Afisco Insurance Corp et. v.

CA
Facts:
- The petitioners are 41 non-life insurance corporations, organized and existing under the laws of the
Philippines. Upon issuance by them of Erection, Machinery Breakdown, Boiler Explosion and Contractors'
All Risk insurance policies, the petitioners on August 1, 1965 entered into a Quota Share Reinsurance
Treaty and a Surplus Reinsurance Treaty with the Munchener Ruckversicherungs-Gesselschaft (Munich), a
non-resident foreign insurance corporation. The reinsurance treaties required petitioners to form a pool then
a pool composed of the petitioners was formed on the same day.
- April 14, 1976- the pool of machinery insurers submitted a financial statement and filed an "Information
Return of Organization Exempt from Income Tax" for the year ending in 1975
- on the basis of which it was assessed by the Commissioner of Internal Revenue deficiency corporate taxes
in the amount of P1,843,273.60, and withholding taxes in the amount of P1,768,799.39 and P89,438.68 on
dividends paid to Munich and to the petitioners, respectively. These assessments were protested by the
petitioners through its auditors Sycip, Gorres, Velayo and Co.
- On January 27, 1986, the Commissioner of Internal Revenue denied the protest and ordered the petitioners,
assessed as "Pool of Machinery Insurers," to pay deficiency income tax, interest, and withholding tax.
- CA ruled in the main that the pool of machinery insurers was a partnership taxable as a corporation, and
that the latter's collection of premiums on behalf of its members, the ceding companies, was taxable
income. It added that prescription did not bar the Bureau of Internal Revenue (BIR) from collecting the
taxes due, because "the taxpayer cannot be located at the address given in the information return filed."
Hence, this Petition for Review before us.

Issues: Whether or not the pool is taxable? Whether or not pool’s remittances are taxable?

First issue: POOL TAXABLE AS CORPORATION (held)

- Petitioners belie the existence of a partnership in this case, because (1) they, the reinsurers, did not share the
same risk or solidary liability; (2) there was no common fund; (3) the executive board of the pool did not
exercise control and management of its funds, unlike the board of directors of a corporation; and (4) the
pool or clearing house "was not and could not possibly have engaged in the business of reinsurance from
which it could have derived income for itself."
- "SEC. 24. Rate of tax on corporations. — (a) Tax on domestic corporations. — A tax is hereby imposed
upon the taxable net income received during each taxable year from all sources by every corporation
organized in, or existing under the laws of the Philippines, no matter how created or organized, but not
including duly registered general co-partnership (compañias colectivas), general professional partnerships,
private educational institutions, and building and loan associations
- Ineludibly, the Philippine legislature included in the concept of corporations those entities that resembled
them such as unregistered partnerships and associations.
- The term 'corporation' shall include partnerships, no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion), associations, or insurance companies, but does not
include general professional partnerships [or] a joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations
pursuant to an operating or consortium agreement under a service contract without the Government.
'General professional partnerships' are partnerships formed by persons for the sole purpose of exercising
their common profession, no part of the income of which is derived from engaging in any trade or business.
- Article 1767 of the Civil Code on partnership:Its requisites are: (1) mutual contribution to a common stock,
and (2) a joint interest in the profits." In other words, a partnership is formed when persons contract "to
devote to a common purpose either money, property, or labor with the intention of dividing the profits
between themselves.
- In this case, the ceding companies entered into a Pool Agreement or an association that would handle all the
insurance businesses covered under their quota-share reinsurance treaty and surplus reinsurance treaty with
 Munich.
- (1) The pool has a common fund, consisting of money and other valuables that are deposited in the name
and credit of the pool. This common fund pays for the administration and operation expenses of the pool.
- (2) The pool functions through an executive board, which resembles the board of directors of a corporation,
composed of one representative for each of the ceding companies.
- (3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its work is
indispensable, beneficial and economically useful to the business of the ceding companies and Munich,
because without it they would not have received their premiums. The ceding companies share "in the
business ceded to the pool" and in the "expenses" according to a "Rules of Distribution" annexed to the
Pool Agreement. Profit motive or business is, therefore, the primordial reason for the pool's formation.

Second Issue: Pool's Remittances Are Taxable (held)

