COMMISSIONER OF INTERNAL REVENUE VS. SMART COMMUNICATION, INC.- Tax Refund

FACTS:

Smart entered into an Agreement with Prism, a nonresident 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:

Does Smart have the right to file the claim for refund?

HELD:

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., nonresident), the authority as agent is held to include the filing of a claim for refund. The Silkair case was held inapplicable as it involved excise taxes and not withholding taxes.

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.