1.
CIR V Marubeni · Respondent filed its tax amnesty return dated October 30, 1986 and attached
GR NO.137377.
December 18, 2001
BL
Topic:Source of Income Rules
Petitioners:COMMISSIONER OF INTERNAL REVENUE,
Respondents: MARUBENI CORPORATION
Ponente:
FACTS
· Petitioner Commissioner of Internal Revenue issued a letter of authority
to examine the books of accounts of the Manila branch office of respondent
corporation for the fiscal year ending March 1985.
· petitioner found respondent to have undeclared income from two (2)
contracts in the Philippines, both of which were completed in 1984.
· One of the contracts was with the National Development Company (NDC)
in connection with the construction and installation of a wharf/port complex at
the Leyte Industrial Development Estate in the municipality of Isabel, province
of Leyte.
· The other contract was with the Philippine Phosphate Fertilizer
Corporation (Philphos) for the construction of an ammonia storage complex also
at the Leyte Industrial Development Estate.
· Petitioner's revenue examiners recommended an assessment for
deficiency income, branch profit remittance, contractor's and commercial
broker's taxes.
· Respondent questioned this assessment
· respondent corporation received a letter
· from petitioner assessing respondent several deficiency taxes
· deficiency internal revenue taxes, inclusive of surcharge and interest,
· I. DEFICIENCY INCOME TAX
· TOTAL AMOUNT DUE
· P290,583,972.40
· II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX
· TOTAL AMOUNT DUE
· P83,036,965.16
· III. DEFICIENCY CONTRACTOR'S TAX
· TOTAL AMOUNT DUE
· P85,563,625.46
· IV. DEFICIENCY COMMERCIAL BROKER'S TAX
· TOTAL AMOUNT DUE
· P3,600,535.68
· Petitioner found that the NDC and Philphos contracts were made on a
"turn-key" basis and that the gross income from the two projects amounted to
P967,269,811.14
· Each contract was for a piece of work and since the projects called for the
construction and installation of facilities in the Philippines, the entire income
therefrom constituted income from Philippine sources, hence, subject to
internal revenue taxes.
· Respondent filed two (2) petitions for review with the Court of Tax Appeals.
· The first petition questioned the deficiency income, branch profit remittance
and contractor's tax assessments in petitioner's assessment letter.
· The second, CTA Case questioned the deficiency commercial broker's
assessment in the same letter
· Earlier, on August 2, 1986, Executive Order (E.O.) No. 41declaring a one-time
amnesty covering unpaid income taxes for the years 1981 to 1985 was issued.
thereto its sworn statement of assets and liabilities and net worth as of Fiscal
Year (FY) 1981 and FY 1986. The return was received by the BIR on November
3, 1986 and respondent paid the amount of P2,891, 273.00 equivalent to ten
percent (10%) of its net worth increase between 1981 and 1986.
· The scope and coverage of E.O. No. 41 was expanded by (E.O.) No. 64.
· E.O. No. 64 included estate and donor's taxes also covering the years 1981 to
1985.
· E.O. No. 64 further provided that the immunities and privileges under E.O.
No. 41 were extended to the foregoing tax liabilities, and the period within
which the taxpayer could avail of the amnesty was extended to December 15,
1986.
· Those taxpayers who already filed their amnesty return under E.O. No. 41, as
amended, could avail themselves of the benefits, immunities and privileges
under the new E.O. by filing an amended return and paying an additional 5% on
the increase in net worth to cover business, estate and donor's tax liabilities.
· The period of amnesty under E.O. No. 64 was extended to January 31, 1987 by
E.O No. 95 dated December 17, 1986.
· On December 15, 1986, respondent filed a supplemental tax amnesty return
under the benefit of E.O. No. 64 and paid a further amount of P1,445, 637.00
to the BIR equivalent to five percent (5%) of the increase of its net worth
between 1981 and 1986.
· ten (10) years after filing of the case, the Court of Tax Appeals rendered a
decision in CTA Case
· The tax court found that respondent had properly availed of the tax amnesty
under E.O. Nos. 41 and 64 and declared the deficiency taxes subject of said
case as deemed cancelled and withdrawn.
· Petitioner challenged the decision of the tax court by filing with the Court of
Appeals.
· Court of Appeals dismissed the petition and affirmed the decision of the Court
of Tax Appeals
ISSUE
(1) Whether or not the Court of Appeals erred in affirming the Decision of the Court
of Tax Appeals which ruled that herein respondent's deficiency tax liabilities
were extinguished upon respondent's availment of tax amnesty under Executive
Orders Nos. 41 and 64.-NO
(2) Whether or not respondent is liable to pay the income, branch profit
remittance, and contractor's taxes assessed by petitioner-NO
HELD/RATIO
· The main controversy in this case lies in the interpretation of the exception to
the amnesty coverage of E.O. Nos. 41 and 64. There are three (3) types of
taxes involved herein — income tax, branch profit remittance tax and
contractor's tax.
· Petitioner claims, however, that respondent is disqualified from availing of the
said amnesties because the latter falls under the exception in Section 4 (b) of
E.O. No. 41.
· Section 4 of E.O. No. 41
· b) Those with income tax cases already filed in Court as of the effectivity
hereof;
· Petitioner argues that at the time respondent filed for income tax amnesty on
October 30, 1986, CTA Case No. 4109 had already been filed and was pending;
before the Court of Tax Appeals. Respondent therefore fell under the exception
in Section 4 (b) of E.O. No. 41.
· Petitioner's claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very
clear and unambiguous. It excepts from income taxamnesty those taxpayers
"with income tax cases already filed in court as of the effectivity hereof." The
point of reference is the date of effectivity of E.O. No. 41. The filing of income
tax cases in court must have been made before and as of the date of
effectivity of E.O. No. 41.
· When E.O. No. 41 became effective on August 22, 1986, CTA Case No. 4109
had not yet been filed in court. Respondent Corporation did not fall under the
said exception in Section 4 (b), hence, respondent was not disqualified from
availing of the amnesty for income tax under E.O. No. 41.
· The same ruling also applies to the deficiency branch profit remittance
taxassessment. A branch profit remittance tax is a tax on income. Respondent
therefore did not fall under the exception in Section 4 (b) when it filed for
amnesty of its deficiency branch profit remittance tax assessment.
· contractor's tax assessment is a tax on business.-not granted amnesty
· respondent's other argument that assuming it did not validly avail of the
amnesty under the two Executive Orders, it is still not liable for the deficiency
contractor's tax because the income from the projects came from the "Offshore
Portion" of the contracts.
· All materials and equipment in the contract under the "Offshore Portion" were
manufactured and completed in Japan, not in the Philippines, and are
therefore not subject to Philippine taxes.
· Under the Philippine Onshore Portion, respondent does not deny its liability
for the contractor's tax on the income from the two projects. In fact
respondent claims, which petitioner has not denied, that the income it derived
from the Onshore Portion of the two projects had been declared for tax
purposes and the taxes thereon already paid to the Philippine government
· It is with regard to the gross receipts from the Foreign Offshore Portion of the
two contracts that the liabilities involved in the assessments subject of this
case arose.
· Petitioner argues that since the two agreements are turn-key, they call for the
supply of both materials and services to the client, they are contracts for a
2. CIR v. BOAC
GR NOS. L-65773-74
April 30, 1987
Topic: SOURCE OF INCOME RULES (SITUS OF TAXATION)
piece of work and are indivisible. The situs of the two projects is in the
Philippines, and the materials provided and services rendered were all done
and completed within the territorial jurisdiction of the Philippines.Accordingly,
respondent's entire receipts from the contracts, including its receipts from the
Offshore Portion, constitute income from Philippine sources.
· A contractor's tax is a tax imposed upon the privilege of engaging in business.
It is generally in the nature of an excise tax on the exercise of a privilege of
selling services or labor rather than a sale on products;and is directly
collectible from the person exercising the privilege.Being an excise tax, it can
be levied by the taxing authority only when the acts, privileges or business are
done or performed within the jurisdiction of said authority. Like property
taxes, it cannot be imposed on an occupation or privilege outside the taxing
district.
· In the case at bar, it is undisputed that respondent was an independent
contractor under the terms of the two subject contracts. Respondent, however,
argues that the work therein were not all performed in the Philippines because
some of them were completed in Japan in accordance with the provisions of
the contracts.
· All the materials and equipment transported to the Philippines were inspected
and tested in Japan prior to shipment in accordance with the terms of the
contracts
· The sub-contractors of the materials and equipment under Japanese Yen
Portion I were all paid by respondent in Japan.
· Between Marubeni and the two Philippine corporations, payments for all
materials and equipment under Japanese Yen Portion I were made to Marubeni
by NDC and Philphos also in Japan.
· Clearly, the service of "design and engineering, supply and delivery,
construction, erection and installation, supervision, direction and control of
testing and commissioning, coordination. . . "of the two projects involved two
taxing jurisdictions. These acts occurred in two countries — Japan and the
Philippines. While the construction and installation work were completed
within the Philippines, the evidence is clear that some pieces of equipment and
supplies were completely designed and engineered in Japan.
· the Court found that Engineering Equipment, although an independent
contractor, was not engaged in the manufacture of air conditioning units in the
Philippines. Engineering Equipment designed, supplied and installed centralized
air-conditioning systems for clients who contracted its services. Engineering,
however, did not manufacture all the materials for the air- conditioning
system. It imported some items for the system it designed and installed.The
issues in that case dealt with services performed within the local taxing
jurisdiction. There was no foreign element involved in the supply of materials
and services.
IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP No. 42518 is
affirmed.

