Marubeni v.
CIR (1989):  AG&P directly remitted the cash dividends to
DOCTRINE
 A foreign corporation is the same juridical entity
as its branch office
 BUT, if the foreign corporation transacts business
in the Philippines independently of its branch, the
principal-agent relationship is set aside. The
transaction becomes one of the foreign
corporation, not of the branch. Consequently, the
taxpayer is the foreign corporation, not the branch
or the resident foreign corporation.
SUMMARY
(There are 2 entities here, Marubeni PH and Marubeni
Japan). Marubeni Corp is a foreign corporation organized in
Japan. Marubeni Japan has equity investments in AG&P of
Manila. AG&P paid dividends to petitioner, and withheld
dividend taxes with the rate of 10%. AG&P directly
remitted the cash dividends to petitioner’s head office in
Tokyo, Japan, net not only of the 10% final dividend tax in
the amounts of P764,748 for the first and third quarters of
1981, but also of the withheld 15% profit remittance tax
based on the remittable amount after deducting the final
withholding tax of 10%. Marubeni, through accounting firm
SGV, sought a ruling from the BIR on whether the dividends
it received from AG&P are connected with its business in the
Philippines as to be considered branch profits subject to the
15% profit remittance tax. The CIR ruled that their dividend
income is subject to the 25% tax pursuant to Article 10 (2)
(b) of the Tax Treaty dated February 13, 1980 between the
Philippines and Japan. The relevant issue is whether
Marubeni Corp is a resident foreign corp or a non-res.
foreign corp.
SC held that the dividends were paid to Marubeni Japan. The
alleged overpaid taxes were incurred for the remittance of
dividend income to the head office in Japan which is a
separate and distinct income taxpayer from the branch in the
Philippines. There can be no other logical conclusion
considering the undisputed fact that the investment was
made for purposes peculiarly germane to the conduct of the
corporate affairs of Marubeni Japan, but certainly not of the
branch in the Philippines. Petitioner, being a non-resident
foreign corporation with respect to the transaction in
question, as a general rule, is taxed 35% of its gross income
from all sources within the Philippines. But a discounted rate
of 15% is given to petitioner based on the treaty bet. Ph and
Japan.
 Petitioner Marubeni Corp is a foreign corporation
organized in Japan and licensed to do business
under Philippine laws.
 Marubeni Japan has equity investments in AG&P
of Manila. For the first quarter of 1981, AG&P
paid cash dividends to petitioner worth P849,720
and withheld the corresponding 10% final
dividend tax. Similarly, for the third quarter of
1981, AG&P paid P849,720 as cash dividends to
petitioner and withheld the corresponding 10%
final dividend tax thereon.
petitioner’s head office in Tokyo, net not only of
the 10% final dividend tax, but also net of the
withheld 15% profit remittance tax based on the
remittable amount after deducting the 10%
dividend tax.
 Thus, for first and third quarters of 1981, AG&P
as withholding agent paid 15% branch profit
remittance tax of P229,424.40.
 Petitioner, through accounting firm SGV, sought a
ruling from the BIR on whether the dividends it
received from AG&P are connected with its
business in the Philippines as to be considered
branch profits subject to the 15% profit remittance
tax. Acting Comm of IR ruled that only profits
remitted abroad by a branch office to its head
office which are effectively connected with its
trade or business in the Philippines are subject to
the 15% profit remittance tax.
 When they sought to collect their tax credit, the
CIR denied on the ff grounds:
o While it is true that said dividends
remitted were not subject to the 15%
profit remittance tax as the same were
not income earned by a Philippine
Branch of Marubeni Corporation of
Japan; and neither is it subject to the
10% intercorporate dividend tax, the
recipient of the dividends, being a
non-resident stockholder, nevertheless,
said dividend income is subject to the
25% tax pursuant to Article 10 (2) (b) of
the Tax Treaty dated February 13, 1980
between the Philippines and Japan.
 Issue:
1) WON the dividends received are to
be considered branch profits
subject to 15% profit remittance
tax.
