CTA Case No. OC-694 (Decision)

, 8�-POJJL!C OP Tfll!: PHrLU"P J / COURT OF TAX .APP 1~ / "'.ANlU �� THE PHILIPPINE GUARANTY c. T. A. 00. , , INC., CASE 00. 694 Petitioner, - versus ... THE COMMISSIONER OF INTERNAL REVENUE, Responderyt . X- ~ - ~ - � - - - - X DECISION This is an appeal from the decision of the . ,� Commissioner of Internal -Revenue demanding pay~ ment by petitioner of the amount of lt465,037.oo as withholding income taxes for the years 1953 and 1954. Petitioner Philippine Guaranty Co., Inc. is a domestic insurance company. In pursuance of reinsurance treaties , petitioner, in 1953 and 1954, ceded portions of insurance premiums on risks located in the Philippines� which it ori- ginally assured , to various non-resident foreign insurance companies , not engaged in trade or business within the Philippines and not having I any office or place of businessiherein. All these reinsurance treaties. except that entered into with Swiss Reinsurance Company which was executed by both parties in Switzerland, were executed in the Philippines by petitione~ and abroad by the reinsurer. The amounts of premiums ceded and remitted under said insurance treaties are item~ ized as follows s �

DECISION:- CTA .. 2 - Case No, 694. Insurance ce~�~������������������� �842,466.71 Add: Interest on reserve ��������� 7,?57.53 R��e�s�e�rv�e��r�e�l�e�a�s�e�d��������������������~� ~66,4i6�~ Total l , Less: 16,4 1. Commissions ����� �283,107.84 Reserve retained 6429787,01204?.,7974 Losses paid ����� Insurance premium tax ����������� 18,124.96 1,426,363.53 Amount remitted ������������������� (~ 209,902,32) Insurance ceded ����������������� �721,471.85 Add: Interest on reserve �������� 6,093,83 Reserve released ����������� 402,318.31 Expense credit ������������� 18.12 Total �������������������������� �1,129,902,11 Less: Commissions ����� �32366000877,078373565...119704 Reserve retained Losses paid ����� Insurance premium tax .. .. � .. � � .. 17,,746,42 947393.63 Amount remitted ������������������ � 182,508.48 (See Stipulation of Facts, pp. 67-80 CTA Rec.) Upon advice of its accountants and auditors, Sycip, Gorres, Velayo & Company, that a domestic insurance company, which cedes part of premiums on \ risks located in the Philippine to a non-resident foreign insurance company not engaged in trade or business in the Philippines and not having any office or place of business therein, is not subject to withholding tax under sections 53 and 54 of the Revenue Code on the reinsurance premiums ceded to such foreign insurance company (see Exh. F-2, I CTA rec, p. 89), petitioner did not collect and remit to the Commissioner of Internal Revenue the withholding tax on the aggregate sum of premiums I

., DECISION:-CTA Case No. 694. - 3- ceded by it during the years 1953 and 1954. For the same reason, it did not file the correspond- ing withholding tax returns. The said advice was given ~n accordance with the resolution, dated August 18, 1953, of the Board of Tax Appeals in the matter of withholding tax of Franklin Bakers Co., Tax Appeal No. 117, and the rulings, dated October 13, 1953 and December 8, 1953, of the Commissioner of Internal Revenue to the effect that the reinsurance premiums in question are not subject to withholding tax and that the ceding domestic insurance company is not required by law to file a return therefor (See Exhs . B, c, D & E, CTA rec. PP� 91-94). In a letter dated April 13, 1959, respondent assessed against petitioner the sums of ~230,673.00 and �234,364.00 as withholding income taxes for the years 1953 and 1954, respectively, computed as follows: Gross premium per investigation�� f768,58o.oo Withholding Tax due thereon at 24%. ����������������������� 184,459.00 25% ����������������������� 46,114.00 Compromise for non-filing of withholding income tax return 100.00 TOTAL AMOUNT DUE & COLLECTIBLE .,,�230,673,00 ~ Gross premium per investigation�� t?8o,88o.68 Withholding tax due thereon at 24~ ���������������������� 187,411.00 25% Surcharge ������������ 46,853.00 Compromise for non-filing of with- holding income tax ret urn 100.00 TOTAL AMOUNT DUE & 00 LIECTIBIE., ~234,364,00 17

