is hereby further
at the administrative forum. Thus, it is well settled amended to read as follows:
that under the same underlying principle of prior
exhaustion of administrative remedies, on the (b) Tax on foreign
judicial level, issues not raised in the lower court corporations. — 1)
cannot be raised for the first time on appeal Non-resident
(Aguinaldo Industries Corporation vs. corporation. A foreign
Commissioner of Internal Revenue, 112 SCRA corporation not
136; Pampanga Sugar Dev. Co., Inc. vs. CIR, 114 engaged in trade or
SCRA 725; Garcia vs. Court of Appeals, 102 business in the
SCRA 597; Matialonzo vs. Servidad, 107 SCRA Philippines, including
726, a foreign life
insurance company
In any event, the submission of petitioner that not engaged in the life
Wander is but a withholding agent of the insurance business in
government and therefore cannot claim the Philippines, shall
reimbursement of the alleged overpaid taxes, is pay a tax equal to
untenable. It will be recalled, that said corporation 35% of the gross
is first and foremost a wholly owned subsidiary of income received
Glaro. The fact that it became a withholding agent during its taxable year
of the government which was not by choice but from all sources
by compulsion under Section 53 (b) of the Tax within the Philippines,
Code, cannot by any stretch of the imagination be as interest (except
considered as an abdication of its responsibility interest on foreign
to its mother company. Thus, this Court loans which shall be
construing Section 53 (b) of the Internal Revenue subject to 15% tax),
Code held that "the obligation imposed dividends, premiums,
thereunder upon the withholding agent is annuities,
compulsory." It is a device to insure the collection compensations,
23
 remuneration for the parent corporation allows a foreign tax credit
technical services or not only for the 15 percentage-point portion
otherwise, actually paid but also for the equivalent twenty
emoluments or other percentage point portion spared, waived or
fixed or determinable, otherwise deemed as if paid in the Philippines;
annual, periodical or that private respondent does not cite anywhere a
casual gains, profits, Swiss law to the effect that in case where a
and income, and foreign tax, such as the Philippine 35% dividend
capital gains: ... tax, is spared waived or otherwise considered as
Provided, still further if paid in whole or in part by the foreign country, a
That on dividends Swiss foreign-tax credit would be allowed for the
received from a whole or for the part, as the case may be, of the
domestic corporation foreign tax so spared or waived or considered as
liable to tax under this if paid by the foreign country.
Chapter, the tax shall
be 15% of the While it may be true that claims for refund are
dividends received, construed strictly against the claimant,
which shall be nevertheless, the fact that Switzerland did not
collected and paid as impose any tax or the dividends received by
provided in Section Glaro from the Philippines should be considered
53 (d) of this Code, as a full satisfaction of the given condition. For,
subject to the as aptly stated by respondent Court, to deny
condition that the private respondent the privilege to withhold only
country in which the 15% tax provided for under Presidential Decree
non-resident foreign No. 369, amending Section 24 (b) (1) of the Tax
corporation is Code, would run counter to the very spirit and
domiciled shall allow intent of said law and definitely will adversely
a credit against the affect foreign corporations" interest here and
tax due from the non- discourage them from investing capital in our
resident foreign country.
corporation taxes
deemed to have been Besides, it is significant to note that the
paid in the Philippines conclusion reached by respondent Court is but a
equivalent to 20% confirmation of the May 19, 1977 ruling of
which represents the petitioner that "since the Swiss Government does
difference between not impose any tax on the dividends to be
the regular tax (35%) received by the said parent corporation in the
on corporations and Philippines, the condition imposed under the
the tax (15%) above-mentioned section is satisfied.
dividends as provided Accordingly, the withholding tax rate of 15% is
in this section: ... hereby affirmed."

From the above-quoted provision, the dividends
received from a domestic corporation liable to tax,
the tax shall be 15% of the dividends received,
subject to the condition that the country in which
the non-resident foreign corporation is domiciled
shall allow a credit against the tax due from the
non-resident 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%) dividends.
In the instant case, Switzerland did not impose
any tax on the dividends received by Glaro.
Accordingly, Wander claims that full credit is
granted and not merely credit equivalent to 20%.
Petitioner, on the other hand, avers the tax
sparing credit is applicable only if the country of
Moreover, as a matter of principle, this Court will
not set aside the conclusion reached by an
agency such as the Court of Tax Appeals which
is, by the very nature of its function, dedicated
exclusively to the study and consideration of tax
problems and has necessarily developed an
expertise on the subject unless there has been an
abuse or improvident exercise of authority (Reyes
vs. Commissioner of Internal Revenue, 24 SCRA
198, which is not present in the instant case.
WHEREFORE, the petition filed is DISMISSED
for lack of merit. SO ORDERED.
24
 Add:
Discrepancie
s:
Professio
nal 261,877.0
fees/yr. 17 0
018
per 110,399.3
investigation 7

SECOND DIVISION Total Adjustment 152,477.00

Net income per 14,727,687
G.R. No. 108067 January 20, 2000 Investigation .00

CYANAMID PHILIPPINES, INC., petitioner, Less: Personal and

vs. additional exemptions
THE COURT OF APPEALS, THE COURT OF
14,727,687
TAX APPEALS and COMMISSIONER OF Amount subject to tax
.00
INTERNAL REVENUE, respondent.
Income tax
QUISUMBING, J.: due thereon . 2,385,231. 3,237,495.
. . 25% 50 00
Petitioner disputes the decision1 of the Court of Surtax
Appeals which affirmed the decision2 of the Court
of Tax Appeals, ordering petitioner to pay Less: Amount already 5,161,788.
respondent Commissioner of Internal Revenue assessed 00
the amount of three million, seven hundred BALANCE 75,709.00
seventy-four thousand, eight hundred sixty seven
pesos and fifty centavos (P3,774,867.50) as 25% monthly 1,389,639.
surtax on improper accumulation of profits for 44,108.00
interest from 00
1981, plus 10% surcharge and 20% annual
interest from January 30, 1985 to January 30,
1987, under Sec. 25 of the National Internal Compromise penalties
Revenue Code.1âwphi1.nêt
TOTAL
The Court of Tax Appeals made the following 3,774,867. 119,817.00
AMOUNT
factual findings: 50 3
DUE
Petitioner, Cyanamid Philippines, Inc., a
corporation organized under Philippine laws, is a On March 4, 1985, petitioner protested the
wholly owned subsidiary of American Cyanamid assessments particularly, (1) the 25% Surtax
Co. based in Maine, USA. It is engaged in the Assessment of P3,774,867.50; (2) 1981
manufacture of pharmaceutical products and Deficiency Income Assessment of P119,817.00;
chemicals, a wholesaler of imported finished and 1981 Deficiency Percentage Assessment of
goods, and an importer/indentor. P8,846.72.4 Petitioner, through its external
accountant, Sycip, Gorres, Velayo & Co.,
On February 7, 1985, the CIR sent an claimed, among others, that the surtax for the
assessment letter to petitioner and demanded the undue accumulation of earnings was not proper
payment of deficiency income tax of one hundred because the said profits were retained to increase
nineteen thousand eight hundred seventeen petitioner's working capital and it would be used
(P119,817.00) pesos for taxable year 1981, as for reasonable business needs of the company.
follows: Petitioner contended that it availed of the tax
amnesty under Executive Order No. 41, hence
enjoyed amnesty from civil and criminal
Net income disclosed by 14,575,210 prosecution granted by the law.
the return as audited .00
On October 20, 1987, the CIR in a letter
addressed to SGV & Co., refused to allow the

