DOMINGO V.

CARLITOS
GR NO. L-18994, 29 JUNE 1963

Topic: Power of taxation compared to other powers

Facts:

In the 1960 case of Domingo v Moscoso, the Supreme Court declared as final and
executory the order for the payment by the estate of the late Walter Scott Price of
estate and inheritance taxes, charges and penalties, amounting to P40,058.55
issued by the Court of First Instance Leyte. The fiscal then presented a petition for
the execution of the judgment before the Court of First Instance Leyte.The petition
was denied as the execution is not justifiable as the government is indebted to the
estate under administration in the amount of P 262,200. Hence, the present petition
for certiorari and mandamus.

Issue: WON the petition must be given due course.

Held:

No, the petition must be given due course. The tax and the debt are compensated.
The court having jurisdiction of the estate had found that the claim of the estate
against the government has been recognized and an amount of P262,200 has
already been appropriated by a corresponding law (RA 2700). Under the
circumstances, both the claim of the Government for the inheritance taxes and the
claim of the intestate for services rendered have already become overdue and
demandable as well as fully liquidated.

Compensation, therefore, takes place by operation of law, in accordance with Article

1279 and 1290 of the Civil Code, and both debts are extinguished to their
concurrent amounts. If the obligation to pay taxes and the taxpayers claim against
the government are both overdue, demandable, as well as fully liquidated,
compensation takes place by operation of law and both obligations are extinguished
to their concurrent amounts.

Referential Syllabus:

Taxation; Inheritance tax; Procedure in enforcement against estate of

deceased person; Claim must be filed before probate court.The ordinary
procedure by which to settle claims or indebtedness against the estate of a
deceased person, as an inheritance tax, is for the claimant to present a claim before
the probate court sa that said court may order the administrator to pay the amount
hereof (Aldamiz vs. Judge of the Court of First Instance of Mindoro, L-2360, Dec. 29,
1949).

Same; Same; Same; Same; Legal basis.The legal basis for such a procedure
is the fact that in the testate or intestate proceedings to settle the estate of a
deceased person, the properties belonging to the estate are under the jurisdiction of
the court and such jurisdiction continues until said properties havebeen distributed
among the heirs entitled thereto. During the pendency of the proceedings all the
estate is in custodia Iegis and the proper procedure is not to allow the sheriff. in
case of a court judgment, to seize the properties but to ask the court for an order to
require the administrator to pay the amount due from the estate and required to be
paid.

Same; Same; Compensation between taxes and claims of intestate

recognized and appropriated for by law.The fact that the court having jurisdiction
of the estate had found that the claim of the estate against the Government has
been appropriated for the purpose by a corresponding law (Rep. Act No. 2700)
shows that both the claim of the Government for inheritance taxes and the claim of
the intestate for services rendered have already become overdue and demandable
as well as fully liquidated. Compensation, therefore, takes place by operation of law,
in accordance with the provisions of Articles 1279 and 1290 of the Civil Code, and
both debts are extinguished to the concurrent amount.

CIR v. SC Johnson and Son Inc. et al

GR NO 127105, 25 June 1999

Topic: Modes of eliminating double taxation

Facts:

Petitioner seeks to set aside the ruling of the Court of Appeals affirming the decision
of the Courts of Tax Appeals. The decision in question grants the respondent a tax
credit certificate to be given by the Petitioner based on claim of the overpaid
withholding tax on royalties paid by the respondent.

To elucidate the matter, it is important to mention that the respondent is 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 basis of the claim, as alleged by the respondent, is embodied on two treaties
connected to double taxation, to wit: RP-US Tax Treaty [Article 13 Paragraph 2 (b)
(iii)] in relation to the RP-West Germany Tax Treaty [Article 12 (2) (b)]. RP-US Tax
Treaty imposes royalties based on a percentage of net sales and subjected the same
to 25% withholding tax on royalty which was paid by the respondent for a period of
time. In connection to this, which is found on the same treaty, is a clause which
states,
 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.

