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HELD: NO.

There is violation of due process only when there is the inherent


Tan vs Del Rosario GR No 109289 03 October 1994
or constitutional limitations in the
exercise of the power to tax is transgressed. Uniformity of
Facts: taxation, merely requires that all subjects or objects of taxation,
Republic Act No 17946 limited the allowable deductions from similarly situated, are to be treated alike both in privileges and
gross income of single proprietorship and professionals in the liabilities.
computation of their taxable income. It was argued that this Uniformity does not forfend classification as long as:
violated the requirement of uniformity in taxation and due (1) the standards that are used therefor are substantial and not
process because single proprietorships and professionals were arbitrary,
taxed differently from corporations and partnerships. (2) the categorization is germane to achieve the legislative
purpose,
Issue: Whether or not deductions should be uniform for all? (3) the law applies, all things being equal, to both present and
future conditions, and
Decision: Petition dismissed. Uniformity does not prohibit (4) the classification applies equally well to all those belonging to
classification so long as the requirements for a valid classification the same class.
under the equal protection clause are complied with. Shifting the What may instead be perceived to be apparent from the
taxation of individuals to the scheduled system which makes the amendatory law is the legislative intent to increasingly shift the
income tax depend on the kind of taxable income and maintaining income tax system towards the schedular approach in the income
for corporations the global treatment which treat in common all taxation of individual taxpayers and to maintain, by and large, the
kinds if taxable income of the taxpayer is not arbitrary. present global treatment on taxable corporations. We certainly do
not view this classification to be arbitrary and inappropriate.

G.R. No. 109289 October 3, 1994


TAN V. DEL ROSARIO G.R. No. 109289 October 3, 1994
FACTS: The case involves two consolidated cases assailing the
constitutionality of RA 7496 (SNITS) RUFINO R. TAN, petitioner,
amending certain provisions of the NIRC and, the validity of vs.
Section 6, Revenue Regulations No. 2-93. RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE
U. ONG, as COMMISSIONER OF INTERNAL
Petitioners claim to be taxpayers adversely affected by the REVENUE, respondents.
continued implementation of the
amendatory legislation.
G.R. No. 109446 October 3, 1994
In G.R. No. 109289, it is asserted that the enactment of Republic
Act No. 7496 violates: CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO
Article VI, Section 26(1) Every bill passed by the Congress shall A. CARAG, MANUELITO O. CABALLES, ELPIDIO C. JAMORA, JR.
embrace only one and BENJAMIN A. SOMERA, JR., petitioners,
subject which shall be expressed in the title thereof. vs.
Article VI, Section 28(1) The rule of taxation shall be uniform RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF
and equitable. FINANCE and JOSE U. ONG, in his capacity as COMMISSIONER OF
The Congress shall evolve a progressive system of taxation. INTERNAL REVENUE, respondents.
Article III, Section 1 No person shall be deprived of . . . property
without due process These two consolidated special civil actions for prohibition
of law, nor shall any person be denied the equal protection of the challenge, in G.R. No. 109289, the constitutionality of Republic Act
laws. No. 7496, also commonly known as the Simplified Net Income
Taxation Scheme ("SNIT"), amending certain provisions of the
Petitioner contends that the title is a misnomer or, deficient for National Internal Revenue Code and, in
being merely entitled, "Simplified Net Income Taxation Scheme G.R. No. 109446, the validity of Section 6, Revenue Regulations
for the Self-Employed and Professionals Engaged in the Practice of No. 2-93, promulgated by public respondents pursuant to said
their Profession" when its full title is: Act Adopting the Simplified law.
Net Income Taxation Scheme For The Self-Employed and
Professionals Engaged In The Practice of Their Profession, Petitioners claim to be taxpayers adversely affected by the
Amending Sections 21 and 29 of the National Internal Revenue continued implementation of the amendatory legislation.
Code, as Amended. Petitioner also contends that SNITS should be
considered as having now adopted a gross income, instead of as
having still retained the net income taxation scheme. The In G.R. No. 109289, it is asserted that the enactment of Republic
allowance for deductible items, may have significantly been Act
reduced by the questioned law in comparison with that which has No. 7496 violates the following provisions of the Constitution:
prevailed prior to the amendment; however, allowable deductions
from gross income is neither discordant with, nor opposed to, the Article VI, Section 26(1) Every bill passed by the
net income tax concept. Congress shall embrace only one subject which shall be
Petitioner contends that the law would now attempt to tax single expressed in the title thereof.
proprietorships and professionals differently from the manner it
imposes the tax on corporations and partnerships. Article VI, Section 28(1) The rule of taxation shall be
uniform and equitable. The Congress shall evolve a
ISSUE: WON the law was unconstitutional for violating due progressive system of taxation.
process.
Article III, Section 1 No person shall be deprived of . . . Sec. 29. Deductions from gross income. In computing
property without due process of law, nor shall any person taxable income subject to tax under Sections 21(a), 24(a),
be denied the equal protection of the laws. (b) and (c); and 25 (a)(1), there shall be allowed as
deductions the items specified in paragraphs (a) to (i) of
In G.R. No. 109446, petitioners, assailing Section 6 of Revenue this section: Provided, however, That in computing taxable
Regulations No. 2-93, argue that public respondents have income subject to tax under Section 21 (f) in the case of
exceeded their rule-making authority in applying SNIT to general individuals engaged in business or practice of profession,
professional partnerships. only the following direct costs shall be allowed as
deductions:
The Solicitor General espouses the position taken by public
respondents. (a) Raw materials, supplies and direct labor;

The Court has given due course to both petitions. The parties, in (b) Salaries of employees directly engaged in activities in
compliance with the Court's directive, have filed their respective the course of or pursuant to the business or practice of
memoranda. their profession;

G.R. No. 109289 (c) Telecommunications, electricity, fuel, light and water;

Petitioner contends that the title of House Bill No. 34314, (d) Business rentals;
progenitor of Republic Act No. 7496, is a misnomer or, at least,
deficient for being merely entitled, "Simplified Net Income (e) Depreciation;
Taxation Scheme for the Self-Employed
and Professionals Engaged in the Practice of their Profession" (f) Contributions made to the Government and accredited
(Petition in G.R. No. 109289). relief organizations for the rehabilitation of calamity
stricken areas declared by the President; and
The full text of the title actually reads:
(g) Interest paid or accrued within a taxable year on loans
An Act Adopting the Simplified Net Income Taxation contracted from accredited financial institutions which
Scheme For The Self-Employed and Professionals Engaged must be proven to have been incurred in connection with
In The Practice of Their Profession, Amending Sections 21 the conduct of a taxpayer's profession, trade or business.
and 29 of the National Internal Revenue Code, as
Amended. For individuals whose cost of goods sold and direct costs
are difficult to determine, a maximum of forty per cent
The pertinent provisions of Sections 21 and 29, so referred to, of (40%) of their gross receipts shall be allowed as deductions
the National Internal Revenue Code, as now amended, provide: to answer for business or professional expenses as the
case may be.
Sec. 21. Tax on citizens or residents.
On the basis of the above language of the law, it would be difficult
xxx xxx xxx to accept petitioner's view that the amendatory law should be
considered as having now adopted a gross income, instead of as
having still retained the net income, taxation scheme. The
(f) Simplified Net Income Tax for the Self-Employed and/or
allowance for deductible items, it is true, may have significantly
Professionals Engaged in the Practice of Profession. A
been reduced by the questioned law in comparison with that
tax is hereby imposed upon the taxable net income as
which has prevailed prior to the amendment; limiting, however,
determined in Section 27 received during each taxable
allowable deductions from gross income is neither discordant
year from all sources, other than income covered by
with, nor opposed to, the net income tax concept. The fact of the
paragraphs (b), (c), (d) and (e) of this section by every
matter is still that various deductions, which are by no means
individual whether
inconsequential, continue to be well provided under the new law.
a citizen of the Philippines or an alien residing in the
Philippines who is self-employed or practices his
profession herein, determined in accordance with the Article VI, Section 26(1), of the Constitution has been envisioned
following schedule: so as (a) to prevent log-rolling legislation intended to unite the
members of the legislature who favor any one of unrelated
subjects in support of the whole act, (b) to avoid surprises or even
Not over P10,000 3%
fraud upon the legislature, and (c) to fairly apprise the people,
through such publications of its proceedings as are usually made,
Over P10,000 P300 + 9% of the subjects of legislation.1 The above objectives of the
but not over P30,000 of excess over P10,000 fundamental law appear to us to have been sufficiently met.
Anything else would be to require a virtual compendium of the
Over P30,000 P2,100 + 15% law which could not have been the intendment of the
but not over P120,00 of excess over P30,000 constitutional mandate.

Over P120,000 P15,600 + 20% Petitioner intimates that Republic Act No. 7496 desecrates the
but not over P350,000 of excess over P120,000 constitutional requirement that taxation "shall be uniform and
equitable" in that the law would now attempt to tax single
Over P350,000 P61,600 + 30% proprietorships and professionals differently from the manner it
of excess over P350,000 imposes the tax on corporations and partnerships. The contention
clearly forgets, however, that such a system of income taxation
has long been the prevailing rule even prior to Republic Act No. pertinent deliberations in Congress during its enactment of
7496. Republic Act No. 7496, also quoted by the Honorable Hernando B.
Perez, minority floor leader of the House of Representatives, in
Uniformity of taxation, like the kindred concept of equal the latter's privilege speech by way of commenting on the
protection, merely requires that all subjects or objects of taxation, questioned implementing regulation of public respondents
similarly situated, are to be treated alike both in privileges and following the effectivity of the law, thusly:
liabilities (Juan Luna Subdivision vs. Sarmiento, 91 Phil. 371).
Uniformity does not forfend classification as long as: (1) the MR. ALBANO, Now Mr. Speaker, I would like to get the
standards that are used therefor are substantial and not arbitrary, correct impression of this bill. Do we speak here of
(2) the categorization is germane to achieve the legislative individuals who are earning, I mean, who earn through
purpose, (3) the law applies, all things being equal, to both business enterprises and therefore, should file an income
present and future conditions, and (4) the classification applies tax return?
equally well to all those belonging to the same class (Pepsi Cola vs.
City of Butuan, 24 SCRA 3; Basco vs. PAGCOR, 197 SCRA 52). MR. PEREZ. That is correct, Mr. Speaker. This does not
apply to corporations. It applies only to individuals.
What may instead be perceived to be apparent from the
amendatory law is the legislative intent to increasingly shift the (See Deliberations on H. B. No. 34314, August
income tax system towards the schedular approach2 in the income 6, 1991, 6:15 P.M.; Emphasis ours).
taxation of individual taxpayers and to maintain, by and large, the
present global treatment3 on taxable corporations. We certainly
Other deliberations support this position, to wit:
do not view this classification to be arbitrary and inappropriate.

MR. ABAYA . . . Now, Mr. Speaker, did I hear the


Petitioner gives a fairly extensive discussion on the merits of the
Gentleman from Batangas say that this bill is intended to
law, illustrating, in the process, what he believes to be an
increase collections as far as individuals are concerned and
imbalance between the tax liabilities of those covered by the
to make collection of taxes equitable?
amendatory law and those who are not. With the legislature
primarily lies the discretion to determine the nature (kind), object
(purpose), extent (rate), coverage (subjects) and situs (place) of MR. PEREZ. That is correct, Mr. Speaker.
taxation. This court cannot freely delve into those matters which,
by constitutional fiat, rightly rest on legislative judgment. Of (Id. at 6:40 P.M.; Emphasis ours).
course, where a tax measure becomes so unconscionable and
unjust as to amount to confiscation of property, courts will not In fact, in the sponsorship speech of Senator
hesitate to strike it down, for, despite all its plenitude, the power Mamintal Tamano on the Senate version of
to tax cannot override constitutional proscriptions. This stage, the SNITS, it is categorically stated, thus:
however, has not been demonstrated to have been reached
within any appreciable distance in this controversy before us.
This bill, Mr. President, is not applicable to
business corporations or to partnerships; it is
Having arrived at this conclusion, the plea of petitioner to have only with respect to individuals and
the law declared unconstitutional for being violative of due professionals. (Emphasis ours)
process must perforce fail. The due process clause may correctly
be invoked only when there is a clear contravention of inherent or
constitutional limitations in the exercise of the tax power. No such The Court, first of all, should like to correct the apparent
transgression is so evident to us. misconception that general professional partnerships are subject
to the payment of income tax or that there is a difference in the
tax treatment between individuals engaged in business or in the
G.R. No. 109446 practice of their respective professions and partners in general
professional partnerships. The fact of the matter is that a general
The several propositions advanced by petitioners revolve around professional partnership, unlike an ordinary business partnership
the question of whether or not public respondents have exceeded (which is treated as a corporation for income tax purposes and so
their authority in promulgating Section 6, Revenue Regulations subject to the corporate income tax), is not itself an income
No. 2-93, to carry out Republic Act No. 7496. taxpayer. The income tax is imposed not on the professional
partnership, which is tax exempt, but on the partners themselves
The questioned regulation reads: in their individual capacity computed on their distributive shares
of partnership profits. Section 23 of the Tax Code, which has not
been amended at all by Republic Act 7496, is explicit:
Sec. 6. General Professional Partnership The general
professional partnership (GPP) and the partners comprising
the GPP are covered by R. A. No. 7496. Thus, in determining Sec. 23. Tax liability of members of general professional
the net profit of the partnership, only the direct costs partnerships. (a) Persons exercising a common
mentioned in said law are to be deducted from partnership profession in general partnership shall be liable for income
income. Also, the expenses paid or incurred by partners in tax only in their individual capacity, and the share in the
their individual capacities in the practice of their profession net profits of the general professional partnership to which
which are not reimbursed or paid by the partnership but are any taxable partner would be entitled whether distributed
not considered as direct cost, are not deductible from his or otherwise, shall be returned for taxation and the tax
gross income. paid in accordance with the provisions of this Title.

The real objection of petitioners is focused on the administrative (b) In determining his distributive share in the net income
interpretation of public respondents that would apply SNIT to of the partnership, each partner
partners in general professional partnerships. Petitioners cite the
(1) Shall take into account separately his distributive mere mechanism or a flow-through entity in the generation of
share of the partnership's income, gain, loss, income by, and the ultimate distribution of such income to,
deduction, or credit to the extent provided by the respectively, each of the individual partners.
pertinent provisions of this Code, and
Section 6 of Revenue Regulation No. 2-93 did not alter, but merely
(2) Shall be deemed to have elected the itemized confirmed, the above standing rule as now so modified by
deductions, unless he declares his distributive share Republic Act
of the gross income undiminished by his share of the No. 7496 on basically the extent of allowable deductions
deductions. applicable to all individual income taxpayers on their non-
compensation income. There is no evident intention of the law,
There is, then and now, no distinction in income tax liability either before or after the amendatory legislation, to place in an
between a person who practices his profession alone or unequal footing or in significant variance the income tax
individually and one who does it through partnership (whether treatment of professionals who practice their respective
registered or not) with others in the exercise of a common professions individually and of those who do it through a general
profession. Indeed, outside of the gross compensation income tax professional partnership.
and the final tax on passive investment income, under the present
income tax system all individuals deriving income from any source WHEREFORE, the petitions are DISMISSED. No special
whatsoever are treated in almost invariably the same manner and pronouncement on costs.
under a common set of rules.
COMMISSIONER OF INTERNAL REVENUE, vs.
We can well appreciate the concern taken by petitioners if BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX
perhaps we were to consider Republic Act No. 7496 as an entirely APPEALS, G.R. No. L-65773-74 April 30, 1987
independent, not merely as an amendatory, piece of legislation. MELENCIO-HERRERA, J.:
The view can easily become myopic, however, when the law is
understood, as it should be, as only forming part of, and subject
to, the whole income tax concept and precepts long obtaining Facts: British Overseas Airways Corporation (BOAC) is a 100%
under the National Internal Revenue Code. To elaborate a little, British Government-owned corporation organized and existing
the phrase "income taxpayers" is an all embracing term used in under the laws of the United Kingdom It is engaged in the
the Tax Code, and it practically covers all persons who derive international airline business and is a member-signatory of the
taxable income. The law, in levying the tax, adopts the most Interline Air Transport Association (IATA). BOAC did not carry
comprehensive tax situs of nationality and residence of the passengers and/or cargo to or from the Philippines, although
taxpayer (that renders citizens, regardless of residence, and during the period covered by the assessments, it maintained a
resident aliens subject to income tax liability on their income from general sales agent in the Philippines Wamer Barnes and
all sources) and of the generally accepted and internationally Company, Ltd., and later Qantas Airways which was responsible
recognized income taxable base (that can subject non-resident for selling BOAC tickets covering passengers and cargoes.
aliens and foreign corporations to income tax on their income
from Philippine sources). In the process, the Code classifies 1st case: On May 7, 1968 CIR assessed BOAC with P2,498,358.56
taxpayers into four main groups, namely: (1) Individuals, (2) for deficiency income taxes covering the years 1959 to 1963.
Corporations, (3) Estates under Judicial Settlement and (4) BOAC protested. Investigation resulted to a assessment in the
Irrevocable Trusts (irrevocable both as to corpus and as amount of P858,307.79 covering the years 1959 to 1967. BOAC
to income). paid this new assessment under protest.