25
cancellation of the assessment notices and
rendered its resolution, as follows:
It appears that your client availed of
Executive Order No. 41 under File No.
32A-F-000455-41B as certified and
confirmed by our Tax Amnesty
Implementation Office on October 6, 1987.
In reply thereto, I have the honor to inform
you that the availment of the tax amnesty
under Executive Order No. 41, as
amended is sufficient basis, in appropriate
cases, for the cancellation of the
assessment issued after August 21, 1986.
(Revenue Memorandum Order No. 4-87)
Said availment does not, therefore, result
in cancellation of assessments issued
before August 21, 1986. as in the instant
case. In other words, the assessments in
this case issued on January 30, 1985
despite your client's availment of the tax
amnesty under Executive Order No. 41, as
amended still subsist.
Such being the case, you are therefore,
requested to urge your client to pay this
Office the aforementioned deficiency
income tax and surtax on undue
accumulation of surplus in the respective
amounts of P119,817.00 and
P3,774,867.50 inclusive of interest
thereon for the year 1981, within thirty (30)
days from receipt hereof, otherwise this
office will be constrained to enforce
collection thereof thru summary remedies
prescribed by law.
This constitutes the final decision of this
Office on this matter.5
Petitioner appealed to the Court of Tax Appeals.
During the pendency of the case, however, both
parties agreed to compromise the 1981
deficiency income tax assessment of
P119,817.00. Petitioner paid a reduced amount
— twenty-six thousand, five hundred seventy-
seven pesos (P26,577.00) — as compromise
settlement. However, the surtax on improperly
accumulated profits remained unresolved.
Petitioner claimed that CIR's assessment
representing the 25% surtax on its accumulated
earnings for the year 1981 had no legal basis for
the following reasons: (a) petitioner accumulated
its earnings and profits for reasonable business
requirements to meet working capital needs and
retirement of indebtedness; (b) petitioner is a
wholly owned subsidiary of American Cyanamid
Company, a corporation organized under the
laws of the State of Maine, in the United States of
America, whose shares of stock are listed and
traded in New York Stock Exchange. This being
the case, no individual shareholder income taxes
by petitioner's accumulation of earnings and
profits, instead of distribution of the same.
In denying the petition, the Court of Tax Appeals
made the following pronouncements:
Petitioner contends that it did not declare
dividends for the year 1981 in order to use
the accumulated earnings as working
capital reserve to meet its "reasonable
business needs". The law permits a stock
corporation to set aside a portion of its
retained earnings for specified purposes
(citing Section 43, paragraph 2 of the
Corporation Code of the Philippines). In
the case at bar, however, petitioner's
purpose for accumulating its earnings
does not fall within the ambit of any of
these specified purposes.
More compelling is the finding that there
was no need for petitioner to set aside a
portion of its retained earnings as working
capital reserve as it claims since it had
considerable liquid funds. A thorough
review of petitioner's financial statement
(particularly the Balance Sheet, p. 127,
BIR Records) reveals that the corporation
had considerable liquid funds consisting of
cash accounts receivable, inventory and
even its sales for the period is adequate to
meet the normal needs of the business.
This can be determined by computing the
current asset to liability ratio of the
company:
current ratio = current assets/
current liabilities
= P 47,052,535.00 /
P21,275,544.00
= 2.21: 1
========
The significance of this ratio is to serve as
a primary test of a company's solvency to
meet current obligations from current
assets as a going concern or a measure of
adequacy of working capital.
xxx xxx xxx
We further reject petitioner's argument that
"the accumulated earnings tax does not
apply to a publicly-held corporation" citing
26
 American jurisprudence to support its
position. The reference finds no
application in the case at bar because
under Section 25 of the NIRC as amended
by Section 5 of P.D. No. 1379 [1739]
(dated September 17, 1980), the
exceptions to the accumulated earnings
tax are expressly enumerated, to wit:
Bank, non-bank financial intermediaries,
corporations organized primarily, and
authorized by the Central Bank of the
Philippines to hold shares of stock of
banks, insurance companies, or personal
holding companies, whether domestic or
foreign. The law on the matter is clear and
specific. Hence, there is no need to resort
to applicable cases decided by the
American Federal Courts for guidance and
enlightenment as to whether the provision
of Section 25 of the NIRC should apply to
petitioner.
Equally clear and specific are the
provisions of E.O. 41 particularly with
respect to its effectivity and coverage . . .
. . . Said availment does not result in
cancellation of assessments issued before
August 21, 1986 as petitioner seeks to do
in the case at bar. Therefore, the
assessments in this case, issued on
January 30, 1985 despite petitioner's
availment of the tax amnesty under E.O.
41 as amended, still subsist.
xxx xxx xxx
WHEREFORE, petitioner Cyanamid
Philippines, Inc., is ordered to pay
respondent Commissioner of Internal
Revenue the sum of P3,774,867.50
representing 25% surtax on improper
accumulation of profits for 1981, plus 10%
surcharge and 20% annual interest from
January 30, 1985 to January 30, 1987.6
Petitioner appealed the Court of Tax Appeal's
decision to the Court of Appeals. Affirming the
CTA decision, the appellate court said:
In reviewing the instant petition and the
arguments raised herein, We find no
compelling reason to reverse the findings
of the respondent Court. The respondent
Court's decision is supported by evidence,
such as petitioner corporation's financial
statement and balance sheets (p. 127, BIR
Records). On the other hand the petitioner
corporation could only come up with an
alternative formula lifted from a decision
rendered by a foreign court (Bardahl Mfg.
Corp. vs. Commissioner, 24 T.C.M. [CCH]
1030). Applying said formula to its
particular financial position, the petitioner
corporation attempts to justify its
accumulated surplus earnings. To Our
mind, the petitioner corporation's
alternative formula cannot overturn the
persuasive findings and conclusion of the
respondent Court based, as it is, on the
applicable laws and jurisprudence, as well
as standards in the computation of taxes
and penalties practiced in this jurisdiction.
WHEREFORE, in view of the foregoing,
the instant petition is hereby DISMISSED
and the decision of the Court of Tax
Appeals dated August 6, 1992 in C.T.A.
Case No. 4250 is AFFIRMED in toto.7
Hence, petitioner now comes before us and
assigns as sole issue:
WHETHER THE RESPONDENT COURT
ERRED IN HOLDING THAT THE
PETITIONER IS LIABLE FOR THE
ACCUMULATED EARNINGS TAX FOR
THE YEAR 1981.8
Sec. 259 of the old National Internal Revenue
Code of 1977 states:
Sec. 25. Additional tax on corporation
improperly accumulating profits or surplus
—
(a) Imposition of tax. — If any corporation
is formed or availed of for the purpose of
preventing the imposition of the tax upon
its shareholders or members or the
shareholders or members of another
corporation, through the medium of
permitting its gains and profits to
accumulate instead of being divided or
distributed, there is levied and assessed
against such corporation, for each taxable
year, a tax equal to twenty-five per-centum
of the undistributed portion of its
accumulated profits or surplus which shall
be in addition to the tax imposed by
section twenty-four, and shall be
computed, collected and paid in the same
manner and subject to the same
provisions of law, including penalties, as
that tax.
(b) Prima facie evidence. — The fact that
any corporation is mere holding company
shall be prima facie evidence of a purpose
to avoid the tax upon its shareholders or
27
 members. Similar presumption will lie in
the case of an investment company where
at any time during the taxable year more
than fifty per centum in value of its
outstanding stock is owned, directly or
indirectly, by one person.
(c) Evidence determinative of purpose. —
The fact that the earnings or profits of a
corporation are permitted to accumulate
beyond the reasonable needs of the
business shall be determinative of the
purpose to avoid the tax upon its
shareholders or members unless the
corporation, by clear preponderance of
evidence, shall prove the contrary.
(d) Exception. — The provisions of this
sections shall not apply to banks, non-
bank financial intermediaries, corporation
organized primarily, and authorized by the
Central Bank of the Philippines to hold
shares of stock of banks, insurance
companies, whether domestic or foreign.
The provision discouraged tax avoidance through
corporate surplus accumulation. When
corporations do not declare dividends, income
taxes are not paid on the undeclared dividends
received by the shareholders. The tax on
improper accumulation of surplus is essentially a
penalty tax designed to compel corporations to
distribute earnings so that the said earnings by
shareholders could, in turn, be taxed.
Relying on decisions of the American Federal
Courts, petitioner stresses that the accumulated
earnings tax does not apply to Cyanamid, a
wholly owned subsidiary of a publicly owned
company.10 Specifically, petitioner cites
