CBK POWER COMPANY LIMITED, Petitioner,
COMMISSIONER OF INTERNAL REVENUE, Respondent.
G.R. Nos. 193383-84 January 14, 2015
TOPIC: Tax treaty, ITAD ruling, tax refund
CBK Power is a limited partnership duly organized and existing under the laws of the Philippines, and primarily engaged in the development and operation of hydro electric power generating plants in Laguna.
In February 2001, CBK Power borrowed money from Industrial Bank of Japan, Fortis-Netherlands, Raiffesen Bank, Fortis-Belgium, and Mizuho Bank for which it remitted interest payments from May 2001 to May 2003. It allegedly withheld final taxes from said payments based on the following rates: (a) fifteen percent (15%) for Fortis-Belgium, Fortis-Netherlands, and Raiffesen Bank; and (b) twenty percent (20%) for Industrial Bank of Japan and Mizuho Bank.
However, according to CBK Power, under the relevant tax treaties between the Philippines and the respective countries in which each of the banks is a resident, the interest income derived by the aforementioned banks are subject only to a preferential tax rate of 10%
Accordingly, on April 14, 2003, CBK Power filed a claim for refund of its excess final withholding taxes allegedly erroneously withheld and collected.
Due to CIR’s inaction, CBK Power appealed to CTA Division. The latter partially granted the refund. One of the refunds was disallowed because of failure on the part of CBK Power to obtain an ITAD ruling with respect to its transactions with Fortis-Netherlands. CTA En Banc affirmed said decision.
Whether or not the BIR may add a requirement– prior application for an ITAD ruling – that is not found in the income tax treaties signed by the Philippines before a taxpayer can avail of preferential tax rates under said treaties.
NO. The Court held that the obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-2000.
Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty relief as required by RMO No. 1-2000 should not operate to divest entitlement to the relief as it would constitute a violation of the duty required by good faith in complying with a tax treaty. The denial of the availment of tax relief for the failure of a taxpayer to apply within the prescribed period under the administrative issuance would impair the value of the tax treaty. At most, the application for a tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief.
Logically, noncompliance with tax treaties has negative implications on international relations, and unduly discourages foreign investors. While the consequences sought to be prevented by RMO No. 1-2000 involve an administrative procedure, these may be remedied through other system management processes, e.g., the imposition of a fine or penalty. But we cannot totally deprive those who are entitled to the benefit of a treaty for failure to strictly comply with an administrative issuance requiring prior application for tax treaty relief.