2) 2) WON Marubeni PH is entitled to
a refund or tax credit.
a. Is Marubeni PH a
resident foreign
corporation subject
only to the 10 %
intercorporate final tax
on dividends received
from a domestic
corporation; or is it a
non-resident foreign
corporation and not
engaged in trade or
business in the
Philippines, subject to
tax on income earned
from Philippine sources
at the rate of 35 % of its
gross income?
 Decision: NO.
1) Pursuant to Section 24 (b) (2) of the Tax
Code, as amended, only profits remitted
abroad by a branch office to its head office
 that are effectively connected with its trade or increments as ordinary consequences of its
business in the Philippines are subject to the trade or business in the Philippines and avail
15% profit remittance tax. In this case, itself of the lower tax rate of 10 %.
investments in AG&P by Marubeni were  Petitioner, being a non-resident foreign
directly made by Marubeni and the dividends corporation with respect to the transaction
on the investments were likewise directly in question, as a general rule, is taxed 35%
remitted to and received by Marubeni. of its gross income from all sources within
Marubeni Corporation Philippine Branch has the Philippines. However, a discounted rate
no participation or intervention, directly or of 15% is given to petitioner on dividends
indirectly, in the investments and in the received from a domestic corporation
receipt of the dividends. And it appears that (AG&P) on the condition that its domicile
the funds invested in the Atlantic Gulf & state (Japan) extends in favor of petitioner a
Pacific Company did not come out of the tax credit of not less than 20 % of the
funds infused by the Marubeni Corporation dividends received. This 20 % represents the
of Japan to the Marubeni Corporation difference between the regular tax of 35 % on
Philippine Branch. non-resident foreign corporations which
2) YES. Marubeni is entitled to a refund or petitioner would have ordinarily paid, and the
issuance of a tax credit. 15 % special rate on dividends received from
a. Public respondents likewise erred a domestic corporation. Consequently,
in automatically imposing the 25% petitioner is entitled to a refund on the
rate under Article 10(2)(b) of the transaction in question to be computed as
Tax Treaty. follows:
b. BUT: The general rule that a
foreign corporation is the same Total cash dividend paid P 1,699,440
juridical entity as its branch office Less: 15% under Sec. 24 (254,916)
in the Philippines cannot apply (b) (1) (iii)
here. This rule is based on the Cash dividend net of 15 % 1,444,524
premise that the business of the tax due petitioner
foreign corporation is conducted Less: net amount actually (1,300,072)
through its branch office, following remitted
the principal agent relationship Amount to be refunded to P 144,452
theory. It is understood that the petitioner representing
branch becomes its agent here. So overpayment of taxes on
that when the foreign corporation dividends remitted
transacts business in the
Philippines independently of its
branch, the principal-agent
relationship is set aside. The
transaction becomes one of the
foreign corporation, not of the
branch. Consequently, the taxpayer
is the foreign corporation, not the
branch or the resident foreign
corporation.
c. Corollarily, if the business
transaction is conducted through
the branch office, the latter
becomes the taxpayer, and not the
foreign corporation
 The alleged overpaid taxes were incurred for
the remittance of dividend income to the head
office in Japan which is a separate and
distinct income taxpayer from the branch in
the Philippines. There can be no other logical
conclusion considering the undisputed fact
that the investment was made for purposes
peculiarly germane to the conduct of the
corporate affairs of Marubeni Japan, but
certainly not of the branch in the Philippines.
It is thus clear that petitioner, having made
this independent investment attributable only
to the head office, cannot now claim the
CIR v. Procter & Gamble:
DOCTRINE
The ordinary thirty-five percent (35%) tax rate applicable to
dividend remittances to non-resident corporate stockholders
of a Philippine corporation, goes down to fifteen percent
(15%) if the country of domicile of the foreign stockholder
corporation "shall allow" such foreign corporation a tax
credit for "taxes deemed paid in the Philippines," applicable
against the tax payable to the domiciliary country by the
foreign stockholder corporation.
