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[70] AFISCO INSURANCE CORPORATION, et. al. v.

CA (Recio) DOCTRINE: Section 24 of the NIRC covers unregistered partnerships and even
January 25, 1999 | PANGANIBAN, J. | Income Tax on Domestic Corporations associations or joint accounts, which had no legal personalities apart from their
individual members. Furthermore, the term 'partnership' includes a syndicate,
PETITIONER: AFISCO INSURANCE CORPORATION; CCC INSURANCE group, pool, joint venture or other unincorporated organization, through or by
CORPORATION; CHARTER INSURANCE CO., INC.; CIBELES means of which any business, financial operation, or venture is carried on.
INSURANCE CORPORATION; COMMONWEALTH INSURANCE
COMPANY; CONSOLIDATED INSURANCE CO., INC.; DEVELOPMENT
INSURANCE & SURETY CORPORATION; and 33 other domestic
corporations, all assessed as POOL OF MACHINERY INSURERS FACTS:
RESPONDENTS: COURT OF APPEALS, COURT OF TAX APPEALS and 1. PETITIONERS: [note the difference!]
COMMISSIONER OF INTERNAL REVENUE a. “AFISCO, et al.” → the 41 petitioners in this case as
INDIVIDUAL COMPANIES
SUMMARY: AFISCO, et al. are 41 domestic companies that issue risk insurance b. “Pool of Machinery Insurers” → the POOL that the 41
policies for machines. These 41 companies entered into 2 Treaties with non- petitioners were required to form; BIR wants to tax the Pool as a
resident foreign corporation, Munich. Such treaties required AFISCO, et al. to
separate juridical entity (Partnership) instead of AFISCO, et al.
form a Pool of Machinery Insurers, which said companies complied with. Years
later, BIR assessed the Pool of Machinery Insurers as a corporation of (1) individually
deficiency corporate taxes, and (2) withholding taxes on dividends paid out to 2. AFISCO, et al. in this case are 41 non-life domestic insurance companies.
Munich and each of the 41 domestic companies. AFISCO, et al. argue that they They issued risk insurance policies for machines.
cannot be considered an informal partnership; thus, they cannot be taxed as a a. In 1965, they entered into a Quota Share Reinsurance Treaty and
corporation. Pursuant to this, AFISCO, et al. filed a protest. The CIR and the CA a Surplus Reinsurance Treaty with the Munchener
both DENIED such protest and ruled that the Pool of Machinery Insurers was a Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-
partnership taxable as a corporation and the said Pool’s collection of premiums on resident foreign insurance corporation. The reinsurance treaties
behalf of its members (AFISCO, et al.) was taxable income. required herein petitioners to form a pool, which they complied
WoN the Pool of Machinery Insurers, acting as a mere agent and performing with.
strictly administrative functions, and which did not insure or assume any risk in 3. The pool of machinery insurers submitted a financial statement and filed an
its own name, was a partnership or association subject to tax as a corporation. - “Information Return of Organization Exempt from Income Tax” for
YES, it is a partnership/association; thus, it is taxable as a corporation under 1975.
Sec. 24. The SC ruled that the ff. factors indicate that the Pool is actually a a. On the basis of this, the CIR assessed deficiency corporate taxes in
partnership/association: (1) the pool has a common fund, consisting of money and the amount of P1,843,273.60, and withholding taxes on dividends
other valuables that are deposited in the name and credit of the pool.; (2) The pool paid to Munich and to AFISCO, et al., respectively.
functions through an executive board, which resembles the board of directors of a b. These assessments were protested by AFISCO, et al. through its
corporation, composed of one representative for each of the ceding companies; auditors Sycip, Gorres, Velayo and Co.
and (3) The pool’s work is indispensable, beneficial and economically useful to 4. CIR: DENIED the protest and ordered AFISCO, et al, assessed as “Pool of
the business of AFISCO, et al. and Munich, because without it they would not Machinery Insurers” to pay deficiency income tax.
have received their premiums. 5. CA: The Pool of Machinery Insurers was a partnership taxable as a
[secondary issue lang to, but sir might ask] WoN the remittances to AFISCO, et corporation, and the Pool’s collection of premiums on behalf of its
al. (AFISCO et al.) and MUNICH of their respective shares of reinsurance members, AFISCO et al., was taxable income.
premiums, pertaining to their individual and separate contracts of reinsurance, a. CA also ruled that prescription did not bar the Bureau of Internal
were "dividends" subject to tax. - YES. Double taxation means taxing the same Revenue (BIR) from collecting the taxes due, because the taxpayer
property twice when it should be taxed only once. In the instant case, the pool is (Pool of Machinery Insurers) cannot be located at the address given
a taxable entity distinct from the individual corporate entities of the ceding in the information return.
