GR 127105; (June, 1999) (Digest)
G.R. No. 127105 June 25, 1999
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. S.C. JOHNSON AND SON, INC., and COURT OF APPEALS, respondents.
FACTS
S.C. Johnson and Son, Inc., a domestic corporation, entered into a license agreement with its U.S.-based parent company, S.C. Johnson and Son, USA, for the use of trademarks, patents, and technology. The agreement was registered with the Technology Transfer Board. For the period July 1992 to May 1993, the Philippine subsidiary paid royalties to the U.S. company, withholding the regular 25% tax on such payments as prescribed by the National Internal Revenue Code, amounting to P1,603,443.00.
Subsequently, S.C. Johnson filed a claim for refund with the BIR, arguing it had overpaid withholding taxes. It invoked the “most-favored-nation” clause in the RP-US Tax Treaty, which provides that if the Philippines agrees in a treaty with another country to a lower tax rate on royalties, that lower rate shall also apply to the U.S. taxpayer under similar circumstances. S.C. Johnson pointed to the RP-West Germany Tax Treaty, which imposes only a 10% tax on royalties. The Commissioner of Internal Revenue did not act on the claim, prompting S.C. Johnson to seek relief from the Court of Tax Appeals, which granted the refund.
ISSUE
Whether the “most-favored-nation” clause in the RP-US Tax Treaty entitles S.C. Johnson and Son, USA, to the preferential 10% tax rate on royalties as provided in the RP-West Germany Tax Treaty.
RULING
Yes. The Supreme Court affirmed the decisions of the lower courts, ruling that the U.S. company is entitled to the 10% rate. The Court examined Article 13(2)(b)(iii) of the RP-US Tax Treaty, which states that the tax rate on royalties shall not exceed 10% if “paid under similar circumstances” to a resident of a third state which is granted such a rate. The Court rejected the Commissioner’s argument that the “similar circumstances” refer to the presence of a “matching credit” provision (like that in the RP-West Germany Treaty) or other tax-related technicalities. The Court held that the phrase refers to the nature and source of the royalty income itself, not ancillary treaty provisions. Since the royalties paid to the U.S. company were for the use of intangible property (technology and trademarks) registered with the Technology Transfer Board—the same kind of royalties contemplated in the RP-West Germany Treaty—they were paid under “similar circumstances.” Therefore, the lower 10% rate applies. The claim for refund of the excess 15% withheld tax was properly granted.