Cases in Taxation

Somollo, Deanne Mitzi A. LLB 4A COMMISIONER OF INTERNAL REVENUE V. MARUBENI CORPORATION

G.R. No. 137377

Facts: Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter of authority to examine the books of accounts of the Manila branch office of Marubeni Corporation for the fiscal year ending March 1985. In the course of the examination, the CIR found out that there was an under declaration of income from two contracts executed in the Philippines. Then on March 1, 1986, CIR revenue examiners recommended an assessment for deficiency income, branch profit remittance, contractors and commercial brokers taxes. Respondent questioned this assessment in a letter dated June 5, 1986, to the total amount due was added 50% surcharge fro failure to report for tax purposes the taxable revenues and the 25% surcharge was imposed for the failure to pay on time. CIR insists that the two contracts that were consummated in the Philippines were subject to internal revenue taxes. While a petition for review in the CTA was pending a supervening event occurred - the passage of EO 41 which provided for a one time tax amnesty covering unpaid income taxes for the years 1981 to 1985. On the strength of the amnesty which Marubeni availed of they were ordered to cease and desist from collecting the 1985 deficiency taxes from Marubeni. CIR was constrained to challenge the EO and the liability of Marbuneni for taxes. Issue: WON liable to pay the income, branch profit remittance, and contractors taxes assessed by petitioner Held: Between Marubeni and the two Philippine corporations, payments for all materials and equipment under Japanese Yen Portion I were made to Marubeni by NDC and Philphos also in Japan. The NDC, through the Philippine National Bank, established letters of credit in favor of respondent through the Bank of Tokyo. The letters of credit were financed by letters of commitment issued by the OECF with the Bank of Tokyo. The Bank of Tokyo, upon respondents submission of pertinent documents, released the amount in the letters of credit in favor of respondent and credited the amount therein to respondents account within the same bank. While generally, all forms of income in the Philippine are subject to income tax that which occurs outside the Philippines, is not subject to Philippine Income tax. In this case the construction and installation work were completed within the Philippines, the evidence is clear that some pieces of equipment and supplies were completely designed and engineered in Japan. All services for the design, fabrication, engineering and manufacture of the materials and equipment under Japanese Yen Portion I were made and completed in Japan. These services were rendered outside the taxing jurisdiction of the Philippines and are therefore not subject to contractors tax.

COMMISSIONER OF INTERNAL REVENUE V. JAPAN AIR LINES, INC., G.R. NO. 60714 Facts: Japan Air Lines, Inc s a foreign corporation engaged in the business of international air carriage. JAL did not have any planes in the Philippines as it was not given a certificate of public convenience and necessity by the Civil Aeronautics Board. But for purposes of maintaining and promoting the company’s public relations it maintained an office in the Filipinas Hotel, Roxas Boulevard, Manila.. Later on it made PAL as its its general sales agent in the Philippines. As an agent, PAL, among other things, sold for and in behalf of JAL, plane tickets and reservations for cargo spaces which were used by the passengers or customers on the facilities of JAL. Sometime in June of 1972 JAL received a deficiency assessment for the amount of P2,099,687.52. This assessment was question on the ground that JAL is a non resident foreign corporation. Issue: WON the proceeds from the sale of JAL air tickets as sold constitute taxable income in the Philippines. Held: The absence of flight operations to and from the Philippines is not determinative of the source of income or the situs of income taxation.Unquestionably, the passage documentations in these cases were sold in the Philippines and the revenue therefrom was derived from a business activity regularly pursued within the Philippines. When Gross Income is referred to it means all property, activity or service that produced the income. Furthermore, the fact that JAL is a foreign corporation does not excuse it from payment of income taxes as it is not merely a foreign corporation but a resident foreign corporation whose income was subject to income tax pursuant to the National Internal Revenue Code.