Partnerships are, under the Code, either "taxable partnerships" or BOAC filed a claim for refund in the amount of P858,307.79 with
"exempt partnerships." Ordinarily, partnerships, no matter how the CIR. However, BOAC did not wait for the decision of the CIR,
created or organized, are subject to income tax (and thus alluded filed petition for review with the tax court. Thereafter, CIR denied
to as "taxable partnerships") which, for purposes of the above claim for refund
categorization, are by law assimilated to be within the context of,
and so legally contemplated as, corporations. Except for few 2nd case: On November 17, 1971 CIR assessed BOAC with
variances, such as in the application of the "constructive receipt deficiency income taxes, interests, and penalty for the fiscal years
rule" in the derivation of income, the income tax approach is alike 1968-1969 to 1970-1971 in the aggregate amount of P549,327.43,
to both juridical persons. Obviously, SNIT is not intended or and the additional amounts of P1,000.00 and P1,800.00 as
envisioned, as so correctly pointed out in the discussions in compromise penalties for violation of Section 46 (requiring the
Congress during its deliberations on Republic Act 7496, filing of corporation returns) penalized under Section 74 of the
aforequoted, to cover corporations and partnerships which are National Internal Revenue Code (NIRC).
independently subject to the payment of income tax.
BOAC in a letter requested that the assessment to
countermanded and set aside. CIR denied the request and
"Exempt partnerships," upon the other hand, are not similarly
reissued the deficiency income tax assessment for P534,132.08 for
identified as corporations nor even considered as independent
the years 1969 to 1970-71 plus P1,000.00 as compromise penalty
taxable entities for income tax purposes. A
under Section 74 of the Tax Code. BOAC asked for reconsideration
general professional partnership is such an example.4Here, the
but CIR denied the same. BOAC filed a 2nd petition for review with
partners themselves, not the partnership (although it is still
the tax court. The 2 cases before the CTA were consolidated
obligated to file an income tax return [mainly for administration
and data]), are liable for the payment of income tax in
Tax Court rendered the assailed joint Decision reversing the CIR.
their individual capacity computed on their respective and
Its position was that income from transportation is income from
distributive shares of profits. In the determination of the tax
services so that the place where services are rendered determines
liability, a partner does so as an individual, and there is no choice
the source. It further held that the proceeds of sales of BOAC
on the matter. In fine, under the Tax Code on income taxation, the
passage tickets in the Philippines by Warner Barnes and Company,
general professional partnership is deemed to be no more than a
Ltd., and later by Qantas Airways, during the period in question,
do not constitute BOAC income from Philippine sources "since no coming to a person within a specific time ...; it means something
service of carriage of passengers or freight was performed by distinct from principal or capital. For, while capital is a fund,
BOAC within the Philippines" and, therefore, said income is not income is a flow. As used in our income tax law, "income" refers
subject to Philippine income tax. to the flow of wealth.

Issues: The source of an income is the property, activity or service that


1. Whether or not during the fiscal years in question BOAC produced the income. For the source of income to be considered
is a resident foreign corporation doing business in the Philippines as coming from the Philippines, it is sufficient that the income is
or has an office or place of business in the Philippines. derived from activity within the Philippines. In BOAC's case, the
sale of tickets in the Philippines is the activity that produces the
2. Whether proceeds from the sale of BOAC tickets in the income. The tickets exchanged hands here and payments for fares
Philippines by Warner Barnes and Company, Ltd are considered were also made here in Philippine currency. The site of the source
income from sources within the Philippines of payments is the Philippines. The flow of wealth proceeded
from, and occurred within, Philippine territory, enjoying the
Ruling: protection accorded by the Philippine government. In
1. Yes, BOAC is a resident foreign corporation. consideration of such protection, the flow of wealth should share
the burden of supporting the government.
There is no specific criterion as to what constitutes "doing" or
"engaging in" or "transacting" business. The term implies a The absence of flight operations to and from the Philippines is not
continuity of commercial dealings and arrangements, and determinative of the source of income or the site of income
contemplates, to that extent, the performance of acts or works or taxation. Admittedly, BOAC was an off-line international airline at
the exercise of some of the functions normally incident to, and in the time pertinent to this case. The test of taxability is the
progressive prosecution of commercial gain or for the purpose "source"; and the source of an income is that activity ... which
and object of the business organization. "In order that a foreign produced the income. Unquestionably, the passage
corporation may be regarded as doing business within a State, documentations in these cases were sold in the Philippines and
there must be continuity of conduct and intention to establish a the revenue therefrom was derived from an activity regularly
continuous business, such as the appointment of a local agent, pursued within the Philippines. And even if the BOAC tickets sold
and not one of a temporary character. covered the "transport of passengers and cargo to and from
foreign cities", it cannot alter the fact that income from the sale of
BOAC, during the periods covered by the subject - assessments, tickets was derived from the Philippines. The word "source"
maintained a general sales agent in the Philippines, That general conveys one essential idea, that of origin, and the origin of the
sales agent, from 1959 to 1971, "was engaged in (1) selling and income herein is the Philippines.
issuing tickets; (2) breaking down the whole trip into series of trips
each trip in the series corresponding to a different airline
company; (3) receiving the fare from the whole trip; and (4) G.R. No. L-65773-74 April 30, 1987
consequently allocating to the various airline companies on the
basis of their participation in the services rendered through the
COMMISSIONER OF INTERNAL REVENUE, petitioner,
mode of interline settlement as prescribed by Article VI of the
vs.
Resolution No. 850 of the IATA Agreement." Those activities were
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX
in exercise of the functions which are normally incident to, and
APPEALS, respondents.
are in progressive pursuit of, the purpose and object of its
organization as an international air carrier. In fact, the regular sale
of tickets, its main activity, is the very lifeblood of the airline Petitioner Commissioner of Internal Revenue (CIR) seeks a review
business, the generation of sales being the paramount objective. on certiorari of the joint Decision of the Court of Tax Appeals
There should be no doubt then that BOAC was "engaged in" (CTA) in CTA Cases Nos. 2373 and 2561, dated 26 January 1983,
business in the Philippines through a local agent during the period which set aside petitioner's assessment of deficiency income taxes
covered by the assessments. Accordingly, it is a resident foreign against respondent British Overseas Airways Corporation (BOAC)
corporation subject to tax upon its total net income received in for the fiscal years 1959 to 1967, 1968-69 to 1970-71,
the preceding taxable year from all sources within the Philippines. respectively, as well as its Resolution of 18 November, 1983
denying reconsideration.
2. Yes, proceeds from the sale of BOAC tickets in the
Philippines by Warner Barnes and Company, Ltd. are considered BOAC is a 100% British Government-owned corporation organized
income from sources within the Philippines hence taxable by the and existing under the laws of the United Kingdom It is engaged in
Philippine government. the international airline business and is a member-signatory of the
Interline Air Transport Association (IATA). As such it operates air
The Tax Code defines "gross income" thus: transportation service and sells transportation tickets over the
"Gross income" includes gains, profits, and income derived from routes of the other airline members. During the periods covered
salaries, wages or compensation for personal service of whatever by the disputed assessments, it is admitted that BOAC had no
kind and in whatever form paid, or from profession, vocations, landing rights for traffic purposes in the Philippines, and was not
trades, business, commerce, sales, or dealings in property, granted a Certificate of public convenience and necessity to
whether real or personal, growing out of the ownership or use of operate in the Philippines by the Civil Aeronautics Board (CAB),
or interest in such property; also from interests, rents, dividends, except for a nine-month period, partly in 1961 and partly in 1962,
securities, or the transactions of any business carried on for gain when it was granted a temporary landing permit by the CAB.
or profile, or gains, profits, and income derived from any source Consequently, it did not carry passengers and/or cargo to or from
whatever (Sec. 29[3]) the Philippines, although during the period covered by the
assessments, it maintained a general sales agent in the Philippines
"The phrase 'income from any source whatever' discloses a Wamer Barnes and Company, Ltd., and later Qantas Airways
legislative policy to include all income not expressly exempted which was responsible for selling BOAC tickets covering
within the class of taxable income under our laws." Income means passengers and cargoes. 1
"cash received or its equivalent"; it is the amount of money
G.R. No. 65773 (CTA Case No. 2373, the First Case) 2. Whether or not during the fiscal years in question BOAC
s a resident foreign corporation doing business in the
On 7 May 1968, petitioner Commissioner of Internal Revenue Philippines or has an office or place of business in the
(CIR, for brevity) assessed BOAC the aggregate amount of Philippines.
P2,498,358.56 for deficiency income taxes covering the years
1959 to 1963. This was protested by BOAC. Subsequent 3. In the alternative that private respondent may not be
investigation resulted in the issuance of a new assessment, dated considered a resident foreign corporation but a non-
16 January 1970 for the years 1959 to 1967 in the amount of resident foreign corporation, then it is liable to Philippine
P858,307.79. BOAC paid this new assessment under protest. income tax at the rate of thirty-five per cent (35%) of its
gross income received from all sources within the
On 7 October 1970, BOAC filed a claim for refund of the amount Philippines.
of P858,307.79, which claim was denied by the CIR on 16 February
1972. But before said denial, BOAC had already filed a petition for Under Section 20 of the 1977 Tax Code:
review with the Tax Court on 27 January 1972, assailing the
assessment and praying for the refund of the amount paid. (h) the term resident foreign corporation engaged in trade
or business within the Philippines or having an office or
G.R. No. 65774 (CTA Case No. 2561, the Second Case) place of business therein.

On 17 November 1971, BOAC was assessed deficiency income (i) The term "non-resident foreign corporation" applies to
taxes, interests, and penalty for the fiscal years 1968-1969 to a foreign corporation not engaged in trade or business
1970-1971 in the aggregate amount of P549,327.43, and the within the Philippines and not having any office or place of
additional amounts of P1,000.00 and P1,800.00 as compromise business therein
penalties for violation of Section 46 (requiring the filing of
corporation returns) penalized under Section 74 of the National It is our considered opinion that BOAC is a resident foreign
Internal Revenue Code (NIRC). corporation. There is no specific criterion as to what constitutes
"doing" or "engaging in" or "transacting" business. Each case must
On 25 November 1971, BOAC requested that the assessment be be judged in the light of its peculiar environmental circumstances.
countermanded and set aside. In a letter, dated 16 February 1972, The term implies a continuity of commercial dealings and
however, the CIR not only denied the BOAC request for refund in arrangements, and contemplates, to that extent, the performance
the First Case but also re-issued in the Second Case the deficiency of acts or works or the exercise of some of the functions normally
income tax assessment for P534,132.08 for the years 1969 to incident to, and in progressive prosecution of commercial gain or
1970-71 plus P1,000.00 as compromise penalty under Section 74 for the purpose and object of the business organization. 2 "In
of the Tax Code. BOAC's request for reconsideration was denied order that a foreign corporation may be regarded as doing
by the CIR on 24 August 1973. This prompted BOAC to file the business within a State, there must be continuity of conduct and
Second Case before the Tax Court praying that it be absolved of intention to establish a continuous business, such as the
liability for deficiency income tax for the years 1969 to 1971. appointment of a local agent, and not one of a temporary
character. 3
This case was subsequently tried jointly with the First Case.
BOAC, during the periods covered by the subject - assessments,
On 26 January 1983, the Tax Court rendered the assailed joint maintained a general sales agent in the Philippines, That general
Decision reversing the CIR. The Tax Court held that the proceeds sales agent, from 1959 to 1971, "was engaged in (1) selling and
of sales of BOAC passage tickets in the Philippines by Warner issuing tickets; (2) breaking down the whole trip into series of trips
Barnes and Company, Ltd., and later by Qantas Airways, during each trip in the series corresponding to a different airline
the period in question, do not constitute BOAC income from company; (3) receiving the fare from the whole trip; and (4)
Philippine sources "since no service of carriage of passengers or consequently allocating to the various airline companies on the
freight was performed by BOAC within the Philippines" and, basis of their participation in the services rendered through the
therefore, said income is not subject to Philippine income tax. The mode of interline settlement as prescribed by Article VI of the
CTA position was that income from transportation is income from Resolution No. 850 of the IATA Agreement." 4 Those activities
services so that the place where services are rendered determines were in exercise of the functions which are normally incident to,
the source. Thus, in the dispositive portion of its Decision, the Tax and are in progressive pursuit of, the purpose and object of its
Court ordered petitioner to credit BOAC with the sum of organization as an international air carrier. In fact, the regular sale
P858,307.79, and to cancel the deficiency income tax assessments of tickets, its main activity, is the very lifeblood of the airline
against BOAC in the amount of P534,132.08 for the fiscal years business, the generation of sales being the paramount objective.
1968-69 to 1970-71. There should be no doubt then that BOAC was "engaged in"
business in the Philippines through a local agent during the period
covered by the assessments. Accordingly, it is a resident foreign
Hence, this Petition for Review on certiorari of the Decision of the
corporation subject to tax upon its total net income received in
Tax Court.
the preceding taxable year from all sources within the
Philippines. 5
The Solicitor General, in representation of the CIR, has aptly
defined the issues, thus:
Sec. 24. Rates of tax on corporations. ...

1. Whether or not the revenue derived by private


(b) Tax on foreign corporations. ...
respondent British Overseas Airways Corporation (BOAC)
from sales of tickets in the Philippines for air
transportation, while having no landing rights here, (2) Resident corporations. A corporation organized,
constitute income of BOAC from Philippine sources, and, authorized, or existing under the laws of any foreign
accordingly, taxable. country, except a foreign fife insurance company, engaged
in trade or business within the Philippines, shall be taxable mention income from the sale of tickets for international
as provided in subsection (a) of this section upon the total transportation. However, that does not render it less an income
net income received in the preceding taxable year from all from sources within the Philippines. Section 37, by its language,
sources within the Philippines. (Emphasis supplied) does not intend the enumeration to be exclusive. It merely directs
that the types of income listed therein be treated as income from
Next, we address ourselves to the issue of whether or not the sources within the Philippines. A cursory reading of the section
revenue from sales of tickets by BOAC in the Philippines will show that it does not state that it is an all-inclusive
constitutes income from Philippine sources and, accordingly, enumeration, and that no other kind of income may be so
taxable under our income tax laws. considered. " 10

The Tax Code defines "gross income" thus: BOAC, however, would impress upon this Court that income
derived from transportation is income for services, with the result
that the place where the services are rendered determines the
"Gross income" includes gains, profits, and income derived
source; and since BOAC's service of transportation is performed
from salaries, wages or compensation for personal service
outside the Philippines, the income derived is from sources
of whatever kind and in whatever form paid, or from
without the Philippines and, therefore, not taxable under our
profession, vocations, trades, business, commerce, sales,
income tax laws. The Tax Court upholds that stand in the joint
or dealings in property, whether real or personal, growing
Decision under review.
out of the ownership or use of or interest in such property;
also from interests, rents, dividends, securities, or
the transactions of any business carried on for gain or The absence of flight operations to and from the Philippines is not
profile, or gains, profits, and income derived from any determinative of the source of income or the site of income
source whatever (Sec. 29[3]; Emphasis supplied) taxation. Admittedly, BOAC was an off-line international airline at
the time pertinent to this case. The test of taxability is the
"source"; and the source of an income is that activity ... which
The definition is broad and comprehensive to include proceeds
produced the income. 11 Unquestionably, the passage
from sales of transport documents. "The words 'income from any
documentations in these cases were sold in the Philippines and
source whatever' disclose a legislative policy to include all income
the revenue therefrom was derived from a activity regularly
not expressly exempted within the class of taxable income under
pursued within the Philippines. business a And even if the BOAC
our laws." Income means "cash received or its equivalent"; it is
tickets sold covered the "transport of passengers and cargo to and
the amount of money coming to a person within a specific time ...;
from foreign cities", 12 it cannot alter the fact that income from
it means something distinct from principal or capital. For, while
the sale of tickets was derived from the Philippines. The word
capital is a fund, income is a flow. As used in our income tax law,
"source" conveys one essential idea, that of origin, and the origin
"income" refers to the flow of wealth. 6
of the income herein is the Philippines. 13

The records show that the Philippine gross income of BOAC for
It should be pointed out, however, that the assessments upheld
the fiscal years 1968-69 to 1970-71 amounted to P10,428,368
herein apply only to the fiscal years covered by the questioned
.00. 7
deficiency income tax assessments in these cases, or, from 1959
to 1967, 1968-69 to 1970-71. For, pursuant to Presidential Decree
Did such "flow of wealth" come from "sources within the No. 69, promulgated on 24 November, 1972, international carriers
Philippines", are now taxed as follows:

The source of an income is the property, activity or service that ... Provided, however, That international
produced the income. 8 For the source of income to be considered carriers shall pay a tax of 2- per cent on their
as coming from the Philippines, it is sufficient that the income is cross Philippine billings. (Sec. 24[b] [21, Tax
derived from activity within the Philippines. In BOAC's case, the Code).
sale of tickets in the Philippines is the activity that produces the
income. The tickets exchanged hands here and payments for fares
Presidential Decree No. 1355, promulgated on 21 April, 1978,
were also made here in Philippine currency. The site of the source
provided a statutory definition of the term "gross Philippine
of payments is the Philippines. The flow of wealth proceeded
billings," thus:
from, and occurred within, Philippine territory, enjoying the
protection accorded by the Philippine government. In
consideration of such protection, the flow of wealth should share ... "Gross Philippine billings" includes gross revenue
the burden of supporting the government. realized from uplifts anywhere in the world by any
international carrier doing business in the Philippines of
passage documents sold therein, whether for passenger,
A transportation ticket is not a mere piece of paper. When issued
excess baggage or mail provided the cargo or mail
by a common carrier, it constitutes the contract between the
originates from the Philippines. ...
ticket-holder and the carrier. It gives rise to the obligation of the
purchaser of the ticket to pay the fare and the corresponding
obligation of the carrier to transport the passenger upon the The foregoing provision ensures that international airlines are
terms and conditions set forth thereon. The ordinary ticket issued taxed on their income from Philippine sources. The 2- % tax on
to members of the traveling public in general embraces within its gross Philippine billings is an income tax. If it had been intended as
terms all the elements to constitute it a valid contract, binding an excise or percentage tax it would have been place under Title V
upon the parties entering into the relationship. 9 of the Tax Code covering Taxes on Business.

