Phil Guaranty v CIR

Phil Guaranty v CIR Doctrines: Reinsurance premiums ceded to foreign reinsurers subject to withholding tax. Reinsurance premiums ceded to foreign reinsurers considered income from Philippine sources. 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. Section 37 of the Tax Code is not an all-inclusive 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. FACTS: The petitioner Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance contracts with foreign insurance companies not doing business in the country, thereby ceding to 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. Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc. ceded to the foreign reinsurers the premiums worth P842,466.71 in 1953 and P721,471.85 in 1954. Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income when it filed its income tax returns for 1953 and 1954. Furthermore, it did not withhold or pay tax on them. Consequently, the Commissioner of Internal Revenue (CIR) 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. Petitioner maintain 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: Whether or not reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines are subject to withholding tax. HELD: Yes. 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. 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 all-inclusive 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. Finally, petitioner 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 eightyfive 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.