Somollo, Deanne Mitzi A. LLB 4A

MARUBENI CORPORATION v. CIR and CTA G.R. NO. 76573 Facts: Marubeni Corporation of Japan has equity investments in AG&P of Manila. For the first quarter of 1981 ending March 31, AG&P declared and paid cash dividends to petitioner in the amount of P849,720 and withheld the corresponding 10% final dividend tax thereon. AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, Japan, net not only of the 10% final dividend tax in the amounts of P764,748 for the first and third quarters of 1981, but also of the withheld 15% profit remittance tax based on the remittable amount after deducting the final withholding tax of 10%. In a letter dated January 29, 1981 Marubeni sought a ruling from the BIR on whether or not the dividends petitioner received from AG&P are effectively connected with its conduct or business in the Philippines as to be considered branch profits subject to the 15% profit remittance tax imposed under Section 24 (b) (2) of the National Internal Revenue Code. Acting Commissioner Ancheta responded that only profits remitted abroad by a branch office to its head office which are effectively connected with its trade or business in the Philippines are subject to the 15% profit remittance tax. To be effectively connected it is not necessary that the income be derived from the actual operation of taxpayer-corporation's trade or business; it is sufficient that the income arises from the business activity in which the corporation is engaged. He furthermore responded that 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 abroad are not considered branch profits for purposes of the 15% profit remittance tax. MARUBENI sought a refund which was denied. Issues: 1. WON the dividends received by a resident foreign corporation liable to tax under the NIRC. 2. WON MARUBENI is entitled to tax refund Held: 1. Under the Tax Code, a resident foreign corporation is one that is "engaged in trade or business" within the Philippines. MARUBENI 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. MARUBENI 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. 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. 2. CIR erred in not granting the tax refund for while they 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. Hence, respondents must grant refund int he amount of P144,452.40. RUFINO TAN V. RAMON DEL ROSARIO G.R. NO. 109289

Somollo, Deanne Mitzi A. LLB 4A Facts: This is a consolidated case involving the constitutionality of RA 7496 or the Simplified Net Income Taxation (SNIT) scheme. Petitioners claim to be taxpayers adversely affected by the continued implementation of the SNIT. In the 1st case, they contend that the House Bill which eventually became RA 7496 is a misnomer or deficient because it was named as “Simplified Net Income Taxation Scheme for the Self-Employed and Professionals Engaged in the Practice of their Profession” while the actual title contains the said words with the additional phrase, “…Amending Section 21 and 29 of the National Internal Revenue Code”. In the 2nd case, they argue that respondents have exceeded their rule-making authority in applying SNIT to general professional partnerships by issuing Revenue Regulation 2-93 to carry out the RA. Also assailed is the constitutionality of the RA for violating uniformity of taxation. Issues: 1. WON a GPP may be taxed 2. WON it violates uniformity of taxation Held: 1. A general professional partnership is not itself an income taxpayer. Income tax is imposed not on the partnership (which is tax exempt), but on the partners themselves in their individual capacity computed on their distributive shares of partnership profits. There is no distinction in income tax liability between a person who practices his profession alone and one who does it through partnership with others in the exercise of a common profession. In the case, SNIT is not envisioned by the Congress to cover corporations or partnerships which are independently subject to the payment of income tax. 2. 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.

COMMISSIONER OF INTERNAL REVENUE V. JULIANE BAIER-NICKEL G.R. NO. 153793 Facts: Juliane Baier-Nickel, a non-resident German citizen, is the President of JUBANITEX, Inc., a domestic corporation engaged in manufacturing, marketing on wholesale only, buying or otherwise acquiring, holding importing and exporting, selling and disposing embroidered textile products. Juliane’s services was engaged as a commission agent with the rate of 10% sales commission on all sales actually concluded and collected through her efforts. Juliane filed an income tax return, later she asked for a refund contending 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. Issue: WON her sales commission are taxable Held: The rule is 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 no merit in the 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.The decisive factual consideration here is not the capacity in which Juliane Baier-Nickel received the income, but the sufficiency of evidence to prove that the services she rendered were performed in Germany to entitle her to tax exemption since she is a non-resident German citizen. Juliane did not prove by substantial evidence, or that relevant evidence that a reasonable mind might accept as adequate to support the conclusion that it was in Germany where she performed

Somollo, Deanne Mitzi A. LLB 4A the income producing service. 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. It must be remembered that the important factor 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.