True, Section 37(a) of the Tax Code, which enumerates items of Lastly, we find as untenable the BOAC argument that the dismissal
gross income from sources within the Philippines, namely: (1) for lack of merit by this Court of the appeal in JAL vs.
interest, (21) dividends, (3) service, (4) rentals and royalties, (5) Commissioner of Internal Revenue (G.R. No. L-30041) on February
sale of real property, and (6) sale of personal property, does not 3, 1969, is res judicata to the present case. The ruling by the Tax
Court in that case was to the effect that the mere sale of tickets, 2. Whether or not during the fiscal years in question 1 BOAC [was]
unaccompanied by the physical act of carriage of transportation, a resident foreign corporation doing business in the Philippines or
does not render the taxpayer therein subject to the common [had] an office or place of business in the Philippines.
carrier's tax. As elucidated by the Tax Court, however, the
common carrier's tax is an excise tax, being a tax on the activity of It is important to note at the outset that the answer to the above-
transporting, conveying or removing passengers and cargo from quoted issue is not determinative of the lialibity of the BOAC to
one place to another. It purports to tax the business of Philippine income taxation in respect of the income here involved.
transportation. 14 Being an excise tax, the same can be levied by The liability of BOAC to Philippine income taxation in respect of
the State only when the acts, privileges or businesses are done or such income depends, not on BOAC's status as a "resident foreign
performed within the jurisdiction of the Philippines. The subject corporation" or alternatively, as a "non-resident foreign
matter of the case under consideration is income tax, a direct tax corporation," but rather on whether or not such income is derived
on the income of persons and other entities "of whatever kind from "source within the Philippines."
and in whatever form derived from any source." Since the two
cases treat of a different subject matter, the decision in one
A "resident foreign corporation" or foreign corporation engaged in
cannot be res judicata to the other.
trade or business in the Philippines or having an office or place of
business in the Philippines is subject to Philippine income
WHEREFORE, the appealed joint Decision of the Court of Tax taxation only in respect of income derived from sources within the
Appeals is hereby SET ASIDE. Private respondent, the British Philippines. Section 24 (b) (2) of the National Internal Revenue
Overseas Airways Corporation (BOAC), is hereby ordered to pay CODE ("Tax Code"), as amended by Republic Act No. 2343,
the amount of P534,132.08 as deficiency income tax for the fiscal approved 20 June 1959, as it existed up to 3 August 1969, read as
years 1968-69 to 1970-71 plus 5% surcharge, and 1% monthly follows:
interest from April 16, 1972 for a period not to exceed three (3)
years in accordance with the Tax Code. The BOAC claim for refund
(2) Resident corporations. A foreign corporation
in the amount of P858,307.79 is hereby denied. Without costs.
engaged in trade or business with in the Philippines
(expect foreign life insurance companies) shall be taxable
Separate Opinions as provided in subsection (a) of this section.

TEEHANKEE, C.J., concurring: Section 24 (a) of the Tax Code in turn provides:

I concur with the Court's majority judgment upholding the Rate of tax on corporations. (a) Tax on domestic
assessments of deficiency income taxes against respondent BOAC corporations. ... and a like tax shall be livied, collected,
for the fiscal years 1959-1969 to 1970-1971 and therefore setting and paid annually upon the total net income received in
aside the appealed joint decision of respondent Court of Tax the preceeding taxable year from all sources within the
Appeals. I just wish to point out that the conflict between the Philippines by every corporation organized, authorized, or
majority opinion penned by Mr. Justice Feliciano as to the proper existing under the laws of any foreign country: ... .
characterization of the taxable income derived by respondent (Emphasis supplied)
BOAC from the sales in the Philippines of tickets foe BOAC form
the issued by its general sales agent in the Philippines gas become
Republic Act No. 6110, which took effect on 4 August 1969, made
moot after November 24, 1972. Booth opinions state that by
this even clearer when it amended once more Section 24 (b) (2) of
amendment through P.D. No.69, promulgated on November 24,
the Tax Code so as to read as follows:
1972, of section 24(b) (2) of the Tax Code providing dor the rate of
income tax on foreign corporations, international carriers such as
respondent BOAC, have since then been taxed at a reduced rate (2) Resident Corporations. A corporation, organized,
of 2-% on their gross Philippine billings. There is, therefore, no authorized or existing under the laws of any foreign
longer ant source of substantial conflict between the two opinions counrty, except foreign life insurance company, engaged in
as to the present 2-% tax on their gross Philippine billings trade or business within the Philippines, shall be taxable as
charged against such international carriers as herein respondent provided in subsection (a) of this section upon the total net
foreign corporation. income received in the preceding taxable year from all
sources within the Philippines. (Emphasis supplied)
FELICIANO, J., dissenting:
Exactly the same rule is provided by Section 24 (b) (1) of the Tax
Code upon non-resident foreign corporations. Section 24 (b) (1) as
With great respect and reluctance, i record my dissent from the
amended by Republic Act No. 3825 approved 22 June 1963, read
opinion of Mme. Justice A.A. Melencio-Herrera speaking for the
as follows:
majority . In my opinion, the joint decision of the Court of Tax
Appeals in CTA Cases Nos. 2373 and 2561, dated 26 January 1983,
is correct and should be affirmed. (b) Tax on foreign corporations. (1) Non-resident
corporations. There shall be levied, collected and paid
for each taxable year, in lieu of the tax imposed by the
The fundamental issue raised in this petition for review is whether
preceding paragraph upon the amount received by every
the British Overseas Airways Corporation (BOAC), a foreign airline
foreign corporation not engaged in trade or business
company which does not maintain any flight operations to and
within the Philippines, from all sources within the
from the Philippines, is liable for Philippine income taxation in
Philippines, as interest, dividends, rents, salaries, wages,
respect of "sales of air tickets" in the Philippines through a general
premium, annuities, compensations, remunerations,
sales agent, relating to the carriage of passengers and cargo
emoluments, or other fixed or determinative annual or
between two points both outside the Philippines.
periodical gains, profits and income a tax equal to thirty
per centum of such amount: provided, however, that
1. The Solicitor General has defined as one of the issue in this case premiums shall not include reinsurance premiums. 2
the question of:
Clearly, whether the foreign corporate taxpayer is doing business this counrty, the income should be from "source within the
in the Philippines and therefore a resident foreign corporation, or United States." If the income is from capital, the place
not doing business in the Philippines and therefore a non-resident where the capital is employed should be decisive; if it is
foreign corporation, it is liable to income tax only to the extent employed in this country, the income should be from
that it derives income from sources within the Philippines. The "source within the United States". If the income is from the
circumtances that a foreign corporation is resident in the sale of capital assets, the place where the sale is made
Philippines yields no inference that all or any part of its income is should be likewise decisive. Much confusion will be
Philippine source income. Similarly, the non-resident status of a avoided by regarding the term "source" in this
foreign corporation does not imply that it has no Philippine source fundamental light. It is not a place; it is an activity or
income. Conversely, the receipt of Philippine source income property. As such, it has a situs or location; and if that situs
creates no presumption that the recipient foreign corporation is a or location is within the United States the resulting income
resident of the Philippines. The critical issue, for present purposes, is taxable to nonresident aliens and foreign corporations.
is therefore whether of not BOAC is deriving income from sources The intention of Congress in the 1916 and subsequent
within the Philippines. statutes was to discard the 1909 and 1913 basis of taxing
nonresident aliens and foreign corporations and to make
2. For purposes of income taxation, it is well to bear in mind that the test of taxability the "source", or situs of the activities
the "source of income" relates not to the physical sourcing of a or property which produce the income . . . . Thus, if income
flow of money or the physical situs of payment but rather to the is to taxed, the recipient thereof must be resident within
"property, activity or service which produced the income." the jurisdiction, or the property or activities out of which
In Howden and Co., Ltd. vs. Collector of Internal Revenue, 3 the the income issue or is derived must be situated within the
court dealt with the issue of the applicable source rule relating to jurisdiction so that the source of the income may be said to
reinsurance premiums paid by a local insurance company to a have a situs in this country. The underlying theory is that
foreign reinsurance company in respect of risks located in the the consideration for taxation is protection of life and
Philippines. The Court said: property and that the income rightly to be levied upon to
defray the burdens of the United States Government is
that income which is created by activities and property
The source of an income is the property, activity or services
protected by this Government or obtained by persons
that produced the income. The reinsurance premiums
enjoying that protection. 5
remitted to appellants by virtue of the reinsurance contract,
accordingly, had for their source the undertaking to
indemnify Commonwealth Insurance Co. against liability. Said 3. We turn now to the question what is the source of income rule
undertaking is the activity that produced the reinsurance applicable in the instant case. There are two possibly relevant
premiums, and the same took place in the Philippines. source of income rules that must be confronted; (a) the source
[T]he reinsurance, the liabilities insured and the risk originally rule applicable in respect of contracts of service; and (b) the
underwritten by Commonwealth Insurance Co., upon which source rule applicable in respect of sales of personal property.
the reinsurance premiums and indemnity were based, were
all situated in the Philippines. 4 Where a contract for the rendition of service is involved, the
applicable source rule may be simply stated as follows: the
The Court may be seen to be saying that it is the underlying income is sourced in the place where the service contracted for is
prestation which is properly regarded as the activity giving rise to rendered. Section 37 (a) (3) of our Tax Code reads as follows:
the income that is sought to be taxed. In the Howden case, that
underlying prestation was the indemnification of the local Section 37. Income for sources within the Philippines.
insurance company. Such indemnification could take place only in
the Philippines where the risks were located and where payment (a) Gross income from sources within the Philippines.
from the foreign reinsurance (in case the casualty insured against The following items of gross income shall be treated as
occurs) would be received in Philippine pesos under the gross income from sources within the Philippines:
reinsurance premiums paid by the local insurance companies
constituted Philippine source income of the foreign reinsurances.
xxx xxx xxx

The concept of "source of income" for purposes of income


(3) Services. Compensation for labor or personal
taxation originated in the United States income tax system. The
services performed in the Philippines;... (Emphasis
phrase "sources within the United States" was first introduced
supplied)
into the U.S. tax system in 1916, and was subsequently embodied
in the 1939 U.S. Tax Code. As is commonly known, our Tax Code
(Commonwealth Act 466, as amended) was patterned after the Section 37 (c) (3) of the Tax Code, on the other hand, deals with
1939 U.S. Tax Code. It therefore seems useful to refer to a income from sources without the Philippines in the following
standard U.S. text on federal income taxation: manner:

The Supreme Court has said, in a definition much quoted (c) Gross income from sources without the Philippines.
but often debated, that income may be derived from three The following items of gross income shall be treated
possible sources only: (1) capital and/or (2) labor and/or as income from sources without the Philippines:
(3) the sale of capital assets. While the three elements of
this attempt at definition need not be accepted as all- (3) Compensation for labor or personal services performed
inclusive, they serve as useful guides in any inquiry into without the Philippines; ... (Emphasis supplied)
whether a particular item is from "source within the
United States" and suggest an investigation into the nature It should not be supposed that Section 37 (a) (3) and (c) (3) of the
and location of the activities or property which produce the Tax Code apply only in respect of services rendered by individual
income. If the income is from labor (services) the place natural persons; they also apply to services rendered by or
where the labor is done should be decisive; if it is done in through the medium of a juridical person. 6 Further, a contract of
carriage or of transportation is assimilated in our Tax Code and telegraph or cable messages between points in the
Revenue Regulations to a contract for services. Thus, Section 37 Philippines and points outside the Philippines derives
(e) of the Tax Code provides as follows: income partly form source within and partly from sources
without the Philippines.
(e) Income form sources partly within and partly without the
Philippines. Items of gross income, expenses, losses and ... (Emphasis supplied)
deductions, other than those specified in subsections (a) and
(c) of this section shall be allocated or apportioned to sources Once more, a very strong inference arises under Sections 163 and
within or without the Philippines, under the rules and 164 of Revenue Regulations No. 2 that steamship and telegraph
regulations prescribed by the Secretary of Finance. ... Gains, and cable services rendered between points both outside the
profits, and income from (1) transportation or other services Philippines give rise to income wholly from sources outside the
rendered partly within and partly without the Philippines, Philippines, and therefore not subject to Philippine income
or (2) from the sale of personnel property produced (in taxation.
whole or in part) by the taxpayer within and sold without the
Philippines, or produced (in whole or in part) by the taxpayer
We turn to the "source of income" rules relating to the sale of
without and sold within the Philippines, shall be treated as
personal property, upon the one hand, and to the purchase and
derived partly from sources within and partly from sources
sale of personal property, upon the other hand.
without the Philippines. ... (Emphasis supplied)

