MARUBENI CORP.

VS CIR ⮚ Because dividends are subject to 25% tax, and the taxes withheld of 10%
Income Taxation of Foreign Persons| Sept. 14, 1989 | Fernan dividend tax and 15% profit remittance tax totals 25%, the amount
Digest maker: Zoe refundable offsets the liability. There is nothing to be refunded.
SUMMARY: Marubeni is a Japanese corporation whose head office is in Japan and has a ● CTA also rejected Marubeni’s claim for refund.
branch in the PH. Marubeni has equity investments in AG&P Manila. When AG&P ● Argument of Marubeni: Following the principal-agent relationship theory, Marubeni
declared and paid dividends directly to the head office of Marubeni in Japan, it withheld Japan is a resident foreign corporation subject only to the 10% intercorporate final tax
10% dividend tax thereon as well as 15% branch profit remittance tax. Marubeni sought a on dividends received from a domestic corporation in accordance with Section 24(c)
refund of the profit tax remittance paid. CIR ruled that because Marubeni is a non-resident (1)
foreign corporation, the dividends received from AG&P would be subject to 25% tax ● Argument of CIR: Marubeni is a non-resident foreign corporation and not engaged in
pursuant to the Tax Treaty between PH and Japan. Marubeni argues that it is a resident trade or business in the PH and is therefore subject to tax on income earned from PH
foreign corporation since it is engaged in business in the PH through its PH branch. The SC sources at the rate of 35% of its gross income under Section 24(b)(1) which was
ruled that in this transaction, Marubeni is a non-resident foreign corporation. expressly made subject to the special rate of 25% under the Tax Treaty between PH
and Japan.
DOCTRINE: The general rule that a foreign corporation is the same juridical entity as its
branch office in the PH cannot apply here. This rule is based on the premise that the WON Marubeni is a resident or non-resident corporation – Non-Resident Foreign Corporation
business of the foreign corporation is conducted through its branch office, following the ● A resident foreign corporation (RFC) is one that is “engages in trade or business”
principal agent relationship theory. It is understood that the branch becomes its agent here. within the PH. Marubeni Corp claims that because it is engaged in business in the
So that when the foreign corporation transacts business in the PH independently of its PH through its PH branch, it must be considered as a RFC. They argue that whether
branch, the principal-agent relationship is set aside. The transaction becomes one of the or not dividends were paid directly to head office in Japan was of no moment
foreign corporation, not of the branch. Consequently, the taxpayer is the foreign because the head office and branch constitute one corporate entity. The court rejected
corporation, not the branch or the resident foreign corporation. this argument.
● The general rule that a foreign corporation is the same juridical entity as its branch
● Marubeni Corp is a foreign corporation duly organized and existing under the laws office in the PH cannot apply here. This rule is based on the premise that the
of Japan and duly licensed to engage in business under PH laws with branch office in business of the foreign corporation is conducted through its branch office,
Manila. following the principal agent relationship theory. It is understood that the branch
● Marubeni Corp has equity investments in AG&P of Manila. AG&P declared and paid becomes its agent here. So that when the foreign corporation transacts business in
cash dividends to Marubeni Corp in the amount of P849,720 and withheld 10% final the PH independently of its branch, the principal-agent relationship is set aside.
dividend tax thereon. The taxpayer is the foreign corporation, not the branch or resident foreign
● AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, corporation.
net not only of the 10% final dividend tax but also of the withheld 15% branch ● The alleged overpaid taxes were incurred for the remittance of dividend income to
profit remittance tax based on the remittable amount after deducting the final the head office in Japan which is a separate and distinct income taxpayer from the
withholding tax of 10%. branch in the PH
● Marubeni sought a ruling from the BRI on WON the dividends received from ● However, CIR erred in simply adding the two taxes to arrive at the 25% tax rate.
AG&P are effectively connected with its conduct of business in the PH as to be While the tax on dividends is directly levied on the dividends received, "the tax base
considered branch profits subject to 15% profit remittance tax. upon which the 15 % branch profit remittance tax is imposed is the profit actually
● Acting Commissioner Ancheta ruled that he dividends received by Marubeni from remitted abroad."
AG&P are not income arising from the business activity in which Marubeni is ● CTA also erred in automatically imposing the 25% rate as if it were a flat rate. The
engaged. Accordingly, said dividends if remitted abroad are not considered branch rates fixed in the treaty are a maximum. Said rate would only apply if the tax
profits for purposes of the 15% profit remittance tax imposed by Section 24 (b) (2) imposed by our laws exceeds the same.
of the Tax Code ● Marubeni being a non-resident foreign corporation with respect to the transaction in
⮚ “To be effectively connected it is not necessary that the income be derived question, is generally taxed 35% of its gross income from all sources within the PH.
from the actual operation of taxpayer-corporation's trade or business; it is ● However, pursuant to Section 24(b)(1)(iii) of the Tax Code (see notes) a discounted
sufficient that the income arises from the business activity in which the rate of 15% is given to Marubeni on dividends received from a domestic
corporation is engaged” corporation (AG&P) on the condition that Japan extends in favor of Marubeni, a
● Marubeni Corp claimed for the refund or issuance of a tax credit of P229,424.42 tax credit of not less than 20 % of the dividends received. This 20 % represents the
representing the profit tax remittance erroneously paid on dividends remitted by difference between the regular tax of 35 % on non-resident foreign corporations
AG&P to the head office in Tokyo. which petitioner would have ordinarily paid, and the 15 % special rate on dividends
● CIR denied Marubeni’s claim for refund/credit, ruling that while it is true that said received from a domestic corporation.
dividends remitted were not subject to the 15% profit remittance tax as the same ●  The 15 % tax rate imposed on the dividends received by a foreign non-resident
were not income earned by a PH Branch of Marubeni Corporation of Japan; and stockholder from a domestic corporation under Section 24 (b) (1) (iii) is easily within
neither is it subject to the 10% intercorporate dividend tax, the recipient of the the maximum ceiling of 25 % of the gross amount of the dividends as decreed in
dividends, being a non-resident stockholder, nevertheless, said dividend income is Article 10 (2) (b) of the Tax Treaty.
subject to the 25 % tax pursuant to Article 10 (2) (b) of the Tax Treaty between the
PH and Japan.
RULING: CTA which affirmed the denial by respondent CIR of petitioner Marubeni Corporation's
claim for refund is hereby REVERSED. CIR is ordered to refund or grant as tax credit in favor of
petitioner the amount of P144,452.40 representing overpayment of taxes on dividends received.

Notes:
Section 24(c)(1): Dividends received by a domestic or resident foreign corporation liable to tax
under this Code — (1) Shall be subject to a final tax of 10% on the total amount thereof, which
shall be collected and paid as provided in Sections 53 and 54 of this Code

Section 24(b)(1) (b) Tax on foreign corporations — (1) Non-resident corporations. — A foreign

Section 24(b)(1)(iii) - (b) Tax on foreign corporations. — (1) Non-resident corporations — ... (iii)
On dividends received from a domestic corporation liable to tax under this Chapter, the tax
shall be 15% of the dividends received, which shall be collected and paid as provided in
Section 53 (d) of this Code, 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, taxes deemed to have been paid in the PH equivalent to 20 % which
represents the difference between the regular tax (35 %) on corporations and the tax (15 %) on
dividends as provided in this Section