A SORIANO Y CIA V. COLLECTOR OF INTERNAL REVENUE G.R. No. L-5896 Facts: A Soriano Y Cia (ASYC) is ngaged in the business of selling surplus goods acquired from the Foreign Liquidation Commission pursuant to an agreement with the United States Government whereby petitioner undertook to rehabilitate the Veterans Administration Building. ASYC had yards known as "Sta. Mesa Yard" and "Pieco Yard" located in Manila, where some of the surplus goods were stored, and those which were defective reconditioned. Sometime late in 1947, United Africa Co., Ltd. sent its representative, Hugh Watson Gibson, to the Philippines to look into the availability of tractors for sale in the Philippines. Mr. Tex Taylor, was employed by the foreign company to select, inspect and test the tractors before delivery. Twenty-four of the tractors were found defective and so were brought to ASYC Sta. Mesa Yard for reconditioning. Upon approval of each invoice, the same was presented by ASYC to the Philippine Refining Company, Inc., an affiliate of the foreign buyer, for payment of the purchase price. The Philippine Refining Co. would in turn notify the National City Bank of New York and the Hongkong and Shanghai Banking Corporation, Manila, where the United Africa Co. had dollar deposits, to make payment of ASYC invoices. Issue: WON ASYC is liable for payment of percentage or sales tax on its sale of 57 tractors. Held: Yes, ASYC is liable for payment of percentage sales tax. Under Sec. 186, percentage tax on sales of other articles requires collection once only on every original sale, barter, exchange, and similar transaction intended to transfer ownership of, or title to, the articles not enumerated in sections 184 and 185, a tax equivalent to five per centum of the gross selling price or gross value in money of the articles so sold, bartered, exchanged, or transferred, such tax to be paid by the manufacturer, producer, or importer; xxx. ASYC argues that the goods in question did not acquire a taxable situs in the Philippines because they merely passed Philippine territory in transit and that they were not intended for local use but for exportation to a foreign country. However the tax in dispute is one on transaction (sales) and not a tax on the property sold. The sale of the tractors was consummated in the Philippines, for title was transferred to the foreign buyer at the pier in Manila; hence, the situs of the sale is Philippines and it is taxable in this country. Thus, ASYC is liable for taxes.

EVANGELISTA, et al. v. CIR, GR No. L-9996 Facts: The petitioners seek a review of CTA’s decision holding them liable for income tax, real estate dealer’s tax and residence tax. As stipulated, petitioners borrowed from their father a certain sum for the purpose of buying real properties. Within February 1943 to April 1994, they have bought parcels

Somollo, Deanne Mitzi A. LLB 4A of land from different persons, the management of said properties was charged to their brother Simeon evidenced by a document. These properties were then leased or rented to various tenants. On September 1954, CIR demanded the payment of income tax on corporations, real estate dealer’s fixed tax, and corporation residence tax to which the petitioners seek to be absolved from such payment. Issue: Whether petitioners are subject to the tax on corporations. Held: The Court ruled that with respect to the tax on corporations, the issue hinges on the meaning of the terms “corporation” and “partnership” as used in Section 24 (provides that a tax shall be levied on every corporation no matter how created or organized except general co-partnerships) and 84 (provides that the term corporation includes among others, partnership) of the NIRC. Pursuant to Article 1767, NCC (provides for the concept of partnership), its essential elements are: (a) an agreement to contribute money, property or industry to a common fund; and (b) intent to divide the profits among the contracting parties. The petitioners are considered as a partnership for it is clear from the facts that they contributed money to a common fund for the purpose of monetary gain. They are not co-owners as they insist for the collective actions that they had produced the effect of satisfying the factual requirements of a partnership. Also, petitioners’ argument that their being mere co-owners did not create a separate legal entity was rejected because, according to the Court, the tax in question is one imposed upon "corporations", which, strictly speaking, are distinct and different from "partnerships". When the NIRC includes "partnerships" among the entities subject to the tax on "corporations", said Code must allude, therefore, to organizations which are not necessarily "partnerships", in the technical sense of the term. The qualifying expression found in Section 24 and 84(b) clearly indicates that a joint venture need not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for purposes of the tax on corporations. Accordingly, the lawmaker could not have regarded that personality as a condition essential to the existence of the partnerships therein referred to. For purposes of the tax on corporations, NIRC includes these partnerships - with the exception only of duly registered general co partnerships - within the purview of the term "corporation." It is, therefore, clear that petitioners herein constitute a partnership, insofar as said Code is concerned and are subject to the income tax for corporations. Thus they are liable for taxes.

