Marubeni Corp V Cir

MARUBENI CORP V CIR
Sept 14, 1989 | Fernan, C.J. | Withholding Tax on Dividends | Co
PETITIONERS: MARUBENI CORPORATION

RESPONDENTS: COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS
SUMMARY:
DOCTRINE:
FACTS:
Petitioner Marubeni Corporation of Japan had equity investments in Atlantic Gulf and Pacific Co. of
Manila (AG&P) of Manila.
 First quarter of 1981 ending March 31: AG&P declared and paid cash dividends to
petitioner in the amount of P849,720 and withheld the corresponding 10% final
dividend tax thereon.
 Third quarter of 1981 ending September 30: AG&P declared and paid P849,720 as
cash dividends to petitioner and withheld the corresponding 10% final dividend tax
AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, Japan (10%
final dividend tax in the amount of P764, 748 and withheld 15% profit remittance tax). The
10% final dividend tax and 15% branch profit remittance tax for first quarter and third quarter
of 1981 were paid to the Bureau of Internal Revenue by AG&P as withholding agent in the
total amount of P229, 424.40
Petitioner: Asked the BIR whether or not the dividends it receive from AG&P are effectively
connected with its business in the Philippines as to be considered as branch profits subject
to 15% profit remittance tax under sec 24 (b)(2) of NIRC.
BIR: Sec. 24(b)(2) of NIRC states that only profits remitted abroad by branch office to its
head office effectively connected with its trade/business in the Philippines are subject to 15%
profit remittance tax. It is sufficient that the income arises from the business activity in which
the corporation is engaged. Dividends received by Marubeni from AG&P are not income
arising from the business activity in which Marubeni is engaged. Said dividends if remitted
abroad are not considered branch profits for purposes of the 15% profit remittance tax.
Petitioner then claimed for the refund or issuance of a tax credit of P229,424.40 representing
profit tax remittance erroneously paid on the dividends remitted by AG&P. BIR agreed that
the dividends were not subject to the 15% profit remittance tax as the same were not income
earned by a Philippine Branch of Marubeni Corporation of Japan; and neither is it subject to
the 10% intercorporate dividend tax, the recipient of the dividends, being a non-resident
stockholder BUT, it still denied the claim because said dividend is subject to the 25% tax
pursuant to the Tax Treaty1 between the Phil and Japan. The amount refundable offsets the
liability.
CA: Affirmed BIR. Dividends in question are income taxable to the Marubeni Corporation of Tokyo,
Japan as these were directly remitted to and received by such. The Philippine branch didn’t have
any participation in the investments and in the receipt of the dividends.
ISSUE / HELD:
1
Article 10 (1) Dividends paid by a company which is a resident of a Contracting State to a
resident of the other Contracting State may be taxed in that other Contracting State.
(2) However, such dividends may also be taxed in the Contracting State of which the
company paying the dividends is a resident, and according to the laws of that Contracting
State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not
exceed;
(b) 25 per cent of the gross amount of the dividends in all other cases.
1. WON the dividends were subject to the 15% profit remittance tax and 10% intercorporate dividend
tax - NO
2. WON Marubeni Japan is a resident or a non-resident corporation under Philippine laws – NON-
RESIDENT
RATIO:
1. The alleged overpaid taxes were incurred for the remittance of dividend income to the
head office in Japan which is a separate and distinct income taxpayer from the branch in the
Philippines. The investment totalling 283.260 shares including that of nominee was made for
purposes peculiarly germane to the conduct of the corporate affairs of Marubeni Japan, but
certainly not of the branch in the Philippines.
The recipient being a non-resident stockholder, BIR grossly erred in holding that no refund
was forthcoming to the petitioner because the taxes thus withheld totalled the 25 % rate
imposed by the Philippine-Japan Tax Convention pursuant to Article 10 (2) (b). To simply
add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule in taxation that
each tax has a different tax basis. While the tax on dividends is directly levied on the
dividends received, "the tax base upon which the 15 % branch profit remittance tax is
imposed is the profit actually remitted abroad." BIR also erred in automatically imposing the
25 % rate under Article 10 (2) (b) of the Tax Treaty as if this were a flat rate. A closer look at
the Treaty reveals that the tax rates fixed by Article 10 are the maximum rates as reflected in
the phrase "shall not exceed." This means that any tax imposable by the contracting state
concerned should not exceed the 25 % limitation and that said rate would apply only if the
tax imposed by our laws exceeds the same.
2. Petitioner, being a non-resident foreign corporation, as a general rule, is taxed 35 % of its

