Haystack: CIR vs. Phoenix Assurance (GR L-19727, 20 May 1965)

CIR vs. Phoenix Assurance [GR L-19727. 20 May 1965.]
Phoenix Assurance vs. CIR [GR L-19903]
En Banc, Bengzon JP (J): 10 concurring

Facts: Phoenix Assurance Co. Ltd., a foreign insurance corporation organized under the laws of Great Britain, is licensed to do business in the Philippines with head office in London. Through its head office it entered, in London, into worldwide reinsurance treaties with various foreign insurance companies. It agreed to cede a portion of premiums received on original insurances underwritten by its head office, subsidiaries, and branch offices throughout the world, in consideration for assumption by the foreign insurance companies of an equivalent portion of the liability from such original insurances. Pursuant to such reinsurance treaties, Phoenix Assurance Co., Ltd. ceded portions of the premiums it earned from its underwriting business in the Philippines (1952, P316,526.75; 1953, P246,082.04; 1954, P203,384.69) upon which the Commissioner of Internal Revenue, by letter of 6 May 1958, assessed withholding tax totaling P183,838.42 (1952, P75,966.42; 1953, 59,059.68; 1954, 48,812.32). On 1 April 1951, Phoenix Assurance filed its Philippine income tax return for 1950, claiming therein, among others, a deduction of P37,147.04 as net addition to marine insurance reserve equivalent to 40% of the gross marine insurance premiums received during the year. The Commissioner disallowed P11,772.57 of such claim for deduction and subsequently assessed against Phoenix Assurance the sum of P1,884.00 as deficiency income tax. The disallowance resulted from the fixing by the Commissioner of the net addition to the marine insurance reserve at 100% of the marine insurance premiums received during the last three months of the year. The Commissioner assumed that “ninety and thirty days are approximately the length of time required before shipments reach their destination or before claims are received by the insurance companies.” On 1 April 1953 Phoenix Assurance filed its Philippine income tax return for 1952, declaring therein a deduction from gross income of P35,912.25 as part of the head office expenses incurred for its Philippine business, computed at 5% on its gross Philippine income. On 30 August 1955 it amended its income tax return for 1952 by excluding from its gross income the amount of P316,526.75 representing reinsurance premiums ceded to foreign reinsurers and further eliminating deductions corresponding to the ceded premiums. The amended return showed an income tax due in the amount of P2,502.00. The Commissioner disallowed P15,826.35 of the claimed deduction for head office expenses and assessed a deficiency tax of P5,667.00 on 24 July 1958. On 30 April 1954 Phoenix Assurance filed its Philippine income tax return for 1953 and claimed therein a deduction from gross income of P33,070.88 as head office expenses allocable to its Philippine business, equivalent to 5% of its gross Philippine income. On 30 August 1955 it amended its 1953 income tax return to exclude from its gross income the amount of P246,082.04 representing reinsurance premiums ceded to foreign reinsurers. At the same time it requested the refund of P23,409.00 as overpaid income tax for 1953. To avoid the prescriptive period provided for in Section 306 of the Tax Code, it filed a petition for review on 11 August 1956 in the Court of Tax Appeals praying for such refund. After verification of the amended income tax return the Commissioner disallowed P12,304.10 of the deduction representing head office expenses allocable to Philippine business thereby reducing the refundable amount to P20,180.00. On 29 April 1955 Phoenix Assurance filed its Philippine income tax return for 1954 claiming therein, among others, a deduction from gross income of P29,624.75 as head office expenses allocable to its Philippine business, computed at 5% of its gross Philippine income. It also excluded from its gross income the amount of P203,384.69 representing reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines. On 1 August 1958 the Bureau of Internal Revenue released an assessment for deficiency income tax for the years 1952 and 1954 against Phoenix Assurance amounting to P2,847. The assessment resulted from the disallowance of a portion of the deduction claimed by Phoenix Assurance as head office expenses allocable to its business in the Philippines fixed by the Commissioner at 5% of the net Philippine income instead of 5% of the gross Philippine income as claimed in the returns. Phoenix Assurance protested against the assessments for withholding tax and deficiency income tax. However, the Commissioner denied such protest.