Golconda Mining Corp. vs. Commissioner, 507
F.2d 594, whereby the U.S. Ninth Circuit Court of
Appeals had taken the position that the
accumulated earnings tax could only apply to a
closely held corporation.
A review of American taxation history on
accumulated earnings tax will show that the
application of the accumulated earnings tax to
publicly held corporations has been problematic.
Initially, the Tax Court and the Court of Claims
held that the accumulated earnings tax applies to
publicly held corporations. Then, the Ninth Circuit
Court of Appeals ruled in Golconda that the
accumulated earnings tax could only apply to
closely held corporations. Despite Golconda, the
Internal Revenue Service asserted that the tax
could be imposed on widely held corporations
including those not controlled by a few
shareholders or groups of shareholders. The
Service indicated it would not follow the Ninth
Circuit regarding publicly held corporations.11 In
1984, American legislation nullified the Ninth
Circuit's Golconda ruling and made it clear that
the accumulated earnings tax is not limited to
closely held corporations.12 Clearly, Golconda is
no longer a reliable precedent.
The amendatory provision of Section 25 of the
1977 NIRC, which was PD 1739, enumerated the
corporations exempt from the imposition of
improperly accumulated tax: (a) banks; (b) non-
bank financial intermediaries; (c) insurance
companies; and (d) corporations organized
primarily and authorized by the Central Bank of
the Philippines to hold shares of stocks of banks.
Petitioner does not fall among those exempt
classes. Besides, the rule on enumeration is that
the express mention of one person, thing, act, or
consequence is construed to exclude all
others.13 Laws granting exemption from tax are
construed strictissimi juris against the taxpayer
and liberally in favor of the taxing power.14
Taxation is the rule and exemption is the
exception.15 The burden of proof rests upon the
party claiming exemption to prove that it is, in fact,
covered by the exemption so claimed,16 a
burden which petitioner here has failed to
discharge.
Another point raised by the petitioner in objecting
to the assessment, is that increase of working
capital by a corporation justifies accumulating
income. Petitioner asserts that respondent court
erred in concluding that Cyanamid need not
infuse additional working capital reserve because
it had considerable liquid funds based on the
2.21:1 ratio of current assets to current liabilities.
Petitioner relies on the so-called "Bardahl"
formula, which allowed retention, as working
capital reserve, sufficient amounts of liquid assets
to carry the company through one operating
cycle. The "Bardahl"17 formula was developed to
measure corporate liquidity. The formula requires
an examination of whether the taxpayer has
sufficient liquid assets to pay all of its current
liabilities and any extraordinary expenses
reasonably anticipated, plus enough to operate
the business during one operating cycle.
Operating cycle is the period of time it takes to
convert cash into raw materials, raw materials
into inventory, and inventory into sales, including
the time it takes to collect payment for the
sales.18
Using this formula, petitioner contends,
Cyanamid needed at least P33,763,624.00 pesos
as working capital. As of 1981, its liquid asset was
only P25,776,991.00. Thus, petitioner asserts
that Cyanamid had a working capital deficit of
28
P7,986,633.00.19 Therefore, the P9,540,926.00
accumulated income as of 1981 may be validly
accumulated to increase the petitioner's working
capital for the succeeding year.
We note, however, that the companies where the
"Bardahl" formula was applied, had operating
cycles much shorter than that of petitioner. In
Atlas Tool Co., Inc, vs. CIR,20 the company's
operating cycle was only 3.33 months or 27.75%
of the year. In Cataphote Corp. of Mississippi vs.
United States,21 the corporation's operating
cycle was only 56.87 days, or 15.58% of the year.
In the case of Cyanamid, the operating cycle was
288.35 days, or 78.55% of a year, reflecting that
petitioner will need sufficient liquid funds, of at
least three quarters of the year, to cover the
operating costs of the business. There are
variations in the application of the "Bardahl"
formula, such as average operating cycle or peak
operating cycle. In times when there is no
recurrence of a business cycle, the working
capital needs cannot be predicted with accuracy.
As stressed by American authorities, although the
"Bardahl" formula is well-established and
routinely applied by the courts, it is not a precise
rule. It is used only for administrative
convenience.22 Petitioner's application of the
"Bardahl" formula merely creates a false illusion
of exactitude.
Other formulas are also used, e.g. the ratio of
current assets to current liabilities and the
adoption of the industry standard.23 The ratio of
current assets to current liabilities is used to
determine the sufficiency of working capital.
Ideally, the working capital should equal the
current liabilities and there must be 2 units of
current assets for every unit of current liability,
hence the so-called "2 to 1" rule.24
As of 1981 the working capital of Cyanamid was
P25,776,991.00, or more than twice its current
liabilities. That current ratio of Cyanamid,
therefore, projects adequacy in working capital.
Said working capital was expected to increase
further when more funds were generated from the
succeeding year's sales. Available income
covered expenses or indebtedness for that year,
and there appeared no reason to expect an
impending "working capital deficit" which could
have necessitated an increase in working capital,
as rationalized by petitioner.
In Basilan Estates, Inc. vs. Commissioner of
Internal Revenue,25 we held that:
. . . [T]here is no need to have such a large
amount at the beginning of the following
year because during the year, current
assets are converted into cash and with
the income realized from the business as
the year goes, these expenses may well
be taken care of. [citation omitted]. Thus, it
is erroneous to say that the taxpayer is
entitled to retain enough liquid net assets
in amounts approximately equal to current
operating needs for the year to cover "cost
of goods sold and operating expenses:" for
"it excludes proper consideration of funds
generated by the collection of notes
receivable as trade accounts during the
course of the year."26
If the CIR determined that the corporation
avoided the tax on shareholders by permitting
earnings or profits to accumulate, and the
taxpayer contested such a determination, the
burden of proving the determination wrong,
together with the corresponding burden of first
going forward with evidence, is on the taxpayer.
This applies even if the corporation is not a mere
holding or investment company and does not
have an unreasonable accumulation of earnings
or profits.27
In order to determine whether profits are
accumulated for the reasonable needs to avoid
the surtax upon shareholders, it must be shown
that the controlling intention of the taxpayer is
manifest at the time of accumulation, not
intentions declared subsequently, which are
mere afterthoughts.28 Furthermore, the
accumulated profits must be used within a
reasonable time after the close of the taxable
year. In the instant case, petitioner did not
establish, by clear and convincing evidence, that
such accumulation of profit was for the immediate
needs of the business.
In Manila Wine Merchants, Inc. vs. Commissioner
of Internal Revenue,29 we ruled:
To determine the "reasonable needs" of
the business in order to justify an
accumulation of earnings, the Courts of
the United States have invented the so-
called "Immediacy Test" which construed
the words "reasonable needs of the
business" to mean the immediate needs of
the business, and it was generally held
that if the corporation did not prove an
immediate need for the accumulation of
the earnings and profits, the accumulation
was not for the reasonable needs of the
business, and the penalty tax would apply.
(Mertens. Law of Federal Income
Taxation, Vol. 7, Chapter 39, p, 103).30
29
In the present case, the Tax Court opted to
determine the working capital sufficiency by using
the ratio between current assets to current
liabilities. The working capital needs of a
business depend upon nature of the business, its
credit policies, the amount of inventories, the rate
of the turnover, the amount of accounts
receivable, the collection rate, the availability of
credit to the business, and similar factors.
Petitioner, by adhering to the "Bardahl" formula,
failed to impress the tax court with the required
definiteness envisioned by the statute. We agree
with the tax court that the burden of proof to
establish that the profits accumulated were not
beyond the reasonable needs of the company,
remained on the taxpayer. This Court will not set
aside lightly the conclusion reached by the Court
of Tax Appeals which, by the very nature of its
function, is dedicated exclusively to the
consideration of tax problems and has
necessarily developed an expertise on the
subject, unless there has been an abuse or
improvident exercise of authority.31 Unless
rebutted, all presumptions generally are indulged
in favor of the correctness of the CIR's
assessment against the taxpayer. With
petitioner's failure to prove the CIR incorrect,
clearly and conclusively, this Court is constrained
to uphold the correctness of tax court's ruling as
affirmed by the Court of Appeals.

