Cyanamid Phil v CA, CTA & BIR

Facts:
Petitioner, Cyanamid Philippines, Inc., a corporation organized
under Philippine laws, is a wholly owned subsidiary of
American Cyanamid Co. based in Maine, USA. It is engaged in
the manufacture of pharmaceutical products and chemicals, a
wholesaler of imported finished goods, and an
importer/indentor.
On February 7, 1985, the CIR sent an assessment letter to
petitioner and demanded the payment of deficiency income
tax of one hundred nineteen thousand eight hundred
seventeen (P119,817.00) pesos for taxable year 1981.
On March 4, 1985, petitioner protested the assessments
particularly, (1) the 25% Surtax Assessment of P3,774,867.50;
(2) 1981 Deficiency Income Assessment of P119,817.00; and
1981 Deficiency Percentage Assessment of P8,846.72.
Petitioner, through its external accountant, Sycip, Gorres,
Velayo & Co., claimed, among others, that the surtax for the
undue accumulation of earnings was not proper because the
said profits were retained to increase petitioners working
capital and it would be used for reasonable business needs of
the company. Petitioner contended that it availed of the tax
amnesty under Executive Order No. 41, hence enjoyed
amnesty from civil and criminal prosecution granted by the
law.
On October 20, 1987, the CIR in a letter addressed to SGV &
Co., refused to allow the cancellation of the assessment
notices.
Petitioner appealed to the Court of Tax Appeals. During the
pendency of the case, however, both parties agreed to
compromise the 1981 deficiency income tax assessment of
P119,817.00. Petitioner paid a reduced amount --twenty-six
thousand, five hundred seventy-seven pesos (P26,577.00) -as compromise settlement. However, the surtax on improperly
accumulated profits remained unresolved.
Issue/s:
Whether the respondent court erred in holding that the
petitioner is liable for the accumulated earnings tax for the
year 1981.
Held/Ratio:
No, the respondent court correctly held the petitioner liable
for the accumulated earnings tax for the year 1981
Section 25 of the old National Internal Revenue Code of 1977
states:
"Sec. 25. Additional tax on corporation improperly
accumulating profits or surplus "(a) Imposition of tax. -- If any corporation is formed or availed
of for the purpose of preventing the imposition of the tax upon
its shareholders or members or the shareholders or members
of another corporation, through the medium of permitting its
gains and profits to accumulate instead of being divided or
distributed, there is levied and assessed against such
corporation, for each taxable year, a tax equal to twentyfive per-centum of the undistributed portion of its
accumulated profits or surplus which shall be in addition to
the tax imposed by section twenty-four, and shall be
computed, collected and paid in the same manner and subject
to the same provisions of law, including penalties, as that tax.
"(b) Prima facie evidence. -- The fact that any corporation is
mere holding company shall be prima facie evidence of a
purpose to avoid the tax upon its shareholders or members.
Similar presumption will lie in the case of an investment
company where at any time during the taxable year more
than fifty per centum in value of its outstanding stock is
owned, directly or indirectly, by one person.
"(c) Evidence determinative of purpose. -- The fact that the
earnings or profits of a corporation are permitted to
accumulate beyond the reasonable needs of the business
shall be determinative of the purpose to avoid the tax upon its
shareholders or members unless the corporation, by clear
preponderance of evidence, shall prove the contrary.
"(d) Exception -- The provisions of this sections shall not apply
to banks, non-bank financial intermediaries, corporation
organized primarily, and authorized by the Central Bank of the