LORENZO T. OÑA et. al. V. THE COMMISSIONER OF INTERNAL REVENUE G.R. No. L19342 Facts: Julia Buñales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T. Oña and her five children. The project of partition shows that the heirs have undivided one-half (1/2) interest in ten parcels of land with a total assessed value of P87,860.00, six houses with a total assessed value of P17,590.00 and an undetermined amount to be collected from the War Damage Commission. Later, they received from said Commission the amount of P50,000.00, more or less. This amount was not divided among them but was used in the rehabilitation of properties owned by them in common no attempt was made to divide the properties therein listed. Instead, the properties remained under the management of Lorenzo T. Oña who used said properties in business by leasing or selling them and investing the income derived therefrom and the proceeds from the sales thereof in real properties and securities. As a result, petitioners' properties and investments gradually increased from P105,450.00 in 1949 to P480,005.2. The Commissioner of Internal Revenue decided that the petitioners formed an unregistered partnership and were assessed corporate income tax. Issue: WON the petitioners are an unregistered partnership. Held: Yes. It must be noted that instead of actually distributing the estate of the deceased among themselves pursuant to the project of partition approved in 1949, "the properties remained under the management of Lorenzo T. Oña who used said properties in business by leasing or selling them and investing the income derived therefrom and the proceed from the sales thereof in real properties and securities," as a result of which said properties and investments steadily increased. It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit themselves to holding the properties inherited by them. Indeed, it is admitted that during the material years herein involved, some of the said properties were sold at considerable profit, and that with said profit, petitioners engaged, thru Lorenzo T. Oña, in the purchase and sale of corporate securities.

Somollo, Deanne Mitzi A. LLB 4A Hence the income derived from inherited properties may be considered as individual income of the respective heirs only so long as the inheritance or estate is not distributed or, at least, partitioned, but the moment their respective known shares are used as part of the common assets of the heirs to be used in making profits, it is but proper that the income of such shares should be considered as the part of the taxable income of an unregistered partnership.

The Philippine Guaranty Co. Inc. v. CIR and CTA G.R. NO. L-22074 Facts: The Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance contracts, on various dates, with foreign insurance companies not doing business in the Philippines . The reinsurance contracts made the commencement of the reinsurers' liability simultaneous with that of Philippine Guaranty Co., Inc. under the original insurance. Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc earned premiums, premiums which they did not include in its gross income when it file its income tax returns for 1953 and 1954. Furthermore, it did not withhold or pay tax on them. Consequently, per letter dated April 13, 1959, the Commissioner of Internal Revenue assessed against Philippine Guaranty Co., Inc. withholding tax on the ceded reinsurance premiums. As a consequence, the Philippine Guaranty Co. Inc. Was assessed deficiency taxes. They protested the assessment ans maintained that the reinsurance premiums in question did not constitute income from sources within the Philippines because the foreign reinsurers did not engage in business in the Philippines, nor did they have office here. The reinsurance contracts, however, show that the transactions or activities that constituted the undertaking to reinsure Philippine Guaranty Co., Inc. against loses arising from the original insurances in the Philippines were performed in the Philippines. Issue: WON the Philippine Guaranty Co. Inc, was liable for taxes. Held: Yes, they are liable for taxes. Section 24 of the Tax Code subjects foreign corporations to tax on their income from sources within the Philippines. The word "sources" has been interpreted as the activity, property or service giving rise to the income. 1 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 Court furthermore ruled that 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.

