For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975 ending 30 June 1975, private respondent Procter and Gamble Philippine Manufacturing Corporation ("P&G-Phil.") declared dividends payable to its parent company and sole stockholder, Procter and Gamble Co., Inc. (USA) ("P&G-USA"), amounting to P24,164,946.30, from which dividends the amount of P8,457,731.21 representing the thirty-five percent (35%) withholding tax at source was deducted.

On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner of Internal Revenue a claim for refund or tax credit in the amount of P4,832,989.26 claiming, among other things, that pursuant to Section 24 (b) (1) of the National Internal Revenue Code ("NIRC"),^[1] as amended by Presidential Decree No. 369, the applicable rate of withholding tax on the dividends remitted was only fifteen percent (15%) (and not thirty-five percent [35%]) of the dividends.

There being no responsive action on the part of the Commissioner, P&G-Phil., on 13 July 1977, filed a petition for review with public respondent Court of Tax Appeals ("CTA") docketed as CTA Case No. 2883.  On 31 January 1984, the CTA rendered a decision ordering petitioner Commissioner to refund or grant the tax credit in the amount of P4,832,989.00.

On appeal by the Commissioner, the Court through its Second Division reversed the decision of the CTA and held that:

(a)  P&G-USA, and not private respondent P&G-Phil., was the proper party to claim the refund or tax credit here involved;

(b)  "there is nothing in Section 902 or other provisions of the US Tax Code that allows a credit against the US tax due from P&G-USA of taxes deemed to have been paid in the Philippines equivalent to twenty percent (20%) which represents the difference between the regular tax of thirty-five percent (35%) on corporations and the tax of fifteen percent (15%) on dividends;" and

(c)  private respondent P&G-Phil. failed to meet certain conditions necessary in order that "the dividends received by its non-resident parent company in the US (P&G-USA) may be subject to the preferential tax rate of 15% instead of 35%."

These holdings were questioned in P&G-Phil.'s Motion for Reconsideration and we will deal with them seriatim in this Resolution resolving that Motion.

I

1.  There are certain preliminary aspects of the question of the capacity of P&G-Phil. to bring the present claim for refund or tax credit, which need to be examined.  This question was raised for the first time on appeal, i.e., in the proceedings before this Court on the Petition for Review filed by the Commissioner of Internal Revenue.  The question was not raised by the Commissioner on the administrative level, and neither was it raised by him before the CTA.

We believe that the Bureau of Internal Revenue ("BIR") should not be allowed to defeat an otherwise valid claim for refund by raising this question of alleged incapacity for the first time on appeal before this Court.  This is clearly a matter of procedure.  Petitioner does not pretend that P&G-Phil., should it succeed in the claim for refund, is likely to run away, as it were, with the refund instead of transmitting such refund or tax credit to its parent and sole stockholder.  It is commonplace that in the absence of explicit statutory provisions to the contrary, the government must follow the same rules of procedure which bind private parties.  It is, for instance, clear that the government is held to compliance with the provisions of Circular No. 1-88 of this Court in exactly the same way that private litigants are held to such compliance, save only in respect of the matter of filing fees from which the Republic of the Philippines is exempt by the Rules of Court.

More importantly, there arises here a question of fairness should the BIR, unlike any other litigant, be allowed to raise for the first time on appeal questions which had not been litigated either in the lower court or on the administrative level.  For, if petitioner had at the earliest possible opportunity, i.e., at the administrative level, demanded that P&G-Phil. produce an express authoriza­tion from its parent corporation to bring the claim for refund, then P&G-Phil. would have been able forthwith to secure and produce such authorization before filing the action in the instant case.  The action here was commenced just before expiration of the two (2)-year prescriptive period.

2.   The question of the capacity of P&G-Phil. to bring the claim for refund has substantive dimensions as well which, as will be seen below, also ultimately relate to fairness.

Under Section 306 of the NIRC, a claim for refund or tax credit filed with the Commissioner of Internal Revenue is essential for maintenance of a suit for recovery of taxes allegedly erroneously or illegally assessed or collected:

"Sec. 306.  Recovery of tax erroneously or illegally collected.  -- No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner of Internal Revenue; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.  In any case, no such suit or proceed­ing shall be begun after the expiration of two years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: x x x." (Underscoring supplied)

Section 309 (3) of the NIRC, in turn, provides:

"Section 309.  Authority of Commissioner to Take Compromises and to Refund Taxes.  -- The Commissioner may:

x x x              x x x                 x x x

(3)   credit or refund taxes erroneously or illegally received, x x x.  No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty." (As amended by P.D. No. 69) (Emphasis supplied)

