Republic of the Philippines SUPREME COURT Manila THIRD DIVISION

G.R. No. 127105 June 25, 1999 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. S.C. JOHNSON AN SON, INC., !n" COURT OF APPEALS, respondents.

GON#AGA$RE%ES, J.: This is a petition for revie on certiorari under Rule !" of the Rules of #ourt see$in% to set aside the decision of the #ourt of &ppeals dated Nove'ber (, )**+ in #&,-R SP No. !./.0 affir'in% the decision of the #ourt of Ta1 &ppeals in #T& #ase No. ")2+. The antecedent facts as found b3 the #ourt of Ta1 &ppeals are not disputed, to it4 5Respondent6, a do'estic corporation or%ani7ed and operatin% under the Philippine la s, entered into a license a%ree'ent ith S# 8ohnson and Son, 9nited States of &'erica :9S&;, a non,resident forei%n corporation based in the 9.S.&. pursuant to hich the 5respondent6 as %ranted the ri%ht to use the trade'ar$, patents and technolo%3 o ned b3 the latter includin% the ri%ht to 'anufacture, pac$a%e and distribute the products covered b3 the &%ree'ent and secure assistance in 'ana%e'ent, 'ar$etin% and production fro' S# 8ohnson and Son, 9. S. &. The said <icense &%ree'ent as dul3 re%istered ith the Technolo%3 Transfer =oard of the =ureau of Patents, Trade Mar$s and Technolo%3 Transfer under #ertificate of Re%istration No. /.+! :>1h. ?&?;. @or the use of the trade'ar$ or technolo%3, 5respondent6 as obli%ed to pa3 S# 8ohnson and Son, 9S& ro3alties based on a percenta%e of net sales and subAected the sa'e to 0"B ithholdin% ta1 on ro3alt3 pa3'ents hich 5respondent6 paid for the period coverin% 8ul3 )**0 to Ma3 )**2 in the total a'ount of P),+.2,!!2... :>1hs. ?=? to ?<? and sub'ar$in%s;. On October 0*, )**2, 5respondent6 filed ith the International Ta1 &ffairs Division :IT&D; of the =IR a clai' for refund of overpaid ithholdin% ta1 on ro3alties ar%uin% that, ?the antecedent facts attendin% 5respondentCs6 case fall sDuarel3 ithin the sa'e circu'stances under hich said MacGeorge and Gillete rulin%s ere issued. Since the a%ree'ent as approved b3 the Technolo%3 Transfer =oard, the preferential ta1 rate of ).B should appl3 to the 5respondent6. Ee therefore sub'it that ro3alties paid b3 the 5respondent6 to S# 8ohnson and Son, 9S& is onl3 subAect to ).B ithholdin% ta1 pursuant to the 'ost,favored nation clause of the RP,9S Ta1 Treat3 5&rticle )2 Para%raph 0 :b; :iii;6 in relation to the RP,Eest -er'an3 Ta1

Treat3 5&rticle )0 :0; :b;6? :Petition for Revie 5filed ith the #ourt of &ppeals6, par. )0;. 5RespondentCs6 clai' for there fund of P*+2,0++... as co'puted as follo s4 -ross 0"B ).B MonthF Ro3alt3 Eithholdin% Eithholdin% Gear @ee Ta1 Paid Ta1 =alance HHH HHH HHH HHH HHH 8ul3 )**0 ""*,/(/ )2*,*(. "",*// /2,*/0 &u%ust "+(,*2" )!),*/! "+,(*! /",)*. Septe'ber "*",*"+ )!/,*/* "*,"*+ /*,2*2 October +2!,!." )"/,+.) +2,!!) *",)+) Nove'ber +0.,//" )"",00) +0,./* *2,)22 Dece'ber 2/2,0(+ *",/)* 2+,20/ "(,!*) 8an )**2 +.0,!") )(.,+2. +/,0!" ).0,2+/ @ebruar3 "+",/!" )!),!+) "+,"/" /!,/(( March "!(,0"2 )2+,/)2 "!,(0" /0,.// &pril ++.,/). )+",0.2 ++,./) **,)00 Ma3 +.2,.(+ )".,(+* +.,2./ *.,!+) HHHH HHHH HHHH HHH P+,!0),((. P),+.",!!2 P+!0,)(( P*+2,0++ 1 IIIIIIII IIIIIIII IIIIIIII IIIIIIII The #o''issioner did not act on said clai' for refund. Private respondent S.#. 8ohnson J Son, Inc. :S.#. 8ohnson; then filed a petition for revie before the #ourt of Ta1 &ppeals :#T&; here the case as doc$eted as #T& #ase No. ")2+, to clai' a refund of the overpaid ithholdin% ta1 on ro3alt3 pa3'ents fro' 8ul3 )**0 to Ma3 )**2. On Ma3 (, )**+, the #ourt of Ta1 &ppeals rendered its decision in favor of S.#. 8ohnson and ordered the #o''issioner of Internal Revenue to issue a ta1 credit certificate in the a'ount of P*+2,0++... representin% overpaid ithholdin% ta1 on ro3alt3 pa3'ents, be%innin% 8ul3, )**0 to Ma3, )**2. 2