Philippines to hold shares of stock of banks, insurance

companies, whether domestic or foreign.
The provision discouraged tax avoidance through corporate
surplus accumulation. When corporations do not declare
dividends, income taxes are not paid on the undeclared
dividends received by the shareholders. The tax on improper
accumulation of surplus is essentially a penalty tax designed
to compel corporations to distribute earnings so that the said
earnings by shareholders could, in turn, be taxed.
The amendatory provision of Section 25 of the 1977 NIRC,
which was PD 1739, enumerated the corporations exempt
from the imposition of improperly accumulated tax: (a) banks;
(b) non-bank financial intermediaries; (c) insurance
companies; and (d) corporations organized primarily and
authorized by the Central Bank of the Philippines to hold
shares of stocks of banks. Petitioner does not fall among those
exempt classes. Besides, the rule on enumeration is that the
express mention of one person, thing, act, or consequence is
construed to exclude all others. Laws granting exemption from
tax are construed strictissimi jurisagainst the taxpayer and
liberally in favor of the taxing power. Taxation is the rule and
exemption is the exception. The burden of proof rests upon
the party claiming exemption to prove that it is, in fact,
covered by the exemption so claimed, a burden which
petitioner here has failed to discharge.
Another point raised by the petitioner in objecting to the
assessment, is that increase of working capital by a
corporation justifies accumulating income. Petitioner asserts
that respondent court erred in concluding that Cyanamid need
not infuse additional working capital reserve because it had
considerable liquid funds based on the 2.21:1 ratio of current
assets to current liabilities. Petitioner relies on the so-called
"Bardahl" formula, which allowed retention, as working capital
reserve, sufficient amounts of liquid assets to carry the
company through one operating cycle. The "Bardahl" formula
was developed to measure corporate liquidity. The formula
requires an examination of whether the taxpayer has
sufficient liquid assets to pay all of its current liabilities and
any extraordinary expenses reasonably anticipated, plus
enough to operate the business during one operating cycle.
Operating cycle is the period of time it takes to convert cash
into raw materials, raw materials into inventory, and inventory
into sales, including the time it takes to collect payment for
the sales.
Using this formula, petitioner contends, Cyanamid needed at
least P33,763,624.00 pesos as working capital. As of 1981, its
liquid asset was only P25,776,991.00. Thus, petitioner asserts
that Cyanamid had a working capital deficit of P7,986,633.00.
Therefore, the P9,540,926.00 accumulated income as of 1981
may be validly accumulated to increase the petitioners
working capital for the succeeding year.
We note, however, that the companies where the "Bardahl"
formula was applied, had operating cycles much shorter than
that of petitioner. In Atlas Tool Co., Inc. vs. CIR, the companys
operating cycle was only 3.33 months or 27.75% of the year.
InCataphote Corp. of Mississippi vs. United States, the
corporations operating cycle was only 56.87 days, or 15.58%
of the year. In the case of Cyanamid, the operating cycle was
288.35 days, or 78.55% of a year, reflecting that petitioner
will need sufficient liquid funds, of at least three quarters of
the year, to cover the operating costs of the business. There
are variations in the application of the "Bardahl" formula, such
as average operating cycle or peak operating cycle. In times
when there is no recurrence of a business cycle, the working
capital needs cannot be predicted with accuracy. As stressed
by American authorities, although the "Bardahl" formula is
well-established and routinely applied by the courts, it is not a
precise rule. It is used only for administrative convenience.
Petitioners application of the "Bardahl" formula merely
creates a false illusion of exactitude.
Other formulas are also used, e.g. the ratio of current assets
to current liabilities and the adoption of the industry standard.
The ratio of current assets to current liabilities is used to
determine the sufficiency of working capital. Ideally, the
working capital should equal the current liabilities and there
must be 2 units of current assets for every unit of current
liability, hence the so-called "2 to 1" rule.