To support the recently mentioned clause, respondent also quoted the second
treaty, RP-West Germany Tax Treaty, to wit:

10 percent of the gross amount of royalties arising from the use of, or the
right to use, any patent, trademark, design or model, plan, secret formula or
process, or from the use of or the right to use, industrial, commercial, or
scientific equipment, or for information concerning industrial, commercial or
scientific experience.

Respondent, as affirmed by the Court of Tax Appeals and Court of Appeals,

construed the phrase under similar circumstance referring to payment of royalties
which would impose only 10% of tax on royalties and support the claim of refund by
the respondent.

Petitioner, on the other hand, dissent on this matter and construed the very same
phrase referring to tax and not on payment of royalties. Having the petitioners
interpretation, since the RP-US Tax Treaty does not give a matching tax credit of 20
percent for the taxes paid to the Philippines on royalties as allowed under the RP-
West Germany Tax Treaty, private respondent cannot be deemed entitled to the 10
percent rate granted under the latter treaty for the reason that there is no payment
of taxes on royalties under similar circumstances.

Issue: WON the respondent is entitled to the claim of tax credit.

Held:

No, the respondent is NOT entitled to the claim of tax credit. The argument of the
petitioner is meritorious. The phrase under similar circumstance must be construed
referring to payment of tax and not royalties. The construction of the respondent
court is based principally on syntax or sentence structure but fails to take into
account the purpose animating the treaty provisions in point.

The apparent rationale for doing away with double taxation is of encourage the free
flow of goods and services and the movement of capital, technology and persons
between countries, conditions deemed vital in creating robust and dynamic
economies. Foreign investments will only thrive in a fairly predictable and
reasonable international investment climate and the protection against double
taxation is crucial in creating such a climate.

Thus, since the RP-US Tax Treaty does not give a matching tax credit of 20 percent
for the taxes paid to the Philippines on royalties as allowed under the RP-West
Germany Tax Treaty, private respondent cannot be deemed entitled to the 10
percent rate granted under the latter treaty for the reason that there is no payment
of taxes on royalties under similar circumstances.
Double taxation usually takes place when a person is resident of a contracting state
and derives income from, or owns capital in, the other contracting state and both
states impose tax on that income or capital. In order to eliminate double taxation, a
tax treaty resorts to several methods. First, it sets out the respective rights to tax of
the state of source or situs and of the state of residence with regard to certain
classes of income or capital. In some cases, an exclusive right to tax is conferred on
one of the contracting states; however, for other items of income or capital, both
states are given the right to tax, although the amount of tax that may be imposed
by the state of source is limited. The second method for the elimination of double
taxation applies whenever the state of source is given a full or limited right to tax
together with the state of residence. In this case, the treaties make it incumbent
upon the state of residence to allow relief in order to avoid double taxation. There
are two methods of reliefthe exemption method and the credit method. In the
exemption method, the income or capital which is taxable in the state of source or
situs is exempted in the state of residence, although in some instances it may be
taken into account in determining the rate of tax applicable to the taxpayers
remaining income or capital. On the other hand, in the credit method, although the
income or capital which is taxed in the state of source is still taxable in the state of
residence, the tax paid in the former is credited against the tax levied in the latter.
The basic difference between the two methods is that in the exemption method, the
focus is on the income or capital itself, whereas the credit method focuses upon the
tax.

Referential Syllabus:

Actions; Pleadings and Practice; Appeals; Forum-Shopping; Circular No. 28-91

applies both to original actions and to appeals.The circular expressly requires that
a certificate of non-forum shopping should be attached to petitions filed before this
Court and the Court of Appeals. Petitioners allegation that Circular No. 28-91
applies only to original actions and not to appeals as in the instant case is not
supported by the text nor by the obvious intent of the Circular which is to prevent
multiple petitions that will result in the same issue being resolved by different
courts.