The #o''issioner of Internal Revenue thus filed a petition for revie ith the #ourt of &ppeals hich rendered the decision subAect of this appeal on Nove'ber (, )**+ findin% no 'erit in the petition and affir'in% in toto the #T& rulin%. & This petition for revie issue4 as filed b3 the #o''issioner of Internal Revenue raisin% the follo in%

TH> #O9RT O@ &PP>&<S >RR>D IN R9<IN- TH&T S# 8OHNSON &ND SON, 9S& IS >NTIT<>D TO TH> ?MOST @&VOR>D N&TION? T&K R&T> O@ ).B ON ROG&<TI>S &S PROVID>D IN TH> RP,9S T&K TR>&TG IN R><&TION TO TH> RP,E>ST ->RM&NG T&K TR>&TG. Petitioner contends that under &rticle )2:0; :b; :iii; of the RP,9S Ta1 Treat3, hich is $no n as the ?'ost favored nation? clause, the lo est rate of the Philippine ta1 at ).B 'a3 be i'posed on ro3alties derived b3 a resident of the 9nited States fro' sources ithin the Philippines onl3 if the circu'stances of the resident of the 9nited States are si'ilar to those of the resident of Eest -er'an3. Since the RP,9S Ta1 Treat3 contains no ?'atchin% credit? provision as that provided under &rticle 0! of the RP,Eest -er'an3 Ta1 Treat3, the ta1 on ro3alties under the RP,9S Ta1 Treat3 is not paid under si'ilar circu'stances as those obtainin% in the RP,Eest -er'an3 Ta1 Treat3. >ven assu'in% that the phrase ?paid under si'ilar circu'stances? refers to the pa3'ent of ro3alties, and not ta1es, as held b3 the #ourt of &ppeals, still, the ?'ost favored nation? clause cannot be invo$ed for the reason that hen a ta1 treat3 conte'plates circu'stances attendant to the pa3'ent of a ta1, or ro3alt3 re'ittances for that 'atter, these 'ust necessaril3 refer to circu'stances that are ta1,related. @inall3, petitioner ar%ues that since S.#. 8ohnsonCs invocation of the ?'ost favored nation? clause is in the nature of a clai' for e1e'ption fro' the application of the re%ular ta1 rate of 0"B for ro3alties, the provisions of the treat3 'ust be construed strictl3 a%ainst it. In its #o''ent, private respondent S.#. 8ohnson avers that the instant petition should be denied :); because it contains a defective certification a%ainst foru' shoppin% as reDuired under S# #ircular No. 0/,*), that is, the certification as not e1ecuted b3 the petitioner herself but b3 her counselL and :0; that the ?'ost favored nation? clause under the RP,9S Ta1 Treat3 refers to ro3alties paid under si'ilar circu'stances as those ro3alties subAect to ta1 in other treatiesL that the phrase ?paid under si'ilar circu'stances? does not refer to pa3'ent of the ta1 but to the subAect 'atter of the ta1, that is, ro3alties, because the ?'ost favored nation? clause is intended to allo the ta1pa3er in one state to avail of 'ore liberal provisions contained in another ta1 treat3 herein the countr3 of residence of such ta1pa3er is also a part3 thereto, subAect to the basic condition that the subAect 'atter of ta1ation in that other ta1 treat3 is the sa'e as that in the ori%inal ta1 treat3 under hich the ta1pa3er is liableL thus, the RP,9S Ta1 Treat3 spea$s of ?ro3alties of the sa'e $ind paid under si'ilar circu'stances?. S.#. 8ohnson also contends that the #o''issioner is estopped fro' insistin% on her interpretation that the phrase ?paid under si'ilar circu'stances? refers to the 'anner in hich the ta1 is paid, for the reason that said interpretation is e'bodied in Revenue Me'orandu' #ircular :?RM#?; 2*,*0 hich as alread3 abandoned b3 the #o''issionerCs predecessor in )**2L and as e1pressl3 revo$ed in =IR Rulin% No. ."0,*" hich stated that ro3alties paid to an &'erican licensor are subAect onl3 to ).B ithholdin% ta1 pursuant to &rt )2:0;:b;:iii; of the RP,9S Ta1 Treat3 in relation to the RP,Eest -er'an3 Ta1 Treat3. Said rulin% should be %iven retroactive effect e1cept if such is preAudicial to the ta1pa3er pursuant to Section 0!+ of the National Internal Revenue #ode. Petitioner filed Repl3 alle%in% that the fact that the certification a%ainst foru' shoppin% as si%ned b3 petitionerCs counsel is not a fatal defect as to arrant the dis'issal of this petition since #ircular No. 0/,*) applies onl3 to ori%inal actions and not to appeals, as in the instant case. Moreover, the reDuire'ent that the certification should be si%ned b3 petitioner and not b3 counsel does not appl3 to petitioner ho has onl3 the Office of the Solicitor -eneral as statutor3 counsel. Petitioner reiterates

