CASE DIGEST: CIR vs. Goodyear Philippines

 

[ GR No. 216130, August 3, 2016 ]

CIR v. GOODYEAR PHILIPPINES

FACTS:

Respondent is a domestic corporation and on August 19, 2003, respondent’s authorized capital stock was increased from P400,000,000.00 divided into 4,000,000 shares with a par value of P100.00 each, to P1,731,863,000.00 divided into 4,000,000 common shares and 13,318,630 preferred shares with a par value of P100.00 each. Consequently, all the preferred shares were solely and exclusively subscribed by Goodyear Tire and Rubber Company, which was a US company and is unregistered in the Philippines.

On May 30, 2008, respondent’s BOD authorized the redemption of GTRC's 3,729,216 preferred shares at the redemption price of P470,653,914.00, broken down as follows: P372,921,600.00 representing the aggregate par value and P97,732,314.00, representing accrued and unpaid dividends.

On October 15, 2008, respondent filed an application for relief from double taxation before the International Tax Affairs Division of the BIR to confirm that the redemption was not subject to Philippine income tax, pursuant to the Philippines - US Tax Treaty. This notwithstanding, respondent still took the conservative approach, and thus, withheld and remitted the sum of P14,659,847.10 to the BIR, representing 15% FWT, computed based on the difference of the redemption price and aggregate par value of the shares.

On October 21, 2010, respondent filed an administrative claim for refund. Thereafter, or on November 3, 2010, it filed a judicial claim, by way of petition for review, before the CTA.

ISSUE:

whether or not the CTA En Banc correctly ruled that the gain derived by GTRC was not subject to 15% FWT on dividends

RULING:

The imposition of 15% FWT on intercorporate dividends received by a non-resident foreign corporation is found in Section 28 (B) (5) (b) of the Tax Code which reads:

SEC. 28. Rates of Income Tax on Foreign Corporations. –

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(B) Tax on Nonresident Foreign Corporation. –

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(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. –

(b) Intercorporate Dividends. – A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation, which shall be collected and paid as provided in Section 57 (A) of this Code, subject to the condition that the country in which the nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines equivalent to twenty percent (20%), which represents the difference between the regular income tax of thirty-five percent (35%) and the fifteen percent (15%) tax on dividends as provided in this subparagraph: Provided, That effective January 1, 2009, the credit against the tax due shall be equivalent to fifteen percent (15%), which represents the difference between the regular income tax of thirty percent (30%) and the fifteen percent (15%) tax on dividends;

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It must be noted, however, that GTRC is a non-resident foreign corporation, specifically a resident of the US. Thus, pursuant to the cardinal principle that treaties have the force and effect of law in this jurisdiction, the RP-US Tax Treaty complementarily governs the tax implications of respondent's transactions with GTRC.

Under Article 11 (5) of the RP-US Tax Treaty, the term "dividends" should be understood according to the taxation law of the State in which the corporation making the distribution is a resident, which, in this case, pertains to respondent, a resident of the Philippines. Accordingly, attention should be drawn to the statutory definition of what constitutes "dividends," pursuant to Section 73 (A) of the Tax Code which provides that "the term 'dividends' means any distribution made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders, whether in money or in other property."

In light of the foregoing, the Court therefore holds that the redemption price representing the amount of P97,732,314.00 received by GTRC could not be treated as accumulated dividends in arrears that could be subjected to 15% FWT. Verily, respondent's AFS covering the years 2003 to 2009 show that it did not have unrestricted retained earnings, and in fact, operated from a position of deficit. Thus, absent the availability of unrestricted retained earnings, the board of directors of respondent had no power to issue dividends.

One of the primary features of an ordinary dividend is that the distribution should be in the nature of a recurring return on stock which, however, does not obtain in this case. The amount of P97,732,314.00 received by GTRC did not represent a periodic distribution of dividend, but rather a payment by respondent for the redemption of GTRC's 3,729,216 preferred shares.

All told, the amount of P97,732,314.00 received by GTRC from respondent for the redemption of its 3,729,216 preferred shares were not accumulated dividends in arrears. Contrary to petitioner's claims, it is therefore not subject to 15% FWT on dividends in accordance with Section 28 (B) (5) (b) of the Tax Code.