WHEREFORE, the instant petition is DENIED,

and the decision of the Court of Appeals,
sustaining that of the Court of Tax Appeals, is
hereby AFFIRMED. Costs against
petitioner.1âwphi1.nêt SO ORDERED.

30
 Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 85749 May 15, 1989
COMMISSIONER OF INTERNAL REVENUE,
petitioner,
vs.
ANTONIO TUASON, INC. and THE COURT OF
TAX APPEALS, respondents.
The Office of the Solicitor General for petitioner.
Mendoza & Papa and Roman M. Umali for
private respondent.
GRIÑO-AQUINO, J.:
Elevated to this Court for review is the decision
dated October 14, 1988 of the Court of Tax
Appeals in CTA Case No. 3865, entitled "Antonio
Tuason, Inc. vs. Commissioner of Internal
Revenue," which set aside the petitioner
Revenue Commissioner's assessment of
P1,151,146.98 as the 25% surtax on the private
respondent's unreasonable accumulation of
surplus for the years 1975-1978.
Under date of February 27, 1981, the petitioner,
Commissioner of Internal Revenue, assessed
Antonio Tuason, Inc.
a. Deficiency income tax for the
years 1975,1976 and 1978 .
. . . . . .
……………………..…………
P37,491.83.
(b) Deficiency corporate
quarterly income tax for the
first quarter of 1975 . . . …. .
. . . . . . . . . . . . . . . . 161.49.
(c) 25% surtax on
unreasonable accumulation
of surplus for the years
1975-1978 . . . . . . . . . . . .
1,151,146.98.
The private respondent did not object to the first
and second items and, therefore, paid the
amounts demanded. However, it protested the
assessment on a 25% surtax on the third item on
the ground that the accumulation of surplus
profits during the years in question was solely for
the purpose of expanding its business operations
as real estate broker. The request for
reinvestigation was granted on condition that a
waiver of the statute of limitations should be filed
by the private respondent. The latter replied that
there was no need of a waiver of the statute of
limitaitons because the right of the Government
to assess said tax does not prescribe.
No investigation was conducted nor a decision
rendered on Antonio Tuazon Inc.'s protest.
meantime, the Revenue Commissioner issued
warrants of distraint and levy to enforce collection
of the total amount originally assessed including
the amounts already paid.
The private respondent filed a petition for review
in the Court of Tax Appeals with a request that
pending determination of the case on the merits,
an order be issued restraining the Commissioner
and/or his representatives from enforcing the
warrants of distraint and levy. Since the right
asserted by the Commissioner to collect the taxes
involved herein by the summary methods of
distraint and levy was not clear, and it was shown
that portions of the tax liabilities involved in the
assessment had already been paid, a writ of
injunction was issued by the Tax Court on
November 26, 1984, ordering the Commissioner
to refrain fron enforcing said warrants of distraint
and levy. It did not require the petitioner to file a
bond (Annex A, pp. 28-30, Rollo).
In view of the reversal of the Commissioner's
decision by the Court of Tax Appeals, the
petitioner appealed to this Court, raising the
following issues:
1. Whether or not private
respondent Antonio Tuason,
Inc. is a holding company
and/or investment company;
2. Whether or not privaaate
respondent Antonio Tuason,
Inc. accumulated surplus for
the years 1975 to 1978; and
3. Whether or not Antonio
Tuason, Inc. is liable for the
25% surtax on undue
accumulation of surplus for
the years 1975 to 1978.
Section 25 of the Tax Code at the time the surtax
was assessed, provided:
Sec. 25. Additional tax on
corporation improperly
31
accumulating profits or
surplus.—
(a) Imposition of tax. — If
any corporation, except
banks, insurance
companies, or personal
holding companies, whether
domestic or foreign, is
formed or availed of for the
purpose of preventing the
imposition of the tax upon its
shareholders or members or
the shareholders or
members of another
corporation, through the
medium of permitting its
gains and profits to
accumulate instead of being
divided or distributed, there
is levied and assessed
against such corporation, for
each taxable year, a tax
equal to twenty-five per
centum of the undistributed
portion of its accumulated
profits or surplus which shall
be in addition to the tax
imposed by section twenty-
four, and shall be computed,
collected and paid in the
same manner and subject to
the same provisions of law,
including penalties, as that
tax.
(b) Prima facie evidence. —
The fact that any corporation
is a mere holding company
shall be prima facie
evidence of a purpose to
avoid the tax upon its
shareholders or members.
Similar presumption will lie in
the case of an investment
company where at any time
during the taxable year more
than fifty per centum in value
of its outstanding stock is
owned, directly or indirectly,
by one person.
(c) Evidence determinative
of purpose. — The fact that
the earnings or profits of a
corporation are permitted to
accumulate beyond the
reasonable needs of the
business shall be
determinative of the purpose
to avoid the tax upon its
shareholders or members
unless the corporation, by
clear preponderance of
evidence, shall prove the
contrary.
The petition for review is meritorious.
The Court of Tax Appeals conceded that the
Revenue Commissioner's determination that
Antonio Tuason, Inc. was a mere holding or
investment company, was "presumptively
correct" (p. 7, Annex A), for the corporation did
not involve itself in the development of
subdivisions but merely subdivided its own lots
and sold them for bigger profits. It derived its
income mostly from interest, dividends and rental
realized from the sale of realty.
Another circumstance supporting that
presumption is that 99.99% in value of the
outstanding stock of Antonio Tuason, Inc., is
owned by Antonio Tuason himself. The
Commissioner "conclusively presumed" that
when the corporation accumulated (instead of
distributing to the shareholders) a surplus of over
P3 million fron its earnings in 1975 up to 1978,
the purpose was to avoid the imposition of the
progressive income tax on its shareholders.
That Antonio Tuason, Inc. accumulated surplus
profits amounting to P3,263,305.88 for 1975 up
to 1978 is not disputed. However, the private
respondent vehemently denies that its purpose
was to evade payment of the progressive income
tax on such dividends by its stockholders.
According to the private respondent, surplus
profits were set aside by the company to build up
sufficient capital for its expansion program which
included the construction in 1979-1981 of an
apartment building, and the purchase in 1980 of
a condominium unit which was intended for
resale or lease.
However, while these investments were actually
made, the Commissioner points out that the
corporation did not use up its surplus profits. It
allegation that P1,525,672.74 was spent for the
construction of an apartment building in 1979 and
P1,752,332.87 for the purchase of a
condominium unit in Urdaneta Village in 1980
was refuted by the Declaration of Real Property
on the apartment building (Exh. C) which shows
that its market value is only P429,890.00, and the
Tax Declaration on the condominium unit which
reflects a market value of P293,830.00 only (Exh.
D-1). The enormous discrepancy between the
alleged investment cost and the declared market
32
value of these pieces of real estate was not
denied nor explained by the private respondent.

