April 30, 1965
Ponente: Bengzon, J.
SUMMARY:
Local insurance company Philippine Guaranty did not include in its income tax returns for 1953 and 1954 the amount ceded to its foreign reinsurance partners, arguing that said amount is not subject to withholding tax. Consequently, it was slapped with a tax assessment by the CIR, which was later affirmed by the CTA. The SC affirmed the CTA ruling, holding that for foreign companies, what is controlling is not the place of business but the place of activity that created an income.
FACTS:
Sometime in the early '50s, local insurance company The Philippine Guaranty Co., Inc., entered into reinsurance contracts with several foreign insurance companies not doing business in the Philippines, namely: Imperio Compañia de Seguros, La Union y El Fenix Español, Overseas Assurance Corp., Ltd., Socieded Anonima de Reaseguros Alianza, Tokio Marino; Fire Insurance Co., Ltd., Union Assurance Society Ltd., Swiss Reinsurance Company and Tariff Reinsurance Limited.
Part of the contracts was the agreement that in consideration of the assumption of liability of the foreign insurance companies, Philippine Guaranty will be ceding to these companies a portion of the premiums on insurance it has originally underwritten in the Philippines. The foreign insurers, on the other hand, agreed to compensate Philippine Guaranty in an amount equal to 5% of the reinsurance premiums in consideration for managing or administering their affairs in the
Philippines.
In 1953, Philippine Guaranty ceded P842,466.71 to the foreign insurers. In 1954, the amount ceded was P721,471.85. In its income tax returns for the said years, Philippine Guaranty excluded the aforecited amounts from its gross income, neither withholding nor paying tax on them.
In 1959, following a tax assessment, the Commissioner of Revenue ordered Philippine Guaranty to pay up P230,673 and P234, 364 representing withholding tax and surcharges on the ceded reinsurance premiums for the years 1953 and 1954,
respectively.
Philippine Guaranty protested the assessment on the ground that reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines were not subject to withholding tax. It maintained that the reinsurance premiums in question did not constitute income from sources within the Philippines because the foreign reinsurers did not engage in business in the Philippines, nor did they have office here.
Its protest was denied and it appealed to the Court of Tax Appeals, which ultimately affirmed the order of the Commissioner of Revenue but modified the sum due to P375,345. Hence, the instant petition..
RULING:
CTA ruling affirmed.
Whether the reinsurance premiums ceded by Philippine Guaranty to foreign reinsurers not doing business in the Philippines are subject to withholding tax. – YES.
The Tax Code subjects foreign corporations to tax on their income from sources within the Philippines. The word "sources" has been interpreted as the activity, property or service giving rise to the income. The reinsurance premiums were income created from the undertaking of the foreign reinsurance companies to reinsure Philippine Guaranty against liability for loss under original insurances. Such undertaking took place in the Philippines. These insurance premiums, therefore, came from sources within the Philippines and, hence, are subject to corporate income tax.
The reinsurance contracts show that the transactions or activities that constituted the undertaking to reinsure Philippine Guaranty against losses arising from the original insurances in the Philippines were performed in the Philippines. The liability of the foreign reinsurers commenced simultaneously with the liability of Philippine Guaranty under the original insurances. Philippine Guaranty kept in Manila a register of the risks ceded to the foreign reinsurers. Entries made in such register bound the foreign reinsurers, localizing in the Philippines the actual cession of the risks and premiums and assumption of the reinsurance undertaking by the foreign reinsurers.
The foreign insurers' place of business should not be confused with their place of activity. Business refers to continuity and progression of transactions while activity may consist of only a single transaction. An activity may occur outside the place of business.
Section 24 of the Tax Code does not require a foreign corporation to engage in business in the Philippines in subjecting its income to tax. It suffices that the activity creating the income is performed or done in the Philippines. What is controlling, therefore, is not the place of business but the place of activity that created an income.
On whether relying on the rulings of the Commissioner of Internal Revenue, although faulty, is a valid excuse for non-payment of taxes. -- No. The Government is not estopped from collecting taxes by the mistakes or errors of its agents.
On whether withholding tax should be computed from the amount actually remitted to the foreign reinsurers instead of from the total amount ceded. – No.
Sections 54 and 53(b) of the Tax Code allow no deduction from the income therein enumerated in determining the amount to be withheld. Accordingly, in computing the withholding tax due on the reinsurance premium in question, no deduction shall be recognized.
DOCTRINE:
The power to tax is an attribute of
sovereignty. It is a power emanating from necessity. It is a necessary
burden to preserve the State's sovereignty and a means to give the
citizenry an army to resist an aggression, a navy to defend its shores
from invasion, a corps of civil servants to serve, public improvement
designed for the enjoyment of the citizenry and those which come within
the State's territory, and facilities and protection which a government
is supposed to provide.
