HELD: NO.

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

Tan vs Del Rosario GR No 109289 03 October 1994
Facts:
Republic Act No 17946 limited the allowable deductions from
gross income of single proprietorship and professionals in the
computation of their taxable income. It was argued that this
violated the requirement of uniformity in taxation and due
process because single proprietorships and professionals were
taxed differently from corporations and partnerships.
Issue: Whether or not deductions should be uniform for all?
Decision: Petition dismissed. Uniformity does not prohibit
classification so long as the requirements for a valid classification
under the equal protection clause are complied with. Shifting the
taxation of individuals to the scheduled system which makes the
income tax depend on the kind of taxable income and maintaining
for corporations the global treatment which treat in common all
kinds if taxable income of the taxpayer is not arbitrary.
or constitutional limitations in the
exercise of the power to tax is transgressed. Uniformity of
taxation, merely requires that all subjects or objects of taxation,
similarly situated, are to be treated alike both in privileges and
liabilities.
Uniformity does not forfend classification as long as:
(1) the standards that are used therefor are substantial and not
arbitrary,
(2) the categorization is germane to achieve the legislative
purpose,
(3) the law applies, all things being equal, to both present and
future conditions, and
(4) the classification applies equally well to all those belonging to
the same class.
What may instead be perceived to be apparent from the
amendatory law is the legislative intent to increasingly shift the
income tax system towards the schedular approach in the income
taxation of individual taxpayers and to maintain, by and large, the
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 . . .
property without due process of law, nor shall any person
be denied the equal protection of the laws.
In G.R. No. 109446, petitioners, assailing Section 6 of Revenue
Regulations No. 2-93, argue that public respondents have
exceeded their rule-making authority in applying SNIT to general
professional partnerships.
The Solicitor General espouses the position taken by public
respondents.
The Court has given due course to both petitions. The parties, in
compliance with the Court's directive, have filed their respective
memoranda.
G.R. No. 109289
Petitioner contends that the title of House Bill No. 34314,
progenitor of Republic Act No. 7496, is a misnomer or, at least,
deficient for being merely entitled, "Simplified Net Income
Taxation Scheme for the Self-Employed
and Professionals Engaged in the Practice of their Profession"
(Petition in G.R. No. 109289).
The full text of the title actually reads:
An Act Adopting the Simplified Net Income Taxation
Scheme For The Self-Employed and Professionals Engaged
In The Practice of Their Profession, Amending Sections 21
and 29 of the National Internal Revenue Code, as
Amended.
The pertinent provisions of Sections 21 and 29, so referred to, of
the National Internal Revenue Code, as now amended, provide:
Sec. 21. Tax on citizens or residents.
xxx xxx xxx
(f) Simplified Net Income Tax for the Self-Employed and/or
Professionals Engaged in the Practice of Profession. A
tax is hereby imposed upon the taxable net income as
determined in Section 27 received during each taxable
year from all sources, other than income covered by
paragraphs (b), (c), (d) and (e) of this section by every
individual whether
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
following schedule:
Not over P10,000 3%
Over P10,000 P300 + 9%
but not over P30,000 of excess over P10,000
Over P30,000 P2,100 + 15%
but not over P120,00 of excess over P30,000
Over P120,000 P15,600 + 20%
but not over P350,000 of excess over P120,000
Over P350,000 P61,600 + 30%
of excess over P350,000
Sec. 29. Deductions from gross income. In computing
taxable income subject to tax under Sections 21(a), 24(a),
(b) and (c); and 25 (a)(1), there shall be allowed as
deductions the items specified in paragraphs (a) to (i) of
this section: Provided, however, That in computing taxable
income subject to tax under Section 21 (f) in the case of
individuals engaged in business or practice of profession,
only the following direct costs shall be allowed as
deductions:
(a) Raw materials, supplies and direct labor;
(b) Salaries of employees directly engaged in activities in
the course of or pursuant to the business or practice of
their profession;
(c) Telecommunications, electricity, fuel, light and water;
(d) Business rentals;
(e) Depreciation;
(f) Contributions made to the Government and accredited
relief organizations for the rehabilitation of calamity
stricken areas declared by the President; and
(g) Interest paid or accrued within a taxable year on loans
contracted from accredited financial institutions which
must be proven to have been incurred in connection with
the conduct of a taxpayer's profession, trade or business.
For individuals whose cost of goods sold and direct costs
are difficult to determine, a maximum of forty per cent
(40%) of their gross receipts shall be allowed as deductions
to answer for business or professional expenses as the
case may be.
On the basis of the above language of the law, it would be difficult
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
allowance for deductible items, it is true, may have significantly
been reduced by the questioned law in comparison with that
which has prevailed prior to the amendment; limiting, however,
allowable deductions from gross income is neither discordant
with, nor opposed to, the net income tax concept. The fact of the
matter is still that various deductions, which are by no means
inconsequential, continue to be well provided under the new law.
Article VI, Section 26(1), of the Constitution has been envisioned
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
fraud upon the legislature, and (c) to fairly apprise the people,
through such publications of its proceedings as are usually made,
of the subjects of legislation.1 The above objectives of the
fundamental law appear to us to have been sufficiently met.
Anything else would be to require a virtual compendium of the
law which could not have been the intendment of the
constitutional mandate.
Petitioner intimates that Republic Act No. 7496 desecrates the
constitutional requirement that taxation "shall be uniform and
equitable" in that the law would now attempt to tax single
proprietorships and professionals differently from the manner it
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.
7496.
Uniformity of taxation, like the kindred concept of equal
protection, merely requires that all subjects or objects of taxation,
similarly situated, are to be treated alike both in privileges and
liabilities (Juan Luna Subdivision vs. Sarmiento, 91 Phil. 371).
Uniformity does not forfend classification as long as: (1) the
standards that are used therefor are substantial and not arbitrary,
(2) the categorization is germane to achieve the legislative
purpose, (3) the law applies, all things being equal, to both
present and future conditions, and (4) the classification applies
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).
What may instead be perceived to be apparent from the
amendatory law is the legislative intent to increasingly shift the
income tax system towards the schedular approach2 in the income
taxation of individual taxpayers and to maintain, by and large, the
present global treatment3 on taxable corporations. We certainly
do not view this classification to be arbitrary and inappropriate.
Petitioner gives a fairly extensive discussion on the merits of the
law, illustrating, in the process, what he believes to be an
imbalance between the tax liabilities of those covered by the
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
taxation. This court cannot freely delve into those matters which,
by constitutional fiat, rightly rest on legislative judgment. Of
course, where a tax measure becomes so unconscionable and
unjust as to amount to confiscation of property, courts will not
hesitate to strike it down, for, despite all its plenitude, the power
to tax cannot override constitutional proscriptions. This stage,
however, has not been demonstrated to have been reached
within any appreciable distance in this controversy before us.
Having arrived at this conclusion, the plea of petitioner to have
the law declared unconstitutional for being violative of due
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
transgression is so evident to us.
G.R. No. 109446
The several propositions advanced by petitioners revolve around
the question of whether or not public respondents have exceeded
their authority in promulgating Section 6, Revenue Regulations
No. 2-93, to carry out Republic Act No. 7496.
The questioned regulation reads:
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
the net profit of the partnership, only the direct costs
mentioned in said law are to be deducted from partnership
income. Also, the expenses paid or incurred by partners in
their individual capacities in the practice of their profession
which are not reimbursed or paid by the partnership but are
not considered as direct cost, are not deductible from his
gross income.
The real objection of petitioners is focused on the administrative
interpretation of public respondents that would apply SNIT to
partners in general professional partnerships. Petitioners cite the
pertinent deliberations in Congress during its enactment of
Republic Act No. 7496, also quoted by the Honorable Hernando B.
Perez, minority floor leader of the House of Representatives, in
the latter's privilege speech by way of commenting on the
questioned implementing regulation of public respondents
following the effectivity of the law, thusly:
MR. ALBANO, Now Mr. Speaker, I would like to get the
correct impression of this bill. Do we speak here of
individuals who are earning, I mean, who earn through
business enterprises and therefore, should file an income
tax return?
MR. PEREZ. That is correct, Mr. Speaker. This does not
apply to corporations. It applies only to individuals.
(See Deliberations on H. B. No. 34314, August
6, 1991, 6:15 P.M.; Emphasis ours).
Other deliberations support this position, to wit:
MR. ABAYA . . . Now, Mr. Speaker, did I hear the
Gentleman from Batangas say that this bill is intended to
increase collections as far as individuals are concerned and
to make collection of taxes equitable?
MR. PEREZ. That is correct, Mr. Speaker.
(Id. at 6:40 P.M.; Emphasis ours).
In fact, in the sponsorship speech of Senator
Mamintal Tamano on the Senate version of
the SNITS, it is categorically stated, thus:
This bill, Mr. President, is not applicable to
business corporations or to partnerships; it is
only with respect to individuals and
professionals. (Emphasis ours)
The Court, first of all, should like to correct the apparent
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
practice of their respective professions and partners in general
professional partnerships. The fact of the matter is that a general
professional partnership, unlike an ordinary business partnership
(which is treated as a corporation for income tax purposes and so
subject to the corporate income tax), is not itself an income
taxpayer. The income tax is imposed not on the professional
partnership, which is tax exempt, but on the partners themselves
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. 23. Tax liability of members of general professional
partnerships. (a) Persons exercising a common
profession in general partnership shall be liable for income
tax only in their individual capacity, and the share in the
net profits of the general professional partnership to which
any taxable partner would be entitled whether distributed
or otherwise, shall be returned for taxation and the tax
paid in accordance with the provisions of this Title.
(b) In determining his distributive share in the net income
of the partnership, each partner
 (1) Shall take into account separately his distributive
share of the partnership's income, gain, loss,
deduction, or credit to the extent provided by the
pertinent provisions of this Code, and
(2) Shall be deemed to have elected the itemized
deductions, unless he declares his distributive share
of the gross income undiminished by his share of the
deductions.
There is, then and now, no distinction in income tax liability
between a person who practices his profession alone or
individually and one who does it through partnership (whether
registered or not) with others in the exercise of a common
profession. Indeed, outside of the gross compensation income tax
and the final tax on passive investment income, under the present
income tax system all individuals deriving income from any source
whatsoever are treated in almost invariably the same manner and
under a common set of rules.
We can well appreciate the concern taken by petitioners if
perhaps we were to consider Republic Act No. 7496 as an entirely
independent, not merely as an amendatory, piece of legislation.
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
under the National Internal Revenue Code. To elaborate a little,
the phrase "income taxpayers" is an all embracing term used in
the Tax Code, and it practically covers all persons who derive
taxable income. The law, in levying the tax, adopts the most
comprehensive tax situs of nationality and residence of the
taxpayer (that renders citizens, regardless of residence, and
resident aliens subject to income tax liability on their income from
all sources) and of the generally accepted and internationally
recognized income taxable base (that can subject non-resident
aliens and foreign corporations to income tax on their income
from Philippine sources). In the process, the Code classifies
taxpayers into four main groups, namely: (1) Individuals, (2)
Corporations, (3) Estates under Judicial Settlement and (4)
Irrevocable Trusts (irrevocable both as to corpus and as
to income).
mere mechanism or a flow-through entity in the generation of
income by, and the ultimate distribution of such income to,
respectively, each of the individual partners.
Section 6 of Revenue Regulation No. 2-93 did not alter, but merely
confirmed, the above standing rule as now so modified by
Republic Act
No. 7496 on basically the extent of allowable deductions
applicable to all individual income taxpayers on their non-
compensation income. There is no evident intention of the law,
either before or after the amendatory legislation, to place in an
unequal footing or in significant variance the income tax
treatment of professionals who practice their respective
professions individually and of those who do it through a general
professional partnership.
WHEREFORE, the petitions are DISMISSED. No special
pronouncement on costs.
COMMISSIONER OF INTERNAL REVENUE, vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX
APPEALS, G.R. No. L-65773-74 April 30, 1987
MELENCIO-HERRERA, J.:
Facts: British Overseas Airways Corporation (BOAC) is a 100%
British Government-owned corporation organized and existing
under the laws of the United Kingdom It is engaged in the
international airline business and is a member-signatory of the
Interline Air Transport Association (IATA). BOAC did not carry
passengers and/or cargo to or from the Philippines, although
during the period covered by the assessments, it maintained a
general sales agent in the Philippines Wamer Barnes and
Company, Ltd., and later Qantas Airways which was responsible
for selling BOAC tickets covering passengers and cargoes.
1st case: On May 7, 1968 CIR assessed BOAC with P2,498,358.56
for deficiency income taxes covering the years 1959 to 1963.
BOAC protested. Investigation resulted to a assessment in the
amount of P858,307.79 covering the years 1959 to 1967. BOAC
paid this new assessment under protest.

Partnerships are, under the Code, either "taxable partnerships" or
"exempt partnerships." Ordinarily, partnerships, no matter how
created or organized, are subject to income tax (and thus alluded
to as "taxable partnerships") which, for purposes of the above
categorization, are by law assimilated to be within the context of,
and so legally contemplated as, corporations. Except for few
variances, such as in the application of the "constructive receipt
rule" in the derivation of income, the income tax approach is alike
to both juridical persons. Obviously, SNIT is not intended or
envisioned, as so correctly pointed out in the discussions in
Congress during its deliberations on Republic Act 7496,
aforequoted, to cover corporations and partnerships which are
independently subject to the payment of income tax.
"Exempt partnerships," upon the other hand, are not similarly
identified as corporations nor even considered as independent
taxable entities for income tax purposes.
general professional partnership is such an example.4Here, the
partners themselves, not the partnership (although it is still
obligated to file an income tax return [mainly for administration
and data]), are liable for the payment of income tax in
their individual capacity computed on their respective and
distributive shares of profits. In the determination of the tax
liability, a partner does so as an individual, and there is no choice
on the matter. In fine, under the Tax Code on income taxation, the
general professional partnership is deemed to be no more than a
BOAC filed a claim for refund in the amount of P858,307.79 with
the CIR. However, BOAC did not wait for the decision of the CIR,
filed petition for review with the tax court. Thereafter, CIR denied
claim for refund
2nd case: On November 17, 1971 CIR assessed BOAC with
deficiency income taxes, interests, and penalty for the fiscal years
1968-1969 to 1970-1971 in the aggregate amount of P549,327.43,
and the additional amounts of P1,000.00 and P1,800.00 as
compromise penalties for violation of Section 46 (requiring the
filing of corporation returns) penalized under Section 74 of the
National Internal Revenue Code (NIRC).