Same; Same; Same; Same; Office of the Solicitor General; Since the OSG is
the only lawyer for the Commissioner of Internal Revenue, the certification executed
by the OSG constitutes substantial compliance with Circular No. 28-91.Anent the
requirement that the party, not counsel, must certify under oath that he has not
commenced any other action involving the same issues in this Court or the Court of
Appeals or any other tribunal or agency, we are inclined to accept petitioners
submission that since the OSG is the only lawyer for the petitioner, which is a
government agency mandated under Section 35, Chapter 12, title III, Book IV of the
1987 Administrative Code to be represented only by the Solicitor General, the
certification executed by the OSG in this case constitutes substantial compliance
with Circular No. 28-91.
 Taxation; Tax Treaties; Double Taxation; International Law; A cursory reading
of the various tax treaties will show that there is no similarity in the provisions on
relief from or avoidance of double taxation as this is a matter of negotiation
between the contracting parties.The above construction is based principally on
syntax or sentence structure but fails to take into account the purpose animating
the treaty provisions in point. To begin with, we are not aware of any law or rule
pertinent to the payment of royalties, and none has been brought to our attention,
which provides for the pay ment of royalties under dissimilar circumstances. The tax
rates on royalties and the circumstances of payment thereof are the same for all the
recipients of such royalties and there is no disparity based on nationality in the
circumstances of such payment. On the other hand, a cursory reading of the various
tax treaties will show that there is no similarity in the provisions on relief from or
avoidance of double taxation as this is a matter of negotiation between the
contracting parties. As will be shown later, this dissimilarity is true particularly in the
treaties between the Philippines and the United States and between the Philippines
and West Germany.

Same; Same; Same; Same; Words and Phrases; International juridical double
taxation is defined as the imposition of comparable taxes in two or more states on
the same taxpayer in respect of the same subject matter and for identical periods;
The apparent rationale for doing away with double taxation is to encourage the free
flow of goods and services and the movement of capital, technology and persons
between countries, conditions deemed vital in creating robust and dynamic
economies.The RP-US Tax Treaty is just one of a number of bilateral treaties which
the Philippines has entered into for the avoidance of double taxation. The purpose
of these international agreements is to reconcile the national fiscal legislations of
the contracting parties in order to help the taxpayer avoid simultaneous taxation in
two different jurisdictions. More precisely, the tax conventions are drafted with a
view towards the elimination of international juridical double taxation, which is
defined as the imposition of comparable taxes in two or more states on the same
taxpayer in respect of the same subject matter and for identical periods. The
apparent rationale for doing away with double taxation is to encourage the free flow
of goods and services and the movement of capital, technology and persons
between countries, conditions deemed vital in creating robust and dynamic
economies. Foreign investments will only thrive in a fairly predictable and
reasonable international investment climate and the protection against double
taxation is crucial in creating such a climate.

Same; Same; Same; Same; Same; Methods resorted to in eliminating double

taxation; Exemption and Credit Methods, Explained.Double taxation usually takes
place when a person is resident of a contracting state and derives income from, or
owns capital in, the other contracting state and both states impose tax on that
income or capital. In order to eliminate double taxation, a tax treaty resorts to
several methods. First, it sets out the respective rights to tax of the state of source
or situs and of the state of residence with regard to certain classes of income or
capital. In some cases, an exclusive right to tax is conferred on one of the
contracting states; however, for other items of income or capital, both states are
given the right to tax, although the amount of tax that may be imposed by the state
of source is limited. The second method for the elimination of double taxation
applies whenever the state of source is given a full or limited right to tax together
with the state of residence. In this case, the treaties make it incumbent upon the
state of residence to allow relief in order to avoid double taxation. There are two
methods of reliefthe exemption method and the credit method. In the exemption
method, the income or capital which is taxable in the state of source or situs is
exempted in the state of residence, although in some instances it may be taken into
account in determining the rate of tax applicable to the taxpayers remaining
income or capital. On the other hand, in the credit method, although the income or
capital which is taxed in the state of source is still taxable in the state of residence,
the tax paid in the former is credited against the tax levied in the latter. The basic
difference between the two methods is that in the exemption method, the focus is
on the income or capital itself, whereas the credit method focuses upon the tax.

Same; Same; Same; Same; In negotiating tax treaties, the underlying

rationale for reducing the tax rate is that the Philippines will give up a part of the
tax in the expectation that the tax given up for this particular investment is not
taxed by the other country.In negotiating tax treaties, the underlying rationale for
reducing the tax rate is that the Philippines will give up a part of the tax in the
expectation that the tax given up for this particular investment is not taxed by the
other country. Thus the petitioner correctly opined that the phrase royalties paid
under similar circumstances in the most favored nation clause of the US-RP Tax
Treaty necessarily contemplated circumstances that are tax related.

