Answer Key Of Income Taxation By Ampongan Pdfl
Miss Ruhnke
I concur with the Court's majority judgment upholding the assessments of deficiency income taxes against respondent BOAC for the fiscal years 1959-1969 to 1970-1971 and therefore setting aside the appealed joint decision of respondent Court of Tax Appeals. I just wish to point out that the conflict between the majority opinion penned by Mr. Justice Feliciano as to the proper characterization of the taxable income derived by respondent BOAC from the sales in the Philippines of tickets foe BOAC form the issued by its general sales agent in the Philippines gas become moot after November 24, 1972. Booth opinions state that by amendment through P.D. No.69, promulgated on November 24, 1972, of section 24(b) (2) of the Tax Code providing dor the rate of income tax on foreign corporations, international carriers such as respondent BOAC, have since then been taxed at a reduced rate of 2-% on their gross Philippine billings. There is, therefore, no longer ant source of substantial conflict between the two opinions as to the present 2-% tax on their gross Philippine billings charged against such international carriers as herein respondent foreign corporation.
With great respect and reluctance, i record my dissent from the opinion of Mme. Justice A.A. Melencio-Herrera speaking for the majority . In my opinion, the joint decision of the Court of Tax Appeals in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, is correct and should be affirmed.
The fundamental issue raised in this petition for review is whether the British Overseas Airways Corporation (BOAC), a foreign airline company which does not maintain any flight operations to and from the Philippines, is liable for Philippine income taxation in respect of "sales of air tickets" in the Philippines through a general sales agent, relating to the carriage of passengers and cargo between two points both outside the Philippines.
It is important to note at the outset that the answer to the above-quoted issue is not determinative of the lialibity of the BOAC to Philippine income taxation in respect of the income here involved. The liability of BOAC to Philippine income taxation in respect of such income depends, not on BOAC's status as a "resident foreign corporation" or alternatively, as a "non-resident foreign corporation," but rather on whether or not such income is derived from "source within the Philippines."
(2)Resident corporations. A foreign corporation engaged in trade or business with in the Philippines (expect foreign life insurance companies) shall be taxable as provided in subsection (a) of this section.
(b)Tax on foreign corporations. (1) Non-resident corporations. There shall be levied, collected and paid for each taxable year, in lieu of the tax imposed by the preceding paragraph upon the amount received by every foreign corporation not engaged in trade or business within the Philippines, from all sources within the Philippines, as interest, dividends, rents, salaries, wages, premium, annuities, compensations, remunerations, emoluments, or other fixed or determinative annual or periodical gains, profits and income a tax equal to thirty per centum of such amount: provided, however, that premiums shall not include reinsurance premiums. 2
Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and therefore a resident foreign corporation, or not doing business in the Philippines and therefore a non-resident foreign corporation, it is liable to income tax only to the extent that it derives income from sources within the Philippines. The circumtances that a foreign corporation is resident in the Philippines yields no inference that all or any part of its income is Philippine source income. Similarly, the non-resident status of a foreign corporation does not imply that it has no Philippine source income. Conversely, the receipt of Philippine source income creates no presumption that the recipient foreign corporation is a resident of the Philippines. The critical issue, for present purposes, is therefore whether of not BOAC is deriving income from sources within the Philippines.
2.For purposes of income taxation, it is well to bear in mind that the "source of income" relates not to the physical sourcing of a flow of money or the physical situs of payment but rather to the "property, activity or service which produced the income." In Howden and Co., Ltd. vs. Collector of Internal Revenue, 3 the court dealt with the issue of the applicable source rule relating to reinsurance premiums paid by a local insurance company to a foreign reinsurance company in respect of risks located in the Philippines. The Court said:
The source of an income is the property, activity or services that produced the income. The reinsurance premiums remitted to appellants by virtue of the reinsurance contract, accordingly, had for their source the undertaking to indemnify Commonwealth Insurance Co. against liability. Said undertaking is the activity that produced the reinsurance premiums, and the same took place in the Philippines. [T]he reinsurance, the liabilities insured and the risk originally underwritten by Commonwealth Insurance Co., upon which the reinsurance premiums and indemnity were based, were all situated in the Philippines. 4
The Court may be seen to be saying that it is the underlying prestation which is properly regarded as the activity giving rise to the income that is sought to be taxed. In the Howden case, that underlying prestation was the indemnification of the local insurance company. Such indemnification could take place only in the Philippines where the risks were located and where payment from the foreign reinsurance (in case the casualty insured against occurs) would be received in Philippine pesos under the reinsurance premiums paid by the local insurance companies constituted Philippine source income of the foreign reinsurances.
