(Situs of Income)

THE PHILIPPINE GUARANTY CO., INC. vs. THE COMMISSIONER OF INTERNAL REVENUE and CTA

Facts:

The Philippine Guaranty Co., Inc., (Philippine Guaranty) a domestic insurance company, entered into reinsurance contracts, with foreign insurance
companies not doing business in the Philippines. Philippine Guaranty 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 assumption by the foreign reinsurers of liability on an equivalent portion of the
risks insured. Said reinsurance contracts were signed by Philippine Guaranty in Manila and by the foreign reinsurers outside the Philippines.

A proportionate amount of taxes on insurance premiums not recovered from the original assured were to be paid for by the foreign reinsurers. The
foreign reinsurers further agreed, in consideration for managing or administering their affairs in the Philippines, to compensate the Philippine Guaranty,
in an amount equal to 5% of the reinsurance premiums.

Said premiums were excluded by Philippine Guaranty 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, Commissioner of Internal Revenue assessed against Philippine Guaranty Co., Inc. withholding tax on the
ceded reinsurance premiums. X X X Philippine Guaranty protested the assessment on the ground that reinsurance premiums ceded to foreign
reinsurers not doing business in the Philippines are not subject to withholding tax. Its protest was denied and it appealed to the Court of Tax Appeals.

CTA: Ordered Philippine Guaranty to pay the computed withholding income taxes plus the statutory delinquency penalties thereon.

Philippine Guaranty contends: 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. It 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.

Issue:

1. W/N reinsurance premium ceded to foreign insurers not doing business in the Philippines are subject to tax. YES
2. W/N Philippine Guaranty is liable to the withholding tax. YES

Ruling:

1.The reinsurance contracts, show that the transactions or activities that constituted the undertaking to reinsure Philippine Guaranty against loses
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 resinsurers, localizing in the Philippines the actual cession of the risks and
premiums and assumption of the reinsurance undertaking by the foreign reinsurers.

Taxes on premiums imposed by Section 259 of the Tax Code for the privilege of doing insurance business in the Philippines were payable by the foreign
reinsurers when the same were not recoverable from the original assured. The foreign reinsurers paid Philippine Guaranty an amount equivalent to 5%
of the ceded premiums, in consideration for administration and management by the latter of the affairs of the former in the Philippines in regard to their
reinsurance activities here. Disputes and differences between the parties were 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 reinsurers
abroad. Although the contract between Philippine Guaranty Co., Inc. and Swiss Reinsurance Company was signed by both parties in Switzerland, the
same specifically provided that its provision shall be construed according to the laws of the Philippines, thereby manifesting a clear intention of the
parties to subject themselves to Philippine law.

Section 24 of 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. 1 The reinsurance premiums were income created from the undertaking of the
foreign reinsurance companies to 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 the Philippines and, hence, are subject to
corporate income tax.

The foreign insurers' place of business should not be confused with their place of activity. Business should not be continuity and progression of
transactions 2 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.

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. 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 reinsurance premiums and reinsurers should share the burden
of maintaining the state.

Petitioner would wish to stress that its reliance in good faith on the rulings of the Commissioner of Internal Revenue requiring no withholding of the tax
due on the reinsurance premiums in question relieved it of the duty to 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 exculpate if
from liability to pay such withholding tax The Government is not estopped from collecting taxes by the mistakes or errors of its agents.3
2.Philippine Guaranty contends that the withholding tax should be computed from the amount actually remitted to the foreign reinsurers instead of
from the total amount ceded. And since it did not remit any amount to its foreign insurers in 1953 and 1954, no withholding tax was due.

The pertinent section of the Tax Code States:

Sec. 54. Payment of corporation income tax at source. — In the case of foreign corporations subject to taxation under this Title not engaged in
trade or business within the Philippines and not having any office or place of business therein, there shall be deducted and withheld at the
source in the same manner and upon the same items as is provided in Section fifty-three a tax equal to twenty-four per centum thereof, and
such tax shall be returned and paid in the same manner and subject to the same conditions as provided in that section.

The applicable portion of Section 53 provides:

(b) Nonresident aliens. — All persons, corporations and general copartnerships (compañias colectivas), in what ever capacity acting, including
lessees or mortgagors of real or personal property, trustees acting in any trust capacity, executors, administrators, receivers, conservators,
fiduciaries, employers, and all officers 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 centum thereof: Provided That no deductions
or withholding shall be required in the case of dividends paid by a foreign corporation unless (1) such corporation is engaged in trade or
business within the Philippines or has an office or place of business therein, and (2) more than eighty-five per centum of the gross income of
such corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part
of such period as the corporation has been in existence)was derived from sources within the Philippines as determined under the provisions of
section thirty-seven: Provided, further, That the Collector of Internal Revenue may authorize such tax to be deducted and withheld from the
interest upon any securities the owners of which are not known to the withholding agent.

The above-quoted provisions allow no deduction from the income therein enumerated in determining the amount to be withheld. According, in
computing the withholding tax due on the reinsurance premium in question, no deduction shall be recognized.