Subsequently, Phoenix Assurance appealed to the Court of Tax Appeals (CTA Cases 305 and 543). In a decision dated 14 February 1962, the Court of Tax Appeals allowed in full the deduction claimed by Phoenix Assurance for 1950 as net addition to marine insurance reserve; determined the allowable head office expenses allocable to Philippine business to be 5% of the net income in the Philippines; declared the right of the Commissioner to assess deficiency income tax for 1952 to have prescribed; absolved Phoenix Assurance from payment of the statutory penalties for non-filing of withholding tax return. Thus, the court ordered Phoenix Assurance to pay the Commissioner the respective amounts of P75,966.42, P59,059.68 and P48,812.32, as withholding tax for the years 1952, 1953 and 1954, and P2,847.00 as income tax for 1954, or the total sum of P186,685.42 within 30 days from the date the decision becomes final. Upon the other hand, the Commissioner was ordered to refund to Phoenix Assurance the sum of P20,180.00 as overpaid income tax for 1953, which sum is to be deducted from the total sum of P186,685.42 due as taxes; and ordered further that if any amount of the tax is not paid within the time prescribed, there shall be collected a surcharge of 5% of the tax unpaid, plus interest at the rate of 1% a month from the date of delinquency to the date of payment, provided that the maximum amount that may be collected as interest shall not exceed the amount corresponding to a period of 3 years; without pronouncement as to costs. Both parties appealed to the Supreme Court.

The Supreme Court modified the decision appealed from, and ordered Phoenix Assurance to pay the Commissioner the amount of P75,966.42, P59,059.68 and P48,812.32 as withholding tax for the years 1952, 1953 and 1954, respectively, and the sums of P5,667.00 and P2,847.00 as income tax for 1952 and 1954 or a total of P192,352.42; and ordered the Commissioner to refund to Phoenix Assurance the amount of P20,180.00 as overpaid income tax for 1953, which should be deducted from the amount of P192,352.42; and ordered further that if the amount of P192,352.42 or a portion thereof is not paid within 30 days from the date the judgment becomes final, there shall be collected a surcharge and interest as provided for in Section 51 (e) (2) of the Tax Code. No costs.

1. British Traders’ Insurance vs. CIR; Reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines pursuant to contracts executed abroad are income from sources within the Philippines subject to withholding tax
The question of whether reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines pursuant to contracts executed abroad are income from sources within the Philippines subject to withholding tax under Section 53 and 54 of the Tax Code has already been resolved in the affirmative in British Traders’ Insurance Co. Ltd. vs. Commissioner of Internal Revenue, L-20501, 30 April 1965.

2. Section 331 of the Tax Code; Period of limitation upon assessment and collection
Section 331 of the Tax Code, which limits the right of the Commissioner of Internal Revenue to assess income tax within five years from the filing of the income tax return, states: “Except as provided in the succeeding section, internal-revenue taxes shall be assessed within five years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period. For the purposes of this section a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day: Provided, That this limitation shall not apply to cases already investigated prior to the approval of this Code.”

3. Running of the prescriptive period commence from filing of original return
The Court of Tax Appeals ruled that the original return was a complete return containing “information on various items of income and deduction from which respondent may intelligently compute and determine the tax liability of petitioner”, hence, the prescriptive period should be counted from the filing of said original return; the view which the Supreme Court sustains. The object of the Tax Code is to impose taxes for the needs of the Government, not to enhance tax avoidance to its prejudice. To hold otherwise would pave the way for taxpayers to evade the payment of taxes by simply reporting in their original return heavy losses and amending the same more than five years later when the Commissioner of Internal Revenue has lost his authority to assess the proper tax thereunder.