BOAC in a letter requested that the assessment to
countermanded and set aside. CIR denied the request and
reissued the deficiency income tax assessment for P534,132.08 for
the years 1969 to 1970-71 plus P1,000.00 as compromise penalty
A
under Section 74 of the Tax Code. BOAC asked for reconsideration
but CIR denied the same. BOAC filed a 2nd petition for review with
the tax court. The 2 cases before the CTA were consolidated
Tax Court rendered the assailed joint Decision reversing the CIR.
Its position was that income from transportation is income from
services so that the place where services are rendered determines
the source. It further held that the proceeds of sales of BOAC
passage tickets in the Philippines by Warner Barnes and Company,
Ltd., and later by Qantas Airways, during the period in question,
do not constitute BOAC income from Philippine sources "since no
service of carriage of passengers or freight was performed by
BOAC within the Philippines" and, therefore, said income is not
subject to Philippine income tax.
Issues:
1. Whether or not during the fiscal years in question BOAC
is a resident foreign corporation doing business in the Philippines
or has an office or place of business in the Philippines.
2. Whether proceeds from the sale of BOAC tickets in the
Philippines by Warner Barnes and Company, Ltd are considered
income from sources within the Philippines
Ruling:
1. Yes, BOAC is a resident foreign corporation.
There is no specific criterion as to what constitutes "doing" or
"engaging in" or "transacting" business. The term implies a
continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or works or
the exercise of some of the functions normally incident to, and in
progressive prosecution of commercial gain or for the purpose
and object of the business organization. "In order that a foreign
corporation may be regarded as doing business within a State,
there must be continuity of conduct and intention to establish a
continuous business, such as the appointment of a local agent,
and not one of a temporary character.
BOAC, during the periods covered by the subject - assessments,
maintained a general sales agent in the Philippines, That general
sales agent, from 1959 to 1971, "was engaged in (1) selling and
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)
consequently allocating to the various airline companies on the
basis of their participation in the services rendered through the
mode of interline settlement as prescribed by Article VI of the
Resolution No. 850 of the IATA Agreement." Those activities were
in exercise of the functions which are normally incident to, and
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
business, the generation of sales being the paramount objective.
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
corporation subject to tax upon its total net income received in
the preceding taxable year from all sources within the Philippines.
2. Yes, proceeds from the sale of BOAC tickets in the
Philippines by Warner Barnes and Company, Ltd. are considered
income from sources within the Philippines hence taxable by the
Philippine government.
The Tax Code defines "gross income" thus:
"Gross income" includes gains, profits, and income derived from
salaries, wages or compensation for personal service of whatever
kind and in whatever form paid, or from profession, vocations,
trades, business, commerce, sales, or dealings in property,
whether real or personal, growing 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 profile, or gains, profits, and income derived from any source
whatever (Sec. 29[3])
"The phrase 'income from any source whatever' discloses a
legislative policy to include all income not expressly exempted
within the class of taxable income under our laws." Income means
"cash received or its equivalent"; it is the amount of money
coming to a person within a specific time ...; it means something
distinct from principal or capital. For, while capital is a fund,
income is a flow. As used in our income tax law, "income" refers
to the flow of wealth.
The source of an income is the property, activity or service that
produced the income. For the source of income to be considered
as coming from the Philippines, it is sufficient that the income is
derived from activity within the Philippines. In BOAC's case, the
sale of tickets in the Philippines is the activity that produces the
income. The tickets exchanged hands here and payments for fares
were also made here in Philippine currency. The site of the source
of payments is the Philippines. The flow of wealth proceeded
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
the burden of supporting the government.
The absence of flight operations to and from the Philippines is not
determinative of the source of income or the site of income
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
produced the income. Unquestionably, the passage
documentations in these cases were sold in the Philippines and
the revenue therefrom was derived from an activity regularly
pursued within the Philippines. And even if the BOAC tickets sold
covered the "transport of passengers and cargo to and from
foreign cities", it cannot alter the fact that income from the sale of
tickets was derived from the Philippines. The word "source"
conveys one essential idea, that of origin, and the origin of the
income herein is the Philippines.
G.R. No. L-65773-74 April 30, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX
APPEALS, respondents.
Petitioner Commissioner of Internal Revenue (CIR) seeks a review
on certiorari of the joint Decision of the Court of Tax Appeals
(CTA) in CTA Cases Nos. 2373 and 2561, dated 26 January 1983,
which set aside petitioner's assessment of deficiency income taxes
against respondent British Overseas Airways Corporation (BOAC)
for the fiscal years 1959 to 1967, 1968-69 to 1970-71,
respectively, as well as its Resolution of 18 November, 1983
denying reconsideration.
BOAC is a 100% British Government-owned corporation organized
and existing under the laws of the United Kingdom It is engaged in
the international airline business and is a member-signatory of the
Interline Air Transport Association (IATA). As such it operates air
transportation service and sells transportation tickets over the
routes of the other airline members. During the periods covered
by the disputed assessments, it is admitted that BOAC had no
landing rights for traffic purposes in the Philippines, and was not
granted a Certificate of public convenience and necessity to
operate in the Philippines by the Civil Aeronautics Board (CAB),
except for a nine-month period, partly in 1961 and partly in 1962,
when it was granted a temporary landing permit by the CAB.
Consequently, it did not carry passengers and/or cargo to or from
the Philippines, although during the period covered by the
assessments, it maintained a general sales agent in the Philippines
Wamer Barnes and Company, Ltd., and later Qantas Airways
which was responsible for selling BOAC tickets covering
passengers and cargoes. 1
G.R. No. 65773 (CTA Case No. 2373, the First Case)
On 7 May 1968, petitioner Commissioner of Internal Revenue
(CIR, for brevity) assessed BOAC the aggregate amount of
P2,498,358.56 for deficiency income taxes covering the years
1959 to 1963. This was protested by BOAC. Subsequent
investigation resulted in the issuance of a new assessment, dated
16 January 1970 for the years 1959 to 1967 in the amount of
P858,307.79. BOAC paid this new assessment under protest.
On 7 October 1970, BOAC filed a claim for refund of the amount
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
review with the Tax Court on 27 January 1972, assailing the
assessment and praying for the refund of the amount paid.
G.R. No. 65774 (CTA Case No. 2561, the Second Case)
On 17 November 1971, BOAC was assessed deficiency income
taxes, interests, and penalty for the fiscal years 1968-1969 to
1970-1971 in the aggregate amount of P549,327.43, and the
additional amounts of P1,000.00 and P1,800.00 as compromise
penalties for violation of Section 46 (requiring the filing of
corporation returns) penalized under Section 74 of the National
Internal Revenue Code (NIRC).
On 25 November 1971, BOAC requested that the assessment be
countermanded and set aside. In a letter, dated 16 February 1972,
however, the CIR not only denied the BOAC request for refund in
the First Case but also re-issued in the Second Case the deficiency
income tax assessment for P534,132.08 for the years 1969 to
1970-71 plus P1,000.00 as compromise penalty under Section 74
of the Tax Code. BOAC's request for reconsideration was denied
by the CIR on 24 August 1973. This prompted BOAC to file the
Second Case before the Tax Court praying that it be absolved of
liability for deficiency income tax for the years 1969 to 1971.
This case was subsequently tried jointly with the First Case.
On 26 January 1983, the Tax Court rendered the assailed joint
Decision reversing the CIR. The Tax Court held that the proceeds
of sales of BOAC passage tickets in the Philippines by Warner
Barnes and Company, Ltd., and later by Qantas Airways, during
the period in question, do not constitute BOAC income from
Philippine sources "since no service of carriage of passengers or
freight was performed by BOAC within the Philippines" and,
therefore, said income is not subject to Philippine income tax. The
CTA position was that income from transportation is income from
services so that the place where services are rendered determines
the source. Thus, in the dispositive portion of its Decision, the Tax
Court ordered petitioner to credit BOAC with the sum of
P858,307.79, and to cancel the deficiency income tax assessments
against BOAC in the amount of P534,132.08 for the fiscal years
1968-69 to 1970-71.
Hence, this Petition for Review on certiorari of the Decision of the
Tax Court.
The Solicitor General, in representation of the CIR, has aptly
defined the issues, thus:
1. Whether or not the revenue derived by private
respondent British Overseas Airways Corporation (BOAC)
from sales of tickets in the Philippines for air
transportation, while having no landing rights here,
constitute income of BOAC from Philippine sources, and,
accordingly, taxable.
2. Whether or not during the fiscal years in question BOAC
s a resident foreign corporation doing business in the
Philippines or has an office or place of business in the
Philippines.
3. In the alternative that private respondent may not be
considered a resident foreign corporation but a non-
resident foreign corporation, then it is liable to Philippine
income tax at the rate of thirty-five per cent (35%) of its
gross income received from all sources within the
Philippines.
Under Section 20 of the 1977 Tax Code:
(h) the term resident foreign corporation engaged in trade
or business within the Philippines or having an office or
place of business therein.
(i) The term "non-resident foreign corporation" applies to
a foreign corporation not engaged in trade or business
within the Philippines and not having any office or place of
business therein
It is our considered opinion that BOAC is a resident foreign
corporation. There is no specific criterion as to what constitutes
"doing" or "engaging in" or "transacting" business. Each case must
be judged in the light of its peculiar environmental circumstances.
The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance
of acts or works or the exercise of some of the functions normally
incident to, and in progressive prosecution of commercial gain or
for the purpose and object of the business organization. 2 "In
order that a foreign corporation may be regarded as doing
business within a State, there must be continuity of conduct and
intention to establish a continuous business, such as the
appointment of a local agent, and not one of a temporary
character. 3
BOAC, during the periods covered by the subject - assessments,
maintained a general sales agent in the Philippines, That general
sales agent, from 1959 to 1971, "was engaged in (1) selling and
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)
consequently allocating to the various airline companies on the
basis of their participation in the services rendered through the
mode of interline settlement as prescribed by Article VI of the
Resolution No. 850 of the IATA Agreement." 4 Those activities
were in exercise of the functions which are normally incident to,
and 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
business, the generation of sales being the paramount objective.
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
corporation subject to tax upon its total net income received in
the preceding taxable year from all sources within the
Philippines. 5
Sec. 24. Rates of tax on corporations. ...
(b) Tax on foreign corporations. ...
(2) Resident corporations. A corporation organized,
authorized, or existing under the laws of any foreign
country, except a foreign fife insurance company, engaged
 in trade or business within the Philippines, shall be taxable
as provided in subsection (a) of this section upon the total
net income received in the preceding taxable year from all
sources within the Philippines. (Emphasis supplied)
Next, we address ourselves to the issue of whether or not the
revenue from sales of tickets by BOAC in the Philippines
constitutes income from Philippine sources and, accordingly,
taxable under our income tax laws.
The Tax Code defines "gross income" thus:
"Gross income" includes gains, profits, and income derived
from salaries, wages or compensation for personal service
of whatever kind and in whatever form paid, or from
profession, vocations, trades, business, commerce, sales,
or dealings in property, whether real or personal, growing
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
profile, or gains, profits, and income derived from any
source whatever (Sec. 29[3]; Emphasis supplied)
The definition is broad and comprehensive to include proceeds
from sales of transport documents. "The words 'income from any
source whatever' disclose a legislative policy to include all income
not expressly exempted within the class of taxable income under
our laws." Income means "cash received or its equivalent"; it is
the amount of money coming to a person within a specific time ...;
it means something distinct from principal or capital. For, while
capital is a fund, income is a flow. As used in our income tax law,
"income" refers to the flow of wealth. 6
The records show that the Philippine gross income of BOAC for
the fiscal years 1968-69 to 1970-71 amounted to P10,428,368
.00. 7
Did such "flow of wealth" come from "sources within the
Philippines",
The source of an income is the property, activity or service that
produced the income. 8 For the source of income to be considered
as coming from the Philippines, it is sufficient that the income is
derived from activity within the Philippines. In BOAC's case, the
sale of tickets in the Philippines is the activity that produces the
income. The tickets exchanged hands here and payments for fares
were also made here in Philippine currency. The site of the source
of payments is the Philippines. The flow of wealth proceeded
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
the burden of supporting the government.
A transportation ticket is not a mere piece of paper. When issued
by a common carrier, it constitutes the contract between the
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
terms and conditions set forth thereon. The ordinary ticket issued
to members of the traveling public in general embraces within its
terms all the elements to constitute it a valid contract, binding
upon the parties entering into the relationship. 9
True, Section 37(a) of the Tax Code, which enumerates items of
gross income from sources within the Philippines, namely: (1)
interest, (21) dividends, (3) service, (4) rentals and royalties, (5)
sale of real property, and (6) sale of personal property, does not
mention income from the sale of tickets for international
transportation. However, that does not render it less an income
from sources within the Philippines. Section 37, by its language,
does not intend the enumeration to be exclusive. It merely directs
that the types of income listed therein be treated as income from
sources within the Philippines. A cursory reading of the section
will show that it does not state that it is an all-inclusive
enumeration, and that no other kind of income may be so
considered. " 10
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
source; and since BOAC's service of transportation is performed
outside the Philippines, the income derived is from sources
without the Philippines and, therefore, not taxable under our
income tax laws. The Tax Court upholds that stand in the joint
Decision under review.
The absence of flight operations to and from the Philippines is not
determinative of the source of income or the site of income
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
produced the income. 11 Unquestionably, the passage
documentations in these cases were sold in the Philippines and
the revenue therefrom was derived from a activity regularly
pursued within the Philippines. business a And even if the BOAC
tickets sold covered the "transport of passengers and cargo to and
from foreign cities", 12 it cannot alter the fact that income from
the sale of tickets was derived from the Philippines. The word
"source" conveys one essential idea, that of origin, and the origin
of the income herein is the Philippines. 13
It should be pointed out, however, that the assessments upheld
herein apply only to the fiscal years covered by the questioned
deficiency income tax assessments in these cases, or, from 1959
to 1967, 1968-69 to 1970-71. For, pursuant to Presidential Decree
No. 69, promulgated on 24 November, 1972, international carriers
are now taxed as follows:
... Provided, however, That international
carriers shall pay a tax of 2- per cent on their
cross Philippine billings. (Sec. 24[b] [21, Tax
Code).