We consider first sales of personal property. Income from the sale


It should be noted that the above underscored portion of Section
of personal property by the producer or manufacturer of such
37 (e) was derived from the 1939 U.S. Tax Code which "was based
personal property will be regarded as sourced entirely within or
upon a recognition that transportation was a service and that the
entirely without the Philippines or as sourced partly within and
source of the income derived therefrom was to be treated as being
partly without the Philippines, depending upon two factors: (a)
the place where the service of transportation was rendered. 7
the place where the sale of such personal property occurs; and (b)
the place where such personal property was produced or
Section 37 (e) of the Tax Code quoted above carries a strong well- manufactured. If the personal property involved was both
nigh irresistible, implication that income derived from produced or manufactured and sold outside the Philippines, the
transportation or other services rendered entirely outside the income derived therefrom will be regarded as sourced entirely
Philippines must be treated as derived entirely from sources outside the Philippines, although the personal property had been
without the Philippines. This implication is reinforced by a produced outside the Philippines, or if the sale of the property
consideration of certain provisions of Revenue Regulations No. 2 takes place outside the Philippines and the personal was produced
entitled "Income Tax Regulations" as amended, first promulgated in the Philippines, then, the income derived from the sale will be
by the Department of Finance on 10 February 1940. Section 155 deemed partly as income sourced without the Philippines. In
of Revenue Regulations No. 2 (implementing Section 37 of the Tax other words, the income (and the related expenses, losses and
Code) provides in part as follows: deductions) will be allocated between sources within and sources
without the Philippines. Thus, Section 37 (e) of the Tax Code,
Section 155. Compensation for labor or personnel although already quoted above, may be usefully quoted again:
services. Gross income from sources within the
Philippines includes compensation for labor or personal (e) Income from sources partly within and partly without
services within the Philippines regardless of the residence the Philippines. ... Gains, profits and income from (1)
of the payer, of the place in which the contract for services transportation or other services rendered partly within and
was made, or of the place of payment (Emphasis partly without the Philippines; or (2) from the sale of
supplied) personal property produced (in whole or in part) by the
taxpayer within and sold without the Philippines, or
Section 163 of Revenue Regulations No. 2 (still relating to Section produced (in whole or in part) by the taxpayer without and
37 of the Tax Code) deals with a particular species of foreign sold within the Philippines, shall be treated as derived
transportation companies i.e., foreign steamship companies partly from sources within and partly from sources without
deriving income from sources partly within and partly without the the Philippines. ... (Emphasis supplied)
Philippines:
In contrast, income derived from the purchase and sale of
Section 163 Foreign steamship companies. The return of personal property i. e., trading is, under the Tax Code,
foreign steamship companies whose vessels touch parts of regarded as sourced wholly in the place where the personal
the Philippines should include as gross income, the property is sold. Section 37 (e) of the Tax Code provides in part as
total receipts of all out-going business whether freight or follows:
passengers. With the gross income thus ascertained, the
ratio existing between it and the gross income from all (e) Income from sources partly within and partly without
ports, both within and without the Philippines of all the Philippines ... Gains, profits and income derived from
vessels, whether touching of the Philippines or not, should the purchase of personal property within and its sale
be determined as the basis upon which allowable without the Philippines or from the purchase of personal
deductions may be computed, . (Emphasis supplied) property without and its sale within the Philippines, shall
be treated as derived entirely from sources within the
Another type of utility or service enterprise is dealt with in Section country in which sold. (Emphasis supplied)
164 of Revenue Regulations No. 2 (again implementing Section 37
of the Tax Code) with provides as follows: Section 159 of Revenue Regulations No. 2 puts the applicable rule
succinctly:
Section 164. Telegraph and cable services. A foreign
corporation carrying on the business of transmission of
Section 159. Sale of personal property. Income derived Decree No. 69, promulgated on 24 November 1972 and by
from the purchase and sale of personal property shall be Presidential Decree No. 1355, promulgated on 21 April 1978, in
treated as derived entirely from the country in which the following manner:
sold. The word "sold" includes "exchange." The "country"
in which "sold" ordinarily means the place where the (2) Resident corporations. A corporation organized,
property is marketed. This Section does not apply to authorized, or existing under the laws of any foreign
income from the sale personal property produced (in country, engaged in trade or business within the
whole or in part) by the taxpayer within and sold without Philippines, shall be taxable as provided in subsection (a)
the Philippines or produced (in whole or in part) by the of this section upon the total net income received in the
taxpayer without and sold within the Philippines. (See preceeding taxable year from all sources within the
Section 162 of these regulations). (Emphasis supplied) Philippines: Provided, however, That international carriers
shall pay a tax of two and one-half per cent on their gross
4. It will be seen that the basic problem is one of characterization Philippine billings. "Gross Philippines of passage
of the transactions entered into by BOAC in the Philippines. Those documents sold therein, whether for passenger, excess
transactions may be characterized either as sales of personal baggege or mail, provide the cargo or mail originates from
property (i. e., "sales of airline tickets") or as entering into a lease the Philippines. The gross revenue realized from the said
of services or a contract of service or carriage. The applicable cargo or mail shall include the gross freight charge up to
"source of income" rules differ depending upon which final destination. Gross revenues from chartered flights
characterization is given to the BOAC transactions. originating from the Philippines shall likewise form part of
"gross Philippine billings" regardless of the place of sale or
The appropriate characterization, in my opinion, of the BOAC payment of the passage documents. For purposes of
transactions is that of entering into contracts of service, i.e., determining the taxability to revenues from chartered
carriage of passengers or cargo between points located outside flights, the term "originating from the Philippines" shall
the Philippines. include flight of passsengers who stay in the Philippines for
more than forty-eight (48) hours prior to embarkation.
(Emphasis supplied)
The phrase "sale of airline tickets," while widely used in popular
parlance, does not appear to be correct as a matter of tax law.
The airline ticket in and of itself has no monetary value, even as Under the above-quoted proviso international carriers issuing for
scrap paper. The value of the ticket lies wholly in the right compensation passage documentation in the Philippines for
acquired by the "purchaser" the passenger to demand a uplifts from any point in the world to any other point in the world,
prestation from BOAC, which prestation consists of the carriage of are not charged any Philippine income tax on their Philippine
the "purchaser" or passenger from the one point to another billings (i.e., billings in respect of passenger or cargo originating
outside the Philippines. The ticket is really the evidence of the from the Philippines). Under this new approach, international
contract of carriage entered into between BOAC and the carriers who service port or points in the Philippines are treated in
passenger. The money paid by the passenger changes hands in the exactly the same way as international carriers not serving any port
Philippines. But the passenger does not receive undertaken to be or point in the Philippines. Thus, the source of income rule
delivered by BOAC. The "purchase price of the airline ticket" is applicable, as above discussed, to transportation or other services
quite different from the purchase price of a physical good or rendered partly within and partly without the Philippines, or
commodity such as a pair of shoes of a refrigerator or an wholly without the Philippines, has been set aside. in place of
automobile; it is really the compensation paid for the undertaking Philippine income taxation, the Tax Code now imposes this 2 per
of BOAC to transport the passenger or cargo outside the cent tax computed on the basis of billings in respect of passengers
Philippines. and cargo originating from the Philippines regardless of where
embarkation and debarkation would be taking place. This 2- per
cent tax is effectively a tax on gross receipts or an excise or
The characterization of the BOAC transactions either as sales of
privilege tax and not a tax on income. Thereby, the Government
personal property or as purchases and sales of personal property,
has done away with the difficulties attending the allocation of
appear entirely inappropriate from other viewpoint. Consider first
income and related expenses, losses and deductions. Because
purchases and sales: is BOAC properly regarded as engaged in
taxes are the very lifeblood of government, the resulting potential
trading in the purchase and sale of personal property?
"loss" or "gain" in the amount of taxes collectible by the state is
Certainly, BOAC was not purchasing tickets outside the Philippines
sometimes, with varying degrees of consciousness, considered in
and selling them in the Philippines. Consider next sales: can BOAC
choosing from among competing possible characterizations under
be regarded as "selling" personal property produced or
or interpretation of tax statutes. It is hence perhaps useful to
manufactured by it? In a popular or journalistic sense, BOAC might
point out that the determination of the appropriate
be described as "selling" "a product" its service. However, for
characterization here that of contracts of air carriage rather
the technical purposes of the law on income taxation, BOAC is in
than sales of airline tickets entails no down-the-road loss of
fact entering into contracts of service or carriage. The very
income tax revenues to the Government. In lieu thereof, the
existance of "source rules" specifically and precisely applicable to
Government takes in revenues generated by the 2- per cent tax
the rendition of services must preclude the application here of
on the gross Philippine billings or receipts of international carriers.
"source rules" applying generally to sales, and purchases and
sales, of personal property which can be invoked only by the grace
of popular language. On a slighty more abstract level, BOAC's I would vote to affirm the decision of the Court of Tax Appeals.
income is more appropriately characterized as derived from a
"service", rather than from an "activity" (a broader term than Separate Opinions
service and including the activity of selling) or from the here
involved is income taxation, and not a sales tax or TEEHANKEE, C.J., concurring:
an excise or privilege tax.
I concur with the Court's majority judgment upholding the
5. The taxation of international carriers is today effected under assessments of deficiency income taxes against respondent BOAC
Section 24 (b) (2) of the Tax Code, as amended by Presidential for the fiscal years 1959-1969 to 1970-1971 and therefore setting
aside the appealed joint decision of respondent Court of Tax and paid annually upon the total net income received in
Appeals. I just wish to point out that the conflict between the the preceeding taxable year from all sources within the
majority opinion penned by Mr. Justice Feliciano as to the proper Philippines by every corporation organized, authorized, or
characterization of the taxable income derived by respondent existing under the laws of any foreign country: ... .
BOAC from the sales in the Philippines of tickets foe BOAC form (Emphasis supplied)
the issued by its general sales agent in the Philippines gas become
moot after November 24, 1972. Booth opinions state that by Republic Act No. 6110, which took effect on 4 August 1969, made
amendment through P.D. No.69, promulgated on November 24, this even clearer when it amended once more Section 24 (b) (2) of
1972, of section 24(b) (2) of the Tax Code providing dor the rate of the Tax Code so as to read as follows:
income tax on foreign corporations, international carriers such as
respondent BOAC, have since then been taxed at a reduced rate
(2) Resident Corporations. A corporation, organized,
of 2-% on their gross Philippine billings. There is, therefore, no
authorized or existing under the laws of any foreign
longer ant source of substantial conflict between the two opinions
counrty, except foreign life insurance company, engaged in
as to the present 2-% tax on their gross Philippine billings
trade or business within the Philippines, shall be taxable as
charged against such international carriers as herein respondent
provided in subsection (a) of this section upon the total net
foreign corporation.
income received in the preceding taxable year from all
sources within the Philippines. (Emphasis supplied)
FELICIANO, J., dissenting:
Exactly the same rule is provided by Section 24 (b) (1) of the Tax
With great respect and reluctance, i record my dissent from the Code upon non-resident foreign corporations. Section 24 (b) (1) as
opinion of Mme. Justice A.A. Melencio-Herrera speaking for the amended by Republic Act No. 3825 approved 22 June 1963, read
majority . In my opinion, the joint decision of the Court of Tax as follows:
Appeals in CTA Cases Nos. 2373 and 2561, dated 26 January 1983,
is correct and should be affirmed.
(b) Tax on foreign corporations. (1) Non-resident
corporations. There shall be levied, collected and paid
The fundamental issue raised in this petition for review is whether for each taxable year, in lieu of the tax imposed by the
the British Overseas Airways Corporation (BOAC), a foreign airline preceding paragraph upon the amount received by every
company which does not maintain any flight operations to and foreign corporation not engaged in trade or business
from the Philippines, is liable for Philippine income taxation in within the Philippines, from all sources within the
respect of "sales of air tickets" in the Philippines through a general Philippines, as interest, dividends, rents, salaries, wages,
sales agent, relating to the carriage of passengers and cargo premium, annuities, compensations, remunerations,
between two points both outside the Philippines. emoluments, or other fixed or determinative annual or
periodical gains, profits and income a tax equal to thirty
1. The Solicitor General has defined as one of the issue in this case per centum of such amount: provided, however, that
the question of: premiums shall not include reinsurance premiums. 2

2. Whether or not during the fiscal years in question 1 BOAC [was] Clearly, whether the foreign corporate taxpayer is doing business
a resident foreign corporation doing business in the Philippines or in the Philippines and therefore a resident foreign corporation, or
[had] an office or place of business in the Philippines. not doing business in the Philippines and therefore a non-resident
foreign corporation, it is liable to income tax only to the extent
It is important to note at the outset that the answer to the above- that it derives income from sources within the Philippines. The
quoted issue is not determinative of the lialibity of the BOAC to circumtances that a foreign corporation is resident in the
Philippine income taxation in respect of the income here involved. Philippines yields no inference that all or any part of its income is
The liability of BOAC to Philippine income taxation in respect of Philippine source income. Similarly, the non-resident status of a
such income depends, not on BOAC's status as a "resident foreign foreign corporation does not imply that it has no Philippine source
corporation" or alternatively, as a "non-resident foreign income. Conversely, the receipt of Philippine source income
corporation," but rather on whether or not such income is derived creates no presumption that the recipient foreign corporation is a
from "source within the Philippines." resident of the Philippines. The critical issue, for present purposes,
is therefore whether of not BOAC is deriving income from sources
within the Philippines.
A "resident foreign corporation" or foreign corporation engaged in
trade or business in the Philippines or having an office or place of
business in the Philippines is subject to Philippine income 2. For purposes of income taxation, it is well to bear in mind that
taxation only in respect of income derived from sources within the the "source of income" relates not to the physical sourcing of a
Philippines. Section 24 (b) (2) of the National Internal Revenue flow of money or the physical situs of payment but rather to the
CODE ("Tax Code"), as amended by Republic Act No. 2343, "property, activity or service which produced the income."
approved 20 June 1959, as it existed up to 3 August 1969, read as In Howden and Co., Ltd. vs. Collector of Internal Revenue, 3 the
follows: court dealt with the issue of the applicable source rule relating to
reinsurance premiums paid by a local insurance company to a
foreign reinsurance company in respect of risks located in the
(2) Resident corporations. A foreign corporation
Philippines. The Court said:
engaged in trade or business with in the Philippines
(expect foreign life insurance companies) shall be taxable
as provided in subsection (a) of this section. The source of an income is the property, activity or services
that produced the income. The reinsurance premiums
remitted to appellants by virtue of the reinsurance
Section 24 (a) of the Tax Code in turn provides:
contract, accordingly, had for their source the undertaking
to indemnify Commonwealth Insurance Co. against
Rate of tax on corporations. (a) Tax on domestic liability. Said undertaking is the activity that produced the
corporations. ... and a like tax shall be livied, collected, reinsurance premiums, and the same took place in the
Philippines. [T]he reinsurance, the liabilities insured and source of income rules that must be confronted; (a) the source
the risk originally underwritten by Commonwealth rule applicable in respect of contracts of service; and (b) the
Insurance Co., upon which the reinsurance premiums and source rule applicable in respect of sales of personal property.
indemnity were based, were all situated in the Philippines.
4 Where a contract for the rendition of service is involved, the
applicable source rule may be simply stated as follows: the
The Court may be seen to be saying that it is the underlying income is sourced in the place where the service contracted for is
prestation which is properly regarded as the activity giving rise to rendered. Section 37 (a) (3) of our Tax Code reads as follows:
the income that is sought to be taxed. In the Howden case, that
underlying prestation was the indemnification of the local Section 37. Income for sources within the Philippines.
insurance company. Such indemnification could take place only in
the Philippines where the risks were located and where payment
(a) Gross income from sources within the Philippines.
from the foreign reinsurance (in case the casualty insured against
The following items of gross income shall be treated as
occurs) would be received in Philippine pesos under the
gross income from sources within the Philippines:
reinsurance premiums paid by the local insurance companies
constituted Philippine source income of the foreign reinsurances.
xxx xxx xxx
The concept of "source of income" for purposes of income
taxation originated in the United States income tax system. The (3) Services. Compensation for labor or personal
phrase "sources within the United States" was first introduced services performed in the Philippines;... (Emphasis
into the U.S. tax system in 1916, and was subsequently embodied supplied)
in the 1939 U.S. Tax Code. As is commonly known, our Tax Code
(Commonwealth Act 466, as amended) was patterned after the Section 37 (c) (3) of the Tax Code, on the other hand, deals with
1939 U.S. Tax Code. It therefore seems useful to refer to a income from sources without the Philippines in the following
standard U.S. text on federal income taxation: manner:

The Supreme Court has said, in a definition much quoted (c) Gross income from sources without the Philippines.
but often debated, that income may be derived from three The following items of gross income shall be treated
possible sources only: (1) capital and/or (2) labor and/or as income from sources without the Philippines:
(3) the sale of capital assets. While the three elements of
this attempt at definition need not be accepted as all- (3) Compensation for labor or personal services performed
inclusive, they serve as useful guides in any inquiry into without the Philippines; ... (Emphasis supplied)
whether a particular item is from "source within the
United States" and suggest an investigation into the nature
and location of the activities or property which produce the It should not be supposed that Section 37 (a) (3) and (c) (3) of the
income. If the income is from labor (services) the place Tax Code apply only in respect of services rendered by individual
where the labor is done should be decisive; if it is done in natural persons; they also apply to services rendered by or
this counrty, the income should be from "source within the through the medium of a juridical person. 6 Further, a contract of
United States." If the income is from capital, the place carriage or of transportation is assimilated in our Tax Code and
where the capital is employed should be decisive; if it is Revenue Regulations to a contract for services. Thus, Section 37
employed in this country, the income should be from (e) of the Tax Code provides as follows:
"source within the United States". If the income is from the
sale of capital assets, the place where the sale is made (e) Income form sources partly within and partly without
should be likewise decisive. Much confusion will be the Philippines. Items of gross income, expenses, losses
avoided by regarding the term "source" in this and deductions, other than those specified in subsections
fundamental light. It is not a place; it is an activity or (a) and (c) of this section shall be allocated or apportioned
property. As such, it has a situs or location; and if that situs to sources within or without the Philippines, under the
or location is within the United States the resulting income rules and regulations prescribed by the Secretary of
is taxable to nonresident aliens and foreign corporations. Finance. ... Gains, profits, and income
The intention of Congress in the 1916 and subsequent from (1) transportation or other services rendered partly
statutes was to discard the 1909 and 1913 basis of taxing within and partly without the Philippines, or (2) from the
nonresident aliens and foreign corporations and to make sale of personnel property produced (in whole or in part)
the test of taxability the "source", or situs of the activities by the taxpayer within and sold without the Philippines, or
or property which produce the income . . . . Thus, if income produced (in whole or in part) by the taxpayer without and
is to taxed, the recipient thereof must be resident within sold within the Philippines, shall be treated as derived
the jurisdiction, or the property or activities out of which partly from sources within and partly from sources without
the income issue or is derived must be situated within the the Philippines. ... (Emphasis supplied)
jurisdiction so that the source of the income may be said to
have a situs in this country. The underlying theory is that It should be noted that the above underscored portion of Section
the consideration for taxation is protection of life and 37 (e) was derived from the 1939 U.S. Tax Code which "was based
property and that the income rightly to be levied upon to upon a recognition that transportation was a service and that the
defray the burdens of the United States Government is source of the income derived therefrom was to be treated as being
that income which is created by activities and property the place where the service of transportation was rendered. 7
protected by this Government or obtained by persons
enjoying that protection. 5
Section 37 (e) of the Tax Code quoted above carries a strong well-
nigh irresistible, implication that income derived from
3. We turn now to the question what is the source of income rule transportation or other services rendered entirely outside the
applicable in the instant case. There are two possibly relevant Philippines must be treated as derived entirely from sources
without the Philippines. This implication is reinforced by a takes place outside the Philippines and the personal was produced
consideration of certain provisions of Revenue Regulations No. 2 in the Philippines, then, the income derived from the sale will be
entitled "Income Tax Regulations" as amended, first promulgated deemed partly as income sourced without the Philippines. In
by the Department of Finance on 10 February 1940. Section 155 other words, the income (and the related expenses, losses and
of Revenue Regulations No. 2 (implementing Section 37 of the Tax deductions) will be allocated between sources within and sources
Code) provides in part as follows: without the Philippines. Thus, Section 37 (e) of the Tax Code,
although already quoted above, may be usefully quoted again:
Section 155. Compensation for labor or personnel services.
Gross income from sources within the Philippines (e) Income from sources partly within and partly without
includes compensation for labor or personal services the Philippines. ... Gains, profits and income from (1)
within the Philippines regardless of the residence of the transportation or other services rendered partly within and
payer, of the place in which the contract for services was partly without the Philippines; or (2) from the sale of
made, or of the place of payment (Emphasis supplied) personal property produced (in whole or in part) by the
taxpayer within and sold without the Philippines, or
Section 163 of Revenue Regulations No. 2 (still relating to Section produced (in whole or in part) by the taxpayer without and
37 of the Tax Code) deals with a particular species of foreign sold within the Philippines, shall be treated as derived
transportation companies i.e., foreign steamship companies partly from sources within and partly from sources without
deriving income from sources partly within and partly without the the Philippines. ... (Emphasis supplied)
Philippines:
In contrast, income derived from the purchase and sale of
Section 163 Foreign steamship companies. The return of personal property i. e., trading is, under the Tax Code,
foreign steamship companies whose vessels touch parts of regarded as sourced wholly in the place where the personal
the Philippines should include as gross income, the property is sold. Section 37 (e) of the Tax Code provides in part as
total receipts of all out-going business whether freight or follows:
passengers. With the gross income thus ascertained, the
ratio existing between it and the gross income from all ports, (e) Income from sources partly within and partly without
both within and without the Philippines of all vessels, the Philippines ... Gains, profits and income derived from
whether touching of the Philippines or not, should be the purchase of personal property within and its sale
determined as the basis upon which allowable deductions without the Philippines or from the purchase of personal
may be computed, . (Emphasis supplied) property without and its sale within the Philippines, shall
be treated as derived entirely from sources within the
Another type of utility or service enterprise is dealt with in Section country in which sold. (Emphasis supplied)
164 of Revenue Regulations No. 2 (again implementing Section 37
of the Tax Code) with provides as follows: Section 159 of Revenue Regulations No. 2 puts the applicable rule
succinctly:
Section 164. Telegraph and cable services. A foreign
corporation carrying on the business of transmission of Section 159. Sale of personal property. Income derived
telegraph or cable messages between points in the from the purchase and sale of personal property shall be
Philippines and points outside the Philippines derives treated as derived entirely from the country in which sold.
income partly form source within and partly from sources The word "sold" includes "exchange." The "country" in
without the Philippines. which "sold" ordinarily means the place where the
property is marketed. This Section does not apply to
... (Emphasis supplied) income from the sale personal property produced (in
whole or in part) by the taxpayer within and sold without
the Philippines or produced (in whole or in part) by the
Once more, a very strong inference arises under Sections 163 and
taxpayer without and sold within the Philippines. (See
164 of Revenue Regulations No. 2 that steamship and telegraph
Section 162 of these regulations). (Emphasis supplied)
and cable services rendered between points both outside the
Philippines give rise to income wholly from sources outside the
Philippines, and therefore not subject to Philippine income 4. It will be seen that the basic problem is one of characterization
taxation. of the transactions entered into by BOAC in the Philippines. Those
transactions may be characterized either as sales of personal
property (i. e., "sales of airline tickets") or as entering into a lease
We turn to the "source of income" rules relating to the sale of
of services or a contract of service or carriage. The applicable
personal property, upon the one hand, and to the purchase and
"source of income" rules differ depending upon which
sale of personal property, upon the other hand.
characterization is given to the BOAC transactions.

We consider first sales of personal property. Income from the sale


The appropriate characterization, in my opinion, of the BOAC
of personal property by the producer or manufacturer of such
transactions is that of entering into contracts of service, i.e.,
personal property will be regarded as sourced entirely within or
carriage of passengers or cargo between points located outside
entirely without the Philippines or as sourced partly within and
the Philippines.
partly without the Philippines, depending upon two factors: (a)
the place where the sale of such personal property occurs; and (b)
the place where such personal property was produced or The phrase "sale of airline tickets," while widely used in popular
manufactured. If the personal property involved was both parlance, does not appear to be correct as a matter of tax law.
produced or manufactured and sold outside the Philippines, the The airline ticket in and of itself has no monetary value, even as
income derived therefrom will be regarded as sourced entirely scrap paper. The value of the ticket lies wholly in the right
outside the Philippines, although the personal property had been acquired by the "purchaser" the passenger to demand a
produced outside the Philippines, or if the sale of the property prestation from BOAC, which prestation consists of the carriage of
the "purchaser" or passenger from the one point to another from the Philippines). Under this new approach, international
outside the Philippines. The ticket is really the evidence of the carriers who service port or points in the Philippines are treated in
contract of carriage entered into between BOAC and the exactly the same way as international carriers not serving any port
passenger. The money paid by the passenger changes hands in the or point in the Philippines. Thus, the source of income rule
Philippines. But the passenger does not receive undertaken to be applicable, as above discussed, to transportation or other services
delivered by BOAC. The "purchase price of the airline ticket" is rendered partly within and partly without the Philippines, or
quite different from the purchase price of a physical good or wholly without the Philippines, has been set aside. in place of
commodity such as a pair of shoes of a refrigerator or an Philippine income taxation, the Tax Code now imposes this 2 per
automobile; it is really the compensation paid for the undertaking cent tax computed on the basis of billings in respect of passengers
of BOAC to transport the passenger or cargo outside the and cargo originating from the Philippines regardless of where
Philippines. embarkation and debarkation would be taking place. This 2- per
cent tax is effectively a tax on gross receipts or an excise or
The characterization of the BOAC transactions either as sales of privilege tax and not a tax on income. Thereby, the Government
personal property or as purchases and sales of personal property, has done away with the difficulties attending the allocation of
appear entirely inappropriate from other viewpoint. Consider first income and related expenses, losses and deductions. Because
purchases and sales: is BOAC properly regarded as engaged in taxes are the very lifeblood of government, the resulting potential
trading in the purchase and sale of personal property? "loss" or "gain" in the amount of taxes collectible by the state is
Certainly, BOAC was not purchasing tickets outside the Philippines sometimes, with varying degrees of consciousness, considered in
and selling them in the Philippines. Consider next sales: can BOAC choosing from among competing possible characterizations under
be regarded as "selling" personal property produced or or interpretation of tax statutes. It is hence perhaps useful to
manufactured by it? In a popular or journalistic sense, BOAC might point out that the determination of the appropriate
be described as "selling" "a product" its service. However, for characterization here that of contracts of air carriage rather
the technical purposes of the law on income taxation, BOAC is in than sales of airline tickets entails no down-the-road loss of
fact entering into contracts of service or carriage. The very income tax revenues to the Government. In lieu thereof, the
existance of "source rules" specifically and precisely applicable to Government takes in revenues generated by the 2- per cent tax
the rendition of services must preclude the application here of on the gross Philippine billings or receipts of international carriers.
"source rules" applying generally to sales, and purchases and
sales, of personal property which can be invoked only by the grace I would vote to affirm the decision of the Court of Tax Appeals.
of popular language. On a slighty more abstract level, BOAC's
income is more appropriately characterized as derived from a
2
"service", rather than from an "activity" (a broader term than
Global treatment is a system where the tax treatment views
service and including the activity of selling) or from the here
indifferently the tax base and generally treats
involved is income taxation, and not a sales tax or
in common all categories of taxable income of the taxpayer.
an excise or privilege tax.
Schedular approach is a system employed
where the income tax treatment varies and made to depend on
5. The taxation of international carriers is today effected under the kind or category of taxable income of
Section 24 (b) (2) of the Tax Code, as amended by Presidential the taxpayer.
Decree No. 69, promulgated on 24 November 1972 and by It is the legislature who has the discretion to determine the nature
Presidential Decree No. 1355, promulgated on 21 April 1978, in (kind), object (purpose), extent (rate),
the following manner: coverage (subjects) and situs (place) of taxation. This court cannot
freely delve into those matters which,
(2) Resident corporations. A corporation organized, by constitutional fiat, rightly rest on legislative judgment. Of
authorized, or existing under the laws of any foreign country, course, where a tax measure becomes so
engaged in trade or business within the Philippines, shall be unconscionable and unjust as to amount to confiscation of
taxable as provided in subsection (a) of this section upon the property, courts will not hesitate to strike it
total net income received in the preceeding taxable year down, for, despite all its plenitude, the power to tax cannot
from all sources within the Philippines: Provided, override constitutional proscriptions.
however, That international carriers shall pay a tax of two
and one-half per cent on their gross Philippine billings. "Gross
Philippines of passage documents sold therein, whether for
passenger, excess baggege or mail, provide the cargo or mail In G.R. No. 109446, petitioners, assailing Section 6 of Revenue
originates from the Philippines. The gross revenue realized Regulations No. 2-93, argue
from the said cargo or mail shall include the gross freight that public respondents have exceeded their rule-making
charge up to final destination. Gross revenues from chartered authority in applying SNIT to
flights originating from the Philippines shall likewise form general professional partnerships.
part of "gross Philippine billings" regardless of the place of
sale or payment of the passage documents. For purposes of ISSUE: Whether or not public respondents have exceeded their
determining the taxability to revenues from chartered flights, authority in promulgating Section 6,
the term "originating from the Philippines" shall include flight Revenue Regulations No. 2-93, to carry out RA 7496.
of passsengers who stay in the Philippines for more than
forty-eight (48) hours prior to embarkation. (Emphasis HELD: NO
supplied) There is no distinction in income tax liability between a person
who practices his profession alone or
Under the above-quoted proviso international carriers issuing for individually and one who does it through partnership (registered
compensation passage documentation in the Philippines for or not) with others in the exercise of a
uplifts from any point in the world to any other point in the world, common profession.
are not charged any Philippine income tax on their Philippine General professional partnership, unlike an ordinary partnership
billings (i.e., billings in respect of passenger or cargo originating (which is treated as a corporation for
income tax purposes and so subject to the corporate income tax), On Nov 17, 1986, EO 64 expanded EO 41s scope to include estate
is not itself an income taxpayer. The and donors taxes under Title 3 and business tax under Chap 2,
income tax is imposed not on the professional partnership, which Title 5 of NIRC, extended the period of availment to Dec 15, 1986
is tax exempt, but on the partners and stated those who already availed amnesty under EO 41
themselves in their individual capacity computed on their should file an amended return to avail of the new benefits.
distributive shares of partnership profits. Marubeni filed a supplemental tax amnesty return on Dec 15,
The law, in levying the tax, adopts the most comprehensive tax 1986.
situs of nationality and residence CTA found that Marubeni properly availed of the tax amnesty and
of the taxpayer (that renders citizens, regardless of residence, and deemed cancelled the deficiency taxes. CA affirmed on appeal.
resident aliens subject to income tax
liability on their income from all sources) and of the generally
accepted and internationally recognized Issue:
income taxable base (that can subject non-resident aliens and W/N Marubeni is exempted from paying tax
foreign corporations to income tax on their income from
Philippine sources). In the process, the Code classifies taxpayers
into four main groups, namely: Held:
(1) Individuals, Yes.
(2) Corporations, 1. On date of effectivity
(3) Estates under Judicial Settlement and CIR claims Marubeni is disqualified from the tax amnesty because
(4) Irrevocable Trusts (irrevocable both as to corpus and as to it falls under the exception in Sec 4b of EO 41:
income).
Sec. 4. Exceptions.The following taxpayers may not avail
Partnerships are, either "taxable partnerships" or "exempt themselves of the amnesty herein granted: xxx b) Those with
partnerships." Ordinarily, partnerships, no income tax cases already filed in Court as of the effectivity hereof;
matter how created or organized, are subject to income tax Petitioner argues that at the time respondent filed for income tax
which, for purposes of the above amnesty on Oct 30, 1986, a case had already been filed and was
categorization, are by law assimilated to be within the context of pending before the CTA and Marubeni therefore fell under the
corporations. Except for few variances, exception. However, the point of reference is the date
such as in the application of the "constructive receipt rule" in the of effectivity of EO 41 and that the filing of income tax cases must
derivation of income, the income tax have been made before and as of its effectivity.
approach is alike to both juridical persons. Obviously, SNIT is not
intended to cover corporations and partnerships which are EO 41 took effect on Aug 22, 1986. The case questioning the 1985
independently subject deficiency was filed with CTA on Sept 26, 1986. When EO 41
to the payment of income tax, but only those self-employed and became effective, the case had not yet been filed. Marubeni does
professionals engaged in the practice of their profession. 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.
MARUBENI vs CIR
GR No. 137377| J. Puno The difficulty herein is with respect to the contractors tax
assessment (business tax) and respondents availment of the
amnesty under EO 64, which expanded EO 41s coverage. When
Facts: EO 64 took effect on Nov 17, 1986, it did not provide for
CIR assails the CA decision which affirmed CTA, ordering CIR to exceptions to the coverage of the amnesty for business, estate
desist from collecting the 1985 deficiency income, branch profit and donors taxes. Instead, Section 8 said EO provided that:
remittance and contractors taxes from Marubeni Corp after
finding the latter to have properly availed of the tax amnesty Section 8. The provisions of Executive Orders Nos. 41 and 54
under EO 41 & 64, as amended. which are not contrary to or inconsistent with this amendatory
Executive Order shall remain in full force and effect.
Marubeni, a Japanese corporation, engaged in general import and Due to the EO 64 amendment, Sec 4b cannot be construed to
export trading, financing and construction, is duly registered in refer to EO 41 and its date of effectivity. The general rule is that
the Philippines with Manila branch office. CIR examined the an amendatory act operates prospectively. It may not be given a
Manila branchs books of accounts for fiscal year ending March retroactive effect unless it is so provided expressly or by necessary
1985, and found that respondent had undeclared income from implication and no vested right or obligations of contract are
contracts with NDC and Philphos for construction of a wharf/port thereby impaired.
complex and ammonia storage complex respectively.
2. On situs of taxation
On August 27, 1986, Marubeni received a letter from CIR assessing Marubeni contends that assuming it did not validly avail of the
it for several deficiency taxes. CIR claims that the income amnesty, it is still not liable for the deficiency tax because the
respondent derived were income from Philippine sources, hence income from the projects came from the Offshore Portion as
subject to internal revenue taxes. On Sept 1986, respondent filed opposed to Onshore Portion. It claims all materials and
2 petitions for review with CTA: the first, questioned the equipment in the contract under the Offshore Portion were
deficiency income, branch profit remittance and contractors tax manufactured and completed in Japan, not in the Philippines,
assessments and second questioned the deficiency commercial and are therefore not subject to Philippine taxes.
brokers assessment. (BG: Marubeni won in the public bidding for projects with
government corporations NDC and Philphos. In the contracts, the
On Aug 2, 1986, EO 41 declared a tax amnesty for unpaid income prices were broken down into a Japanese Yen Portion (I and II)
taxes for 1981-85, and that taxpayers who wished to avail this and Philippine Pesos Portion and financed either by OECF or by
should on or before Oct 31, 1986. Marubeni filed its tax amnesty suppliers credit. The Japanese Yen Portion I corresponds to the
return on Oct 30, 1986. Foreign Offshore Portion, while Japanese Yen Portion II and the
Philippine Pesos Portion correspond to the Philippine Onshore Cash Dividend 764,748.00 764,748.00 1,529,496.00
Portion. Marubeni has already paid the Onshore Portion, a fact net of 10%
that CIR does not deny.) Dividend Tax
Withheld
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 15% Branch 114,712.20 114,712.20 229,424.40 3
contracts for a piece of work and are indivisible. The situs of the Profit
two projects is in the Philippines, and the materials provided and Remittance Tax
Withheld
services rendered were all done and completed within the
territorial jurisdiction of the Philippines. Accordingly, respondents Net Amount 650,035.80 650,035.80 1,300,071.60
entire receipts from the contracts, including its receipts from the Remitted to
Offshore Portion, constitute income from Philippine sources. The Petitioner
total gross receipts covering both labor and materials should be
subjected to contractors tax (a tax on the exercise of a privilege
of selling services or labor rather than a sale on products). The 10% final dividend tax of P84,972 and the 15% branch profit
Marubeni, however, was able to sufficiently prove in trial that not remittance tax of P114,712.20 for the first quarter of 1981 were paid to
the Bureau of Internal Revenue by AG&P on April 20, 1981 under Central
all its work was performed in the Philippines because some of
Bank Receipt No. 6757880. Likewise, the 10% final dividend tax of P84,972
them were completed in Japan (and in fact subcontracted) in and the 15% branch profit remittance tax of P114,712 for the third quarter
accordance with the provisions of the contracts. All services for of 1981 were paid to the Bureau of Internal Revenue by AG&P on August
the design, fabrication, engineering and manufacture of the 4, 1981 under Central Bank Confirmation Receipt No. 7905930. 4
materials and equipment under Japanese Yen Portion I were
made and completed in Japan. These services were rendered Thus, for the first and third quarters of 1981, AG&P as withholding agent
outside Philippines taxing jurisdiction and are therefore not paid 15% branch profit remittance on cash dividends declared and
subject to contractors tax. Petition denied. remitted to petitioner at its head office in Tokyo in the total amount of
P229,424.40 on April 20 and August 4, 1981. 5