that even if the phrase ?paid under si'ilar circu'stances? e'bodied in the 'ost favored nation clause of the RP,9S Ta1 Treat3 refers to the pa3'ent of ro3alties and not ta1es, still the presence or absence of a ?'atchin% credit? provision in the said RP,9S Ta1 Treat3 ould constitute a 'aterial circu'stance to such pa3'ent and ould be deter'inative of the said clauseCs application.
1wphi1.nt

Ee address first the obAection raised b3 private respondent that the certification a%ainst foru' shoppin% as not e1ecuted b3 the petitioner herself but b3 her counsel, the Office of the Solicitor -eneral :O.S.-.; throu%h one of its Solicitors, &tt3. To'as M. Navarro. S# #ircular No. 0/,*) provides4 S9=8>#T4 &DDITION&< R>M9ISIT>S @OR P>TITIONS @I<>D EITH TH> S9PR>M> #O9RT &ND TH> #O9RT O@ &PP>&<S TO PR>V>NT @OR9M SHOPPIN- OR M9<TIP<> @I<IN- O@ P>TITIONS &ND #OMP<&INTS TO4 111 111 111 The attention of the #ourt has been called to the filin% of 'ultiple petitions and co'plaints involvin% the sa'e issues in the Supre'e #ourt, the #ourt of &ppeals or other tribunals or a%encies, ith the result that said courts, tribunals or a%encies have to resolve the sa'e issues. :); To avoid the fore%oin%, in ever3 petition filed ith the Supre'e #ourt or the #ourt of &ppeals, the petitioner aside fro' co'pl3in% ith pertinent provisions of the Rules of #ourt and e1istin% circulars, 'ust certif3 under oath to all of the follo in% facts or underta$in%s4 :a; he has not theretofore co''enced an3 other action or proceedin% involvin% the sa'e issues in the Supre'e #ourt, the #ourt of &ppeals, or an3 tribunal or a%enc3L . . . :0; &n3 violation of this revised #ircular ill entail the follo in% sanctions4 :a; it shall be a cause for the su''ar3 dis'issal of the 'ultiple petitions or co'plaintsL . . . The circular e1pressl3 reDuires that a certificate of non,foru' shoppin% should be attached to petitions filed before this #ourt and the #ourt of &ppeals. PetitionerCs alle%ation that #ircular No. 0/, *) applies onl3 to ori%inal actions and not to appeals as in the instant case is not supported b3 the te1t nor b3 the obvious intent of the #ircular hich is to prevent 'ultiple petitions that ill result in the sa'e issue bein% resolved b3 different courts. &nent the reDuire'ent that the part3, not counsel, 'ust certif3 under oath that he has not co''enced an3 other action involvin% the sa'e issues in this #ourt or the #ourt of &ppeals or an3 other tribunal or a%enc3, e are inclined to accept petitionerCs sub'ission that since the OS- is the onl3 la 3er for the petitioner, hich is a %overn'ent a%enc3 'andated under Section 2", #hapter )0, title III, =oo$ IV of the )*/( &d'inistrative #ode ' to be represented onl3 b3 the Solicitor -eneral, the certification e1ecuted b3 the OS- in this case constitutes substantial co'pliance ith #ircular No. 0/, *).