Since the company as of the time of the

assessment in 1981, had invested in its business
operations only P 773,720 out of its accumulated
surplus profits of P3,263,305.88 for 1975-1978,
its remaining accumulated surplus profits of
P2,489,858.88 are subject to the 25% surtax.

All presumptions are in favor of the correctness

of petitioner's assessment against the private
respondent. It is incumbent upon the taxpayer to
prove the contrary (Mindanao Bus Company vs.
Commissioner of Internal Revenue, 1 SCRA
538). Unfortunately, the private respondent failed
to overcome the presumption of correctness of
the Commissioner's assessment.

The touchstone of liability is the purpose behind

the accumulation of the income and not the
consequences of the accumulation. Thus, if the
failure to pay dividends were for the purpose of
using the undistributed earnings and profits for
the reasonable needs of the business, that
purpose would not fall within the interdiction of the
statute" (Mertens Law of Federal Income
Taxation, Vol. 7, Chapter 39, p. 45 cited in Manila
Wine Merchants, Inc. vs. Commissioner of
Internal Revenue, 127 SCRA 483, 493).

It is plain to see that the company's failure to

distribute dividends to its stockholders in 1975-
1978 was for reasons other than the reasonable
needs of the business, thereby falling within the
interdiction of Section 25 of the Tax Code of
1977.

WHEREFORE, the appealed decision of the

Court of Tax Appeals is hereby set aside. The
petitioner's assessment of a 25% surtax against
the Antonio Tuason, Inc. is reinstated but only on
the latter's unspent accumulated surplus profits of
P2,489,585.88. No costs.

SO ORDERED.