Since the claim for refund was filed by P&G-Phil., the question which arises is: is P&G-Phil. a "taxpayer" under Section 309 (3) of the NIRC?  The term "taxpayer" is defined in our NIRC as referring to "any person subject to tax imposed by the Title [on Tax on Income]."^[2] It thus becomes important to note that under Section 53 (c) of the NIRC, the withholding agent who is "required to deduct and withhold any tax" is made "personally liable for such tax" and indeed is indemnified against any claims and demands which the stockholder might wish to make in questioning the amount of payments effected by the withholding agent in accordance with the provisions of the NIRC.  The withholding agent, P&G-Phil., is directly and independently liable^[3] for the correct amount of the tax that should be withheld from the dividend remittances.  The withholding agent is, moreover, subject to and liable for deficiency assessments, surcharges and penalties should the amount of the tax withheld be finally found to be less than the amount that should have been withheld under law.

A "person liable for tax" has been held to be a "person subject to tax" and properly considered a "taxpayer."^[4] The terms "liable for tax" and "subject to tax" both connote legal obligation or duty to pay a tax.  It is very difficult, indeed conceptually impossible, to consider a person who is statutorily made "liable for tax" as not "subject to tax." By any reasonable standard, such a person should be regarded as a party in interest, or as a person having sufficient legal interest, to bring a suit for refund of taxes he believes were illegally collected from him.

In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue,^[5] this Court pointed out that a withholding agent is in fact the agent both of the government and of the taxpayer, and that the withholding agent is not an ordinary government agent:

"The law sets no condition for the personal liability of the withholding agent to attach.  The reason is to compel the withholding agent to withhold the tax under all circumstances.  In effect, the responsibility for the collection of the tax as well as the payment thereof is concentrated upon the person over whom the Govern­ment has jurisdiction.  Thus, the withholding agent is constituted the agent of both the Government and the taxpayer.  With respect to the collection and/or withholding of the tax, he is the Government's agent.  In regard to the filing of the necessary income tax return and the payment of the tax to the Government, he is the agent of the taxpayer.  The withholding agent, therefore, is no ordinary government agent especially because under Section 53 (c) he is held personally liable for the tax he is duty bound to withhold; whereas the Commissioner and his deputies are not made liable by law."^[6] (Emphases supplied)

If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial owner of the dividends with respect to the filing of the necessary income tax return and with respect to actual payment of the tax to the government, such authority may reasonably be held to include the authority to file a claim for refund and to bring an action for recovery of such claim.  This implied authority is especially warranted where, as in the instant case, the withholding agent is the wholly owned subsidiary of the parent-stockholder and therefore, at all times, under the effective control of such parent-stockholder.  In the circumstances of this case, it seems particularly unreal to deny the implied authority of P&G-Phil. to claim a refund and to commence an action for such refund.

We believe that, even now, there is nothing to preclude the BIR from requiring P&G-Phil. to show some written or telexed confirmation by P&G-USA of the subsidiary's authority to claim the refund or tax credit and to remit the proceeds of the refund, or to apply the tax credit to some Philippine tax obligation of P&G-USA, before actual payment of the refund or issuance of a tax credit certificate.  What appears to be vitiated by basic unfairness is petitioner's position that, although P&G-Phil. is directly and personally liable to the Government for the taxes and any deficiency assessments to be collected, the Government is not legally liable for a refund simply because it did not demand a written confirmation of P&G-Phil.'s implied authority from the very beginning.  A sovereign government should act honorably and fairly at all times, even vis-a-vis taxpayers.

We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as a "taxpayer" within the meaning of Section 309, NIRC, and as impliedly authorized to file the claim for refund and the suit to recover such claim.

II

1.   We turn to the principal substantive question before us; the applicability to the dividend remittances by P&G-Phil. to P&G-USA of the fifteen percent (15%) tax rate provided for in the following portion of Section 24 (b)(1) of the NIRC:

"(b) Tax on foreign corporations.  -‑

(1)  Non-resident corporation.  -- A foreign corporation not engaged in trade and business in the Philippines, x x x, shall pay a tax equal to 35% of the gross income receipt during its taxable year from all sources within the Philippines, as x x x dividends x x x.  Provided, still further, that on dividends received from a domestic corpora­tion liable to tax under this Chapter, the tax shall be 15% of the dividends, which shall be collected and paid as provided in Section 53 (d) of this Code, subject to the condition that the country in which the non-resident foreign corporation is domiciled 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% which represents the difference between the regular tax (35%) on corporations and the tax (15%) on dividends as provided in this Section x x x."

