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[ G.R. No. 127105. August 30, 1999]

Quoted hereunder, for your information, is a resolution of this court dated AUG 30, 1999.

G.R. No. 127105 (The Commissioner of Internal Revenue vs. Court of Appeals and S.C. Johnson & Son, Inc.)

Before us is a motion for Reconsideration from the decision rendered by this Court dated June 25, 1999 in G.R. No. 127105, entitled The Commissioner of Internal Revenue vs. Court of Appeals and S.C Johnson & Son, Inc." In this case, we held that the phrase "paid under similar circumstances" in Article 13 (2) (b) (iii) of the RP-US Tax Treaty should be interpreted as referring to the payment of taxes, and not royalties. Such an interpretation is consistent with the purpose of the RP-US Tax Treaty which is the avoidance of double taxation. As a consequence of such an interpretation, we held that private respondent S.C. Johnson & Son, Inc. (S.C. Johnson) is not entitled to the 10 percent rate imposed on royalties under the RP-West Germany Tax Treaty because such treaty provides for a matching tax credit of 20 percent for the taxes paid to the Philippines on royalties, whereas the RP-US Tax Treaty does not. Thus, there is no payment of taxes under similar circumstances.

Private respondent S.C. Johnson filed the instant motion for reconsideration of the above mentioned decision, alleging the following grounds in support thereof:

Private respondent alleged that courts may not construe a statute which is clear and free from doubt. However, it is precisely because Article 13 (2) (b) (iii) of the RP-US Tax Treaty is subject to varied interpretations that this Court has rendered its June 25, 1999 decision interpreting it. We interpreted the contested provision with a view to its purpose, which is the avoidance of double taxation. As we stated in our decision, it is the duty of the courts to look to the object to be accompanied by the law, the evils to be remedied, or the purpose to be subserved, and to give the law a reasonable or liberal interpretation which will best effectuate its purpose.2 [Paras vs. Commission on elections, G.R. No. 123169, November 4, 1999.] This is also sanctioned by the Vienna Convention on the Law of Treaties which stated that a treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.3 [Article 31.]

In support of private respondent's second ground, it cites the interpretations given to the RP-US Tax Treaty by the Department of Treasury4 [In interpretation Article 13 of the RP-US Tax Treaty, the Technical Explanation of the US Department of Treasury states that:

xxx xxx xxx

Notwithstanding such 25 percent and 15 percent limitations, the Philippine tax cannot exceed the lowest rate of Philippine Tax that may be imposed on royalties of the same kind under similar circumstances to a resident of a third State. Thus, for example, because the Philippines agreed to limit its tax on film royalties to an amount not in excess of 10 percent of the gross amount of such royalties in its income Tax Conventions with Sweden and Denmark, that limitation will apply to film royalties paid under similar circumstances to United States residents.

xxx xxx xxx] and the Senate Foreign Relations Committee5 [The US Senate Foreign Relations Committee, in its report recommending the approval of the RP-US Tax Treaty stated that:

Under the proposed treaty, the withholding tax imposed by the United States on royalties derived by a resident of the Philippines is limited to 15 percent of the gross amount of the royalty. The withholding tax on royalties imposed by the Philippines is generally limited to 25 percent of the gross amount of the royalties. However, if the royalties are paid by a corporation which us registered with the Philippine Board of Investment and is engaged in preferred areas or activity, the withholding tax is limited to 15 percent of the gross amount of the royalties. In no case is either the 25 percent of the 15 percent limitation to exceed the lower withholding rate of the Philippine tax which may imposed on similar types of royalties paid to residents of a third State. Thus, U.S. residents will automatically receive the benefits of any lower withholding rates on royalties established in Philippine tax treaties with any third country.] of the United States. However, said reports do not clearly support private respondent's interpretation of the RP-US Tax Treaty, they merely reiterate the law as presently worded. Also, assuming that they did support private respondent's position, the Court is not bound to adopt the interpretations given to a tax treaty by the executive or legislative branch of the United States government. After the RP-US Tax Treaty was ratified by the President and concurred in by two-thirds of all the members of the Senate, it becomes a part of the law of the land and the courts have the exclusive power to interpret the same. In fact, private respondents itself recognized the court's jurisdiction when it stated in its motion for reconsideration that ".when a treaty affect private rights, the courts have the power and the duty to construe the treaty and apply it in appropriate cases."6 [Rollo, p. 148.]

Private respondents also claims that the RP-US Tax Treaty, while not providing for a matching 20 percent tax credit as found in the RP-Germany Tax Treaty, does provide for a substantially similar provision for tax credit, i.e., a credit against the United States tax for the appropriate amount of taxes actually paid or accrued to the Philippine by a citizen or resident of the United States.7 [RP-US Tax Treaty, Article 23 (1).] We have already disposed of this allegation in our decision wherein we held that the tax credits under the two treaties are not paid under similar circumstance.8 [Rollo, p. 136.]

Finally, private respondent claims that petitioner initially interpreted the RP-US Tax Treaty provision in question as referring to the payment of royalties under similar circumstances. (McGeorge, November 27, 1986; Gillette, March 8, 1988). However, petitioner reversed its position on the matter by issuing Revenue Memorandum Circular No. 39-92 wherein it held that the payment of taxes must be made under similar circumstances. But in the case of IBM Phils. (CTA Case No. 4308), petitioner once again reverted to its original interpretation by withdrawing its appeal of the CTA's decision. Private respondent alleges that "[p]etitioner's unilateral, erratic and inconsistent and constantly changing interpretation cannot and should not be sanctioned, as the same is tantamount to bad faith and, hence, a violation of the treaty."9 [Rollo, pp. 154-159.] Petitioner's inconsistent rulings as to the interpretation of the RP-US Tax Treaty only made it more imperative for this Court to decide the matter with finality, which it did in its June 25, 1999 decision.

Clearly, all the grounds raised by private respondent have already been effectively disposed of in its questioned ruling.

Wherefore, the Motion for Reconsideration is denied.