SUMMARY
In 1977, Proctor & Gamble Philippines (P&G-PHIL)
declared dividends payable to its parent company and sole
stockholder, Proctor & Gamble USA (P&G-USA), which
was based in USA. The total amount was reduced by 35%
withholding tax. Now, P&G-PHIL seeks to refund such paid
withheld tax. They claim that under Sec 24(b)(1), the tax that
should be applied is 15% and not 35%. In order to determine
what rate shall apply, NIRC Sec 24(b)(1) states that “A
foreign corporation not engaged in trade and business in the
Philippines shall pay a tax of 35% of the gross income
received from sources within the Philippines (including
dividends). Provided, that for dividends received from a
domestic corporation, the tax shall be 15% of the
dividends This is subject to the condition that the country in
which the non-resident foreign corporation is domiciled,
shall allow a credit against the tax due from the non-
resident foreign corporation and that this tax credit incentive
of the foreign government must equal the amount of the 20%
(the difference of the supposed 35% and the applied
deduction of 15%) given by the Philippine government. The
SC held that US Tax Code Sec. 901 and 902 shows that a
tax credit is given to income derived by P&G-USA from
P&G-PHIL. This entitles the P&G-PHIL to the 15%
withholding tax instead of the 35%, which was imposed.
 1977: P&G-PHIL paid dividends to its sole
stockholder, P&G-USA. The total amount was
reduced by 35% withholding tax.
 P&G-PHIL seeks to refund such paid withheld
tax. They claim that the tax that should be applied
is 15% and not 35%.
 The provision reads: Non-resident Corporation —
A foreign corporation not engaged in trade and
business in the Philippines shall pay a tax of 35%
of the gross income received from sources within
the Philippines (including dividends). Provided,
that for dividends received from a domestic
corporation, the tax shall be 15% of the
dividends:
1) This is subject to the condition that the
country in which the non-resident foreign
corporation is domiciled, shall allow a credit
against the tax due from the non-resident
foreign corporation
2) This tax credit incentive of the foreign
government must equal the amount of the
20% (the difference of the supposed 35% and
the applied deduction of 15%) given by the
Philippine government.
 Basically what this means is that the 15% tax rate
shall only be applicable if the non-resident foreign
corporation received its dividends from a domestic
corporation and when the tax laws of the said
foreign corporation allows a tax credit which is
equal to amount of 20% that the Philippine
government has deemed waived.
 CONSIDER: A Non-Resident Foreign
Corporation is not here in the Philippines and does
not do business here directly. Take note, the
income being talked about here are only the
dividends received as a stockholder from a
domestic corporation.
 Issue:
o WON P&G-USA, and not P&G-PHIL,
was the proper party to claim the refund.
o WON P&G-USA is entitled to a refund
 WON the US Tax Code
allows a credit against the US
Tax due from P&G-USA of
taxes derived from the
Philippines, and that it is
equivalent to the 20%
required by the Philippine
government
 Decision: YES.
1) P&G-USA is considered in the NIRC as a
taxpayer. As such, it may assign an agent, in
this case, P&G-PHIL, to transact, pay, and
claim refunds through it. A taxpayer is
defined as referring to “any person subject to
tax imposed.” It is important to note that
under Sec 53(c), the withholding agent
(P&G-PHIL) who is required to deduct and
withhold any tax is made personally liable for
such tax and indeed is indemnified against
any claims and demands which the
stockholder (P&G-USA) might with to make
in questioning such amount.
2) The ordinary thirty-five percent (35%) tax
rate applicable to dividend remittances to
non-resident corporate stockholders of a
Philippine corporation, goes down to fifteen
percent (15%) if the country of domicile of
the foreign stockholder corporation "shall
allow" such foreign corporation a tax credit
for "taxes deemed paid in the Philippines,"
applicable against the tax payable to the
domiciliary country by the foreign
stockholder corporation. In other words, in
the instant case, the reduced fifteen percent
(15%) dividend tax rate is applicable if the
USA "shall allow" to P&G- USA a tax credit
for "taxes deemed paid in the Philippines"
applicable against the US taxes of
P&G-USA.
a. The NIRC specifies that such tax
credit for "taxes deemed paid in the
Philippines" must, as a minimum,
reach an amount equivalent to
 twenty (20) percentage points
which represents the difference
between the regular thirty-five
percent (35%) dividend tax rate
and the preferred fifteen percent
(15%) dividend tax rate.