As of 1981 the working capital of Cyanamid was

P25,776,991.00, or more than twice its current liabilities. That
current ratio of Cyanamid, therefore, projects adequacy in
working capital. Said working capital was expected to increase
further when more funds were generated from the succeeding
years sales. Available income covered expenses or
indebtedness for that year, and there appeared no reason to
expect an impending working capital deficit which could
have necessitated an increase in working capital, as
rationalized by petitioner.
If the CIR determined that the corporation avoided the tax on
shareholders by permitting earnings or profits to accumulate,
and the taxpayer contested such a determination, the burden
of proving the determination wrong, together with the
corresponding burden of first going forward with evidence, is
on the taxpayer. This applies even if the corporation is not a
mere holding or investment company and does not have an
unreasonable accumulation of earnings or profits.
In order to determine whether profits are accumulated for the
reasonable needs of the business to avoid the surtax upon
shareholders, it must be shown that the controlling intention
of the taxpayer is manifested at the time of accumulation, not
intentions declared subsequently, which are mere
afterthoughts. Furthermore, the accumulated profits must be
used within a reasonable time after the close of the taxable
year. In the instant case, petitioner did not establish, by clear
and convincing evidence, that such accumulation of profit was
for the immediate needs of the business.
In Manila Wine Merchants, Inc. vs. Commissioner of Internal
Revenue, we ruled:
"To determine the reasonable needs of the business in order
to justify an accumulation of earnings, the Courts of the
United States have invented the so-called Immediacy Test
which construed the words reasonable needs of the business
to mean the immediate needs of the business, and it was
generally held that if the corporation did not prove an
immediate need for the accumulation of the earnings and
profits, the accumulation was not for the reasonable needs of
the business, and the penalty tax would apply. (Mertens, Law
of Federal Income Taxation,Vol. 7, Chapter 39, p. 103).
In the present case, the Tax Court opted to determine the
working capital sufficiency by using the ratio between current
assets to current liabilities. The working capital needs of a
business depend upon the nature of the business, its credit
policies, the amount of inventories, the rate of turnover, the
amount of accounts receivable, the collection rate, the
availability of credit to the business, and similar factors.
Petitioner, by adhering to the "Bardahl" formula, failed to
impress the tax court with the required definiteness
envisioned by the statute. We agree with the tax court that
the burden of proof to establish that the profits accumulated
were not beyond the reasonable needs of the company,
remained on the taxpayer. This Court will not set aside lightly
the conclusion reached by the Court of Tax Appeals which, by
the very nature of its function, is dedicated exclusively to the
consideration of tax problems and has necessarily developed
an expertise on the subject, unless there has been an abuse
or improvident exercise of authority. Unless rebutted, all
presumptions generally are indulged in favor of the
correctness of the CIRs assessment against the taxpayer.
With petitioners failure to prove the CIR incorrect, clearly and
conclusively, this Court is constrained to uphold the
correctness of tax courts ruling as affirmed by the Court of
Appeals.

CIR v. GENERAL FOODS

Facts:
Respondent corp, engaged in the manufacture of beverages,
filed its income tax return for the fiscal year ending Feb 28.
1985. In said tax return, resp corp claimed as deduction the
amount of P9.4 million for media advertising for Tang.

Commissioner disallowed 50% of the deduction claimed by

resp corp. consequently, the latter was assessed deficiency
income taxes in the amount of P2.6M. resp corp filed for MFR
but
the
same
was
denied.

Resp corp appealed to the CTA but the same was dismissed.
Aggrieved, resp corp filed a petition for review at the CA
which reversed and set aside the decision of the CTA since it
has not been sufficiently established that the item it claimed
as a deduction is excessive, thus should be allowed.
Issue:
Whether or not the subject media advertising expense for
Tang incurred by resp corp was an ORDINARY AND
NECESSARY EXPENSE fully deductible under the NIRC.
Ruling:
No.
It is a governing principle in taxation that tax exemptions
must be construed in strictissimi juris against the taxpayer
and liberally in favor of the taxing authority; and he who
claims an exemption must be able to justify his claim by the
clearest grant of organic or statute law. An exemption from
the common burden cannot be permitted to exist upon vague
implications.
Deductions for income tax purposes partake of the nature of
tax exemptions; hence, if tax exemptions are strictly
construed, then deductions must also be strictly construed.
Was the media advertising expense for Tang paid or
incurred by respondent corporation for the fiscal year ending
February 28, 1985 necessary and ordinary, hence, fully
deductible under the NIRC? Or was it a capital expenditure,
paid in order to create goodwill and reputation for
respondent corporation and/or its products, which should
have been amortized over a reasonable period?
Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the
NIRC provides:
(A) Expenses.(1)
Ordinary and necessary trade, business or professional
expenses.(a)

In general.- There shall be allowed

as deduction from gross income all
ordinary and necessary expenses
paid or incurred during the taxable
year in carrying on, or which are
directly
attributable
to,
the
development,
management,
operation and/or conduct of the
trade, business or exercise of a
profession.

