HOWDEN v. CIR

 

ALEXANDER HOWDEN & CO., LTD., H. G. CHESTER & OTHERS, ET AL., petitioners, vs. THE COLLECTOR (NOW COMMISSIONER) OF INTERNAL REVENUE, respondent.

[G.R. No. L-19392. April 14, 1965.]

 

FACTS:

The Commonwealth Insurance Co., a domestic corporation, entered into reinsurance contracts with 32 British insurance companies not engaged in trade or business in the Philippines, whereby the former agreed to cede to them a portion of the premiums on insurance on fire, marine and other risks it has underwritten in the Philippines.

Alexander Howden & Co., Ltd. (Alexander), also a British corporation not engaged in business in this country, represented the aforesaid British insurance companies.

Pursuant to the aforesaid contracts, Commonwealth Insurance Co. remitted P798,297.47 to Alexander Howden & Co., Ltd., as reinsurance premiums. In behalf of Alexander, Commonwealth Insurance Co. filed in April 1952 an income tax return declaring the sum of P798,297.47, with accrued interest thereon in the amount of P4,985.77, as Alexander 's gross income for calendar year 1951. It also paid the BIR P66,112.00 as income tax thereon.

Within the two-year period provided for by law, Alexander, filed with the BIR a claim for refund of the P66,112.00, later reduced to P65,115.00.

Subsequently, Alexander instituted an action in the CFI Manila for the recovery of the aforesaid amount claimed. Pursuant to Section 22 of Republic Act 1125 the case was certified to the Court of Tax Appeals which denied the claim.

 

ISSUES:

(1)  W/N the subject reinsurance premiums are subject to income tax or not?

 

(2)  If subject thereto, may or may not the income tax on reinsurance premiums be withheld pursuant to Sections 53 and 54 of the National Internal Revenue Code?

 

RULING:

1. YES, the subject reinsurance premiums are subject to income tax.

Section 24 of the NIRC subjects to tax a non-resident foreign corporation's income from sources within the Philippines. The first issue therefore hinges on whether or not the reinsurance premiums in question came from sources within the Philippines.

APPELLANTS argue that the reinsurance premiums came from sources outside the Philippines, for these reasons:

(1)  The contracts of reinsurance, out of which the reinsurance premiums were earned, were prepared and signed abroad, so that their situs lies outside the Philippines.

(2)  The reinsurers, not being engaged in business in the Philippines, received the reinsurance premiums as income from their business conducted in England and, as such, taxable in England.

(3)  Section 37 of the Tax Code, enumerating what are income from sources within the Philippines, does not include reinsurance premiums.

 

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.

(1)  In the first place, the reinsured, the liabilities insured and the risks originally underwritten by Commonwealth Insurance Co., upon which the reinsurance premiums and indemnity were based, were all situated in the Philippines.

(2)  Secondly, the reinsurance contracts were perfected in the Philippines, for Commonwealth Insurance Co. signed them last in Manila.

(3)  And, thirdly, the parties to the reinsurance contracts in question evidently intended Philippine law to govern. Article 11 thereof provided for arbitration in Manila, according to the laws of the Philippines, of any dispute arising between the parties in regard to the interpretation of said contracts or rights in respect of any transaction involved. Furthermore, the contracts provided for the use of Philippine currency as the medium of exchange and for the payment of Philippine taxes.

Appellants should not confuse activity that creates income with business in the course of which an income is realized. An activity may consist of a single act; while business implies continuity of transactions. An income may be earned by a corporation in the Philippines although such corporation conducts all its business abroad. Precisely, Section 24 of the Tax Code does not require a foreign corporation to be engaged in business in the Philippines, in order for its income from sources within the Philippines to be taxable. It subjects foreign corporations not doing business in the Philippines to tax for income from sources within the Philippines. If by source of income is meant the business of the taxpayer, foreign corporations not engaged in business in the Philippines would be exempt from taxation on their income from sources within the Philippines.

"Income" refers to the flow of wealth. Such flow, in the instant case, proceeded from the Philippines. Such income enjoyed the protection of the Philippine government. As wealth flowing from within the taxing jurisdiction of the Philippines and in consideration for protection accorded it by the Philippines, said income should properly share the burden of maintaining the government.

Section 37 of the NIRC is not an all-inclusive enumeration. It states that "the following items of gross income shall be treated as gross income from sources within the Philippines". It does not state or imply that an income not listed therein is necessarily from sources outside the Philippines.

As to APPELLANTS, contention that reinsurance premiums constitute "gross receipts" instead of "gross income", not subject to income tax.

“Gross receipts" of amounts that do not constitute return of capital, such as reinsurance premiums, are part of the gross income of a taxpayer. At any rate, the tax actually collected in this case was computed not on the basis of gross premium receipts but on the net premium income that is, after deducting general expenses, payment of policies and taxes.

 

2. YES, the income tax on reinsurance premiums may be withheld pursuant to Sections 53 and 54 of the National Internal Revenue Code.

Subsection (b) of Section 53 subjects to withholding tax the following: interest, dividends, rents, salaries, wages, premiums, annuities, compensation, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income of any non-resident alien individual not engaged in trade or business within the Philippines and not having any office or place of business therein.

Section 54, by reference, applies this provision to foreign corporations not engaged in trade or business in the Philippines.

APPELLANTS maintain that reinsurance premiums are not "premiums" at all as contemplated by Subsection (b) of Section 53; that they are not within the scope of "other fixed or determinable annual or periodical gains, profits, and income"; that, therefore, they are not items of income subject to withholding tax.

We disagree with the foregoing proposition. Since Section 53 subjects to withholding tax various specified income, among them, "premiums", the generic connotation of each and every word or phrase composing the enumeration in Subsection (b) thereof is income. Perforce, the word "premiums", which is neither qualified nor defined by the law itself, should mean income and should include all premiums constituting income, whether they be insurance or reinsurance premiums.

 Assuming that reinsurance premiums are not within the word "premiums" in Section 53, still they may be classified as determinable and periodical income under the same provision of law. Section 199 of the Income Tax Regulations defines fixed, determinable, annual and periodical income:

"Income is fixed when it is to be paid in amounts definitely pre-determined. On the other hand, it is determinable whenever there is a basis of calculation by which the amount to be paid may be ascertained.

"The income need not be paid annually if it is paid periodically; that is to say, from time to time, whether or not at regular intervals. That the length of time during which the payments are to be made may be increased or diminished in accordance with some one's will or with the happening of an event does not make the payments any the less determinable or periodical. . . ."

 

Reinsurance premiums, therefore, are determinable and periodical income; determinable, because they can be calculated accurately on the basis of the reinsurance contracts; periodical, inasmuch as they were earned and remitted from time to time.

 

WHEREFORE, the judgment appealed from is hereby affirmed with costs against appellants. It is so ordered.