Case Summary (G.R. No. 42780)
Factual Summary of Transactions
For 1930–1932, Manila Gas paid P1,348,847.50 in dividends and P543,244.90 in interest on bonds and other indebtedness to its foreign stockholder and creditor corporations. It withheld and remitted P56,757.37 to the Bureau of Internal Revenue under protest.
First Issue: Dividend Withholding Tax
Manila Gas challenged the withholding on dividends, arguing that taxing its stockholders effectively taxes the corporation in violation of its tax-exemption franchise and the Contract Clause.
Analysis Under Contract Clause and Precedent
The court applied the rule from Philippine Telephone & Telegraph Co. v. Collector of Internal Revenue: a corporation’s legal personality is distinct from that of its shareholders, thus withholding on dividends does not impair the corporate-charter exemption. The franchise’s commutation of the corporate tax does not bar taxing dividend recipients. The first error was overruled.
Second Issue: Source of Interest Income
The corporation contended that interest paid abroad to nonresidents did not constitute Philippine-sourced income and thus fell outside the tax law’s reach.
Due Process and Taxation Jurisprudence
Under due-process principles, a state may tax income whose source or situs lies within its territory. The court noted precedent distinguishing nonresident-earned interest, but held that Act No. 3761 extended source-based taxation to interest “paid within or without the Philippine Islands.”
Application of Income Tax Law to Interest Payments
Despite uncertainty as to payment location, the majority found that Manila Gas’s business operations and earnings originated in the Philippines, and that the situs of income is its origin. Accordingly, interest paid to nonresidents was properly taxed under the amended Income Tax Law. The second error was overruled, and the trial court’s dismissal
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Background and Facts
- Manila Gas Corporation is organized under Philippine law, operating a gas plant in the City of Manila under a government‐granted franchise.
- Foreign stockholders include Islands Gas and Electric Company (domiciled in New York) and General Finance Company (domiciled in Zurich), neither resident in the Philippines.
- For 1930–1932, the corporation paid dividends totaling ₱1,348,847.50 to Islands Gas and Electric Company and withheld ₱40,460.03 in income tax.
- In the same period it paid ₱411,600 in bond interest, withholding ₱12,348, and ₱131,644.90 in interest on other indebtedness, withholding ₱3,949.34.
- Exhibits E, F, and G, certified by the treasurer, indicate payment occurred in the United States and Switzerland, though the bonds and obligations themselves are not in the record.
Procedural History
- Manila Gas Corporation filed suit against the Collector of Internal Revenue seeking recovery of ₱56,757.37 paid under protest.
- The trial court dismissed the complaint with costs.
- The corporation appealed, assigning two principal errors regarding the taxation of dividends and interest to non‐resident corporations.
Assigned Error No. 1: Taxation of Dividends
- The appellant argued that taxing dividends to its foreign stockholder would effectively tax the corporation, violating its franchise exemption and the Contract Clause.
- The franchise stipulates a 2.5% payment of gross receipts “in lieu of all taxes, Insular, provincial and municipal,” except real estate, buildings, plant, machinery, and personal property.
Majority’s Analysis on Dividend Taxation
- The Cour