CIR vs. SC Johnson

G.R. No. 127105 June 25, 1999

DOCTRINE: Double taxation usually takes place when a person is a resident of a contracting state and derives income from, or owns capital in, the other contracting state and both states impose tax on that income or capital.

Respondent, S.C. Johnson and Son, Inc. is a domestic corporation, entered into a license agreement with SC Johnson and Son, USA, a non-resident foreign corporation, pursuant to which, respondent was granted the right to use the trademark, patents, and technology owned by the latter.

Respondent was obliged to pay SC Johnson and Son, USA royalties based on the percentage of net sales and subjected the same to 25% withholding tax on royalty payments which respondent paid. Respondent subsequently filed a claim for refund of overpaid withholding tax on royalties with the International Tax Affairs Division (ITAD) of the Bureau of Internal Revenue. He claims that the preferential tax rate of 10% should be applied to him.

The Commissioner did not act on such refund, hence the private respondent filed a petition for review before the Court of Tax Appeals (CTA). The CTA ruled in favor of Private Respondent ordered the commissioner to issue a tax credit certificate in favor of said respondent.

The Commissioner filed a petition for review with the Court of Appeals, which affirmed in toto the CTA ruling.

Whether respondent SC Johnson and Son, Inc. is entitled to the 10% royalty under the most favored nation clause as provided in the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty.

No. The most favored nation clause is intended to establish the principle of equality of international treatment by providing that the citizens or subjects of the contracting nations may enjoy the privileges accorded by either party to those of the most favored nation. The similarity in the circumstances of payment of taxes is a condition for the enjoyment of most favored nation treatment precisely to underscore the need for equality of treatment. Both the RP-US Tax Treaty and the RP-West Germany Tax Treaty provide for a tax on royalties for the use of trademark, patent, and technology.

The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered into for the avoidance of double taxation. Tax conventions are drafted with a view towards the elimination of international juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods.

Double taxation usually takes place when a person is a resident of a contracting state and derives income from, or owns capital in the other contracting state and both states impose a tax on that income or capital.

Here, the state of source is the Philippines because the royalties are paid for the right to use property or rights, i.e. trademarks, patents, and technology, located within the Philippines. The United States is the state of residence since the taxpayer, S. C. Johnson and Son, U.S.A., is based there. Under the RP-US Tax Treaty, the state of residence and the state of source are both permitted to tax the royalties, with a restraint on the tax that may be collected by the state of source. Furthermore, the method employed to give relief from double taxation is the allowance of a tax credit to citizens or residents of the United States (in an appropriate amount based upon the taxes paid or accrued to the Philippines) against the United States tax, but such amount shall not exceed the limitations provided by United States law for the taxable year.

Article 24 of the RP-Germany Tax Treaty allows crediting against German income and corporation tax of20% of the gross amount of royalties paid under the law of the Philippines while Article 23 of the RP-US Tax Treaty does not. Since the RP-US Tax Treaty does not give a matching tax credit of 20 % for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty, private respondent cannot be deemed entitled to the 10% rate granted under the latter treaty for the reason that there is no payment of taxes on royalties under similar circumstances.

Most favored nation (MFN) clauses refer to a benefit under an agreement that allows a party to receive benefits or rights that can comparatively match or equal the right and benefits received by others.

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