Phil. Guaranty v CIR, 13 SCRA 775

THE PHILIPPINE GUARANTY CO., INC., PETITIONER, VS. THE COMMISSIONER OF INTERNAL REVENUE AND THE COURT OF TAX APPEALS, RESPONDENTS;

G.R. No. L-22074, April 30, 1965; REYES, J.B.L., J

Facts:

The Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance contracts with foreign insurance companies not doing business in the Philippines, thereby ceding to the foreign reinsurers a portion of the premiums on insurances it has originally underwritten in the Philippines.  Philippine Guaranty Co., Inc. ceded to the foreign reinsurers the premiums for 1953 and 1954. Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income when it filed its income tax returns for 1953 and 1951. Furthermore, it did not withhold or pay tax on them. Consequently,  the Commissioner of Internal Revenue assessed Philippine Guaranty Co., Inc. against withholding tax on the ceded reinsurance premiums. Philippine Guaranty Co., Inc. protested the assessment on the ground that the premiums are not subject to tax for the premiums did not constitute income from sources within the Philippines because the foreign reinsurers did not engage in business in the Philippines,and CIR's previous rulings did not require insurance companies to withhold income tax due from foreign companies.

ISSUE: Are insurance companies required to withhold tax on reinsurance premiums ceded to foreign insurance companies?

Ruling:

Yes. The reinsurance contracts however show that the transactions or activities that constituted the undertaking to reinsure Philippine Guaranty Co., Inc. against losses arising from the original insurances in the Philippines were performed in the Philippines. The reinsurance premiums were income created from the undertaking of the foreign reinsurance companies to reinsure Philippine Guaranty Co., Inc. against liability for loss under original insurances. Such undertaking, as explained above, took place in the Philippines. These insurance premiums therefore came from sources within the Philippines and, hence, are subject to corporate income tax.

The power to lax is an attribute of sovereignty. It is a power emanating from necessity. It is a necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to resist an aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements designed for the enjoyment of the citizenry and those which come within the State's territory, and facilities and protection which a government is supposed to provide. Considering that the reinsurance premiums in question were afforded protection by the government and the recipient foreign reinsurers exercised rights and privileges guaranteed by our laws, such reinsurance premiums and reinsurers should share the burden of maintaining the state.