Eith respect to the 'erits of this petition, the 'ain point of contention in this appeal is the interpretation of &rticle )2 :0; :b; :iii; of the RP,9S Ta1 Treat3 re%ardin% the rate of ta1 to be i'posed b3 the Philippines upon ro3alties received b3 a non,resident forei%n corporation. The provision states insofar as pertinent that H ); Ro3alties derived b3 a resident of one of the #ontractin% States fro' sources ithin the other #ontractin% State 'a3 be ta1ed b3 both #ontractin% States. 0; Ho ever, the ta1 i'posed b3 that #ontractin% State shall not e1ceed. a; In the case of the 9nited States, )" percent of the %ross a'ount of the ro3alties, and b; In the case of the Philippines, the least of4 :i; 0" percent of the %ross a'ount of the ro3altiesL :ii; )" percent of the %ross a'ount of the ro3alties, here the ro3alties are paid b3 a corporation re%istered ith the Philippine =oard of Invest'ents and en%a%ed in preferred areas of activitiesL and :iii; the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. 111 111 111 :e'phasis supplied; Respondent S. #. 8ohnson and Son, Inc. clai's that on the basis of the Duoted provision, it is entitled to the concessional ta1 rate of ). percent on ro3alties based on &rticle )0 :0; :b; of the RP, -er'an3 Ta1 Treat3 hich provides4 :0; Ho ever, such ro3alties 'a3 also be ta1ed in the #ontractin% State in hich the3 arise, and accordin% to the la of that State, but the ta1 so char%ed shall not e1ceed4 111 111 111 b; ). percent of the %ross a'ount of ro3alties arisin% fro' the use of, or the ri%ht to use, an3 patent, trade'ar$, desi%n or 'odel, plan, secret for'ula or

process, or fro' the use of or the ri%ht to use, industrial, co''ercial, or scientific eDuip'ent, or for infor'ation concernin% industrial, co''ercial or scientific e1perience. @or as lon% as the transfer of technolo%3, under Philippine la , is subAect to approval, the li'itation of the ta1 rate 'entioned under b; shall, in the case of ro3alties arisin% in the Republic of the Philippines, onl3 appl3 if the contract %ivin% rise to such ro3alties has been approved b3 the Philippine co'petent authorities. 9nli$e the RP,9S Ta1 Treat3, the RP,-er'an3 Ta1 Treat3 allo s a ta1 credit of 0. percent of the %ross a'ount of such ro3alties a%ainst -er'an inco'e and corporation ta1 for the ta1es pa3able in the Philippines on such ro3alties here the ta1 rate is reduced to ). or )" percent under such treat3. &rticle 0! of the RP,-er'an3 Ta1 Treat3 states H ); Ta1 shall be deter'ined in the case of a resident of the @ederal Republic of -er'an3 as follo s4 111 111 111 b; SubAect to the provisions of -er'an ta1 la re%ardin% credit for forei%n ta1, there shall be allo ed as a credit a%ainst -er'an inco'e and corporation ta1 pa3able in respect of the follo in% ite's of inco'e arisin% in the Republic of the Philippines, the ta1 paid under the la s of the Philippines in accordance ith this &%ree'ent on4 111 111 111 dd; ro3alties, as defined in para%raph 2 of &rticle )0L 111 111 111 c; @or the purpose of the credit referred in subpara%raphL b; the Philippine ta1 shall be dee'ed to be 111 111 111 cc; in the case of ro3alties for hich the ta1 is reduced to ). or )" per cent accordin% to para%raph 0 of &rticle )0, 0. percent of the %ross a'ount of such ro3alties. 111 111 111 &ccordin% to petitioner, the ta1es upon ro3alties under the RP,9S Ta1 Treat3 are not paid under circu'stances si'ilar to those in the RP,Eest -er'an3 Ta1 Treat3 since there is no provision for a

