September 1965 - Philippine Supreme Court Decisions/Resolutions
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G.R. No. L-22074 September 6, 1965 - PHIL. GUARANTY CO., INC. v. CIR:
EN BANC
[G.R. No. L-22074. September 6, 1965.]
THE PHILIPPINE GUARANTY CO., INC., Petitioner, v. THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, ET AL., Respondents.
SYLLABUS
1. TAXATION; INCOME TAX; REINSURANCE PREMIUMS CEDED TO FOREIGN REINSURERS SUBJECT TO WITHHOLDING TAX. — Reinsurance premiums on local risks ceded by domestic insurers to foreign reinsurers not doing business in the Philippines are subject to withholding tax.
2. ID.; ID.; REINSURANCE PREMIUMS CEDED TO FOREIGN REINSURERS CONSIDERED INCOME FROM PHILIPPINE SOURCES. — Where the reinsurance contracts show that the activities that constituted the undertaking to reinsure a domestic insurer against losses arising from the original insurances in the Philippines were performed in the Philippines, the reinsurance premiums are considered as coming from sources within the Philippines and are subject to Philippine income tax.
3. ID.; ID.; ID.; PLACE OF ACTIVITY CREATING INCOME CONTROLLING. — Section 24 of the Tax Code does not require a foreign corporation to engage in business in the Philippines in subjecting its income to tax. It suffices that the activity creating the income is performed or done in the Philippines. What is controlling, therefore, is not the place of business but the place of activity that created an income.
4. ID.; ID.; SECTION 37 OF TAX CODE NOT ALL INCLUSIVE ENUMERATION. — Section 37 of the Tax Code is not an all-inclusive enumeration, for it merely directs that the kinds of income mentioned therein should be treated as income from sources within the Philippines but it does not require that other kinds of income should not be considered likewise.
5. ID.; ID.; NO ESTOPPEL ON GOVERNMENT FOR MISTAKE OF ITS AGENTS. — The defense of reliance in good faith on rulings of the Commissioner of Internal Revenue requiring no withholding of the tax due on reinsurance premiums may free the taxpayer from the payment of surcharges or penalties imposed for failure to pay the corresponding withholding tax, but it certainly would not exculpate it from liability to pay such withholding tax. The Government is not estopped from collecting taxes by the mistakes or errors of its agents.
6. ID.; ID.; WITHHOLDING TAX ON REINSURANCE PREMIUMS COMPUTED ON TOTAL AMOUNT CEDED. — The withholding tax on reinsurance premiums should be computed on the total amount ceded instead of on the amount actually remitted to foreign reinsurers. Sections 53 and 54 of the Tax Code allow no deduction from the income therein enumerated in determining the amount to be withheld. Accordingly, in computing the withholding tax due on the reinsurance premiums no deduction shall be recognized.
2. ID.; ID.; REINSURANCE PREMIUMS CEDED TO FOREIGN REINSURERS CONSIDERED INCOME FROM PHILIPPINE SOURCES. — Where the reinsurance contracts show that the activities that constituted the undertaking to reinsure a domestic insurer against losses arising from the original insurances in the Philippines were performed in the Philippines, the reinsurance premiums are considered as coming from sources within the Philippines and are subject to Philippine income tax.
3. ID.; ID.; ID.; PLACE OF ACTIVITY CREATING INCOME CONTROLLING. — Section 24 of the Tax Code does not require a foreign corporation to engage in business in the Philippines in subjecting its income to tax. It suffices that the activity creating the income is performed or done in the Philippines. What is controlling, therefore, is not the place of business but the place of activity that created an income.
4. ID.; ID.; SECTION 37 OF TAX CODE NOT ALL INCLUSIVE ENUMERATION. — Section 37 of the Tax Code is not an all-inclusive enumeration, for it merely directs that the kinds of income mentioned therein should be treated as income from sources within the Philippines but it does not require that other kinds of income should not be considered likewise.
5. ID.; ID.; NO ESTOPPEL ON GOVERNMENT FOR MISTAKE OF ITS AGENTS. — The defense of reliance in good faith on rulings of the Commissioner of Internal Revenue requiring no withholding of the tax due on reinsurance premiums may free the taxpayer from the payment of surcharges or penalties imposed for failure to pay the corresponding withholding tax, but it certainly would not exculpate it from liability to pay such withholding tax. The Government is not estopped from collecting taxes by the mistakes or errors of its agents.