Presidential Decree No. 1355, promulgated on 21 April, 1978,
provided a statutory definition of the term "gross Philippine
billings," thus:
... "Gross Philippine billings" includes gross revenue
realized from uplifts anywhere in the world by any
international carrier doing business in the Philippines of
passage documents sold therein, whether for passenger,
excess baggage or mail provided the cargo or mail
originates from the Philippines. ...
The foregoing provision ensures that international airlines are
taxed on their income from Philippine sources. The 2- % tax on
gross Philippine billings is an income tax. If it had been intended as
an excise or percentage tax it would have been place under Title V
of the Tax Code covering Taxes on Business.
Lastly, we find as untenable the BOAC argument that the dismissal
for lack of merit by this Court of the appeal in JAL vs.
Commissioner of Internal Revenue (G.R. No. L-30041) on February
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,
unaccompanied by the physical act of carriage of transportation,
does not render the taxpayer therein subject to the common
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
transporting, conveying or removing passengers and cargo from
one place to another. It purports to tax the business of
transportation. 14 Being an excise tax, the same can be levied by
the State only when the acts, privileges or businesses are done or
performed within the jurisdiction of the Philippines. The subject
matter of the case under consideration is income tax, a direct tax
on the income of persons and other entities "of whatever kind
and in whatever form derived from any source." Since the two
cases treat of a different subject matter, the decision in one
cannot be res judicata to the other.
WHEREFORE, the appealed joint Decision of the Court of Tax
Appeals is hereby SET ASIDE. Private respondent, the British
Overseas Airways Corporation (BOAC), is hereby ordered to pay
the amount of P534,132.08 as deficiency income tax for the fiscal
years 1968-69 to 1970-71 plus 5% surcharge, and 1% monthly
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
in the amount of P858,307.79 is hereby denied. Without costs.
Separate Opinions
TEEHANKEE, C.J., concurring:
I concur with the Court's majority judgment upholding the
assessments of deficiency income taxes against respondent BOAC
for the fiscal years 1959-1969 to 1970-1971 and therefore setting
aside the appealed joint decision of respondent Court of Tax
Appeals. I just wish to point out that the conflict between the
majority opinion penned by Mr. Justice Feliciano as to the proper
characterization of the taxable income derived by respondent
BOAC from the sales in the Philippines of tickets foe BOAC form
the issued by its general sales agent in the Philippines gas become
moot after November 24, 1972. Booth opinions state that by
amendment through P.D. No.69, promulgated on November 24,
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
of 2-% on their gross Philippine billings. There is, therefore, no
longer ant source of substantial conflict between the two opinions
as to the present 2-% tax on their gross Philippine billings
charged against such international carriers as herein respondent
foreign corporation.
FELICIANO, J., dissenting:
With great respect and reluctance, i record my dissent from the
opinion of Mme. Justice A.A. Melencio-Herrera speaking for the
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.
The fundamental issue raised in this petition for review is whether
the British Overseas Airways Corporation (BOAC), a foreign airline
company which does not maintain any flight operations to and
from the Philippines, is liable for Philippine income taxation in
respect of "sales of air tickets" in the Philippines through a general
sales agent, relating to the carriage of passengers and cargo
between two points both outside the Philippines.
1. The Solicitor General has defined as one of the issue in this case
the question of:
2. Whether or not during the fiscal years in question 1 BOAC [was]
a resident foreign corporation doing business in the Philippines or
[had] an office or place of business in the Philippines.
It is important to note at the outset that the answer to the above-
quoted issue is not determinative of the lialibity of the BOAC to
Philippine income taxation in respect of the income here involved.
The liability of BOAC to Philippine income taxation in respect of
such income depends, not on BOAC's status as a "resident foreign
corporation" or alternatively, as a "non-resident foreign
corporation," but rather on whether or not such income is derived
from "source 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
taxation only in respect of income derived from sources within the
Philippines. Section 24 (b) (2) of the National Internal Revenue
CODE ("Tax Code"), as amended by Republic Act No. 2343,
approved 20 June 1959, as it existed up to 3 August 1969, read as
follows:
(2) Resident corporations. A foreign corporation
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.
Section 24 (a) of the Tax Code in turn provides:
Rate of tax on corporations. (a) Tax on domestic
corporations. ... and a like tax shall be livied, collected,
and paid annually upon the total net income received in
the preceeding taxable year from all sources within the
Philippines by every corporation organized, authorized, or
existing under the laws of any foreign country: ... .
(Emphasis supplied)
Republic Act No. 6110, which took effect on 4 August 1969, made
this even clearer when it amended once more Section 24 (b) (2) of
the Tax Code so as to read as follows:
(2) Resident Corporations. A corporation, organized,
authorized or existing under the laws of any foreign
counrty, except foreign life insurance company, engaged in
trade or business within the Philippines, shall be taxable as
provided in subsection (a) of this section upon the total net
income received in the preceding taxable year from all
sources within the Philippines. (Emphasis supplied)
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
amended by Republic Act No. 3825 approved 22 June 1963, read
as follows:
(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
preceding paragraph upon the amount received by every
foreign corporation not engaged in trade or business
within the Philippines, from all sources within the
Philippines, as interest, dividends, rents, salaries, wages,
premium, annuities, compensations, remunerations,
emoluments, or other fixed or determinative annual or
periodical gains, profits and income a tax equal to thirty
per centum of such amount: provided, however, that
premiums shall not include reinsurance premiums. 2
Clearly, whether the foreign corporate taxpayer is doing business
in the Philippines and therefore a resident foreign corporation, or
not doing business in the Philippines and therefore a non-resident
foreign corporation, it is liable to income tax only to the extent
that it derives income from sources within the Philippines. The
circumtances that a foreign corporation is resident in the
Philippines yields no inference that all or any part of its income is
Philippine source income. Similarly, the non-resident status of a
foreign corporation does not imply that it has no Philippine source
income. Conversely, the receipt of Philippine source income
creates no presumption that the recipient foreign corporation is a
resident of the Philippines. The critical issue, for present purposes,
is therefore whether of not BOAC is deriving income from sources
within the Philippines.
2. For purposes of income taxation, it is well to bear in mind that
the "source of income" relates not to the physical sourcing of a
flow of money or the physical situs of payment but rather to the
"property, activity or service which produced the income."
In Howden and Co., Ltd. vs. Collector of Internal Revenue, 3 the
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
Philippines. The Court said:
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 contract,
accordingly, had for their source the undertaking to
indemnify Commonwealth Insurance Co. against liability. Said
undertaking is the activity that produced the reinsurance
premiums, and the same took place in the Philippines.
[T]he reinsurance, the liabilities insured and the risk originally
underwritten by Commonwealth Insurance Co., upon which
the reinsurance premiums and indemnity were based, were
all situated in the Philippines. 4
The Court may be seen to be saying that it is the underlying
prestation which is properly regarded as the activity giving rise to
the income that is sought to be taxed. In the Howden case, that
underlying prestation was the indemnification of the local
insurance company. Such indemnification could take place only in
the Philippines where the risks were located and where payment
from the foreign reinsurance (in case the casualty insured against
occurs) would be received in Philippine pesos under the
reinsurance premiums paid by the local insurance companies
constituted Philippine source income of the foreign reinsurances.
The concept of "source of income" for purposes of income
taxation originated in the United States income tax system. The
phrase "sources within the United States" was first introduced
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
1939 U.S. Tax Code. It therefore seems useful to refer to a
standard U.S. text on federal income taxation:
The Supreme Court has said, in a definition much quoted
but often debated, that income may be derived from three
possible sources only: (1) capital and/or (2) labor and/or
(3) the sale of capital assets. While the three elements of
this attempt at definition need not be accepted as all-
inclusive, they serve as useful guides in any inquiry into
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
income. If the income is from labor (services) the place
where the labor is done should be decisive; if it is done in
this counrty, the income should be from "source within the
United States." If the income is from capital, the place
where the capital is employed should be decisive; if it is
employed in this country, the income should be from
"source within the United States". If the income is from the
sale of capital assets, the place where the sale is made
should be likewise decisive. Much confusion will be
avoided by regarding the term "source" in this
fundamental light. It is not a place; it is an activity or
property. As such, it has a situs or location; and if that situs
or location is within the United States the resulting income
is taxable to nonresident aliens and foreign corporations.
The intention of Congress in the 1916 and subsequent
statutes was to discard the 1909 and 1913 basis of taxing
nonresident aliens and foreign corporations and to make
the test of taxability the "source", or situs of the activities
or property which produce the income . . . . Thus, if income
is to taxed, the recipient thereof must be resident within
the jurisdiction, or the property or activities out of which
the income issue or is derived must be situated within the
jurisdiction so that the source of the income may be said to
have a situs in this country. The underlying theory is that
the consideration for taxation is protection of life and
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
protected by this Government or obtained by persons
enjoying that protection. 5
3. We turn now to the question what is the source of income rule
applicable in the instant case. There are two possibly relevant
source of income rules that must be confronted; (a) the source
rule applicable in respect of contracts of service; and (b) the
source rule applicable in respect of sales of personal property.
Where a contract for the rendition of service is involved, the
applicable source rule may be simply stated as follows: the
income is sourced in the place where the service contracted for is
rendered. Section 37 (a) (3) of our Tax Code reads as follows:
Section 37. Income for sources within the Philippines.
(a) Gross income from sources within the Philippines.
The following items of gross income shall be treated as
gross income from sources within the Philippines:
xxx xxx xxx
(3) Services. Compensation for labor or personal
services performed in the Philippines;... (Emphasis
supplied)
Section 37 (c) (3) of the Tax Code, on the other hand, deals with
income from sources without the Philippines in the following
manner:
(c) Gross income from sources without the Philippines.
The following items of gross income shall be treated
as income from sources without the Philippines:
(3) Compensation for labor or personal services performed
without the Philippines; ... (Emphasis supplied)
It should not be supposed that Section 37 (a) (3) and (c) (3) of the
Tax Code apply only in respect of services rendered by individual
natural persons; they also apply to services rendered by or
through the medium of a juridical person. 6 Further, a contract of
carriage or of transportation is assimilated in our Tax Code and
Revenue Regulations to a contract for services. Thus, Section 37
(e) of the Tax Code provides as follows:
(e) Income form sources partly within and partly without the
Philippines. Items of gross income, expenses, losses and
deductions, other than those specified in subsections (a) and
(c) of this section shall be allocated or apportioned to sources
within or without the Philippines, under the rules and
regulations prescribed by the Secretary of Finance. ... Gains,
profits, and income from (1) transportation or other services
rendered partly within and partly without the Philippines,
or (2) from the sale of personnel 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 taxpayer
without and sold within the Philippines, shall be treated as
derived partly from sources within and partly from sources
without the Philippines. ... (Emphasis supplied)
It should be noted that the above underscored portion of Section
37 (e) was derived from the 1939 U.S. Tax Code which "was based
upon a recognition that transportation was a service and that the
source of the income derived therefrom was to be treated as being
the place where the service of transportation was rendered. 7
Section 37 (e) of the Tax Code quoted above carries a strong well-
nigh irresistible, implication that income derived from
transportation or other services rendered entirely outside the
Philippines must be treated as derived entirely from sources
without the Philippines. This implication is reinforced by a
consideration of certain provisions of Revenue Regulations No. 2
entitled "Income Tax Regulations" as amended, first promulgated
by the Department of Finance on 10 February 1940. Section 155
of Revenue Regulations No. 2 (implementing Section 37 of the Tax
Code) provides in part as follows:
Section 155. Compensation for labor or personnel
services. Gross income from sources within the
Philippines includes compensation for labor or personal
services within the Philippines regardless of the residence
of the payer, of the place in which the contract for services
was made, or of the place of payment (Emphasis
supplied)
Section 163 of Revenue Regulations No. 2 (still relating to Section
37 of the Tax Code) deals with a particular species of foreign
transportation companies i.e., foreign steamship companies
deriving income from sources partly within and partly without the
Philippines:
Section 163 Foreign steamship companies. The return of
foreign steamship companies whose vessels touch parts of
the Philippines should include as gross income, the
total receipts of all out-going business whether freight or
passengers. With the gross income thus ascertained, the
ratio existing between it and the gross income from all
ports, both within and without the Philippines of all
vessels, whether touching of the Philippines or not, should
be determined as the basis upon which allowable
deductions may be computed, . (Emphasis supplied)
Another type of utility or service enterprise is dealt with in Section
164 of Revenue Regulations No. 2 (again implementing Section 37
of the Tax Code) with provides as follows:
Section 164. Telegraph and cable services. A foreign
corporation carrying on the business of transmission of
telegraph or cable messages between points in the
Philippines and points outside the Philippines derives
income partly form source within and partly from sources
without the Philippines.
... (Emphasis supplied)
Once more, a very strong inference arises under Sections 163 and
164 of Revenue Regulations No. 2 that steamship and telegraph
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
taxation.
We turn to the "source of income" rules relating to the sale of
personal property, upon the one hand, and to the purchase and
sale of personal property, upon the other hand.
