Case #6 Digest by Atenta
G.R. No. L-22074 April 30, 1965
THE PHILIPPINE GUARANTY CO., INC., petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX
APPEALS, respondents.
Facts:
The Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance
contracts, on various dates, with foreign insurance companies not doing business in the Philippines
namely; Swiss Reinsurance Company.
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
assumption by the latter of liability on an equivalent portion of the risks insured.
The reinsurance contracts made the commencement of the reinsurers' liability simultaneous
with that of Philippine Guaranty Co., Inc. under the original insurance. Philippine Guaranty Co., Inc.
was required to keep a register in Manila where the risks ceded to the foreign reinsurers where
entered, and entry therein was binding upon the reinsurers.
The foreign reinsurers further agreed, in consideration for managing or administering their
affairs in the Philippines, to compensate the Philippine Guaranty Co., Inc., in an amount equal to 5%
of the reinsurance premiums.
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 April 13, 1959, the Commissioner of Internal Revenue assessed
against Philippine Guaranty Co., Inc. withholding tax on the ceded reinsurance premiums
Philippine Guaranty Co., Inc., 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.
On July 6, 1963, the Court of Tax Appeals rendered judgment, ordering petitioner to pay the
withholding income taxes for the years 1953 and 1954 with all the corresponding penalties.
Philippine Guaranty Co, Inc. has appealed, maintaining 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.
Issue:
WON the reinsurance premiums in question constitute income from Philippine sources (thus
under the territorial taxing power of the state)
Ruling:
Petitioner maintains 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.
In contrary to this, the contract executed between the parties clearly indicate the activities
and records would be respectively conducted and kept in the Philippines. Additionally, said contract,
despite being signed 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.
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 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.
