06 CIR v. CA and S.C. Johnson

[WITHHOLDING TAX ON ROYALTIES] Denmark, that limitation will apply to film royalties paid under
06 CIR V. CA AND S.C. JOHNSON & SON, INC. similar circumstances to US residents.
August 30, 1999 ○ The US Senate Foreign Relations Committee, in its report
recommending the approval of the RP-US Tax Treaty stated that:
Doctrine: Insert doctrine here Under the proposed treaty, the withholding tax imposed by the US
on royalties derived by a resident of the Philippines is limited to 15
Facts: percent of the gross amount of the royalty. The withholding tax on
● This is a motion for reconsideration of the June 25, 1999 decision where the Court royalties imposed by the Philippines is generally limited to 25
held that the phrase "paid under similar circumstances" in Article 13 (2) (b) (iii) of percent of the gross amount of the royalties. However, if the
the RP-US Tax Treaty should be interpreted as referring to the payment of taxes, royalties are paid by a corporation which is registered with the
and not royalties and that such an interpretation is consistent with the purpose of Philippine Board of Investment and is engaged in preferred areas
the RP-US Tax Treaty which is the avoidance of double taxation. or activity, the withholding tax is limited to 15 percent of the gross
● As a consequence of such an interpretation, it was held that S.C. Johnson is not amount of the royalties. In no case is either the 25 percent of the
entitled to the 10 percent rate imposed on royalties under the RP-West Germany 15 percent limitation to exceed the lower withholding rate of the
Tax Treaty because such treaty provides for a matching tax credit of 20 percent Philippine tax which may imposed on similar types of royalties paid
for the taxes paid to the Philippines on royalties, whereas the RP-US Tax Treaty to residents of a third State. Thus, US residents will automatically
does not. Thus, there is no payment of taxes under similar circumstances. receive the benefits of any lower withholding rates on royalties
established in Philippine tax treaties with any third country of the
Ruling: US.
S.C. Johnson: SC:
● When the language of the law/treaty is plain and unambiguous, as in this case, it ● Said reports do not clearly support S.C. Johnson’s interpretation of the RP-US Tax
is not susceptible of interpretation. The duty of the courts, in such a case, is simply Treaty, they merely reiterate the law as presently worded.
to apply the law. ● Also, assuming that they did support S.C. Johnson’s position, the Court is not
SC: bound to adopt the interpretations given to a tax treaty by the executive or
● It is precisely because Article 13 (2) (b) (iii) of the RP-US Tax Treaty is subject to legislative branch of the US government.
varied interpretations that SC has rendered its June 25 decision interpreting it. ● After the RP-US Tax Treaty was ratified by the President and concurred in by two-
● The SC interpreted the provision with a view to its purpose, which is the avoidance thirds of all the members of the Senate, it becomes a part of the law of the land
of double taxation. and the courts have the exclusive power to interpret the same. In fact, S.C.
● As stated in the decision, it is the duty of the courts to look to the object to be Johnson itself recognized the court's jurisdiction when it stated in its motion for
accompanied by the law, the evils to be remedied, or the purpose to be subserved, reconsideration that "when a treaty affect private rights, the courts have the power
and to give the law a reasonable or liberal interpretation which will best effectuate and the duty to construe the treaty and apply it in appropriate cases."
its purpose.
● This is also sanctioned by the Vienna Convention on the Law of Treaties which S.C. Johnson:
stated that a treaty shall be interpreted in good faith in accordance with the ordinary ● Even assuming arguendo that the phrase “paid under similar circumstances” in
meaning to be given to the terms of the treaty in their context and in the light of its par. 2(b)(iii) of Art. 13 of the RP-US Tax Treaty refers to the payment of the tax,
object and purpose. S.C. Johnson is still entitled to avail of the “most favored nation” clause in the RP-
US Tax Treaty, in relation to the RP-Germany Tax Treaty.
S.C. Johnson: ● The RP-US Tax Treaty, while not providing for a matching 20 percent tax credit as
● Both the CA and the CTA correctly rules that the phrase “paid under similar found in the RP-Germany Tax Treaty, does provide for a substantially similar
circumstances” in par. 2(b)(iii) of Art. 13 of the RP-US Tax Treaty does not refer to provision for tax credit, i.e., a credit against the United States tax for the
the payment of the tax but to the subject matter of the tax, i.e., royalties. appropriate amount of taxes actually paid or accrued to the Philippine by a citizen
● S.C. Johnson cites the interpretations given to the RP-US Tax Treaty by the or resident of the United States.
Department of Treasury and the US Senate Foreign Relations Committee. SC:
○ The Technical Explanation of the US Department of Treasury states ● The Court has already disposed of this allegation in the June 25 decision wherein
that: it held that the tax credits under the two treaties are not paid under similar
Notwithstanding such 25 percent and 15 percent limitations, the circumstance.
Philippine tax cannot exceed the lowest rate of Philippine Tax that
may be imposed on royalties of the same kind under similar S.C. Johnson:
circumstances to a resident of a third State. Thus, for example, ● CIR’s unilateral, erratic, inconsistent and constantly changing interpretation of the
because the Philippines agreed to limit its tax on film royalties to treaty amounts to bad faith and a violation of its terms, which should not be
an amount not in excess of 10 percent of the gross amount of such sanctioned.
royalties in its income Tax Conventions with Sweden and
● CIR initially interpreted the RP-US Tax Treaty provision in question as referring to
the payment of royalties under similar circumstances.
● However, CIR reversed its position on the matter by issuing Revenue
Memorandum Circular No. 39-92 wherein it held that the payment of taxes must
be made under similar circumstances.
● But in the case of IBM Phils., CIR once again reverted to its original interpretation
by withdrawing its appeal of the CTA's decision.
SC:
● CIR’s inconsistent rulings as to the interpretation of the RP-US Tax Treaty only
made it more imperative for the Court to decide the matter with finality, which it did
in its June 25, 1999 decision.
Dispositive
WHEREFORE, the Motion for Reconsideration is denied.

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[WITHHOLDING TAX ON ROYALTIES] Denmark, that limitation will apply to film royalties paid under

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