G.R. No. L-22074 - Philippine Guaranty Co., Inc. vs. Commissioner of Internal Revenue

Case Summary (G.R. No. L-22074)

Factual Background

THE PHILIPPINE GUARANTY CO., INC. entered into reinsurance contracts with several foreign insurers not doing business in the Philippines, including Imperio Compania de Seguros, La Union y El Fenix Espaniol, Overseas Assurances Corp., Ltd., Sociedad Anonima de Reaseguros Alianza, Tokio Marine & Fire Insurance Co., Ltd., Union Assurance Society Ltd., Swiss Reinsurance Company, and Tariff Reinsurance Limited. Under these contracts the petitioner ceded portions of premiums on Philippine-origin insurance in consideration for assumption by the foreign reinsurers of equivalent portions of the insured risks. The contracts provided that the reinsurers’ liability commenced simultaneously with the petitioner’s liability under the original policies, that the petitioner would keep in Manila a register of ceded risks whose entries would bind the reinsurers, that a proportionate share of premium taxes not recoverable from the original assured would be payable by the reinsurers, that the reinsurers would pay the petitioner five per cent of ceded premiums for administration and management in the Philippines, and that disputes would be arbitrated in Manila; the contract with Swiss Reinsurance Company expressly provided for construction under Philippine law. The petitioner ceded reinsurance premiums for 1953 and 1954 in the amounts recorded in its books and excluded such ceded premiums from gross income and did not withhold or remit withholding tax.

Assessment by the Commissioner

By letter dated April 13, 1959, THE COMMISSIONER OF INTERNAL REVENUE assessed withholding tax on ceded reinsurance premiums for the years 1953 and 1954. The assessment for 1953 was computed on a gross premium per investigation of P768,580.00, with withholding tax at 24% of P184,459.00, a 25% surcharge of P46,114.00, and a compromise fee of P100.00, totalling P230,673.00. The assessment for 1954 was computed on a gross premium per investigation of P780,880.68, with withholding tax at 24% of P187,411.00, a 25% surcharge of P46,853.00, and a compromise fee of P100.00, totalling P234,364.00.

Procedural History

THE PHILIPPINE GUARANTY CO., INC. protested the assessment on the ground that the reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines were not subject to withholding tax. The Commissioner denied the protest. The petitioner appealed to the Court of Tax Appeals, which on July 6, 1963 rendered judgment ordering petitioner to pay P202,192.00 and P173,153.00 for 1953 and 1954 respectively, plus statutory delinquency penalties, aggregating P375,345.00. The petitioner then appealed to the Supreme Court, which issued its decision on April 30, 1965 and thereafter denied the motion for reconsideration.

Issues Presented

The principal legal questions were whether reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines constituted income from sources within the Philippines subject to corporate income tax and withholding under Section 24, Sections 53 and 54 of the Tax Code; whether the withholding tax should be computed on amounts actually remitted to foreign reinsurers rather than on the total ceded premiums; and whether reliance on prior administrative or Board of Tax Appeals rulings absolved the petitioner from personal liability as withholding agent or from payment of the tax.

The Parties' Contentions

Petitioner argued that the foreign reinsurers did not engage in business and had no office in the Philippines, that the ceded premiums were therefore not income from Philippine sources, that Section 37 did not specifically enumerate such premiums and thus they were not taxable, and that withholding should be measured by amounts actually remitted to the reinsurers; petitioner also invoked reliance on a Board of Tax Appeals ruling in Franklin Baker and on a Commissioner’s opinion of September 5, 1953. The Commissioner and the Court of Tax Appeals contended that the operative acts giving rise to the reinsurance income occurred in the Philippines — simultaneous assumption of liability, the Manila register, payment of taxes and administrative fees, and arbitration in Manila — and that Section 24 and Sections 53 and 54 therefore subjected the foreign reinsurers’ income to Philippine taxation and required withholding by the petitioner as withholding agent; they further maintained that administrative mistakes do not estop the Government from collecting taxes and cited prior decisions, including Alexander Howden & Co., Ltd. vs. Collector of Internal Revenue.

Court of Tax Appeals' Ruling

The Court of Tax Appeals found that the activity which created the reinsurance income occurred in the Philippines and that the place of activity, not the place of business, determines source for taxation; it held that the reinsurance premiums were income from Philippine sources and that petitioner, as withholding agent, was liable to deduct and remit tax under Sections 53 and 54. The court accepted that petitioner relied on accountants and a Commissioner’s opinion which constituted a reasonable cause for failure to file and thus excused the imposition of surcharge, but it nevertheless ordered payment of the withholding tax due.