Petitioner: COMMISSIONER OF INTERNAL REVENUE
Respondent: BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS
Ponente: MELENCIO-HERRERA, J.
DOCTRINE: The test of taxability is the "source" and the source of an income is the
property, activity or service that produced the income. For the source of income to
be considered as coming from the Philippines, it is sufficient that the income is
derived from activity within the Philippines.
FACTS:
! BOAC is a 100% British Government-owned corporation existing under the
laws of the United Kingdom.
o engaged in the international airline business
o member-signatory of the Interline Air Transport Association (IATA)
o operates air transportation service and sells transportation tickets
over the routes of the other airline members
! During the periods covered by the disputed assessments, BOAC had no
landing rights for traffic purposes in the Philippines
o it maintained a general sales agent in the Philippines — Qantas
Airways, responsible for selling BOAC tickets covering passengers
and cargoes
G.R. No. 65773 (First Case)
! CIR assessed BOAC the amount of P858,307.79 for deficiency income taxes
covering the years 1959 to 1967.
o BOAC paid under protest.
! BOAC filed a claim for refund of the amount of P858,307.79
o denied by the CIR
! Before said denial, BOAC had already filed a petition for review with the
Tax Court, assailing the assessment and praying for the refund of the
amount paid.
G.R. No. 65774 (Second Case)
! BOAC was assessed deficiency income taxes in the amount of P534,132.08
for the years 1969 to 1971 plus P1,000.00 as compromise penalty
! BOAC requested that the assessment be countermanded and set aside
o CIR denied the request for refund in the First Case and re-issued
in the Second Case the deficiency income tax assessment
! This prompted BOAC to file the Second Case before the Tax Court, praying
that it be absolved of liability for deficiency income tax for the years 1969
to 1971.
! Tax Court rendered the assailed joint Decision, reversing the CIR
o ordered CIR to credit BOAC with the sum of P858,307.79 and to
cancel the deficiency income tax assessments against BOAC in the
amount of P534,132.08 for the years 1969 to 1971
o “proceeds of sales of BOAC passage tickets in the Philippines by
Qantas Airways do not constitute BOAC income from Philippine
sources since no service of carriage of passengers or freight was
performed by BOAC within the Philippines”
! Hence, this Petition for Review on Certiorari.
ISSUE: W/N the revenue from sales of tickets by BOAC in the Philippines constitutes
income from Philippine sources and accordingly, taxable under our income tax laws
– YES.
RULING:
! The source of an income is the property, activity or service that produced
the income. For the source of income to be considered as coming from the
Philippines, it is sufficient that the income is derived from activity within
the Philippines.
o In BOAC's case, the sale of tickets in the Philippines is the activity
that produces the income. The tickets exchanged hands here and
payments for fares were also made here in Philippine currency.
o The situs of the source of payments is the Philippines. The flow of
wealth proceeded from and occurred within Philippine territory,
enjoying the protection accorded by the Philippine government.
o In consideration of such protection, the flow of wealth should
share the burden of supporting the government.
! Section 37(a) of the Tax Code enumerates items of gross income from
sources within the Philippines, namely: (1) interest, (2) dividends, (3)
service, (4) rentals and royalties, (5) sale of real property, and (6) sale of
personal property,
o does not mention income from the sale of tickets for international
transportation
o but, enumeration not intended to be exclusive
! BOAC, however, would impress upon this Court that income derived from
transportation is income for services, with the result that the place where
the services are rendered determines the source and since BOAC's service
of transportation is performed outside the Philippines, the income derived
is from sources without the Philippines and therefore, not taxable under
our income tax laws.
o The absence of flight operations to and from the Philippines is not
determinative of the source of income or the situs of income
taxation.
o Unquestionably, the passage documentations in these cases were
sold in the Philippines and the revenue therefrom was derived
from a business activity regularly pursued within the Philippines.
DISPOSITIVE PORTION:
WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET
ASIDE. Private respondent, the British Overseas Airways Corporation (BOAC), is
hereby ordered to pay the amount of P534,132.08 as deficiency income tax for the
fiscal years 1968-69 to 1970-71 plus 5% surcharge, and 1% monthly interest from
April 16, 1972 for a period not to exceed three (3) years in accordance with the Tax
Code. The BOAC claim for refund in the amount of P858,307.79 is hereby denied.
Without costs.
3. CIR v. CTA and Smith Kline
GR NO. L-54108
January 17, 1984
By: RM
Topic: Source of Income Rules
Petitioners: COMMISSIONER OF INTERNAL REVENUE
Respondents: COURT OF TAX APPEALS and SMITH KLINE & FRENCH OVERSEAS CO.
(PHILIPPINE BRANCH)
Ponente: AQUINO, J.
FACTS:
· Smith Kline and French Overseas Company is multinational firm domiciled
in Philadelphia, Pennsylvania, is licensed to do business in the PH. It is
 engaged in the importation, manufacture and sale of pharmaceuticals, drugs
and chemicals.
· Smith Kline declared a net taxable income of P1,489,277 for 1971 and paid
P501,247 as tax due.
o Among the deductions from the gross income was P501,040 as
its share of the head office overhead expenses.
· However, it claimed that there was an overpayment of P324,255 arising
from underdeduction of home office overhead and made a formal claim for the
refund.
o Background of the overpayment: It appears that sometime in
October, 1972, Smith Kline received from its international
independent auditors, Peat, Marwick, Mitchell and Company,
an authenticated certification to the effect that the
Philippine share in the unallocated overhead expenses of the
main office for the year ended December 31, 1971 was
actually $219,547 (1,427,484). It further stated in the
certification that the allocation was made on the basis of the
percentage of gross income in the Philippines to gross income
of the corporation as a whole. By reason of the new
adjustment, Smith Kline's tax liability was greatly reduced
from P511,247 to P186,992 resulting in an overpayment of
P324,255.
· CTA ordered the Commissioner to refund the overpayment or grant a tax
credit to Smith Kline. Commissioner appealed.
ISSUE: W/N Smith Kline is entitled to the refund?
RULING: YES.
· The governing law is found in section 37 of the old National Internal
Revenue Code, Commonwealth Act No. 466, which is reproduced in Presidential
Decree No. 1158, the National Internal Revenue Code of 1977 and which reads:
“SEC. 37. Income from sources within the Philippines.
“(b) Net income from sources in the Philippines. — From the items of gross income
specified in subsection (a) of this section there shall be deducted the expenses,
losses, and other deductions properly apportioned or allocated thereto and a
ratable part of any expenses, losses, or other deductions which cannot definitely be
allocated to some item or class of gross income. The remainder, if any, shall be
included in full as net income from sources within the Philippines. “
· Revenue Regulations No. 2 of the Department of Finance contains the
following provisions on the deductions to be made to determine the net income
from Philippine sources:
"SEC. 160. Apportionment of deductions. — From the items specified in section
37(a), as being derived specifically from sources within the Philippines there shall
be deducted the expenses, losses, and other deductions properly apportioned or
allocated thereto and a ratable part of any other expenses, losses or deductions
which can not definitely be allocated to some item or class of gross income. The
remainder shall be included in full as net income from sources within the
Philippines. The ratable part is based upon the ratio of gross income from sources
within the Philippines to the total gross income.
· Doctrine: From the foregoing provisions, it is manifest that where an
expense is clearly related to the production of Philippine-derived income or
to Philippine operations (e.g. salaries of Philippine personnel, rental of
office building in the Philippines), that expense can be deducted from the
gross income acquired in the Philippines without resorting to
apportionment.
o The overhead expenses incurred by the parent company in
connection with finance, administration, and research and
development, all of which directly benefit its branches all
over the world, including the Philippines, fall under a
different category however. These are items which cannot be
definitely allocated or identified with the operations of the
Philippine branch.
· Smith Kline had to amend its return because it is of common knowledge
that audited financial statements are generally completed three or four months
after the close of the accounting period. There being no financial statements
yet when the certification of January 11, 1972 was made, the treasurer could
not have correctly computed Smith Kline's share in the home office overhead
expenses in accordance with the gross income formula prescribed in section
160 of the Revenue Regulations. What the treasurer certified was a mere
estimate.
· Smith Kline likewise submits that it has presented ample evidence to
support its claim for refund.
o It has presented before the Tax Court the authenticated
statement of Peat, Marwick, Mitchell and Company to show
that since the gross income of the Philippine branch was
P7,143,155 ($1,098,617) for 1971 as per audit report
prepared by Sycip, Gorres, Velayo and Company, and the
gross income of the corporation as a whole was $6,891,052,
Smith Kline's share at 15.94% of the home office overhead
expenses was P1,427,484 ($219,547)
o Clearly, the weight of evidence bolsters its position that the
amount of P1,427,484 represents the correct ratable share,
the same having been computed pursuant to section 37(b)
and section 160.
WHEREFORE, the decision of the Tax Court is hereby affirmed. No costs.
SO ORDERED.
4. Philippine Guaranty Co. v. CIR
GR NO. L-22074
April 30, 1965
SPV
Topic: Source of Income Rules (Situs of Taxation)
Petitioners: The Philippine Guaranty Co., Inc.
Respondents: Commissioner of Internal Revenue and the Court of Tax Appeals
Ponente: Bengzon
FACTS
- Philippine Guaranty Co. entered into reinsurance contracts with foreign
insurance companies not doing business in the Philippines.
o It agreed to cede to the 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.
o A proportionate amount of taxes on insurance premiums not
recovered from the original assured were to be paid for by the
foreign reinsurers.
- Philippine Guaranty Co., Inc. ceded to the foreign reinsurers the following
premiums:
o In 1935, the amount of P842,466.71; In 1954, the amount of
721,471.85.
- Said premiums were excluded by Philippine Guaranty Co., Inc. from its
gross income when it filed its income tax returns for 1953 and 1954. It did
not withhold or pay tax on them.
- The Commissioner on Internal Revenue assessed Philippine Guaranty Co
and it arrived at the following:
o P230,673 for the year 1935; and P234,365 for the year 1934.
- 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.
o Its protest was denied and it appealed to the Court of Tax
Appeals.
- CTA ordered Philippine Guaranty Co., Inc. to pay to the Commissioner of
Internal Revenue the the total sum of P375,345.00 as withholding income
taxes for the years 1953 and 1954, plus the statutory delinquency penalties
thereon.
ISSUE: W/N the reinsurance premiums constitute income from sources within the
Philippines – YES
HELD:
- The reinsurance contracts show that the transactions or activities that
constituted the undertaking to reinsure Philippine Guaranty Co., Inc.
against loses arising from the original insurances in the Philippines were
performed in the Philippines.
- The liability of the foreign reinsurers commenced simultaneously with the
liability of Philippine Guaranty Co., Inc. under the original insurances.
These are the proof:
o The liability of the foreign reinsurers commenced simultaneously
with the liability of Philippine Guaranty Co., Inc. under the
original insurances.
o Philippine Guaranty Co., Inc. kept in Manila a register of the risks
ceded to the foreign reinsurers. Entries made in such register
bound the foreign reinsurers, localizing in the Philippines the
actual cession of the risks and premiums and assumption of the
reinsurance undertaking by the foreign reinsurers.
o Taxes on premiums imposed by Section 259 of the Tax Code for
the privilege of doing insurance business in the Philippines were
payable by the foreign reinsurers when the same were not
recoverable from the original assured.
o The foreign reinsurers paid Philippine Guaranty Co., Inc. an
amount equivalent to 5% of the ceded premiums, in consideration
for administration and management by the latter of the affairs of
the former in the Philippines in regard to their reinsurance
activities here.
o Disputes and differences between the parties were subject to
arbitration in the City of Manila.
o All the reinsurance contracts, except that with Swiss Reinsurance
Company, were signed by Philippine Guaranty Co., Inc. in the
Philippines and later signed by the foreign reinsurers abroad.
o The contracts provided that its provision shall be construed
according to the laws of the Philippines, thereby manifesting a
clear intention of the parties to subject themselves to Philippine
law.
- Section 24 of the Tax Code subjects foreign corporations to tax on their
income from sources within the Philippines.
o 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 took place in the
Philippines.
o 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.
o 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.
o 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. What is controlling is the place of activity that created the
income.
- Therefore, reinsurance premiums ceded to foreign reinsurers not doing
business in the Philippines are subject to withholding tax under Section 53
and 54 of the Tax Code.
Dispositive
WHEREFORE, in affirming the decision appealed from, the Philippine Guaranty Co.,
Inc. is hereby ordered to pay to the Commissioner of Internal Revenue the sums of
P202,192.00 and P173,153.00, or a total amount of P375,345.00, as withholding tax
for the years 1953 and 1954, respectively. If the amount of P375,345.00 is not paid
within 30 days from the date this judgement becomes final, there shall be collected