33

SECOND DIVISION
[G.R. No. L-26145. February 20, 1984.]
THE MANILA WINE MERCHANTS, INC.,
Petitioner, v. THE COMMISSIONER OF
INTERNAL REVENUE, Respondent.
Rafael D. Salcedo for Petitioner.
The Solicitor General for Respondent.
SYLLABUS
1. TAXATION; NATIONAL INTERNAL
REVENUE CODE; CORPORATE INCOME
TAX; ADDITIONAL TAX ON ACCUMULATED
EARNINGS; EXEMPTION THEREFROM. — A
prerequisite to the imposition of the tax has been
that the corporation be formed or availed of for
the purpose of avoiding the income tax (or
surtax) on its shareholders, or on the
shareholders of any other corporation by
permitting the earnings and profits of the
corporation to accumulate instead of dividing
them among or distributing them to the
shareholders. If the earnings and profits were
distributed, the shareholders would be required
to pay an income tax thereon whereas, if the
distribution were not made to them, they would
incur no tax in respect to the undistributed
earnings and profits of the corporation (Mertens,
Law on Federal Income Taxation, Vol. 7,
Chapter 39, p. 44). The touchstone of liability is
the purpose behind the accumulation of the
income and not the consequences of the
accumulation (Ibid., p. 47). Thus, if the failure to
pay dividends is due to some other cause, such
as the use of undistributed earnings and profits
for the reasonable needs of the business, such
purpose does not fall within the interdiction of
the statute (Ibid., p. 45).
2. ID.; ID.; ID.; ID.; ID.; WHEN
ACCUMULATION CONSIDERED
UNREASONABLE. — An accumulation of
earnings or profits (including undistributed
earnings or profits of prior years) is
unreasonable if it is not required for the purpose
of the business, considering all the
circumstances of the case (Sec. 21, Revenue
Regulations No. 2).
3. ID.; ID.; ID.; ID.; ID.; "REASONABLE NEEDS
OF THE BUSINESS," CONSTRUED. — To
determine the "reasonable needs" of the
business in order to justify an accumulation of
earnings, the Courts of the United States have
invented the so-called "Immediacy Test" which
construed the words "reasonable needs of the
business" to mean the immediate needs of the
business, and it was generally held that if the
corporation did not prove an immediate need for
the accumulation of the earnings and profits, the
accumulation was not for the reasonable needs
of the business, and the penalty tax would apply.
American cases likewise hold that investment of
the earnings and profits of the corporation in
stock or securities of an unrelated business
usually indicates an accumulation beyond the
reasonable needs of the business. (Helvering v.
Chicago Stockyards Co., 318 US 693; Helvering
v. National Grocery Co., 304 US 282).
4. REMEDIAL LAW; APPEALS; FACTUAL
FINDINGS OF THE COURT OF TAX APPEALS,
BINDING. — The finding of the Court of Tax
Appeals that the purchase of the U.S.A.
Treasury bonds were in no way related to
petitioner’s business of importing and selling
wines whisky, liquors and distilled spirits, and
thus construed as an investment beyond the
reasonable needs of the business is binding on
Us, the same being factual (Renato Raymundo
v. Hon. De Jova, 101 SCRA 495). Furthermore,
the wisdom behind thus finding cannot be
doubted, The case of J.M. Perry & Co. v.
Commissioner of Internal Revenue supports the
same.
5. TAXATION; NATIONAL INTERNAL
REVENUE CODE; INCOME TAX OF
CORPORATIONS; ADDITIONAL TAX ON
ACCUMULATED EARNINGS; EXCEPTION
THEREFROM; ACCUMULATION OF
EARNINGS, MUST BE USED FOR
REASONABLE NEEDS OF BUSINESS WITHIN
A REASONABLE TIME. — The records further
reveal that from May 1951 when petitioner
purchased the U.S.A. Treasury shares, until
1962 when it finally liquidated the same, it
(petitioner) never had the occasion to use the
said shares in aiding or financing its importation.
This militates against the purpose enunciated
earlier by petitioner that the shares were
purchased to finance its importation business.
To justify an accumulation of earnings and
profits for the reasonably anticipated future
needs, such accumulation must be used within a
reasonable time after the close of the taxable
year (Mertens, Ibid., p. 104).
6. ID.; ID.; ID.; ID.; ID.; ID.; INTENTION AT THE
34
TIME OF ACCUMULATION, BASIS OF THE
TAX; ACCUMULATION OF PROFITS IN CASE
AT BAR, UNREASONABLE. — In order to
determine whether profits are accumulated for
the reasonable needs of the business as to
avoid the surtax upon shareholders, the
controlling intention of the taxpayer is that which
is manifested at the time of accumulation not
subsequently declared intentions which are
merely the product of afterthought (Basilan
Estates, Inc. v. Comm. of Internal Revenue, 21
SCRA 17 citing Jacob Mertens, Jr., The law of
Federal Income Taxation, Vol. 7, Cumulative
Supplement, p. 213; Smoot and San & Gravel
Corp. v. Comm., 241 F 2d 197). A speculative
and indefinite purpose will not suffice. The mere
recognition of a future problem and the
discussion of possible and alternative solutions
is not sufficient. Definiteness of plan coupled
with action taken towards its consummation are
essential (Fuel Carriers, Inc. v. US 202 F supp.
497; Smoot Sand & Gravel Corp. v. Comm.,
supra). Viewed on the foregoing analysis and
tested under the "immediacy doctrine," We are
convinced that the Court of Tax Appeals is
correct in finding that the investment made by
petitioner in the U.S.A. Treasury shares in 1951
was an accumulation of profits in excess of the
reasonable needs of petitioner’s
business.chanroblesvirtuallawlibrary
7. ID.; ID.; ID.; ID.; ACCUMULATIONS OF
PRIOR YEARS TAKEN INTO ACCOUNT IN
DETERMINATION OF LIABILITY THEREFOR.
— The rule is now settled in Our jurisprudence
that undistributed earnings or profits of prior
years are taken into consideration in determining
unreasonable accumulation for purposes of the
25% surtax. The case of Basilan Estates, Inc. v.
Commissioner of Internal Revenue further
strengthen this rule in determining unreasonable
accumulation for the year concerned.’In
determining whether accumulations of earnings
or profits in a particular year are within the
reasonable needs of a corporation, it is
necessary to take into account prior
accumulations, since accumulations prior to the
year involved may have been sufficient to cover
the business needs and additional
accumulations during the year involved would
not reasonably be necessary.
DECISION
GUERRERO, J.:
In this Petition for Review on Certiorari,
Petitioner, the Manila Wine Merchants, Inc.,
disputes the decision of the Court of Tax
Appeals ordering it (petitioner) to pay
respondent, the Commissioner of Internal
Revenue, the amount of P86,804.38 as 25%
surtax plus interest which represents the
additional tax due petitioner for improperly
accumulating profits or surplus in the taxable
year 1957 under Sec. 25 of the National Internal
Revenue Code.chanrobles virtualawlibrary
chanrobles.com:chanrobles.com.ph
The Court of Tax Appeals made the following
finding of facts, to wit:jgc:chanrobles.com.ph
"Petitioner, a domestic corporation organized in
1937, is principally engaged in the importation
and sale of whisky, wines, liquors and distilled
spirits. Its original subscribed and paid capital
was P500,000.00. Its capital of P500,000.00
was reduced to P250,000.00 in 1950 with the
approval of the Securities and Exchange
Commission but the reduction of the capital was
never implemented. On June 21, 1958,
petitioner’s capital was increased to
P1,000,000.00 with the approval of the said
Commission.
On December 31, 1957, herein respondent
caused the examination of herein petitioner’s
book of account and found the latter of having
unreasonably accumulated surplus of
P428,934.32 for the calendar year 1947 to 1957,
in excess of the reasonable needs of the
business subject to the 25% surtax imposed by
Section 25 of the Tax Code.
On February 26, 1963, the Commissioner of
Internal Revenue demanded upon the Manila
Wine Merchants, Inc. payment of P126,536.12
as 25% surtax and interest on the latter’s
unreasonable accumulation of profits and
surplus for the year 1957, computed as
follows:chanrob1es virtual 1aw library
Unreasonable accumulation of surtax
P428,934.42
—————
25% surtax due thereon P107,234.00
Add: 1/2% monthly interest from June 20,
1959 to June 20, 1962 19,302.12
—————
TOTAL AMOUNT DUE AND COLLECTIBLE
P126,536.12
35
=========
Respondent contends that petitioner has
accumulated earnings beyond the reasonable
needs of its business because the average ratio
of the cash dividends declared and paid by
petitioner from 1947 to 1957 was 40.33% of the
total surplus available for distribution at the end
of each calendar year. On the other hand,
petitioner contends that in 1957, it distributed
100% of its net earnings after income tax and
part of the surplus for prior years. Respondent
further submits that the accumulated earnings
tax should be based on 25% of the total surplus
available at the end of each calendar year while
petitioner maintains that the 25% surtax is
imposed on the total surplus or net income for
the year after deducting therefrom the income
tax due.
The records show the following analysis of
petitioner’s net income, cash dividends and
earned surplus for the years 1946 to 1957: 1
Percentage of
Dividends to
Net Income Total Cash Net Income Balance
After Income Dividends After of Earned
Year Tax Paid Income Tax Surplus
1946 P 613,790.00 P 200,000. 32.58% P
234,104.81
1947 425,719.87 360,000. 84.56% 195,167.10
1948 415,591.83 375,000. 90.23% 272,991.38
1949 335,058.06 200,000. 59.69% 893,113.42
1950 399,698.09 600,000. 150.11% 234,987.07
1951 346,257.26 300,000. 86.64% 281,244.33
1952 196,161.97 200,000. 101.96% 277,406.30
1953 169,714.04 200,000. 117.85% 301,138.84
1954 238,124.85 250,000. 104.99% 289,262.69
1955 312,284.74 200,000. 64.04% 401,548.43
1956 374,240.28 300,000. 80.16% 475,788.71
1957 353,145.71 400,000. 113.27% 428,934.42
—————— ————— ———— —————
—
P4,179,787.36 P3,585.000. 85.77%
