15 State’s undertaking to guarantee promissory notes does not diminish its taxing power. (G.R. (G.R. No. L-53961 June 30, 1987, NATIONAL DEVELOPMENT COMPAN vs. COMMI!! COMMI!!IONER IONER O" INTERNAL REVEN#E$ 137. Residence of !"igor who pays the interest determined the source of interest income. "ACT!% #he $ationa" %eve"opment %eve"opment &ompany ($%&' entered entered into contracts contracts in #okyo with severa" apanese ship!ui"ding companies for the construction of 1) ocean* going vesse"s. #he purchase price was to come from the proceeds of !onds issued !y &enta" +ank. ,nitia" payments were made in cash and through irrevoca!"e "etters of credit. 1- promissory notes were signed for the !a"ance !y $%& and as re/uired !y the ship!ui"ders guaranteed !y the Repu!"ic of #he 0hi"s. hen the vesse"s were comp"eted and de"ivered to the $%& in #okyo the "atter remitted to the ship!ui"ders the amount of #!& ',066,580.70 ',066,580.70 () *n+ee)+ on +e (/(ne o +e 2u()e 2*e.. $o tax was withhe"d. #he &ommissioner then he"d the $%& "ia!"e on such tax 2*e in the tota" sum of 05115)3-.7-. $egotiations $egotiations fo""owed !ut fai"ed. $%& went to . +,R was sustained !y . +,R was sustained !y . ence this petition for certiorari. I!##E% ,s $%& "ia!"e for tax4 R#LING% es. R#LING% es. #he apanese ship!ui"ders ship!ui"ders were "ia!"e "ia!"e to tax on the the interes interestt remitted to them under Section 37 of the #ax &ode. thus6 S&. 37. Income from sources within the Philippines. — (a' 8ross income from sources within the 0hi"ippines. 9 #he fo""owing items of gross income sha"" !e treated as gross income from sources within the 0hi"ippines6 (1' Interest. — ,nterest derived from sources within the 0hi"ippines and interest on !onds notes orother orother interest-bearing obligations of residents, corporate or otherwise;
$%& is not the one taxed !ut the apanese ship!ui"ders who were "ia!"e on the interest remitted to them under Section 37 of the #ax &ode. #he imposition of the de:ciency taxes on $%& is a pena"ty for its fai"ure to withho"d the same from the apanese ship!ui"ders. ship!ui"ders. Such "ia!i"ity "ia!i"ity is imposed !y !y Section 53c of the #ax &ode. $%& was remiss in the discharge of its o!"igation as the withho"ding agent of the government and so shou"d !e "ia!"e for the omission. ,t is a"so incorrect to suggest that the Repu!"ic of the 0hi"ippines cou"d not co""ect taxes on the interest remitted !ecause of the undertaking signed !y the Secretary of ;inance ;inance in each of the promissory notes that. #here is nothing in the 0$ guaranteed !y the state exempting the interests from taxes. 0etitioner has not esta!"ished a c"ear waiver therein of the right to tax interests. #ax exemptions
cannot !e mere"y imp"ied !ut must !e categorica""y and unmistaka!"y unmistaka!"y expressed. 2ny dou!t concerning this /uestion must !e reso"ved in favor of the taxing power.
"#LL TET% $ +2$& G.R. No. L-53961 June 30, 1987 NATIONAL DEVELOPMENT COMPAN, petitioner vs. COMMI!!IONER COMMI! !IONER O" INTERNAL REVEN#E, respondent. CR#4, J.: e are asked to reverse the decision of the &ourt of #ax 2ppea"s on the ground that it is erroneous. e have carefu""y studied it and :nd it is not< on the contrary it is supported !y "aw and doctrine. So :nding we a=rm. Reduced to simp"est terms the !ackground facts are as fo""ows. #he nationa" %eve"opment &ompany &ompany entered into contracts in #okyo with with severa" apanese ship!ui"ding ship!ui"ding companies companies for the construction construction of twe"ve ocean*going ocean*going vesse"s. 1 #he purchase price was to come from the proceeds of !onds issued !y the &entra" +ank. ,nitia" payments were made in cash and through irrevoca!"e "etters of credit. 3 ;ourteen promissory notes were signed for the !a"ance !y the $%& and as re/uired !y the ship!ui"ders guaranteed !y the Repu!"ic of the 0hi"ippines. ' 0ursuant thereto the remaining payments and the interests thereon were remitted in due time !y the $%& to #okyo. #he vesse"s were eventua""y comp"eted and de"ivered to the $%& in #okyo. 5 #he $%& remitted remitted to the ship!ui"ders ship!ui"ders in #okyo the tota" tota" amount of >S?-@AA
[email protected]@ >S?-@AA
[email protected]@ as interest on the !a"ance of the purchase price. $o tax was withhe"d. #he &ommissioner then he"d the $%& "ia!"e on such tax in the tota" sum of 05115)3-.7-. $egotiations $egotiations fo""owed !ut fai"ed. #he +,R thereupon served on the $%& a warrant of distraint and "evy to enforce co""ection of the c"aimed amount. 6 #he $%& went to the &ourt of #ax 2ppea"s. #he +,R was sustained sustained !y the the except for for a s"ight reduction reduction of the the tax de:ciency 7 in the sum of 0C@@.@@ representing the compromise pena"ty. #he $%& then came to this &ourt in a petition for certiorari.
