Case Summary (G.R. No. 112675)
Petitioner and Respondent
Petitioners: AFISCO Insurance Corp., CCC Insurance Corp., Charter Insurance Co., Inc., et al., all organized under Philippine law and assessed collectively as the Pool of Machinery Insurers.
Respondents: Commissioner of Internal Revenue (CIR), CTA, and CA.
Key Dates
• August 1, 1965 – Pool formed under quota-share and surplus reinsurance treaties.
• April 14, 1976 – Pool filed its Information Return of Organization Exempt from Income Tax for 1975.
• January 27, 1986 – CIR denied petitioners’ protest, confirming deficiency assessments.
• October 19, 1992 – CTA Decision sustaining the BIR assessment.
• October 11 & November 15, 1993 – CA Decision and Resolution dismissing petitioners’ appeal.
• January 25, 1999 – Supreme Court renders final decision.
Applicable Law
– 1987 Philippine Constitution (decision rendered post-1987).
– National Internal Revenue Code (NIRC) of 1975, Sec. 24 (tax on domestic and foreign corporations), Sec. 255 (reinsurance exemption), and Sec. 333 (suspension of prescription).
– Tax Reform Act of 1997 (RA 8424) clarifying corporate tax definitions (post-1997 reference).
Issues Presented
- Whether the pool, acting purely as an administrative clearing house without assuming risk, is a partnership or association taxable as a corporation under NIRC Sec. 24.
- Whether distributions of reinsurance premium shares to Munich and to petitioners constitute dividends subject to withholding tax.
- Whether the CIR’s right to assess and collect taxes prescribed under NIRC prescriptive rules.
I. Pool Taxable as a Corporation
The Supreme Court affirmed the CA and CTA rulings that the pool qualifies as an “association” or informal partnership taxable under Sec. 24. Although the pool did not, in name, underwrite risks, it:
• Maintained a common fund funded by all members to cover operating expenses;
• Operated through an executive board analogous to a board of directors;
• Facilitated the transaction of business for profit—allocating premiums, disbursing collections, and performing indispensable administrative functions for the ceding companies and Munich.
Under prevailing jurisprudence (Evangelista v. Collector), “partnership” in Sec. 24 encompasses syndicates, pools, and joint ventures without legal personality independent of their members. The pool met Civil Code requisites: mutual contribution to a common fund and shared profits. The pool’s lack of formal corporate structure or independent risk-bearing did not exempt it from taxation. Deference was accorded to findings of the CIR, CTA, and CA in absence of palpably erroneous conclusions.
II. Remittances as Taxable Dividends
Petitioners’ argument that remittances to Munich and to the ceding companies were not dividends, or that they were exempt, was rejected. The Court held:
• The pool is a distinct taxable entity; its net income and subsequent distributions are separate from the tax liabilities of its members. No double taxation arises, as the pool’s income tax and withholding tax on dividends are levied on different taxable persons.
• Exemption provisions (Sec. 255 and Sec. 24(b)(1)) were inapplicable: Sec. 255 applied only where the same entity paid both premiums and reinsurance tax; here, distinct entities existed. Sec. 24(b)(1) addresses foreign corporations, but it expressly taxes dividends.
• Munich, though not a party to the Pool Agreement, functioned as an associate under the treaties and shared in profits and losses
Case Syllabus (G.R. No. 112675)
Facts of the Case
- Petitioners are forty-one non-life insurance corporations organized under Philippine law.
- On August 1, 1965, they entered into a Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with Münchener Rückversicherungs-Gesellschaft (Munich), a foreign reinsurer.
- The treaties required the formation of a Pool of Machinery Insurers (“the pool”) to allocate and distribute risks, maintain records, collect premiums, and perform related administrative functions.
- On April 14, 1976, the pool submitted a financial statement and an Information Return of Organization Exempt from Income Tax for the year ending 1975.
- The Commissioner of Internal Revenue assessed a deficiency income tax of ₱1,843,273.60, withholding tax of ₱1,768,799.39 on dividends paid to Munich, and ₱89,438.68 on dividends to pool members; the assessments were protested and denied.
Procedural History
- On October 19, 1992, the Court of Tax Appeals (CTA) sustained the Commissioner’s assessment for deficiency income tax, interest, and withholding taxes.
- On October 11, 1993, the Court of Appeals (CA) dismissed petitioners’ appeal; on November 15, 1993, the CA denied reconsideration.
- Petitioners filed a Petition for Review on Certiorari under Rule 45 before the Supreme Court, raising questions of law only.
Issues Presented
- Whether the pool—acting as a mere agent performin