OMMISSIONER OF I NTERNAL R EVENUE V .

P ROCTER AND G AMBLE P HILIPPINE M ANUFACTURING C ORPORATION (160 SCRA 560) Topic: Tax on dividends remitted to foreign corporations Facts: Procter and Gamble Philippines, a domestic corporation wholly owned by Procter and Gamble USA, is invoking thetax-sparing credit provision in Section 24(b) and is claiming a refund or tax credit of the 20 percentage-point portionof the 35 percentage-point whole tax on dividends that it had previously paid to the Bureau of Internal Revenue. Issue and Ruling: 1. W/ N Procter and Gamble Philippines is entitled to the preferential 15% tax rate on dividends declared andremitted to its parent corporation. NO. Procter and Gamble Philippines failed to meet certain conditions necessary in order that the dividends received by the non-resident parent company in the US may be subject to the preferential 15% tax instead of 35%, among which are:(a) To show the actual amount credited by the US government against the income tax due from Procter andGamble USA;(b) To present the income tax return of its mother company for the years the dividends were received; and(c) To submit any duly authenticated document showing that the US government credited the 20% tax deemedpaid in the Philippines. Notes: The State can never be in estoppel, and this is particularly true in matters involving taxation. The errors of certainadministrative officers should never be allowed to jeopardize the governments financial position. CIR v. Procter &Gamble (taxation of NRFCs Facts: Procter and Gamble Philippines is a wholly owned subsidiary of Procter and Gamble USA(PMC-USA), a non- resident foreign corporation in the Philippines, not engaged in trade andbusiness therein. PMC-USA is the sole shareholder of PMC Philippines and is entitled toreceive income from PMC Philippines in the form of dividends, if not rents or royalties. For thetaxable years 1974 and 1975, PMC Philippines filed its income tax return and also declareddividends in favor of PMC- USA. In 1977, PMC Philippines, invoking the tax-sparing provision of Section 24 (b) as the withholding agent of the Philippine Government with respect to dividendtaxes paid by PMC-USA, filed a claim for the refund of 20 percentage point portion of the 35percentage whole tax paid with the Commissioner of Internal Revenue.Issue: Whether PMC Philippines is entitled to the 15% preferential tax rate on dividendsdeclared and remitted to its parent corporation .Held: The submission of the Commissioner that PMC Philippines is but a withholding agent of the government and therefore cannot

claim reimbursement of alleged overpaid taxes, iscompletely meritorious. The real party in interest is PMC-USA, which should prove that it isentitled under the US Tax Code to a US Foreign Tax Credit equivalent to at least 20 percentagepoints spared or waived as otherwise considered or deemed paid by the Government. Herein,the claimant failed to show or justify the tax return of the disputed 15% as it failed to show theactual amount credited by the US Government against the income tax due from PMC-USA onthe dividends received from PMC Philippines; to present the income tax return of PMC-USA for 1975 when the dividends were received; and to submit duly authenticated document showingthat the US government credited the 20% tax deemed paid in the Philippines. CIR v. PLDT, G.R. No. 140230, Dec. 15, 2005 DIRECT v. INDIRECT TAX: based on the possibility of shifting the incidence of taxation. Direct taxes are those that are exacted from the very person who, it is intended or desired, should pay them; impositions for which a taxpayer is directly liable on the transaction or business he is engaged in. Indirect taxes are those that are demanded, in the first instance, from, or are paid by, one person in the expectation and intention that he can shift the burden to someone else; liability for the payment falls on one person but the burden can be shifted or passed on to another person, such as when the tax is imposed ex. VAT, advance sales tax, compensating tax upon goods before reaching the consumer who ultimately pays for it. When the seller passes on the tax to his buyer, he, in effect, shifts the tax burden, not the liability to pay it, to the purchaser as part of the price of goods sold or services rendered. By tacking the VAT due to the selling price, the seller remains the person primarily and legally liable for the payment of the tax. What is shifted only to the intermediate buyer and ultimately to the final purchaser is the burden of the tax. Stated differently, a seller who is directly and legally liable for payment of an indirect tax, such as VAT on goods and services, is not necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser or end-user of such goods or services who, although not directly and legally liable for the payment thereof, ultimately bears the burden of the tax. City of Iloilo vs. SMART Communications Inc., [G.R. No. 167260] Facts: SMART received a letter of assessment dated February 12, 2002 from petitioner requiring it to pay deficiency local franchise and business taxes (in the amount of P764,545.29, plus interests and surcharges) which it incurred for the years 1997 to 2001. SMART protested the assessment by sending a letter dated February 15, 2002 to the City Treasurer. It claimed exemption from payment of local franchise and business taxes based on Section 9 of its legislative franchise under Republic Act (R.A.) No. 7294 (SMARTs franchise). Under SMARTs franchise, it was required to pay a franchise tax equivalent to 3% of all gross receipts, which amount shall be in lieu of all taxes. SMART contends that the in lieu of all taxes clause covers local franchise and business taxes. SMART similarly invoked R.A. No. 7925 or the Public Telecommunications Policy Act (Public Telecoms Act) whose Section 23 declares that any existing privilege, incentive, advantage, or exemption granted under existing franchises shall ipso facto become part of previously granted-telecommunications franchise. SMART contends that by virtue of Section 23, tax exemptions granted by the legislature to other holders of telecommunications franchise may be extended to and availed of by SMART. Petitioner denied SMARTs protest, citing the failure of SMART to comply with Section 252 of R.A. No. 7160 or the Local Government Code (LGC) before filing the protest against the assessment. Section 252 of the LGC requires payment of the tax before any protest against the tax assessment can be made. SMART objected to the petitioners denial of its protest by instituting a case against petitioner before the RTC of Iloilo City. The trial court ruled in favor of SMART and declared the telecommunications firm exempt from the payment of local franchise and business taxes; it agreed with SMARTs claim of exemption under Section 9 of its franchise and Section 23 of the Public Telecoms Act. Issue: Whether SMART is exempt from the payment of local franchise and business taxes. Held: SMARTs claim for exemption under its franchise is not equivocal enough to prevail over the specific grant of power to local government units to exact taxes from businesses operating within its territorial jurisdiction under Section 137 in relation to Section 151 of the LGC. More importantly, it claimed that exemptions from taxation have already been removed by Section 193 of the LGC:

Section 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or controlled corporations, except local water districts, cooperatives duly registered under RA No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code. The BLGF opined that SMART should be considered exempt from the franchise tax that the local government may impose under Section 137 of the LGC. SMART, relying on the letter-opinion of the BLGF, invoked the same in the administrative protest it filed against petitioner on February 15, 2002, as well as in the petition for prohibition that it filed before the RTC of Iloilo on April 30, 2002. However, in the 2001 case of PLDT v. City of Davao, we declared that we do not find BLGFs interpretation of local tax laws to be authoritative and persuasive. The BLGFs function is merely to provide consultative services and technical assistance to the local governments and the general public on local taxation, real property assessment, and other related matters. Unlike the Commissioner of Internal Revenue who has been given the express power to interpret the Tax Code and other national tax laws, no such power is given to the BLGF. SMARTs dependence on BLGFs interpretation was thus misplaced.