0. percent 'atchin% credit in the for'er convention and private respondent cannot invo$e the concessional ta1 rate on the stren%th of the 'ost favored nation clause in the RP,9S Ta1 Treat3. PetitionerCs position is e1plained thus4 9nder the fore%oin% provision of the RP,Eest -er'an3 Ta1 Treat3, the Philippine ta1 paid on inco'e fro' sources ithin the Philippines is allo ed as a credit a%ainst -er'an inco'e and corporation ta1 on the sa'e inco'e. In the case of ro3alties for hich the ta1 is reduced to ). or )" percent accordin% to para%raph 0 of &rticle )0 of the RP,Eest -er'an3 Ta1 Treat3, the credit shall be 0.B of the %ross a'ount of such ro3alt3. To illustrate, the ro3alt3 inco'e of a -er'an resident fro' sources ithin the Philippines arisin% fro' the use of, or the ri%ht to use, an3 patent, trade 'ar$, desi%n or 'odel, plan, secret for'ula or process, is ta1ed at ).B of the %ross a'ount of said ro3alt3 under certain conditions. The rate of ).B is i'posed if credit a%ainst the -er'an inco'e and corporation ta1 on said ro3alt3 is allo ed in favor of the -er'an resident. That 'eans the rate of ).B is %ranted to the -er'an ta1pa3er if he is si'ilarl3 %ranted a credit a%ainst the inco'e and corporation ta1 of Eest -er'an3. The clear intent of the ?'atchin% credit? is to soften the i'pact of double ta1ation b3 different Aurisdictions. The RP,9S Ta1 Treat3 contains no si'ilar ?'atchin% credit? as that provided under the RP,Eest -er'an3 Ta1 Treat3. Hence, the ta1 on ro3alties under the RP,9S Ta1 Treat3 is not paid under si'ilar circu'stances as those obtainin% in the RP,Eest -er'an3 Ta1 Treat3. Therefore, the ?'ost favored nation? clause in the RP,Eest -er'an3 Ta1 Treat3 cannot be availed of in interpretin% the provisions of the RP,9S Ta1 Treat3. 5
The petition is 'eritorious.

Ee are unable to sustain the position of the #ourt of Ta1 &ppeals, hich as upheld b3 the #ourt of &ppeals, that the phrase ?paid under si'ilar circu'stances in &rticle )2 :0; :b;, :iii; of the RP,9S Ta1 Treat3 should be interpreted to refer to pa3'ent of ro3alt3, and not to the pa3'ent of the ta1, for the reason that the phrase ?paid under si'ilar circu'stances? is follo ed b3 the phrase ?to a resident of a third state?. The respondent court held that ?Eords are to be understood in the conte1t in hich the3 are used?, and since hat is paid to a resident of a third state is not a ta1 but a ro3alt3 ?lo%ic instructs? that the treat3 provision in Duestion should refer to ro3alties of the sa'e $ind paid under si'ilar circu'stances. The above construction is based principall3 on s3nta1 or sentence structure but fails to ta$e into account the purpose ani'atin% the treat3 provisions in point. To be%in ith, e are not a are of an3 la or rule pertinent to the pa3'ent of ro3alties, and none has been brou%ht to our attention, hich provides for the pa3'ent of ro3alties under dissi'ilar circu'stances. The ta1 rates on ro3alties and the circu'stances of pa3'ent thereof are the sa'e for all the recipients of such ro3alties and there is no disparit3 based on nationalit3 in the circu'stances of such pa3'ent. ( On the other hand, a cursor3 readin% of the various ta1 treaties ill sho that there is no si'ilarit3 in the provisions on relief fro' or avoidance of double ta1ation 7 as this is a 'atter of ne%otiation bet een the contractin% parties. )&s ill be sho n later, this dissi'ilarit3 is true particularl3 in the treaties bet een the Philippines and the 9nited States and bet een the Philippines and Eest -er'an3. The RP,9S Ta1 Treat3 is Aust one of a nu'ber of bilateral treaties hich the Philippines has entered into for the avoidance of double ta1ation. 9 The purpose of these international a%ree'ents is to reconcile the national fiscal le%islations of the contractin% parties in order to help the ta1pa3er avoid si'ultaneous ta1ation in t o different Aurisdictions.10 More precisel3, the ta1 conventions are drafted ith a vie to ards the eli'ination of international Auridical double ta1ation, hich is defined as the i'position of co'parable