Simply put, to be deductible from gross income, the subject

advertising expense must comply with the following
requisites: (a) the expense must be ordinary and necessary;
(b) it must have been paid or incurred during the taxable
year; (c) it must have been paid or incurred in carrying on the
trade or business of the taxpayer; and (d) it must be
supported by receipts, records or other pertinent papers.
The parties are in agreement that the subject advertising
expense was paid or incurred within the corresponding
taxable year and was incurred in carrying on a trade or
business. Hence, it was necessary. However, their views

conflict as to whether or not it was ordinary. To be deductible,

an advertising expense should not only be necessary but also
ordinary. These two requirements must be met.
Commissioner: the subject advertising expense was not
ordinary since it failed the two conditions set by US
jurisprudence: first, reasonableness of the amount incurred
and second, the amount incurred must not be a capital outlay
to create goodwill for the product and/or private
respondents business. Otherwise, the expense must be
considered a capital expenditure to be spread out over a
reasonable time.
There is yet to be a clear-cut criteria or fixed test for
determining the reasonableness of an advertising expense.
There being no hard and fast rule on the matter, the right to a
deduction depends on a number of factors such as but not
limited to: the type and size of business in which the taxpayer
is engaged; the volume and amount of its net earnings; the
nature of the expenditure itself; the intention of the taxpayer
and the general economic conditions. It is the interplay of
these, among other factors and properly weighed, that will
yield a proper evaluation.
Advertising is generally of two kinds: (1) advertising to
stimulate the current sale of merchandise or use of services
and (2) advertising designed to stimulate the future sale of
merchandise or use of services. The second type involves
expenditures incurred, in whole or in part, to create or
maintain some form of goodwill for the taxpayers trade or
business or for the industry or profession of which the
taxpayer is a member. If the expenditures are for the
advertising of the first kind, then, except as to the question of
the reasonableness of amount, there is no doubt such
expenditures are deductible as business expenses. If,
however, the expenditures are for advertising of the second
kind, then normally they should be spread out over a
reasonable period of time.
We agree with the Court of Tax Appeals that the subject
advertising expense was of the second kind. Not only
was the amount staggering; the respondent corporation itself
also admitted, in its letter protest to the Commissioner of
Internal Revenues assessment, that the subject media
expense was incurred in order to protect Respondent
Corporations brand franchise, a critical point during the
period under review.
The protection of brand franchise is analogous to the
maintenance
of
goodwill
or
title
to
ones
property. This is a capital expenditure which should be
spread out over a reasonable period of time.
Respondent corporations venture to protect its brand
franchise was tantamount to efforts to establish a reputation.
This was akin to the acquisition of capital assets and therefore
expenses related thereto were not to be considered as
business expenses but as capital expenditures.
True, it is the taxpayers prerogative to determine the
amount of advertising expenses it will incur and where to
apply them.[11] Said prerogative, however, is subject to certain
considerations. The first relates to the extent to which the
expenditures are actually capital outlays; this necessitates an
inquiry into the nature or purpose of such expenditures. [12] The
second, which must be applied in harmony with the first,
relates to whether the expenditures are ordinary and
necessary. Concomitantly, for an expense to be considered
ordinary, it must be reasonable in amount. The Court of Tax
Appeals ruled that respondent corporation failed to meet the
two foregoing limitations.