The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation, goes down to fifteen percent (15%) if the country of domicile of the foreign stockholder corporation "shall allow" such foreign corporation a tax credit for "taxes deemed paid in the Philippines," applicable against the tax payable to the domiciliary country by the foreign stockholder corporation.  In other words, in the instant case, the reduced fifteen percent (15%) dividend tax rate is applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes deemed paid in the Philippines" applicable against the US taxes of P&G-USA.  The NIRC specifies that such tax credit for "taxes deemed paid in the Philippines" must, as a minimum, reach an amount equivalent to twenty (20) percentage points which represents the difference between the regular thirty-five percent (35%) dividend tax rate and the preferred fifteen percent (15%) dividend tax rate.

It is important to note that Section 24 (b)(1), NIRC, does not require that the US must give a "deemed paid" tax credit for the dividend tax (20 percentage points) waived by the Philippines in making applicable the preferred dividend tax rate of fifteen percent (15%).  In other words, our NIRC does not require that the US tax law deem the parent‑corporation to have paid the twenty (20) percentage points of dividend tax waived by the Philippines.  The NIRC only requires that the US "shall allow" P&G-USA a "deemed paid" tax credit in an amount equivalent to the twenty (20) percentage points waived by the Philippines.

2. The question arises: Did the US law comply with the above requirement?  The relevant provisions of the US Internal Revenue Code ("Tax Code") are the following:

"SEC. 901  -- Taxes of foreign countries and possessions of United States.

(a)  Allowance of credit.  -- If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to the applicable limitation of section 904, be credited with the amounts provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid under sections 902 and 960.  Such choice for any taxable year may be made or changed at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by this chapter for such taxable year.  The credit shall not be allowed against the tax imposed by section 531 (relating to the tax on accumulated earnings), against the additional tax imposed for the taxable year under section 1333 (relating to war loss recoveries) or under section 1351 (relating to recoveries of foreign expropriation losses), or against the personal holding company tax imposed by section 541.

(b)  Amount allowed.  -- Subject to the applicable limitation of section 904, the following amounts shall be allowed as the credit under subsection (a):

(a)  Citizens and domestic corporations.  -- In the case of a citizen of the United States and of a domestic corporation, the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States; and

x x x                        x x x                 x x x

SEC. 902.  -- Credit for corporate stockholders in foreign corporation.

(A)  Treatment of Taxes Paid by Foreign Corporation  - For purposes of this subject, a domestic corporation which owns at least 10 percent of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall

x x x                        x x x                 x x x

(2)   to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in subsection (c) (1) (b)] of a year for which such foreign corporation is a less-developed country corporation, be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any possession of the United States on or with respect to such accumulated profits, which the  amount of such dividends bears to the amount of such accumulated profits.

x x x                        x x x                 x x x

(c)   Applicable Rules

(1)  Accumulated profits defined.  -- For purposes of this section, the term 'accumulated profits' means with respect to any foreign corporation,

(A)  for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits, or income computed without reduction by the amount of the income, war profits, and excess profits taxes imposed on or with respect to such profits or income by any foreign country.  x x x; and

(B)  for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or income in excess of  the income, war profits, and excess profits taxes imposed on or with respect to such profits or income.

The Secretary or his delegate shall have full power to determine from the accumulated profits of what year or years such dividends were paid, treating dividends paid in the first 20 days of any year as having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction shows otherwise), and in other respects treating dividends as having been paid from the most recently accumulated gains, profits, or earning.  x x x  x x x." (Emphases supplied)

Close examination of the above quoted provisions of the US Tax Code^[7] shows the following:

a.  US law (Section 901, Tax Code) grants P&G-USA a tax credit for the amount of the dividend tax actually paid (i.e., withheld) from the dividend remittances to P&G-USA;

b.  US law (Section 902, US Tax Code) grants to P&G-USA a "deemed paid" tax credit^[8]for a proportionate part of the corporate income tax actually paid to the Philippines by P&G-Phil.

The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate income tax although that tax was actually paid by its Philippine subsidiary, P&G-Phil., not by P&G-USA.  This "deemed paid" concept merely reflects economic reality, since the Philippine corporate income tax was in fact paid and deducted from revenues earned in the Philippines, thus reducing the amount remittable as dividends to P&G-USA.  In other words, US tax law treats the Philippine corporate income tax as if it came out of the pocket, as it were, of P&G-USA as a part of the economic cost of carrying on business operations in the Philippines through the medium of P&G-Phil. and here earning profits.  What is, under US law, deemed paid by P&G-USA are not "phantom taxes" but instead Philippine corporate income taxes actually paid here by P&G-Phil., which  are very real indeed.