- Petitioners further contend that the remittances of the pool to the ceding companies and Munich are not
dividends subject to tax. They insist that taxing such remittances contravene Sections 24 (b) (I) and 263 of
the 1977 NIRC and "would be tantamount to an illegal double taxation, as it would result in taxing the
same premium income twice in the hands of the same taxpayer." Moreover, petitioners argue that since
Munich was not a signatory to the Pool Agreement, the remittances it received from the pool cannot be
deemed dividends. They add that even if such remittances were treated as dividends, they would have been
exempt under the previously mentioned sections of the 1977 NIRC, as well as Article 7 of paragraph 1 and
Article 5 of paragraph 5 of the RP-West German Tax Treaty.
- Double taxation means taxing the same property twice when it should be taxed only once.
- 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.
- The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto remains
unproven and unsubstantiated.
- Section 24 (b) (1) pertains to tax on foreign corporations; hence, it cannot be claimed by the ceding
companies which are domestic corporations. Nor can Munich, a foreign corporation, be granted exemption
based solely on this provision of the Tax Code,because the same subsection specifically taxes dividends,
the type of remittances forwarded to it by the pool. Although not a signatory to the Pool Agreement,
Munich is patently an associate of the ceding companies in the entity formed, pursuant to their reinsurance
treaties which required the creation of said pool.
- Under its pool arrangement with the ceding companies, Munich shared in their income and loss. This is
manifest from a reading of Articles 3 and 10 of the Quota- Share Reinsurance Treaty and Articles 3 and 10
of the Surplus Reinsurance Treaty. The foregoing interpretation of Section 24 (b) (1) is in line with the
doctrine that a tax exemption must be construed strictissimi juris, and the statutory exemption claimed must
be expressed in a language too plain to be mistaken.
- Finally, the petitioners' claim that Munich is tax-exempt based on the RP-West German Tax Treaty is
likewise unpersuasive, because the internal revenue commissioner assessed the pool for corporate taxes on
the basis of the information return it had submitted for the year ending 1975, a taxable year when said
treaty was not yet in effect. Although petitioners omitted in their pleadings the date of effectivity of the
treaty, the Court takes judicial notice that it took effect only later, on December 14, 1984.

NDC v. CIR
Facts:
- The National Development Company entered into contracts in Tokyo with several Japanese shipbuilding
companies for the construction of twelve ocean-going vessels. The purchase price was to come from the proceeds of
bonds issued by the Central Bank.
- The NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70 as interest on the balance of
the purchase price. No tax was withheld. The Commissioner then held the NDC liable on such tax in the total sum of
P5,115,234.74. Negotiations followed but failed. The BIR thereupon served on the NDC a warrant of distraint and
levy to enforce collection of the claimed amount. 6 The NDC went to the Court of Tax Appeals.
- The BIR was sustained by the CTA except for a slight reduction of the tax deficiency in the sum of P900.00,
representing the compromise penalty. The NDC then came to this Court in a petition for certiorari.

Issue: Whether or not the Japanese Shipbuilders are liable to tax on the interest remitted to them? - yes.

Held:
- The Japanese shipbuilders were liable to tax on the interest remitted to them under Section 37 of the Tax Code,
thus:
"SEC. 37. Income from sources within the Philippines. — (a) Gross income from sources within the Philippines. —
The following items of gross income shall be treated as gross income from sources within the Philippines:
(1) Interest. — Interest derived from sources within the Philippines, and interest on bonds, notes, or other interest-
bearing obligations of residents, corporate or otherwise;
- The petitioner argues that the Japanese shipbuilders were not subject to tax under the above provision
because all the related activities — the signing of the contract, the construction of the vessels, the payment
of the stipulated price, and their delivery to the NDC — were done in Tokyo. The law, however, does not
speak of activity but of "source," which in this case is the NDC. This is a domestic and resident corporation
with principal offices in Manila.
- The law specifies: `Interest derived from sources within the Philippines, and interest on bonds, notes, or
other interest-bearing obligations of residents, corporate or otherwise.' Nothing there speaks of the `act or
activity' of non-resident corporations in the Philippines, or place where the contract is signed. The residence
of the obligor who pays the interest rather than the physical location of the securities, bonds or notes or the
place of payment, is the determining factor of the source of interest income.
- The law is clear. The residence of the obligor which paid the interest under consideration, petitioner herein,
is Calle Pureza, Sta. Mesa, Manila, Philippines; and as a corporation duly organized and existing under the
laws of the Philippines, it is a domestic corporation, resident of the Philippines. (Sec. 84(c), National
Internal Revenue Code.) The interest paid by petitioner, which is admittedly a resident of the Philippines, is
on the promissory notes issued by it. Clearly, therefore, the interest remitted to the Japanese shipbuilders in
Japan in 1960, 1961 and 1962 on the unpaid balance of the purchase price of the vessels acquired by
petitioner is interest derived from sources within the Philippines subject to income tax under the then
Section 24(b)(1) of the National Internal Revenue Code.
- The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on the interests earned
by the Japanese shipbuilders. It was the income of these companies and not the Republic of the Philippines
that was subject to the tax the NDC did not withhold.
- In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure to withhold
the same from the Japanese shipbuilders.