Same; Same; Same; Same; Most Favored Nation Clause; 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.Given the purpose underlying tax
treaties and the rationale for the most favored nation clause, the concessional tax
rate of 10 percent provided for in the RP-Germany Tax Treaty should apply only if
the taxes imposed upon royalties in the RP-US Tax Treaty and in the RP-Germany Tax
Treaty are paid under similar circumstances. This would mean that private
respondent must prove that the RP-US Tax Treaty grants similar tax reliefs to
residents of the United States in respect of the taxes imposable upon royalties
earned from sources within the Philippines as those allowed to their German
counterparts under the RP-Germany Tax Treaty. The RP-US and the RP-West
Germany Tax Treaties do not contain similar provisions on tax crediting. Article 24 of
the RP-Germany Tax Treaty, supra, expressly allows crediting against German
income and corporation tax of 20% of the gross amount of royalties paid under the
law of the Philippines. On the other hand, Article 23 of the RP-US Tax Treaty, which is
the counterpart provision with respect to relief for double taxation, does not provide
for similar crediting of 20% of the gross amount of royalties paid.

Same; Same; Same; Same; Same; Statutory Construction; Laws are not just
mere compositions, but have ends to be achieved and that the general purpose is a
more important aid to the meaning of a law than any rule which grammar may lay
down; A treaty shall be interpreted in good faith in accordance with the ordinary
meaning to be given to the terms of the treaty in their context and in the light of its
object and purpose.The reason for construing the phrase paid under similar
circumstances as used in Article 13 (2) (b) (iii) of the RP-US Tax Treaty as referring
to taxes is anchored upon a logical reading of the text in the light of the
fundamental purpose of such treaty which is to grant an incentive to the foreign
investor by lowering the tax and at the same time crediting against the domestic
tax abroad a figure higher than what was collected in the Philippines. In one case,
the Supreme Court pointed out that laws are not just mere compositions, but have
ends to be achieved and that the general purpose is a more important aid to the
meaning of a law than any rule which grammar may lay down. It is the duty of the
courts to look to the object to be accomplished, the evils to be remedied, or the
purpose to be subserved, and should give the law a reasonable or liberal
construction which will best effectuate its purpose. The Vienna Convention on the
Law of Treaties states that a treaty shall be interpreted in good faith in accordance
with the ordinary meaning to be given to the terms of the treaty in their context and
in the light of its object and purpose.

Same; Same; Same; Same; Same; The purpose of a most favored nation
clause is to grant to the contracting party treatment not less favorable than that
which has been or may be granted to the most favored among other countries.
The purpose of a most favored nation clause is to grant to the contracting party
treatment not less favorable than that which has been or may be granted to the
most favored among other countries. The most favored nation clause is intended
to establish the principle of equality of international treatment by providing that the
citizens or subjects of the contracting nations may enjoy the privileges accorded by
either party to those of the most favored nation. The essence of the principle is to
allow the taxpayer in one state to avail of more liberal provisions granted in another
tax treaty to which the country of residence of such taxpayer is also a party
provided that the subject matter of taxation, in this case royalty income, is the
same as that in the tax treaty under which the taxpayer is liable. Both Article 13 of
the RP-US Tax Treaty and Article 12 (2) (b) of the RP-West Germany Tax Treaty,
above-quoted, speaks of tax on royalties for the use of trademark, patent, and
technology. The entitlement of the 10% rate by U.S. firms despite the absence of a
matching credit (20% for royalties) would derogate from the design behind the most
favored nation clause to grant equality of international treatment since the tax
burden laid upon the income of the investor is not the same in the two countries.
The similarity in the circumstances of payment of taxes is a condition for the
enjoyment of most favored nation treatment precisely to underscore the need for
equality of treatment.

Same; Tax Refunds; Statutory Construction; Tax refunds are in the nature of
tax exemptions, and 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.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. 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. 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.