We find said ruling to be well founded. Respondent

corporation incurred the subject advertising expense in order
to protect its brand franchise. We consider this as a capital
outlay since it created goodwill for its business and/or
product. TheP9,461,246 media advertising expense for the
promotion of a single product, almost one-half of petitioner
corporations entire claim for marketing expenses for that
year under review, inclusive of other advertising and
promotion expenses of P2,678,328 and P1,548,614 for
consumer promotion, is doubtlessly unreasonable.

PHILIPPINE REFINING CO VS CA
Facts: Petitioner PRC was assessed by CIR to pay deficiency
tax for 1985 which was timely protested by petitioner that it
was based on erroneous disallowances of bad debts and
interest expense although the same are both allowable and
legal deductions.
:But Respondent Commissioner still issued a warrant of
garnishment against the deposits of petitioner so petitioner
filed a petition with the CTA alleging that bad debts and
interest expense are legal and allowable deductions.
:CTA modified the findings of the commissioner by reducing
the deficiency income tax assessment with surcharge and
interest incident to delinquency. The Tax court reversed and
set aside the commissioners disallowance of the interest
expense but maintained the disallowance of the bad debts. CA
affirmed the CTAs decision.

Issue: WON petitioner PRC is entitled to the allowable

deduction of bad debt

Held: This pronouncement of respondent Court of Appeals

relied on the ruling of this Court in Collector vs. Goodrich
International Rubber Co., which established the rule in
determining the "worthlessness of a debt." In said case, we
held that for debts to be considered as "worthless," and
thereby qualify as "bad debts" making them deductible,
the taxpayer should show that (1) there is a valid and
subsisting debt; (2) the debt must be actually ascertained
to be worthless and uncollectible during the taxable year;
(3) the debt must be charged off during the taxable year;
and (4) the debt must arise from the business or trade of
the taxpayer. Additionally, before a debt can be considered
worthless, the taxpayer must also show that it is indeed
uncollectible even in the future.
:Furthermore, there are steps outlined to be undertaken by
the taxpayer to prove that he exerted diligent efforts to
collect the debts, viz: (1) sending of statement of accounts;
(2) sending of collection letters; (3) giving the account to a
lawyer for collection; and (4) filing a collection case in
court.
:On the foregoing considerations, respondent Court of
Appeals held that petitioner did not satisfy the
requirements of "worthlessness of a debt" as to the
thirteen (13) accounts disallowed as deductions.
:It appears that the only evidentiary support given by PRC
for its aforesaid claimed deductions was the explanation or
justification posited by its financial adviser or accountant,
Guia D. Masagana. Her allegations were not supported by
any documentary evidence, hence, both the Court of
Appeals and the CTA ruled that said contentions per se

cannot prove that the debts were indeed uncollectible and

can be considered as bad debts as to make them
deductible. That both lower courts are correct is shown by
petitioner's own submission and the discussion thereof
which we have taken time and patience to cull from the
antecedent proceedings in this case, albeit bordering on
factual settings.
: The contentions of PRC that nobody is in a better position
to determine when an obligation becomes a bad debt than
the creditor itself, and that its judgment should not be
substituted by that of respondent court as it is PRC which
has the facilities in ascertaining the collectibility or
uncollectibility of these debts, are presumptuous and
uncalled for. The Court of Tax Appeals is a highly
specialized body specifically created for the purpose of
reviewing tax cases. Through its expertise, it is undeniably
competent to determine the issue of whether or not the
debt is deductible through the evidence presented before
it.
: The Court vehemently rejects the absurd thesis of
petitioner that despite the supervening delay in the tax
payment, nothing is lost on the part of the Government
because in the event that these debts are collected, the
same will be returned as taxes to it in the year of the
recovery. This is an irresponsible statement which
deliberately ignores the fact that while the Government
may eventually recover revenues under that hypothesis,
the delay caused by the non-payment of taxes under such
a contingency will obviously have a disastrous effect on the
revenue collections necessary for governmental operations
during the period concerned.