b. The parent-corporation P&G-USA
is "deemed to have paid" a portion
of the Philippine corporate income
tax although that tax was actually
paid by its Philippine subsidiary,
P&G-Phil., not by P&G-USA. This
"deemed paid" concept merely
reflects economic reality, since the
Philippine corporate income tax
was in fact paid and deducted from
revenues earned in the Philippines,
thus reducing the amount
remittable as dividends to P&G-
USA. In other words, US tax law
treats the Philippine corporate
income tax as if it came out of the
pocket, as it were, of P&G-USA as
a part of the economic cost of
carrying on business operations in
the Philippines through the
medium of P&G-Phil. and here
earning profits. What is, under US
law, deemed paid by P&G- USA
are not "phantom taxes" but instead
Philippine corporate income taxes
actually paid here by P&G-Phil.,
which are very real indeed.
c. US Tax Code Sec. 901 and 902
shows that a tax credit is given to
income derived by P&G-USA
from P&G-PHIL. This entitles the
P&G-PHIL to the 15% withholding
tax instead of the 35%, which was
imposed. Courts should be
“lenient” in interpreting the tax
laws of other countries to further
encourage foreign corporations to
invest in the Philippines.
CIR vs ST LUKE’S MEDICAL CENTER
DOCTRINE:
 Section 27(B) of the NIRC imposes a 10%
preferential tax rate on the income of (1)
proprietary non-profit educational institutions and
(2) proprietary non-profit hospitals. The only
qualifications for hospitals are that they must be
proprietary and non-profit.
 To be exempt from income taxes, Section 30(E) of
the NIRC requires that a charitable institution must
be "organized and operated exclusively" for
charitable purposes. Likewise, to be exempt from
income taxes, Section 30(G) of the NIRC requires
that the institution be "operated exclusively" for
social welfare.
 St. Luke's is a corporation that is not "operated
exclusively" for charitable or social welfare
purposes insofar as its revenues from paying
patients are concerned.
 However, it remains a proprietary non-profit
hospital under Section 27(B) of the NIRC as long
as it does not distribute any of its profits to its
members and such profits are reinvested pursuant
to its corporate purposes. St. Luke's, as a
proprietary non-profit hospital, is entitled to the
preferential tax rate of 10% on its net income from
its for-profit activities.
RECIT-READY:
St. Luke's Medical Center, Inc. (St. Luke's) is a hospital
organized as a non-stock and non-profit corporation. The
BIR assessed St. Luke’s as having a deficiency income tax,
among others. BIR claims that Section 27(B) of the NIRC,
which imposes a 10% preferential tax rate on the income of
proprietary non-profit hospitals, should be applicable to St.
Luke's. On the other hand, St. Luke's maintained that it is a
non-stock and non-profit institution for charitable and social
welfare purposes under Section 30(E) and (G) of the NIRC
and therefore exempt form income tax. The Court ruled in
favor of BIR, ruling that To be exempt from income taxes,
Section 30(E) requires that a charitable institution must be
"organized and operated exclusively" for charitable
purposes. Likewise, Section 30(G) requires that the
institution be "operated exclusively" for social welfare. In
the case at bar, St. Luke's is a corporation that is not
"operated exclusively" for charitable or social welfare
purposes insofar as its revenues from paying patients are
concerned. However, it remains a proprietary non-profit
hospital under Section 27(B) of the NIRC as long as it does
not distribute any of its profits to its members and such
profits are reinvested pursuant to its corporate purposes.
Therefore, it is entitled to the preferential tax rate of 10% on
its net income from its for-profit activities.
FACTS:
St. Luke's Medical Center, Inc. (St. Luke's) is a hospital
organized as a non-stock and non-profit corporation. The
BIR assessed St. Luke’s as having a deficiency income tax,
value-added tax, withholding tax on compensation and
expanded withholding tax for 1998. St. Luke’s filed an
administrative protest with the BIR against the deficiency
tax assessments, but the latter did not act on it. Thus, St.
Luke’s appealed to the CTA, who ordered St. Luke’s to pay
the income deficiency tax expanded withholding tax.