4. Right of Commissioner to assess the deficiency tax has not prescribed
Considering that the deficiency assessment was based on the amended return which, as aforestated, is substantially different from the original return, the period of limitation of the right to issue the same should be counted from the filing of the amended income tax return. From August 30, 1955, when the amended return was filed, to July 24, 1958, when the deficiency assessment was issued, less than five years elapsed. The right of the Commissioner to assess the deficiency tax on such amended return has not prescribed.

5. Section 32, paragraph (a) of the Tax Code Special provisions regarding income and deductions of insurance companies, whether domestic or foreign, Special deductions allowed to insurance companies
Paragraph (a) of Section 32 of the Tax Code states “In the case of insurance companies, except domestic life insurance companies and foreign life insurance companies doing business in the Philippines, the net additions, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity contracts may be deducted from their gross income: Provided, however, That the released reserve be treated as income for the year of release.”

6. Section 186 of the Insurance Law
Section 186 of the Insurance Law requires the setting up of reserves for liability on marine insurance, thus “. . . Provided, That for marine risks the insuring company shall be required to charge as the liability for reinsurance fifty per centum of the premiums written in the policies upon yearly risks, and the full premiums written in the policies upon all other marine risks not terminated.”

7. Determination of the required reserve for marine insurance
The reserve required for marine insurance is determined on two bases: 50% of premiums under policies on yearly risks and 100% of premiums under policies of marine risks not terminated during the year. Section 32 (a) of the Tax Code allows the full amount of such reserve to be deducted from gross income. In the present case, the formulas for determining the marine reserve employed by Phoenix Assurance and the Commissioner (40% of premiums received during the year and 100% of premiums received during the last three months of the year, respectively) do not comply with Section 186. Said determinations run short of the requirement. For purposes of the Insurance Law, the Court therefore cannot countenance the same. Phoenix Assurance’s claim for deduction of P37,147.04 being less than the amount required in Section 186 of the Insurance Law, the same cannot be and is not excessive, and should therefore be fully allowed.

8. Purpose of the reserve; What is prohibited by income tax law
The reserve called for in Section 186 is a safeguard to the general public and should be strictly followed not only because it is an express provision but also as a matter of public policy. However, for income tax purposes a taxpayer is free to deduct from its gross income a lesser amount, or not to claim any deduction at all. What is prohibited by the income tax law is to claim a deduction beyond the amount authorized therein. *

9. Items of income not belonging to the company’s Philippine business excluded from head office expenses allocable to Philippine Branch; Paragraph 2, subsection (a), Section 30 of the Tax Code
The gross income of Phoenix Assurance consists of income from its Philippine business as well as reinsurance premiums received for its head office in London and reinsurance premiums ceded to foreign reinsurers. Since the items of income not belonging to its Philippine business are not taxable to its Philippine branch, they should be excluded in determining the head office expenses allocable to said Philippine branch. This conclusion finds support in paragraph 2, subsection (a), Section 30 of the Tax Code, which provides that “Expenses allowable to non-resident alien individuals and foreign corporations. — In the case of a non-resident alien individual or a foreign corporation, the expenses deductible are the necessary expenses paid or incurred in carrying on any business or trade conducted within the Philippines exclusively.” Consequently, the deficiency assessments for 1952, 1953 and 1954, resulting from partial disallowance of deduction representing head office expenses, are sustained.

10. Interest on tax payment; Absolution based on equitable ground
The imposition of interest on unpaid taxes is one of the statutory penalties for tax delinquency, from the payments of which the Court of Tax Appeals absolved the Phoenix Assurance on the equitable ground that the latter’s failure to pay the withholding tax was due to the Commissioner’s opinion that no withholding tax was due. Consequently, the taxpayer could be liable for the payment of statutory penalties only upon its failure to comply with the Tax Court’s judgment rendered on 14 February 1962, after Republic Act 2343 took effect. This part of the ruling of the court ought not to be disturbed.