#he petition must must fai" for tthe he fo""owing reasons. reasons. #he apanese ship!ui"ders ship!ui"ders were "ia!"e "ia!"e to tax on the the interes interestt remitted to them under Section 37 of the #ax &ode thus6 S&. 37. Income from sources within the Philippines. — (a' 8ross income from sources within the 0hi"ippines. 9 #he fo""owing items of gross income sha"" !e treated as gross income from sources within the 0hi"ippines6 (1' Interest. — ,nterest derived from sources within the 0hi"ippines and interest on !onds notes orother orother interest-bearing obligations of residents, corporate or otherwise; xxx xxx xxx #he petitioner argues tthat hat the apanese apanese ship!ui"ders ship!ui"ders were not su!Dect to to tax under the a!ove provision !ecause a"" the re"ated activities 9 the signing of the contract the construction of the vesse"s the payment of the stipu"ated price and their de"ivery to the $%& 9 were done in #okyo. 8 #he "aw however does not speak of activity !ut of EsourceE which in this case is the $%&. #his is a domestic and resident corporation with principa" o=ces in Fani"a. 2s the #ax &ourt put it6 ,t is /uite apparent under the terms of the "aw that the 8overnmentGs right to "evy and co""ect income tax on interest received !y foreign corporations not engaged in trade or !usiness within the 0hi"ippines is not p"anted upon the condition that Gthe activity or "a!or 9 and the sa"e from which the (interest' income Howed had its situsG in the 0hi"ippines. #he "aw speci:es6 G,nterest derived from sources within the 0hi"ippines and interest on !onds notes or other interest*!earing o!"igations of residents resident s corporate or otherwise.G $othing there speaks of the Gact or activityG of non*resident corporations in the 0hi"ippines or p"ace where the contract is signed. #he residence of the obligor who who pays the interest rather than the physica" "ocation of the securities !onds or notes or the p"ace of payment is the determining determining factor of the source of interest income. (Fertens Iaw of ;edera" ,ncome #axation Jo". B p. 1)B citing 2.&. Fonk K &o. ,nc. 1@ #.&. 77< Sumitomo +ank Itd. 1C +#2 -B@< state of I.. Fckinnon A +#2 -1)< Standard Farine ,ns. &o. Itd. - +#2 B53< Farine ,ns. &o. Itd. - +#2 BA7.' 2ccording"y if the o!"igor is a resident of the 0hi"ippines the interest payment paid !y him can have no other source than within the 0hi"ippines 0hi"ippines.. #he interest interest is paid not not !y the !ond !ond note or other interest*!earing interest*!earing o!"igations o!"igations !ut !y the o!"igor. (See mertens ,d., ,d ., Jo". B p. 1)-.' ere in the case at !ar petitioner $ationa" %eve"opment &ompan &ompany y a corporation du"y organiLed and existing under the "aws of the Repu!"ic of the 0hi"ippines with address and principa" o=ce at &a""e 0ureLa Sta. Fesa Fani"a 0hi"ippines unconditiona""y uncondition a""y promised to pay the apanese ship!ui"ders as o!"igor in fourteen
(1-' promissory promissory notes for each vesse" the !a"ance of the contract price of the twe"ve (1)' ocean*going vesse"s purchased and ac/uired !y it from the apanese corporations inc"uding the interest on the principa" sum at the rate of :ve per cent (5M' per annum. (See xhs. E%E %*1E to E%*13E pp. 1@@*113 Records< par. 11 0artia" Stipu"ation of ;acts.' 2nd pursuant to the terms and conditions of these promisory notes which are du"y signed !y its Jice &hairman and 8enera" Fanager petitioner remitted to the apanese ship!ui"ders in apan during the years 1CA@ 1CA1 and 1CA) the sum of ?B3@A13.17 ?1A5-C3A.5) and ?15-1.@31.@@ respective"y as interest on the unpaid !a"ance of the purchase price of the aforesaid vesse"s. (pars. 13 1- K 15 0artia" Stipu"ation of ;acts.' #he "aw is c"ear c"ear.. ur p"ain duty duty is to app"y app"y it as written. written. #he residence residence of the o!"igor o!"igor which paid the interest under consideration petitioner herein is &a""e 0ureLa Sta. Fesa Fani"a 0hi"ippines< and as a corporation du"y organiLed and existing under the "aws of the 0hi"ippines it is a domestic corporation resident resident of the 0hi"ippines. 