6. ID.; ID.; WITHHOLDING TAX ON REINSURANCE PREMIUMS COMPUTED ON TOTAL AMOUNT CEDED. — The withholding tax on reinsurance premiums should be computed on the total amount ceded instead of on the amount actually remitted to foreign reinsurers. Sections 53 and 54 of the Tax Code allow no deduction from the income therein enumerated in determining the amount to be withheld. Accordingly, in computing the withholding tax due on the reinsurance premiums no deduction shall be recognized.
R E S O L U T I O N *
BENGZON, J. P., J.:
The Philippine Guaranty Company, Inc. moves for the reconsideration of our decision, promulgated on April 30, 1965, holding it liable for the payment of income tax which it should have withheld and remitted to the Bureau of Internal Revenue in the total sum of P375,345.00.
The grounds raised in the instant motion all spring from movant’s view that the Court of Tax Appeals as well as this Court found it "innocent of the charges of violating, wilfully or negligently, sub-section (c) of Section 53 and Section 54 of the National Internal Revenue Code." Hence, it cannot subsequently be held liable for the assessment of P375,345.00 based on said sections.
The premise of movant’s reasoning cannot be accepted. The Court of Tax Appeals and this Court did not find that it did not violate Section 53(c) and 54 of the Tax Code. On the contrary, movant was found to have violated Section 53(c) by failing to file the necessary withholding tax return and to pay the tax due. Still, finding that movant’s violation was due to a reasonable cause — namely, reliance on the advice of its auditors and opinion of the Commissioner of Internal Revenue — no surcharge to the tax was imposed. Section 72 of the Tax Code provides:jgc:chanrobles.com.ph
"SEC. 72. Surcharges for failure to render returns and for rendering false and fraudulent returns. — The Commissioner of Internal Revenue shall assess all income taxes. In case of willful neglect to file the return or list within the time prescribed by law, or in case a false or fraudulent return or list is willfully made, the Commissioner of Internal Revenue shall add to the tax or to the deficiency tax, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud, a surcharge of fifty per centum of the amount of such tax or deficiency tax. In case of any failure to make and file a return or list within the time prescribed by law or by the Commissioner or other internal revenue officer, not due to willful neglect, the Commissioner of Internal Revenue shall add to the tax twenty-five per centum of its amount, except that, when a return is voluntarily and without notice from the Commissioner or other officer filed after such time, and it is shown that the failure to file it was due to a reasonable cause, no such addition shall be made to the tax. . . ."cralaw virtua1aw library
It will be noted that the first half of the above-quoted section covers failure to file a return, willingly and/or due to negligence, in which case the surcharge is 50%. In the second part of the law it covers failure to make and file a return "not due to willful neglect", in which case only 25% surcharge should be added. As a further concession to the taxpayer the above-quoted section provides that if "it is shown that the failure to file it was due to a reasonable cause, no such addition shall be made to the tax."cralaw virtua1aw library
It would, therefore, be incorrect for movant to state that it was found "innocent of the charges of violating, willfully or negligently, sub-section (c) of Section 53 and section 54." For, precisely, the mere fact that it was exempted from paying the penalty necessarily implies violation of Section 53(c). Violating Section 53(c) is one thing; imposing the penalty for such violation under Section 72 ** is another. If it is found that the failure to file is due to a reasonable cause, then exemption from surcharge sets in but never exemption from payment of the tax due.
Since movant failed to pay the tax due, in the sum of P375,345.00, this Court ordered it to pay the same. Simply because movant was relieved from paying the surcharge for failure to file the necessary returns, it now wants us to absolve it from paying even the tax. This, we cannot do. The non-imposition of the 25% surcharge does not carry with it remission of the tax.
Movant argues that it could not be expected to withhold the tax, for as early as August 18, 1953 the Board of Tax Appeals held in the case of Franklin Baker 1 that the reinsurance premiums in question were not subject to withholding. On top of that, movant maintains, the Commissioner of Internal Revenue, in reply to the query of its accountants and auditors, issued on September 5, 1953 an opinion subscribing to the ruling in the Franklin Baker case. As already explained in our decision a mistake committed by Government agents is not binding on the Government.
Inasmuch as movant insists on this point in its motion for reconsideration, we shall further elaborate on the same. Section 200 of the Income Tax Regulations expressly grants protection to him only if and when he follows strictly what has been provided therein.
