G.R. No. L-66838 April 15, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION & THE COURT OF TAX APPEALS, respondents.

FACTS

Procter & Gamble Philippine Manufacturing Corporation (PMC-Phil.), a domestic corporation and wholly-owned subsidiary of the non-resident foreign corporation Procter & Gamble, U.S.A. (PMC-USA), declared and paid dividends to its parent company for the taxable years ending in 1974 and 1975. As the withholding agent, PMC-Phil. remitted a 35% tax on these dividend payments to the Bureau of Internal Revenue, pursuant to Section 24(b)(1) of the National Internal Revenue Code. Subsequently, PMC-Phil. filed a claim for refund of P4,832,989.00, arguing it had over-withheld. It invoked the tax-sparing credit provision in Section 24(b)(1), which reduces the tax on dividends received by a non-resident foreign corporation from a domestic corporation to 15%, provided the country where the non-resident is domiciled allows a credit against its tax due for taxes deemed paid in the Philippines equivalent to 20% (the difference between 35% and 15%).
The Court of Tax Appeals granted the refund, ruling that PMC-Phil. was entitled to the benefit of the 15% preferential rate. The Commissioner of Internal Revenue appealed, contending that the conditions for applying the lower rate were not satisfied.

ISSUE

Whether Procter & Gamble Philippine Manufacturing Corporation is entitled to a refund representing the 20% differential in the withholding tax on dividends remitted to its non-resident parent corporation, based on the tax-sparing credit provision.

RULING

The Supreme Court reversed the Court of Tax Appeals and denied the refund. The legal logic centers on the conditional nature of the tax-sparing credit. The provision lowering the tax to 15% is not automatic; it is expressly subject to the condition that the country of domicile of the non-resident corporate stockholder (the United States, in this case) “shall allow a credit against the tax due from the non-resident foreign corporation, taxes deemed to have been paid in the Philippines equivalent to 20%.” The burden of proof to establish that this condition was met rested upon PMC-Phil., the claimant.
The Court found that PMC-Phil. failed to discharge this burden. It did not present crucial evidence, such as the actual U.S. income tax return of PMC-USA showing the credit allowed by the U.S. government for the taxes deemed paid in the Philippines. There was no duly authenticated document proving that the U.S. Internal Revenue Service had, in fact, credited the 20% Philippine tax against PMC-USA’s U.S. tax liability. Without this proof, the essential condition precedent for applying the preferential 15% rate remained unfulfilled. Consequently, the default rate of 35% under Section 24(b)(1) properly applied, and no overpayment occurred. The claim for refund, therefore, lacked legal basis.