THE PHILIPPINE GUARANTY CO., INC vs .

CIR and CTA

G.R. No. L-22074 , April 30, 1965
BENGZON, J.P., J.

FACTS: The petitioner Philippine Guaranty Co., Inc., a domestic insurance company,
entered into reinsurance contracts, with foreign insurance companies not
doing business in the country. By said contracts, it agreed to cede ] a portion
of the premiums on insurance it has originally underwritten in the
Philippines to the foreign reinsurers, which the petitioner excluded from its
gross income when it filed for income tax returns for the year 1953 and
1954. Furthermore, it did withhold or pay any tax on them.

The Commission on Internal Revenue then assessed withholding taxes

against the petitioner on the ceded reinsurance premiums. Petitioner then
protested the assessment on the ground that premiums are not subject to tax
for it did not constitute income from sources within the Philippines and at
the same time did not engage in business in the Philippines. Moreover, it
keep hold of the Commission of Internal Revenue previous rulings, which did
not require insurance companies to withhold income tax due from foreign
companies. Hence, this petition.

ISSUE: 1.Whether or not insurance companies are not required to withhold tax on
premiums ceded to foreign insurers.

2. Whether or not petitioner’s reliance to previous CIR rulings, relieve them

from payment of withholding tax.

2. Whether or not a foreign corporation need to engage in business in the

Philippines in order for its income to be subjected to tax.

3. Whether or not the insurance premiums are not income from sources
within the Philippines because they are not specifically mentioned in Section
37 of the Tax Code.

HELD: 1. No. The power to tax is an attribute of sovereignty. It is a power

emanating from necessity. It is a necessary burden to preserve the State's
sovereignty and a means to give the citizenry an army to resist an aggression,
a navy to defend its shores from invasion, a corps of civil servants to serve,
public improvement designed for the enjoyment of the citizenry and those
which come within the State's territory, and facilities and protection which a
government is supposed to provide. Considering that the reinsurance
premiums in question were afforded protection by the government and the
recipient foreign reinsurers exercised rights and privileges guaranteed by
our laws, such reinsurance premiums and reinsurers should share the
burden of maintaining the state

2. No. This defense of the petitioner may only free it from the payment of
surcharges or penalties imposed for failure to pay the corresponding
withholding tax, but it certainly would not exculpate if from liability to pay
such withholding tax . The Government is not estopped from collecting taxes
by the mistakes or errors of its agents.

3. No. 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. It
suffices that the activity creating the income is performed or done in the
Philippines. What is controlling, therefore, is not the place of business but the
place of activity that created an income.

4. No. Section 37 is not an all-inclusive enumeration, for it merely directs

that the kinds of income mentioned therein should be treated as income from
sources within the Philippines but it does not require that other kinds of
income should not be considered likewise

NOTE:

AS TO STATUTORY CONSTRUCTION

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
Philippine Guaranty Co., Inc., against liability for loss under original
insurances. Such undertaking, took place in the Philippines. These insurance
premiums, therefore, came from sources within the Philippines and, hence,
are subject to corporate income tax.