P3,785.688.50
========== ========= =======
==========
Another basis of respondent in assessing
petitioner for accumulated earnings tax is its
substantial investment of surplus or profits in
unrelated business. These investments are
itemized as follows:chanrob1es virtual 1aw
library
1. Acme Commercial Co., Inc. P 27,501.00
2. Union Insurance Society
of Canton 1,145.76
3. U.S.A. Treasury Bond 347,217.50
4. Wack Wack Golf &
Country Club 1.00
—————
375,865.26
=========
As to the investment of P27,501.00 made by
petitioner in the Acme Commercial Co., Inc., Mr.
N.R.E. Hawkins, president of the petitioner
corporation 2 explained as follows:chanrob1es
virtual 1aw library
‘The first item consists of shares of Acme
Commercial Co., Inc. which the Company
acquired in 1947 and 1949. In the said years, we
thought it prudent to invest in a business which
patronizes us. As a supermarket, Acme
Commercial Co., Inc. is one of our best
customers. The investment has proven to be
beneficial to the stockholders of this Company.
As an example, the Company received cash
dividends in 1961 totalling P16,875.00 which
was included in its income tax return for the said
year.’
As to the investments of petitioner in Union
Insurance Society of Canton and Wack Wack
Golf Club in the sums of P1,145.76 and P1.00,
respectively, the same official of the petitioner-
corporation stated that: 3
‘The second and fourth items are small amounts
which we believe would not affect this case
36
substantially. As regards the Union Insurance
Society of Canton shares, this was a pre-war
investment, when Wise & Co., Inc., Manila Wine
Merchants and the said insurance firm were
common stockholders of the Wise Bldg. Co.,,
Inc. and the three companies were all housed in
the same building. Union Insurance invested in
Wise Bldg. Co., Inc. but invited Manila Wine
Merchants, Inc. to buy a few of its shares.’
As to the U.S.A. Treasury Bonds amounting to
P347,217.50, Mr. Hawkins explained as follows:
4 Treasury Bills were liquidated on February 15,
‘With regards to the U.S.A. Treasury Bills in the
amount of P347,217.50, in 1950, our balance
sheet for the said year shows the Company had
deposited in current account in various banks
P629,403.64 which was not earning any interest.
We decided to utilize part of this money as
reserve to finance our importations and to take
care of future expansion including acquisition of
a lot and the construction of our own office
building and bottling plant.
At that time, we believed that a dollar reserve
abroad would be useful to the Company in
meeting immediate urgent orders of its local
customers. In order that the money may earn
interest, the Company, on May 31, 1951
purchased US Treasury bills with 90-day
maturity and earning approximately 1% interest
with the face value of US$175,000.00. US
Treasury Bills are easily convertible into cash
and for the said reason they may be better
classified as cash rather than investments.
The Treasury Bills in question were held as such
for many years in view of our expectation that
the Central Bank inspite of the controls would
allow no-dollar licenses importations. However,
since the Central Bank did not relax its policy
with respect thereto, we decided sometime in
1957 to hold the bills for a few more years in
view of our plan to buy a lot and construct a
building of our own. According to the lease
agreement over the building formerly occupied
by us in Dasmariñas St., the lease was to expire
sometime in 1957. At that time, the Company
was not yet qualified to own real property in the
Philippines. We therefore waited until 60% of the
stocks of the Company would be owned by
Filipino citizens before making definite plans.
Then in 1959 when the Company was already
more than 60% Filipino owned, we commenced
looking for a suitable location and then finally in
1961, we bought the man lot with an old building
on Otis St., Paco, our present site, for
P665,000.00. Adjoining smaller lots were bought
later. After the purchase of the main property,
we proceeded with the remodelling of the old
building and the construction of additions, which
were completed at a cost of P143,896.00 in
April, 1962.
In view of the needs of the business of this
Company and the purchase of the Otis lots and
the construction of the improvements thereon,
most of its available funds including the
Treasury Bills had been utilized, but inspite of
the said expenses the Company consistently
declared dividends to its stockholders. The
1962.’
Respondent found that the accumulated surplus
in question were invested to ‘unrelated business’
which were not considered in the ‘immediate
needs’ of the Company such that the 25% surtax
be imposed therefrom."cralaw virtua1aw library
Petitioner appealed to the Court of Tax Appeals.
On the basis of the tabulated figures, supra, the
Court of Tax Appeals found that the average
percentage of cash dividends distributed was
85.77% for a period of 11 years from 1946 to
1957 and not only 40.33% of the total surplus
available for distribution at the end of each
calendar year actually distributed by the
petitioner to its stockholders, which is indicative
of the view that the Manila Wine Merchants, Inc.
was not formed for the purpose of preventing the
imposition of income tax upon its shareholders.
5
With regards to the alleged substantial
investment of surplus or profits in unrelated
business, the Court of Tax Appeals held that the
investment of petitioner with Acme Commercial
Co., Inc., Union Insurance Society of Canton
and with the Wack Wack Golf and Country Club
are harmless accumulation of surplus and,
therefore, not subject to the 25% surtax provided
in Section 25 of the Tax Code. 6
As to the U.S.A. Treasury Bonds amounting to
P347,217.50, the Court of Tax Appeals ruled
that its purchase was in no way related to
petitioner’s business of importing and selling
wines, whisky, liquors and distilled spirits.
Respondent Court was convinced that the
surplus of P347,217.50 which was invested in
the U.S.A. Treasury Bonds was availed of by
petitioner for the purpose of preventing the
imposition of the surtax upon petitioner’s
shareholders by permitting its earnings and
profits to accumulate beyond the reasonable
needs of business. Hence, the Court of Tax
Appeals modified respondent’s decision by
37
imposing upon petitioner the 25% surtax for
1957 only in the amount of P86,804.38
computed as follows:chanrob1es virtual 1aw
library
Unreasonable accumulation
of surplus P347,217.50
—————
25% surtax due thereon P 86,804.38 7
On May 30, 1966, the Court of Tax Appeals
denied the motion for reconsideration filed by
petitioner on March 30, 1966. Hence, this
petition.
Petition assigns the following errors:chanrob1es
virtual 1aw library
I Revenue Code reads as
The Court of Tax Appeals erred in holding that
petitioner was availed of for the purpose of
preventing the imposition of a surtax on its
shareholders.
II
The Court of Tax Appeals erred in holding that
petitioner’s purchase of U.S.A. Treasury Bills in
1951 was an investment in unrelated business
subject to the 25% surtax in 1957 as surplus
profits improperly accumulated in the latter
years.
III
The Court of Tax Appeals erred in not finding
that petitioner did not accumulate its surplus
profits improperly in 1957, and in not holding
that such surplus profits, including the so-called
unrelated investments, were necessary for its
reasonable business needs.
IV
The Court of Tax Appeals erred in not holding
that petitioner had overcome the prima facie
presumption provided for in Section 25(c) of the
Revenue Code.
V
The Court of Tax Appeals erred in finding
petition liable for the payment of the surtax of
P86,804.38 and in denying petitioner’s Motion
for Reconsideration and/or New Trial.
The issues in this case can be summarized as
follows: (1) whether the purchase of the U.S.A.
Treasury bonds by petitioner in 1951 can be
construed as an investment to an unrelated
business and hence, such was availed of by
petitioner for the purpose of preventing the
imposition of the surtax upon petitioner’s
shareholders by permitting its earnings and
profits to accumulate beyond the reasonable
needs of the business, and if so, (2) whether the
penalty tax of twenty-five percent (25%) can be
imposed on such improper accumulation in 1957
despite the fact that the accumulation occurred
in 1951.chanrobles virtualawlibrary
chanrobles.com:chanrobles.com.ph
The pertinent provision of the National Internal
follows:jgc:chanrobles.com.ph
"Sec. 25. Additional tax on corporations
improperly accumulating profits or surplus. — (a)
Imposition of Tax. — If any corporation, except
banks, insurance companies, or personal
holding companies whether domestic or foreign,
is formed or availed of for the purpose of
preventing the imposition of the tax upon its
shareholders or members or the shareholders or
members of another corporation, through the
medium of permitting its gains and profits to
accumulate instead of being divided or
distributed, there is levied and assessed against
such corporation, for each taxable year, a tax
equal to twenty-five per centum of the
undistributed portion of its accumulated profits or
surplus which shall be in addition to the tax
imposed by section twenty-four and shall be
computed, collected and paid in the same
manner and subject to the same provisions of
law, including penalties, as that tax: Provided,
that no such tax shall be levied upon any
accumulated profits or surplus, if they are
invested in any dollar-producing or dollar-saving
industry or in the purchase of bonds issued by
the Central Bank of the Philippines.
x x x
(c) Evidence determinative of purpose. — The
fact that the earnings of profits of a corporation
are permitted to accumulate beyond the
reasonable needs of the business shall be
determinative of the purpose to avoid the tax
upon its shareholders or members unless the