Supreme Court's Ruling

The Supreme Court affirmed the Court of Tax Appeals and ordered THE PHILIPPINE GUARANTY CO., INC. to pay P202,192.00 and P173,153.00, or a total of P375,345.00, as withholding tax for 1953 and 1954, respectively, with the applicable surcharge and interest provisions if unpaid within thirty days. The Court held that the reinsurance premiums were taxable because the reinsurers’ undertaking and the acts giving rise to the income were performed in the Philippines, that Section 24 subjects foreign corporations to tax on income from Philippine sources, and that Section 37 is not an exhaustive list. The Court ruled that reliance upon administrative rulings or Board decisions may excuse penalties when failure to file was due to reasonable cause, but it does not relieve the withholding agent from the obligation to withhold and remit the tax. The Court further held that Section 53(c) made the withholding agent personally liable and that Section 200 of the Income Tax Regulations required strict compliance with the steps prescribed if a withholding agent sought protection from liability, including withholding before submitting a query to the Commissioner; the petitioner did not withhold prior to inquiry and therefore could not invoke that protection.

Legal Basis and Reasoning

The Court reasoned that the term “sources” in Section 24 of the Tax Code refers to the activity, property, or service giving rise to the income, and that where the activity creating the income is performed in the Philippines the income is from Philippine s

Case Syllabus (G.R. No. L-22074)

Parties and Procedural Posture

THE PHILIPPINE GUARANTY CO., INC. was the petitioner and a domestic insurance company that ceded reinsurance premiums to foreign reinsurers not doing business in the Philippines.
THE COMMISSIONER OF INTERNAL REVENUE assessed petitioner for withholding tax on ceded reinsurance premiums for 1953 and 1954, and petitioner protested the assessment.
THE COURT OF TAX APPEALS denied petitioner's protest and ordered payment of withholding taxes for 1953 and 1954, and petitioner appealed to this Court.
The Supreme Court rendered judgment affirming the Court of Tax Appeals and later denied petitioner's motion for reconsideration.

Key Factual Allegations

Petitioner entered into reinsurance contracts with foreign reinsurers named Imperio Compania de Seguros, La Union y El Fenix Espanol, Overseas Assurances Corp., Ltd., Sociedad Anonima de Reaseguros Alianza, Tokio Marine & Fire Insurance Co., Ltd., Union Assurance Society Ltd., Swiss Reinsurance Company, and Tariff Reinsurance Limited.
Petitioner ceded premiums in the amounts of P842,466.71 for 1953 and P721,471.85 for 1954 and excluded those amounts from its gross income and did not withhold or pay tax thereon.
The reinsurance contracts were signed in Manila by petitioner and by the foreign reinsurers outside the Philippines, except the contract with Swiss Reinsurance Company, which the parties signed in Switzerland but stipulated that it would be construed by Philippine laws.
The contracts made the reinsurers' liability commence simultaneously with petitioner's liability under the original insurances and required petitioner to keep a register in Manila binding upon the reinsurers.
The contracts provided that a proportionate amount of taxes on premiums not recovered from the original assured would be paid by the foreign reinsurers, that petitioner would receive five percent of the ceded premiums for administration and management in the Philippines, and that disputes would be arbitrated in Manila.

Statutory Framework

Section 24 of the Tax Code subjects foreign corporations to tax on income from sources within the Philippines.
Section 37 of the Tax Code lists kinds of income treated as from sources within the Philippines but does not, according to the Court, exhaustively define such income.
Section 54 of the Tax Code prescribes deduction and withholding at source of twenty-four percent for foreign corporations not engaged in trade or business within the Philippines and having no office or place of business therein.
Section 53 of the Tax Code prescribes the items subject to withholding and, in subsection (c), makes every person required to withhold personally liable for return and payment.
Section 200 of the Income Tax Regulations prescribes procedural steps by which a withholding agent may seek protection from liability by querying the Commissioner and by withholding pending decision.
Section 255 of the Tax Code was invoked in the contracts as imposing taxes on premiums for the privilege of doing insurance business in the Philippines.
Section 72 of the Tax Code prescribes surcharges for failure to render returns and for rendering false or fraudulent returns.

Issues

Whether reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines constitute income from sources within the Philippines and are therefore subject to withholding tax under Sections 53 and 54.
Whether the withholding tax should be computed on the total amount ceded or only on the amount actually remitted to the foreign reinsurers.
Whether petitioner’s reliance on a Board of Tax Appeals ruling and an opinion of the Commissioner of Internal Revenue relieved petitioner of personal liability for withholding under Section 53(c).

Petitioner's Contentions

Petitioner contended that the foreign reinsurers did not engage in business in the Philippines and had no office here, so the ceded premiums did not arise from sources within the Philippines.
Petitioner argued that the reinsurance activity and the income-producing acts did not occur in the Philippines and that Section 37 does not include reinsurance