ta1es in t o or 'ore states on the sa'e ta1pa3er in respect of the sa'e subAect 'atter and for identical periods. 11 The apparent rationale for doin% a a3 ith double ta1ation is of encoura%e the free flo of %oods and services and the 'ove'ent of capital, technolo%3 and persons bet een countries, conditions dee'ed vital in creatin% robust and d3na'ic econo'ies. 12 @orei%n invest'ents ill onl3 thrive in a fairl3 predictable and reasonable international invest'ent cli'ate and the protection a%ainst double ta1ation is crucial in creatin% such a cli'ate. 1&

Double ta1ation usuall3 ta$es place hen a person is resident of a contractin% state and derives inco'e fro', or o ns capital in, the other contractin% state and both states i'pose ta1 on that inco'e or capital. In order to eli'inate double ta1ation, a ta1 treat3 resorts to several 'ethods. @irst, it sets out the respective ri%hts to ta1 of the state of source or situs and of the state of residence ith re%ard to certain classes of inco'e or capital. In so'e cases, an e1clusive ri%ht to ta1 is conferred on one of the contractin% statesL ho ever, for other ite's of inco'e or capital, both states are %iven the ri%ht to ta1, althou%h the a'ount of ta1 that 'a3 be i'posed b3 the state of source is li'ited. 1' The second 'ethod for the eli'ination of double ta1ation applies henever the state of source is %iven a full or li'ited ri%ht to ta1 to%ether ith the state of residence. In this case, the treaties 'a$e it incu'bent upon the state of residence to allo relief in order to avoid double ta1ation. There are t o 'ethods of relief H the e1e'ption 'ethod and the credit 'ethod. In the e1e'ption 'ethod, the inco'e or capital hich is ta1able in the state of source or situs is e1e'pted in the state of residence, althou%h in so'e instances it 'a3 be ta$en into account in deter'inin% the rate of ta1 applicable to the ta1pa3erCs re'ainin% inco'e or capital. On the other hand, in the credit 'ethod, althou%h the inco'e or capital hich is ta1ed in the state of source is still ta1able in the state of residence, the ta1 paid in the for'er is credited a%ainst the ta1 levied in the latter. The basic difference bet een the t o 'ethods is that in the e1e'ption 'ethod, the focus is on the inco'e or capital itself, hereas the credit 'ethod focuses upon the ta1. 15 In ne%otiatin% ta1 treaties, the underl3in% rationale for reducin% the ta1 rate is that the Philippines ill %ive up a part of the ta1 in the e1pectation that the ta1 %iven up for this particular invest'ent is not ta1ed b3 the other countr3. 1( Thus the petitioner correctl3 opined that the phrase ?ro3alties paid under si'ilar circu'stances? in the 'ost favored nation clause of the 9S,RP Ta1 Treat3 necessaril3 conte'plated ?circu'stances that are ta1,related?. In the case at bar, the state of source is the Philippines because the ro3alties are paid for the ri%ht to use propert3 or ri%hts, i.e. trade'ar$s, patents and technolo%3, located ithin the Philippines. 17 The 9nited States is the state of residence since the ta1pa3er, S. #. 8ohnson and Son, 9. S. &., is based there. 9nder the RP,9S Ta1 Treat3, the state of residence and the state of source are both per'itted to ta1 the ro3alties, ith a restraint on the ta1 that 'a3 be collected b3 the state of source. 1) @urther'ore, the 'ethod e'plo3ed to %ive relief fro' double ta1ation is the allo ance of a ta1 credit to citi7ens or residents of the 9nited States :in an appropriate a'ount based upon the ta1es paid or accrued to the Philippines; a%ainst the 9nited States ta1, but such a'ount shall not e1ceed the li'itations provided b3 9nited States la for the ta1able 3ear. 19 9nder &rticle )2 thereof, the Philippines 'a3 i'pose one of three rates H 0" percent of the %ross a'ount of the ro3altiesL )" percent hen the ro3alties are paid b3 a corporation re%istered ith the Philippine =oard of Invest'ents and en%a%ed in preferred areas of activitiesL or the lo est rate of Philippine ta1 that 'a3 be i'posed on ro3alties of the sa'e $ind paid under si'ilar circu'stances to a resident of a third state. -iven the purpose underl3in% ta1 treaties and the rationale for the 'ost favored nation clause, the concessional ta1 rate of ). percent provided for in the RP,-er'an3 Ta1 Treat3 should appl3 onl3 if the ta1es i'posed upon ro3alties in the RP,9S Ta1 Treat3 and in the RP,-er'an3 Ta1 Treat3 are paid under si'ilar circu'stances. This ould 'ean that private respondent 'ust prove that the RP, 9S Ta1 Treat3 %rants si'ilar ta1 reliefs to residents of the 9nited States in respect of the ta1es