a surcharged of 5% on the amount unpaid, plus interest at the rate of 1% a month
from the date of delinquency to the date of payment, provided that the maximum
amount that may be collected as interest shall not exceed the amount
corresponding to a period of three (3) years. With costs against petitioner.
5. ALEXANDER HOWDEN v CIR
GR NO. L-19392
April 14, 1965
By: Raymond Villafuerte
Topic: TAX1; Sources of Income Rules
Petitioners: ALEXANDER HOWDEN & CO., LTD., H. G. CHESTER & OTHERS, ET AL.,
Respondents: THE COLLECTOR (NOW COMMISSIONER) of INTERNAL REVENUE,
Ponente: Bengzon, J.
FACTS:
Commonwealth Insurance Co. entered into reinsurance contracts with 32 British
insurance companies not engaged in trade or business in the Philippines, whereby
the former agreed to cede to them a portion of the premiums on insurances on fire,
marine, and other risks it has underwritten in the Philippines. Alexander Howden &
Co., Ltd. (a British insurance broker) represented the aforesaid British insurance
companies. Pursuant to the contracts, Commonwealth remitted P798,297.47
(reinsurance premiums) to Howeden. In behalf of Howden, Commonwealth also
filed an income tax return for the same amount, with accrued interest thereon in
the amount of P4,985.77, which represented Howden’s gross income for 1951. It
also paid an income tax of P66,112 to the BIR.
Within the 2 year period provided for by law, Howeden filed with the BIR a claim for
refund of the P66,112 (later reduced to P65,115) because it agreed to pay P977 as
income tax on the P4,985.77 accrued interest. Howden, invoking a CIR Ruling dated
December 8, 1953, wherein the CIR had exempted from withholding tax reinsurance
premiums which were received by foreign insurance companies not authorized to do
business in the Philippines from domestic insurance companies. Subsequently,
Howeden instituted an action in the CFI Manila for recovery of the aforesaid amount
claimed. The case was certified to the CTA, which denied the claim.
ISSUES/HELD:
1. W/N the reinsurance premiums are subject to income tax. YES.
● SEC 24 NIRC subjects to tax a non-resident foreign corporation’s income
from sources within the Philippines.
● The source of an income is the property, activity or service that produced
the income.
○ The reinsurance premiums remitted to appellants by virtue of the
reinsurance contracts, accordingly, had for their source the
undertaking to indemnify Commonwealth Insurance Co. against
liability.
○ Said undertaking is the activity that produced the reinsurance
premiums, and the same took place in the Philippines.
● Appellants should not confuse activity that creates income with business in
the course of which an income is realized.
○ An activity may consist of a single act; while business implies
continuity of transactions.
○ An income may be earned by a corporation in the Philippines
although such corporation conducts all its businesses abroad.
● SEC 24 of the Tax Code does NOT require a foreign corporation to be
engaged in business in the Philippines in order for its income from sources
within the Philippines to be taxable.
○ It subjects foreign corporations not doing business in the
Philippines to tax for income from sources within the Philippines.
● Furthermore, as used in our income tax law, “income” refers to the flow
of wealth.
○ Such flow, in the instant case, proceeded from the Philippines.
○ Such income enjoyed the protection of the Philippine
Government.
○ As wealth flowing from within the taxing jurisdiction of the
Philippines and in consideration for protection accorded it by the
Philippines, said income should properly share the burden of
maintaining the government.
Factual basis as to why the SC concluded the undertaking that produced the
reinsurance premiums took place in the Philippines:
1) The reinsured, the liabilities insured and the risks originally underwritten
by Commonwealth Insurance Co., upon which the reinsurance premiums and
indemnity were based, were all situated in the Philippines;
2) The reinsurance contracts were perfected in the Philippines, for
Commonwealth Insurance Co. signed them last in Manila;
3) The parties to the reinsurance contracts in question evidently intended
Philippine law to govern.
4) The contracts provided for the use of Philippine currency as the medium of
exchange and for the payment of Philippine taxes.
2. If taxable, W/N they are subject to withholding tax under SEC 54 in relation
to SEC 58 of the Tax Code. YES.
● Appellants maintain that reinsurance premiums are not “premiums” at all
as contemplated by Subsection (b) of Section 53; that they are not within
the scope of “other fixed or determinable annual or periodical gains,
profits, and income”; that, therefore, they are not items of income
subject to withholding tax.
○ SC disagrees.
● SEC 53(b) subjects to withholding tax the following: interest, dividends,
rents, salaries, wages, premiums, annuities, compensations,
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.
○ SEC 54, by reference, applies this provision to foreign
corporations not engaged in trade or business in the Philippines.
● The word “premiums”, which is neither qualified nor defined by the law
itself, should mean income and should include all premiums constituting
income, whether they be insurance or reinsurance premiums.
○ Assuming that reinsurance premiums are not within the word
“premiums” in Section 53, still they may be classified as
determinable and periodical income under the same provision of
law.
DISPOSITIVE PORTION:
WHEREFORE, the judgment appealed from is hereby affirmed with costs against
appellants. It is so ordered.
6. PHILAMLIFE v. CIR
SP No. 31283
DATE: April 25, 1995
By: EAY3
Topic: SITUS of TAXATION
Petitioners: PHILAMLIFE ET. AL.
Respondents: CIR
Ponente: TAYAO-JAGUROS, J.
FACTS:
· Petitioner Philippine American Life Insurance Co., Inc. (PHILAMLIFE) a
domestic corporation entered into a Management Services Agreement with
American International Reinsurance Co., Inc. (AIRCO), a non-resident foreign
corporation with principal place of business in Pembroke, Bermuda.
· Whereby, effective January 1, 1972, for a fee of not exceeding
$250,000.00 per annum, AIRCO shall perform for PHILAMLIFE the following
services regarding Investment, Underwriting and Marketing, Education and
Training, Accounting and Auditing, Corporate and Personnel.
· AIRCO merged with petitioner American International Group, Inc. (AIGI)
with the latter as the surviving corporation and successor-in-interest in AIRCO's
Management services Agreement with PHILAMLIFE.
· CIR issued in favor of PHILAMLIFE Tax Credit Memo in the amount of
P643,125.00 representing erroneous payment of withholding tax at source on
remittances to AIGI for services rendered abroad in 1979.
· PHILAMLIFE, in a letter dated March 12, 1981, ︎led with respondent a claim
for the refund of the second erroneous tax payment of P643,125.00
· Without waiting for respondent to resolve the claim for refund, petitioners
︎led with the Honorable Court on July 29, 1982 the petition seeking said refund.
· During the pendency of the case, respondent, in a letter dated April 15,
1985, denied PHILAMLIFE's claim for refund of P643,125.00 as withholding tax
at source for 1980. Moreover, respondent cancelled the Tax Credit Memo in the
amount of P643,125.00 previously issued to PHILAMLIFE on November 18, 1980
and requested the latter to pay the amount of P643,125.00 as de︎ciency
withholding tax at source for 1979 plus increments
· Without protesting the assessment for the amount of P643,125.00 as
de︎ciency withholding tax at source for 1979, petitioners ︎led with this
Honorable Court on June 14, 1985 the petition, seeking the annulment of said
assessment.
· CTA -rendered decision in favor of respondents ordered to pay respondent
the amount of P643,125.00 with interest at the rate of twenty (20) per centum
per annum
· Hence, this petition
ISSUE: W/N compensation for advisory services admittedly performed abroad by
the personnel of a non-resident foreign corporation not doing business in the
Philippines (AIGI) are subject to Philippines withholding income tax - YES
HELD/RATIO:
Section 37. Income from Services within the Philippines, (a) Gross income from
sources within the Philippines — the following items of gross income shall be
treated as gross income from source within the Philippines.
(4) Rentals and royalties — Rentals and royalties from properties located in the
Philippines or from any interest in such property, including rentals or royalties for—
...
(c) The supply of scienti︎c, technical, industrial or commercial knowledge
or informations;
(d) The supply of any assistance that is auxiliary and subsidiary to, and is
furnished as a means of enabling the application or enjoyment of, any property, or
right as is mentioned in paragraph (a), any such equipment as is mentioned in
paragraph (b) or any such knowledge or information as is mentioned in paragraph
(c); or
...
(f) Technical advice, assistance or services rendered in connection with the
technical management and administration of any scienti︎c, industrial or commercial
undertaking, venture, project of scheme; and
· this Court rules that while it is true petitioner AIGI has no properties in the
Philippines, agreement with petitioner PHILAMLIFE necessary for the latter
company's e︎cient operation and growth, with petitioner AIGI deriving income
from said agreement, petitioner AIGI is well-within the ambit of Section 37 (a)
(7) of the Tax Code.
· It is not the presence of any property from which one derives rentals and
royalties that is controlling, but rather as expressed under the expanded
meaning of "royalties", it includes " royalties for the supply of scienti︎c,
technical, industrial, or commercial knowledge or informations; and the
technical advice, assistance or services rendered in connection with the
technical management and administration of any scienti︎c, industrial or
commercial undertaking, venture, project or scheme", and others
WHEREFORE, the instant petition for review is DISMISSED by the Court for lack of
merit. The respondent court's decision dated March 10, 1993 and order dated May
19, 1993 in C.T.A. Cases Nos. 3504 and 3943 are hereby A︎rmed. Costs against
petitioners.
IT IS SO ORDERED.
7. CIR V Baier-nickel
GR NO. 153793
August 29, 2006
By: Atmos
Topic: Source of Income Rules (situs of Taxation)
Petitioners: Commissioner of internal revenue
Respondents: Juliane baier-nicke, as represented by Marina Q. Guzman (atty-in-
fact)
Ponente: Ynares-Santiago, J.
DOCTRINE: The important factor which determines the source of income of
personal services is not the residence of the payor, or the place where the contract
for service is entered into, or the place of payment, but the place where the
services were actually rendered.
FACTS:
- CIR appeals the CA decision, which granted the tax refund of respondent and
reversed that of the CTA. Juliane Baier-Nickel, a non-resident German, is the
president of Jubanitex, a domestic corporation engaged in the manufacturing,
marketing and selling of embroidered textile products.
- Through Jubanitex’s general manager, Marina Guzman, the company appointed
respondent as commission agent with 10% sales commission on all sales actually
concluded and collected through her efforts.
- In 1995, respondent received P1, 707, 772. 64 as sales commission from w/c
Jubanitex deducted the 10% withholding tax of P170, 777.26 and remitted to BIR.
Respondent filed her income tax return but then claimed a refund from BIR for
the P170K, alleging this was mistakenly withheld by Jubanitex and that her sales
commission income was compensation for services rendered in Germany not
Philippines and thus not taxable here.
- She filed a petition for review with CTA for alleged non-action by BIR. CTA denied
her claim but decision was reversed by CA on appeal, holding that the commission
was received as sales agent not as President and that the “source” of income
arose from marketing activities in Germany.
-ISSUES:1. W/O respondent's sales commission income is taxable in the
Philippines? (YES)
2 .W/N respondent is entitled to refund (NO)
RULING:
- Commission received by respondent were actually her remuneration in the
performance of her duties as President of JUBANITEX and not as a mere sales
agent.  The income derived by respondent is therefore an income taxable in the
Philippines because JUBANITEX is a domestic corporation.
- Pursuant to the foregoing provision of the NIRC, non-resident aliens, whether or
not engaged in trade or business, are subject to Philippine income taxation on
their income received from all sources within the Philippines.
- Respondent failed to discharge the burden of proving that her income was from
sources outside the Philippines and exempt from the application of our income
tax law.
Pursuant to Sec 25 of NIRC, non-resident aliens, whether or not engaged in trade or
business, are subject to the Philippine income taxation on their income received
from all sources in the Philippines. In determining the meaning of “source”, the
Court resorted to origin of Act 2833 (the first Philippine income tax law), the US
Revenue Law of 1916, as amended in 1917.
US SC has said that income may be derived from three possible sources only: (1)
capital and/or (2) labor; and/or (3) the sale of capital assets. If the income is from
labor, the place where the labor is done should be decisive; if it is done in this
country, the income should be from “sources within the United States.” If the
income is from capital, the place where the capital is employed should be
decisive; if it is employed in this country, the income should be from “sources
within the United States.” If the income is from the sale of capital assets, the
place where the sale is made should be likewise decisive. “Source” is not a
place, it is an activity or property.
As such, it has a situs or location, and if that situs or location is within the United
States the resulting income is taxable to nonresident aliens and foreign
corporations.
The source of an income is the property, activity or service that produced the
income. For the source of income to be considered as coming from the
Philippines, it is sufficient that the income is derived from activity within the
Philippines.
The settled rule is that tax refunds are in the nature of tax exemptions and are to
be construed strictissimi juris against the taxpayer. To those therefore, who claim a
refund rest the burden of proving that the transaction subjected to tax is actually
exempt from taxation.
In the instant case, respondent failed to give substantial evidence to prove that she
performed the incoming producing service in Germany, which would have entitled
her to a tax exemption for income from sources outside the Philippines. Petition
granted.
WHEREFORE, the petition is GRANTED and the January 18, 2002 Decision and May