N.V. REEDERIJ "AMSTERDAM" and ROYAL INTEROCEAN LINES V. COMMISSIONER OF INTERNAL REVENUE G.R. NO. L-46029 Facts: From March 27 to April 30, 1963, M.V. Amstelmeer and from September 24 to October 28, 1964, MV "Amstelkroon, " both of which are vessels of petitioner N.B. Reederij "AMSTERDAM," called on Philippine ports to load cargoes for foreign destination. The freight fees for these transactions were paid abroad in the amount of US $98,175.00 in 1963 and US $137,193.00 in 1964. In these two instances, petitioner Royal Interocean Lines acted as husbanding agent for a fee or commission on said vessels. No income tax appears to have been paid by petitioner N.V. Reederij

Somollo, Deanne Mitzi A. LLB 4A "AMSTERDAM" on the freight receipts. On the assumption that the said petitioner is a foreign corporation engaged in trade or business in the Philippines, on August 28, 1967, petitioner Royal Interocean Lines filed an income tax return N.V. Reederij "AMSTERDAM" filed a written protest against the abovementioned assessment made by the respondent Commissioner which protest was denied by said respondent in a letter dated March 3, 1969: On March 31, 1969, petitioners filed a petition for review with the respondent Court of Tax Appeals praying for the cancellation of the subject assessment. Issue: WON “AMSTERDAM” should be taxed as a foreign corporation engaged in trade or business in the Philippines Held: A casual business activity in the Philippines by a foreign corporation, as in the present case, does not amount to engaging in trade or business in the Philippines for income tax purposes. It is therefore taxable on income from all sources within the Philippines.NV Reederij “AMSTERDAM” should be taxed as a foreign corporation, not engaged in the trade or business in the Philippines (NRFC). It must be noted that here, petitioner N.V. Reederij "Amsterdam" is a non-resident foreign corporation, organized and existing under the laws of The Netherlands with principal office in Amsterdam and not licensed to do business in the Philippines. It is therefore taxable on income from all sources within the Philippines, as interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical or casual gains, profits and income and capital gains, and the tax is equal to thirty per centum of such amount, under Section 24(b) (1) of the Tax Code.

NATIONAL DEVELOPMENT COMPANY V. CIR G.R. NO. L-53961 Facts: The National Development Company (NDC) entered into contracts in Tokyo with several Japanese shipbuilding companies for the construction of 12 ocean-going vessels. The purchase price was to come from the proceeds of bonds issued by the Central Bank and payments were made in cash and through irrevocable letters of credit. 3 Fourteen promissory notes were signed for the balance by the NDC and, as required by the shipbuilders, guaranteed by the Republic of the Philippines. The NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70 as interest on the balance of the purchase price. No tax was withheld. The Commissioner then held the NDC liable on such tax in the total sum of P5,115,234.74. NDC went to CTA but the later sustained the BIR. Issue: WON NDC is liable for tax Held: Yes. Here in the case at bar, petitioner National Development Company, a corporation duly organized and existing under the laws of the Republic of the Philippines, with address and principal office at Calle Pureza, Sta. Mesa, Manila, Philippines unconditionally promised to pay the Japanese shipbuilders, as obligor in fourteen (14) promissory notes for each vessel, the balance of the contract price of the twelve (12) ocean-going vessels purchased and acquired by it from the Japanese corporations, including the interest on the principal sum at the rate of five per cent (5%) per annum. Clearly, therefore, the interest remitted to the Japanese shipbuilders in Japan in 1960, 1961 and 1962 on the unpaid balance of the purchase price of the vessels acquired by petitioner is interest derived from sources within the Philippines subject to income tax under the then Section 24(b)(1) of the National Internal Revenue Code. Although NDC is not the one taxed since it was the Japanese shipbuilders who were liable on the interest remitted to them under Section 37 of the Tax Code, still, the imposition is valid. The imposition of the deficiency taxes on NDC is a penalty for its failure to withhold the same from the Japanese shipbuilders. Such liability is imposed by Section 53c of the Tax Code. NDC was remiss in the discharge of its obligation as the withholding agent of the government and so should be liable for the omission.