In a letter dated January 29, 1981, petitioner, through the accounting firm
G.R. No. 76573 September 14, 1989 Sycip, Gorres, Velayo and Company, sought a ruling from the Bureau of
Internal Revenue on whether or not the dividends petitioner received
from AG&P are effectively connected with its conduct or business in the
MARUBENI CORPORATION (formerly Marubeni Iida, Co., Philippines as to be considered branch profits subject to the 15% profit
Ltd.), petitioner, remittance tax imposed under Section 24 (b) (2) of the National Internal
vs. Revenue Code as amended by Presidential Decrees Nos. 1705 and 1773.
COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX
APPEALS, respondents.
In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled:
Petitioner, Marubeni Corporation, representing itself as a foreign
corporation duly organized and existing under the laws of Japan and duly Pursuant to Section 24 (b) (2) of the Tax Code, as amended, only
licensed to engage in business under Philippine laws with branch office at profits remitted abroad by a branch office to its head office which
the 4th Floor, FEEMI Building, Aduana Street, Intramuros, Manila seeks the are effectively connected with its trade or business in the
reversal of the decision of the Court of Tax Appeals 1 dated February 12, Philippines are subject to the 15% profit remittance tax. To be
1986 denying its claim for refund or tax credit in the amount of effectively connected it is not necessary that the income be
P229,424.40 representing alleged overpayment of branch profit derived from the actual operation of taxpayer-corporation's trade
remittance tax withheld from dividends by Atlantic Gulf and Pacific Co. of or business; it is sufficient that the income arises from the
Manila (AG&P). business activity in which the corporation is engaged. For
example, if a resident foreign corporation is engaged in the buying
and selling of machineries in the Philippines and invests in some
The following facts are undisputed: Marubeni Corporation of Japan has shares of stock on which dividends are subsequently received, the
equity investments in AG&P of Manila. For the first quarter of 1981 ending dividends thus earned are not considered 'effectively connected'
March 31, AG&P declared and paid cash dividends to petitioner in the with its trade or business in this country. (Revenue Memorandum
amount of P849,720 and withheld the corresponding 10% final dividend Circular No. 55-80).
tax thereon. Similarly, for the third quarter of 1981 ending September 30,
AG&P declared and paid P849,720 as cash dividends to petitioner and
withheld the corresponding 10% final dividend tax thereon. 2 In the instant case, the dividends received by Marubeni from
AG&P are not income arising from the business activity in which
Marubeni is engaged. Accordingly, said dividends if remitted
AG&P directly remitted the cash dividends to petitioner's head office in abroad are not considered branch profits for purposes of the 15%
Tokyo, Japan, net not only of the 10% final dividend tax in the amounts of profit remittance tax imposed by Section 24 (b) (2) of the Tax
P764,748 for the first and third quarters of 1981, but also of the withheld Code, as amended . . . 6
15% profit remittance tax based on the remittable amount after deducting
the final withholding tax of 10%. A schedule of dividends declared and
paid by AG&P to its stockholder Marubeni Corporation of Japan, the 10% Consequently, in a letter dated September 21, 1981 and filed with the
final intercorporate dividend tax and the 15% branch profit remittance tax Commissioner of Internal Revenue on September 24, 1981, petitioner
paid thereon, is shown below: claimed for the refund or issuance of a tax credit of P229,424.40
"representing profit tax remittance erroneously paid on the dividends
remitted by Atlantic Gulf and Pacific Co. of Manila (AG&P) on April 20 and
1981 FIRST QUARTER THIRD QUARTER TOTAL OF FIRST August 4, 1981 to ... head office in Tokyo. 7
(three months (three months ended and THIRD quarters
ended 3.31.81) 9.30.81)
(In Pesos) On June 14, 1982, respondent Commissioner of Internal Revenue denied
petitioner's claim for refund/credit of P229,424.40 on the following
Cash Dividends 849,720.44 849,720.00 1,699,440.00 grounds:
Paid
While it is true that said dividends remitted were not subject to
10% Dividend 84,972.00 84,972.00 169,944.00 the 15% profit remittance tax as the same were not income
Tax Withheld earned by a Philippine Branch of Marubeni Corporation of Japan;
and neither is it subject to the 10% intercorporate dividend tax, (b) Tax on foreign corporations (1) Non-resident corporations.
the recipient of the dividends, being a non-resident stockholder, A foreign corporation not engaged in trade or business in the
nevertheless, said dividend income is subject to the 25 % tax Philippines shall pay a tax equal to thirty-five per cent of the gross
pursuant to Article 10 (2) (b) of the Tax Treaty dated February 13, income received during each taxable year from all sources within
1980 between the Philippines and Japan. the Philippines as ... dividends ....

Inasmuch as the cash dividends remitted by AG&P to Marubeni but expressly made subject to the special rate of 25% under Article 10(2)
Corporation, Japan is subject to 25 % tax, and that the taxes (b) of the Tax Treaty of 1980 concluded between the Philippines and
withheld of 10 % as intercorporate dividend tax and 15 % as profit Japan. 11 Thus:
remittance tax totals (sic) 25 %, the amount refundable offsets the
liability, hence, nothing is left to be refunded. 8
Article 10 (1) Dividends paid by a company which is a resident of a
Contracting State to a resident of the other Contracting State may
Petitioner appealed to the Court of Tax Appeals which affirmed the denial be taxed in that other Contracting State.
of the refund by the Commissioner of Internal Revenue in its assailed
judgment of February 12, 1986. 9
(2) However, such dividends may also be taxed in the Contracting
State of which the company paying the dividends is a resident,
In support of its rejection of petitioner's claimed refund, respondent Tax and according to the laws of that Contracting State, but if the
Court explained: recipient is the beneficial owner of the dividends the tax so
charged shall not exceed;
Whatever the dialectics employed, no amount of sophistry can
ignore the fact that the dividends in question are income taxable (a) . . .
to the Marubeni Corporation of Tokyo, Japan. The said dividends
were distributions made by the Atlantic, Gulf and Pacific Company
(b) 25 per cent of the gross amount of the dividends in all other
of Manila to its shareholder out of its profits on the investments
cases.
of the Marubeni Corporation of Japan, a non-resident foreign
corporation. The investments in the Atlantic Gulf & Pacific
Company of the Marubeni Corporation of Japan were directly Central to the issue of Marubeni Japan's tax liability on its dividend income
made by it and the dividends on the investments were likewise from Philippine sources is therefore the determination of whether it is a
directly remitted to and received by the Marubeni Corporation of resident or a non-resident foreign corporation under Philippine laws.
Japan. Petitioner Marubeni Corporation Philippine Branch has no
participation or intervention, directly or indirectly, in the Under the Tax Code, a resident foreign corporation is one that is "engaged
investments and in the receipt of the dividends. And it appears in trade or business" within the Philippines. Petitioner contends that
that the funds invested in the Atlantic Gulf & Pacific Company did precisely because it is engaged in business in the Philippines through its
not come out of the funds infused by the Marubeni Corporation of Philippine branch that it must be considered as a resident foreign
Japan to the Marubeni Corporation Philippine Branch. As a matter corporation. Petitioner reasons that since the Philippine branch and the
of fact, the Central Bank of the Philippines, in authorizing the Tokyo head office are one and the same entity, whoever made the
remittance of the foreign exchange equivalent of (sic) the investment in AG&P, Manila does not matter at all. A single corporate
dividends in question, treated the Marubeni Corporation of Japan entity cannot be both a resident and a non-resident corporation
as a non-resident stockholder of the Atlantic Gulf & Pacific depending on the nature of the particular transaction involved.
Company based on the supporting documents submitted to it. Accordingly, whether the dividends are paid directly to the head office or
coursed through its local branch is of no moment for after all, the head
Subject to certain exceptions not pertinent hereto, income is office and the office branch constitute but one corporate entity, the
taxable to the person who earned it. Admittedly, the dividends Marubeni Corporation, which, under both Philippine tax and corporate
under consideration were earned by the Marubeni Corporation of laws, is a resident foreign corporation because it is transacting business in
Japan, and hence, taxable to the said corporation. While it is true the Philippines.
that the Marubeni Corporation Philippine Branch is duly licensed
to engage in business under Philippine laws, such dividends are The Solicitor General has adequately refuted petitioner's arguments in this
not the income of the Philippine Branch and are not taxable to the wise:
said Philippine branch. We see no significance thereto in the
identity concept or principal-agent relationship theory of
petitioner because such dividends are the income of and taxable The general rule that a foreign corporation is the same juridical
to the Japanese corporation in Japan and not to the Philippine entity as its branch office in the Philippines cannot apply here. This
branch. 10 rule is based on the premise that the business of the foreign
corporation is conducted through its branch office, following the
principal agent relationship theory. It is understood that the branch
Hence, the instant petition for review. becomes its agent here. So that when the foreign corporation
transacts business in the Philippines independently of its branch, the
It is the argument of petitioner corporation that following the principal- principal-agent relationship is set aside. The transaction becomes
agent relationship theory, Marubeni Japan is likewise a resident foreign one of the foreign corporation, not of the branch. Consequently, the
corporation subject only to the 10 % intercorporate final tax on dividends taxpayer is the foreign corporation, not the branch or the resident
received from a domestic corporation in accordance with Section 24(c) (1) foreign corporation.
of the Tax Code of 1977 which states:
Corollarily, if the business transaction is conducted through the
Dividends received by a domestic or resident foreign corporation branch office, the latter becomes the taxpayer, and not the foreign
liable to tax under this Code (1) Shall be subject to a final tax of corporation. 12
10% on the total amount thereof, which shall be collected and
paid as provided in Sections 53 and 54 of this Code .... In other words, the alleged overpaid taxes were incurred for the
remittance of dividend income to the head office in Japan which is a
Public respondents, however, are of the contrary view that Marubeni, separate and distinct income taxpayer from the branch in the Philippines.
Japan, being a non-resident foreign corporation and not engaged in trade There can be no other logical conclusion considering the undisputed fact
or business in the Philippines, is subject to tax on income earned from that the investment (totalling 283.260 shares including that of nominee)
Philippine sources at the rate of 35 % of its gross income under Section 24 was made for purposes peculiarly germane to the conduct of the
(b) (1) of the same Code which reads: corporate affairs of Marubeni Japan, but certainly not of the branch in the
Philippines. It is thus clear that petitioner, having made this independent
investment attributable only to the head office, cannot now claim the
increments as ordinary consequences of its trade or business in the It is readily apparent that the 15 % tax rate imposed on the dividends
Philippines and avail itself of the lower tax rate of 10 %. received by a foreign non-resident stockholder from a domestic
corporation under Section 24 (b) (1) (iii) is easily within the maximum
ceiling of 25 % of the gross amount of the dividends as decreed in Article
But while public respondents correctly concluded that the dividends in
10 (2) (b) of the Tax Treaty.
dispute were neither subject to the 15 % profit remittance tax nor to the
10 % intercorporate dividend tax, the recipient being a non-resident
stockholder, they grossly erred in holding that no refund was forthcoming There is one final point that must be settled. Respondent Commissioner of
to the petitioner because the taxes thus withheld totalled the 25 % rate Internal Revenue is laboring under the impression that the Court of Tax
imposed by the Philippine-Japan Tax Convention pursuant to Article 10 (2) Appeals is covered by Batas Pambansa Blg. 129, otherwise known as the
(b). Judiciary Reorganization Act of 1980. He alleges that the instant petition
for review was not perfected in accordance with Batas Pambansa Blg. 129
which provides that "the period of appeal from final orders, resolutions,
To simply add the two taxes to arrive at the 25 % tax rate is to disregard a
awards, judgments, or decisions of any court in all cases shall be fifteen
basic rule in taxation that each tax has a different tax basis. While the tax
(15) days counted from the notice of the final order, resolution, award,
on dividends is directly levied on the dividends received, "the tax base
judgment or decision appealed from ....
upon which the 15 % branch profit remittance tax is imposed is the profit
actually remitted abroad." 13
This is completely untenable. The cited BP Blg. 129 does not include the
Court of Tax Appeals which has been created by virtue of a special law,
Public respondents likewise erred in automatically imposing the 25 % rate
Republic Act No. 1125. Respondent court is not among those courts
under Article 10 (2) (b) of the Tax Treaty as if this were a flat rate. A closer
specifically mentioned in Section 2 of BP Blg. 129 as falling within its scope.
look at the Treaty reveals that the tax rates fixed by Article 10 are the
maximum rates as reflected in the phrase "shall not exceed." This means
that any tax imposable by the contracting state concerned should not Thus, under Section 18 of Republic Act No. 1125, a party adversely
exceed the 25 % limitation and that said rate would apply only if the tax affected by an order, ruling or decision of the Court of Tax Appeals is given
imposed by our laws exceeds the same. In other words, by reason of our thirty (30) days from notice to appeal therefrom. Otherwise, said order,
bilateral negotiations with Japan, we have agreed to have our right to tax ruling, or decision shall become final.
limited to a certain extent to attain the goals set forth in the Treaty.
Records show that petitioner received notice of the Court of Tax Appeals's
Petitioner, being a non-resident foreign corporation with respect to the decision denying its claim for refund on April 15, 1986. On the 30th day, or
transaction in question, the applicable provision of the Tax Code is Section on May 15, 1986 (the last day for appeal), petitioner filed a motion for
24 (b) (1) (iii) in conjunction with the Philippine-Japan Treaty of 1980. Said reconsideration which respondent court subsequently denied on
section provides: November 17, 1986, and notice of which was received by petitioner on
November 26, 1986. Two days later, or on November 28, 1986, petitioner
simultaneously filed a notice of appeal with the Court of Tax Appeals and a
(b) Tax on foreign corporations. (1) Non-resident corporations
petition for review with the Supreme Court. 14 From the foregoing, it is
... (iii) On dividends received from a domestic corporation liable to
evident that the instant appeal was perfected well within the 30-day
tax under this Chapter, the tax shall be 15% of the dividends
period provided under R.A. No. 1125, the whole 30-day period to appeal
received, which shall be collected and paid as provided in Section 53
having begun to run again from notice of the denial of petitioner's motion
(d) of this Code, subject to the condition that the country in which
for reconsideration.
the non-resident foreign corporation is domiciled shall allow a credit
against the tax due from the non-resident foreign corporation, taxes
deemed to have been paid in the Philippines equivalent to 20 % WHEREFORE, the questioned decision of respondent Court of Tax Appeals
which represents the difference between the regular tax (35 %) on dated February 12, 1986 which affirmed the denial by respondent
corporations and the tax (15 %) on dividends as provided in this Commissioner of Internal Revenue of petitioner Marubeni Corporation's
Section; .... claim for refund is hereby REVERSED. The Commissioner of Internal
Revenue is ordered to refund or grant as tax credit in favor of petitioner
the amount of P144,452.40 representing overpayment of taxes on
Proceeding to apply the above section to the case at bar, petitioner, being
dividends received. No costs.
a non-resident foreign corporation, as a general rule, is taxed 35 % of its
gross income from all sources within the Philippines. [Section 24 (b) (1)].
G.R. No. 103092 July 21, 1994
However, a discounted rate of 15% is given to petitioner on dividends
received from a domestic corporation (AG&P) on the condition that its BANK OF AMERICA NT & SA, petitioner,
domicile state (Japan) extends in favor of petitioner, a tax credit of not less vs.
than 20 % of the dividends received. This 20 % represents the difference HONORABLE COURT OF APPEALS, AND THE COMMISSIONER OF
between the regular tax of 35 % on non-resident foreign corporations INTERNAL REVENUE, respondents.
which petitioner would have ordinarily paid, and the 15 % special rate on
dividends received from a domestic corporation.
G.R. No. 103106 July 21, 1994

Consequently, petitioner is entitled to a refund on the transaction in


BANK OF AMERICA NT & SA, petitioner,
question to be computed as follows:
vs.
THE HONORABLE COURT OF APPEALS AND THE COMMISSIONER OF
Total cash dividend paid ................P1,699,440.00 INTERNAL REVENUE, respondents.
less 15% under Sec. 24
(b) (1) (iii ) .........................................254,916.00
Sycip, Salazar, Hernandez & Gatmaitan and Agcaoili & Associates for
------------------
petitioner.