8, 2002 Resolution of the Court of Appeals in CA-G.R. SP No. 59794, are REVERSED
and SET ASIDE. The June 28, 2000 Decision of the Court of Tax Appeals in C.T.A.
Case No. 5633, which denied respondent’s claim for refund of income tax paid for
the year 1995 is REINSTATED
8.A.Soriano Y Cia v CIR
GR NO. L-5986
August 31,1955
MJB
Topic: Sources of Income Rules
Petitioners: A Soriano Y Cia
Respondents: Collector of Internal Revenue
Ponente: Reyes JBL
DOCTRINE:
! One who acquires title to surplus equipment found in U.S. Army bases or
installations within the Philippines by purchase, and brings them out of those
bases or deposits, is an importer, and sales made by him of such surplus goods
to the general public are taxable under sections 185 and 186 of the Internal
Revenue Code.
! The sale of the tractors was consummated in the Philippines, for title was
transferred to the foreign buyer at the prier in Manila; hence, the situs of the
sale is Philippines and it is taxable in this country.
! The consignment tax formerly imposed on exports by section 187 of the
Internal Revenue Code (now repealed by Republic Act 41) is different from the
sales tax imposed by Article 186, which has not been repealed.
o "The tax on consignment is a privileged tax pure and simple; it is a
tax on the business of consigning commodities abroad from these
Islands . . . If the tax were one on sales we would readily agree that
the sales, in order to be in the Philippines, must be consummated
there." (Vegetable Oil Co. Trinidad, 45 Phil., 634-635)
o The law subjects to the payment of the sales tax, not the buyer who
intends to export what he buys, but the seller because such sale is
domestic and therefore liable for the payment of sales tax in this
country.
FACTS:
! Petitioner was engaged in the business of selling surplus goods acquired from
the Foreign Liquidation Commission
! Petitioner undertook to rehabilitate the Veterans Administration Building for
and in consideration of over a million pesos worth of surplus goods.
! In January, 1947, the United Africa Co., Ltd. sent its representative, Hugh
Watson Gibson, to the Philippines to look into the availability of tractors for
sale in the Philippines.
! Gibson learned of petitioner's business and contracted to buy tractors from the
latter, to be delivered f.a.s. (free alongside ship), Manila, in good working
condition and capable of running off lighters under their own power.
! A tractor expert, Mr. Tex Taylor, was employed by the foreign company to
select, inspect and test the tractors before delivery.
! Tex Taylor went to the different military bases, took the serial numbers of the
tractors which he wanted, and gave the list thereof to the petitioner, who then
secured from the Foreign Liquidation Commission the purchase invoices and
other documents for the immediate release of the tractors.
! The tractors were then removed by petitioner to its Pieco Yard, where they
were tested by Tex Taylor.
! Those found to be in good condition were approved by Taylor, wherefore
petitioner presented to him the sales invoices for his signature, stamping his
approval thereon.
! Twenty-four of the tractors were found defective and so were brought to
petitioner's Sta. Mesa Yard for reconditioning.
! Upon approval of each invoice, the same was presented by petitioner to the
Philippine Refining Company, Inc., an affiliate of the foreign buyer, for payment
of the purchase price. The Philippine Refning Co. would in turn notify the
National City Bank of New York and the Hongkong and Shanghai Banking
Corporation, Manila, where the United Africa Co. had dollar deposits, to make
payment of petitioner's invoices.
! The tractors were delivered by petitioner to the pier in Manila by means of
barges as soon as notice was received from the representative of its foreign
buyer that a carrying vessel was ready.
! On June 24 and August 26, 1947, the Philippine Refining Co., Inc. shipped the
57 tractors acquired from petitioner from the port of Manila to United Africa
Co., Ltd. at Dares Salaem, East Africa.
! The total value of the tractors was P757,000. However, due to certain defects
of some of them upon reaching Africa, the sum of P4,959.19 was reimbursed by
petitioner to its foreign buyer by credit memo.
ISSUE:
! Whether or not petitioner is liable for the payment of percentage or sales tax
on its gross sales of the 57 tractors in question to the United Africa Co., Ltd.
under the provisions of Sec. 186 of the National Internal Revenue Code.? YES
o Under the above provisions, petitioner's liability would thus depend on
︎first, whether or not it was an importer of the 57 tractors?
o And second, whether it made an original sale thereof in the
Philippines?
RULING: ( BOLD yung sinabi ng SC)
! Petitioner insists, that it did not import the 57 tractors in question for the
Foreign Liquidation Commission because title to the same passed to its foreign
buyer while the goods were still at the foreign bases, and that they passed
Philippine territory merely in transit to pier, Manila, where they were delivered
f.a.s.; hence its sale of the tractors was not domestic and therefore not liable
for the payment of sales tax.
o SC - Petitioner's theory is not supported by the records. It admits
that delivery of the tractors was made by it to the carrier f.a.s.
Manila
o The rule is that where the contract is to deliver goods f.a.s, the
property passes on delivery at the wharf or the dock. Otherwise
stated, delivery to the carrier is delivery to the buyer
o No proof to show that petitioner and its foreign buyer intended
otherwise, that is, that delivery and the passing of title to its buyer
should take place right in the army bases where the tractors were
located.
o Petitioner itself has admitted that Tex Taylor has no power or
authority whatever to do so.
o In its letter to the Collector of Internal Revenue and Secretary of
Finance. The letters show that Tex Taylor had no authority to
accept delivery of the tractors for the buyer United Africa Co.,
Ltd., his duty being merely to inspect and approve their condition.
o The designation by Taylor of the tractors he selected at the bases,
therefore, was merely a preliminary step for their removal from the
bases to petitioner's service and storage yards in Manila. Then
petitioner made delivery of the tractors at the pier in Manila
whenever there was an available boat for transportation to Africa, and
it was so informed by the representatives of the United Africa Co.
o Hence, it was only at Manila that the goods were delivered, and
title passed to the buyer; and from their removal from the bases
until their delivery at shipside, title to the tractors was in the
seller.
o Other undisputed facts in the record also force the conclusion that
title to the tractors in question passed to petitioner's buyer not at the
bases, but only at pier, Manila.
▪ First, it was petitioner who paid for the delivery charges
from the different bases to the pier, pursuant to the tax in
"fob" or "f.a.s."
▪ Second, the tractors were described in petitioner's
invoices as bearing certain numbers followed by the phrase
"Our Unit Sta. Mesa" or "Our Unit Pieco", showing that the
tractors were first brought to petitioner's yards and
numbered accordingly, in the same way that all goods
 found and stored in these yards were numbered, and it
was only after they had passed petitioner's yards that they
were delivered to the buyer.
▪ Third, two of petitioner's invoices state that the tractors
were inspected and accepted at Pieco Yard and/or Sta.
Mesa Yard, which disproves petitioner's contention that Tex
Taylor tested and approved of them right in the bases.
Fourth, petitioner's own witness Epimaco Gonzales
admitted that it was only at Pieco Yard that Taylor
inspected and tested the tractors
! Petitioner argues that the goods in question did not acquire a taxable situs in
the Philippines because they merely passed Philippine territory in transit and
that they were not intended for local use but for exportation to a foreign
country.
o We ︎find this argument irrelevant, since the tax in dispute is one on
transaction (sales) and not a tax on the property sold.
o The sale of the tractors was consummated in the Philippines, for
title was transferred to the foreign buyer at the pier in Manila;
hence, the situs of the sale is Philippines and it is taxable in this
country.
! Petitioner contends that to tax one who sells goods intended for export would
be to nullify the legislative intent behind the repeal of the tax on consignments
abroad, which is to encourage exports.
o The argument is fallacious. The law subjects to the payment of the
sales tax not the buyer who intends to exports what he buys, but
the seller, because such sale is domestic and therefore liable for
the payment of sales tax in this country.
o "Domestic and foreign sale distinguished. — The sales tax liability of
a person consigning his timber abroad depends upon where the title
to the timber consigned passes from the seller to the buyer. If the
title to the timber consigned abroad passes to the buyer within the
jurisdiction of the Philippines, the transaction is domestic and is
subject to the sales tax; otherwise, the transaction will be
considered a foreign sale and is exempt from the sales tax
prescribed in section 186 of the Tax Code." (Formilleza,
Commentaries on the N. I. R. C., Vol. II, pp. 729-730)
o As for the legislative policy to exempt consignments abroad from
tax in order to encourage exports, t
o he Solicitor General has pointed out that it is only the exportation
of locally produced or manufactured products, and not every kind
of exportation, that Congress wanted to encourage and promote.
Hence, section 189 of the Code exempts from percentage tax
coconut oil and by-products of copra produced or manufactured in
the Philippines
9. ACES PHILIPPINES V. CIR
CTA EB CASE NO. 1242
June 8, 2016
By: BDC
Topic: Situs of Taxation
Petitioners: Aces Philippines Cellular Corp.
Respondents: CIR
Ponente: MINDARO-GRULLA, J.
DOCTRINE:
The activity and services that produces the income is the undertaking of providing
satellite communications to be delivered in the Philippines. The important factor
which determines the source of income of personal services is not the residence of
the payor, or the place where the contract for service is entered into, or the place
of payment, but he place where the services were actually rendered.
FACTS:
· In 1995, petitioner was incorporated in the PH to operate telecommunications
gatewats and equipment involving the processing, storage, monitoring and
retrieval of data, image, voice, audio and tone.
oPetitioner is a corporation duly organized and existing under the laws of the
Philippines and is registered with the Subic Bay Freeport Enterprise for the
purpose of engaging in the business of providing communication services via
satellite.
· On March 12, 1997, petitioner through its parent company, PLDT, entered into an
Air Time Purchase Agreement with P.T Asia Cellular Satellite (PTACS), a company
in Indonesia, which was assigned by PLDT to the petitioner while PTACS assigned
the same agreement to Aces International Limited (AIL).
oAIL is a foreign corporation established and organized in Bermuda. Its
principal business is to provide and develop a mobile satellite
telecommunication network in Asia.
· The agreement granted petitioner the right to purchase satellite
communications time from AIL which the petitioner sells and furnishes to its
subscribers.
· Petitioner received two BIR LOA requesting to examine the books of accounts
and other accounting records for all internal revenue taxes for 2006
· Petitioner transmitted the documents requested in both letters but asked to be
allowed to complete the rest until the end of Oct. 2007 but submitted the same
on June 2010.
· Petitioner received a Notice of Informal Conference relating to petitioner’s
alleged deficiency income tax, expanded withholding tax, final withholding tax,
and documentary stamp tax which amounted to P176,688,087.39.
· After further investigation and numerous position papers, the Revenue District
Officer found that the alleged deficiency in final withholding taxes inclusive of
penalties amount to P163,377,931.84.
· Respondent’s contention: It is income derived from sources within the PH. The
communication time rendered by AIL through the petitioner was made available
within the PH, subscribed and patronized by Filipinos. The source or origin of
income is determined by the situs where the activity or service was performed.
As claimed by the petitioner, it cannot be said that the situs of the activity, in
this case, took place outside the Philippines because the activity in which the
 AIL is engaged in providing a satellite communication time. As such, there can
only be an income-producing activity when such communication time is
subscribed into; and the absence of a ground station in the Philippines is not
determinative of the situs of the income-producing activity.
· Petitioner’s Contention: AIL is paid the satellite air time fees only when the
satellite air time is delivered to petitioner and its subscribers and subsequently
utilized by them in the PH. The services rendered by AIL such as the use of
Garuda Satellite (located in outer space), Network Control Center (located in
Indonesia) are made outside of the Philippines. Petitioner claims that AIL's
service is terminated when its Network Control Center (located in Indonesia)
provides information to Garuda Satellite (located in outer space) on which
gateway the call shall be routed. Without petitioner's own gateway located in
the Philippines, the call cannot be terminated and would be incomplete
ISSUE: WON the satellite airtime fees are considered income from sources within
the Philippines, hence subject to 35% withholding tax
RULING: YES,the satellite airtime fees are considered income from sources
within the PH.
The services for satellite airtime fees do not only compound with the use of the
Garuda Satellite and the Network Control Center, but also require the
communication time be available in the Philippines.
There is a continuous and very real connection starting from the Philippines (i.e.,
the agreement to sell satellite communications time for the ACES System in the
Philippines, Garuda Satellite (located in outer space), the Network Control Center
(located in Indonesia), and again in the Philippines, through petitioner’s gateway
facilities.
The activity and services that produces the income is the undertaking of
providing satellite communications to be delivered in the Philippines.The
important factor which determines the source of income of personal services is
not the residence of the payor, or the place where the contract for service is
entered into, or the place of payment, but he place where the services were
actually rendered.

