DIGEST/MARIETTA RAEL/CIR v. S.C. JOHNSON, GR No. 127105, 1999-06-25 CIR v. S.C. JOHNSON, GR No. 127105, 1999-06-25

 DIGEST/MARIETTA RAEL/CIR v. S.C. JOHNSON, GR No. 127105, 1999-06-25

Facts 

Respondent, JOHNSON AND SON,INC a domestic corporation organized and operating under the Philippine laws, entered into a license agreement with SC Johnson and Son, United States of America(USA), a non-resident foreign corporation based in the U.S.A. pursuant to which the [respondent] was granted the right to use the trademark, patents and technology owned by the latter including the right to manufacture, package and distribute the products covered by the Agreement and secure assistance in management, marketing and production from SC Johnson and Son, U. S. A. The said License Agreement was duly registered with the Technology Transfer Board of the Bureau of Patents, Trade Marks and Technology Transfer under Certificate of Registration No. 8064. For the use of the trademark or technology, SC JOHNSON AND SON,INC was obliged to pay SC Johnson and Son, US royalties based on a percentage of net sales and subjected the same to 25% withholding tax on royalty payments which respondent paid for the period covering July 1992 to May 1993.00 On October 29,1993, SC JOHNSON AND SON,USA filed with the International Tax Affairs Division (ITAD) of the BIR acclaim for refund of overpaid withholding tax on royalties arguing that, since the agreement was approved by the Technology Transfer Board, the preferential tax rate of 10% should apply to the respondent. Respondent submits that royalties paid to SC Johnson and Son, USA is only subject to 10%withholding tax pursuant to the most-favored nation clause of the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty. The Internal Tax Affairs Division of the BIR ruled against SC Johnson and Son, Inc. and an appeal was filed by the former to the Court of tax appeals. The CTA ruled against CIR and ordered that a tax credit be issued in favor of SC Johnson and Son, Inc. Unpleased with the decision; the CIR filed an appeal to the CA which subsequently affirmed in toto the decision of the CTA. Hence, an appeal on certiorari was filed to the SC.

ISSUE:

WON SC JOHNSON AND SON, USA IS ENTITLED TO THE MOST FAVORED NATION TAX RATE OF 10% ON ROYALTIES AS PROVIDED IN THE RP- US TAX TREATY IN RELATION TO THE RP-WEST GERMANY TAX TREATY.

RULING:

The concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty could not apply to taxes imposed upon royalties in the RP-US Tax Treaty since the two taxes imposed under the two tax treaties are not paid under similar circumstances; they are not containing similar provisions on tax crediting.

The United States is the state of residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based there. Under the RP-US Tax Treaty, the state of residence and the state of source are both permitted to tax the royalties, with a restraint on the tax that may be collected by the state of source. Furthermore, the method employed to give relief from double taxation is the allowance of a tax credit to citizens or residents of the United States against the United States tax, but such amount shall not exceed the limitations provided by United States law for the taxable year. The Philippines may impose one of three rates- 25 percent of the gross amount of the royalties; 15 percent when the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities; or 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.

It bears stress that tax refunds are in the nature of tax exemptions. As such they are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption.[27] The burden of... proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic or statute law.[28] Private respondent is claiming for a refund of the alleged overpayment of tax on royalties; however, there... is nothing on record to support a claim that the tax on royalties under the RP-US Tax Treaty is paid under similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty.

WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision dated May 7, 1996 of the Court of Tax Appeals and the decision dated November 7, 1996 of the Court