Cash dividend net of 15 % tax


due petitioner ...............................P1,444.524.00
less net amount
actually remitted .............................1,300,071.60 VITUG, J.:
-------------------
Section 24(b) (2) (ii) of the National Internal Revenue Code, in the
Amount to be refunded to petitioner language it was worded in 1982 (the taxable period relevant to the case at
representing overpayment of bench), provided, in part, thusly:
taxes on dividends remitted ..............P 144 452.40
===========
Sec. 24. Rates of tax on corporations. . . . The Court of Tax Appeals upheld petitioner bank in its claim for refund.
The Commissioner of Internal Revenue filed a timely appeal to the
Supreme Court (docketed G.R. No. 76512) which referred it to the Court of
(b) Tax on foreign corporations. . . .
Appeals following this Court's pronouncement in Development Bank of the
Philippines vs. Court of Appeals, et al. (180 SCRA 609). On 19 September
(2) (ii) Tax on branch profit and remittances. 1990, the Court of Appeals set aside the decision of the Court of Tax
Appeals. Explaining its reversal of the tax court's decision, the appellate
Any profit remitted abroad by a branch to its head court said:
office shall be subject to a tax of fifteen per cent
(15%) . . . ." The Court of Tax Appeals sought to deduce legislative intent vis-a-
vis the aforesaid law through an analysis of the wordings thereof,
Petitioner Bank of America NT & SA argues that the 15% branch profit which to their minds reveal an intent to mitigate at least the
remittance tax on the basis of the above provision should be assessed on harshness of successive taxation. The use of the
the amount actually remitted abroad, which is to say that the 15% profit word remitted may well be understood as referring to that part of
remittance tax itself should not form part of the tax base. Respondent the said total branch profits which would be sent to the head
Commissioner of Internal Revenue, contending otherwise, holds the office as distinguished from the total profits of the branch (not all
position that, in computing the 15% remittance tax, the tax should be of which need be sent or would be ordered remitted abroad). If
inclusive of the sum deemed remitted. the legislature indeed had wanted to mitigate the harshness of
successive taxation, it would have been simpler to just lower the
rates without in effect requiring the relatively novel and
The statement of facts made by the Court of Tax Appeals, later adopted by complicated way of computing the tax, as envisioned by the
the Court of Appeals, and not in any serious dispute by the parties, can be herein private respondent. The same result would have been
quoted thusly: achieved.2

Petitioner is a foreign corporation duly licensed to engage in business Hence, these petitions for review in G.R. No. 103092 and G.R.
in the Philippines with Philippine branch office at BA Lepanto Bldg., No. 103106 (filed separately due to inadvertence) by the law firms of
Paseo de Roxas, Makati, Metro Manila. On July 20, 1982 it paid 15% "Agcaoili and Associates" and of "Sycip, Salazar, Hernandez and
branch profit remittance tax in the amount of P7,538,460.72 on Gatmaitan" in representation of petitioner bank.
profit from its regular banking unit operations and P445,790.25 on
profit from its foreign currency deposit unit operations or a total of
P7,984,250.97. The tax was based on net profits after income tax We agree with the Court of Appeals that not much reliance can be made
without deducting the amount corresponding to the 15% tax. on our decision in Burroughs Limited vs. Commission of Internal Revenue
(142 SCRA 324), for there we ruled against the Commissioner mainly on
the basis of what the Court so then perceived as his position in a 21
Petitioner filed a claim for refund with the Bureau of Internal January 1980 ruling the reversal of which, by his subsequent ruling of 17
Revenue of that portion of the payment which corresponds to the March 1982, could not apply retroactively against Burroughs in conformity
15% branch profit remittance tax, on the ground that the tax should with Section 327 (now Section 246, re: non-retroactivity of rulings) of the
have been computed on the basis of profits actually remitted, which National Internal Revenue Code. Hence, we held:
is P45,244,088.85, and not on the amount before profit remittance
tax, which is P53,228,339.82. Subsequently, without awaiting
respondent's decision, petitioner filed a petition for review on June Petitioner's aforesaid contention is without merit. What is
14, 1984 with this Honorable Court for the recovery of the amount of applicable in the case at bar is still the Revenue Ruling of January
P1,041,424.03 computed as follows: 21, 1980 because private respondent Burroughs Limited paid the
branch profit remittance tax in question on March 14, 1979.
Memorandum Circular
Net Profits After Profit Tax Due Alleged No. 8-82 dated March 17, 1982 cannot be given retroactive effect
Income Tax But Remittance Alleged by Overpayment in the light of Section 327 of the National Internal Revenue Code
Before Profit Tax Paid Petitioner Item 1-2 which
Remittance Tax _________ _________ ___________ provides

A. Regular Banking Sec. 327. Non-retroactivity of rulings. Any revocation,


Unit Operations modification, or reversal of any of the rules and regulations
(P50,256,404.82) promulgated in accordance with the preceding section or
any of the rulings or circulars promulgated by the
1. Computation of BIR Commissioner shall not be given retroactive application if
15% x P50,256,404.82 - P7,538,460.72 the revocation, modification, or reversal will be prejudicial to
the taxpayer except in the following cases (a) where the
taxpayer deliberately misstates or omits material facts from
2. Computation of his return or in any document required of him by the Bureau
Petitioner of Internal Revenue; (b) where the facts subsequently
- P50,256,404.82 x 15% P6,555,183.24 P983,277.48 gathered by the Bureau of Internal Revenue are materially
1.15 different from the facts on which the ruling is based, or (c)
where the taxpayer acted in bad faith. (ABS-CBN
B. Foreign Currency Broadcasting Corp. v. CTA, 108 SCRA 151-152)
Deposit Unit
Operations The prejudice that would result to private respondent
(P2,971,935) Burroughs Limited by a retroactive application of
Memorandum Circular No. 8-82 is beyond question for it
1. Computation of BIR would be deprived of the substantial amount of
15% x - P2,971,935.00 P445,790.25 P172,058.90. And, insofar as the enumerated exceptions are
concerned, admittedly, Burroughs Limited does not fall
under any of them.
2. Computation of
Petitioner
- P2,971,935.00 x 15% P387,643.70 P58,146.55 The Court of Tax Appeals itself commented similarly when it
observed thusly in its decision:
T O T A L. . P7,984,250.97 P6,942,286.94 P1,041,424.02"1
In finding the Commissioner's contention without merit, this Court Internal Revenue, to require the withholding of income
however ruled against the applicability of Revenue Memorandum tax on the same items of income payable to persons
Circular No. 8-82 dated March 17, 1982 to the Burroughs Limited (natural or judicial) residing in the Philippines by the
case because the taxpayer paid the branch profit remittance tax persons making such payments at the rate of not less
involved therein on March 14, 1979 in accordance with the ruling than 2 1/2% but not more than 35% which are to be
of the Commissioner of Internal Revenue dated January 21, 1980. credited against the income tax liability of the taxpayer
In view of Section 327 of the then in force National Internal for the taxable year.
Revenue Code, Revenue Memorandum Circular No. 8-82 dated
March 17, 1982 cannot be given retroactive effect because any
On the other hand, there is absolutely nothing in Section 24(b) (2)
revocation or modification of any ruling or circular of the Bureau
(ii), supra, which indicates that the 15% tax on branch profit
of Internal Revenue should not be given retroactive application if
remittance is on the total amount of profit to be remitted abroad
such revocation or modification will, subject to certain exceptions
which shall be collected and paid in accordance with the tax
not pertinent thereto, prejudice taxpayers.3
withholding device provided in Sections 53 and 54 of the Tax
Code. The statute employs "Any profit remitted abroad by a
The Solicitor General correctly points out that almost invariably in an ad branch to its head office shall be subject to a tax of fifteen per
valorem tax, the tax paid or withheld is not deducted from the tax base. cent (15%)" without more. Nowhere is there said of "base on
Such impositions as the ordinary income tax, estate and gift taxes, and the the total amount actually applied for by the branch with the
value added tax are generally computed in like manner. In these cases, Central Bank of the Philippines as profit to be remitted abroad,
however, it is so because the law, in defining the tax base and in providing which shall be collected and paid as provided in Sections 53 and 54
for tax withholding, clearly spells it out to be such. As so well expounded of this Code." Where the law does not qualify that the tax is
by the Tax Court imposed and collected at source based on profit to be remitted
abroad, that qualification should not be read into the law. It is a
basic rule of statutory construction that there is no safer nor
. . . In all the situations . . . where the mechanism of withholding of
better canon of interpretation than that when the language of the
taxes at source operates to ensure collection of the tax, and which
law is clear and unambiguous, it should be applied as written. And
respondent claims the base on which the tax is computed is the
to our mind, the term "any profit remitted abroad" can only mean
amount to be paid or remitted, the law applicable expressly,
such profit as is "forwarded, sent, or transmitted abroad" as the
specifically and unequivocally mandates that the tax is on the total
word "remitted" is commonly and popularly accepted and
amount thereof which shall be collected and paid as provided in
understood. To say therefore that the tax on branch profit
Sections 53 and 54 of the Tax Code. Thus:
remittance is imposed and collected at source and necessarily the
tax base should be the amount actually applied for the branch
Dividends received by an individual who is a citizen or with the Central Bank as profit to be remitted abroad is to ignore
resident of the Philippines from a domestic corporation, the unmistakable meaning of plain words.4
shall be subject to a final tax at the rate of fifteen (15%)
per cent on the total amount thereof, which shall be
In the 15% remittance tax, the law specifies its own tax base to be on the
collected and paid as provided in Sections 53 and 54 of
"profit remitted abroad." There is absolutely nothing equivocal or
this Code. (Emphasis supplied; Sec. 21, Tax Code)
uncertain about the language of the provision. The tax is imposed on the
amount sent abroad, and the law (then in force) calls for nothing further.
Interest from Philippine Currency bank deposits and yield The taxpayer is a single entity, and it should be understandable if, such as
from deposit substitutes whether received by citizens of in this case, it is the local branch of the corporation, using its own local
the Philippines or by resident alien individuals, shall be funds, which remits the tax to the Philippine Government.
subject to a final tax as follows: (a) 15% of the interest or
savings deposits, and (b) 20% of the interest on time
The remittance tax was conceived in an attempt to equalize the income
deposits and yield from deposits substitutes, which shall
tax burden on foreign corporations maintaining, on the one hand, local
be collected and paid as provided in Sections 53 and 54 of
branch offices and organizing, on the other hand, subsidiary domestic
this Code: . . . (Emphasis supplied; Sec. 21, Tax Code
corporations where at least a majority of all the latter's shares of stock are
applicable.)
owned by such foreign corporations. Prior to the amendatory provisions of
the Revenue Code, local branches were made to pay only the usual
And on rental payments payable by the lessee to the lessor (at corporate income tax of 25%-35% on net income (now a uniform 35%)
5%), also cited by respondent, Section 1, paragraph (C), of applicable to resident foreign corporations (foreign corporations doing
Revenue Regulations No. 13-78, November 1, 1978, provides that: business in the Philippines). While Philippine subsidiaries of foreign
corporations were subject to the same rate of 25%-35% (now also a
Section 1. Income payments subject to withholding tax uniform 35%) on their net income, dividend payments, however, were
and rates prescribed therein. Except as therein additionally subjected to a 15% (withholding) tax (reduced conditionally
otherwise provided, there shall be withheld a creditable from 35%). In order to avert what would otherwise appear to be an
income tax at the rates herein specified for each class of unequal tax treatment on such subsidiaries vis-a-vis local branch offices, a
payee from the following items of income payments to 20%, later reduced to 15%, profit remittance tax was imposed on local
persons residing in the Philippines. branches on their remittances of profits abroad. But this is where the
tax pari-passu ends between domestic branches and subsidiaries of
foreign corporations.
xxx xxx xxx

The Solicitor General suggests that the analogy should extend to the
(C) Rentals When the gross rental or the payment ordinary application of the withholding tax system and so with the rule on
required to be made as a condition to the continued use constructive remittance concept as well. It is difficult to accept the
or possession of property, whether real or personal, to proposition. In the operation of the withholding tax system, the payee is
which the payor or obligor has not taken or is not taking the taxpayer, the person on whom the tax is imposed, while the payor, a
title or in which he has no equity, exceeds five hundred separate entity, acts no more than an agent of the government for the
pesos (P500.00) per contract or payment whichever is collection of the tax in order to ensure its payment. Obviously, the amount
greater five per centum (5%). thereby used to settle the tax liability is deemed sourced from the
proceeds constitutive of the tax base. Since the payee, not the payor, is
Note that the basis of the 5% withholding tax, as expressly the real taxpayer, the rule on constructive remittance (or receipt) can be
and unambiguously provided therein, is on the gross easily rationalized, if not indeed, made clearly manifest. It is hardly the
rental. Revenue Regulations No. 13-78 was promulgated case, however, in the imposition of the 15% remittance tax where there is
pursuant to Section 53(f) of the then in force National but one taxpayer using its own domestic funds in the payment of the tax.
Internal Revenue Code which authorized the Minister of To say that there is constructive remittance even of such funds would be
Finance, upon recommendation of the Commissioner of stretching far too much that imaginary rule. Sound logic does not defy but
must concede to facts.
We hold, accordingly, that the written claim for refund of the excess tax from the marketing activities performed by respondent in
payment filed, within the two-year prescriptive period, with the Court of Germany. The dispositive portion of the appellate courts
Tax Appeals has been lawfully made. Decision, reads:

WHEREFORE, the decision of the Court of Appeals appealed from is


WHEREFORE, premises considered, the assailed decision of the
REVERSED and SET ASIDE, and that of the Court of Tax Appeals is
REINSTATED. Court of Tax Appeals dated June 28, 2000 is hereby REVERSED and
SET ASIDE and the respondent court is hereby directed to grant
petitioner a tax refund in the amount of Php 170,777.26.
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
JULIANE BAIER-NICKEL, as represented by Marina Q. Guzman SO ORDERED.8
(Attorney-in-fact) Respondent.
Petitioner filed a motion for reconsideration but was
DECISION denied.9 Hence, the instant recourse.

YNARES-SANTIAGO, J.: Petitioner maintains that the income earned by respondent is


taxable in the Philippines because the source thereof is
JUBANITEX, a domestic corporation located in the City of Makati.
Petitioner Commissioner of Internal Revenue (CIR) appeals from It thus implied that source of income means the physical source
the January 18, 2002 Decision1 of the Court of Appeals in CA-G.R. where the income came from. It further argued that since
SP No. 59794, which granted the tax refund of respondent Juliane respondent is the President of JUBANITEX, any remuneration she
Baier-Nickel and reversed the June 28, 2000 Decision2 of the Court received from said corporation should be construed as payment of
of Tax Appeals (CTA) in C.T.A. Case No. 5633. Petitioner also her overall managerial services to the company and should not be
assails the May 8, 2002 Resolution3 of the Court of Appeals interpreted as a compensation for a distinct and separate service
denying its motion for reconsideration. as a sales commission agent.