It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually withheld, and (ii) the tax credit for the Philippine corporate income tax actually paid by P&G-Phil. but "deemed paid" by P&G-USA, are tax credits available or applicable against the US corporate income tax of P&G-USA.  These tax credits are allowed because of the US congressional desire to avoid or reduce double taxation of the same income stream.^[9]

In order to determine whether US tax law complies with the requirements for applicability of the reduced or preferential fifteen percent (15%) dividend tax rate under Section 24 (b)(1), NIRC, it is necessary:

a.  to determine the amount of the 20 percentage points dividend tax waived by the Philippine government under Section 24 (b) (1), NIRC, and which hence goes to P&G-USA;

b.  to determine the amount of the "deemed paid" tax credit which US tax law must allow to P&G-USA; and

c.  to ascertain that the amount of the "deemed paid" tax credit allowed by US law is at least equal to the amount of the dividend tax waived by the Philippine Government.

Amount (a), i.e., the amount of the dividend tax waived by the Philippine government is arithmetically determined in the following manner:

P100.00   --------- Pretax net corporate income earned by P&G-Phil.

x 35%       --------- Regular Philippine corporate income tax rate

P 35.00    --------- Paid to the BIR by P&G-Phil. as Philippine corporate income tax.

P100.00

-  35.00

P65.00     --------  Available for remittance as dividends to P&G-USA

P65.00     --------  Dividends remittable to P&G-USA

x 35%       --------  Regular Philippine dividend tax rate under Section 24 (b)(1), NIRC

P 22.75    --------  Regular dividend tax

P 65.00    --------  Dividends remittable to P&G-USA

x 15%       --------  Reduced dividend tax rate under Section 24 (b)(1), NIRC

P 9.75      --------  Reduced dividend tax

22.75        --------  Regular dividend tax under Section 24 (b)(1), NIRC

- 9.75       --------  Reduced dividend tax under Section 24 (b)(1), NIRC

P 13.00    --------  Amount of dividend tax waived by Philippine government under Section 24 (b) (1), NIRC.

Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by P&G-Phil.  Amount (a) is also the minimum amount of the "deemed paid" tax credit that US tax law shall allow if P&G-USA is to qualify for the reduced or preferential dividend tax rate under Section 24 (b)(1), NIRC.

Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law allows under Section 902, Tax Code, may be computed arithmetically as follows:

P 65.00    -------   Dividends remittable to P&G-USA

- 9.75       -------   Dividend tax withheld at the reduced (15%) rate

P 55.25    -------   Dividends actually remitted to P&G-USA

P35.00     -------   Philippine corporate income tax paid by P&G-Phil to the BIR

Dividends actually remitted by P&G‑Phil. to P&G-USA            P55.25

____________________________________________   = ___________  x P35.00 = P29.75^[10]

Amount of accumulated profits earned by P&G-Phil.               P65.00

in excess of income tax

Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of 15%) by P&G-Phil. to its US parent P&G-USA, a tax credit of P29.75 is allowed by Section 902 US Tax Code for Philippine corporate income tax "deemed paid" by the parent but actually paid by the wholly-owned subsidiary.

Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the Philippine government), Section 902, US Tax Code, specifically and clearly complies with the requirements of Section 24 (b)(1), NIRC.

3.  It is important to note also that the foregoing reading of Sections 901 and 902 of the US Tax Code is identical with the reading of the BIR of Sections 901 and 902 as shown by administrative rulings issued by the BIR.

The first Ruling was issued in 1976, i.e., BIR Ruling No. 76-004, rendered by then Acting Commissioner of Internal Revenue Efren I. Plana, later Associate Justice of this Court, the relevant portion of which stated:

"However, after a restudy of the decision in the American Chicle Company case and the provisions of Sections 901 and 902 of the U.S. Internal Revenue Code, we find merit in your contention that our computation of the credit which the U.S. tax law allows in such cases is erroneous as the amount of tax 'deemed paid' to the Philippine government for purposes of credit against the U.S. tax by the recipient of dividends includes a portion of the amount of income tax paid by the corporation declaring the dividend in addition to the tax withheld from the dividend remitted.  In other words, the U.S. government will allow a credit to the U.S. corporation or recipient of the dividend, in addition to the amount of tax actually withheld, a portion of the income tax paid by the corporation declaring the dividend.  Thus, if a Philippine corporation wholly owned by a U.S. corporation has a net income of P100,000, it will pay P25,000 Philippine income tax thereon in accordance with Section 24(a) of the Tax Code. The net income, after income tax, which is P75,000, will then be declared as dividend to the U.S. corporation at 15%  tax, or P11,250, will be withheld therefrom.  Under the aforementioned sections of the U.S. Internal Revenue Code, U.S. corporation receiving the dividend can utilize as credit against its U.S. tax payable on said dividends the amount P30,000 composed of:

(1) The tax 'deemed paid' or indirectly paid on the dividend arrived at as follows:

P75,000 x P25,000  = P18,750

100,000*

(2) The amount of 15% of P75,000 withheld           =   11,250

P30,000

The amount of P18,750 deemed paid and to be  credited against the U.S. tax on the dividends received by the U.S. corporation from a Philippine subsidiary is clearly more  than 20% requirement of  Presidential Decree No. 369 as 20% of P75,000.00 the dividends to be remitted under the above example, amounts to P15,000.00 only.

