FACTS
The National Development Company (NDC) entered into contracts with various Japanese shipbuilding companies for the construction of 12 ocean-going vessels. Upon the completion of the vessels, the NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70 as interest on the balance of the purchase price with zero tax withheld.
Subsequently, the CIR held the NDC liable on the tax due. NDC refused to pay, arguing that it was merely an administrator of the funds of the Republic of the Philippines and that the interest payments were obligations of the Republic. It also argued that the promissory notes of the NDC were government securities exempt from taxation under Section 29(b)(4) of the Tax Code.
The CTA sustained the validity of CIR’s assessment.
RULING
The Supreme Court ruled in favor of CIR.
Under Sec. 37 of the Tax Code, the Japanese shipbuilders were liable to pay for tax on the interest remitted to them by NDC. Under the terms of the law, the Government’s right to levy and collect income tax on interest received by foreign corporations not engaged in trade or business within the Philippines is not planted upon the condition that the activity or labor — and the sale from which the (interest) income flowed – had its situs in the Philippines.
The law specifies: “Interest derived from sources within the Philippines, and interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise.” By failing to withhold the taxes due, NDC was remiss in the discharge of its obligation as the withholding agent of the government and so should be held liable for its omission.