(Commr. v. Procter & Gamble Philippines

Manufacturing Corp., G.R. No. 66838 (Resolution),
December 02, 1991)
FACTS: For the taxable year 1974 ending on 30 June 1974,
and the taxable year 1975 ending 30 June 1975, private
respondent Procter and Gamble Philippine Manufacturing
Corporation declared dividends payable to its parent company
and sole stockholder, Procter and Gamble Co., Inc. 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 ("NIRC"), as 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.
ISSUES:
1. Whether or not P&G-Phil as withholding agent has the
capacity to claim refund?
2.Whether or not the fifteen percent (15%) tax rate provided
in Section 24 (b) (1) of the NIRC is applicable to the dividend
remittances by P&G-Phil. to P&G-USA (or whether or not
P&G Philippines is entitled to the refund or tax credit.)
HELD:
1. YES. The term "taxpayer" is defined in our NIRC as
referring to "any person subject to tax imposed by the Title

[on Tax on Income]." It thus becomes important to note that

under Section 53 (c) of the NIRC, the withholding agent who is
"required to deduct and withhold any tax" is made personally
liable for such tax" and indeed is indemnified against any
claims and demands which the stockholder might wish to
make in questioning the amount of payments effected by the
withholding agent in accordance with the provisions of the
NIRC. The withholding agent, P&G-Phil., is directly and
independently liable for the correct amount of the tax
that should be withheld from the dividend remittances.
The withholding agent is, moreover, subject to and
liable for deficiency assessments, surcharges and
penalties should the amount of the tax withheld be
finally found to be less than the amount that should
have been withheld under law. A "person liable for tax"
has been held to be a "person subject to tax" and
properly considered a "taxpayer." The terms "liable for
tax" and "subject to tax" both connote legal obligation
or duty to pay a tax. It is very difficult, indeed
conceptually impossible, to consider a person who is
statutorily made "liable for tax" as not "subject to tax."
By any reasonable standard, such a person should be
regarded as a party in interest, or as a person having
sufficient legal interest, to bring a suit for refund of
taxes he believes were illegally collected from him.
In Philippine Guaranty Company, Inc. v. Commissioner of
Internal Revenue, (15 SCRA 1 (1965)) this Court pointed out
that a withholding agent is in fact the agent both of the
government and of the taxpayer, and that the withholding
agent is not an ordinary government agent: "The law sets no
condition for the personal liability of the withholding agent to
attach. The reason is to compel the withholding agent to
withhold the tax under all circumstances. In effect, the
responsibility for the collection of the tax as well as the
payment thereof is concentrated upon the person over whom
the Government has jurisdiction. Thus, the withholding agent
is constituted the agent of both the Government and the
taxpayer. With respect to the collection and/or withholding of
the tax, he is the Government's agent. In regard to the filing
of the necessary income tax return and the payment of the
tax to the Government, he is the agent of the taxpayer. The
withholding agent, therefore, is no ordinary government
agent especially because under Section 53 (c) he is held
personally liable for the tax he is duty bound to withhold;
whereas the Commissioner and his deputies are not made
liable by law." If, as pointed out in Philippine Guaranty, the
withholding agent is also an agent of the beneficial owner of
the dividends with respect to the filing of the necessary
income tax return and with respect to actual payment of the
tax to the government, such authority may reasonably be held
to include the authority to file a claim for refund and to bring
an action for recovery of such claim. This implied authority is
especially warranted where, as in the instant case, the
withholding agent is the wholly owned subsidiary of the
parent-stockholder and therefore, at all times, under the
effective control of such parent-stockholder. In the
circumstances of this case, it seems particularly unreal to
deny the implied authority of P&G-Phil. to claim a refund and
to commence an action for such refund.
2. YES. P&G Philippines is entitled.
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. However, such tax credit for taxes deemed
paid in the Philippines MUST, as a minimum, reach an