In the case at bar, it is only when the satellite signals are received by Aces’ gateway
facilities in the Philippines that it can be said that the performance of the
contractual services was fully consummated or rendered.
Aces pay airtime fees only when the satellite airtime is successfully delivered to
Aces through its gateway facilities in the Philippines. For unanswered calls, no
charges are billed against petitioner even if Garuda satellite (located in outer
space), the Network Control Center (located in Indonesia) were used. Clearly, the
absence of successful transmission of the satellite signal by AIL to Aces gateway
facilities located in the Philippines, income or payment for satellite airtime fees
will not arise.
DISPOSITIVE PORTION:
WHEREFORE, the Petition for Review is DENIED, for lack of merit. Accordingly, the
Decision of the Second Division promulgated on July 23, 2014 and Resolution dated
October 15, 2014 are AFFIRMED. No pronouncement as to costs.
DISSENTING OPINION (Baustista, J.)
The assessment for FWT against Aces should be cancelled.
A distinction must be made between the services rendered by Aces and that
rendered by AIL.
· Aces rendered satellite communication services to its Philippine
subscribers while AIL is a satellite airtime provider. 

· AIL operates the geostationary satellite which has the capacity to
receive, switch, amplify, and transmit radio signals to and from
terminal and gateways.
· AIL’s services are all performed outside the Philippines 