Somollo, Deanne Mitzi A. LLB 4A

COMMISSIONER OF INTERNAL REVENUE V. CTA and SMITH KLINE and FRENCH OVERSEAS CO. G.R. NO. L-54108 Facts:Smith Kline & French Overseas Company is a multinational firm domiciled in Philadelphia, licensed to do business in the Philippines. It is engaged in the importation, manufacture, and sale of pharmaceutical drugs and chemicals. In 1971, it declared a net taxable income of P1.4 M and paid P511k as tax due. It claimed its share of the head office overhead expenses (P501k) as deduction from gross income. In its amended return, it claimed that there was an overpayment of tax (P324k) arising from under-deduction of the overhead expense. This was certified by international independent auditors, the allocation of the overhead expense made on the basis of the percentage of gross income in the Philippines to gross income of the corporation as a whole. In 1974, without waiting for the action of the CIR, Smith filed a petition for review with the CTA. CTA ordered CIR to refund the overpayment or grant Smith a tax credit. CIR appealed to the SC. Issue: WON Smith Kline is entitled to a refund Held: Yes, The governing law is found in Sec. 37 (b).Net income from sources in the Philippines. – From the items of gross income specified in subsection (a) of this section there shall be deducted expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as net income from sources within the Philippines. Revenue Regulation No. 2 of the DOF contains a similar provision, with the additional line that “the ratable part is based upon the ratio of gross income from sources within the Philippines to the total gross income” (Sec. 160). Hence, where an expense is clearly related to the production of Philippine-derived income or to Philippine operations, that expense can be deducted from the gross income acquired in the Philippines without resorting to apportionment. However, the overhead expenses incurred by the parent company in connection with finance, administration, and research & development, all of which directly benefit its branches all over the world, fall under a different category. These are items which cannot be definitely allocated or identified with the operations of the Philippine branch. Smith can claim as its deductible share a ratable part of such expenses based upon the ration of the local branch’s gross income to the total gross income of the corporation worldwide.

COMMISSIONER OF INTERNAL REVENUE V. BRITISH AIRWAYS CORPORATION and CTA Facts: 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). 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

Somollo, Deanne Mitzi A. LLB 4A 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. It was assessed taxes for those tickets which it was able to sell through Warner Barnes and Company, Ltd., and later by Qantas Airways, during the period in question. Issue: WON the revenue derived by the BOAC from sales of ticket in the Philippines from air transportation while having no landing rights constitute income. Held: 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. Herein, the sale of tickets in the Philippines is the activity that produced the income. The tickets exchanged hands here and payment for fares were also made here in the 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. PD 68, in relation to PD 1355, ensures that international airlines are taxed on their income from Philippine sources. The 2 1/2% tax on gross billings is an income tax. If it had been intended as an excise tax or percentage tax, it would have been placed under Title V of the Tax Code covering taxes on business. Hence, BOAC is liable for taxes.

JOSE P. OBILLOS JR. Et. Al. V. COMMISSIONER OF INTERNAL REVENUE G.R. L-68118 Facts: Sometime in 1973, Jose Obillos completed payment on two lots located in Greenhills, San Juan, lots which they inherited from their father. The next day, he transferred his rights to his four children for them to build their own residences. The Torrens title would show that they were coowners of the two lots. However, the petitioners resold them to Walled City Securities Corporation and Olga Cruz Canda for P313k or P33k for each of them. The CIR requested the petitioners to pay the corporate income tax of their shares, as this entire assessment is based on the alleged partnership under Article 1767 of the Civil Code; simply because they contributed each to buy the lots, resold them and divided the profits among them. They were in other words treated as a partnership. Obillos claimed that they have no intention to form a partnership and that the transactions were merely incidental since the lots were sold due to the high demand of construction. They claimed further that their intention was to divide the lots for residential purposes. Issue: WON the petitioners are liable for corporate income tax as an unregistered partnership Held: NO, As Article 1769 (3) of the Civil Code provides: the sharing of gross returns does not in itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived. It is not enough to contribute money to a common fund to form a partnership there must also be a clear and unmistakable intention to form a partnership. In this case they had no intention of the same. What they merely did was to sell the lots which were passed on to them by their father.