i'posable upon ro3alties earned fro' sources ithin the Philippines as those allo ed to their -er'an counterparts under the RP,-er'an3 Ta1 Treat3. The RP,9S and the RP,Eest -er'an3 Ta1 Treaties do not contain si'ilar provisions on ta1 creditin%. &rticle 0! of the RP,-er'an3 Ta1 Treat3, supra, e1pressl3 allo s creditin% a%ainst -er'an inco'e and corporation ta1 of 0.B of the %ross a'ount of ro3alties paid under the la of the Philippines. On the other hand, &rticle 02 of the RP,9S Ta1 Treat3, hich is the counterpart provision ith respect to relief for double ta1ation, does not provide for si'ilar creditin% of 0.B of the %ross a'ount of ro3alties paid. Said &rticle 02 reads4 &rticle 02 Relief fro' double ta1ation Double ta1ation of inco'e shall be avoided in the follo in% 'anner4 ); In accordance ith the provisions and subAect to the li'itations of the la of the 9nited States :as it 'a3 be a'ended fro' ti'e to ti'e ithout chan%in% the %eneral principle thereof;, the 9nited States shall allo to a citi7en or resident of the 9nited States as a credit a%ainst the 9nited States ta1 the appropriate a'ount of ta1es paid or accrued to the Philippines and, in the case of a 9nited States corporation o nin% at least ). percent of the votin% stoc$ of a Philippine corporation fro' hich it receives dividends in an3 ta1able 3ear, shall allo credit for the appropriate a'ount of ta1es paid or accrued to the Philippines b3 the Philippine corporation pa3in% such dividends ith respect to the profits out of hich such dividends are paid. Such appropriate a'ount shall be based upon the a'ount of ta1 paid or accrued to the Philippines, but the credit shall not e1ceed the li'itations :for the purpose of li'itin% the credit to the 9nited States ta1 on inco'e fro' sources ithin the Philippines or on inco'e fro' sources outside the 9nited States; provided b3 9nited States la for the ta1able 3ear. . . . The reason for construin% the phrase ?paid under si'ilar circu'stances? as used in &rticle )2 :0; :b; :iii; of the RP,9S Ta1 Treat3 as referrin% to ta1es is anchored upon a lo%ical readin% of the te1t in the li%ht of the funda'ental purpose of such treat3 hich is to %rant an incentive to the forei%n investor b3 lo erin% the ta1 and at the sa'e ti'e creditin% a%ainst the do'estic ta1 abroad a fi%ure hi%her than hat as collected in the Philippines. In one case, the Supre'e #ourt pointed out that la s are not Aust 'ere co'positions, but have ends to be achieved and that the %eneral purpose is a 'ore i'portant aid to the 'eanin% of a la than an3 rule hich %ra''ar 'a3 la3 do n. 20 It is the dut3 of the courts to loo$ to the obAect to be acco'plished, the evils to be re'edied, or the purpose to be subserved, and should %ive the la a reasonable or liberal construction hich ill best effectuate its purpose. 21 The Vienna #onvention on the <a of Treaties states that a treat3 shall be interpreted in %ood faith in accordance ith the ordinar3 'eanin% to be %iven to the ter's of the treat3 in their conte1t and in the li%ht of its obAect and purpose. 22 &s stated earlier, the ulti'ate reason for avoidin% double ta1ation is to encoura%e forei%n investors to invest in the Philippines H a crucial econo'ic %oal for developin% countries. 2& The %oal of double ta1ation conventions ould be th arted if such treaties did not provide for effective 'easures to 'ini'i7e,