AIL is paid for each six-second interval of satellite utilization time
beginning when AIL’s satellite receives the call until the call is
routed to Aces’ gateway.
Thus, Except for routing the call to the Philippines, where ACES will necessary
receive the call for further routing and termination considering ACES's facilities are
located in the Philippines, AIL's services are all performed outside the Philippines. In
conclusion AIL's services are rendered outside the Philippines, and are therefore not
subject to Philippine income tax.
!!! NOTES !!!
ACES subscriber (who may or may not be located in the Philippines) makes a call
using the satellite user terminal → AIL's satellite (located in space) receives the call
and beams the signal to AIL's Network Control Center (located in Indonesia) → AIL's
Network Control Center informs the satellite to route the call to the gateway
facilities of ACES (located in the Philippines) → ACES will then receive the call and
route it to ACES' switch (located in the Philippines), which processes the call for
routing and termination.
Final withholding tax is the full and final payment of income tax due from the
recipient of the income and the obligation to withhold the tax is imposed by law
on the payor of the goods or service.
10. WISE & CO VS. MEER
G.R. NO. 48231
30 JUN 1947
 By: DEINLA
P265,000.00 P 5,116.59
Topic: TAX; Gross income; inclusions
Petitioners: WISE & CO., INC., ET AL. ! At a special general meeting of the shareholders of the Hongkong Company, the
Respondents: BIBIANO L. MEER, Collector of Internal Revenue stockholders by resolution directed that the company be voluntarily liquidated,
Ponente: HILADO, J. and its capital distributed among the stockholders.
! Plaintiffs filed Philippine income tax returns. The defendant subsequently made
DOCTRINE: deficiency assessments against plaintiffs of Php 7,003.47 and the rest Php
1,145.54.
FACTS: ! Plaintiffs paid the said amounts under written protest, which was overruled in
! During the year 1937, plaintiffs were stockholders of Manila Wine Merchants, due course. The plaintiffs requested from defendant a refund of the said
Ltd., a foreign corporation duly authorized to do business in the Philippines. amounts which defendant has refused and still refuses to refund.
! The Board of Directors of Manila Wine Merchants, Ltd., (hereinafter referred to ! Appellants maintain that the amounts received by them and on which the taxes
as the Hongkong Company), recommended to the stockholders of the company in question were assessed and collected were ordinary dividends; while the
that they adopt the resolutions necessary to enable the company to sell its appellee contends that they were liquidating dividends.
business and assets to Manila Wine Merchants, Inc., a Philippine corporation o If the first proposition is correct, this assignment would be well-taken,
(hereinafter referred to as the Manila Company). otherwise, the decision of the court upon the point must be upheld.
! On June 22, 1937, said sale was authorized by the stockholders of the
Hongkong Company and the contract of sale between the two companies was ISSUE: Whether petitioners are entitled to a refund. NO.
executed on the same date. Manila Company paid the Hongkong company the
P400,000 purchase price. RULING:
! Pursuant to a resolution by its BoD purporting to declare a dividend, the First resolve the issue of whether the dividends are ordinary or liquidating.
Hongkong Company made a distribution from its earnings for the year 1937 to (Liquidating)
its stockholders. ! The determining element is whether the distribution was in the ordinary course
! The Hongkong Company distributed this surplus to its stockholders, plaintiffs of business and with intent to maintain the corporation as a going concern, or
receiving the following sums declared and paid June 8, 1937. after deciding to quit with intent to liquidate the business.
! In the case at bar, when in the deed of July 22, 1937, the Hongkong Company
Wise & Co., Inc. P7,677.82 thru its authorized representative declared and agreed that the aforesaid sale
Mr. J.F. MacGregor 2,554.86 and transfer shall take effect as of June 1, 1937, and distribution from its
Mr. N.C. MacGregor 2,369.48 assets to those same stockholders made after June 1, 1937, although before
Mr. C.J. Lafrentz 529.51 July 22, 1937, must have been considered by them as liquidating dividends.
Mrs. E.M.G. Strickland 2,369.48 ! For how could they consistently deem all the business and assets of the
Mrs. M.J.G. Mullins 2,369.48 corporation sold as of June 1, 1937, and still say that said corporation, as a
TOTAL P17,870.63 going concern, distributed ordinary dividends to them thereafter?
! The Hongkong Company paid Philippine income tax on the entire earnings from ! The fact that the distributions were called "dividends" and were made, in part,
which the said distributions were paid. from earnings and profits, and that some of them were made before liquidation
! After deducting the said dividend, the surplus of the Hongkong was P74,182.12. or dissolution proceedings were commenced, is not controlling.
Because of the sale of its business and assets to the Manila Company, the ! The directors or representatives of the Hongkong Company or the Manila
surplus of the Hongkong Company was increased to a total of P270,116.59. Said Company, or both, could of course not convert into ordinary dividends what in
surplus was again distributed. law and in reality were not such.
Is it taxable? (Yes)
Declared: July 22, 1937
 Declared: July 22, 1937
 ! The Income Tax Law, Act No. 2833 section 25 (a), as amended by section 4 of
Paid: August 4, 1937 Paid: October 28, 1937 Act. No. 3761, inter alia stipulated:
o Where a corporation, partnership, association, joint-account, or insurance
Wise & Co., Inc. P113,851.85 P 2,198.24 company distributes all of its assets in complete liquidation or dissolution, the
gain realized or loss sustained by the stockholder, whether individual or
Mr. J.F. MacGregor 37,885.20 731.48 corporation, is a taxable income or a deductible loss as the case may be.
! In making the deficiency assessments, the Collector, among other items, made
Mr. N.C. MacGregor 35,137.03 678.42
proper deduction of the "value of shares" or "cost of shares" in the case of each
Mr. C.J. Lafrentz 7,851.86 151.61 individual plaintiff, assessing the tax only on the resulting "profit realized"; and
of course in case the value or cost of the shares should exceed the distribution
Mrs. E.M.G. Strickland 35,137.03 678.42 received by the stockholder, the resulting difference will be treated as a
"deductible loss."
Mrs. M.J.G. Mullins 35,137.03 678.42
! It should be borne in mind that plaintiffs received the distributions in question
in exchange for the surrender and relinquishment by them of their stock in the
Hongkong Company which was dissolved and in process of complete liquidation.
! That money in the hands of the corporation formed a part of its income and
was properly taxable to it under the then existing Income Tax Law. When the
corporation was dissolved and in process of complete liquidation and its
shareholders surrendered their stock to it and it paid the sums in question to
them in exchange, a transaction took place, which was no different in its
essence from a sale of the same stock to a third party who paid therefor.
! In either case the shareholder who received the consideration for the stock
earned that much money as income of his own, which again was properly
taxable to him under the same Income Tax Law.
DISPOSITIVE PORTION:
Motion denied. So ordered.
11. CIR vs CA (1999)
by: Shanon / G.R. No. 108576 / January 20, 1999/ Ponente: MARTINEZ, J.
Topic: GROSS INCOME: INCLUSIONS
Petitioners: CIR
Respondents: CA, CTA and A. SORIANO CORP.
Facts:
! Don Andres Soriano formed the corporation “A. Soriano Y Cia”, predecessor of
ANSCOR with a P1M capitalization divided into 10,000 common shares at a par
value of P100/share.
o ANSCOR is wholly owned and controlled by the family of Don Andres.
o Don Andres subscribed to 4,963 shares of the 5,000 shares originally
issued.
! ANSCOR’s authorized capital stock was increased to P2.5M divided into 25,000
common shares with the same par value.
o Of the additional 15,000 shares, only 10,000 was issued which were all
subscribed by Don Andres, after the other stockholders waived in favor
of the former their pre-emptive rights to subscribe to the new issues.
o This increased his subscription to 14,963 common shares.
o Don Andres transferred 1,250 shares each to his two sons, Jose and
Andres Jr., as their initial investments in ANSCOR.
! ANSCOR declared stock dividends.
! Don Andres died.
o Records revealed that he has a total shareholdings of 185,154 shares.
o 50,495 of which are original issues and the balance of 134,659 shares
as stock dividend declarations.
o 1/2 of that shareholdings or 92,577 shares were transferred to his
wife, Doña Carmen Soriano, as her conjugal share. The offer half
formed part of his estate.
! A day after Don Andres died, ANSCOR increased its capital stock to P20M and,
further increased it to P30M.
! Stock dividends worth 46,290 and 46,287 shares were respectively received by
the Don Andres estate and Doña Carmen from ANSCOR.
o Hence, increasing their accumulated shareholdings to 138,867 and
138,864 common shares each.
! Doña Carmen requested a ruling from the U.S. Internal Revenue Service (IRS),
inquiring if an exchange of common with preferred shares may be considered as
a tax avoidance scheme.
! ANSCOR reclassified its existing 300,000 common shares into 150,000 common
and 150,000 preferred shares.
! In a letter-reply, the IRS opined that the exchange is only a recapitalization
scheme and not tax avoidance.
! Consequently, Doña Carmen exchanged her whole 138,864 common shares for
138,860 of the preferred shares.
o The estate of Don Andres in turn exchanged 11,140 of its common
shares for the remaining 11,140 preferred shares.
! After examining ANSCOR’s books of account and record, Revenue examiners
issued a report proposing that ANSCOR be assessed for deficiency withholding
tax-at-source, based on the transaction of exchange and redemption of stocks.
! BIR made the corresponding assessments.
! ANSCOR’s subsequent protest on the assessments was denied by CIR.
! ANSCOR filed a petition for review with the CTA, the Tax Court reversed CIR’s
ruling. CA affirmed the ruling of the CTA. Hence this position.
Issue/Ruling: Whether ANSCOR's redemption of stocks from its stockholder Don
Andres, can be considered as "essentially equivalent to the distribution of taxable
dividend" making the proceeds taxable. (YES)
! GR: A stock dividend representing the transfer of surplus to capital account
shall not be subject to tax.
! XPN: If a corporation cancels or redeems stock issued as a dividend at such
time and in such manner as to make the distribution and cancellation or
redemption, in whole or in part, essentially equivalent to the distribution of a
taxable dividend, the amount so distributed in redemption or cancellation of
the stock shall be considered as taxable income.
! Exception to plug the loophole in the law:
o Corporate earnings would be distributed under the guise of its initial
capitalization by declaring the stock dividends previously issued and
later redeem said dividends by paying cash to the stockholder.
o This process of issuance-redemption amounts to a distribution of
taxable cash dividends which was just delayed so as to escape the tax.
o The redemption or cancellation of stock dividends, depending on the
"time" and "manner" it was made, is "essentially equivalent to a
distribution of taxable dividends," making the proceeds thereof
"taxable income" "to the extent it represents profits"
! Requisites for the Exempting Clause to apply
o There is redemption or cancellation.
o The transaction involves stock dividends; and
o The "time and manner" of the transaction makes it "essentially
equivalent to a distribution of taxable dividends"
! Not all redemptions of stocks will result in a taxable dividend
o If the source of the stock redeemed is the original or subsequent
subscription, then there is return of capital.
o If the source of the stock redeemed is stock dividends declared, then
there is taxable dividend
! It is undisputed that at the time of the last redemption, the original common
shares owned by the estate were only 25,247.5.
! This means that from the total of 108,000 shares redeemed from the estate,
the balance of 82,752.5 (108,000 less 25,247.5) must have come from stock
dividends.
! As to the 3rd element, the stock dividends that were redeemed were issued
just 2 to 3 years earlier.
! The issuance of stock dividends and its subsequent redemption must be
separate, distinct, and not related, for the redemption to be considered a
legitimate tax scheme.
o Redemption cannot be used as a cloak to distribute corporate
earnings.
! The three elements in the imposition of income tax are: (1) there must be gain
or and profit, (2) that the gain or profit is realized or received, actually or
constructively, and (3) it is not exempted by law or treaty from income tax.
! The test of taxability under the exempting clause of Section 83(b) is, whether
income was realized through the redemption of stock dividends.
! The two purposes invoked by ANSCOR are no excuse for its tax liability.
! First, the alleged "filipinization" plan cannot be considered legitimate as it was
not implemented until the BIR started making assessments on the proceeds of
the redemption. Records show that despite the existence of enormous
corporate profits no cash dividend was ever declared by ANSCOR from 1945
until the BIR started making assessments in the early 1970's. This circumstance
negates the legitimacy of ANSCOR's alleged purposes.
! ANSCOR argued that to treat as "taxable dividend" the proceeds of the
redeemed stock dividends would be to impose on such stock an undisclosed lien
and would be extremely unfair to intervening purchase. Such argument,
however, bears no relevance in this case as no intervening buyer is involved.
! After considering the manner and the circumstances by which the issuance and
redemption of stock dividends were made, there is no other conclusion but that
the proceeds thereof are essentially considered equivalent to a distribution of
taxable dividends. As "taxable dividend" under Section 83(b), it is part of the
"entire income" subject to tax.
! WHEREFORE, premises considered, the decision of the Court of Appeals is
MODIFIED in that ANSCORs redemption of 82,752.5 stock dividends is herein
considered as essentially equivalent to a distribution of taxable dividends for
which it is LIABLE for the withholding tax-at-source. The decision is AFFIRMED
in all other respects.
12. CIR V CA
G.R. No. 95022
March 23, 1992
BL
Topic:
Petitioners:COMMISSIONER OF INTERNAL REVENUE
Respondents: THE HON. COURT OF APPEALS, THE COURT OF TAX APPEALS, GCL
RETIREMENT PLAN, represented by its Trustee-Director
Ponente: MELENCIO-HERRERA
FACTS
· Private Respondent, GCL Retirement Plan is an employees' trust maintained by
the employer, GCL Inc., to provide retirement, pension, disability and death
benefits to its employees.
· The Plan as submitted was approved and qualified as exempt from income tax
by Petitioner Commissioner of Internal Revenue in accordance with Rep. Act No.
4917.
· Respondent GCL made investments and earned therefrom interest income from
which was withheld fifteen per centum (15%) final withholding tax imposed by
Pres. Decree No. 1959,which took effect on 15 October 1984
· Respondent GCL filed with Petitioner a claim for refund in the amounts of P1,
312.66 withheld by Anscor Capital and Investment Corp., and P2, 064.15 by
Commercial Bank of Manila. On 12 February 1985, it filed a second claim for
refund of the amount of P7, 925.00 withheld by Anscor, stating in both letters
that it disagreed with the collection of the 15% final withholding tax from the
interest income as it is an entity fully exempt from income tax as provided
under Rep. Act No. 4917 in relation to Section 56 (b) of the Tax Code.
· refund requested having been denied
· GCL elevated the matter to respondent Court of Tax Appeals (CTA).
· CTA ruled in favor of GCL, holding that employees' trusts are exempt from the
15% final withholding tax on interest income and ordering a refund of the tax
withheld. Upon appeal, originally to this Court, but referred to respondent Court
of Appeals, the latter upheld the CTA Decision.
· Rep. Act No. 1983, which took effect on 22 June 1957, amending Sec. 56 (b) of
the National Internal Revenue Code (Tax Code, for brevity), employees' trusts
were exempt from income tax:
· Exception.— The tax imposed by this Title shall not apply to employees' trust
which forms a part of a pension, stock bonus or profit-sharing plan of an
employer for the benefit of some or all of his employees (1) if contributions are
made to trust by such employer, or employees, or both, for the purpose of
distributing to such employees the earnings and principal of the fund
accumulated by the trust in accordance with such plan.
· Pres. Decree No. 1156 provided, for the first time, for the withholding from
the interest on bank deposits at the source of a tax of fifteen per cent (15%) of
said interest. However, it also allowed a specific exemption in its Section 53
· Withholding of tax at source
· It is to be noted that the exemption from withholding tax on interest on bank
deposits previously extended by Pres. Decree No. 1739 if the recipient
(individual or corporation) of the interest income is exempt from income
taxation, and the imposition of the preferential tax rates if the recipient of the
income is enjoying preferential income tax treatment, were both abolished by
Pres. Decree No. 1959.
· Petitioner thus submits that the deletion of the exempting and preferential tax
treatment provisions under the old law is a clear manifestation that the single
15% (now 20%) rate is impossible on all interest incomes from deposits, deposit
substitutes, trust funds and similar arrangements, regardless of the tax status or
character of the recipients thereof. In short, petitioner's position is that from 15
October 1984 when Pres. Decree No. 1959 was promulgated, employees' trusts
ceased to be exempt and thereafter became subject to the final withholding
tax.
· GCL contends that the tax-exempt status of the employees' trusts applies to
all kinds of taxes, including the final withholding tax on interest income.
· according to GCL, is derived from Section 56(b) and not from Section 21 (d)
or 24 (cc) of the Tax Code, as argued by Petitioner.
ISSUE
· Whether or not the GCL Plan is exempt from the final withholding tax
on interest income from money placements and purchase of treasury bills
required by Pres. Decree No. 1959.
HELD/RATIO
 · We uphold the exemption. 