Section 53(c) makes the withholding agent personally liable for the income tax withheld under Section 54. It states:jgc:chanrobles.com.ph
"SEC. 53(c). Return and payment. — Every person required to deduct and withhold any tax under this section shall make return thereof, in duplicate, on or before the fifteenth day of April of each year, and, on or before the time fixed by law for the payment of the tax, shall pay the amount withheld to the officer of the Government of the Philippines authorized to receive it. Every such person is made personally liable for such tax, and is indemnified against the claims and demands of any person for the amount of any payments made in accordance with the provisions of this section."cralaw virtua1aw library
The law sets no condition for the personal liability of the withholding agent to attach. The reason is to compel the withholding agent to withhold the tax under all circumstances. In effect, the responsibility for the collection of the tax as well as the payment thereof is concentrated upon the person over whom the Government has jurisdiction. Thus, the withholding agent is constituted the agent of both the Government and the taxpayer. With respect to the collection and/or withholding of the tax, he is the Government’s agent. In regard to the filing of the necessary income tax return and the payment of the tax to the Government, he is the agent of the taxpayer. The withholding agent, therefore, is no ordinary government agent especially because under Section 53(c) he is held personally liable for the tax he is duty bound to withhold; whereas, the Commissioner of Internal Revenue and his deputies are not made liable by law.
Movant then further contends that as agent of the Government it was released from liability for the tax after it was advised by the Commissioner of Internal Revenue that the reinsurance premiums involved were not subject to withholding. It relies on the provisions of the second paragraph of Section 200 of the Income Tax Regulation, which states:jgc:chanrobles.com.ph
"In case of doubt, a withholding agent may always protect himself by withholding the tax due, and promptly causing a query to be addressed to the Commissioner of Internal Revenue for the determination of whether or not the income paid to an individual is not subject to withholding. In case the Commissioner of Internal Revenue decides that the income paid to an individual is not subject to withholding. The withholding agent may thereupon remit the amount of tax withheld."cralaw virtua1aw library
The section above-quoted relaxes the application of the stringent provisions of Section 53 of the Tax Code. Accordingly, it grants exemption from tax liability, and in so doing, it lays down steps to be taken by the withholding agent, namely, (1) that he withholds the tax due, (2) that he promptly addresses a query to the Commissioner of Internal Revenue for determination whether or not the income paid to an individual is subject to withholding; and (3) that the Commissioner of Internal Revenue decides that such income is not subject to withholding. Strict observance of said steps is required of a withholding agent before he could be released from liability. Generally, the law frowns upon exemption from taxation, hence, an exempting provision should be construed strictissimi juris. 2
It may be illuminating to mention here however that the Income Tax Regulations was issued by the Secretary of Finance upon his authority, "to promulgate all needful rules and regulations of the effective enforcement" of the provisions of the Tax Code. 3 The mission therefore of Section 200, quoted above, is to implement Section 53 of the Tax Code for no other purpose than to enforce its provisions effectively. It should also be noted, that Section 53 provides for no exemption from the duty to withhold except in the cases of tax-free covenant bonds and dividends.
The facts in this case do not support a finding that movant complied with Section 200. For, it has not been shown that it withheld the amount of tax due before it inquired from the Bureau of Internal Revenue as to the taxability of the reinsurance premiums involved. As a matter of fact, the Court of Tax Appeals found that "upon advice of its accountants and auditors, . . . petitioner did not collect and remit to the Commissioner of Internal Revenue the withholding tax." This finding of fact of the lower court, unchallenged as it is, may not be disturbed. 4
The requirement in Section 200 that the withholding agent should first withhold the tax before addressing a query to the Commissioner of Internal Revenue is not without a meaning for it is in keeping with the general operation of our tax laws: payment precedes defense. Prior to the creation of the Court of Tax Appeals, the remedy of a taxpayer was to pay an internal revenue tax first and file a claim for refund later. 5 This remedy has not been abrogated, for the law creating the Court of Tax Appeals merely gives to the taxpayer an additional remedy. With respect to customs duties the consignee or importer concerned is required to pay them under protest, before he is allowed to question legality of the imposition. 6 Likewise, validity of a realty tax cannot be assailed until after the taxpayer has paid the tax under protest. 7 The legislature, in adopting such measures in our tax laws, only wanted to be assured that taxes are paid and collected without delay. For taxes are the lifeblood of government. Also, such measures tend to prevent collusion between the taxpayer and the tax collector. By questioning a tax’s legality without first paying it, a taxpayer, in collusion with Bureau of Internal Revenue. officials, can unduly delay, if not totally evade, the payment of such tax.
Of course, in this case there was absolutely no such collusion. Precisely, the Philippine Guaranty Company, Inc. was absolved from the payment of the 25% surcharge for non-filing of income tax returns inasmuch as the Tax Court as well as this Court believes that its omission was due to a reasonable cause.
WHEREFORE, the motion for reconsideration is denied. So ordered.
Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Dizon, Regala, Makalintal and Zaldivar, JJ., concur.