if not co'pletel3 eli'inate, the ta1 burden laid upon the inco'e or capital of the investor. Thus, if the rates of ta1 are lo ered b3 the state of source, in this case, b3 the Philippines, there should be a conco'itant co''it'ent on the part of the state of residence to %rant so'e for' of ta1 relief, hether this be in the for' of a ta1 credit or e1e'ption. 2' Other ise, the ta1 hich could have been collected b3 the Philippine %overn'ent ill si'pl3 be collected b3 another state, defeatin% the obAect of the ta1 treat3 since the ta1 burden i'posed upon the investor ould re'ain unrelieved. If the state of residence does not %rant so'e for' of ta1 relief to the investor, no benefit ould redound to the Philippines, i.e., increased invest'ent resultin% fro' a favorable ta1 re%i'e, should it i'pose a lo er ta1 rate on the ro3alt3 earnin%s of the investor, and it ould be better to i'pose the re%ular rate rather than lose 'uch, needed revenues to another countr3.

&t the sa'e ti'e, the intention behind the adoption of the provision on ?relief fro' double ta1ation? in the t o ta1 treaties in Duestion should be considered in li%ht of the purpose behind the 'ost favored nation clause. The purpose of a 'ost favored nation clause is to %rant to the contractin% part3 treat'ent not less favorable than that hich has been or 'a3 be %ranted to the ?'ost favored? a'on% other countries. 25 The 'ost favored nation clause is intended to establish the principle of eDualit3 of international treat'ent b3 providin% that the citi7ens or subAects of the contractin% nations 'a3 enAo3 the privile%es accorded b3 either part3 to those of the 'ost favored nation. 2( The essence of the principle is to allo the ta1pa3er in one state to avail of 'ore liberal provisions %ranted in another ta1 treat3 to hich the countr3 of residence of such ta1pa3er is also a part3 provided that the subAect 'atter of ta1ation, in this case ro3alt3 inco'e, is the sa'e as that in the ta1 treat3 under hich the ta1pa3er is liable. =oth &rticle )2 of the RP,9S Ta1 Treat3 and &rticle )0 :0; :b; of the RP,Eest -er'an3 Ta1 Treat3, above, Duoted, spea$s of ta1 on ro3alties for the use of trade'ar$, patent, and technolo%3. The entitle'ent of the ).B rate b3 9.S. fir's despite the absence of a 'atchin% credit :0.B for ro3alties; ould dero%ate fro' the desi%n behind the 'ost %rant eDualit3 of international treat'ent since the ta1 burden laid upon the inco'e of the investor is not the sa'e in the t o countries. The si'ilarit3 in the circu'stances of pa3'ent of ta1es is a condition for the enAo3'ent of 'ost favored nation treat'ent precisel3 to underscore the need for eDualit3 of treat'ent. Ee accordin%l3 a%ree ith petitioner that since the RP,9S Ta1 Treat3 does not %ive a 'atchin% ta1 credit of 0. percent for the ta1es paid to the Philippines on ro3alties as allo ed under the RP,Eest -er'an3 Ta1 Treat3, private respondent cannot be dee'ed entitled to the ). percent rate %ranted under the latter treat3 for the reason that there is no pa3'ent of ta1es on ro3alties under si'ilar circu'stances. It bears stress that ta1 refunds are in the nature of ta1 e1e'ptions. &s such the3 are re%arded as in dero%ation of soverei%n authorit3 and to be construed strictissimi uris a%ainst the person or entit3 clai'in% the e1e'ption. 27The burden of proof is upon hi' ho clai's the e1e'ption in his favor and he 'ust be able to Austif3 his clai' b3 the clearest %rant of or%anic or statute la . 2) Private respondent is clai'in% for a refund of the alle%ed overpa3'ent of ta1 on ro3altiesL ho ever, there is nothin% on record to support a clai' that the ta1 on ro3alties under the RP,9S Ta1 Treat3 is paid under si'ilar circu'stances as the ta1 on ro3alties under the RP,Eest -er'an3 Ta1 Treat3. EH>R>@OR>, for all the fore%oin%, the instant petition is -R&NT>D. The decision dated Ma3 (, )**+ of the #ourt of Ta1 &ppeals and the decision dated Nove'ber (, )**+ of the #ourt of &ppeals are hereb3 S>T &SID>. SO ORD>R>D.