· it is significant to note that the GCL Plan was qualified as exempt from Respondents filed a claim for tax credit requesting that the sum of P1,971,595.01
income tax by the Commissioner of Internal Revenue in accordance with Rep. be applied against their existing and future tax liabilities. 

Act No. 4917 approved on 17 June 1967.


· The tax-exemption privilege of employees' trusts, as distinguished from
any other kind of property held in trust, springs from the foregoing provision. It The petition was grounded on the claim that Mitsubishi was a mere agent of
is unambiguous. Manifest therefrom is that the tax law has singled out Eximbank, which is a financing institution owned, controlled and financed by the
employees' trusts for tax exemption. Japanese Government. Such governmental status of Eximbank, if it may be so
· It is evident that tax-exemption is likewise to be enjoyed by the income of called, is the basis for private repondents' claim for exemption from paying the tax
the pension trust. Otherwise, taxation of those earnings would result in a on the interest payments on the loan as earlier stated. It was further claimed that
diminution accumulated income and reduce whatever the trust beneficiaries the interest payments on the loan from the consortium of Japanese banks were
would receive out of the trust fund. This would run afoul of the very
likewise exempt because said loan supposedly came from or were financed by
intendment of the law.
Eximbank. The provision of the National Internal Revenue Code relied upon is
Section 29 (b) (7) (A), 6 which excludes from gross income:




 (A) Income received from their investments in the Philippines in loans, stocks,
13. CIR v. MITSUBISHI
 bonds or other domestic securities, or from interest on their deposits in banks in
G.R. No. L-54908
 the Philippines by (1) foreign governments, (2) financing institutions owned,
G.R. No. 80041
 controlled, or enjoying refinancing from them, and (3) international or regional
22 January 1990
 financing institutions established by governments.

By: DATU PAX ALI
 

Topic: Tax
 CA promulgated its decision ordering petitioner to grant a tax credit in favor of
Petitioners: COMMISSIONER OF INTERNAL REVENUE
 Atlas in the amount of P1,971,595.01. 

Respondents: MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND 

DEVELOPMENT CORPORATION and the COURT OF TAX APPEALS
 While the case was still pending before the tax court, the corresponding 15% tax on
Ponente: Ragalado, J.
 the amount of P439,167.95 on the P2,927,789.06 interest payments for the years

 1977 and 1978 was withheld and remitted to the Government. Atlas again filed a
FACTS:
 claim for tax credit with the petitioner, repeating the same basis for exemption.


 

Atlas Consolidated Mining and Development Corporation entered into a Loan and Relying on its prior ruling in the previous case, respondent court rendered judgment
Sales Contract with Mitsubishi Metal Corporation, a Japanese corporation licensed ordering the petitioner to credit Atlas the aforesaid amount of tax paid.

to engage in business in the Philippines, for purposes of the projected expansion of 

the productive capacity of the former's mines in Cebu. Mitsubishi agreed to extend ISSUE: Whether or not the interest income from the loans extended to Atlas by
a loan to Atlas 'in the amount of $20,000,000.00 US Dollars for the installation of a Mitsubishi is excludible from gross income taxation pursuant to Section 29 b) (7) (A)
new concentrator for copper production. 
 of the tax code and, therefore, exempt from withholding tax. 


 

Mitsubishi applied for a loan with the Export-Import Bank of Japan (Eximbank) RULING: NO

obviously for purposes of its obligation under said contract. Its loan application was 

approved in the sum total of $20,000,000.00 US Dollars. The records in the BIR show The loan and sales contract between Mitsubishi and Atlas does not contain any
that the approval of the loan by Eximbank to Mitsubishi was subject to the direct or inferential reference to Eximbank whatsoever. The agreement is strictly
condition that Mitsubishi would use the amount as a loan to Atlas and as a between Mitsubishi as creditor in the contract of loan and Atlas as the seller of the
consideration for importing copper concentrates from Atlas.
 copper concentrates. 