The concept of "source of income" for purposes of income taxation originated in the United States income tax system. The phrase "sources within the United States" was first introduced into the U.S. tax system in 1916, and was subsequently embodied in the 1939 U.S. Tax Code. As is commonly known, our Tax Code (Commonwealth Act 466, as amended) was patterned after the 1939 U.S. Tax Code. It therefore seems useful to refer to a standard U.S. text on federal income taxation:
The Supreme Court has said, in a definition much quoted but often debated, that income may be derived from three possible sources only: (1) capital and/or (2) labor and/or (3) the sale of capital assets. While the three elements of this attempt at definition need not be accepted as all-inclusive, they serve as useful guides in any inquiry into whether a particular item is from "source within the United States" and suggest an investigation into the nature and location of the activities or property which produce the income. If the income is from labor (services) the place where the labor is done should be decisive; if it is done in this counrty, the income should be from "source within the United States." If the income is from capital, the place where the capital is employed should be decisive; if it is employed in this country, the income should be from "source within the United States". If the income is from the sale of capital assets, the place where the sale is made should be likewise decisive. Much confusion will be avoided by regarding the term "source" in this fundamental light. It is not a place; it is an activity or property. As such, it has a situs or location; and if that situs or location is within the United States the resulting income is taxable to nonresident aliens and foreign corporations. The intention of Congress in the 1916 and subsequent statutes was to discard the 1909 and 1913 basis of taxing nonresident aliens and foreign corporations and to make the test of taxability the "source", or situs of the activities or property which produce the income . . . . Thus, if income is to taxed, the recipient thereof must be resident within the jurisdiction, or the property or activities out of which the income issue or is derived must be situated within the jurisdiction so that the source of the income may be said to have a situs in this country. The underlying theory is that the consideration for taxation is protection of life and property and that the income rightly to be levied upon to defray the burdens of the United States Government is that income which is created by activities and property protected by this Government or obtained by persons enjoying that protection. 5
3.We turn now to the question what is the source of income rule applicable in the instant case. There are two possibly relevant source of income rules that must be confronted; (a) the source rule applicable in respect of contracts of service; and (b) the source rule applicable in respect of sales of personal property.
Where a contract for the rendition of service is involved, the applicable source rule may be simply stated as follows: the income is sourced in the place where the service contracted for is rendered. Section 37 (a) (3) of our Tax Code reads as follows:
It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only in respect of services rendered by individual natural persons; they also apply to services rendered by or through the medium of a juridical person. 6 Further, a contract of carriage or of transportation is assimilated in our Tax Code and Revenue Regulations to a contract for services. Thus, Section 37 (e) of the Tax Code provides as follows:
(e)Income form sources partly within and partly without the Philippines. Items of gross income, expenses, losses and deductions, other than those specified in subsections (a) and (c) of this section shall be allocated or apportioned to sources within or without the Philippines, under the rules and regulations prescribed by the Secretary of Finance. ... Gains, profits, and income from (1) transportation or other services rendered partly within and partly without the Philippines, or (2) from the sale of personnel property produced (in whole or in part) by the taxpayer within and sold without the Philippines, or produced (in whole or in part) by the taxpayer without and sold within the Philippines, shall be treated as derived partly from sources within and partly from sources without the Philippines. ... (Emphasis supplied)
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