In the light of the foregoing, BIR Ruling No. 75-005 dated September 10, 1975 is hereby amended in the sense that the dividends to be remitted by your client to its parent company shall be subject to the withholding tax at the rate of 15% only.

This ruling shall have force and effect only for as long as the present pertinent provisions of the U.S. Federal Tax Code, which are the bases of the ruling, are not revoked, amended and modified, the effect of which will reduce the percentage of tax deemed paid and creditable against the U.S. tax on dividends remitted by a foreign corporation to a U.S. corporation." (Emphases supplied)

The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981 addressed to Basic Foods Corporation and BIR Ruling dated 20 October 1987 addressed to Castillo, Laman, Tan and Associates.  In other words, the 1976 Ruling of Hon. Efren I. Plana was reiterated by the BIR even as the case at bar was pending before the CTA and this Court.

4.  We should not overlook the fact that the concept of "deemed paid" tax credit, which is embodied in Section 902, US Tax Code, is exactly the same "deemed paid" tax credit found in our NIRC and which Philippine tax law allows to Philippine corporations which have operations abroad (say, in the United States) and which, therefore, pay income taxes to the US government.

Section 30 (c) (3) and (8), NIRC, provides:

"Sec. 30.  Deductions from Gross Income.  -- In computing net income, there shall be allowed as deductions -- x x x

(c) Taxes. -- x x x

x x x              x x x                 x x x

(3) Credits against tax for taxes of foreign countries.  -- If the taxpayer signifies in his return his desire to have the benefits of this paragraphs, the tax imposed by this Title shall be credited with x x x

(a)  Citizen and Domestic Corporation.  -- In the case of a citizen of the Philippines and of domestic corporation, the amount of net income, war profits or excess profits, taxes paid or accrued during the taxable year to any foreign country." (Emphases supplied)

Under Section 30 (c)(3)(a), NIRC, above, the BIR must give a tax credit to a Philippine corporation for taxes actually paid by it to the US government -- e.g., for taxes collected by the US government on dividend remittances to the Philippine corporation.  This Section of the NIRC is the equivalent of Section 901 of the US Tax Code.

Section 30 (c)(8), NIRC, is practically identical with Section 902 of the US Tax Code, and provides as follows:

"(8)  Taxesof foreign subsidiary.  -- For the purposes of this subsection a domestic corporation which owns a majority of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall be deemed to have paid the same proportion of any income, war-profits, or excess-profits taxes paid by such foreign corporation to any foreign country, upon or with respect to the accumulated profits of such foreign corporation from which such dividends were paid, which the amount of such dividends bears to the amount of such accumulated profits: Provided, That the amount of tax deemed to have been paid under this subsection shall in no case exceed the same proportion of the tax against which credit is taken which the amount of such dividends bears to the amount of the entire net income of the domestic corporation in which such dividends are included.  The term 'accumulated profits' when used in this subsection in reference to a foreign corporation, means the amount of its gains, profits, or income in excess of the income,, war-profits, and excess-profits taxes imposed upon or with respect to such profits or income; and the Commissioner of Internal Revenue shall have full power to determine from the accumulated profits of what year or years such dividends were paid; treating dividends paid in the first sixty days of any year as having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction shown otherwise), and in other respects treating dividends as having been paid from the most recently accumulated gains, profits, or earnings.  In the case of a foreign corpora­tion, the income, war-profits, and excess-profits taxes of which are determined on the basis of an accounting period of less than one year, the word 'year' as used in this subsection shall be construed to mean such accounting period." (Emphases supplied)

Under the above quoted Section 30 (c)(8), NIRC, the BIR must give a tax credit to a Philippine parent corporation for taxes "deemed paid" by it, that is, e.g., for taxes paid to the US by the US subsidiary of a Philippine-parent corporation.  The Philippine parent or corporate stockholder is "deemed" under our NIRC to have paid a proportionate part of the UScorporate income tax paid by its USsubsidiary, although such US tax was actually paid by the subsidiary and not by the Philippine parent.

Clearly, the "deemed paid" tax credit which, under Section 24 (b)(1), NIRC, must be allowed by US law to P&G-USA, is the same "deemed paid" tax credit that Philippine law allows to a Philippine corporation with a wholly- or majority-owned subsidiary in (for instance) the US.  The "deemed paid" tax credit allowed in Section 902, US Tax Code, is no more a credit for "phantom taxes" than is the "deemed paid" tax credit granted in Section 30 (c)(8), NIRC.