amount equivalent to 20 percentage points which represents

the difference between the regular 35% dividend tax rate and
the reduced 15% tax rate. Thus, the test is if USA shall allow
P&G USA a tax credit for taxes deemed paid in the
Philippines applicable against the US taxes of P&G USA, and
such tax credit must reach at least 20 percentage points.
Requirements were met.*
The parent-corporation P&G-USA is "deemed to have paid" a
portion of the Philippine corporate income tax although that
tax was actually paid by its Philippine subsidiary, P&G-Phil.,
not by P&G-USA. This "deemed paid" concept merely reflects
economic reality, since the Philippine corporate income tax
was in fact paid and deducted from revenues earned in the
Philippines, thus reducing the amount remittable as dividends
to P&G-USA. In other words, US tax law treats the Philippine
corporate income tax as if it came out of the pocket, as it
were, of P&G-USA as a part of the economic cost of carrying
on business operations in the Philippines through the medium
of P&G-Phil. and here earning profits. What is, under US law,
deemed paid by P&G-USA are not "phantom taxes" but
instead Philippine corporate income taxes actually paid here
by P&G-Phil., which are very real indeed.)
It is also useful to note that both (i) the tax credit for the
Philippine dividend tax actually withheld, and (ii) the tax credit
for the Philippine corporate income tax actually paid by P&GPhil. but "deemed paid" by P&G-USA, are tax credits
available or applicable against the US corporate
income tax of P&G-USA. These tax credits are allowed
because of the US congressional desire to avoid or
reduce double taxation of the same income stream.
* In order to determine whether US tax law complies with the
requirements for applicability of the reduced or preferential
fifteen percent (15%) dividend tax rate under Section 24 (b)
(1), NIRC, it is necessary:
a. to determine the amount of the 20 percentage
points dividend tax waived by the Philippine
government under Section 24 (b) (1), NIRC, and
which hence goes to P&G-USA;
b. to determine the amount of the "deemed paid" tax
credit which US tax law must allow to P&G-USA; and
c. to ascertain that the amount of the "deemed paid"
tax credit allowed by US law is at least equal to the
amount of the dividend tax waived by the Philippine
Government.
Per computation, it found these amounts referred above.

a. Per computation, an amount of P13.00 for every

P100.00 of pre-tax net income earned by P&G-Phil is
the minimum amount of the "deemed paid" tax
credit that US tax law shall allow if P&G-USA is to
qualify for the reduced or preferential dividend tax
rate under Section 24 (b) (1), NIRC.
b.Per computation, for every P55.25 of dividends
actually remitted (after withholding at the rate of
15%) by P&G-Phil. to its US parent P&G-USA, a tax
credit of P29.75 is allowed by Section 902 US Tax
Code for Philippine corporate income tax "deemed
paid" by the parent but actually paid by the whollyowned subsidiary
c. Since P29.75 is much higher than P13.00 (the
amount of dividend tax waived by the Philippine
government), Section 902, US Tax Code, specifically
and clearly complies with the requirements of
Section 24 (b) (1), NIRC.
Note:The NIRC does not require that the US tax law deem the
parent corporation to have paid the 20 percentage points of
dividend tax waived by the Philippines. It only requires that
the US shall allow P&G-USA a deemed paid tax credit in
an amount equivalent to the 20 percentage points waived by
the Philippines. Section 24(b)(1) does not create a tax
exemption nor does it provide a tax credit; it is a provision
which specifies when a particular (reduced) tax rate is legally
applicable.
Section 24(b)(1) of the NIRC seeks to promote the in-flow of
foreign equity investment in the Philippines by reducing the
tax cost of earning profits here and thereby increasing the net
dividends remittable to the investor. The foreign investor,
however, would not benefit from the reduction of the
Philippine dividend tax rate unless its home country gives it
some relief from double taxation by allowing the investor
additional tax credits which would be applicable against the
tax payable to such home country. Accordingly Section 24(b)
(1) of the NIRC requires the home or domiciliary country to
give the investor corporation a deemed paid tax credit at
least equal in amount to the 20 percentage points of dividend
tax foregone by the Philippines, in the assumption that a
positive incentive effect would thereby be felt by the investor.