The grounds raised in the instant motion all spring from movant’s view that the Court of Tax Appeals as well as this Court found it "innocent of the charges of violating, wilfully or negligently, sub-section (c) of Section 53 and Section 54 of the National Internal Revenue Code." Hence, it cannot subsequently be held liable for the assessment of P375,345.00 based on said sections.
The premise of movant’s reasoning cannot be accepted. The Court of Tax Appeals and this Court did not find that it did not violate Section 53(c) and 54 of the Tax Code. On the contrary, movant was found to have violated Section 53(c) by failing to file the necessary withholding tax return and to pay the tax due. Still, finding that movant’s violation was due to a reasonable cause — namely, reliance on the advice of its auditors and opinion of the Commissioner of Internal Revenue — no surcharge to the tax was imposed. Section 72 of the Tax Code provides:jgc:chanrobles.com.ph
"SEC. 72. Surcharges for failure to render returns and for rendering false and fraudulent returns. — The Commissioner of Internal Revenue shall assess all income taxes. In case of willful neglect to file the return or list within the time prescribed by law, or in case a false or fraudulent return or list is willfully made, the Commissioner of Internal Revenue shall add to the tax or to the deficiency tax, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud, a surcharge of fifty per centum of the amount of such tax or deficiency tax. In case of any failure to make and file a return or list within the time prescribed by law or by the Commissioner or other internal revenue officer, not due to willful neglect, the Commissioner of Internal Revenue shall add to the tax twenty-five per centum of its amount, except that, when a return is voluntarily and without notice from the Commissioner or other officer filed after such time, and it is shown that the failure to file it was due to a reasonable cause, no such addition shall be made to the tax. . . ."cralaw virtua1aw library
It will be noted that the first half of the above-quoted section covers failure to file a return, willingly and/or due to negligence, in which case the surcharge is 50%. In the second part of the law it covers failure to make and file a return "not due to willful neglect", in which case only 25% surcharge should be added. As a further concession to the taxpayer the above-quoted section provides that if "it is shown that the failure to file it was due to a reasonable cause, no such addition shall be made to the tax."cralaw virtua1aw library
It would, therefore, be incorrect for movant to state that it was found "innocent of the charges of violating, willfully or negligently, sub-section (c) of Section 53 and section 54." For, precisely, the mere fact that it was exempted from paying the penalty necessarily implies violation of Section 53(c). Violating Section 53(c) is one thing; imposing the penalty for such violation under Section 72 ** is another. If it is found that the failure to file is due to a reasonable cause, then exemption from surcharge sets in but never exemption from payment of the tax due.
Since movant failed to pay the tax due, in the sum of P375,345.00, this Court ordered it to pay the same. Simply because movant was relieved from paying the surcharge for failure to file the necessary returns, it now wants us to absolve it from paying even the tax. This, we cannot do. The non-imposition of the 25% surcharge does not carry with it remission of the tax.
Movant argues that it could not be expected to withhold the tax, for as early as August 18, 1953 the Board of Tax Appeals held in the case of Franklin Baker 1 that the reinsurance premiums in question were not subject to withholding. On top of that, movant maintains, the Commissioner of Internal Revenue, in reply to the query of its accountants and auditors, issued on September 5, 1953 an opinion subscribing to the ruling in the Franklin Baker case. As already explained in our decision a mistake committed by Government agents is not binding on the Government.
Inasmuch as movant insists on this point in its motion for reconsideration, we shall further elaborate on the same. Section 200 of the Income Tax Regulations expressly grants protection to him only if and when he follows strictly what has been provided therein.
Section 53(c) makes the withholding agent personally liable for the income tax withheld under Section 54. It states:jgc:chanrobles.com.ph
"SEC. 53(c). Return and payment. — Every person required to deduct and withhold any tax under this section shall make return thereof, in duplicate, on or before the fifteenth day of April of each year, and, on or before the time fixed by law for the payment of the tax, shall pay the amount withheld to the officer of the Government of the Philippines authorized to receive it. Every such person is made personally liable for such tax, and is indemnified against the claims and demands of any person for the amount of any payments made in accordance with the provisions of this section."cralaw virtua1aw library
The law sets no condition for the personal liability of the withholding agent to attach. The reason is to compel the withholding agent to withhold the tax under all circumstances. In effect, the responsibility for the collection of the tax as well as the payment thereof is concentrated upon the person over whom the Government has jurisdiction. Thus, the withholding agent is constituted the agent of both the Government and the taxpayer. With respect to the collection and/or withholding of the tax, he is the Government’s agent. In regard to the filing of the necessary income tax return and the payment of the tax to the Government, he is the agent of the taxpayer. The withholding agent, therefore, is no ordinary government agent especially because under Section 53(c) he is held personally liable for the tax he is duty bound to withhold; whereas, the Commissioner of Internal Revenue and his deputies are not made liable by law.