We consider first sales of personal property. Income from the sale
of personal property by the producer or manufacturer of such
personal property will be regarded as sourced entirely within or
entirely without the Philippines or as sourced partly within and
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
manufactured. If the personal property involved was both
produced or manufactured and sold outside the Philippines, the
income derived therefrom will be regarded as sourced entirely
outside the Philippines, although the personal property had been
produced outside the Philippines, or if the sale of the property
takes place outside the Philippines and the personal was produced
in the Philippines, then, the income derived from the sale will be
deemed partly as income sourced without the Philippines. In
other words, the income (and the related expenses, losses and
deductions) will be allocated between sources within and sources
without the Philippines. Thus, Section 37 (e) of the Tax Code,
although already quoted above, may be usefully quoted again:
(e) Income from sources partly within and partly without
the Philippines. ... Gains, profits and income from (1)
transportation or other services rendered partly within and
partly without the Philippines; or (2) from the sale of
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 taxpayer without and
sold within the Philippines, shall be treated as derived
partly from sources within and partly from sources without
the Philippines. ... (Emphasis supplied)
In contrast, income derived from the purchase and sale of
personal property i. e., trading is, under the Tax Code,
regarded as sourced wholly in the place where the personal
property is sold. Section 37 (e) of the Tax Code provides in part as
follows:
(e) Income from sources partly within and partly without
the Philippines ... Gains, profits and income derived from
the purchase of personal property within and its sale
without the Philippines or from the purchase of personal
property without and its sale within the Philippines, shall
be treated as derived entirely from sources within the
country in which sold. (Emphasis supplied)
Section 159 of Revenue Regulations No. 2 puts the applicable rule
succinctly:
 Section 159. Sale of personal property. Income derived
from the purchase and sale of personal property shall be
treated as derived entirely from the country in which
sold. The word "sold" includes "exchange." The "country"
in which "sold" ordinarily means the place where the
property is marketed. This Section does not apply to
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
taxpayer without and sold within the Philippines. (See
Section 162 of these regulations). (Emphasis supplied)
4. It will be seen that the basic problem is one of characterization
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
of services or a contract of service or carriage. The applicable
"source of income" rules differ depending upon which
characterization is given to the BOAC transactions.
The appropriate characterization, in my opinion, of the BOAC
transactions is that of entering into contracts of service, i.e.,
carriage of passengers or cargo between points located outside
the Philippines.
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
scrap paper. The value of the ticket lies wholly in the right
acquired by the "purchaser" the passenger to demand a
prestation from BOAC, which prestation consists of the carriage of
the "purchaser" or passenger from the one point to another
outside the Philippines. The ticket is really the evidence of the
contract of carriage entered into between BOAC and the
passenger. The money paid by the passenger changes hands in the
Philippines. But the passenger does not receive undertaken to be
delivered by BOAC. The "purchase price of the airline ticket" is
quite different from the purchase price of a physical good or
commodity such as a pair of shoes of a refrigerator or an
automobile; it is really the compensation paid for the undertaking
of BOAC to transport the passenger or cargo outside the
Philippines.
The characterization of the BOAC transactions either as sales of
personal property or as purchases and sales of personal property,
appear entirely inappropriate from other viewpoint. Consider first
purchases and sales: is BOAC properly regarded as engaged in
trading in the purchase and sale of personal property?
Certainly, BOAC was not purchasing tickets outside the Philippines
and selling them in the Philippines. Consider next sales: can BOAC
be regarded as "selling" personal property produced or
manufactured by it? In a popular or journalistic sense, BOAC might
be described as "selling" "a product" its service. However, for
the technical purposes of the law on income taxation, BOAC is in
fact entering into contracts of service or carriage. The very
existance of "source rules" specifically and precisely applicable to
the rendition of services must preclude the application here of
"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
income is more appropriately characterized as derived from a
"service", rather than from an "activity" (a broader term than
service and including the activity of selling) or from the here
involved is income taxation, and not a sales tax or
an excise or privilege tax.
5. The taxation of international carriers is today effected under
Section 24 (b) (2) of the Tax Code, as amended by Presidential
Decree No. 69, promulgated on 24 November 1972 and by
Presidential Decree No. 1355, promulgated on 21 April 1978, in
the following manner:
(2) Resident corporations. A corporation organized,
authorized, or existing under the laws of any foreign
country, engaged in trade or business within the
Philippines, shall be taxable as provided in subsection (a)
of this section upon the total net income received in the
preceeding taxable year from all sources within the
Philippines: Provided, 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 originates from
the Philippines. The gross revenue realized from the said
cargo or mail shall include the gross freight charge up to
final destination. Gross revenues from chartered flights
originating from the Philippines shall likewise form part of
"gross Philippine billings" regardless of the place of sale or
payment of the passage documents. For purposes of
determining the taxability to revenues from chartered
flights, the term "originating from the Philippines" shall
include flight of passsengers who stay in the Philippines for
more than forty-eight (48) hours prior to embarkation.
(Emphasis supplied)
Under the above-quoted proviso international carriers issuing for
compensation passage documentation in the Philippines for
uplifts from any point in the world to any other point in the world,
are not charged any Philippine income tax on their Philippine
billings (i.e., billings in respect of passenger or cargo originating
from the Philippines). Under this new approach, international
carriers who service port or points in the Philippines are treated in
exactly the same way as international carriers not serving any port
or point in the Philippines. Thus, the source of income rule
applicable, as above discussed, to transportation or other services
rendered partly within and partly without the Philippines, or
wholly without the Philippines, has been set aside. in place of
Philippine income taxation, the Tax Code now imposes this 2 per
cent tax computed on the basis of billings in respect of passengers
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
privilege tax and not a tax on income. Thereby, the Government
has done away with the difficulties attending the allocation of
income and related expenses, losses and deductions. Because
taxes are the very lifeblood of government, the resulting potential
"loss" or "gain" in the amount of taxes collectible by the state is
sometimes, with varying degrees of consciousness, considered in
choosing from among competing possible characterizations under
or interpretation of tax statutes. It is hence perhaps useful to
point out that the determination of the appropriate
characterization here that of contracts of air carriage rather
than sales of airline tickets entails no down-the-road loss of
income tax revenues to the Government. In lieu thereof, the
Government takes in revenues generated by the 2- per cent tax
on the gross Philippine billings or receipts of international carriers.
I would vote to affirm the decision of the Court of Tax Appeals.
Separate Opinions
TEEHANKEE, C.J., concurring:
I concur with the Court's majority judgment upholding the
assessments of deficiency income taxes against respondent BOAC
for the fiscal years 1959-1969 to 1970-1971 and therefore setting
aside the appealed joint decision of respondent Court of Tax
Appeals. I just wish to point out that the conflict between the
majority opinion penned by Mr. Justice Feliciano as to the proper
characterization of the taxable income derived by respondent
BOAC from the sales in the Philippines of tickets foe BOAC form
the issued by its general sales agent in the Philippines gas become
moot after November 24, 1972. Booth opinions state that by
amendment through P.D. No.69, promulgated on November 24,
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
of 2-% on their gross Philippine billings. There is, therefore, no
longer ant source of substantial conflict between the two opinions
as to the present 2-% tax on their gross Philippine billings
charged against such international carriers as herein respondent
foreign corporation.
FELICIANO, J., dissenting:
With great respect and reluctance, i record my dissent from the
opinion of Mme. Justice A.A. Melencio-Herrera speaking for the
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.
The fundamental issue raised in this petition for review is whether
the British Overseas Airways Corporation (BOAC), a foreign airline
company which does not maintain any flight operations to and
from the Philippines, is liable for Philippine income taxation in
respect of "sales of air tickets" in the Philippines through a general
sales agent, relating to the carriage of passengers and cargo
between two points both outside the Philippines.
1. The Solicitor General has defined as one of the issue in this case
the question of:
2. Whether or not during the fiscal years in question 1 BOAC [was]
a resident foreign corporation doing business in the Philippines or
[had] an office or place of business in the Philippines.
It is important to note at the outset that the answer to the above-
quoted issue is not determinative of the lialibity of the BOAC to
Philippine income taxation in respect of the income here involved.
The liability of BOAC to Philippine income taxation in respect of
such income depends, not on BOAC's status as a "resident foreign
corporation" or alternatively, as a "non-resident foreign
corporation," but rather on whether or not such income is derived
from "source 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
taxation only in respect of income derived from sources within the
Philippines. Section 24 (b) (2) of the National Internal Revenue
CODE ("Tax Code"), as amended by Republic Act No. 2343,
approved 20 June 1959, as it existed up to 3 August 1969, read as
follows:
(2) Resident corporations. A foreign corporation
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.
Section 24 (a) of the Tax Code in turn provides:
Rate of tax on corporations. (a) Tax on domestic
corporations. ... and a like tax shall be livied, collected,
and paid annually upon the total net income received in
the preceeding taxable year from all sources within the
Philippines by every corporation organized, authorized, or
existing under the laws of any foreign country: ... .
(Emphasis supplied)
Republic Act No. 6110, which took effect on 4 August 1969, made
this even clearer when it amended once more Section 24 (b) (2) of
the Tax Code so as to read as follows:
(2) Resident Corporations. A corporation, organized,
authorized or existing under the laws of any foreign
counrty, except foreign life insurance company, engaged in
trade or business within the Philippines, shall be taxable as
provided in subsection (a) of this section upon the total net
income received in the preceding taxable year from all
sources within the Philippines. (Emphasis supplied)
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
amended by Republic Act No. 3825 approved 22 June 1963, read
as follows:
(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
preceding paragraph upon the amount received by every
foreign corporation not engaged in trade or business
within the Philippines, from all sources within the
Philippines, as interest, dividends, rents, salaries, wages,
premium, annuities, compensations, remunerations,
emoluments, or other fixed or determinative annual or
periodical gains, profits and income a tax equal to thirty
per centum of such amount: provided, however, that
premiums shall not include reinsurance premiums. 2
Clearly, whether the foreign corporate taxpayer is doing business
in the Philippines and therefore a resident foreign corporation, or
not doing business in the Philippines and therefore a non-resident
foreign corporation, it is liable to income tax only to the extent
that it derives income from sources within the Philippines. The
circumtances that a foreign corporation is resident in the
Philippines yields no inference that all or any part of its income is
Philippine source income. Similarly, the non-resident status of a
foreign corporation does not imply that it has no Philippine source
income. Conversely, the receipt of Philippine source income
creates no presumption that the recipient foreign corporation is a
resident of the Philippines. The critical issue, for present purposes,
is therefore whether of not BOAC is deriving income from sources
within the Philippines.
2. For purposes of income taxation, it is well to bear in mind that
the "source of income" relates not to the physical sourcing of a
flow of money or the physical situs of payment but rather to the
"property, activity or service which produced the income."
In Howden and Co., Ltd. vs. Collector of Internal Revenue, 3 the
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
Philippines. The Court said:
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
contract, accordingly, had for their source the undertaking
to indemnify Commonwealth Insurance Co. against
liability. Said undertaking is the activity that produced the
reinsurance premiums, and the same took place in the
 Philippines. [T]he reinsurance, the liabilities insured and
the risk originally underwritten by Commonwealth
Insurance Co., upon which 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
The Court may be seen to be saying that it is the underlying
prestation which is properly regarded as the activity giving rise to
the income that is sought to be taxed. In the Howden case, that
underlying prestation was the indemnification of the local
insurance company. Such indemnification could take place only in
the Philippines where the risks were located and where payment
from the foreign reinsurance (in case the casualty insured against
occurs) would be received in Philippine pesos under the
reinsurance premiums paid by the local insurance companies
constituted Philippine source income of the foreign reinsurances.
The concept of "source of income" for purposes of income
taxation originated in the United States income tax system. The
phrase "sources within the United States" was first introduced
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
1939 U.S. Tax Code. It therefore seems useful to refer to a
standard U.S. text on federal income taxation:
The Supreme Court has said, in a definition much quoted
but often debated, that income may be derived from three
possible sources only: (1) capital and/or (2) labor and/or
(3) the sale of capital assets. While the three elements of
this attempt at definition need not be accepted as all-
inclusive, they serve as useful guides in any inquiry into
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
income. If the income is from labor (services) the place
where the labor is done should be decisive; if it is done in
this counrty, the income should be from "source within the
United States." If the income is from capital, the place
where the capital is employed should be decisive; if it is
employed in this country, the income should be from
"source within the United States". If the income is from the
sale of capital assets, the place where the sale is made
should be likewise decisive. Much confusion will be
avoided by regarding the term "source" in this
fundamental light. It is not a place; it is an activity or
property. As such, it has a situs or location; and if that situs
or location is within the United States the resulting income
is taxable to nonresident aliens and foreign corporations.
The intention of Congress in the 1916 and subsequent
statutes was to discard the 1909 and 1913 basis of taxing
nonresident aliens and foreign corporations and to make
the test of taxability the "source", or situs of the activities
or property which produce the income . . . . Thus, if income
is to taxed, the recipient thereof must be resident within
the jurisdiction, or the property or activities out of which
the income issue or is derived must be situated within the
jurisdiction so that the source of the income may be said to
have a situs in this country. The underlying theory is that
the consideration for taxation is protection of life and
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
protected by this Government or obtained by persons
enjoying that protection. 5
3. We turn now to the question what is the source of income rule
applicable in the instant case. There are two possibly relevant
source of income rules that must be confronted; (a) the source
rule applicable in respect of contracts of service; and (b) the
source rule applicable in respect of sales of personal property.
applicable source rule may be simply stated as follows: the
income is sourced in the place where the service contracted for is
rendered. Section 37 (a) (3) of our Tax Code reads as follows:
Section 37. Income for sources within the Philippines.
(a) Gross income from sources within the Philippines.
The following items of gross income shall be treated as
gross income from sources within the Philippines:
xxx xxx xxx
(3) Services. Compensation for labor or personal
services performed in the Philippines;... (Emphasis
supplied)
Section 37 (c) (3) of the Tax Code, on the other hand, deals with
income from sources without the Philippines in the following
manner:
(c) Gross income from sources without the Philippines.