gross income from all sources within the Philippines. However, a discounted rate of 15% is
given to petitioner on dividends received from a domestic corporation (AG&P) on the
condition that its domicile state (Japan) extends in favor of petitioner, a tax credit of not less
than 20 % of the dividends received. This 20 % represents the difference between the
regular tax of 35 % on non-resident foreign corporations which petitioner would have
ordinarily paid, and the 15 % special rate on dividends received from a domestic corporation.
The 15 % tax rate imposed on the dividends received by a foreign non-resident stockholder
from a domestic corporation under Section 24 (b) (1) (iii) is easily within the maximum ceiling
of 25 % of the gross amount of the dividends as decreed in Article 10 (2) (b) of the Tax
Treaty.
DISPOSITIVE: CIR is to refund or grant a tax credit in favor of petitioner in the amount of P144, 452.
40 representing overpayment of taxes on dividends
On October 9, 1989, petitioner similarly filed its motion for reconsideration remaining steadfast to
its position that it is a resident foreign corporation subject only to the 10% final intercorporate
dividend tax.
"Section 24(b)(1) is explicit on the conditions for the availment of the preferential 15% tax rate.
Under said provision, petitioner must show that Japan grants a tax credit to Marubeni, taxes
deemed to have been paid in the Philippines equivalent to at least 20% against the tax due from
Marubeni.
In the case of Commissioner of Internal Revenue vs. Procter and Gamble PMC, Procter and
Gamble's claim for refund for its parent company in the United States was denied since it failed to
meet the following conditions necessary for the availment of the preferential fifteen percent(15%)
tax namely:
(1) to show the actual amount credited by the U.S. Government against the income tax due from
PMC-USA on the dividends received from private respondent;
(2) to present the income tax return of its mother company for1975 when the dividends were
received;
(3) to submit any authenticated document showing that the US Government credited 20% of the
tax deemed paid in the Philippines.
In the case at bar, petitioner similarly failed to comply with the requisites set forth under
Section 24(b)(1). Petitioner reasons that it cannot furnish the CIR with the confidential income
tax return of Marubeni Japan since such a requirement is beyond the power of Philippine taxation
laws. Such reasoning finds no merit. Section 24(b)(i) of the National Internal Revenue Code of
1977 is clear and explicit on the conditions for the availment of the preferential fifteen percent
15% tax rate. Normally the Philippines imposes a higher 35% tax rate on corporations, but since
the Philippines seeks to lessen the impact of double taxation between countries, the lower tax
rate of 15% on dividends is imposed subject to the condition that the country in which the non-
resident foreign corporation is domiciled allows a tax credit of twenty percent (20%). Such
prerequisite must be strictly complied with because the fifteen percent (15%) tax rate is a
concession in the nature of a taxexemption vis-a-vis the normal rate of thirty five (35%) on
corporations.
Since petitioner failed to comply with the conditions set forth under Section 24 (b)(1) of the
National Internal Revenue Code of 1977, petitioner corporation is subject to the 25% tax rate on
dividends pursuant to Article 10(2) of the Philippine-Japan Tax Convention. The Commissioner of
Internal Revenue is hereby ordered to recompute the tax due from petitioner corporation using
the correct tax base and rate.

Marubeni Corp V Cir

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Marubeni Corp V Cir

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MARUBENI CORP V CIR

Sept 14, 1989 | Fernan, C.J. | Withholding Tax on Dividends | Co

PETITIONERS: MARUBENI CORPORATION

2. Petitioner, being a non-resident foreign corporation, as a general rule, is taxed 35 % of its

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