G.R. No. 76573 September 14, 1989
MARUBENI CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS, respondents.

FACTS

Marubeni Corporation, a Japanese corporation licensed to do business in the Philippines, owned equity investments in Atlantic Gulf and Pacific Co. of Manila (AG&P). In 1981, AG&P declared and paid cash dividends to Marubeni. As a withholding agent, AG&P deducted and remitted to the BIR a 10% final dividend tax and an additional 15% branch profit remittance tax on the dividends before remitting the net amounts to Marubeni’s head office in Tokyo. The total 15% branch profit remittance tax withheld for two quarters amounted to P229,424.40.
Prior to the remittance, Marubeni sought a ruling from the BIR on whether the dividends were subject to the 15% branch profit remittance tax under the Tax Code. The Acting Commissioner ruled that the dividends were not income “effectively connected” with Marubeni’s Philippine branch business and thus were not subject to the 15% tax. Relying on this ruling, Marubeni filed a claim for refund of the P229,424.40 erroneously withheld. The Commissioner denied the claim, arguing that while the 15% tax was inapplicable, the dividends were subject to a 25% tax rate under the Philippines-Japan Tax Treaty, and the total 25% withheld (10% + 15%) offset any refundable amount.

ISSUE

Whether Marubeni is entitled to a refund of the 15% branch profit remittance tax erroneously withheld from its dividend income from AG&P.

RULING

Yes, the Supreme Court granted the refund. The legal logic proceeds from the proper characterization of the income and the applicable tax treaty. First, the Court affirmed the BIR’s own ruling that the dividend income was not “effectively connected” to Marubeni’s Philippine branch business. The dividends arose from passive portfolio investment, not from the branch’s operational activities. Therefore, the 15% branch profit remittance tax under Section 24(b)(2) of the Tax Code was erroneously applied.
Second, the Court rejected the Commissioner’s offset theory based on the Philippines-Japan Tax Treaty. The Treaty (Article 10(2)(b)) indeed imposes a 15% tax on dividends paid to a Japanese corporate beneficial owner, not the 25% rate erroneously cited by the Commissioner. Since AG&P had already correctly withheld the 10% final dividend tax under domestic law, and the Treaty rate was 15%, the total tax due was only 15%. The amount already withheld was 25% (10% + 15%). Consequently, Marubeni overpaid by 10% of the gross dividend, or P169,944. However, as Marubeni only sought a refund of the erroneously withheld 15% branch profit remittance tax (P229,424.40), and considering the proper tax due was 15% of the gross under the Treaty, the Court computed the overpayment. The 15% Treaty tax on the gross dividends of P1,699,440 was P254,916. The total tax already paid was P399,368.40 (10% dividend tax of P169,944 plus the 15% branch tax of P229,424.40). Thus, the overpayment was P144,452.40 (P399,368.40 minus P254,916). The Supreme Court ordered the Commissioner to refund this amount. The Court also found the appeal timely filed under the specific 30-day period prescribed for the Court of Tax Appeals by Republic Act No. 1125 .