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3/5/2017 G.R.No.

L22074

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RepublicofthePhilippines
SUPREMECOURT
Manila

ENBANC

G.R.No.L22074April30,1965

THEPHILIPPINEGUARANTYCO.,INC.,petitioner,
vs.
THECOMMISSIONEROFINTERNALREVENUEandTHECOURTOFTAXAPPEALS,respondents.

JosueH.GustiloandRamirezandOrtigasforpetitioner.
OfficeoftheSolicitorGeneralandAttorneyV.G.Saldajenaforrespondents.

BENGZON,J.P.,J.:

ThePhilippineGuarantyCo.,Inc.,adomesticinsurancecompany,enteredintoreinsurancecontracts,onvarious
dates, with foreign insurance companies not doing business in the Philippines namely: Imperio Compaia de
Seguros, La Union y El Fenix Espaol, Overseas Assurance Corp., Ltd., Socieded Anonima de Reaseguros
Alianza,TokioMarino&FireInsuranceCo.,Ltd.,UnionAssuranceSocietyLtd.,SwissReinsuranceCompanyand
Tariff Reinsurance Limited. Philippine Guaranty Co., Inc., thereby agreed to cede to the foreign reinsurers a
portion of the premiums on insurance it has originally underwritten in the Philippines, in consideration for the
assumptionbythelatterofliabilityonanequivalentportionoftherisksinsured.Saidreinsurrancecontractswere
signedbyPhilippineGuarantyCo.,Inc.inManilaandbytheforeignreinsurersoutsidethePhilippines,exceptthe
contractwithSwissReinsuranceCompany,whichwassignedbybothpartiesinSwitzerland.

Thereinsurancecontractsmadethecommencementofthereinsurers'liabilitysimultaneouswiththatofPhilippine
GuarantyCo.,Inc.undertheoriginalinsurance.PhilippineGuarantyCo.,Inc.wasrequiredtokeeparegisterin
Manila where the risks ceded to the foreign reinsurers where entered, and entry therein was binding upon the
reinsurers.Aproportionateamountoftaxesoninsurancepremiumsnotrecoveredfromtheoriginalassuredwere
tobepaidforbytheforeignreinsurers.Theforeignreinsurersfurtheragreed,inconsiderationformanagingor
administeringtheiraffairsinthePhilippines,tocompensatethePhilippineGuarantyCo.,Inc.,inanamountequal
to 5% of the reinsurance premiums. Conflicts and/or differences between the parties under the reinsurance
contracts were to be arbitrated in Manila. Philippine Guaranty Co., Inc. and Swiss Reinsurance Company
stipulatedthattheircontractshallbeconstruedbythelawsofthePhilippines.

Pursuanttotheaforesaidreinsurancecontracts,PhilippineGuarantyCo.,Inc.cededtotheforeignreinsurersthe
followingpremiums:

1953..................... P842,466.71

1954..................... 721,471.85

Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income when it file its income tax
returns for 1953 and 1954. Furthermore, it did not withhold or pay tax on them. Consequently, per letter dated
April13,1959,theCommissionerofInternalRevenueassessedagainstPhilippineGuarantyCo.,Inc.withholding
taxonthecededreinsurancepremiums,thus:

1953
Grosspremiumperinvestigation.......... P768,580.00

Withholdingtaxduethereonat24%........ P184,459.00
25%surcharge.......................... 46,114.00

Compromisefornonfilingofwithholding
100.00
incometaxreturn.........................
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TOTALAMOUNTDUE&COLLECTIBLE.... P230,673.00
==========
1954

Grosspremiumperinvestigation.......... P780.880.68
Withholdingtaxduethereonat24%........ P184,411.00

25%surcharge.......................... P184,411.00
Compromisefornonfilingofwithholding
100.00
incometaxreturn.........................

TOTALAMOUNTDUE&COLLECTIBLE.... P234,364.00
==========

Philippine Guaranty Co., Inc., protested the assessment on the ground that reinsurance premiums ceded to
foreignreinsurersnotdoingbusinessinthePhilippinesarenotsubjecttowithholdingtax.Itsprotestwasdenied
anditappealedtotheCourtofTaxAppeals.

OnJuly6,1963,theCourtofTaxAppealsrenderedjudgmentwiththisdispositiveportion:

IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner Philippine Guaranty Co., Inc. is hereby
ordered to pay to the Commissioner of Internal Revenue the respective sums of P202,192.00 and
P173,153.00 or the total sum of P375,345.00 as withholding income taxes for the years 1953 and 1954,
plusthestatutorydelinquencypenaltiesthereon.Withcostsagainstpetitioner.