0hi"ippines. (Sec. B-(c' $ationa" ,nterna" Revenue &ode.' #he interest paid !y petitioner which is admitted"y a resident of the 0hi"ippines is on the promissory notes issued !y it. &"ear"y therefore the interest remitted to the apanese ship!ui"ders in apan in 1CA@ 1CA1 and 1CA) on the unpaid !a"ance of the purchase price of the vesse"s ac/uired !y petitioner is interest derived from sources within the 0hi"ippines su!Dect to income tax under the then Section )-(!'(1' of the $ationa" ,nterna" Revenue Revenue 9 &ode. #here is no !asis for for saying that that the interest interest payments were were o!"igations of the Repu!"ic of the 0hi"ippines and that the promissory notes of the $%& were government securities exempt from taxation under Section )C(!'N-O of the #ax &ode reading as fo""ows6 S&. )C. Gross Income. — xxxx xxx xxx xxx (!' Exclusion from gross income. 9 #he fo""owing items sha"" not !e inc"uded in gross income and sha"" !e exempt from taxation under this #it"e6 xxx xxx xxx (! Interest on Go"ernment #ecurities. 9 ,nterest upon the o!"igations of the 8overnment of the Repu!"ic of the 0hi"ippines or any po"itica" su!division thereof !ut in the case of such obligations issued after appro"al appro"al of this $ode, onl% to the extent pro"ided in the act authori&ing the issue thereof.(2s thereof. (2s amended !y Section A R.2. $o. B)< emphasis supp"ied' #he "aw invoked invoked !y the the petitioner as authoriLing the issuance issuance of securities is R.2. R.2. $o. 1-@7 which in fact is si"ent on this matter. &.2. $o. 1B) as amended !y &.2. $o. 311 does carry such authoriLation !ut "ike R.2. $o. 1-@7 does not exempt from taxes the interests on such securities.
,t is a"so incorrect to suggest that the Repu!"ic of the 0hi"ippines cou"d not co""ect taxes on the interest remitted !ecause of the undertaking signed !y the Secretary of ;inance in each of the promissory notes that6 >pon authority of the 0resident of the Repu!"ic of the 0hi"ippines the undersigned for va"ue received here!y a!so"ute"y and unconditiona""y guarantee (sic' on !eha"f of the Repu!"ic of the 0hi"ippines the due and punctua" payment of !oth principa" and interest of the a!ove note. 10 #here is nothing in the the a!ove undertaking undertaking ex exempting empting the interests interests from from taxes. 0etitioner has not esta!"ished a c"ear waiver therein of the right to tax interests. #ax exemptions cannot !e mere"y imp"ied !ut must !e categorica""y and unmistaka!"y expressed. 11 11 2ny 2ny dou!t concerning this /uestion must !e reso"ved in favor of the taxing power. 1 $owhere in the said undertaking do we :nd any inhi!ition against the co""ection of the disputed taxes. ,n fact such undertaking was made !y the government in consonance with and certain"y not against the fo""owing provisions of the #ax &ode6 Sec. 53(!'. 'onresident aliens. 9 aliens. 9 2"" persons corporations and genera" co* partnership partnershi p (companies co"ectivas' in whatever capacity acting inc"uding "essees or mortgagors of rea" or persona" capacity executors administrators receivers conservators :duciaries emp"oyers and a"" o=cers and emp"oyees of the conservators 8overnment of the 0hi"ippines having contro" receipt custody< disposa" or payment of interest dividends rents sa"aries wages premiums annuities compensations remunerations emo"uments or other :xed or determina!"e annua" or categorica" gains pro:ts and income of any nonresident a"ien individua" not engaged in trade or !usiness within the 0hi"ippines and not having any o=ce or p"ace of !usiness therein sha"" (except in the cases provided for in su!section (a' of this section' deduct and withho"d from such annua" or periodica" gains pro:ts and income a tax to twenty (now 3@M' per 3@M' per centum thereof thereof ... Sec. 5-. Pa%ment of corporation income tax at source. source . 