The Philippine Guaranty Co., Inc. v.

CIR
GR No. L-22074; April 30, 1965

FACTS: Philippine Guaranty Co. Inc. is a domestic insurance company, entered into reinsurance
contracts with foreign insurance companies not doing business in the Philippines, thereby
agreed to cede to the foreign insurers a portion of the premium on insurance it has originally
underwritten in the PH.

Said premiums were excluded by PH Guaranty Co. Inc. from its gross income when it filed its
income tax returns for 1953 and 1954. Furthermore, it did not withhold or pay tax on them.
Consequently, CIR assessed against the petitioner withholding taxes on the ceded reinsurance
premiums to which the latter protested the assessment on the ground that reinsurance
premiums in question did not constitute income from sources within the PH because the
foreign insurer did not engage in business in the PH, and CIR’s previous rulings did not require
insurance companies to withhold income tax due from foreign companies.

ISSUE: Whether or not insurance companies are required to withhold tax on reinsurance
premiums ceded to foreign insurance companies

HELD: Yes. SC held that the reinsurance contracts show that the transactions or activities that
constituted the undertaking to reinsure PH Guaranty Co. Inc. against loses arising from the
original insurances in the PH were performed in the PH.

Furthermore, Sec 24 of the Tax Code subjects foreign corporations to tax on their income from
sources within the PH. The word “sources” has been interpreted as the activity, property or
service giving rise to the income. The reinsurance premiums were income created from the
undertaking of the foreign reinsurance companies to reinsure PH Guaranty Co. Inc. against
liability for loss under original insurances. Such undertaking, as explained above, took place in
the Philippines. These insurance premiums, therefore, came from sources within the Philippines
and, hence, are subject to the corporate income tax.

The foreign insurers’ place of business should not be confused with their place of activity. Sec
24 of the Tax Code does not require a foreign corporation to engage in business in the
Philippines in subjecting its income to tax. It suffices that the activity creating the income is
performed or done in the Philippines. What controlling, therefore, is not the place of business
but the place of activity that created an income.

The power to tax is an attribute of sovereignty. It is a power emanating from necessity. Phil.
Guaranty’s reliance in good faith on the rulings of the CIR requiring no withholding of the tax
due on the reinsurance premiums in question relieved it of duty to pay the corresponding
withholding tax thereon. This defense may free if from payment of surcharged or penalties
imposed for failure to pay corresponding tax, but it certainly would not exculpate if from
liability to pay such withholding tax. The government is not estopped from collecting taxes by
mistakes or errors of its agents.