PHILIPPINE GHUARANTY CO. V.

COMMISSIONER ON INTERNAL REVENUE

AND CTA
GR No. L-22074
April 30, 1965

Facts: This case is about an insurance company who enter into a contract of reinsurance to
various foreign companies. The petitioner agreed to cede to these foreign companies a portion of
premiums on insurance which was originally underwritten in the Philippines, in consideration for
the assumption by the foreign companies of liability on an equivalent portion of the risk insured.
The contracts were signed in the Philippines except contract with Swiss Reinsurance Company
which was signed in Switzerland and they had also agreed that such contract shall be construed
by the laws of the Philippines.
Thereafter, the reinsurance contract commenced with the insurer’s liability simultaneous with
Phil. Guaranty under the original insurance.
The Phil. Guaranty was also required to maintain a register in Manila where the risk ceded to the
foreign companies, where entered and entry therein was binding upon the reinsurers.
The proportionate amount of taxes on those insurance premiums not recovered from the original
assured were to be paid the foreign insurer’s, which later on, agreed to compensate the petitioner
in an equal amount of 5% of the insurance premiums in consideration for managing and
administering their affairs in the Philippines.
However, when the Phil Guaranty filed their income tax return, the premiums on 1953 and 1954
ceded the foreign companies were excluded and it did not also withhold or pay tax on them.
Hence, the CIR assessed a withholding tax on these ceded premiums amounting to 230,673 for
1953 and 234,364 for 1954.
Petitioner protested the assessment on the ground that such reinsurance premium ceded to
foreign insurers not doing business in the Philippines are not subject to withholding tax.
The protest was denied and the petitioner appeal to CTA.
The CTA denied the appeal and order the petitioner to pay the withholding taxes with statutory
penalties.
Hence, this petition.

Issue: Whether the assailed ceded premiums are exempted from corporate income tax.

Ruling: The assailed ceded premiums are not exempted but subject to withholding income tax.
The court explained that Section 24 of Tax Code subjects foreign corporations to tax on their
income from sources within the Philippines.
In the case at bar, the reinsurance premiums were income created from the undertaking of the
foreign reinsurance company to reinsure the Petitioner against liability for loss under original
insurances, in which such undertaking took place in the Philippines. These premiums came from
sources within the Philippines, hence, are subject to corporate income tax.
The court also further explained that in Section 24 of the Tax Code does not require a foreign
corporation to engage in business in the Philippines, it suffices that the activity creating the
income ins performed or done within the Philippines. The controlling factor is not the place of
business but the place of activity where the income derived from.
The court also laid down the Necessary theory, which states that,
“The power of 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 it 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.”
Therefore, considering that the assailed reinsurance premium were afforded by the protection of
the government and the recipient foreign insurers exercised rights and priviledges guaranteed by
our law, such as the reinsurance premium and reinsurers should share the burden of maintaining
the State.

Rationale:
 Reinsurance premium are subject to corporate income tax.
 Necessity theory: “The power of 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 it
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.”