BIR’s Arguments:
Section 27(B) of the NIRC, which imposes a 10%
preferential tax rate on the income of proprietary non-profit
hospitals, should be applicable to St. Luke's. Said section "is
a new provision intended to amend the exemption on non-
profit hospitals that were previously categorized as non-
stock, non-profit corporations under Section 26 of the 1997
Tax Code." It is a specific provision which prevails over the
general exemption on income tax granted under Section
30(E) and (G) for non-stock, non-profit charitable
institutions and civic organizations promoting social
welfare.
The BIR claimed that St. Luke's was actually operating for
profit in 1998 because only 13% of its revenues came from
charitable purposes. Moreover, the hospital's board of
trustees, officers and employees directly benefit from its
profits and assets. St. Luke's had total revenues of
₱1,730,367,965 or approximately ₱1.73 billion from patient
services in 1998.
St. Luke’s Arguments:
The BIR should not consider its total revenues, because its
free services to patients was 65.20% of its 1998 operating
income (i.e., total revenues less operating expenses) of
₱334,642,615. St. Luke's also claimed that its income does
not inure to the benefit of any individual.
St. Luke's maintained that it is a non-stock and non-profit
institution for charitable and social welfare purposes under
Section 30(E) and (G) of the NIRC. It argued that the making
of profit per se does not destroy its income tax exemption.
WHETHER ST. LUKE’S IS LIABLE FOR
DEFICIENCY INCOME TAX IN 1998 UNDER
SECTION 27(B) OF THE NIRC – YES
SEC. 27. Rates of Income Tax on Domestic Corporations. -
(B) Proprietary Educational Institutions and
Hospitals. - Proprietary educational institutions
and hospitals which are non-profit shall pay a tax
of ten percent (10%) on their taxable income
except those covered by Subsection (D) hereof . .
.
On the other hand, Section 30(E) and (G) provide:
SEC. 30. Exemptions from Tax on Corporations. - The
following organizations shall not be taxed under this Title in
respect to income received by them as such:
(E) Nonstock corporation or association organized
and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the
rehabilitation of veterans, no part of its net income
or asset shall belong to or inure to the benefit of
any member, organizer, officer or any specific
person;
(G) Civic league or organization not organized
for profit but operated exclusively for the
promotion of social welfare;
Notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and
character of the foregoing organizations from any
of their properties, real or personal, or from any of
their activities conducted for profit regardless of
 the disposition made of such income, shall be
subject to tax imposed under this Code.
Section 27(B) on one hand, and Section 30(E) and (G) on the
other hand, can be construed together without the removal of
such tax exemption. The effect of the introduction of Section
27(B) is to subject the taxable income of two specific
institutions, namely, proprietary non-profit educational
institutions and proprietary non-profit hospitals, among the
institutions covered by Section 30, to the 10% preferential
rate under Section 27(B) instead of the ordinary 30%
corporate rate under the last paragraph of Section 30 in
relation to Section 27(A)(1).
Section 27(B) of the NIRC imposes a 10% preferential tax
rate on the income of (1) proprietary non-profit educational
institutions and (2) proprietary non-profit hospitals. The only
qualifications for hospitals are that they must be proprietary
and non-profit. "Proprietary" means private, following the
definition of a "proprietary educational institution" as "any
private school maintained and administered by private
individuals or groups" with a government permit. "Non-
profit" means no net income or asset accrues to or benefits
any member or specific person, with all the net income or
asset devoted to the institution's purposes and all its activities
conducted not for profit.
However, “Non-profit" does not necessarily mean
"charitable." In Lung Center of the Philippines v. Quezon
City, the Court defined “charity” as "a gift, to be applied
consistently with existing laws, for the benefit of an
indefinite number of persons, either by bringing their minds
and hearts under the influence of education or religion, by
assisting them to establish themselves in life or [by]
otherwise lessening the burden of government."
Charitable institutions are not ipso facto entitled to a tax
exemption. The requirements for a tax exemption are
specified by the law granting it. The power of Congress to
tax implies the power to exempt from tax. Congress can
create tax exemptions, subject to the constitutional provision
that "[n]o law granting any tax exemption shall be passed
without the concurrence of a majority of all the Members of
Congress." The requirements for a tax exemption are strictly
construed against the taxpayer.