The following items of gross income shall be treated
as income from sources without the Philippines:
(3) Compensation for labor or personal services performed
without the Philippines; ... (Emphasis supplied)
It should not be supposed that Section 37 (a) (3) and (c) (3) of the
Tax Code apply only in respect of services rendered by individual
natural persons; they also apply to services rendered by or
through the medium of a juridical person. 6 Further, a contract of
carriage or of transportation is assimilated in our Tax Code and
Revenue Regulations to a contract for services. Thus, Section 37
(e) of the Tax Code provides as follows:
(e) Income form sources partly within and partly without
the Philippines. Items of gross income, expenses, losses
and deductions, other than those specified in subsections
(a) and (c) of this section shall be allocated or apportioned
to sources within or without the Philippines, under the
rules and regulations prescribed by the Secretary of
Finance. ... Gains, profits, and income
from (1) transportation or other services rendered partly
within and partly without the Philippines, or (2) from the
sale of personnel 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 taxpayer without and
sold within the Philippines, shall be treated as derived
partly from sources within and partly from sources without
the Philippines. ... (Emphasis supplied)
It should be noted that the above underscored portion of Section
37 (e) was derived from the 1939 U.S. Tax Code which "was based
upon a recognition that transportation was a service and that the
source of the income derived therefrom was to be treated as being
the place where the service of transportation was rendered. 7
Section 37 (e) of the Tax Code quoted above carries a strong well-
nigh irresistible, implication that income derived from
transportation or other services rendered entirely outside the
Philippines must be treated as derived entirely from sources
without the Philippines. This implication is reinforced by a
consideration of certain provisions of Revenue Regulations No. 2
entitled "Income Tax Regulations" as amended, first promulgated
by the Department of Finance on 10 February 1940. Section 155
of Revenue Regulations No. 2 (implementing Section 37 of the Tax
Code) provides in part as follows:
Section 155. Compensation for labor or personnel services.
Gross income from sources within the Philippines
includes compensation for labor or personal services
within the Philippines regardless of the residence of the
payer, of the place in which the contract for services was
made, or of the place of payment (Emphasis supplied)
Section 163 of Revenue Regulations No. 2 (still relating to Section
37 of the Tax Code) deals with a particular species of foreign
transportation companies i.e., foreign steamship companies
deriving income from sources partly within and partly without the
Philippines:
Section 163 Foreign steamship companies. The return of
foreign steamship companies whose vessels touch parts of
the Philippines should include as gross income, the
total receipts of all out-going business whether freight or
passengers. With the gross income thus ascertained, the
ratio existing between it and the gross income from all ports,
both within and without the Philippines of all vessels,
whether touching of the Philippines or not, should be
determined as the basis upon which allowable deductions
may be computed, . (Emphasis supplied)
Another type of utility or service enterprise is dealt with in Section
164 of Revenue Regulations No. 2 (again implementing Section 37
of the Tax Code) with provides as follows:
Section 164. Telegraph and cable services. A foreign
corporation carrying on the business of transmission of
telegraph or cable messages between points in the
Philippines and points outside the Philippines derives
income partly form source within and partly from sources
without the Philippines.
... (Emphasis supplied)
Once more, a very strong inference arises under Sections 163 and
164 of Revenue Regulations No. 2 that steamship and telegraph
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
taxation.
We turn to the "source of income" rules relating to the sale of
personal property, upon the one hand, and to the purchase and
sale of personal property, upon the other hand.
We consider first sales of personal property. Income from the sale
of personal property by the producer or manufacturer of such
personal property will be regarded as sourced entirely within or
entirely without the Philippines or as sourced partly within and
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
manufactured. If the personal property involved was both
produced or manufactured and sold outside the Philippines, the
income derived therefrom will be regarded as sourced entirely
outside the Philippines, although the personal property had been
produced outside the Philippines, or if the sale of the property
takes place outside the Philippines and the personal was produced
in the Philippines, then, the income derived from the sale will be
deemed partly as income sourced without the Philippines. In
other words, the income (and the related expenses, losses and
deductions) will be allocated between sources within and sources
without the Philippines. Thus, Section 37 (e) of the Tax Code,
although already quoted above, may be usefully quoted again:
(e) Income from sources partly within and partly without
the Philippines. ... Gains, profits and income from (1)
transportation or other services rendered partly within and
partly without the Philippines; or (2) from the sale of
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 taxpayer without and
sold within the Philippines, shall be treated as derived
partly from sources within and partly from sources without
the Philippines. ... (Emphasis supplied)
In contrast, income derived from the purchase and sale of
personal property i. e., trading is, under the Tax Code,
regarded as sourced wholly in the place where the personal
property is sold. Section 37 (e) of the Tax Code provides in part as
follows:
(e) Income from sources partly within and partly without
the Philippines ... Gains, profits and income derived from
the purchase of personal property within and its sale
without the Philippines or from the purchase of personal
property without and its sale within the Philippines, shall
be treated as derived entirely from sources within the
country in which sold. (Emphasis supplied)
Section 159 of Revenue Regulations No. 2 puts the applicable rule
succinctly:
Section 159. Sale of personal property. Income derived
from the purchase and sale of personal property shall be
treated as derived entirely from the country in which sold.
The word "sold" includes "exchange." The "country" in
which "sold" ordinarily means the place where the
property is marketed. This Section does not apply to
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
taxpayer without and sold within the Philippines. (See
Section 162 of these regulations). (Emphasis supplied)
4. It will be seen that the basic problem is one of characterization
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
of services or a contract of service or carriage. The applicable
"source of income" rules differ depending upon which
characterization is given to the BOAC transactions.
The appropriate characterization, in my opinion, of the BOAC
transactions is that of entering into contracts of service, i.e.,
carriage of passengers or cargo between points located outside
the Philippines.
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
scrap paper. The value of the ticket lies wholly in the right
acquired by the "purchaser" the passenger to demand a
prestation from BOAC, which prestation consists of the carriage of
the "purchaser" or passenger from the one point to another
outside the Philippines. The ticket is really the evidence of the
contract of carriage entered into between BOAC and the
passenger. The money paid by the passenger changes hands in the
Philippines. But the passenger does not receive undertaken to be
delivered by BOAC. The "purchase price of the airline ticket" is
quite different from the purchase price of a physical good or
commodity such as a pair of shoes of a refrigerator or an
automobile; it is really the compensation paid for the undertaking
of BOAC to transport the passenger or cargo outside the
Philippines.
The characterization of the BOAC transactions either as sales of
personal property or as purchases and sales of personal property,
appear entirely inappropriate from other viewpoint. Consider first
purchases and sales: is BOAC properly regarded as engaged in
trading in the purchase and sale of personal property?
Certainly, BOAC was not purchasing tickets outside the Philippines
and selling them in the Philippines. Consider next sales: can BOAC
be regarded as "selling" personal property produced or
manufactured by it? In a popular or journalistic sense, BOAC might
be described as "selling" "a product" its service. However, for
the technical purposes of the law on income taxation, BOAC is in
fact entering into contracts of service or carriage. The very
existance of "source rules" specifically and precisely applicable to
the rendition of services must preclude the application here of
"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
income is more appropriately characterized as derived from a
"service", rather than from an "activity" (a broader term than
service and including the activity of selling) or from the here
involved is income taxation, and not a sales tax or
an excise or privilege tax.
5. The taxation of international carriers is today effected under
Section 24 (b) (2) of the Tax Code, as amended by Presidential
Decree No. 69, promulgated on 24 November 1972 and by
Presidential Decree No. 1355, promulgated on 21 April 1978, in
the following manner:
(2) Resident corporations. A corporation organized,
authorized, or existing under the laws of any foreign country,
engaged in trade or business within the Philippines, shall be
taxable as provided in subsection (a) of this section upon the
total net income received in the preceeding taxable year
from all sources within the Philippines: Provided,
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
originates from the Philippines. The gross revenue realized
from the said cargo or mail shall include the gross freight
charge up to final destination. Gross revenues from chartered
flights originating from the Philippines shall likewise form
part of "gross Philippine billings" regardless of the place of
sale or payment of the passage documents. For purposes of
determining the taxability to revenues from chartered flights,
the term "originating from the Philippines" shall include flight
of passsengers who stay in the Philippines for more than
forty-eight (48) hours prior to embarkation. (Emphasis
supplied)
Under the above-quoted proviso international carriers issuing for
compensation passage documentation in the Philippines for
uplifts from any point in the world to any other point in the world,
are not charged any Philippine income tax on their Philippine
billings (i.e., billings in respect of passenger or cargo originating
from the Philippines). Under this new approach, international
carriers who service port or points in the Philippines are treated in
exactly the same way as international carriers not serving any port
or point in the Philippines. Thus, the source of income rule
applicable, as above discussed, to transportation or other services
rendered partly within and partly without the Philippines, or
wholly without the Philippines, has been set aside. in place of
Philippine income taxation, the Tax Code now imposes this 2 per
cent tax computed on the basis of billings in respect of passengers
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
privilege tax and not a tax on income. Thereby, the Government
has done away with the difficulties attending the allocation of
income and related expenses, losses and deductions. Because
taxes are the very lifeblood of government, the resulting potential
"loss" or "gain" in the amount of taxes collectible by the state is
sometimes, with varying degrees of consciousness, considered in
choosing from among competing possible characterizations under
or interpretation of tax statutes. It is hence perhaps useful to
point out that the determination of the appropriate
characterization here that of contracts of air carriage rather
than sales of airline tickets entails no down-the-road loss of
income tax revenues to the Government. In lieu thereof, the
Government takes in revenues generated by the 2- per cent tax
on the gross Philippine billings or receipts of international carriers.
I would vote to affirm the decision of the Court of Tax Appeals.
2
Global treatment is a system where the tax treatment views
indifferently the tax base and generally treats
in common all categories of taxable income of the taxpayer.
Schedular approach is a system employed
where the income tax treatment varies and made to depend on
the kind or category of taxable income of
the taxpayer.
It is the legislature who has the discretion to determine the nature
(kind), object (purpose), extent (rate),
coverage (subjects) and situs (place) of taxation. This court cannot
freely delve into those matters which,
by constitutional fiat, rightly rest on legislative judgment. Of
course, where a tax measure becomes so
unconscionable and unjust as to amount to confiscation of
property, courts will not hesitate to strike it
down, for, despite all its plenitude, the power to tax cannot
override constitutional proscriptions.
In G.R. No. 109446, petitioners, assailing Section 6 of Revenue
Regulations No. 2-93, argue
that public respondents have exceeded their rule-making
authority in applying SNIT to
general professional partnerships.
ISSUE: Whether or not public respondents have exceeded their
authority in promulgating Section 6,
Revenue Regulations No. 2-93, to carry out RA 7496.
HELD: NO
There is no distinction in income tax liability between a person
who practices his profession alone or
individually and one who does it through partnership (registered
or not) with others in the exercise of a
common profession.
General professional partnership, unlike an ordinary partnership
(which is treated as a corporation for
income tax purposes and so subject to the corporate income tax),
is not itself an income taxpayer. The
income tax is imposed not on the professional partnership, which
is tax exempt, but on the partners
themselves in their individual capacity computed on their
distributive shares of partnership profits.
The law, in levying the tax, adopts the most comprehensive tax
situs of nationality and residence
of the taxpayer (that renders citizens, regardless of residence, and
resident aliens subject to income tax
liability on their income from all sources) and of the generally
accepted and internationally recognized
income taxable base (that can subject non-resident aliens and
foreign corporations to income tax on their income from
Philippine sources). In the process, the Code classifies taxpayers
into four main groups, namely:
(1) Individuals,
(2) Corporations,
(3) Estates under Judicial Settlement and
(4) Irrevocable Trusts (irrevocable both as to corpus and as to
income).
Partnerships are, either "taxable partnerships" or "exempt
partnerships." Ordinarily, partnerships, no
matter how created or organized, are subject to income tax
which, for purposes of the above
categorization, are by law assimilated to be within the context of
corporations. Except for few variances,
such as in the application of the "constructive receipt rule" in the
derivation of income, the income tax
approach is alike to both juridical persons. Obviously, SNIT is not
intended to cover corporations and partnerships which are
independently subject
to the payment of income tax, but only those self-employed and
professionals engaged in the practice of their profession.
MARUBENI vs CIR
GR No. 137377| J. Puno
Facts:
CIR assails the CA decision which affirmed CTA, ordering CIR to
desist from collecting the 1985 deficiency income, branch profit
remittance and contractors taxes from Marubeni Corp after
finding the latter to have properly availed of the tax amnesty
under EO 41 & 64, as amended.
Marubeni, a Japanese corporation, engaged in general import and
export trading, financing and construction, is duly registered in
the Philippines with Manila branch office. CIR examined the
Manila branchs books of accounts for fiscal year ending March
1985, and found that respondent had undeclared income from
contracts with NDC and Philphos for construction of a wharf/port
complex and ammonia storage complex respectively.
On August 27, 1986, Marubeni received a letter from CIR assessing
it for several deficiency taxes. CIR claims that the income
respondent derived were income from Philippine sources, hence
subject to internal revenue taxes. On Sept 1986, respondent filed
2 petitions for review with CTA: the first, questioned the
deficiency income, branch profit remittance and contractors tax
assessments and second questioned the deficiency commercial
brokers assessment.
On Aug 2, 1986, EO 41 declared a tax amnesty for unpaid income
taxes for 1981-85, and that taxpayers who wished to avail this
should on or before Oct 31, 1986. Marubeni filed its tax amnesty
return on Oct 30, 1986.
On Nov 17, 1986, EO 64 expanded EO 41s scope to include estate
and donors taxes under Title 3 and business tax under Chap 2,
Title 5 of NIRC, extended the period of availment to Dec 15, 1986
and stated those who already availed amnesty under EO 41
should file an amended return to avail of the new benefits.
Marubeni filed a supplemental tax amnesty return on Dec 15,
1986.
CTA found that Marubeni properly availed of the tax amnesty and
deemed cancelled the deficiency taxes. CA affirmed on appeal.
Issue:
W/N Marubeni is exempted from paying tax
Held:
Yes.
1. On date of effectivity
CIR claims Marubeni is disqualified from the tax amnesty because
it falls under the exception in Sec 4b of EO 41:
Sec. 4. Exceptions.The following taxpayers may not avail
themselves of the amnesty herein granted: xxx b) Those with
income tax cases already filed in Court as of the effectivity hereof;
Petitioner argues that at the time respondent filed for income tax
amnesty on Oct 30, 1986, a case had already been filed and was
pending before the CTA and Marubeni therefore fell under the
exception. However, the point of reference is the date
of effectivity of EO 41 and that the filing of income tax cases must
have been made before and as of its effectivity.
EO 41 took effect on Aug 22, 1986. The case questioning the 1985
deficiency was filed with CTA on Sept 26, 1986. When EO 41
became effective, the case had not yet been filed. Marubeni does
not fall in the exception and is thus, not disqualified from availing
of the amnesty under EO 41 for taxes on income and branch profit
remittance.