Somollo, Deanne Mitzi A. LLB 4A

STATE INVESTMENT HOUSE, INC. AND STATE FINANCING CERNTER INC V. CITIBANK et.al G.R. NO. 79926-27 Facts: On Dec 1981, the Bank of America (BA), Citibank, and Hongkong Shanghai Banking Corporation (HSBC) (The Banks) filed a petition for involuntary insolvency of Consolidated Mining Inc. (CMI) under Sec 20 of the Insolvency Law (Act No. 1956) in the CFI of Rizal. The pertinent provision of law states, “an adjudication of insolvency may be made on the petition of three or more creditors, residents of the Philippine Islands, whose credits or demands accrued in the Philippine Islands, and the amount of which credits or demands are in the aggregate not less than one thousand pesos…” The petition alleged that CMI obtained loans from The Banks and as Nov./Dec. 1891 the outstanding debts were millions in US$ and in pesos (P15M and $4.18M from BA, $4.9M from Citibank, and $5.3M and P6M from HSBC), that State Investment House Inc (SIHI) and State Financing Center Inc (SFCI) had separately instituted actions for collection of sums of money against CMI and writ of attachment were issued against royalty/ profit payment due to CMI from Benguet Consolidated Mining Inc., and that CMI committed acts of insolvency (its property remained under attachment and it defaulted in paying its obligations).The petition was opposed by SIHI and SFCI averring that the court has no jurisdiction because the foreign banks are non-resident creditors in contemplation of the insolvency law. Issue: WONr foreign banks licensed to do business in the Philippines, may be considered "residents of the Philippine Islands" within the meaning of Section 20 of the Insolvency Law. Held: The petition is denied. Section 20 of the Insolvency law does not give a cogent definition of resident of the Philippine Islands rather the answer can be found in the NIRC which declares that the term "'resident foreign corporation' applies to a foreign corporation engaged in trade or business within the Philippines," as distinguished from a "non-resident foreign corporation" which is one not engaged in trade or business within the Philippines.The assimilation of foreign corporations authorized to do business in the Philippines "to the status of domestic corporations," subsumes their being found and operating as corporations, hence, residing, in the country. The residence of a corporation, is necessarily where it exercises corporate functions and that it is considered dwelling in the place where its business is done.

COMMISSIONER OF INTERNAL REVENUE V. CTA et. Al. G.R. NO. 95022 Facts: Private Respondent, GCL Retirement Plan (GCL, for brevity) is an employees' trust maintained by the employer, GCL Inc., to provide retirement, pension, disability and death benefits to its employees. The Plan as submitted was approved and qualified as exempt from income tax by Petitioner Commissioner of Internal Revenue in accordance with Rep. Act No. 4917. Sometime later GCL made investsments and earned therefrom interest income from which was witheld the fifteen per centum (15%) final witholding tax imposed by Pres. Decree No. 1959. GIR filed with CIR a claim for refund for the amounts withheld. GCL disagreed with the collection of the 15% final witholding tax from the interest income as it is an entity fully exempt from income tax.