DECISION :-CTA Case No . 694-. - 4- (0ee BIR rec . PP � 78- 79) Petitioner requested for the reconsideration of the assessment (BIR rec . PP � 99- 105) , which request was denied by respondent (Exh. 5, BIR rec. pp . lo6- l07). Respondent, however, ordered the reinvestigation of the c~se for purposes of ascer- ,. taining the correct amount of reinsurance premiums ceded to the � non-resident foreign insurance com- panies . The main issue to be resolved in this case is whether or not the reinsurance premiums on risks located in the Philippines ceded by petitioner in the years �1953 and 1954 to non-resident foreign insurance companies not engaged in trade or busi- ness in the Philippines and not having any office or place of business therein, pursuant to reinsu- rance agreements, whiph were signed for and behalf of petitioner in the Philippines and by the foreign insurance "companies abroad, are subject to with- holding tax under Sections 53 and 54 of the National Internal Revenue Code. Petitioner contends that it had been legally discharged from the duties of withholding and p~ying the income tax due the Government on the reinsurance premiums in question and filing the returns therefor by reason of the rulings iss ued by the Commissioner of Internal Revenue on October '' 13, 1953 and December 8, 1953, in answer to queries of petitioner ' s accountants and auditors, that tta domestic insurance company which reinsures or cedes part of .the risks located in the Philippines 1?1

DECISION - C.T.A. CASE NO. 694 to a non-resident foreign insurance company not authorized to do business in the Philippines is not subject to the withholding tax under Sections 53 ~nd 54 of the Tax Code on the re- ins~rance premiums forwarded to such foreign companies ., � and that �x x x the non-resident . foreign insurance company is not required to file income t~x returns on the reinsurance pre- miums x x x.� A determination by a previous Commissioner of Internal Revenue that an income paid to an individual is not subject to withholding will not discharge a taxpayer of liability tberefor if the ruling turns out to be erroneous. For the Government is never estopped from collecting the correct taxes if it is subsequently found out that an error was previously committed in the enforcement of the law (Pineda v. CFI of Tayabas, Phil. 338; Canlubang Sugar Sstate v. Standard Alcohol Co. (Phil.) Inc., G. R. No. L"l0887t April 16, 1958; Cu Unjieng $ons, Inc. V� The Board of Tax Appeals, et . al., G. R~ No. ~296 1 Sept. 29, 1956; Emilio Y. Hilado v. The . Collec~or of Internal Revenl,le, et al. , G. R. No. L-.9408, October 31, 1956). Moreover , a mere ruling or circular that is issued _on a wrong construction of the law cannot give rise to a vested right (Hilado �v. The Collector of Internal Revenue 1i ~upra. ). The most that said ruling can do is

'I .' DECISION ., C.T.A. CASE NO. 694 ... 6 .. to save the taxpayer from the statutory penal- ties imposed for failure to comply with the law� as in this case where petitioner, in good faith, relied on the advice of its accountants and au. ditors and on the rulings issued by the Commis- sioner of Internal Revenue. Petitioner, therefore. should not be held liable for the payment of sur~ charge for failure to file the necessary with- holding tax return (See Collector of Internal . Revenue vs. Batangas Transportation Co., _G. R. No. L~9692 1 January 6, 1958 1 54 OG 6724). ~etitioner further maintains that _the insu~~ ance premiums ceded by it in 1953 and 1954 to non- resident foreign insurance companies not engaged in business in the Philippines were not income from sources within the Philippines and are, there- fore, not subject to withholding tax. This view is without merit. The evidence shows that the re- insurance premiums in question were part of the pre- miums earned by petitioner on risks located in the 7 Philippines. In a similar case, we observeds �x x x the reinsurance _premiums were taken from the premiums earned by the Commonwealth Insurance Co. from its insurance business cond1..1cted in the Phil~ ippines, and then ceded to the plaintiffs herein. Hence, _the reinsurance premiums �: were derived from the Philippines.� (Alexan- der Howden & Co., Ltd., et al. v. The Col- lector of Internal Revenue, Manila CC No. 22848 , Nov. 24, 1961) It is also argued by petitioner that insurance premiums do not fall under any of the classes or / 17;;

