Friday, January 29, 2016

CIR vs. SMART Communications, Inc.


FACTS: SMART entered into an agreement with Prism, a non-resident foreign corporation domiciled in Malaysia, whereby Prism will provide programming and consultancy services to SMART. Thinking that the payments to Prism were royalties, SMART withheld 25% under the RP-Malaysia Tax Treaty. SMART then filed a refund with the BIR alleging that the payments were not subject to Philippine withholding taxes given that they constituted business profits paid to an entity without a permanent establishment in the Philippines.

ISSUE: Whether or not SMART has the right to file a claim for refund

RULING: Yes. The Court reiterated the ruling in Procter & Gamble stating that a person “liable for tax” has sufficient legal interest to bring a suit for refund of taxes he believes were illegally collected from him. Since the withholding agent is an agent of the beneficial owner of the payments (i.e., non-resident), the authority as agent is held to include the filing of a claim for refund. SMART was granted a refund given that only a portion of its payments represented royalties since it is only that portion over which Prism maintained intellectual property rights and the rest involved full transfer of proprietary rights to SMART and were thus treated as business profits of Prism.

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