As a general principle, a charitable institution does not lose
its character as such and its exemption from taxes simply
because it derives income from paying patients, whether out-
patient, or confined in the hospital, or receives subsidies
from the government, so long as the money received is
devoted or used altogether to the charitable object which it
is intended to achieve; and no money inures to the private
benefit of the persons managing or operating the institution.
Section 30(E) of the NIRC provides that a charitable
institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes;
and
(4) No part of its net income or asset shall belong
to or inure to the benefit of any member, organizer,
officer or any specific person.
Thus, both the organization and operations of the charitable
institution must be devoted "exclusively" for charitable
purposes. The organization of the institution refers to its
corporate form, as shown by its articles of incorporation, by-
laws and other constitutive documents. Section 30(E) of the
NIRC specifically requires that the corporation or
association be non-stock, which is defined by the
Corporation Code as "one where no part of its income is
distributable as dividends to its members, trustees, or
officers" and that any profit "obtain[ed] as an incident to its
operations shall, whenever necessary or proper, be used for
the furtherance of the purpose or purposes for which the
corporation was organized." However, under Lung Center,
any profit by a charitable institution must not only be plowed
back "whenever necessary or proper," but must be "devoted
or used altogether to the charitable object which it is
intended to achieve."
There is no dispute that St. Luke's is organized as a non-stock
and non-profit charitable institution. However, this does not
automatically exempt St. Luke's from paying taxes. This
only refers to the organization of St. Luke's. Even if St.
Luke's meets the test of charity, a charitable institution is not
ipso facto tax exempt. To be exempt from real property
taxes, Section 28(3), Article VI of the Constitution requires
that a charitable institution use the property "actually,
directly and exclusively" for charitable purposes. To be
exempt from income taxes, Section 30(E) of the NIRC
requires that a charitable institution must be "organized and
operated exclusively" for charitable purposes. Likewise, to
be exempt from income taxes, Section 30(G) of the NIRC
requires that the institution be "operated exclusively" for
social welfare.
However, the last paragraph of Section 30 of the NIRC
qualifies the words "organized and operated exclusively". It
provides that if a tax exempt charitable institution conducts
"any" activity for profit, such activity is not tax exempt even
as its not-for-profit activities remain tax exempt. This
paragraph qualifies the requirements in Section 30(E) that
the "[n]on-stock corporation or association [must be]
organized and operated exclusively for x x x charitable x x x
purposes x x x." It likewise qualifies the requirement in
Section 30(G) that the civic organization must be "operated
exclusively" for the promotion of social welfare.
Thus, even if the charitable institution must be "organized
and operated exclusively" for charitable purposes, it is
nevertheless allowed to engage in "activities conducted for
profit" without losing its tax exempt status for its not-for-
profit activities. The only consequence is that the "income of
whatever kind and character" of a charitable institution
"from any of its activities conducted for profit, regardless of
the disposition made of such income, shall be subject to tax."
The tax rate on such income from for-profit activities is now
10%.
In the case at bar, St. Luke's is a corporation that is not
"operated exclusively" for charitable or social welfare
purposes insofar as its revenues from paying patients are
concerned. This ruling is based not only on a strict
interpretation of a provision granting tax exemption, but also
on the clear and plain text of Section 30(E) and (G). An
institution under Section 30(E) or (G) does not lose its tax
exemption if it earns income from its for-profit activities.
Such income from for-profit activities, under the last
paragraph of Section 30, is merely subject to income tax.
However, it remains a proprietary non-profit hospital under
Section 27(B) of the NIRC as long as it does not distribute
any of its profits to its members and such profits are
reinvested pursuant to its corporate purposes. St. Luke's, as
a proprietary non-profit hospital, is entitled to the
preferential tax rate of 10% on its net income from its for-
profit activities.
A tax exemption is effectively a social subsidy granted by
the State because an exempt institution is spared from
sharing in the expenses of government and yet benefits from
them. Tax exemptions for charitable institutions should
therefore be limited to institutions beneficial to the public
and those which improve social welfare. A profit-making
entity should not be allowed to exploit this subsidy to the
detriment of the government and other taxpayers.