I. Case Summary

Company A, a business registered in the Philippines, and Company B, a tax resident of Delaware, USA, signed a trademark licensing agreement on December 13, 2010. This agreement granted Company A the exclusive rights to use Company B’s trademarks and other intellectual properties within the Philippines. The agreement was officially registered and approved by the Philippine Intellectual Property Office. Under this agreement, from July 2011 to October 2012, Company A paid royalties amounting to PHP 2,795,486,568.18 to Company B. Between August 15, 2011, and November 14, 2012, Company A withheld and paid a total of PHP 838,645,970.45 in income taxes on behalf of Company B to the Philippine Bureau of Internal Revenue (BIR) at a withholding tax rate of 30%.

On July 31, 2013, acting as the withholding agent for Company B, Company A applied to the Philippine Bureau of Internal Revenue to use the “Most-Favored-Nation” (MFN) clause under Article 13(2)(b)(iii) of the Philippines-U.S. Tax Treaty. Company A referred to Article 12(2)(b) of the Philippines-China Tax Treaty and Article 12(2) of the Philippines-UAE Tax Treaty, seeking a reduced tax rate of 10% and a refund of the excess withholding tax paid on behalf of Company B, totaling PHP 559,097,313.63. According to Article 13(2)(b)(iii) of the Philippines-U.S. Tax Treaty, the Philippines may apply the lowest tax rate agreed upon for similar royalties under other tax treaties with other countries, regardless of whether these treaties were signed before or after the Philippines-U.S. Tax Treaty. The Philippine Bureau of Internal Revenue did not respond to Company A’s request, prompting Company A to file an administrative appeal with the Philippine Court of Tax Appeals (CTA) on August 12, 2013. The appeal sought a refund of the excess withholding tax paid on behalf of Company B and a declaration that Article 14 of Revenue Memorandum Order No. 72-10 (RMO) was invalid. The Court of Tax Appeals later partially upheld Company A’s claims.

II. Key Points of Dispute

The first key point of dispute was whether Company A could apply a reduced tax rate of 10% under the “Most-Favored-Nation” clause of Article 13(2)(b)(iii) of the Philippines-U.S. Tax Treaty by referencing Article 12(2)(b) of the Philippines-China Tax Treaty and Article 12(2) of the Philippines-UAE Tax Treaty.

The Philippine Bureau of Internal Revenue argued that Company A, as the payer, did not submit a Tax Treaty Relief Application (TTRA) to the International Tax Affairs Division (ITAD) of the Bureau before withholding and remitting the tax. Therefore, Company A did not meet the requirements of Revenue Memorandum Order No. 72-10 and could not enjoy the reduced tax rate under the tax treaty, meaning it should have withheld and remitted taxes on royalties paid to Company B at the general rate of 30%. Company A countered that failing to submit a tax treaty exemption application does not prevent eligible entities from benefiting from the treaty, and that the Bureau’s memoranda do not supersede the tax treaties. Consequently, Company A not only sought a tax refund but also requested the court to review the validity and constitutionality of Article 14 of Revenue Memorandum Order No. 72-10. The Philippine Bureau of Internal Revenue contended that the Court of Tax Appeals only has jurisdiction over tax disputes involving assessments or refunds and does not have the authority to review the constitutionality of administrative documents. Therefore, Company A should have submitted its application to the appropriate Regional Trial Court.

The second point of dispute was whether, if Company A could enjoy the 10% reduced tax rate on the royalties paid to Company B, it could apply for a refund of the excess withholding tax paid between August 2011 and November 2012. Company A argued that the trademark licensing agreement with Company B had been formally registered and approved by the Intellectual Property Office and that the royalties paid under this agreement were eligible for the “Most-Favored-Nation” treatment under Article 13(2)(b)(iii) of the Philippines-U.S. Tax Treaty, referencing the 10% rate in the Philippines-China and Philippines-UAE Tax Treaties. Therefore, the excess tax paid should be refunded.

III. Final Ruling

On July 27, 2015, the Philippine Court of Tax Appeals ruled in favor of Company A’s request to apply a 10% reduced tax rate under the “Most-Favored-Nation” clause of the Philippines-U.S. Tax Treaty and to refund the excess withholding tax paid. The court’s reasoning was as follows:

The purpose of the Most-Favored-Nation clause is to ensure that contracting states receive “most-favored” treatment that is not less favorable than what has already been or may be granted to other countries. Article 13(2)(b)(iii) of the Philippines-U.S. Tax Treaty outlines the conditions for enjoying most-favored-nation treatment for royalties: (1) the payer must be a resident of the Philippines; (2) the recipient must be a resident of the United States; (3) the royalties must be paid by the payer to the recipient; (4) the tax rate on royalties paid to a third country must be lower than 15%; (5) the type and conditions of the royalties paid to the third country resident must be the same as those paid to the U.S. resident. In this case, Company A met all the conditions for applying the 10% reduced tax rate, and the royalties paid to Company B could enjoy a 10% rate by referencing the provisions in the Philippines-China and Philippines-UAE Tax Treaties. The court ordered the Philippine Bureau of Internal Revenue to refund the excess withholding tax of PHP 490,422,017.77 paid by Company A (calculated based on the verifiable withholding tax of PHP 735,633,026.66 that Company A actually paid to Company B). Regarding Company A’s request to review the validity and constitutionality of Article 14 of Revenue Memorandum Order No. 72-10, the Court of Tax Appeals ruled that it did not have jurisdiction to address the constitutionality of the order.

IV. Insights for International Businesses

（A）Leveraging the Most-Favored-Nation Clause in Tax Treaties

For companies expanding internationally, if a Most-Favored-Nation clause exists in the treaty between China and the host country, they should pay attention to whether other tax treaties signed by the host country offer “preferential tax rates.” They should also stay updated on the latest developments in the host country’s tax treaty network and utilize the Most-Favored-Nation clause to maximize treaty benefits.

（B）Understanding the Procedures for Enjoying Treaty Benefits in the Host Country

 In this case, according to Revenue Memorandum Order No. 72-10, non-resident taxpayers eligible for bilateral tax treaty benefits must apply for a tax treaty exemption with the International Tax Affairs Division of the Philippine Bureau of Internal Revenue at least 15 days in advance. Company A encountered difficulties in applying for treaty benefits due to not following the relevant administrative procedures. International businesses should learn about the administrative procedures for accessing treaty benefits in the host country in advance to avoid unnecessary tax disputes.

（C）Using Legal Tools to Protect Their Interests

Under Philippine law, disputes over administrative decisions made by the Bureau of Internal Revenue can be appealed to the Court of Tax Appeals. It is important to note that while the Court of Tax Appeals has jurisdiction over tax disputes, it does not have the authority to review the constitutionality of laws and regulations. The Philippine Constitution grants ordinary courts (including Regional Trial Courts) the right to conduct judicial reviews of laws, presidential orders, decrees, regulations, etc. Therefore, the constitutionality of tax regulations and orders issued by the Bureau of Internal Revenue falls under the jurisdiction of ordinary courts. Additionally, the Philippine Supreme Court has final appellate jurisdiction over cases heard by the Court of Tax Appeals. International businesses should familiarize themselves with the judicial procedures for resolving tax disputes in the host country and understand the jurisdiction of different courts to effectively manage tax disputes through litigation if necessary.