companies. The tax on its income is obviously different from the tax on the 6. AFISCO, et al. contend that the Court of Appeals erred in finding that the
dividends received by the said companies. Clearly, there is no double taxation pool or clearing house was an informal partnership, which was taxable as
here. a corporation under the NIRC.
a. They point out that the reinsurance policies were written by them
"individually and separately," and that their liability was limited to organized in, or existing under the laws of the Philippines, no matter how
the extent of their allocated share in the original risks thus reinsured. created or organized, but not including duly registered general co-partnership
Hence, the pool did not act or earn income as a reinsurer. (compañias colectivas), general professional partnerships, private
7. AFISCO, et al. belie the existence of a partnership in this case because: educational institutions, and building and loan associations…”
a. AFISCO et al, the reinsurers, did not share the same risk or solidary 4. Ineludibly, the Philippine legislature included in the concept of
liability; corporations those entities that resembled them such as unregistered
b. there was no common fund; partnerships and associations.
c. the executive board of the pool did not exercise control and 5. Parenthetically, the NLRC's inclusion of such entities in the tax on
management of its funds, unlike the board of directors of a corporations was made even clearer by the Tax Reform Act of 1997, which
corporation; amended the Tax Code:
d. the pool or clearing house "was not and could not possibly have “SEC. 27. Rates of Income Tax on Domestic Corporations. —
engaged in the business of reinsurance from which it could have (A) In General. — Except as otherwise provided in this Code, an
derived income for itself.” income tax of thirty-five percent (35%) is hereby imposed upon the taxable
income derived [by every domestic corporation]...”
ISSUE: “SEC. 22. Definition. — When used in this Title:
1. [IMPT!!!] WoN the Pool of Machinery Insurers, acting as a mere agent and (B) The term 'corporation' shall include partnerships, no matter
performing strictly administrative functions, and which did not insure or how created or organized, joint-stock companies, joint accounts (cuentas en
assume any risk in its own name, was a partnership or association subject to participacion), associations, or insurance companies, [...] 'General
tax as a corporation. - YES, it is a partnership/association; thus, it is professional partnerships' are partnerships formed by persons for the sole
taxable as a corporation under Sec. 24. purpose of exercising their common profession, no part of the income of
2. [Secondary issue, but also relevant] WoN the remittances to AFISCO, et which is derived from engaging in any trade or business.
al. (AFISCO et al.) and MUNICH of their respective shares of reinsurance 6. In Evangelista v. CIR, the SC held that Section 24 covered these
premiums, pertaining to their individual and separate contracts of unregistered partnerships and even associations or joint accounts, which
reinsurance, were "dividends" subject to tax. - YES. had no legal personalities apart from their individual members. The CA
3. WoN the respondent Commissioner's right to assess the Clearing House had in this case applied Evangelista:
already prescribed. - NO. a. ". . . Accordingly, a pool of individual real property owners
dealing in real estate business was considered a corporation for
RULING: The petition is devoid of merit. We sustain the ruling of the Court of purposes of the tax in Sec. 24 of the Tax Code in Evangelista v.
Appeals that the pool is taxable as a corporation, and that the government's right to Collector of Internal Revenue, supra. The Supreme Court said: 'The
assess and collect the taxes had not prescribed. term 'partnership' includes a syndicate, group, pool, joint
venture or other unincorporated organization, through or by
RATIO: means of which any business, financial operation, or venture is
Issue 1: Pool Taxable as a Corporation. carried on…’”
1. The opinion or ruling of the Commission of Internal Revenue, the agency 7. Art. 1767 of the Civil Code recognizes the creation of a contract of
tasked with the enforcement of tax laws, is accorded much weight and even partnership under the ff. requisites: (1) mutual contribution to a common
finality, when there is no showing that it is patently wrong, particularly in this stock, and (2) a joint interest in the profits. In other words, a partnership is
case where the findings and conclusions of the internal revenue commissioner formed when persons contract "to devote to a common purpose either money,
were subsequently affirmed by the CTA, a specialized body created for the property, or labor with the intention of dividing the profits between
exclusive purpose of reviewing tax cases, and the Court of Appeals. themselves. Meanwhile, an association implies “associates who enter into a
2. This Court rules that the Court of Appeals, in affirming the CTA which had joint enterprise… for the transaction of business.”
previously sustained the internal revenue commissioner, committed no 8. In the case before us, the ceding companies entered into a Pool
reversible error. Agreement or an association that would handle all the insurance
3. Section 24 of the NIRC provides: businesses covered under their quota- share reinsurance treaty and
“SEC. 24. Rate of tax on corporations. — (a) Tax on domestic surplus reinsurance treaty with Munich.