The difficulty herein is with respect to the contractors tax
assessment (business tax) and respondents availment of the
amnesty under EO 64, which expanded EO 41s coverage. When
EO 64 took effect on Nov 17, 1986, it did not provide for
exceptions to the coverage of the amnesty for business, estate
and donors taxes. Instead, Section 8 said EO provided that:
Section 8. The provisions of Executive Orders Nos. 41 and 54
which are not contrary to or inconsistent with this amendatory
Executive Order shall remain in full force and effect.
Due to the EO 64 amendment, Sec 4b cannot be construed to
refer to EO 41 and its date of effectivity. The general rule is that
an amendatory act operates prospectively. It may not be given a
retroactive effect unless it is so provided expressly or by necessary
implication and no vested right or obligations of contract are
thereby impaired.
2. On situs of taxation
Marubeni contends that assuming it did not validly avail of the
amnesty, it is still not liable for the deficiency tax because the
income from the projects came from the Offshore Portion as
opposed to Onshore Portion. It claims all materials and
equipment in the contract under the Offshore Portion were
manufactured and completed in Japan, not in the Philippines,
and are therefore not subject to Philippine taxes.
(BG: Marubeni won in the public bidding for projects with
government corporations NDC and Philphos. In the contracts, the
prices were broken down into a Japanese Yen Portion (I and II)
and Philippine Pesos Portion and financed either by OECF or by
suppliers credit. The Japanese Yen Portion I corresponds to the
Foreign Offshore Portion, while Japanese Yen Portion II and the
 Philippine Pesos Portion correspond to the Philippine Onshore 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,
the recipient of the dividends, being a non-resident stockholder,
nevertheless, said dividend income is subject to the 25 % tax
pursuant to Article 10 (2) (b) of the Tax Treaty dated February 13,
1980 between the Philippines and Japan.
Inasmuch as the cash dividends remitted by AG&P to Marubeni
Corporation, Japan is subject to 25 % tax, and that the taxes
withheld of 10 % as intercorporate dividend tax and 15 % as profit
remittance tax totals (sic) 25 %, the amount refundable offsets the
liability, hence, nothing is left to be refunded. 8
Petitioner appealed to the Court of Tax Appeals which affirmed the denial
of the refund by the Commissioner of Internal Revenue in its assailed
judgment of February 12, 1986. 9
In support of its rejection of petitioner's claimed refund, respondent Tax
Court explained:
Whatever the dialectics employed, no amount of sophistry can
ignore the fact that the dividends in question are income taxable
to the Marubeni Corporation of Tokyo, Japan. The said dividends
were distributions made by the Atlantic, Gulf and Pacific Company
of Manila to its shareholder out of its profits on the investments
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
made by it and the dividends on the investments were likewise
directly remitted to and received by the Marubeni Corporation of
Japan. Petitioner Marubeni Corporation Philippine Branch has no
participation or intervention, directly or indirectly, in the
investments and in the receipt of the dividends. And it appears
that the funds invested in the Atlantic Gulf & Pacific Company did
not come out of the funds infused by the Marubeni Corporation of
Japan to the Marubeni Corporation Philippine Branch. As a matter
of fact, the Central Bank of the Philippines, in authorizing the
remittance of the foreign exchange equivalent of (sic) the
dividends in question, treated the Marubeni Corporation of Japan
as a non-resident stockholder of the Atlantic Gulf & Pacific
Company based on the supporting documents submitted to it.
Subject to certain exceptions not pertinent hereto, income is
taxable to the person who earned it. Admittedly, the dividends
under consideration were earned by the Marubeni Corporation of
Japan, and hence, taxable to the said corporation. While it is true
that the Marubeni Corporation Philippine Branch is duly licensed
to engage in business under Philippine laws, such dividends are
not the income of the Philippine Branch and are not taxable to the
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
to the Japanese corporation in Japan and not to the Philippine
branch. 10
Hence, the instant petition for review.
It is the argument of petitioner corporation that following the principal-
agent relationship theory, Marubeni Japan is likewise a resident foreign
corporation subject only to the 10 % intercorporate final tax on dividends
received from a domestic corporation in accordance with Section 24(c) (1)
of the Tax Code of 1977 which states:
Dividends received by a domestic or resident foreign corporation
liable to tax under this Code (1) Shall be subject to a final tax of
10% on the total amount thereof, which shall be collected and
paid as provided in Sections 53 and 54 of this Code ....
Public respondents, however, are of the contrary view that Marubeni,
Japan, being a non-resident foreign corporation and not engaged in trade
or business in the Philippines, is subject to tax on income earned from
Philippine sources at the rate of 35 % of its gross income under Section 24
(b) (1) of the same Code which reads:
(b) Tax on foreign corporations (1) Non-resident corporations.
A foreign corporation not engaged in trade or business in the
Philippines shall pay a tax equal to thirty-five per cent of the gross
income received during each taxable year from all sources within
the Philippines as ... dividends ....
but expressly made subject to the special rate of 25% under Article 10(2)
(b) of the Tax Treaty of 1980 concluded between the Philippines and
Japan. 11 Thus:
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
be taxed in that other Contracting State.
(2) However, such dividends may also be taxed in the Contracting
State of which the company paying the dividends is a resident,
and according to the laws of that Contracting State, but if the
recipient is the beneficial owner of the dividends the tax so
charged shall not exceed;
(a) . . .
(b) 25 per cent of the gross amount of the dividends in all other
cases.
Central to the issue of Marubeni Japan's tax liability on its dividend income
from Philippine sources is therefore the determination of whether it is a
resident or a non-resident foreign corporation under Philippine laws.
Under the Tax Code, a resident foreign corporation is one that is "engaged
in trade or business" within the Philippines. Petitioner contends that
precisely because it is engaged in business in the Philippines through its
Philippine branch that it must be considered as a resident foreign
corporation. Petitioner reasons that since the Philippine branch and the
Tokyo head office are one and the same entity, whoever made the
investment in AG&P, Manila does not matter at all. A single corporate
entity cannot be both a resident and a non-resident corporation
depending on the nature of the particular transaction involved.
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
office and the office branch constitute but one corporate entity, the
Marubeni Corporation, which, under both Philippine tax and corporate
laws, is a resident foreign corporation because it is transacting business in
the Philippines.
The Solicitor General has adequately refuted petitioner's arguments in this
wise:
The general rule that a foreign corporation is the same juridical
entity as its branch office in the Philippines cannot apply here. This
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
becomes its agent here. So that when the foreign corporation
transacts business in the Philippines independently of its branch, the
principal-agent relationship is set aside. The transaction becomes
one of the foreign corporation, not of the branch. Consequently, the
taxpayer is the foreign corporation, not the branch or the resident
foreign corporation.
Corollarily, if the business transaction is conducted through the
branch office, the latter becomes the taxpayer, and not the foreign
corporation. 12
In other words, the alleged overpaid taxes were incurred for the
remittance of dividend income to the head office in Japan which is a
separate and distinct income taxpayer from the branch in the Philippines.
There can be no other logical conclusion considering the undisputed fact
that the investment (totalling 283.260 shares including that of nominee)
was made for purposes peculiarly germane to the conduct of the
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
Philippines and avail itself of the lower tax rate of 10 %.
But while public respondents correctly concluded that the dividends in
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
to the petitioner because the taxes thus withheld totalled the 25 % rate
imposed by the Philippine-Japan Tax Convention pursuant to Article 10 (2)
(b).
To simply add the two taxes to arrive at the 25 % tax rate is to disregard a
basic rule in taxation that each tax has a different tax basis. While the tax
on dividends is directly levied on the dividends received, "the tax base
upon which the 15 % branch profit remittance tax is imposed is the profit
actually remitted abroad." 13
Public respondents likewise erred in automatically imposing the 25 % rate
under Article 10 (2) (b) of the Tax Treaty as if this were a flat rate. A closer
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
exceed the 25 % limitation and that said rate would apply only if the tax
imposed by our laws exceeds the same. In other words, by reason of our
bilateral negotiations with Japan, we have agreed to have our right to tax
limited to a certain extent to attain the goals set forth in the Treaty.
Petitioner, being a non-resident foreign corporation with respect to the
transaction in question, the applicable provision of the Tax Code is Section
24 (b) (1) (iii) in conjunction with the Philippine-Japan Treaty of 1980. Said
section provides:
(b) Tax on foreign corporations. (1) Non-resident corporations
... (iii) On dividends received from a domestic corporation liable to
tax under this Chapter, the tax shall be 15% of the dividends
received, which shall be collected and paid as provided in Section 53
(d) of this Code, subject to the condition that the country in which
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 %
which represents the difference between the regular tax (35 %) on
corporations and the tax (15 %) on dividends as provided in this
Section; ....
Proceeding to apply the above section to the case at bar, petitioner, being
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)].
However, a discounted rate of 15% is given to petitioner on dividends
received from a domestic corporation (AG&P) on the condition that its
domicile state (Japan) extends in favor of petitioner, a tax credit of not less
than 20 % of the dividends received. This 20 % represents the difference
between the regular tax of 35 % on non-resident foreign corporations
which petitioner would have ordinarily paid, and the 15 % special rate on
dividends received from a domestic corporation.
Consequently, petitioner is entitled to a refund on the transaction in
question to be computed as follows:
Total cash dividend paid ................P1,699,440.00
less 15% under Sec.
(b) (1) (iii ) .........................................254,916.00
------------------
Cash dividend net of 15 % tax
due petitioner ...............................P1,444.524.00
less net amount
actually remitted .............................1,300,071.60
-------------------
Amount to be refunded to petitioner
representing overpayment of
taxes on dividends remitted ..............P 144 452.40
===========
It is readily apparent that the 15 % tax rate imposed on the dividends
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
10 (2) (b) of the Tax Treaty.
There is one final point that must be settled. Respondent Commissioner of
Internal Revenue is laboring under the impression that the Court of Tax
Appeals is covered by Batas Pambansa Blg. 129, otherwise known as the
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,
awards, judgments, or decisions of any court in all cases shall be fifteen
(15) days counted from the notice of the final order, resolution, award,
judgment or decision appealed from ....
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,
Republic Act No. 1125. Respondent court is not among those courts
specifically mentioned in Section 2 of BP Blg. 129 as falling within its scope.
Thus, under Section 18 of Republic Act No. 1125, a party adversely
affected by an order, ruling or decision of the Court of Tax Appeals is given
thirty (30) days from notice to appeal therefrom. Otherwise, said order,
ruling, or decision shall become final.
Records show that petitioner received notice of the Court of Tax Appeals's
decision denying its claim for refund on April 15, 1986. On the 30th day, or
on May 15, 1986 (the last day for appeal), petitioner filed a motion for
reconsideration which respondent court subsequently denied on
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
petition for review with the Supreme Court. 14 From the foregoing, it is
evident that the instant appeal was perfected well within the 30-day
period provided under R.A. No. 1125, the whole 30-day period to appeal
having begun to run again from notice of the denial of petitioner's motion
for reconsideration.
WHEREFORE, the questioned decision of respondent Court of Tax Appeals
dated February 12, 1986 which affirmed the denial by respondent
Commissioner of Internal Revenue of petitioner Marubeni Corporation's
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
dividends received. No costs.
G.R. No. 103092 July 21, 1994
BANK OF AMERICA NT & SA, petitioner,
vs.
HONORABLE COURT OF APPEALS, AND THE COMMISSIONER OF
INTERNAL REVENUE, respondents.
G.R. No. 103106 July 21, 1994
BANK OF AMERICA NT & SA, petitioner,
vs.
THE HONORABLE COURT OF APPEALS AND THE COMMISSIONER OF
INTERNAL REVENUE, respondents.
24
Sycip, Salazar, Hernandez & Gatmaitan and Agcaoili & Associates for
petitioner.
VITUG, J.:
Section 24(b) (2) (ii) of the National Internal Revenue Code, in the
language it was worded in 1982 (the taxable period relevant to the case at
bench), provided, in part, thusly:
 Sec. 24. Rates of tax on corporations. . . .
(b) Tax on foreign corporations. . . .
(2) (ii) Tax on branch profit and remittances.
Any profit remitted abroad by a branch to its head
office shall be subject to a tax of fifteen per cent
(15%) . . . ."
Petitioner Bank of America NT & SA argues that the 15% branch profit
remittance tax on the basis of the above provision should be assessed on
the amount actually remitted abroad, which is to say that the 15% profit
remittance tax itself should not form part of the tax base. Respondent
Commissioner of Internal Revenue, contending otherwise, holds the
position that, in computing the 15% remittance tax, the tax should be
inclusive of the sum deemed remitted.
The statement of facts made by the Court of Tax Appeals, later adopted by
the Court of Appeals, and not in any serious dispute by the parties, can be
quoted thusly:
Petitioner is a foreign corporation duly licensed to engage in business
in the Philippines with Philippine branch office at BA Lepanto Bldg.,
Paseo de Roxas, Makati, Metro Manila. On July 20, 1982 it paid 15%
branch profit remittance tax in the amount of P7,538,460.72 on
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
without deducting the amount corresponding to the 15% tax.
Petitioner filed a claim for refund with the Bureau of Internal
Revenue of that portion of the payment which corresponds to the
15% branch profit remittance tax, on the ground that the tax should
have been computed on the basis of profits actually remitted, which
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
14, 1984 with this Honorable Court for the recovery of the amount of
P1,041,424.03 computed as follows:
Net Profits After Profit Tax Due Alleged
Income Tax But Remittance Alleged by Overpayment
Before Profit Tax Paid Petitioner Item 1-2
Remittance Tax _________ _________ ___________
A. Regular Banking
Unit Operations
(P50,256,404.82)
1. Computation of BIR
15% x P50,256,404.82 - P7,538,460.72
2. Computation of
Petitioner
- P50,256,404.82 x 15% P6,555,183.24 P983,277.48
1.15
B. Foreign Currency
Deposit Unit
Operations
(P2,971,935)
1. Computation of BIR
15% x - P2,971,935.00 P445,790.25
2. Computation of
Petitioner
- P2,971,935.00 x 15% P387,643.70 P58,146.55
T O T A L. . P7,984,250.97 P6,942,286.94 P1,041,424.02"1
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
Appeals following this Court's pronouncement in Development Bank of the
Philippines vs. Court of Appeals, et al. (180 SCRA 609). On 19 September
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
court said:
The Court of Tax Appeals sought to deduce legislative intent vis-a-
vis the aforesaid law through an analysis of the wordings thereof,
which to their minds reveal an intent to mitigate at least the
harshness of successive taxation. The use of the
word remitted may well be understood as referring to that part of
the said total branch profits which would be sent to the head
office as distinguished from the total profits of the branch (not all
of which need be sent or would be ordered remitted abroad). If
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
complicated way of computing the tax, as envisioned by the
herein private respondent. The same result would have been
achieved.2
Hence, these petitions for review in G.R. No. 103092 and G.R.
