G.R. No. 203346 , September 09, 2020
Cargill Philippines, Inc., Petitioner, vs. Commissioner of Internal Revenue, Respondent.

FACTS

Cargill Philippines, Inc. (Cargill), a domestic corporation, entered into an Intellectual Property License Agreement with CAN Technologies, Inc., a United States company, on June 1, 2002. The agreement granted Cargill a non-exclusive license to use CAN Technologies’ intellectual property in exchange for royalty payments. From June 1, 2005 to April 2007, Cargill paid royalties to CAN Technologies, withholding final taxes at the rate of 15%. Cargill sought a confirmation from the Bureau of Internal Revenue (BIR) that a preferential tax rate of 10% should apply to these royalties pursuant to the “most favored nation” clause in the RP-US Tax Treaty, in relation to other treaties. The BIR issued Ruling No. DA-ITAD 60-07 on May 11, 2007, confirming the applicability of the 10% rate, citing Article 12 of the RP-Czech Tax Treaty in relation to Article 13 of the RP-US Tax Treaty. Based on this ruling, Cargill filed a claim for refund or tax credit for alleged overpaid withholding taxes amounting to P8,771,270.71. The Court of Tax Appeals (CTA) First Division dismissed the petition, finding Cargill failed to prove the conditions for applying the most favored nation clause, specifically the similarity in circumstances of tax payment between the US and Czech Republic. The CTA First Division also held the BIR Ruling was not binding. The CTA En Banc affirmed this decision, leading Cargill to file the present Petition for Review on Certiorari.

ISSUE

Whether the Court of Tax Appeals erred in denying Cargill’s claim for refund or tax credit, specifically in ruling that the most favored nation clause under the RP-US Tax Treaty does not apply to justify a reduced 10% withholding tax rate on the royalty payments to CAN Technologies, and in holding that BIR Ruling No. DA-ITAD 60-07 is not binding.

RULING

The Supreme Court denied the petition and affirmed the decisions of the Court of Tax Appeals. The Court held that for the most favored nation clause to apply, two conditions must be met: (1) similarity in subject matter (i.e., the royalties derived by a resident of the United States and of the third state are of the same kind); and (2) similarity in circumstances in the payment of tax (i.e., the same mechanism must be employed by the United States and the third state in mitigating the effects of double taxation). The Court found that Cargill failed to establish the second condition. It did not present evidence, such as the relevant United States domestic law, to demonstrate that the tax credit mechanisms under the RP-US Tax Treaty and the RP-Czech Tax Treaty are the same. The mere similarity in treaty provisions on tax credit is insufficient; the actual relief granted under each country’s domestic law must be compared. Furthermore, the Court ruled that the CTA has jurisdiction to pass upon the validity of BIR Ruling No. DA-ITAD 60-07 when raised in a tax refund case, and it correctly found the ruling infirm for lacking a substantive basis. The BIR Ruling’s conclusion was not binding as it was issued without the requisite factual and legal foundation, particularly the comparison of the double taxation relief mechanisms. Therefore, Cargill was not entitled to the refund or tax credit claim.