Manila Electric Co. vs. Yatco

Factual Background

In 1935, Manila Electric Company insured certain real and personal properties located in the Philippines with the City of New York Insurance Company and the United States Guaranty Company. The insurance was procured through the plaintiff’s broker in New York City. The two insurers were foreign corporations not licensed to do business in the Philippines and having no agents therein. The insurance policies contained provisions governing settlement and payment of losses, including duties to produce books and submit to examination, and procedures for appraisal and selection of an umpire, with recourse to judicial appointment of an umpire in the state where the property was located. Premiums totaling P 91,696 were paid in New York to the insurers through the broker.

Statutory Provision and Assessment

Under the authority of Act No. 2427, Sec. 192, the Collector of Internal Revenue assessed and levied a tax of one per centum upon the premiums paid to the foreign insurers. Section 192 generally prohibited the procurement or forwarding of applications for insurance and the issuance or delivery of policies by foreign companies not authorized to transact business in the Philippines, but contained a proviso allowing owners who obtain insurance directly with foreign companies, without use of any agent or company within the Philippines, to do so upon reporting to the insurance commissioner and the Collector and upon payment of the one per centum tax in the manner required of insurance companies.

Procedural History

The Collector assessed the tax and the plaintiff paid it under protest. The plaintiff’s protest was overruled administratively. Thereafter, Manila Electric Company instituted an action in the trial court to recover the tax paid under protest. The trial court dismissed the complaint. The plaintiff appealed from that judgment to the Supreme Court.

Appellant’s Contentions

The appellant contended that the second paragraph of Act No. 2427, Sec. 192 was unconstitutional insofar as it authorized the imposition of the tax upon premiums paid to foreign insurers pursuant to contracts made or executed outside the jurisdiction of the Philippines. The appellant relied principally on the decision of the United States Supreme Court in Compania General de Tabacos v. Collector of Internal Revenue, 275 U. S. 87, which had invalidated a like tax as applied to premiums paid under a contract made and to be performed outside the Philippines.

Relevant Precedent

In Compania General de Tabacos v. Collector of Internal Revenue, the Tobacco Company’s Barcelona head office placed fire insurance on merchandise in the Philippines with a London insurer and marine insurance while in transit to Spain with a Paris insurer. The United States Supreme Court sustained the tax as to premiums paid to the London insurer, which was licensed and had an agent in the Philippines, but held the tax erroneous as to premiums paid to the Paris insurer, whose contract was made in Barcelona, whose losses were payable in Paris, and which had no communication with anyone in the Philippines. The Court explained that a state may not, consistent with due process, exact tribute for contracts made and to be performed outside the state, citing Allgeyer v. Louisiana and St. Louis Cotton Compress Company v. Arkansas. The Court contrasted that situation with one in which an insurer’s activities and the making or execution of the policy involved doing business within the taxing jurisdiction, relying on Equitable Life Assur. Soc. v. Pennsylvania to sustain taxation where the insurer’s operations or contract execution subjected it to local regulation and jurisdiction.

Court’s Analysis of Analogous Facts

The Supreme Court in the present case examined the London-company rationale and found it analogous to the present facts. The Court observed that the insured was a Philippine corporation with its principal place of business in Manila and that the policies issued by the New York Insurance Company and the United States Guaranty Company covered risks located in the Philippines which might require adjustment and the activities of agents in the Philippines for the settlement of losses. The Court relied on specific contractual stipulations—production of remains and books for examination, submission to examination under oath, and appraisal procedures requiring an umpire and, failing agreement, selection by a judge in the state where the insured property is located—to demonstrate that incidents of the contract were to be attended to in the Philippines. The Court rejected the contention that the possibility of sending an adjuster was too contingent to establish jurisdiction, noting that in the London-company line of cases the existence of such stipulations sufficed to bring the foreign corporation within the local taxing jurisdiction even if actual adjustment had not occurred.

Legal Reasoning and Doctrine Applied

The Court framed the controlling question as whether the disputed tax operated as an exaction upon a contract beyond the jurisdiction of the Commonwealth. It held that where the insured is within the Philippines, the risk insured is within the Philippines, and certain incidents of the contract must be performed or may be performed in the Philippines—such as receipt of dividends in cash, sending an adjuster in case of dispute, or making proof of loss—the Commonwealth has the power to impose the one per centum tax upon the insured, notwithstanding that the contract may have been executed in a foreign country with a foreign corporation. The Court reasoned that substantial elements of the contract were situated in the Philippines and thus subject to its taxing power. The Court further held that even if the economic incidence of the tax ul