TheoryandBasisofTaxation

Parties:
Petitioner:THEPHILIPPINEGUARANTYCO.,INC.,vs.
Respondents:THECOMMISSIONEROFINTERNALREVENUEandTHECOURT
OFTAXAPPEALS
Facts:
ThePhilippineGuarantyCo.,Inc.,adomesticinsurancecompany,enteredinto
reinsurancecontractswithforeigninsurancecompaniesnotdoingbusinessinthe
Philippines,therebycedingtotheforeignreinsurersaportionofthepremiumson
insurancesithasoriginallyunderwritteninthePhilippines.PhilippineGuarantyCo.,Inc.
cededtotheforeignreinsurersthepremiumsfor1953and1954.Saidpremiumswere
excludedbyPhilippineGuarantyCo.,Inc.fromitsgrossincomewhenitfileditsincome
taxreturnsfor1953and1954.Furthermore,itdidnotwithholdorpaytaxonthem.
Consequently,theCommissionerofInternalRevenueassessedPhilippineGuarantyCo.,
Inc.againstwithholdingtaxonthecededreinsurancepremiumsthus,
1953
GrosspremiumperinvestigationP768,580.00
Withholdingtaxduethereonat24%P184,459.00
25%surcharge46,114.00
Compromisefornonfilingofwithholding
incometaxreturn100.00
TOTALAMOUNTDUE&
COLLECTIBLEP230,673.00
1954
GrosspremiumperinvestigationP780,880.68
Withholdingtaxduethereonat24%P187,411.00
25%surcharge46,853.00
Compromisefornonfilingofwithholding
incometaxreturn100.00
TOTALAMOUNTDUE&
COLLECTIBLEP234,364.00

Petitionerscontention
PhilippineGuarantyCo.,Inc.protestedtheassessmentonthegroundthatthepremiums
arenotsubjecttotaxforthepremiumsdidnotconstituteincomefromsourceswithinthe
PhilippinesbecausetheforeignreinsurersdidnotengageinbusinessinthePhilippines,

andCIR'spreviousrulingsdidnotrequireinsurancecompaniestowithholdincometax
duefromforeigncompanies.
Courtoftaxappealsjudgment:
"INVIEWOFTHEFOREGOINGCONSIDERATIONS,petitionerPhilippineGuaranty
Co.,Inc.isherebyorderedtopaytotheCommissionerofInternalRevenuetherespective
sumsofP202,192.00andP173,153.00orthetotalsumofP375,345.00aswithholding
incometaxesfortheyears1953and1954,plusthestatutorydelinquencypenalties
thereon.Withcostsagainstpetitioner."

ISSUE:WONthePhilGuarantyCO,.INC.requiredtowithholdtaxonreinsurance
premiumscededtoforeigninsurancecompanies?
Ruling:
Yes.Thereinsurancecontractshowevershowthatthetransactionsoractivitiesthat
constitutedtheundertakingtoreinsurePhilippineGuarantyCo.,Inc.againstlosses
arisingfromtheoriginalinsurancesinthePhilippineswereperformedinthePhilippines.
Thereinsurancepremiumswereincomecreatedfromtheundertakingoftheforeign
reinsurancecompaniestoreinsurePhilippineGuarantyCo.,Inc.againstliabilityforloss
underoriginalinsurances.Suchundertaking,asexplainedabove,tookplaceinthe
Philippines.Theseinsurancepremiumsthereforecamefromsourceswithinthe
Philippinesand,hence,aresubjecttocorporateincometax.
Thepowertotaxisanattributeofsovereignty.Itisapoweremanatingfromnecessity.It
isanecessaryburdentopreservetheState'ssovereigntyandameanstogivethecitizenry
anarmytoresistanaggression,anavytodefenditsshoresfrominvasion,acorpsofcivil
servantstoserve,publicimprovementsdesignedfortheenjoymentofthecitizenryand
thosewhichcomewithintheState'sterritory,andfacilitiesandprotectionwhicha
governmentissupposedtoprovide.Consideringthatthereinsurancepremiumsin
questionwereaffordedprotectionbythegovernmentandtherecipientforeignreinsurers
exercisedrightsandprivilegesguaranteedbyourlaws,suchreinsurancepremiumsand
reinsurersshouldsharetheburdenofmaintainingthestate.
ThepertinentsectionoftheTaxCodestates:
"SEC. 54. Payment of corporation income tax at source. In the case of foreign
corporationsubjecttotaxationunderthisTitlenotengagedintradeorbusinesswithinthe
Philippinesandnothavinganyofficeorplaceofbusinesstherein,thereshallbededucted
andwithheldatthesourceinthesamemanneranduponthesameitemsasisprovidedin
sectionfiftythreeataxequaltotwentyfourpercentumthereof,andsuchtaxshallbe

returnedandpaidinthesamemannerandsubjecttothesameconditionsasprovidedin
thatsection."
TheapplicableportionofSection53provides:
"(b) Nonresident aliens. All persons, corporations and general copartnerships
(companiascolectivas),inwhatevercapacityacting,includinglesseesormortgagorsof
realorpersonalproperty,trusteesactinginanytrustcapacity,executors,administrators
receivers, conservators, fiduciaries, employers, and all officers and employees of the
GovernmentofthePhilippineshavingthecontrol,receipt,custody,disposal,orpayment
of interest, dividends, rents, salaries, wages, premiums, annuities, compensation,
remunerations,emoluments,orotherfixedordeterminableannualorperiodicalgains,
profits,andincomeofanynonresidentalienindividual,notengagedintradeorbusiness
within the Philippines and not having any office or place of business therein, shall
(except)inthecasesprovidedforinsubsection(a)ofthissection)deductandwithhold
from such annual or periodical gains, profits, and income a tax equal to twelve per
centumhereof:Provided,Thatnosuchdeductionorwithholdingshallberequiredinthe
caseofdividendspaidbyaforeigncorporationunless(1)suchcorporationisengagedin
tradeorbusinesswithinthePhilippinesorhasanofficeorplaceofbusinesstherein,and
(2)morethaneightyfivepercentumofthegrossincomeofsuchcorporationforthe
threeyearperiodendingwiththecloseofitstaxableyearprecedingthedeclarationof
suchdividends(orforsuchpartofsuchperiodasthecorporationhasbeeninexistence)
wasderivedfromsourceswithinthePhilippinesasdeterminedundertheprovisionsof
section thirtyseven: Provided, further, That the Collector of Internal Revenue may
authorizesuchtaxtobedeductedandwithheldfromtheinterestuponanysecuritiesthe
ownersofwhicharenotknowntothewithholdingagent."
Theabovequotedprovisionsallownodeductionfromtheincomethereinenumeratedin
determiningtheamounttobewithheld.Accordingly,incomputingthewithholdingtax
dueonthereinsurancepremiumsinquestion,nodeductionshallberecognized.