The facts show that respondent Juliane Baier-Nickel, a non- Respondent, on the other hand, claims that the income she
resident German citizen, is the President of JUBANITEX, Inc., a received was payment for her marketing services. She contended
domestic corporation engaged in "[m]anufacturing, marketing on that income of nonresident aliens like her is subject to tax only if
wholesale only, buying or otherwise acquiring, holding, importing the source of the income is within the Philippines. Source,
and exporting, selling and disposing embroidered textile according to respondent is the situs of the activity which produced
products."4Through JUBANITEXs General Manager, Marina Q. the income. And since the source of her income were her
Guzman, the corporation appointed and engaged the services of marketing activities in Germany, the income she derived from said
respondent as commission agent. It was agreed that respondent activities is not subject to Philippine income taxation.
will receive 10% sales commission on all sales actually concluded
and collected through her efforts.5
The issue here is whether respondents sales commission income
is taxable in the Philippines.
In 1995, respondent received the amount of P1,707,772.64,
representing her sales commission income from which JUBANITEX
withheld the corresponding 10% withholding tax amounting to Pertinent portion of the National Internal Revenue Code (NIRC),
P170,777.26, and remitted the same to the Bureau of Internal states:
Revenue (BIR). On October 17, 1997, respondent filed her 1995
income tax return reporting a taxable income of P1,707,772.64 SEC. 25. Tax on Nonresident Alien Individual.
and a tax due of P170,777.26.6
(A) Nonresident Alien Engaged in Trade or Business Within the
On April 14, 1998, respondent filed a claim to refund the amount Philippines.
of P170,777.26 alleged to have been mistakenly withheld and
remitted by JUBANITEX to the BIR. Respondent contended that (1) In General. A nonresident alien individual engaged in trade or
her sales commission income is not taxable in the Philippines business in the Philippines shall be subject to an income tax in the
because the same was a compensation for her services rendered same manner as an individual citizen and a resident alien
in Germany and therefore considered as income from sources individual, on taxable income received from all sources within the
outside the Philippines. Philippines. A nonresident alien individual who shall come to the
Philippines and stay therein for an aggregate period of more than
The next day, April 15, 1998, she filed a petition for review with one hundred eighty (180) days during any calendar year shall be
the CTA contending that no action was taken by the BIR on her deemed a nonresident alien doing business in the Philippines,
claim for refund.7 On June 28, 2000, the CTA rendered a decision Section 22(G) of this Code notwithstanding.
denying her claim. It held that the commissions received by
respondent were actually her remuneration in the performance of xxxx
her duties as President of JUBANITEX and not as a mere sales
agent thereof. The income derived by respondent is therefore an
(B) Nonresident Alien Individual Not Engaged in Trade or Business
income taxable in the Philippines because JUBANITEX is a
Within the Philippines. There shall be levied, collected and paid
domestic corporation.
for each taxable year upon the entire income received from all
sources within the Philippines by every nonresident alien
On petition with the Court of Appeals, the latter reversed the individual not engaged in trade or business within the Philippines
Decision of the CTA, holding that respondent received the x x x a tax equal to twenty-five percent (25%) of such income. x x x
commissions as sales agent of JUBANITEX and not as President
thereof. And since the "source" of income means the activity or
Pursuant to the foregoing provisions of the NIRC, non-resident
service that produce the income, the sales commission received
aliens, whether or not engaged in trade or business, are subject to
by respondent is not taxable in the Philippines because it arose
Philippine income taxation on their income received from all "sources within the United States" and suggest an investigation
sources within the Philippines. Thus, the keyword in determining into the nature and location of the activities or property which
the taxability of non-resident aliens is the incomes "source." In produce the income.
construing the meaning of "source" in Section 25 of the NIRC,
resort must be had on the origin of the provision. If the income is from labor the place where the labor is done
should be decisive; if it is done in this country, the income should
The first Philippine income tax law enacted by the Philippine be from "sources within the United States." If the income is from
Legislature was Act No. 2833,10 which took effect on January 1, capital, the place where the capital is employed should be
1920.11 Under Section 1 thereof, nonresident aliens are likewise decisive; if it is employed in this country, the income should be
subject to tax on income "from all sources within the Philippine from "sources within the United States." If the income is from the
Islands," thus sale of capital assets, the place where the sale is made should be
likewise decisive.
SECTION 1. (a) There shall be levied, assessed, collected, and paid
annually upon the entire net income received in the preceding Much confusion will be avoided by regarding the term "source" in
calendar year from all sources by every individual, a citizen or this fundamental light. It is not a place, it is an activity or property.
resident of the Philippine Islands, a tax of two per centum upon As such, it has a situs or location, and if that situs or location is
such income; and a like tax shall be levied, assessed, collected, within the United States the resulting income is taxable to
and paid annually upon the entire net income received in the nonresident aliens and foreign corporations.
preceding calendar year from all sources within the Philippine
Islands by every individual, a nonresident alien, including interest The intention of Congress in the 1916 and subsequent statutes
on bonds, notes, or other interest-bearing obligations of was to discard the 1909 and 1913 basis of taxing nonresident
residents, corporate or otherwise. aliens and foreign corporations and to make the test of taxability
the "source," or situs of the activities or property which produce
Act No. 2833 substantially reproduced the United States (U.S.) the income. The result is that, on the one hand, nonresident aliens
Revenue Law of 1916 as amended by U.S. Revenue Law of and nonresident foreign corporations are prevented from deriving
1917.12 Being a law of American origin, the authoritative decisions income from the United States free from tax, and, on the other
of the official charged with enforcing it in the U.S. have peculiar hand, there is no undue imposition of a tax when the activities do
persuasive force in the Philippines.13 not take place in, and the property producing income is not
employed in, this country. Thus, if income is to be taxed, the
The Internal Revenue Code of the U.S. enumerates specific types recipient thereof must be resident within the jurisdiction, or the
of income to be treated as from sources within the U.S. and property or activities out of which the income issues or is derived
specifies when similar types of income are to be treated as from must be situated within the jurisdiction so that the source of the
sources outside the U.S.14 Under the said Code, compensation for income may be said to have a situs in this country.
labor and personal services performed in the U.S., is generally
treated as income from U.S. sources; while compensation for said The underlying theory is that the consideration for taxation is
services performed outside the U.S., is treated as income from protection of life and property and that the income rightly to be
sources outside the U.S.15 A similar provision is found in Section levied upon to defray the burdens of the United States
42 of our NIRC, thus: Government is that income which is created by activities and
property protected by this Government or obtained by persons
SEC. 42. x x x enjoying that protection. 16

(A) Gross Income From Sources Within the Philippines. x x x The important factor therefore which determines the source of
income of personal services is not the residence of the payor, or
the place where the contract for service is entered into, or the
xxxx
place of payment, but the place where the services were actually
rendered.17
(3) Services. Compensation for labor or personal services
performed in the Philippines;
In Alexander Howden & Co., Ltd. v. Collector of Internal
Revenue,18 the Court addressed the issue on the applicable source
xxxx rule relating to reinsurance premiums paid by a local insurance
company to a foreign insurance company in respect of risks
(C) Gross Income From Sources Without the Philippines. x x x located in the Philippines. It was held therein that the undertaking
of the foreign insurance company to indemnify the local insurance
xxxx company is the activity that produced the income. Since the
activity took place in the Philippines, the income derived
therefrom is taxable in our jurisdiction. Citing Mertens, The Law of
(3) Compensation for labor or personal services performed Federal Income Taxation, the Court emphasized that the technical
without the Philippines; meaning of source of income is the property, activity or service
that produced the same. Thus:
The following discussions on sourcing of income under the
Internal Revenue Code of the U.S., are instructive: The source of an income is the property, activity or service that
produced the income. The reinsurance premiums remitted to
The Supreme Court has said, in a definition much quoted but appellants by virtue of the reinsurance contracts, accordingly, had
often debated, that income may be derived from three possible for their source the undertaking to indemnify Commonwealth
sources only: (1) capital and/or (2) labor; and/or (3) the sale of Insurance Co. against liability. Said undertaking is the activity that
capital assets. While the three elements of this attempt at produced the reinsurance premiums, and the same took place in
definition need not be accepted as all-inclusive, they serve as the Philippines. x x x the reinsured, the liabilities insured and the
useful guides in any inquiry into whether a particular item is from risk originally underwritten by Commonwealth Insurance Co.,
upon which the reinsurance premiums and indemnity were based, The source of an income is the property, activity or service that
were all situated in the Philippines. x x x19 produced the income. For the source of income to be considered
as coming from the Philippines, it is sufficient that the income is
In Commissioner of Internal Revenue v. British Overseas Airways derived from activity within the Philippines. In BOAC's case, the
Corporation (BOAC),20 the issue was whether BOAC, a foreign sale of tickets in the Philippines is the activity that produces the
airline company which does not maintain any flight to and from income. The tickets exchanged hands here and payments for fares
the Philippines is liable for Philippine income taxation in respect of were also made here in Philippine currency. The situs of the
sales of air tickets in the Philippines, through a general sales agent source of payments is the Philippines. The flow of wealth
relating to the carriage of passengers and cargo between two proceeded from, and occurred within, Philippine territory,
points both outside the Philippines. Ruling in the affirmative, the enjoying the protection accorded by the Philippine government. In
Court applied the case of Alexander Howden & Co., Ltd. v. consideration of such protection, the flow of wealth should share
Collector of Internal Revenue, and reiterated the rule that the the burden of supporting the government.
source of income is that "activity" which produced the income. It
was held that the "sale of tickets" in the Philippines is the A transportation ticket is not a mere piece of paper. When issued
"activity" that produced the income and therefore BOAC should by a common carrier, it constitutes the contract between the
pay income tax in the Philippines because it undertook an income ticket-holder and the carrier. It gives rise to the obligation of the
producing activity in the country. purchaser of the ticket to pay the fare and the corresponding
obligation of the carrier to transport the passenger upon the
Both the petitioner and respondent cited the case terms and conditions set forth thereon. The ordinary ticket issued
of Commissioner of Internal Revenue v. British Overseas Airways to members of the traveling public in general embraces within its
Corporation in support of their arguments, but the correct terms all the elements to constitute it a valid contract, binding
interpretation of the said case favors the theory of respondent upon the parties entering into the relationship.22
that it is the situs of the activity that determines whether such
income is taxable in the Philippines. The conflict between the The Court reiterates the rule that "source of income" relates to
majority and the dissenting opinion in the said case has nothing to the property, activity or service that produced the income. With
do with the underlying principle of the law on sourcing of income. respect to rendition of labor or personal service, as in the instant
In fact, both applied the case of Alexander Howden & Co., Ltd. v. case, it is the place where the labor or service was performed that
Collector of Internal Revenue. The divergence in opinion centered determines the source of the income. There is therefore no merit
on whether the sale of tickets in the Philippines is to be construed in petitioners interpretation which equates source of income in
as the "activity" that produced the income, as viewed by the labor or personal service with the residence of the payor or the
majority, or merely the physical source of the income, as place of payment of the income.
ratiocinated by Justice Florentino P. Feliciano in his dissent. The
majority, through Justice Ameurfina Melencio-Herrera, Having disposed of the doctrine applicable in this case, we will
as ponente, interpreted the sale of tickets as a business activity now determine whether respondent was able to establish the
that gave rise to the income of BOAC. Petitioner cannot therefore factual circumstances showing that her income is exempt from
invoke said case to support its view that source of income is the Philippine income taxation.
physical source of the money earned. If such was the
interpretation of the majority, the Court would have simply stated
The decisive factual consideration here is not the capacity in
that source of income is not the business activity of BOAC but the
which respondent received the income, but the sufficiency of
place where the person or entity disbursing the income is located
evidence to prove that the services she rendered were performed
or where BOAC physically received the same. But such was not the
in Germany. Though not raised as an issue, the Court is clothed
import of the ruling of the Court. It even explained in detail
with authority to address the same because the resolution thereof
the business activity undertaken by BOAC in the Philippines to
will settle the vital question posed in this controversy.23
pinpoint the taxable activity and to justify its conclusion that
BOAC is subject to Philippine income taxation. Thus
The settled rule is that tax refunds are in the nature of tax
exemptions and are to be construed strictissimi juris against the
BOAC, during the periods covered by the subject assessments,
taxpayer.24 To those therefore, who claim a refund rest the
maintained a general sales agent in the Philippines. That general
burden of proving that the transaction subjected to tax is actually
sales agent, from 1959 to 1971, "was engaged in (1) selling and
exempt from taxation.
issuing tickets; (2) breaking down the whole trip into series of trips
each trip in the series corresponding to a different airline
company; (3) receiving the fare from the whole trip; and (4) In the instant case, the appointment letter of respondent as agent
consequently allocating to the various airline companies on the of JUBANITEX stipulated that the activity or the service which
basis of their participation in the services rendered through the would entitle her to 10% commission income, are "sales actually
mode of interline settlement as prescribed by Article VI of the concluded and collected through [her] efforts."25 What she
Resolution No. 850 of the IATA Agreement." Those activities were presented as evidence to prove that she performed income
in exercise of the functions which are normally incident to, and producing activities abroad, were copies of documents she
are in progressive pursuit of, the purpose and object of its allegedly faxed to JUBANITEX and bearing instructions as to the
organization as an international air carrier. In fact, the regular sale sizes of, or designs and fabrics to be used in the finished products
of tickets, its main activity, is the very lifeblood of the airline as well as samples of sales orders purportedly relayed to her by
business, the generation of sales being the paramount objective. clients. However, these documents do not show whether the
There should be no doubt then that BOAC was "engaged in" instructions or orders faxed ripened into concluded or collected
business in the Philippines through a local agent during the period sales in Germany. At the very least, these pieces of evidence show
covered by the assessments. x x x21 that while respondent was in Germany, she sent
instructions/orders to JUBANITEX. As to whether these
instructions/orders gave rise to consummated sales and whether
xxxx
these sales were truly concluded in Germany, respondent
presented no such evidence. Neither did she establish reasonable
connection between the orders/instructions faxed and the GR No. 153793 | August 29, 2006 | J. Ynares-Santiago
reported monthly sales purported to have transpired in Germany.
Facts:
The paucity of respondents evidence was even noted by Atty. CIR appeals the CA decision, which granted the tax refund of
Minerva Pacheco, petitioners counsel at the hearing before the respondent and reversed that of the CTA. Juliane Baier-Nickel, a
Court of Tax Appeals. She pointed out that respondent presented non-resident German, is the president of Jubanitex, a domestic
no contracts or orders signed by the customers in Germany to corporation engaged in the manufacturing, marketing and selling
prove the sale transactions therein.26 Likewise, in her Comment to of embroidered textile products. Through Jubanitexs general
the Formal Offer of respondents evidence, she objected to the manager, Marina Guzman, the company appointed respondent as
admission of the faxed documents bearing instruction/orders commission agent with 10% sales commission on all sales actually
marked as Exhibits "R,"27 "V," "W", and "X,"28 for being self concluded and collected through her efforts.
serving.29 The concern raised by petitioners counsel as to the
absence of substantial evidence that would constitute proof that In 1995, respondent received P1, 707, 772. 64 as sales commission
the sale transactions for which respondent was paid commission from w/c Jubanitex deducted the 10% withholding tax of P170,
actually transpired outside the Philippines, is relevant because 777.26 and remitted to BIR. Respondent filed her income tax
respondent stayed in the Philippines for 89 days in 1995. Except return but then claimed a refund from BIR for the P170K, alleging
for the months of July and September 1995, respondent was in this was mistakenly withheld by Jubanitex and that her sales
the Philippines in the months of March, May, June, and August commission income was compensation for services rendered in
1995,30 the same months when she earned commission income Germany not Philippines and thus not taxable here.
for services allegedly performed abroad. Furthermore, respondent
presented no evidence to prove that JUBANITEX does not sell She filed a petition for review with CTA for alleged non-action by
embroidered products in the Philippines and that her BIR. CTA denied her claim but decision was reversed by CA on
appointment as commission agent is exclusively for Germany and appeal, holding that the commission was received as sales agent
other European markets. not as President and that the source of income arose from
marketing activities in Germany.
In sum, we find that the faxed documents presented by
respondent did not constitute substantial evidence, or that
relevant evidence that a reasonable mind might accept as
Issue: W/N respondent is entitled to refund
adequate to support the conclusion31 that it was in Germany
where she performed the income producing service which gave
rise to the reported monthly sales in the months of March and
Held:
May to September of 1995. She thus failed to discharge the
No. Pursuant to Sec 25 of NIRC, non-resident aliens, whether or
burden of proving that her income was from sources outside the
not engaged in trade or business, are subject to the Philippine
Philippines and exempt from the application of our income tax
income taxation on their income received from all sources in the
law. Hence, the claim for tax refund should be denied.
Philippines. In determining the meaning of source, the Court
resorted to origin of Act 2833 (the first Philippine income tax law),
The Court notes that in Commissioner of Internal Revenue v. Baier- the US Revenue Law of 1916, as amended in 1917.
Nickel,32 a previous case for refund of income withheld from US SC has said that income may be derived from three possible
respondents remunerations for services rendered abroad, the sources only: (1) capital and/or (2) labor; and/or (3) the sale of
Court in a Minute Resolution dated February 17, 2003,33 sustained capital assets. If the income is from labor, the place where the
the ruling of the Court of Appeals that respondent is entitled to labor is done should be decisive; if it is done in this country, the
refund the sum withheld from her sales commission income for income should be from sources within the United States. If the
the year 1994. This ruling has no bearing in the instant income is from capital, the place where the capital is employed
controversy because the subject matter thereof is the income of should be decisive; if it is employed in this country, the income
respondent for the year 1994 while, the instant case deals with should be from sources within the United States. If the income
her income in 1995. Otherwise, stated, res judicata has no is from the sale of capital assets, the place where the sale is made
application here. Its elements are: (1) there must be a final should be likewise decisive. Source is not a place, it is an activity
judgment or order; (2) the court that rendered the judgment must or property. As such, it has a situs or location, and if that situs or
have jurisdiction over the subject matter and the parties; (3) it location is within the United States the resulting income is taxable
must be a judgment on the merits; (4) there must be between the to nonresident aliens and foreign corporations.
two cases identity of parties, of subject matter, and of causes of
action. 34 The instant case, however, did not satisfy the fourth The source of an income is the property, activity or service that
requisite because there is no identity as to the subject matter of produced the income. For the source of income to be considered
the previous and present case of respondent which deals with as coming from the Philippines, it is sufficient that the income is
income earned and activities performed for different taxable derived from activity within the Philippines.
years.
The settled rule is that tax refunds are in the nature of tax
WHEREFORE, the petition is GRANTED and the January 18, 2002 exemptions and are to be construed strictissimi juris against the
Decision and May 8, 2002 Resolution of the Court of Appeals in taxpayer. To those therefore, who claim a refund rest the burden
CA-G.R. SP No. 59794, are REVERSED and SET ASIDE. The June 28, of proving that the transaction subjected to tax is actually exempt
2000 Decision of the Court of Tax Appeals in C.T.A. Case No. 5633, from taxation.
which denied respondents claim for refund of income tax paid for In the instant case, respondent failed to give substantial evidence
the year 1995 is REINSTATED. to prove that she performed the incoming producing service in
Germany, which would have entitled her to a tax exemption for
income from sources outside the Philippines. Petition granted.