Philippine Guaranty Co, Inc. has appealed, questioning the legality of the Commissioner of Internal Revenue's
assessmentforwithholdingtaxonthereinsurancepremiumscededin1953and1954totheforeignreinsurers.

Petitioner maintain that the reinsurance premiums in question did not constitute income from sources within the
PhilippinesbecausetheforeignreinsurersdidnotengageinbusinessinthePhilippines,nordidtheyhaveoffice
here.

The reinsurance contracts, however, show that the transactions or activities that constituted the undertaking to
reinsure Philippine Guaranty Co., Inc. against loses arising from the original insurances in the Philippines were
performedinthePhilippines.Theliabilityoftheforeignreinsurerscommencedsimultaneouslywiththeliabilityof
PhilippineGuarantyCo.,Inc.undertheoriginalinsurances.PhilippineGuarantyCo.,Inc.keptinManilaaregister
oftheriskscededtotheforeignreinsurers.Entriesmadeinsuchregisterboundtheforeignresinsurers,localizing
inthePhilippinestheactualcessionoftherisksandpremiumsandassumptionofthereinsuranceundertakingby
the foreign reinsurers. Taxes on premiums imposed by Section 259 of the Tax Code for the privilege of doing
insurancebusinessinthePhilippineswerepayablebytheforeignreinsurerswhenthesamewerenotrecoverable
fromtheoriginalassured.TheforeignreinsurerspaidPhilippineGuarantyCo.,Inc.anamountequivalentto5%of
thecededpremiums,inconsiderationforadministrationandmanagementbythelatteroftheaffairsoftheformer
inthePhilippinesinregardtotheirreinsuranceactivitieshere.Disputesanddifferencesbetweenthepartieswere
subject to arbitration in the City of Manila. All the reinsurance contracts, except that with Swiss Reinsurance
Company, were signed by Philippine Guaranty Co., Inc. in the Philippines and later signed by the foreign
reinsurersabroad.AlthoughthecontractbetweenPhilippineGuarantyCo.,Inc.andSwissReinsuranceCompany
was signed by both parties in Switzerland, the same specifically provided that its provision shall be construed
accordingtothelawsofthePhilippines,therebymanifestingaclearintentionofthepartiestosubjectthemselves
toPhilippinelaw.

Section 24 of the Tax Code subjects foreign corporations to tax on their income from sources within the
Philippines.Theword"sources"hasbeeninterpretedastheactivity,propertyorservicegivingrisetotheincome.
1Thereinsurancepremiumswereincomecreatedfromtheundertakingoftheforeignreinsurancecompaniesto
reinsure Philippine Guaranty Co., Inc., against liability for loss under original insurances. Such undertaking, as
explained above, took place in the Philippines. These insurance premiums, therefore, came from sources within
thePhilippinesand,hence,aresubjecttocorporateincometax.

Theforeigninsurers'placeofbusinessshouldnotbeconfusedwiththeirplaceofactivity.Businessshouldnotbe
continuityandprogressionoftransactions2whileactivitymayconsistofonlyasingletransaction.Anactivitymay
occuroutsidetheplaceofbusiness.Section24oftheTaxCodedoesnotrequireaforeigncorporationtoengage
in business in the Philippines in subjecting its income to tax. It suffices that the activity creating the income is

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performedordoneinthePhilippines.Whatiscontrolling,therefore,isnottheplaceofbusinessbuttheplaceof
activitythatcreatedanincome.

Petitioner further contends that the reinsurance premiums are not income from sources within the Philippines
because they are not specifically mentioned in Section 37 of the Tax Code. Section 37 is not an allinclusive
enumeration, for it merely directs that the kinds of income mentioned therein should be treated as income from
sources within the Philippines but it does not require that other kinds of income should not be considered
likewise.1 w p h 1 . t

Thepowertotaxisanattributeofsovereignty.Itisapoweremanatingfromnecessity.Itisanecessaryburdento
preserve the State's sovereignty and a means to give the citizenry an army to resist an aggression, a navy to
defenditsshoresfrominvasion,acorpsofcivilservantstoserve,publicimprovementdesignedfortheenjoyment
ofthecitizenryandthosewhichcomewithintheState'sterritory,andfacilitiesandprotectionwhichagovernment
is supposed to provide. Considering that the reinsurance premiums in question were afforded protection by the
government and the recipient foreign reinsurers exercised rights and privileges guaranteed by our laws, such
reinsurancepremiumsandreinsurersshouldsharetheburdenofmaintainingthestate.

