COMMISSIONER OF INTERNAL REVENUE,
vs. PROCTER & GAMBLE PHILIPPINE
MANUFACTURING CORPORATION and THE COURT OF TAX APPEALS
G.R. No. L-66838 December 2, 1991
PONENTE: FELICIANO, J.:
DOCTRINE: Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to
dividend remittances to non-resident corporate stockholders of a Philippine corporation. This
rate goes down to 15% ONLY 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.
FACTS: Private respondent Procter and Gamble Philippines is a parent company and sole
stockholder of Procter and Gamble Co., Inc. (USA) ("P&G-USA"), which is a non-resident foreign
corporation in the Philippines, not engaged in trade and business therein. P&G USA is entitled
to receive income from P&G Philippines in the form of dividends. For the taxable year 1974
ending on 30 June 1974, and the taxable year 1975 ending 30 June 1975, private respondent,
declared dividends payable to its parent company and sole stockholder, Procter and Gamble Co.,
Inc. ("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"), as
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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., filed a petition for
review with public respondent Court of Tax Appeals ("CTA"). The CTA rendered a decision ordering
petitioner Commissioner to refund or grant the tax credit in the amount of P4,832,989.00.
ISSUE: Whether or not the fifteen percent (15%) tax rate provided for in the following portion of
Section 24 (b) (1) of the NIRC will apply in the dividend remittances by P&G-Phil. to P&G-USA
RULING: Yes. 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.
It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a
"deemed paid" tax credit for the dividend tax (20 percentage points) waived by the Philippines in
making applicable the preferred divided tax rate of fifteen percent (15%). In other words, our
NIRC does not require that the US tax law deem the parent-corporation to have paid the twenty
(20) percentage points of dividend tax waived by the Philippines. The NIRC only requires that
the US "shall allow" P&G-USA a "deemed paid" tax credit in an amount equivalent to the twenty
(20) percentage points waived by the Philippines.