III

1.  The Second Division of the Court, in holding that the applicable dividend tax rate in the instant case was the regular thirty-five percent (35%) rate rather than the reduced rate of fifteen percent (15%), held that P&G-Phil. had failed to prove that its parent, P&G-USA, had in fact been given by the US tax authorities a "deemed paid" tax credit in the amount required by Section 24 (b)(1), NIRC.

We believe, in the first place, that we must distinguish between the legal question before this Court from questions of administrative implementation arising after the legal question has been answered. The basic legal issue is, of course, this: which is the applicable dividend tax rate in the instant case: the regular thirty-five percent (35%) rate or the reduced fifteen percent (15%) rate?  The question of whether or not P&G-USA is in fact given by the US tax authorities a "deemed paid" tax credit in the required amount, relates to the administrative implementation of the applicable reduced tax rate.

In the second place, Section 24 (b)(1), NIRC, does not in fact require that the "deemed paid" tax credit shall have actually been granted before the applicable dividend tax rate goes down from thirty-five percent (35%) to fifteen percent (15%).  As noted several times earlier, Section 24 (b)(1), NIRC, merely requires, in the case at bar, that the USA "shall allow a credit against the tax due from [P&G-USA for] taxes deemed to have been paid in the Philippines x x x." There is neither statutory provision nor revenue regulation issued by the Secretary of Finance requiring the actual grant of the "deemed paid" tax credit by the US Internal Revenue Service to P&G-USA before the preferential fifteen percent (15%) dividend rate becomes applicable.  Section 24 (b)(1), NIRC, does not create a tax exemption nor does it provide a tax credit; it is a provision which specifies when a particular (reduced) tax rate is legally applicable.

In the third place, the position originally taken by the Second Division results in a severe practical problem of administrative circularity.  The Second Division in effect held that the reduced dividend tax rate is not applicable until the US tax credit for "deemed paid" taxes is actually given in the required minimum amount by the US Internal Revenue Service to P&G-USA.  But, the US "deemed paid" tax credit cannot be given by the US tax authorities unless dividends have actually been remitted to the US, which means that the Philippine dividend tax, at the rate here applicable, was actually imposed and collected.^[11] It is this practical or operating circularity that is in fact avoided by our BIR when it issues rulings that the tax laws of particular foreign jurisdictions (e.g., Republic of Vanuatu,^[12] Hongkong,^[13] Denmark,^[14] etc.) comply with the requirements set out in Section 24 (b)(1), NIRC, for applicability of the fifteen percent (15%) tax rate.  Once such a ruling is rendered, the Philippine subsidiary begins to withhold at the reduced dividend tax rate.

A requirement relating to administrative implementation is not properly imposed as a condition for the applicabi­lity, as a matter of law, of a particular tax rate.  Upon the other hand, upon the determination or recognition of the applicability of the reduced tax rate, there is nothing to prevent the BIR from issuing implementing regulations that would require P&G-Phil., or any Philippine corporation similarly situated, to certify to the BIR the amount of the "deemed paid" tax credit actually subsequently granted by the US tax authorities to P&G-USA or a US parent corporation for the taxable year involved.  Since the US tax laws can and do change, such implementing regulations could also provide that failure of P&G-Phil. to submit such certification within a certain period of time, would result in the imposition of a deficiency assessment for the twenty (20) percentage points differential.  The task of this Court is to settle which tax rate is applicable, considering the state of US law at a given time.  We should leave details relating to administrative implementation where they properly belong -- with the BIR.

2.  An interpretation of a tax statute that produces a revenue flow for the government is not, for that reason alone, necessarily the correct reading of the statute.  There are many tax statutes or provisions which are designed, not to trigger off an instant surge of revenues, but rather to achieve longer-term and broader-gauge fiscal and economic objectives.  The task of our Court is to give effect to the legislative design and objectives as they are written into the statute even if, as in the case at bar, some revenues have to be foregone in that process.

The economic objectives sought to be achieved by the Philippine Government by reducing the thirty-five percent (35%) dividend rate to fifteen percent (15%) are set out in the preambular clauses of P.D. No. 369 which amended Section 24 (b)(1), NIRC, into its present form:

"WHEREAS, it is imperative to adopt measures responsive to the requirements of a developing economy foremost of which is the financing of economic development programs;

WHEREAS, nonresident foreign corporations with investments in the Philippines are taxed on their earnings from dividends at the rate of 35%;

WHEREAS, in order to encourage more capital investment for large projects an appropriate tax need be imposed on dividends received by non-resident foreign corporations in the same manner as the tax imposed on interest on foreign loans;

x x x                x x x                 x x x"

(Emphases supplied)

More simply put, Section 24 (b)(1), NIRC, seeks to promote the in-flow of foreign equity investment in the Philippines by reducing the tax cost of earning profits here and thereby increasing the net dividends remittable to the investor.  The foreign investor, however, would not benefit from the reduction of the Philippine dividend tax rate unless its home country gives it some relief from double taxation (i.e., second-tier taxation) (the home country would simply have more "post-R.P. tax" income to subject to its own taxing power) by allowing the investor additional tax credits which would be applicable against the tax payable to such home country.  Accordingly, Section 24 (b)(1), NIRC, requires the home or domiciliary country to give the investor corporation a "deemed paid" tax credit at least equal in amount to the twenty (20) percentage points of dividend tax foregone by the Philippines, in the assumption that a positive incentive effect would thereby be felt by the investor.