corporations. — A tax is hereby imposed upon the taxable net income 9. [IMPT!!!] The following FACTORS indicate a partnership or an
received during each taxable year from all sources by every corporation associated taxable under Section 24 of the NIRC:
a. The pool has a common fund, consisting of money and other 6. Regarding their argument that taxing the remittances of the pool would
valuables that are deposited in the name and credit of the pool. This contravene Section 24 (b) (1), the Court ruled that such argument has no
common fund pays for the administration and operation expenses of merit. Section 24 (b) (1) pertains to tax on foreign corporations; hence, it
the pool. cannot be claimed by the ceding companies which are domestic corporations.
b. The pool functions through an executive board, which resembles Nor can Munich, a foreign corporation, be granted exemption based
the board of directors of a corporation, composed of one solely on this provision of the Tax Code, because the same subsection
representative for each of the ceding companies. specifically taxes dividends, the type of remittances forwarded to it by the
c. True, the pool itself is not a reinsurer and does not issue any pool.
insurance policy; however, its work is indispensable, beneficial and a. Although not a signatory to the Pool Agreement, Munich is patently
economically useful to the business of the ceding companies and an ASSOCIATE of the ceding companies in the entity formed,
Munich, because without it they would not have received their pursuant to their reinsurance treaties which required the creation of
premiums. The ceding companies share "in the business ceded to said pool.
the pool" and in the "expenses" according to a "Rules of b. Under its pool arrangement with the ceding companies, Munich
Distribution" annexed to the Pool Agreement. Profit motive or shared in their income and loss. This is seen from a reading of the
business is, therefore, the primordial reason for the pool’s article under the Quota-Share Reinsurance Treaty and the
formation. Surplus Reinsurance Treaty.
10. As aptly found by the CA: ". . . The fact that the pool does not retain any 7. Finally, AFISCO, et al.' claim that Munich is tax-exempt based on the RP-
profit or income does not obliterate an antecedent fact, that of the pool being West German Tax Treaty is likewise unpersuasive, because the internal
used in the transaction of business for profit. It is apparent, and AFISCO, et revenue commissioner assessed the pool for corporate taxes on the basis
al. admit, that their association or coaction was indispensable [to] the of the information return it had submitted for the year ending 1975, a
transaction of the business. . . If together they have conducted business, taxable year when said treaty was not yet in effect.
profit must have been the object as, indeed, profit was earned. Though the
profit was apportioned among the members, this is only a matter of Issue 3: Prescription
consequence, as it implies that profit actually resulted." 1. AFISCO, et al. also argue that the government's right to assess and collect the
subject tax had prescribed. They claim that the subject information return was
Issue 2: Pool’s Remittances Are Taxable filed by the pool on April 14, 1976. On the basis of this return, the BIR
1. AFISCO, et al. further contend that the remittances of the pool to the telephoned AFISCO, et al. on November 11, 1981, to give them notice of its
ceding companies and Munich are not dividends subject to tax. They letter of assessment dated March 27, 1981. Thus, AFISCO, et al. contend that
insist that taxing such remittances contravene Sections 24 (b) (1) and 263 of the five-year statute of limitations then provided in the NIRC had already
the 1977 NIRC and "would be tantamount to an illegal double taxation, as it lapsed, and that the internal revenue commissioner was already barred by
would result in taxing the same premium income twice in the hands of the prescription from making an assessment.
same taxpayer." 2. We cannot sustain AFISCO, et al.. The CA and the CTA categorically found
2. Moreover, AFISCO et al. argue that since Munich was not a signatory to the that the prescriptive period was tolled under then Section 333 of the NIRC
Pool Agreement, the remittances it received from the pool cannot be deemed because " the taxpayer cannot be located at the address given in the
dividends. AFISCO, et al. add that even if such remittances were treated as information return filed and for which reason there was delay in sending the
dividends, they would be exempt pursuant to the RP-West German Tax assessment."
Treaty.
3. AFISCO, et al. are clutching at straws. Double taxation means taxing the
same property twice when it should be taxed only once. That is, ". . .
taxing the same person twice by the same jurisdiction for the same thing.
4. In the instant case, the pool is a taxable entity distinct from the individual
corporate entities of the ceding companies. The tax on its income is
obviously different from the tax on the dividends received by the said
companies. Clearly, there is no double taxation here.
5. Neither may the tax exemptions claimed by AFISCO, et al. be granted, since
they failed to prove and substantiate their claim to the tax exemption.