(Exclusions)

NATIONAL DEVELOPMENT COMPANY vs. COMMISSIONER OF INTERNAL REVENUE

Facts:

The National Development Company (NDC) entered into contracts in Tokyo with several Japanese shipbuilding companies for the construction of twelve
ocean-going vessels. 1 The purchase price was to come from the proceeds of bonds issued by the Central Bank. 2 Initial payments were made in cash and
through irrevocable letters of credit. 3Fourteen promissory notes were signed for the balance by the NDC and, as required by the shipbuilders,
guaranteed by the Republic of the Philippines. 4 Pursuant thereto, the remaining payments and the interests thereon were remitted in due time by the
NDC to Tokyo. The vessels were eventually completed and delivered to the NDC in Tokyo. 5

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. No tax was
withheld. The Commissioner then held the NDC liable on such tax in the total sum of P5,115,234.74.

The NDC argues that the Japanese shipbuilders were not subject to tax under section 37 because all the related activities — the signing of the contract,
the construction of the vessels, the payment of the stipulated price, and their delivery to the NDC — were done in Tokyo. 8

Issue:

W/N NDC is liable to the tax.

Ruling: Yes.

The law, however, does not speak of activity but of "source," which in this case is the NDC. This is a domestic and resident corporation with principal
offices in Manila.

The Japanese shipbuilders were liable to tax on the interest remitted to them under Section 37 of the Tax Code, thus:

SEC. 37. Income from sources within the Philippines. — (a) Gross income from sources within the Philippines. — The following items of gross
income shall be treated as gross income from sources within the Philippines:

(1) Interest. — Interest derived from sources within the Philippines, and interest on bonds, notes, or other interest-bearing obligations of
residents, corporate or otherwise; x x x xxx xxx

There is no basis for saying that the interest payments were obligations of the Republic of the Philippines and that the promissory notes of the NDC were
government securities exempt from taxation under Section 29(b)[4] of the Tax Code, reading as follows:

SEC. 29. Gross Income. — xxxx xxx xxx xxx

(4) Interest on Government Securities. — Interest upon the obligations of the Government of the Republic of the Philippines or any political
subdivision thereof, but in the case of such obligations issued after approval of this Code, only to the extent provided in the act authorizing
the issue thereof. (As amended by Section 6, R.A. No. 82; emphasis supplied)

The law invoked by the petitioner as authorizing the issuance of securities is R.A. No. 1407, which in fact is silent on this matter. C.A. No. 182 as
amended by C.A. No. 311 does carry such authorization but, like R.A. No. 1407, does not exempt from taxes the interests on such securities.

It is also incorrect to suggest that the Republic of the Philippines could not collect taxes on the interest remitted because of the undertaking signed by the
Secretary of Finance in each of the promissory notes that:

Upon authority of the President of the Republic of the Philippines, the undersigned, for value received, hereby absolutely and unconditionally
guarantee (sic), on behalf of the Republic of the Philippines, the due and punctual payment of both principal and interest of the above note.10

There is nothing in the above undertaking exempting the interests from taxes. Petitioner has not established a clear waiver therein of the right to tax
interests. Tax exemptions cannot be merely implied but must be categorically and unmistakably expressed. 11 Any doubt concerning this question must
be resolved in favor of the taxing power. 12

Nowhere in the said undertaking do we find any inhibition against the collection of the disputed taxes. In fact, such undertaking was made by the
government in consonance with and certainly not against the following provisions of the Tax Code:

Sec. 53(b). Nonresident aliens. — All persons, corporations and general co-partnership (companies colectivas), in whatever capacity acting,
including lessees or mortgagors of real or personal capacity, executors, administrators, receivers, conservators, fiduciaries, employers, and all
officers and employees of the Government of the Philippines having control, receipt, custody; disposal or payment of interest, dividends, rents,
salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or categorical 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 cases provided for in subsection (a) of this section) deduct and withhold from such annual or
periodical gains, profits and income a tax to twenty (now 30%) per centum thereof: ...

Sec. 54. Payment of corporation income tax at source. — In the case of foreign corporations subject to taxation under this Title not engaged in
trade or business within the Philippines and not having any office or place of business therein, there shall be deducted and withheld at the
source in the same manner and upon the same items as is provided in section fifty-three a tax equal to thirty (now 35%) per centum thereof,
and such tax shall be returned and paid in the same manner and subject to the same conditions as provided in that section:....

Manifestly, the said undertaking of the Republic of the Philippines merely guaranteed the obligations of the NDC but without diminution of its taxing
power under existing laws.

In suggesting that the NDC is merely an administrator of the funds of the Republic of the Philippines, the petitioner closes its eyes to the nature of this
entity as a corporation. As such, it is governed in its proprietary activities not only by its charter but also by the Corporation Code and other pertinent
laws.

The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on the interests earned by the Japanese shipbuilders. It was the
income of these companies and not the Republic of the Philippines that was subject to the tax the NDC did not withhold.

In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure to withhold the same from the Japanese shipbuilders.
Such liability is imposed by Section 53(c) of the Tax Code, thus:

Section 53(c). Return and Payment. — Every person required to deduct and withhold any tax under this section shall make return thereof, in
duplicate, on or before the fifteenth day of April of each year, and, on or before the time fixed by law for the payment of the tax, shall pay the
amount withheld to the officer of the Government of the Philippines authorized to receive it. Every such person is made personally liable for
such tax, and is indemnified against the claims and demands of any person for the amount of any payments made in accordance with the
provisions of this section. (As amended by Section 9, R.A. No. 2343.)

"Strict observance of said steps is required of a withholding agent before he could be released from liability," so said Justice Jose P. Bengson, who wrote
the decision. "Generally, the law frowns upon exemption from taxation; hence, an exempting provision should be construed strictissimi juris." 14