DOCTRINE:
Unregistered
Partnerships and associations are considered as corporations for tax
purposes – Under the
old internal revenue code, “A tax is hereby imposed upon the
taxable net income received during each taxable year from all sources
by every corporation organized in, or existing under the
laws of the Philippines, no matter how created or organized,
xxx.” Ineludibly, the Philippine legislature included in the
concept of corporations those entities that resembled them such as
unregistered partnerships and associations.
Insurance
pool in the case at bar is deemed a partnership or association
taxable as a corporation – In
the case at bar, petitioners-insurance companies formed a Pool
Agreement, or an association that would handle all the insurance
businesses covered under their quota-share reinsurance treaty and
surplus reinsurance treaty with Munich is considered a partnership or
association which may be taxed as a ccorporation.
Double
Taxation is not Present in the Case at Bar –
Double taxation means “taxing the same person twice by the same
jurisdiction for the same thing.” In the instant case, the
insurance pool is a taxable entity distince from the individual
corporate entities of the ceding companies. The tax on its income is
obviously different from the tax on the dividends received by the
companies. There is no double taxation.
FACTS:
The
petitioners are 41 non-life domestic insurance corporations. They
issued risk insurance policies for machines. The petitioners in
1965 entered into a Quota
Share Reinsurance Treaty and a Surplus Reinsurance Treaty
with the Munchener Ruckversicherungs-Gesselschaft (hereafter called
Munich), a non-resident foreign insurance corporation. The
reinsurance treaties required petitioners to form a pool, which they
complied with.
In
1976, the pool of machinery insurers submitted a financial statement
and filed an “Information Return of Organization Exempt from Income
Tax” for 1975. On the basis of this, the CIR assessed a deficiency
of P1,843,273.60,
and withholding taxes in the amount of P1,768,799.39
and P89,438.68
on dividends paid to Munich and to the petitioners, respectively.
The
Court of Tax Appeal sustained the petitioner's liability. The Court
of Appeals dismissed their appeal.
The
CA ruled in that the pool of machinery insurers was a partnership
taxable as a corporation, and that the latter’s collection of
premiums on behalf of its members, the ceding companies, was taxable
income.
ISSUE/S:
- Whether or not the pool is taxable as a corporation.
- Whether or not there is double taxation.
HELD:
1)
Yes: Pool taxable as a corporation
Argument
of Petitioner: The
reinsurance policies were written by them “individually and
separately,” and that their liability was limited to the extent of
their allocated share in the original risks thus reinsured. Hence,
the pool did not act or earn income as a reinsurer. Its role was
limited to its principal function of “allocating and distributing
the risk(s) arising from the original insurance among the signatories
to the treaty or the members of the pool based on their ability to
absorb the risk(s) ceded[;] as well as the performance of incidental
functions, such as records, maintenance, collection and custody of
funds, etc.”
Argument
of SC: According to Section 24 of the NIRC of 1975:
“SEC.
24. Rate
of tax on corporations. -- (a) Tax
on domestic corporations. -- A
tax is hereby imposed upon the taxable net income received during
each taxable year from all sources by every corporation organized in,
or existing under the laws of the Philippines, no matter how created
or organized, but not including duly registered general
co-partnership (compañias
colectivas),
general professional partnerships, private educational institutions,
and building and loan associations xxx.”
Ineludibly,
the Philippine legislature included in the concept of corporations
those entities that resembled them such as unregistered partnerships
and associations. Interestingly, the NIRC’s inclusion of such
entities in the tax on corporations was made even clearer by the Tax
Reform Act of 1997 Sec. 27 read together with Sec. 22 reads:
“SEC.
27. Rates
of Income Tax on Domestic Corporations. --
(A) In
General. -- Except
as otherwise provided in this Code, an income tax of thirty-five
percent (35%) is hereby imposed upon the taxable income derived
during each taxable year from all sources within and without the
Philippines by every corporation, as defined in Section 22 (B) of
this Code, and taxable under this Title as a corporation xxx.”
“SEC.
22. -- Definition. -- When
used in this Title:
xxx xxx xxx
(B) The
term ‘corporation’ shall
include partnerships, no matter how created or organized, joint-stock
companies, joint accounts (cuentas
en participacion),
associations, or insurance companies, but does not include general
professional partnerships [or] a joint venture or consortium formed
for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to
an operating or consortium agreement under a service contract without
the Government. ‘General
professional partnerships’
are partnerships formed by persons for the sole purpose of exercising
their common profession, no part of the income of which is derived
from engaging in any trade or business.
Thus,
the Court in Evangelista
v. Collector of Internal Revenue held
that Section 24 covered these unregistered partnerships and even
associations or joint accounts, which had no legal personalities
apart from their individual members.
Furthermore,
Pool Agreement or an association that would handle all the insurance
businesses covered under their quota-share reinsurance treaty and
surplus reinsurance treaty with Munich may be considered a
partnership because it contains the following elements: (1) The
pool has a common fund, consisting of money and other valuables that
are deposited in the name and credit of the pool. This common fund
pays for the administration and operation expenses of the pool. (2)
The pool functions through an executive board, which resembles the
board of directors of a corporation, composed of one representative
for each of the ceding companies. (3) While, the pool itself is not
a reinsurer and does not issue any policies; its work is
indispensable, beneficial and economically useful to the business of
the ceding companies and Munich, because without it they would not
have received their premiums pursuant to the agreement with Munich.
Profit motive or business is, therefore, the primordial reason for
the pool’s formation.
2)
No: There is no double taxation.
Argument
of Petitioner: Remittances
of the pool to the ceding companies and Munich are not dividends
subject to tax. Imposing a tax “would be tantamount to an illegal
double taxation, as it would result in taxing the same premium income
twice in the hands of the same taxpayer.” Furthermore, even if
such remittances were treated as dividends, they would have been
exempt under tSections 24 (b) (I) and 263 of the 1977 NIRC , as well
as Article 7 of paragraph 1and Article 5 of paragraph 5 of the
RP-West German Tax Treaty.
Argument
of Supreme Court: Double
taxation means “taxing the same person twice by the same
jurisdiction for the same thing.” In the instant case, the
insurance pool is a taxable entity distince from the individual
corporate entities of the ceding companies. The tax on its income is
obviously different from the tax on the dividends received by the
companies. There is no double taxation.
Tax
exemption cannot be claimed by non-resident foreign insurance
corporattion; tax exemption construed strictly against the taxpayer -
Section 24 (b) (1) pertains to tax on foreign corporations; hence, it
cannot be claimed by the ceding companies which are domestic
corporations. Nor can Munich, a foreign corporation, be granted
exemption based solely on this provision of the Tax Code because the
same subsection specifically taxes dividends, the type of remittances
forwarded to it by the pool. The foregoing interpretation of
Section 24 (b) (1) is in line with the doctrine that a tax exemption
must be construed strictissimi
juris,
and the statutory exemption claimed must be expressed in a language
too plain to be mistaken.
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