Movant then further contends that as agent of the Government it was released from liability for the tax after it was advised by the Commissioner of Internal Revenue that the reinsurance premiums involved were not subject to withholding. It relies on the provisions of the second paragraph of Section 200 of the Income Tax Regulation, which states:jgc:chanrobles.com.ph
"In case of doubt, a withholding agent may always protect himself by withholding the tax due, and promptly causing a query to be addressed to the Commissioner of Internal Revenue for the determination of whether or not the income paid to an individual is not subject to withholding. In case the Commissioner of Internal Revenue decides that the income paid to an individual is not subject to withholding. The withholding agent may thereupon remit the amount of tax withheld."cralaw virtua1aw library
The section above-quoted relaxes the application of the stringent provisions of Section 53 of the Tax Code. Accordingly, it grants exemption from tax liability, and in so doing, it lays down steps to be taken by the withholding agent, namely, (1) that he withholds the tax due, (2) that he promptly addresses a query to the Commissioner of Internal Revenue for determination whether or not the income paid to an individual is subject to withholding; and (3) that the Commissioner of Internal Revenue decides that such income is not subject to withholding. Strict observance of said steps is required of a withholding agent before he could be released from liability. Generally, the law frowns upon exemption from taxation, hence, an exempting provision should be construed strictissimi juris. 2
It may be illuminating to mention here however that the Income Tax Regulations was issued by the Secretary of Finance upon his authority, "to promulgate all needful rules and regulations of the effective enforcement" of the provisions of the Tax Code. 3 The mission therefore of Section 200, quoted above, is to implement Section 53 of the Tax Code for no other purpose than to enforce its provisions effectively. It should also be noted, that Section 53 provides for no exemption from the duty to withhold except in the cases of tax-free covenant bonds and dividends.
The facts in this case do not support a finding that movant complied with Section 200. For, it has not been shown that it withheld the amount of tax due before it inquired from the Bureau of Internal Revenue as to the taxability of the reinsurance premiums involved. As a matter of fact, the Court of Tax Appeals found that "upon advice of its accountants and auditors, . . . petitioner did not collect and remit to the Commissioner of Internal Revenue the withholding tax." This finding of fact of the lower court, unchallenged as it is, may not be disturbed. 4
The requirement in Section 200 that the withholding agent should first withhold the tax before addressing a query to the Commissioner of Internal Revenue is not without a meaning for it is in keeping with the general operation of our tax laws: payment precedes defense. Prior to the creation of the Court of Tax Appeals, the remedy of a taxpayer was to pay an internal revenue tax first and file a claim for refund later. 5 This remedy has not been abrogated, for the law creating the Court of Tax Appeals merely gives to the taxpayer an additional remedy. With respect to customs duties the consignee or importer concerned is required to pay them under protest, before he is allowed to question legality of the imposition. 6 Likewise, validity of a realty tax cannot be assailed until after the taxpayer has paid the tax under protest. 7 The legislature, in adopting such measures in our tax laws, only wanted to be assured that taxes are paid and collected without delay. For taxes are the lifeblood of government. Also, such measures tend to prevent collusion between the taxpayer and the tax collector. By questioning a tax’s legality without first paying it, a taxpayer, in collusion with Bureau of Internal Revenue. officials, can unduly delay, if not totally evade, the payment of such tax.
Of course, in this case there was absolutely no such collusion. Precisely, the Philippine Guaranty Company, Inc. was absolved from the payment of the 25% surcharge for non-filing of income tax returns inasmuch as the Tax Court as well as this Court believes that its omission was due to a reasonable cause.
WHEREFORE, the motion for reconsideration is denied. So ordered.
Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Dizon, Regala, Makalintal and Zaldivar, JJ., concur.
Endnotes:
* Editor’s Note : See main decision in 13 SCRA 775.
** Not Section 265 of the Tax Code as claimed by movant.
1. Umali, Roman N., Decisions of the Board of Tax Appeals, Vol. 2, pp. 303-307.
2. La Carlota Sugar Central v. Jimenez, L-12436, May 31, 1961. .
3. Section 338, National Internal Revenue Code.
4. This case was appealed upon questions of law.
5. Section 306, Revised Administrative Code.
6. Section 1370, Revised Administrative Code.
7. Section 54, Commonwealth Act 470.