No. 103106 (filed separately due to inadvertence) by the law firms of
"Agcaoili and Associates" and of "Sycip, Salazar, Hernandez and
Gatmaitan" in representation of petitioner bank.
We agree with the Court of Appeals that not much reliance can be made
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
January 1980 ruling the reversal of which, by his subsequent ruling of 17
March 1982, could not apply retroactively against Burroughs in conformity
with Section 327 (now Section 246, re: non-retroactivity of rulings) of the
National Internal Revenue Code. Hence, we held:
Petitioner's aforesaid contention is without merit. What is
applicable in the case at bar is still the Revenue Ruling of January
21, 1980 because private respondent Burroughs Limited paid the
branch profit remittance tax in question on March 14, 1979.
Memorandum Circular
No. 8-82 dated March 17, 1982 cannot be given retroactive effect
in the light of Section 327 of the National Internal Revenue Code
which
provides
Sec. 327. Non-retroactivity of rulings. Any revocation,
modification, or reversal of any of the rules and regulations
promulgated in accordance with the preceding section or
any of the rulings or circulars promulgated by the
Commissioner shall not be given retroactive application if
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
his return or in any document required of him by the Bureau
of Internal Revenue; (b) where the facts subsequently
gathered by the Bureau of Internal Revenue are materially
different from the facts on which the ruling is based, or (c)
where the taxpayer acted in bad faith. (ABS-CBN
Broadcasting Corp. v. CTA, 108 SCRA 151-152)
The prejudice that would result to private respondent
Burroughs Limited by a retroactive application of
Memorandum Circular No. 8-82 is beyond question for it
would be deprived of the substantial amount of
P172,058.90. And, insofar as the enumerated exceptions are
concerned, admittedly, Burroughs Limited does not fall
under any of them.
The Court of Tax Appeals itself commented similarly when it
observed thusly in its decision:
 In finding the Commissioner's contention without merit, this Court
however ruled against the applicability of Revenue Memorandum
Circular No. 8-82 dated March 17, 1982 to the Burroughs Limited
case because the taxpayer paid the branch profit remittance tax
involved therein on March 14, 1979 in accordance with the ruling
of the Commissioner of Internal Revenue dated January 21, 1980.
In view of Section 327 of the then in force National Internal
Revenue Code, Revenue Memorandum Circular No. 8-82 dated
March 17, 1982 cannot be given retroactive effect because any
revocation or modification of any ruling or circular of the Bureau
of Internal Revenue should not be given retroactive application if
such revocation or modification will, subject to certain exceptions
not pertinent thereto, prejudice taxpayers.3
The Solicitor General correctly points out that almost invariably in an ad
valorem tax, the tax paid or withheld is not deducted from the tax base.
Such impositions as the ordinary income tax, estate and gift taxes, and the
value added tax are generally computed in like manner. In these cases,
however, it is so because the law, in defining the tax base and in providing
for tax withholding, clearly spells it out to be such. As so well expounded
by the Tax Court
. . . In all the situations . . . where the mechanism of withholding of
taxes at source operates to ensure collection of the tax, and which
respondent claims the base on which the tax is computed is the
amount to be paid or remitted, the law applicable expressly,
specifically and unequivocally mandates that the tax is on the total
amount thereof which shall be collected and paid as provided in
Sections 53 and 54 of the Tax Code. Thus:
Dividends received by an individual who is a citizen or
resident of the Philippines from a domestic corporation,
shall be subject to a final tax at the rate of fifteen (15%)
per cent on the total amount thereof, which shall be
collected and paid as provided in Sections 53 and 54 of
this Code. (Emphasis supplied; Sec. 21, Tax Code)
Interest from Philippine Currency bank deposits and yield
from deposit substitutes whether received by citizens of
the Philippines or by resident alien individuals, shall be
subject to a final tax as follows: (a) 15% of the interest or
savings deposits, and (b) 20% of the interest on time
deposits and yield from deposits substitutes, which shall
be collected and paid as provided in Sections 53 and 54 of
this Code: . . . (Emphasis supplied; Sec. 21, Tax Code
applicable.)
And on rental payments payable by the lessee to the lessor (at
5%), also cited by respondent, Section 1, paragraph (C), of
Revenue Regulations No. 13-78, November 1, 1978, provides that:
Section 1. Income payments subject to withholding tax
and rates prescribed therein. Except as therein
otherwise provided, there shall be withheld a creditable
income tax at the rates herein specified for each class of
payee from the following items of income payments to
persons residing in the Philippines.
xxx xxx xxx
(C) Rentals When the gross rental or the payment
required to be made as a condition to the continued use
or possession of property, whether real or personal, to
which the payor or obligor has not taken or is not taking
title or in which he has no equity, exceeds five hundred
pesos (P500.00) per contract or payment whichever is
greater five per centum (5%).
Note that the basis of the 5% withholding tax, as expressly
and unambiguously provided therein, is on the gross
rental. Revenue Regulations No. 13-78 was promulgated
pursuant to Section 53(f) of the then in force National
Internal Revenue Code which authorized the Minister of
Finance, upon recommendation of the Commissioner of
Internal Revenue, to require the withholding of income
tax on the same items of income payable to persons
(natural or judicial) residing in the Philippines by the
persons making such payments at the rate of not less
than 2 1/2% but not more than 35% which are to be
credited against the income tax liability of the taxpayer
for the taxable year.
On the other hand, there is absolutely nothing in Section 24(b) (2)
(ii), supra, which indicates that the 15% tax on branch profit
remittance is on the total amount of profit to be remitted abroad
which shall be collected and paid in accordance with the tax
withholding device provided in Sections 53 and 54 of the Tax
Code. The statute employs "Any profit remitted abroad by a
branch to its head office shall be subject to a tax of fifteen per
cent (15%)" without more. Nowhere is there said of "base on
the total amount actually applied for by the branch with the
Central Bank of the Philippines as profit to be remitted abroad,
which shall be collected and paid as provided in Sections 53 and 54
of this Code." Where the law does not qualify that the tax is
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
better canon of interpretation than that when the language of the
law is clear and unambiguous, it should be applied as written. And
to our mind, the term "any profit remitted abroad" can only mean
such profit as is "forwarded, sent, or transmitted abroad" as the
word "remitted" is commonly and popularly accepted and
understood. To say therefore that the tax on branch profit
remittance is imposed and collected at source and necessarily the
tax base should be the amount actually applied for the branch
with the Central Bank as profit to be remitted abroad is to ignore
the unmistakable meaning of plain words.4
In the 15% remittance tax, the law specifies its own tax base to be on the
"profit remitted abroad." There is absolutely nothing equivocal or
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.
The taxpayer is a single entity, and it should be understandable if, such as
in this case, it is the local branch of the corporation, using its own local
funds, which remits the tax to the Philippine Government.
The remittance tax was conceived in an attempt to equalize the income
tax burden on foreign corporations maintaining, on the one hand, local
branch offices and organizing, on the other hand, subsidiary domestic
corporations where at least a majority of all the latter's shares of stock are
owned by such foreign corporations. Prior to the amendatory provisions of
the Revenue Code, local branches were made to pay only the usual
corporate income tax of 25%-35% on net income (now a uniform 35%)
applicable to resident foreign corporations (foreign corporations doing
business in the Philippines). While Philippine subsidiaries of foreign
corporations were subject to the same rate of 25%-35% (now also a
uniform 35%) on their net income, dividend payments, however, were
additionally subjected to a 15% (withholding) tax (reduced conditionally
from 35%). In order to avert what would otherwise appear to be an
unequal tax treatment on such subsidiaries vis-a-vis local branch offices, a
20%, later reduced to 15%, profit remittance tax was imposed on local
branches on their remittances of profits abroad. But this is where the
tax pari-passu ends between domestic branches and subsidiaries of
foreign corporations.
The Solicitor General suggests that the analogy should extend to the
ordinary application of the withholding tax system and so with the rule on
constructive remittance concept as well. It is difficult to accept the
proposition. In the operation of the withholding tax system, the payee is
the taxpayer, the person on whom the tax is imposed, while the payor, a
separate entity, acts no more than an agent of the government for the
collection of the tax in order to ensure its payment. Obviously, the amount
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
the real taxpayer, the rule on constructive remittance (or receipt) can be
easily rationalized, if not indeed, made clearly manifest. It is hardly the
case, however, in the imposition of the 15% remittance tax where there is
but one taxpayer using its own domestic funds in the payment of the tax.
To say that there is constructive remittance even of such funds would be
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
payment filed, within the two-year prescriptive period, with the Court of
Tax Appeals has been lawfully made.
WHEREFORE, the decision of the Court of Appeals appealed from is
REVERSED and SET ASIDE, and that of the Court of Tax Appeals is
REINSTATED.
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
JULIANE BAIER-NICKEL, as represented by Marina Q. Guzman
(Attorney-in-fact) Respondent.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) appeals from
the January 18, 2002 Decision1 of the Court of Appeals in CA-G.R.
SP No. 59794, which granted the tax refund of respondent Juliane
Baier-Nickel and reversed the June 28, 2000 Decision2 of the Court
of Tax Appeals (CTA) in C.T.A. Case No. 5633. Petitioner also
assails the May 8, 2002 Resolution3 of the Court of Appeals
denying its motion for reconsideration.
The facts show that respondent Juliane Baier-Nickel, a non-
resident German citizen, is the President of JUBANITEX, Inc., a
domestic corporation engaged in "[m]anufacturing, marketing on
wholesale only, buying or otherwise acquiring, holding, importing
and exporting, selling and disposing embroidered textile
products."4Through JUBANITEXs General Manager, Marina Q.
Guzman, the corporation appointed and engaged the services of
respondent as commission agent. It was agreed that respondent
will receive 10% sales commission on all sales actually concluded
and collected through her efforts.5
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
P170,777.26, and remitted the same to the Bureau of Internal
Revenue (BIR). On October 17, 1997, respondent filed her 1995
income tax return reporting a taxable income of P1,707,772.64
and a tax due of P170,777.26.6
On April 14, 1998, respondent filed a claim to refund the amount
of P170,777.26 alleged to have been mistakenly withheld and
remitted by JUBANITEX to the BIR. Respondent contended that
her sales commission income is not taxable in the Philippines
because the same was a compensation for her services rendered
in Germany and therefore considered as income from sources
outside the Philippines.
The next day, April 15, 1998, she filed a petition for review with
the CTA contending that no action was taken by the BIR on her
claim for refund.7 On June 28, 2000, the CTA rendered a decision
denying her claim. It held that the commissions received by
respondent were actually her remuneration in the performance of
her duties as President of JUBANITEX and not as a mere sales
agent thereof. The income derived by respondent is therefore an
income taxable in the Philippines because JUBANITEX is a
domestic corporation.
On petition with the Court of Appeals, the latter reversed the
Decision of the CTA, holding that respondent received the
commissions as sales agent of JUBANITEX and not as President
thereof. And since the "source" of income means the activity or
service that produce the income, the sales commission received
by respondent is not taxable in the Philippines because it arose
from the marketing activities performed by respondent in
Germany. The dispositive portion of the appellate courts
Decision, reads:
WHEREFORE, premises considered, the assailed decision of the
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.
SO ORDERED.8
Petitioner filed a motion for reconsideration but was
denied.9 Hence, the instant recourse.
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.
It thus implied that source of income means the physical source
where the income came from. It further argued that since
respondent is the President of JUBANITEX, any remuneration she
received from said corporation should be construed as payment of
her overall managerial services to the company and should not be
interpreted as a compensation for a distinct and separate service
as a sales commission agent.
Respondent, on the other hand, claims that the income she
received was payment for her marketing services. She contended
that income of nonresident aliens like her is subject to tax only if
the source of the income is within the Philippines. Source,
according to respondent is the situs of the activity which produced
the income. And since the source of her income were her
marketing activities in Germany, the income she derived from said
activities is not subject to Philippine income taxation.
The issue here is whether respondents sales commission income
is taxable in the Philippines.
Pertinent portion of the National Internal Revenue Code (NIRC),
states:
SEC. 25. Tax on Nonresident Alien Individual.
(A) Nonresident Alien Engaged in Trade or Business Within the
Philippines.
(1) In General. A nonresident alien individual engaged in trade or
business in the Philippines shall be subject to an income tax in the
same manner as an individual citizen and a resident alien
individual, on taxable income received from all sources within the
Philippines. A nonresident alien individual who shall come to the
Philippines and stay therein for an aggregate period of more than
one hundred eighty (180) days during any calendar year shall be
deemed a nonresident alien doing business in the Philippines,
Section 22(G) of this Code notwithstanding.
xxxx
(B) Nonresident Alien Individual Not Engaged in Trade or Business
Within the Philippines. There shall be levied, collected and paid
for each taxable year upon the entire income received from all
sources within the Philippines by every nonresident alien
individual not engaged in trade or business within the Philippines
x x x a tax equal to twenty-five percent (25%) of such income. x x x
Pursuant to the foregoing provisions of the NIRC, non-resident
aliens, whether or not engaged in trade or business, are subject to
Philippine income taxation on their income received from all
sources within the Philippines. Thus, the keyword in determining
the taxability of non-resident aliens is the incomes "source." In
construing the meaning of "source" in Section 25 of the NIRC,
resort must be had on the origin of the provision.