corporation, by clear preponderance of
38
evidence, shall prove the contrary." (As
amended by Republic Act No. 1823).
As correctly pointed out by the Court of Tax
Appeals, inasmuch as the provisions of Section
25 of the National Internal Revenue Code were
bodily lifted from Section 102 of the U.S. Internal
Revenue Code of 1939, including the
regulations issued in connection therewith, it
would be proper to resort to applicable cases
decided by the American Federal Courts for
guidance and enlightenment.chanrobles virtual
lawlibrary
A prerequisite to the imposition of the tax has
been that the corporation be formed or availed
of for the purpose of avoiding the income tax (or
surtax) on its shareholders, or on the
shareholders of any other corporation by
permitting the earnings and profits of the
corporation to accumulate instead of dividing
them among or distributing them to the
shareholders. If the earnings and profits were
distributed, the shareholders would be required
to pay an income tax thereon whereas, if the
distribution were not made to them, they would
incur no tax in respect to the undistributed
earnings and profits of the corporation. 8 The
touchstone of liability is the purpose behind the
accumulation of the income and not the
consequences of the accumulation. 9 Thus, if
the failure to pay dividends is due to some other
cause, such as the use of undistributed earnings
and profits for the reasonable needs of the
business, such purpose does not fall within the
interdiction of the statute. 10
An accumulation of earnings or profits (including
undistributed earnings or profits of prior years) is
unreasonable if it is not required for the purpose
of the business, considering all the
circumstances of the case. 11
In purchasing the U.S.A. Treasury Bonds, in
1951, petitioner argues that these bonds were
so purchased (1) in order to finance their
importation; and that a dollar reserve abroad
would be useful to the Company in meeting
urgent orders of its local customers and (2) to
take care of future expansion including the
acquisition of a lot and the construction of their
office building and bottling plant.
We find no merit in the petition.
To avoid the twenty-five percent (25%) surtax,
petitioner has to prove that the purchase of the
U.S.A. Treasury Bonds in 1951 with a face value
of $175,000.00 was an investment within the
reasonable needs of the Corporation.
To determine the "reasonable needs" of the
business in order to justify an accumulation of
earnings, the Courts of the United States have
invented the so-called "Immediacy Test" which
construed the words "reasonable needs of the
business" to mean the immediate needs of the
business, and it was generally held that if the
corporation did not prove an immediate need for
the accumulation of the earnings and profits, the
accumulation was not for the reasonable needs
of the business, and the penalty tax would apply.
12 American cases likewise hold that investment
of the earnings and profits of the corporation in
stock or securities of an unrelated business
usually indicates an accumulation beyond the
reasonable needs of the business. 13
The finding of the Court of Tax Appeals that the
purchase of the U.S.A. Treasury bonds were in
no way related to petitioner’s business of
importing and selling wines whisky, liquors and
distilled spirits, and thus construed as an
investment beyond the reasonable needs of the
business 14 is binding on Us, the same being
factual. 15 Furthermore, the wisdom behind thus
finding cannot be doubted, The case of J.M.
Perry & Co. v. Commissioner of Internal
Revenue 16 supports the same. In that case, the
U.S. Court said the
following:jgc:chanrobles.com.ph
"It appears that the taxpayer corporation was
engaged in the business of cold storage and
wareshousing in Yahima, Washington. It
maintained a cold storage plant, divided into four
units, having a total capacity of 490,000 boxes
of fruits. It presented evidence to the effect that
various alterations and repairs to its plant were
contemplated in the tax years, . . .
It also appeared that in spite of the fact that the
taxpayer contended that it needed to maintain
this large cash reserve on hand, it proceeded to
make various investments which had no relation
to its storage business. In 1934, it purchased
mining stock which it sold in 1935 at a profit of
US $47,995.29. . . .
All these things may reasonably have appealed
to the Board as incompatible with a purpose to
strengthen the financial position of the taxpayer
and to provide for needed alteration."cralaw
virtua1aw library
The records further reveal that from May 1951
when petitioner purchased the U.S.A. Treasury
shares, until 1962 when it finally liquidated the
same, it (petitioner) never had the occasion to
use the said shares in aiding or financing its
39
importation. This militates against the purpose
enunciated earlier by petitioner that the shares
were purchased to finance its importation
business. To justify an accumulation of earnings
and profits for the reasonably anticipated future
needs, such accumulation must be used within a
reasonable time after the close of the taxable
year. 17
Petitioner advanced the argument that the
U.S.A. Treasury shares were held for a few
more years from 1957, in view of a plan to buy a
lot and construct a building of their own; that at
that time (1957), the Company was not yet
qualified to own real property in the Philippines,
hence it (petitioner) had to wait until sixty
percent (60%) of the stocks of the Company
would be owned by Filipino citizens before
making definite plans. 18
These arguments of petitioner indicate that it
considers the U.S.A. Treasury shares not only
for the purpose of aiding or financing its
importation but likewise for the purpose of
buying a lot and constructing a building thereon
in the near future, but conditioned upon the
completion of the 60% citizenship requirement of
stock ownership of the Company in order to
qualify it to purchase and own a lot. The time
when the company would be able to establish
itself to meet the said requirement and the
decision to pursue the same are dependent
upon various future contingencies. Whether
these contingencies would unfold favorably to
the Company and if so, whether the Company
would decide later to utilize the U.S.A. Treasury
shares according to its plan, remains to be seen.
From these assertions of petitioner, We cannot
gather anything definite or certain. This, We
cannot approve.chanrobles law library
In order to determine whether profits are
accumulated for the reasonable needs of the
business as to avoid the surtax upon
shareholders, the controlling intention of the
taxpayer is that which is manifested at the time
of accumulation not subsequently declared
intentions which are merely the product of
afterthought. 19 A speculative and indefinite
purpose will not suffice. The mere recognition of
a future problem and the discussion of possible
and alternative solutions is not sufficient.
Definiteness of plan coupled with action taken
towards its consummation are essential. 20 The
Court of Tax Appeals correctly made the
following ruling: 21
"As to the statement of Mr. Hawkins in Exh. "B"
regarding the expansion program of the
petitioner by purchasing a lot and building of its
own, we find no justifiable reason for the
retention in 1957 or thereafter of the US
Treasury Bonds which were purchased in 1951.
x x x
"Moreover, if there was any thought for the
purchase of a lot and building for the needs of
petitioner’s business, the corporation may not
with impunity permit its earnings to pile up
merely because at some future time certain
outlays would have to be made. Profits may only
be accumulated for the reasonable needs of the
business, and implicit in this is further
requirement of a reasonable time."cralaw
virtua1aw library
Viewed on the foregoing analysis and tested
under the "immediacy doctrine," We are
convinced that the Court of Tax Appeals is
correct in finding that the investment made by
petitioner in the U.S.A. Treasury shares in 1951
was an accumulation of profits in excess of the
reasonable needs of petitioner’s business.
Finally, petitioner asserts that the surplus profits
allegedly accumulated in the form of U.S.A.
Treasury shares in 1951 by it (petitioner) should
not be subject to the surtax in 1957. In other
words, petitioner claims that the surtax of 25%
should be based on the surplus accumulated in
1951 and not in 1957.
This is devoid of merit.
The rule is now settled in Our jurisprudence that
undistributed earnings or profits of prior years
are taken into consideration in determining
unreasonable accumulation for purposes of the
25% surtax. 22 The case of Basilan Estates, Inc.
v. Commissioner of Internal Revenue 23 further
strengthen this rule, and We
quote:jgc:chanrobles.com.ph
"Petitioner questions why the examiner covered
the period from 1948-1953 when the taxable
year on review was 1953. The surplus of
P347,507.01 was taken by the examiner from
the balance sheet of the petitioner for 1953. To
check the figure arrived at, the examiner traced
the accumulation process from 1947 until 1953,
and petitioner’s figure stood out to be correct.
There was no error in the process applied, for
previous accumulations should be considered in
determining unreasonable accumulation for the
year concerned.’In determining whether
accumulations of earnings or profits in a
particular year are within the reasonable needs
of a corporation, it is necessary to take into
40
account prior accumulations, since
accumulations prior to the year involved may
have been sufficient to cover the business
needs and additional accumulations during the
year involved would not reasonably be
necessary.’" chanroblesvirtuallawlibrary

WHEREFORE, IN VIEW OF THE FOREGOING,

the decision of the Court of Tax Appeals is
AFFIRMED in toto, with costs against petitioner.

SO ORDERED.

41