The net effect upon the foreign investor may be shown arithmetically in the following manner:

P65.00     --------- Dividends remittable to P&G-USA (please see page 16 above)

- 9.75       --------- Reduced R.P. dividend tax withheld by P&G-Phil.

P55.25     --------- Dividends actually remitted to P&G-USA

P55.25

x 46%       --------- Maximum US corporate income tax rate

P25.415   --------- US corporate tax payable by P&G-USA without tax credits

P25.415

- 9.75       --------- US tax credit for RP dividend tax withheld by P&G-Phil. at 15% (Section 901, US Tax Code)

P15.66     --------- US corporate income tax payable after Section 901 tax credit.

P55.25

-15.66

P39.59     --------- Amount received by P&G-USA net of R.P. and U.S. taxes without "deemed paid" tax credit.

P25.415

-29.75      --------- "Deemed paid" tax credit under Section 902 US Tax Code (please see page 18 above)

 -  0  -       --------- US corporate income tax payable on dividends remitted by P&G-Phil. to P&G-USA after Section 902 tax credit.

P55.25     --------- Amount received by P&G-USA net of RP and US taxes after Section 902 tax credit.

It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax Code, could offset the US corporate income tax payable on the dividends remitted by P&G-Phil.  The result, in fine, could be that P&G-USA would after US tax credits, still wind up with P55.25, the full amount of the dividends remitted to P&G-USA net of Philippine taxes.  In the calculation of the Philippine Government, this should encourage additional investment or re-investment in the Philippines by P&G-USA.

3.  It remains only to note that under the Philippines -United States Convention "With Respect to Taxes on Income,"^[15] the Philippines, by a treaty commitment, reduced the regular rate of dividend tax to a maximum of twenty percent (20%) of the gross amount of dividends paid to US parent corporations:

"Article 11. -- Dividends

x x x              x x x                 x x x

(2)  The rate of tax imposed by one of the Contracting States on dividends derived from sources within that Contracting State by a resident of the other Contracting State shall not exceed --

(a)   25 percent of the gross amount of the dividend; or

(b)  When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of the paying corporation's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10 percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation."

x x x              x x x                 x x x"

(Emphases supplied)

The Tax Convention, at the same time, established a treaty obligation on the part of the United States that it "shall allow" to a US parent corporation receiving dividends from its Philippine subsidiary "a [tax] credit for the appro­priate amount of taxes paid or accrued to the Philippines by the Philippine [subsidiary] ----."^[16] This is, of course, precisely the "deemed paid" tax credit provided for in Section 902, US Tax Code, discussed above.  Clearly, there is here on the part of the Philippines a deliberate undertaking to reduce the regular dividend tax rate of thirty-five percent (35%).  Since, however, the treaty rate of twenty percent (20%) is a maximum rate, there is still a differential or additional reduction of five (5) percentage points which compliance of US law (Section 902) with the requirements of Section 24 (b)(1), NIRC, makes available in respect of dividends from a Philippine subsidiary.

We conclude that private respondent P&G-Phil. is entitled to the tax refund or tax credit which it seeks.

WHEREFORE, for all the foregoing, the Court Resolved to GRANT private respondent's Motion for Reconsideration dated 11 May 1988, to SET ASIDE the Decision of the Second Division of the Court promulgated on 15 April 1988, and in lieu thereof, to REINSTATE and AFFIRM the Decision of the Court of Tax Appeals in CTA Case No. 2883 dated 31 January 1984 and to DENY the Petition for Review for lack of merit.  No pronouncement as to costs.

Narvasa, Gutierrez, Jr., Griño-Aquino, Medialdea, and Romero, JJ., concur.
Melencio-Herrera, Padilla, Regalado, and Davide, Jr., JJ., joins J. Paras in his dissenting opinion.
Fernan, C.J., on leave.
Cruz and Bidin, JJ., see concurring opinion.

---

^[1] We refer here (unless otherwise expressly indicated) to the provisions of the NIRC as they existed during the relevant taxable years and at the time the claim for refund was made.  We shall hereafter refer simply to the NIRC.

^[2] Section 20 (n), NIRC (as renumbered and re-arranged by Executive Order No. 273, 1 January 1988).

