036. CIR v.

P&G
CIR v Procter and Gamble Phils, And the CTA
Dec. 2, 1991
Feliciano, J.
Recit-Ready Version:

Facts:
For the taxable year 1974 P&G Phils declared dividends payable to its parent company and sole stockholder
P&G USA, amounting to P24M, from which P3.8M was deducted as the 35% withholding tax at the source.
In 1977, P&G Phils. Applied for a tax refund or tax credit, on the ground, inter alia, that pursuant to
Sec. 24(b)(1) of the NIRC, the applicable rate of withholding tax on the dividends remitted was only 15%,
and not 35%. The Commissioner did not respond, leading P&G to file a petition for review with the CTA.
The CTA ordered the Commissioner to refund or grant the tax credit.
On appeal, the SC reversed the CTA, and held that it was P&G USA, who was the proper party to
claim the tax refund or credit, that there was nothing int eh US Tax code that allows a credit in the amount of
20%, the difference between the withholding tax and the corporate income tax and that P&G Phils failed to
meet certain conditions necessary in order that the dividends received by P7G USA could be subjected to the
preferential rate of 15%. Hence this motion for reconsideration.
Issues:
1. WON it mattered that the issue of capacity of P7G Phils to bring the claim was first brought up on
appeal. (Yes)
2. WON P&G Phils is a taxpayer under Sec. 309 (3) of the NIRC. (yes)
3. WON the 15% preferential rate is applicable to the dividends here involved.
Ratio:
1. Yes, its unfair. Commissioner cant do that. It would be unfair to allow the CIR to skirt rules of
procedure when the private company could not do so. Further, the claim for refund is essential for
maintenance of a suit for recovery of taxes allegedly erroneously or illegally assessed or collected in
accordance with Secs. 306 and 309 of the NIRC.
2. Under the NIRC, the withholding agent, i.e. P&G Phils., is directly and independently liable for the
correct amount of the tax that should be withheld from the dividend remittances, and is also subject
to and liable for deficiency assessments, surcharges, and penalties.
The withholding agent is an agent of both the government and the taxpayer, and is not an
ordinary government agent. The law sets no condition for his personal liability to attach, in order to
compel the agent to withhold the tax under all circumstances. In effect, the responsibility of
collecting the tax as well as the payment thereof is concentrated upon the person over whom the
government has jurisdiction.
With regard to the filing of the necessary income tax return and the payment of the tax to
the government, the withholding agent is the agent of the taxpayer. Thus, he is no ordinary
government agent, especially because he is held personally liable for the tax he is duty bound to
withhold. This is particularly the case here, as the withholding agent is the wholly owned subsidiary
of the parent-stockholder, and is at all times under the effective control of such stockholder. It would
seem particularly unreal to deny an implied authority to claim a refund and commence an action for
such refund.
Under the circumstances of this case, therefore, P&G Phils is properly regarded as a
taxpayer.
3. Acc. To sec. 24(b) of the NIRC, a foreign corporation not engaged in trade and business in the Phils.
Shall pay a tax equal to 35% of its gross income receipt, provided that on dividends received from a
domestic corporation liable to tax, the tax shall be 15% of the dividends, to be withheld under Sec.
53(d). Thus, the usual 35% rax rate applicable to dividend remittances goes down to 15% if the
country of domicile of the foreign 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.
Here, therefore, the 15% reduced rate is applicable if the USA shall allow to P&G US a tax
credit for taxes deemed paid in the Philippines against the USA taxes. The NIRC, notably, does not
require that the US give a deemed paid tax credit for the dividend tax waived by the Phlippines. It
only requires that the US shall allow a deemed paid tax credit in an amount equivalent to the
amount waived.
Based on the US Tax Code, P&G USA was granted a tax credit for the amount of the
dividend tax actually paid/withheld from the remittances. It was also granted a deemed paid tax
credit for a proportionate part of the corporate income tax actually paid to the Philippines. Thus,
P7G USA was deemed to have paid a portion of the Philippine corporate income tax although that
tax was actually paid by P&G Phils.
MR Granted. CTA decision reinstated.
Gabe.