9 ,n the case of foreign corporations su!Dect to taxation under this #it"e not engaged in trade or !usiness within the 0hi"ippines and not having any o=ce or p"ace of !usiness therein there sha"" !e deducted and withhe"d at the source in the same manner and upon the same items as is provided in section :fty*three a tax e/ua" to thirty (now 35M' per 35M' per centum thereof centum thereof and such tax sha"" !e returned returned and paid in the same manner and su!Dect to the same conditions as provided in that section6.... Fanifest"y the said undertaking of the Repu!"ic of the 0hi"ippines mere"y guaranteed the o!"igations of the $%& !ut without diminution of its taxing power under existing "aws. ,n suggesting that the $%& is mere"y an administrator of the funds of the Repu!"ic of the 0hi"ippines the petitioner c"oses its eyes to the nature of this entity as a
corporation. 2s such it is governed in its proprietary activities not on"y !y its charter !ut a"so !y the &orporation &ode and other pertinent "aws. #he petitioner a"so for forgets gets that it is not the $%& that that is !eing ta taxed. xed. #he tax tax was due on the interests earned !y the apanese ship!ui"ders. ,t was the income of these companies and not the Repu!"ic of the 0hi"ippines that was su!Dect to the tax the $%& did not withho"d. ,n ePect therefore the imposition of the de:ciency taxes on the $%& is a penalt% for for its fai"ure to withho"d the same from the apanese ship!ui"ders. Such "ia!i"ity is imposed !y Section 53(c' of the #ax &ode thus6 Section 53(c'. )eturn and Pa%ment . 9 very person re/uired to deduct and withho"d any tax under this section sha"" make return thereof in dup"icate on or !efore the :fteenth day of 2pri" of each year and on or !efore the time :xed !y "aw for the payment of the tax sha"" pay the amount withhe"d to the o=cer of the 8overnment of the 0hi"ippines authoriLed to receive it. very such person is made persona""y "ia!"e for such tax and is indemni:ed against the c"aims and demands of any person for the amount of any payments made in accordance with the provisions of this section. (2s amended !y Section C R.2. $o. )3-3.' ,n Philippine ,n Philippine Guarant% $o. ". *he $ommissioner of Internal )e"enue and the $ourt of *ax +ppeals, +ppeals, 13 the &ourt /uoted with approva" the fo""owing regu"ation regu"ation of the +,R on the responsi!i"ities of withho"ding agents6 ,n case of dou!t a withho"ding withho"ding agent may a"ways protect himse"f !y withho"ding the tax due and prompt"y causing a /uery to !e addressed to the &ommissioner of ,nterna" Revenue for the determination whether or not the income paid to an individua" is not su!Dect to withho"ding. ,n case the &ommissioner of ,nterna" Revenue decides that the income paid to an individua" is not su!Dect to withho"ding the withho"ding agent may thereupon remit the amount of a tax withhe"d. ()nd par. Sec. )@@ ,ncome #ax Regu"ations'. EStrict o!servance of said steps is re/uired of a withho"ding agent !efore he cou"d !e re"eased from "ia!i"ityE so said ustice ose 0. +engson who wrote the decision. E8enera""y the "aw frowns upon exemption from taxation< hence an exempting provision shou"d !e construed strictissim strictissimii uris.E uris.E 1' #he petitioner was remi remiss ss in the discharge discharge of of its o!"igation o!"igation as the withho"ding withho"ding agent agent of the government an so shou"d !e he"d "ia!"e for its omission. R;R the appea"ed decision is 2;;,RF% without any pronouncement as to costs. ,t is so ordered. *eehanee, $.., /ap, 0ernan, 'ar"asa, 1elencio-2errera, Gutierre&, r., Paras, 0eliciano, Ganca%no, Padilla, 3idin, #armiento and $orte&, ., concur