Somollo, Deanne Mitzi A. LLB 4A The refund requested having been denied, GCL elevated the matter to the CTA, which ruled in favor of GCL, holding that employees' trusts are exempt from the 15% final withholding tax on interest income and ordering a refund of the tax withheld. CA upheld the CTA Decision. Issue: WON GCL is exempt from witholding tax Held: Yes, The refund requested having been denied, GCL elevated the matter to the CTA, which ruled in favor of GCL, holding that employees' trusts are exempt from the 15% final withholding tax on interest income and ordering a refund of the tax withheld. CA upheld the CTA Decision. The tax exemption imposed was for the benefit of the plan holders and the plan providers since it will encourage the later to provide the same and the former to avail of the same. Thus, there can be no denying either that the final withholding tax is collected from income in respect of which employees' trusts are declared exempt.

MARIANO P. PASCUAL and RENATO P. DRAGON v. CIR and CTA G.R. NO. 78133 Facts: Mariano Pascual and Renato Dragon brought two parcels of land and after the lapse of one year they brought three more lots which they sold and realized profits. The corresponding capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax amnesties granted in the said years. Despite this, the Acting BIR Commissioner assessed and required from them the payment of income taxes equivalent to the rate for corporations. It was alleged by the BIR Commissioner that the transactions which are involved constituted the acts of an unregistered partnership or joint venture. Pascual and Dragon claim that since they availed of amnesty they are relieved from payment of individual tax. They also cannot be taxed using the rate for corporations since they are no an unregistered partnership. Issue: WON Pascual and Dragon are liable for corporate income tax as an unregistered partnership. Held: No, as can be gleaned from the facts they are not partners but merely co-owners.By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves (Art. 1767, Civil Code of the Philippines). In the present case, there is no evidence that petitioners entered into an agreement to contribute money, property or industry to a common fund, and that they intended to divide the profits among themselves. The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. Hence, there is no adequate basis to support the proposition that they thereby formed an unregistered partnership. The two isolated transactions whereby they purchased properties and sold the same a few years thereafter did not thereby make them partners. Under the circumstances, it would be iniquitous to require them to pay income tax as an registered partnership when they are not required by law to do so.

Somollo, Deanne Mitzi A. LLB 4A

COMMISSIONER OF INTERNAL REVENUE V. ST. LUKE’S MEDICAL CENTER G.R. NO. 195909 Facts: St Luke’s Medical Center Inc. (St Luke’s) is a nonprofit hospital in Manila, thus it is tax exempt. On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St Luke’s deficiency taxes amounting to ₱76,063,116.06 for 1998, comprising deficiency income tax, value-added tax, withholding tax on compensation and expanded withholding tax. The BIR reduced the amount to ₱63,935,351.57 during trial in the First Division of the Court of Tax Appeals (CTA). The BIR had argued before the CTA that section 27(B) of the NIRC, which imposes a 10% preferential tax rate on the income of proprietary nonprofit hospitals, should be applicable to St Luke’s. St Luke’s took the position that the BIR should not consider its total revenues, because its free services to patients amounted to ₱218,187,498 or 65.20% of its 1998 operating income (i.e. total revenues less operating expenses) of ₱334,642,615. St Luke’s also claimed that its income did not inure to the benefit of any individual, and that its making a profit did not affect its status as exempt from taxation under sub-sections 30(E) and (G) of the NIRC. Issue: WON all of St. Luke’s income is subject to tax. Held: No, It was exempt from taxation on income derived from all services to patients, whether paying or non-paying. The Court said that charitable institutions were not automatically granted tax exemptions. Tax exemptions are given by the Congress under specific laws (except for exemption from real property taxation which was given by the Constitution of the Philippines). The Court further ruled that, Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand, can be construed together without the removal of such tax exemption. The only qualifications for hospitals are that they must be proprietary and non-profit. ‘Proprietary’ means private… ‘Non-profit’ means no net income or asset accrues to or benefits any member or specific person, with all the net income or asset devoted to the institution’s purposes and all its activities conducted not for profit. ‘Non-profit’ does not necessarily mean ‘charitable’.’ Thus, accepting paying patients does not destroy the exemption of St. Luke’s under Sec. 30 of the NIRC. Instead, the last paragraph of Sec. 30 of the NIRC provides that St. Luke’s activities conducted for profit, regardless of the disposition of such income, shall be subject to tax.