Petitioner would wish to stress that its reliance in good faith on the rulings of the Commissioner of Internal
Revenuerequiringnowithholdingofthetaxdueonthereinsurancepremiumsinquestionrelieveditofthedutyto
pay the corresponding withholding tax thereon. This defense of petitioner may free if from the payment of
surcharges or penalties imposed for failure to pay the corresponding withholding tax, but it certainly would not
exculpateiffromliabilitytopaysuchwithholdingtaxTheGovernmentisnotestoppedfromcollectingtaxesbythe
mistakesorerrorsofitsagents.3

Inrespecttothequestionofwhetherornotreinsurancepremiumscededtoforeignreinsurersnotdoingbusiness
inthePhilippinesaresubjecttowithholdingtaxunderSection53and54oftheTaxCode,sufficeittostatethat
this question has already been answered in the affirmative in Alexander Howden & Co., Ltd. vs. Collector of
InternalRevenue,L19393,April14,1965.

Finally,petitionercontendsthatthewithholdingtaxshouldbecomputedfromtheamountactuallyremittedtothe
foreign reinsurers instead of from the total amount ceded. And since it did not remit any amount to its foreign
insurersin1953and1954,nowithholdingtaxwasdue.

ThepertinentsectionoftheTaxCodeStates:

Sec. 54. Payment of corporation income tax at source. In the case of foreign corporations subject to
taxationunderthisTitlenotengagedintradeorbusinesswithinthePhilippinesandnothavinganyofficeor
placeofbusinesstherein,thereshallbedeductedandwithheldatthesourceinthesamemannerandupon
thesameitemsasisprovidedinSectionfiftythreeataxequaltotwentyfourpercentumthereof,andsuch
taxshallbereturnedandpaidinthesamemannerandsubjecttothesameconditionsasprovidedinthat
section.

TheapplicableportionofSection53provides:

(b)Nonresidentaliens.Allpersons,corporationsandgeneralcopartnerships(compaiascolectivas), in
what ever capacity acting, including lessees or mortgagors of real or personal property, trustees acting in
anytrustcapacity,executors,administrators,receivers,conservators,fiduciaries,employers,andallofficers
and employees of the Government of the Philippines having the control, receipt, custody, disposal, or
payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensation, remunerations,
emoluments, or other fixed or determinable annual or periodical gains, profits, and income of any
nonresident alien individual, not engaged in trade or business within the Philippines and not having any
office or place of business therein, shall (except in the case provided for in subsection [a] of this section)
deduct and withhold from such annual or periodical gains, profits, and income a tax equal to twelve per
centumthereof:ProvidedThatnodeductionsorwithholdingshallberequiredinthecaseofdividendspaid
byaforeigncorporationunless(1)suchcorporationisengagedintradeorbusinesswithinthePhilippines
orhasanofficeorplaceofbusinesstherein,and(2)morethaneightyfivepercentumofthegrossincome
of such corporation for the threeyear period ending with the close of its taxable year preceding the
declarationofsuchdividends(orforsuchpartofsuchperiodasthecorporationhasbeeninexistence)was
derived from sources within the Philippines as determined under the provisions of section thirtyseven:
Provided, further, That the Collector of Internal Revenue may authorize such tax to be deducted and
withheldfromtheinterestuponanysecuritiestheownersofwhicharenotknowntothewithholdingagent.

Theabovequotedprovisionsallownodeductionfromtheincomethereinenumeratedindeterminingtheamount
to be withheld. According, in computing the withholding tax due on the reinsurance premium in question, no
deductionshallberecognized.

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WHEREFORE,inaffirmingthedecisionappealedfrom,thePhilippineGuarantyCo.,Inc.isherebyorderedtopay
to the Commissioner of Internal Revenue the sums of P202,192.00 and P173,153.00, or a total amount of
P375,345.00, as withholding tax for the years 1953 and 1954, respectively. If the amount of P375,345.00 is not
paidwithin30daysfromthedatethisjudgementbecomesfinal,thereshallbecollectedasurchargedof5%on
theamountunpaid,plusinterestattherateof1%amonthfromthedateofdelinquencytothedateofpayment,
providedthatthemaximumamountthatmaybecollectedasinterestshallnotexceedtheamountcorrespondingto
aperiodofthree(3)years.Withcostsagainstspetitioner.

Bengzon,C.J.,BautistaAngelo,Concepcion,Reyes,J.B.L.,Barrera,Paredes,DizonandRegala,JJ.,concur.
MakalintalandZaldivar,JJ.,tooknopart.

Footnotes

1Mertens,Jr.,Jacob,LawOnFederalIncomeTaxation,Vol.8,Section45.27.

2Imperialv.CollectorofInternalRevenue,L7924,September30,1955.

3Hilado v. Collector of Internal Revenue, 53 O.G. 2471 Koppel (Philippines), Inc. v. Collector of Internal
Revenues,L10550,September19,1961CompaiaGeneraldeTabacosdeFilipinasv.CityofManila,L
16619,June29,1963.

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