CIR v. Marubeni
Facts:
- Commissioner of Internal Revenue assails the decision of the Court of Appeal in affirming the decision of the
 CTA. The tax court ordered the Commissioner of Internal Revenue to desist from collecting the 1985 deficiency
income, branch profit remittance and contractor's taxes from Marubeni Corporation after finding the latter to have
properly availed of the tax amnesty under Executive Orders Nos. 41 and 64, as amended.
- Marubeni Corporation is a foreign corporation organized and existing under the laws of Japan. It is engaged in
general import and export trading, financing and the construction business. It is duly registered to engage in such
business in the Philippines and maintains a branch office in Manila.
- Sometime in November 1985, 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.
In the course of the examination, 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.
- On March 1, 1986, petitioner's revenue examiners recommended an assessment for deficiency income, branch
profit remittance, contractor's and commercial broker's taxes. Respondent questioned this assessment in a letter
dated June 5, 1986.
- On August 27, 1986, Marubeni received a letter from CIR assessing it for several deficiency taxes. 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.
- On Sept 1986, respondent filed 2 petitions for review with CTA: the first, questioned the deficiency income,
branch profit remittance and contractor’s tax assessments and second questioned the deficiency commercial broker’s
assessment.
- On Aug 2, 1986, EO 41 declared a tax amnesty for unpaid income taxes for 1981-85, and that taxpayers who
wished to avail this should on or before Oct 31, 1986. Marubeni filed its tax amnesty return on Oct 30, 1986.
- On Nov 17, 1986, EO 64 expanded EO 41’s scope to include estate and donor’s taxes under Title 3 and business
tax under Chap 2, Title 5 of NIRC, extended the period of availment to Dec 15, 1986 and stated those who already
availed amnesty under EO 41 should file an amended return to avail of the new benefits. Marubeni filed a
supplemental tax amnesty return on Dec 15, 1986.
CTA found that Marubeni properly availed of the tax amnesty and deemed cancelled the deficiency taxes. CA
affirmed on appeal.

Issue: Whether or not Marubeni Corporation is exempted from taxes? YES.

Held:
1. On date of effectivity
- CIR claims Marubeni is disqualified from the tax amnesty because it falls under the exception in Sec 4b of EO 41:
“Sec. 4. Exceptions.—The following taxpayers may not avail themselves of the amnesty herein granted: xxx 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 Oct 30, 1986, a case had already been
filed and was pending before the CTA and Marubeni therefore fell under the exception. However, the point of
reference is the date of effectivity of EO 41 and that the filing of income tax cases must have been made before and
as of its effectivity.
- EO 41 took effect on Aug 22, 1986. The case questioning the 1985 deficiency was filed with CTA on Sept 26, 1986.
When EO 41 became effective, the case had not yet been filed. Marubeni does not fall in the exception and is thus,
not disqualified from availing of the amnesty under EO 41 for taxes on income and branch profit remittance.
- The difficulty herein is with respect to the contractor’s tax assessment (business tax) and respondent’s availment of
 the amnesty under EO 64, which expanded EO 41’s coverage. When EO 64 took effect on Nov 17, 1986, it did not
provide for exceptions to the coverage of the amnesty for business, estate and donor’s taxes. Instead, Section 8 said
EO provided that:“Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to or
inconsistent with this amendatory Executive Order shall remain in full force and effect.”
- Due to the EO 64 amendment, Sec 4b cannot be construed to refer to EO 41 and its date of effectivity. The general
rule is that an amendatory act operates prospectively. It may not be given a retroactive effect unless it is so
provided expressly or by necessary implication and no vested right or obligations of contract are thereby impaired.

2. On situs of taxation
- Marubeni contends that assuming it did not validly avail of the amnesty, it is still not liable for the deficiency tax
because the income from the projects came from the “Offshore Portion” as opposed to “Onshore Portion”. It claims
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.
(BG: Marubeni won in the public bidding for projects with government corporations NDC and Philphos. In the
contracts, the prices were broken down into a Japanese Yen Portion (I and II) and Philippine Pesos Portion and
financed either by OECF or by supplier’s credit. The Japanese Yen Portion I corresponds to the Foreign Offshore
Portion, while Japanese Yen Portion II and the Philippine Pesos Portion correspond to the Philippine Onshore
Portion. Marubeni has already paid the Onshore Portion, a fact that CIR does not deny.)
- CIR 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 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. The total gross receipts covering both labor and
materials should be subjected to contractor’s tax (a tax on the exercise of a privilege of selling services or labor
rather than a sale on products).
- 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, respondent was an independent contractor under the terms of the two subject contracts.
- 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 two sets of ship unloader and loader, the boats and
mobile equipment for the NDC project and the ammonia storage tanks and refrigeration units were made and
completed in Japan. They were already finished products when shipped to the Philippines. The other construction
supplies listed under the Offshore Portion such as the steel sheets, pipes and structures, electrical and instrumental
apparatus, these were not finished products when shipped to the Philippines. They, however, were likewise
fabricated and manufactured by the sub-contractors in Japan. All services for the design, fabrication, engineering
and manufacture of the materials and equipment under Japanese Yen Portion I were made and completed in Japan.
These services were rendered outside the taxing jurisdiction of the Philippines and are therefore not subject to
contractor’s tax.