The first Philippine income tax law enacted by the Philippine
Legislature was Act No. 2833,10 which took effect on January 1,
1920.11 Under Section 1 thereof, nonresident aliens are likewise
subject to tax on income "from all sources within the Philippine
Islands," thus
SECTION 1. (a) There shall be levied, assessed, collected, and paid
annually upon the entire net income received in the preceding
calendar year from all sources by every individual, a citizen or
resident of the Philippine Islands, a tax of two per centum upon
such income; and a like tax shall be levied, assessed, collected,
and paid annually upon the entire net income received in the
preceding calendar year from all sources within the Philippine
Islands by every individual, a nonresident alien, including interest
on bonds, notes, or other interest-bearing obligations of
residents, corporate or otherwise.
Act No. 2833 substantially reproduced the United States (U.S.)
Revenue Law of 1916 as amended by U.S. Revenue Law of
1917.12 Being a law of American origin, the authoritative decisions
of the official charged with enforcing it in the U.S. have peculiar
persuasive force in the Philippines.13
The Internal Revenue Code of the U.S. enumerates specific types
of income to be treated as from sources within the U.S. and
specifies when similar types of income are to be treated as from
sources outside the U.S.14 Under the said Code, compensation for
labor and personal services performed in the U.S., is generally
treated as income from U.S. sources; while compensation for said
services performed outside the U.S., is treated as income from
sources outside the U.S.15 A similar provision is found in Section
42 of our NIRC, thus:
SEC. 42. x x x
(A) Gross Income From Sources Within the Philippines. x x x
xxxx
(3) Services. Compensation for labor or personal services
performed in the Philippines;
xxxx
(C) Gross Income From Sources Without the Philippines. x x x
xxxx
(3) Compensation for labor or personal services performed
without the Philippines;
The following discussions on sourcing of income under the
Internal Revenue Code of the U.S., are instructive:
The Supreme Court has said, in a definition much quoted but
often debated, that income may be derived from three possible
sources only: (1) capital and/or (2) labor; and/or (3) the sale of
capital assets. While the three elements of this attempt at
definition need not be accepted as all-inclusive, they serve as
useful guides in any inquiry into whether a particular item is from
"sources within the United States" and suggest an investigation
into the nature and location of the activities or property which
produce the income.
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
be from "sources within the United States." If the income is from
capital, the place where the capital is employed should be
decisive; if it is employed in this country, the income should be
from "sources within the United States." If the income is from the
sale of capital assets, the place where the sale is made should be
likewise decisive.
Much confusion will be avoided by regarding the term "source" in
this fundamental light. It is not a place, it is an activity or property.
As such, it has a situs or location, and if that situs or location is
within the United States the resulting income is taxable to
nonresident aliens and foreign corporations.
The intention of Congress in the 1916 and subsequent statutes
was to discard the 1909 and 1913 basis of taxing nonresident
aliens and foreign corporations and to make the test of taxability
the "source," or situs of the activities or property which produce
the income. The result is that, on the one hand, nonresident aliens
and nonresident foreign corporations are prevented from deriving
income from the United States free from tax, and, on the other
hand, there is no undue imposition of a tax when the activities do
not take place in, and the property producing income is not
employed in, this country. Thus, if income is to be taxed, the
recipient thereof must be resident within the jurisdiction, or the
property or activities out of which the income issues or is derived
must be situated within the jurisdiction so that the source of the
income may be said to have a situs in this country.
The underlying theory is that the consideration for taxation is
protection of life and 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 protected by this Government or obtained by persons
enjoying that protection. 16
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
place of payment, but the place where the services were actually
rendered.17
In Alexander Howden & Co., Ltd. v. Collector of Internal
Revenue,18 the Court addressed the issue on the applicable source
rule relating to reinsurance premiums paid by a local insurance
company to a foreign insurance company in respect of risks
located in the Philippines. It was held therein that the undertaking
of the foreign insurance company to indemnify the local insurance
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
Federal Income Taxation, the Court emphasized that the technical
meaning of source of income is the property, activity or service
that produced the same. Thus:
The source of an income is the property, activity or service that
produced the income. The reinsurance premiums remitted to
appellants by virtue of the reinsurance contracts, accordingly, had
for their source the undertaking to indemnify Commonwealth
Insurance Co. against liability. Said undertaking is the activity that
produced the reinsurance premiums, and the same took place in
the Philippines. x x x the reinsured, the liabilities insured and the
risk originally underwritten by Commonwealth Insurance Co.,
upon which the reinsurance premiums and indemnity were based,
were all situated in the Philippines. x x x19
In Commissioner of Internal Revenue v. British Overseas Airways
Corporation (BOAC),20 the issue was whether BOAC, a foreign
airline company which does not maintain any flight to and from
the Philippines is liable for Philippine income taxation in respect of
sales of air tickets in the Philippines, through a general sales agent
relating to the carriage of passengers and cargo between two
points both outside the Philippines. Ruling in the affirmative, the
Court applied the case of Alexander Howden & Co., Ltd. v.
Collector of Internal Revenue, and reiterated the rule that the
source of income is that "activity" which produced the income. It
was held that the "sale of tickets" in the Philippines is the
"activity" that produced the income and therefore BOAC should
pay income tax in the Philippines because it undertook an income
producing activity in the country.
Both the petitioner and respondent cited the case
of Commissioner of Internal Revenue v. British Overseas Airways
Corporation in support of their arguments, but the correct
interpretation of the said case favors the theory of respondent
that it is the situs of the activity that determines whether such
income is taxable in the Philippines. The conflict between the
majority and the dissenting opinion in the said case has nothing to
do with the underlying principle of the law on sourcing of income.
In fact, both applied the case of Alexander Howden & Co., Ltd. v.
Collector of Internal Revenue. The divergence in opinion centered
on whether the sale of tickets in the Philippines is to be construed
as the "activity" that produced the income, as viewed by the
majority, or merely the physical source of the income, as
ratiocinated by Justice Florentino P. Feliciano in his dissent. The
majority, through Justice Ameurfina Melencio-Herrera,
as ponente, interpreted the sale of tickets as a business activity
that gave rise to the income of BOAC. Petitioner cannot therefore
invoke said case to support its view that source of income is the
physical source of the money earned. If such was the
interpretation of the majority, the Court would have simply stated
that source of income is not the business activity of BOAC but the
place where the person or entity disbursing the income is located
or where BOAC physically received the same. But such was not the
import of the ruling of the Court. It even explained in detail
the business activity undertaken by BOAC in the Philippines to
pinpoint the taxable activity and to justify its conclusion that
BOAC is subject to Philippine income taxation. Thus
BOAC, during the periods covered by the subject assessments,
maintained a general sales agent in the Philippines. That general
sales agent, from 1959 to 1971, "was engaged in (1) selling and
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)
consequently allocating to the various airline companies on the
basis of their participation in the services rendered through the
mode of interline settlement as prescribed by Article VI of the
Resolution No. 850 of the IATA Agreement." Those activities were
in exercise of the functions which are normally incident to, and
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
business, the generation of sales being the paramount objective.
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. x x x21
xxxx
The source of an income is the property, activity or service that
produced the income. For the source of income to be considered
as coming from the Philippines, it is sufficient that the income is
derived from activity within the Philippines. In BOAC's case, the
sale of tickets in the Philippines is the activity that produces the
income. The tickets exchanged hands here and payments for fares
were also made here in Philippine currency. The situs of the
source of payments is the Philippines. The flow of wealth
proceeded 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
the burden of supporting the government.
A transportation ticket is not a mere piece of paper. When issued
by a common carrier, it constitutes the contract between the
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
terms and conditions set forth thereon. The ordinary ticket issued
to members of the traveling public in general embraces within its
terms all the elements to constitute it a valid contract, binding
upon the parties entering into the relationship.22
The Court reiterates the rule that "source of income" relates to
the property, activity or service that produced the income. With
respect to rendition of labor or personal service, as in the instant
case, it is the place where the labor or service was performed that
determines the source of the income. There is therefore no merit
in petitioners interpretation which equates source of income in
labor or personal service with the residence of the payor or the
place of payment of the income.
Having disposed of the doctrine applicable in this case, we will
now determine whether respondent was able to establish the
factual circumstances showing that her income is exempt from
Philippine income taxation.
The decisive factual consideration here is not the capacity in
which respondent received the income, but the sufficiency of
evidence to prove that the services she rendered were performed
in Germany. Though not raised as an issue, the Court is clothed
with authority to address the same because the resolution thereof
will settle the vital question posed in this controversy.23
The settled rule is that tax refunds are in the nature of tax
exemptions and are to be construed strictissimi juris against the
taxpayer.24 To those therefore, who claim a refund rest the
burden of proving that the transaction subjected to tax is actually
exempt from taxation.
In the instant case, the appointment letter of respondent as agent
of JUBANITEX stipulated that the activity or the service which
would entitle her to 10% commission income, are "sales actually
concluded and collected through [her] efforts."25 What she
presented as evidence to prove that she performed income
producing activities abroad, were copies of documents she
allegedly faxed to JUBANITEX and bearing instructions as to the
sizes of, or designs and fabrics to be used in the finished products
as well as samples of sales orders purportedly relayed to her by
clients. However, these documents do not show whether the
instructions or orders faxed ripened into concluded or collected
sales in Germany. At the very least, these pieces of evidence show
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
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
reported monthly sales purported to have transpired in Germany.
The paucity of respondents evidence was even noted by Atty.
Minerva Pacheco, petitioners counsel at the hearing before the
Court of Tax Appeals. She pointed out that respondent presented
no contracts or orders signed by the customers in Germany to
prove the sale transactions therein.26 Likewise, in her Comment to
the Formal Offer of respondents evidence, she objected to the
admission of the faxed documents bearing instruction/orders
marked as Exhibits "R,"27 "V," "W", and "X,"28 for being self
serving.29 The concern raised by petitioners counsel as to the
absence of substantial evidence that would constitute proof that
the sale transactions for which respondent was paid commission
actually transpired outside the Philippines, is relevant because
respondent stayed in the Philippines for 89 days in 1995. Except
for the months of July and September 1995, respondent was in
the Philippines in the months of March, May, June, and August
1995,30 the same months when she earned commission income
for services allegedly performed abroad. Furthermore, respondent
presented no evidence to prove that JUBANITEX does not sell
embroidered products in the Philippines and that her
appointment as commission agent is exclusively for Germany and
other European markets.
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
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
May to September of 1995. She thus failed to discharge the
burden of proving that her income was from sources outside the
Philippines and exempt from the application of our income tax
law. Hence, the claim for tax refund should be denied.
The Court notes that in Commissioner of Internal Revenue v. Baier-
Nickel,32 a previous case for refund of income withheld from
respondents remunerations for services rendered abroad, the
Court in a Minute Resolution dated February 17, 2003,33 sustained
the ruling of the Court of Appeals that respondent is entitled to
refund the sum withheld from her sales commission income for
the year 1994. This ruling has no bearing in the instant
controversy because the subject matter thereof is the income of
respondent for the year 1994 while, the instant case deals with
her income in 1995. Otherwise, stated, res judicata has no
application here. Its elements are: (1) there must be a final
judgment or order; (2) the court that rendered the judgment must
have jurisdiction over the subject matter and the parties; (3) it
must be a judgment on the merits; (4) there must be between the
two cases identity of parties, of subject matter, and of causes of
action. 34 The instant case, however, did not satisfy the fourth
requisite because there is no identity as to the subject matter of
the previous and present case of respondent which deals with
income earned and activities performed for different taxable
years.
WHEREFORE, the petition is GRANTED and the January 18, 2002
Decision and May 8, 2002 Resolution of the Court of Appeals in
CA-G.R. SP No. 59794, are REVERSED and SET ASIDE. The June 28,
2000 Decision of the Court of Tax Appeals in C.T.A. Case No. 5633,
which denied respondents claim for refund of income tax paid for
the year 1995 is REINSTATED.
GR No. 153793 | August 29, 2006 | J. Ynares-Santiago
Facts:
CIR appeals the CA decision, which granted the tax refund of
respondent and reversed that of the CTA. Juliane Baier-Nickel, a
non-resident German, is the president of Jubanitex, a domestic
corporation engaged in the manufacturing, marketing and selling
of embroidered textile products. Through Jubanitexs general
manager, Marina Guzman, the company appointed respondent as
commission agent with 10% sales commission on all sales actually
concluded and collected through her efforts.
In 1995, respondent received P1, 707, 772. 64 as sales commission
from w/c Jubanitex deducted the 10% withholding tax of P170,
777.26 and remitted to BIR. Respondent filed her income tax
return but then claimed a refund from BIR for the P170K, alleging
this was mistakenly withheld by Jubanitex and that her sales
commission income was compensation for services rendered in
Germany not Philippines and thus not taxable here.
She filed a petition for review with CTA for alleged non-action by
BIR. CTA denied her claim but decision was reversed by CA on
appeal, holding that the commission was received as sales agent
not as President and that the source of income arose from
marketing activities in Germany.
Issue: W/N respondent is entitled to refund
Held:
No. Pursuant to Sec 25 of NIRC, non-resident aliens, whether or
not engaged in trade or business, are subject to the Philippine
income taxation on their income received from all sources in the
Philippines. In determining the meaning of source, the Court
resorted to origin of Act 2833 (the first Philippine income tax law),
the US Revenue Law of 1916, as amended in 1917.
US SC has said that income may be derived from three possible
sources only: (1) capital and/or (2) labor; and/or (3) the sale of
capital assets. 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 be from sources within the United States. If the
income is from capital, the place where the capital is employed
should be decisive; if it is employed in this country, the income
should be from sources within the United States. If the income
is from the sale of capital assets, the place where the sale is made
should be likewise decisive. Source is not a place, it is an activity
or property. As such, it has a situs or location, and if that situs or
location is within the United States the resulting income is taxable
to nonresident aliens and foreign corporations.
The source of an income is the property, activity or service that
produced the income. For the source of income to be considered
as coming from the Philippines, it is sufficient that the income is
derived from activity within the Philippines.
The settled rule is that tax refunds are in the nature of tax
exemptions and are to be construed strictissimi juris against the
taxpayer. To those therefore, who claim a refund rest the burden
of proving that the transaction subjected to tax is actually exempt
from taxation.
In the instant case, respondent failed to give substantial evidence
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.