^[3] E.g., Section 51 (e), NIRC:

"Sec. 51.  Returns and payment of taxes withheld at source.   -- x x x

x x x                 x x x                 x x x

(e) Surcharge and interest for failure to deduct and withhold.  -- If the withholding agent, in violation of the provisions of the preceding section and implementing regulations thereunder, fails to deduct and withhold the amount of tax required under said section and regulations, he shall be liable to pay in addition to the tax required to be deducted and withheld, a surcharge of fifty per centum if the failure is due to willful neglect or with intent to defraud the Government, or twenty-five per centum if the failure is not due to such causes, plus interest at the rate of fourteen per centum per annum from the time the tax is required to be withheld until the date of assessment.

xx x                  x x x                 x x x"

Section 251 (Id.):

"Sec. 251.  Failure of a withholding agent to collect and remit tax.  -- Any person required to collect, account for, and remit any tax imposed by this Code who willfully fails to collect such tax, or account for and remit such tax, or willfully assists in any manner to evade any such tax or the payment thereof, shall, in addition to other penalties provided for under this Chapter, be liable to a penalty equal to the total amount of the tax not collected, or not accounted for and remitted." (Emphases supplied)

^[4] Houston Street Corporation v. Commissioner of Internal Revenue, 84 F. 2nd. 821 (1936); Bank of America v. Anglim, 138 F. 2nd. 7 (1943).

^[5] 15 SCRA 1 (1965).

^[6] 15 SCRA at 4.

^[7] The following detailed examination of the tenor and import of Sections 901 and 902 of the US Tax Code is, regrettably, made necessary by the fact that the original decision of the Second Division overlooked those Sections in their entirety.  In the original opinion in 160 SCRA 560 (1988), immediately after Section 902, US Tax Code is quoted, the following appears: "To Our mind, there is nothing in the aforecited provision that would justify tax return of the disputed 15% to the private respondent" (160 SCRA at 567).  No further discussion of Section 902 was offered.

^[8] Sometimes also called a "derivative" tax credit or an "indirect" tax credit; Bittker and Ebb, United States Taxation of Foreign Income and Foreign Persons, 319 (2nd Ed., 1968).

^[9] American Chicle Co. v. U.S., 316 US 450, 86 L. ed. 1591 (1942); W.K. Buckley, Inc. v. C.I.R., 158 F. 2d. 158 (1946).

^[10] In his dissenting opinion, Paras, J. writes that "the amount of the tax credit purportedly being allowed is not fixed or ascertained, hence we do not know whether or not the tax credit contemplated is within the limits set forth in the law" (Dissent, p. 6) Section 902 US Tax Code does not specify particular fixed amounts or percentages as tax credits; what it does specify in Section 902(A)(2) and (C)(1)(B) is a proportion expressed in the fraction:

dividends actually remitted by P&G-Phil. to P&G-USA

______________________________________________

amount of accumulated profits earned by P&G-Phil. in excess of income tax

The actual or absolute amount of the tax credit allowed by Section 902 will obviously depend on the actual values of the numerator and the denominator used in the fraction specified.  The point is that the establishment of the proportion or fraction in Section 902 renders the tax credit there allowed determinate and determinable.

* The denominator used by Com. Plana is the total pre-tax income of the Philippine subsidiary.  Under Section 902 (c)(1)(B), US Tax Code, quoted earlier, the denominator should be the amount of income of the subsidiary in excess of [Philippine] income tax.

^[11] The US tax authorities cannot determine the amount of the "deemed paid" credit to be given because the correct proportion cannot be determined: the numerator of the fraction is unknown, until remittance of the dividends by P&G-Phil. is in fact effected. Please see computation, supra, p. 17.

^[12] BIR Ruling dated 21 March 1983, addressed to the Tax Division, Sycip, Gorres, Velayo and Company.

^[13] BIR Ruling dated 13 October 1981, addressed to Mr. A.R. Sarvino, Manager-Securities, Hongkong and Shanghai Banking Corporation.

^[14] BIR Ruling dated 31 January 1983, addressed to the Tax Division, Sycip, Gorres, Velayo and Company.

^[15] Text in 7 Philippine Treaty Series 523; signed on 1 October 1976 and effective on 16 October 1982 upon ratifica­tion by both Governments and exchange of instruments of ratification.

^[16] Art. 23(1), Tax Convention; the same treaty imposes a similar obligation upon the Philippines to give to the Philippine parent of a US subsidiary a tax credit for the appropriate amount of US taxes paid by the US subsidiary.  (Art. 23[2], id) Thus, Sec. 902 US Tax Code and Sec. 30(c)(8), NIRC, have been in effect been converted into treaty commitments of the United States and the Philippines, respectively, in respect of US and Philippine corporations.

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