.. DECISION:-CTA Case No. 694,. - 7- items of income enumerated in subsection (b) of Section 53 of the Tax Code as subject to withhold- ing tax. Again, petitioner is in error. Section 53(b) of the Tax Code enumerates ttinterest, divi- dends, rents, salaries, wages, premiums, annuities, compensations, renumerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and incomett as subject to withholding. The word 11 premiumstt is mentioned in the said sta- tutory provision without any qualification. We have equally held that the term ttpremiumu used in Section 53(b) of the Revenue Code includes reinsu- rance premiums, and therefore, the reinsurance premiums ceded to the various non-resident foreign insurance companies are subject to withholding tax (Alexander Howden &reo., Ltd., et a1 vs. Collector, supra,) o Similarlv, it is suggested that reinsurance premiums, by their very nature, are not fixed and . determinable. We do not agree with petitioner. Income is fixed when it is to be paid in amounts definitely predetermined. It is also determinable whenever there is a basis of calculation by which the amount to be paid may be ascertained (Sec. 199, Rev. Reg. Noo 2). In the case at bar, the reinsurance contracts are clear and specific as to hrn much shall be ceded by way of reinsurance. In other words, the reinsurance premiums due the rein- surers were determinable on the basis of the rein- surance agreements. "I

.. DECISION:-CTA Case No. 694. - 8- .t It is finally contended by petitioner that the assessment in question is erroneous, illegal and not enforceable against it because during the years 1953 and 1954 it did not pay awamount of insurance premiums which were ceded to foreign insurance corporations. On the concession in arguendo that it is liable for withholding tax, petitioner suggests that the amount subject to withholding is not the total premiums ceded but the difference between the total premiums ceded and various deductions such as commissions, re- tention for reserves, losses paid, tax on insu- rance premiums, etc. In this connection, it must be noted that Sections 53(b) and 54 of the Tax Code do not provide for deduction from gross in- come or gross premium before the rate of with- holding tax is applied. Be that as it may, we are inclined to hold that the withholding tax should be based on the amount of premiums ceded, without any deduction. " The question of -whether or not reinsurance premiums similar to those involved in this case are subij.ect to withholding tax has been a subject of our consideration in two previous cases (Alex- ander Howden & Co., Ltd., et al. vs. The Collector of Internal Revenue, supra; and British Traders� Insurance Co., Ltd. vs. Commissioner of Internal Revenue, CTA Case No. 683, January 30, 1962). The facts in those two cases are similar to those in I

DECISION:- CTA Case No . 694. - 9- the case at bar. After thoroughly assessing the evidence presented and the argument advanced by both parties, we find no compelling reason to de- part from our stand in the previous two cases . We, therefore, hold that petitioner is liable for withholding tax for the years 1953 and 1954 on the insurance premiums it ceded to non- resident foreign insurance companies not engaged in busi- ness in the Philippines by way of reinsurance agree- ments . For the years 1953 and 1954 it ceded the sums of ~842,466 . 71 and 1 ~721,471 . 85 resp~ctively . The withholding tax thereon (at 24%) amounts to ~202,192 . 00 and ~173,153 . 00 , respectively . Having acted in good faith, as discussed above, petitioner is relieved from the payment of the 25% surcharge for failure to file withholding tax return.a. Similarly, in the absence of an agree- ment between the parties, petitioner cannot be compelled to pay compromise penalties (Collector of Internal Revenue vs. U. S. T. , G. R. Nos . L-11274 & L-11280, November 28, 1958) . IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner Philippine Guaranty Co., Inc. is here- by ordered to pay to the Commissioner of Internal Revenue the respective sums of ~202,192 . 00 and ~173,153.00 or the total sum of P375,345 . 00 as withholding income taxes for the years 1953 and 1954, plus the statut ory delinquency penalties

- 10 - thereon. With costs against petitioner. SO ORDERED. Manila, July 6, 1963. I concur solely on the ground that the majority of this Court, as p:t'eset:ltly const:f.tuted, has expressed the view that insurance premiums ' received by a foreign insurance company not en- gaged in business in the Philippines on account of reinsurance contracts made abroad covering . property situate4 .in the Philippines are subject to the withholding tax (see Alexander Howden v~ Com. of Int. Rev., cited in the foregoing opin~ ion). and in view of the fact that said case is now p~nding appeal in the Supreme Court. ROMAN M. UMAU Associate Judge