 

Pursuant to the contract between Atlas and Mitsubishi, interest payments were Eximbank had nothing to do with the sale of the copper concentrates since all that
made by the former to the latter totalling P13,143,966.79 for the years 1974 and Mitsubishi stated in its loan application with the former was that the amount being
1975. The corresponding 15% tax thereon in the amount of P1,971,595.01 was procured would be used as a loan to and in consideration for importing copper
withheld pursuant to NIRC.
 concentrates from Atlas. Such an innocuous statement of purpose could not have
been intended for, nor could it legally constitute, a contract of agency. If that had
been the purpose as respondent court believes, said corporations would have
specifically so stated, especially considering their experience and expertise in
financial transactions, not to speak of the amount involved and its purchasing value
in 1970.
 at face value and an interest coupon rate of 22.875% payable semi-


When MITSUBISHI therefore secured such loans, it was in its own independent
capacity as a private entity and not as a conduit of the consortium of Japanese
banks or the EXIMBANK of Japan.
 purchase the Bond from Citibank N.A. at a premium, or at a price higher


The contract between Eximbank and Mitsubishi is entirely different. It is complete
in itself, does not appear to be suppletory or collateral to another contract and is,
therefore, not to be distorted by other considerations aliunde.
 1999. On three separate occasions during this period, or on May 27, 1998,


It is true that under the contract of loan with Eximbank, Mitsubishi agreed to use
the amount as a loan to and in consideration for importing copper concentrates
from Atlas, but all that this proves is the justification for the loan as represented by
Mitsubishi, a standard banking practice for evaluating the prospects of due
repayment. There is nothing wrong with such stipulation as the parties in a contract
are free to agree on such lawful terms and conditions as they see fit.
 ●




14.) NIPPON LIFE INSURANCE COMPANY OF THE PHILIPPINES
vs. COMMISSIONER OF INTERNAL REVENUE
CTA Case: 6142
Feb 4, 2002
By: Martin
FACTS
● · This is a petition for review which seeks to refund the amount of
P2,223,386.82, allegedly representing income taxes erroneously withheld
from the interest income and gain from sale derived from Petitioner's
investment in a 10-year Fixed Rate Treasury Bond for the years 1998 and
1999.
● · Petitioner is a domestic corporation duly organized and existing
under the laws of the Republic of the Philippines and It is engaged in the
business of life insurance
● · Petitioner is required under the Insurance Code of the Philippines to
invest in and purchase certain government securities in the course of its
operations. These investments consist of bonds or other evidences of debt
of the Philippine Government, its political subdivisions or
instrumentalities, or of government-owned or controlled corporations and
entities.
● · Petitioner purchased from Citibank N.A. a 10-year Fixed Rate
Treasury Bond (Bond) with a face value of P20 Million. The Bureau of
Treasury issued the Bond originally to Citibank N.A. on November 27, 1997
annually, i.e. on May 27 and November 27 each year for 10 years. At the
time of the purchase, the Bond offered a yield rate of 22.82375%, which is
lower than the Bond's fixed interest rate of 22.875%. Petitioner had to
than the Bond's face value. Petitioner's total cash outlay to acquire the
Bond amounted to P20,076,022.89
● · Petitioner held on to the Bond from December 1, 1997 up to June 15,
November 27, 1998 and May 27, 1999, Petitioner collected interest income
on the Bond amounting to P1,830,000.00 for each income payment, net of
P457,500.00, representing the 20% final tax withheld and remitted by the
Bureau of Treasury to the BIR pursuant to Section 27 (D)(1) of the NIRC.
Thus, Petitioner received a total of P5,490,000.00 as interest income on
the Bond, net of P1,372,500.00 final withholding tax.
· Petitioner sold the Bond to Hongkong and Shanghai Banking
Corporation (HSBC) at a premium, because on the date of the sale, the
Bond offered a yield rate of 14.625%. Petitioner received P27,152,761.15
from HSBC on the sale,
● · The total amount of taxes allegedly withheld from Petitioner's income
on the Bond and remitted by the Bureau of Treasury to the BIR for the
years 1998 and 1999 is P2,223,386.82
● · the BIR issued BIR Ruling No. 166-99, providing that the interest
income, yield or gain derived from bonds, debentures or certificates of
indebtedness as deposit substitutes, which are ordinarily subject to 20%
final tax under Section 27 (D)(1) of the NIRC, should exclude the interest
income, yield or gain from the gross income if the bonds, debentures or
the certificate of indebtedness have maturities of more than five (5) years.
● · BIR Ruling No. 016-00 was issued, with the BIR reiterating its stand
that if the maturity period of the bonds issued through the Bureau of
Treasury will be more than 5 years, the gains that may be derived
therefrom by the bondholders shall accordingly be exempt from the 20%
final withholding tax. The BIR stated further that: "Since the law speaks of
the exclusion from gross income of all gains derived from long-term
investments, it follows that embraced thereunder are income, yield or
interest, which are all synonymous with gains, whether discounted or at
premium. Thus, the exemption applies to interest/coupon or profit from
the principal of such long-term regular or SDT bonds complying with the
statutory period.
● · On the basis of the foregoing rulings, Petitioner filed with Revenue
District of the BIR, an administrative claim for the refund of the amount of
P2,223,386.82 allegedly representing taxes erroneously withheld from its
income from investment in Fixed Rate Treasury Bond for the years 1998
and 1999
ISSUE
Whether or not the term "gains", as used in Section 32(B)(7)(g) of the National
Internal Revenue Code of the Philippines ("NIRC"), encompasses all forms of
"income" derived from bonds, debentures and other certificates of indebtedness
with a maturity of more than 5 years, including the interest income and yield
derived from such longterm certificates of indebtedness, considering the
connotation of the term "gains" in relation to the financial treatment of bonds,
debentures and other certificates of indebtedness.
. considered gain exempt from income tax pursuant to
HELD/RATIO
No
● · To support its view that interest from the Bond is exempt from tax,
Petitioner cites Respondent's own rulings, namely, BIR Ruling No. 166-99,
BIR Ruling No. 016-2000 and BIR Ruling No. 020-01 dated May 31, 2001. In
BIR Ruling No. 166-99, issued on October 25, 1999 and addressed to Aegon
Life Insurance (Philippines), Inc., which is engaged in the same line of
business as that of the Petitioner, Respondent ruled that interest income or
yields or gain from the sale of bonds, debentures and certificates of
indebtedness with maturities of more than 5 years are excluded from gross
income in accordance with Section 32(B)(7)(g) of the 1997 Tax Code and
therefore exempt from the 20% final withholding tax on deposit
substitutes. BIR Ruling No. 166-99 states in pertinent part: "B. As a general
rule, the interest income on currency bank deposit and yield or other
monetary benefit from these "deposit substitutes" and similar arrangement
derived by banks and non-bank financial intermediaries are being taxed at
the final rate of 20% under Section 27(D)(1) of the 1997 Tax Code.
● · However, Section 32(B)(7)(g) of the 1997 Tax Code, provides an
exception, thus,
■ · "Section 32. Gross Income. —
■ · "(B) Exclusions from Gross Income. — The following
items shall not be included in gross income and shall be
exempt from taxation under this Title:
● "(7) Miscellaneous Items. — "
(g) Gains from the Sale of Bonds,
Debentures or other Certificate of
Indebtedness. Gains realized from the
sale or exchange or retirement of
bonds, debentures or other certificate
of indebtedness with a maturity of
more than five 5 years
● The idea therefore, is to still treat bonds,
debentures or other certificates of indebtedness
as "deposit substitutes" the interest income,
yield or gain derived therefrom subject to the
20% final tax under Section 27(D)(1) of the 1997
Tax Code, but exclude said interest income,
yield or gain from the gross income if the bonds,
debentures or the certificate of indebtedness
have maturities of more than 5 years.
Conversely, only the income derived on these
debt instruments with maturity of more than 5
years shall be excluded from the gross income
■ We cannot agree with Petitioner's contention that
interest on its long term investments should be
Section 32(B)(7)(g) of the Tax Code.
■ Rulings issued by the Commissioner of Internal Revenue
command respect and weight. However, such rulings are
not conclusive upon the courts and will be ignored if
found to be erroneous
■ It bears repeating that Revenue memorandum-circulars
are considered administrative rulings (in the sense of
more specific and less general interpretations of tax
laws) which are issued from time to time by the
Commissioner of Internal Revenue. It is widely accepted
that the interpretation placed upon a statute by the
executive executive officers, whose duty is to enforce it,
is entitled to great respect by the courts. Nevertheless,
such interpretation is not conclusive and will be ignored
if judicially found to be erroneous. Thus, courts will not
countenance administrative issuances that override,
instead of remaining consistent with, the law they seek
to apply and implement.|||
■ · In this case, We conclude that the aforementioned
BIR rulings are erroneous. Such rulings were based on the
mistaken belief that the term "gains" as used in Section
32(B)(7)(g) of the Tax Code include interest.
■ Initially, it must be pointed out that whereas the term
"gains" includes "interest" as a general rule, this rule
cannot be applied to Section 32(B)(7)(g) of the Tax Code
which particularly refers to "Gains from the Sale of
Bonds, Debentures or other Certificate of Indebtedness"
in its title and "Gains realized from the sale or exchange
or retirement of bonds, debentures and other certificate
of indebtedness with a maturity of more than 5 years" in
its body.
■ Stated otherwise, Section 32(B)(7)(g) of the Tax Code
specifically refers to gains from the sale of bonds,
debentures and other certificates of indebtedness as
contradistinguished from the term "gains" in its general
sense, which is synonymous to income.
■ In this regard, Section 32(A) of the Tax Code defines
"gross income" as follows:
 ■ SEC. 32. Gross Income. — (A) General Definition. —
Except when otherwise provided in this Title, gross
income means all income derived from whatever source,
including (but not limited to) the following items
● (3) Gains derived from dealings in property;
● (4) Interests;
■ From the aforequoted Section 32(A) of the Tax Code, it
is clear that there is a distinction between "gains derived
from dealings in property" and "interests", which are
separately classified as items of gross income. "Gains
realized from the sale or exchange or retirement of
bonds, debentures and other certificate of indebtedness"
would fall under the category of "gains derived from
dealings in property".
■ "Interests" would include interest from bonds,
debentures and other certificate of indebtedness. Gain
realized from the sale or exchange or retirement of
bonds, debentures and other certificate of indebtedness
and interest from bonds, debentures and other
certificate of indebtedness fall under separate and
distinct income categories.
■ It should be noted that both Sections 24(B)(1) and 25(A)
(2), respectively, of the Tax Code expressly exempt
interest derived from certain long-term deposit or
investment (covered by Bangko Sentral ng Pilipinas (BSP)
certificates and with maturity of 5 years or more) by
citizens, resident aliens and nonresident aliens engaged
in trade or business within the Philippines from income
tax. However, there is no such exemption from income
tax on such interest for corporations, domestic or
foreign, under Sections 27 and 28 of the Tax Code.
·
·