COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. THE PHILIPPINE AMERICAN ACCIDENT INSURANCE COMPANY, INC., THE PHILIPPINE AMERICAN ASSURANCE COMPANY, INC., AND THE PHILIPPINE A…

Philippine American Accident Insurance Company versus Commissioner of Internal Revenue

The Case

This is a petition for review brought by the Commissioner of Internal Revenue against three affiliated insurance companies, the Philippine American Accident Insurance Company, the Philippine American Assurance Company, and the Philippine American General Insurance Company. The Commissioner sought to collect the three percent percentage tax on lending investors, and the fixed tax on lending investors, from the insurance companies on the interest income they earned from mortgage and other loans. The companies had paid these taxes under protest and sued for a refund. The case matters because it fixes the rule that an insurance company does not become a lending investor, for tax purposes, merely because it lends money at interest as part of its investment activities.

Procedural History

The three companies each filed a petition for review with the Court of Tax Appeals after the Commissioner failed to act on their letter-claim for refund. The petitions were later consolidated. The Court of Tax Appeals held that the companies were not taxable as lending investors and ordered the Commissioner to refund the amounts paid. The Commissioner then elevated the matter to the Court of Appeals, which affirmed the Court of Tax Appeals in its decision of 7 January 2000. The Commissioner appealed that affirmance to the Supreme Court by petition for review.

Facts

The three companies are domestic corporations licensed to transact insurance business in the country. From August 1971 to September 1972, they paid the Bureau of Internal Revenue, under protest, the three percent tax imposed on lending investors. The amounts were 7,985.25 pesos from the Philippine American Accident Insurance Company, 7,047.80 pesos from the Philippine American Assurance Company, and 14,541.97 pesos from the Philippine American General Insurance Company. These amounts represented three percent of each company's interest income from mortgage and other loans. The companies also paid the taxes required of insurance companies.

On 31 January 1973, the companies sent a letter-claim to the Commissioner seeking a refund of the taxes paid under protest. When they received no response, each company filed a petition for review with the Court of Tax Appeals on 26 April 1973. They argued that they were not lending investors and so were not subject to the three percent lending investors' tax.

The Court of Tax Appeals archived the case for several years while a similar issue was pending before the higher courts. When the case was reinstated, the Court of Tax Appeals ruled that the companies were entitled to their refund, because the term lending investors does not embrace insurance companies. The Court of Appeals affirmed.

Issues

• Whether or not the insurance companies are subject to the three percent percentage tax on lending investors under Section 195-A of Commonwealth Act Number 466.
• Whether or not the insurance companies are subject to the annual fixed tax on lending investors under Section 182(A)(3)(dd) of Commonwealth Act Number 466.

Applicable Provisions

Section 195-A of Commonwealth Act Number 466 provides:

Section 195-A. Percentage tax on dealers in securities; lending investors. Dealers in securities and lending investors shall pay a tax equivalent to three per centum on their gross income.

This is the percentage tax the Commissioner sought to impose on the companies' interest income.

Section 182(A)(3)(dd) of Commonwealth Act Number 466 provides:

Section 182. Fixed taxes. (A) On business. (3) Other fixed taxes. The following fixed taxes shall be collected as follows, the amount stated being for the whole year, when not otherwise specified; (dd) Lending investors. In chartered cities and first class municipalities, five hundred pesos; In second and third class municipalities, two hundred and fifty pesos; In fourth and fifth class municipalities and municipal districts, one hundred and twenty-five pesos; Provided, That lending investors who do business as such in more than one province shall pay a tax of five hundred pesos.

This is the annual fixed tax on lending investors that the Commissioner also invoked.

Section 194(u) of Commonwealth Act Number 466 provides:

(u) Lending investor includes all persons who make a practice of lending money for themselves or others at interest.

This is the definition the Commissioner relied on to argue that the companies' lending activities made them lending investors.

Section 185 of the Insurance Code provides:

Section 185. Corporations formed or organized to save any person or persons or other corporations harmless from loss, damage, or liability arising from any unknown or future or contingent event, or to indemnify or to compensate any person or persons or other corporations for any such loss, damage, or liability, or to guarantee the performance of or compliance with contractual obligations or the payment of debts of others shall be known as insurance corporations.

This defines the business the companies actually engage in, which the Court distinguishes from lending.

Ruling

On the first issue, the Court held that insurance companies are not lending investors under Commonwealth Act Number 466. Section 194(u) does not tax the practice of lending per se; it merely defines who lending investors are. The definition is not broad enough to include insurance companies, which are different enterprises in the eyes of the law. The Court stressed that the granting of mortgage and other loans is one of several means of investment allowed to, and strictly regulated for, insurance companies. When a company is taxed on its main business, it is no longer taxable for an activity that is merely a part of, incidental to, and necessary to that main business. The companies had already paid percentage and fixed taxes on their insurance business, and no provision of law required an additional payment.

On the second issue, the Court held that the companies are likewise not subject to the fixed tax on lending investors. Section 182(A)(3) accorded different tax treatments to lending investors and to insurance companies, the latter being grouped with banks, finance and investment companies. The separate provisions demonstrate an intention to treat these businesses differently. The Court also applied the rule that the imposition of a tax cannot be presumed, and that where there is doubt, tax laws must be construed strictly against the government and in favor of the taxpayer.

Doctrine

An insurance company does not become a lending investor, for purposes of the percentage tax and the fixed tax, merely because it lends money at interest. The lending of money by an insurer is an investment activity that is part of, incidental to, and necessary to the insurance business, and the fruits of these investments are income from the insurance business. The definition of lending investor in Section 194(u) defines but does not tax the practice of lending, and it is not broad enough to include insurance companies. Where a statute enumerates the things upon which it is to operate, everything else is by implication excluded. The imposition of a tax cannot be presumed; where there is doubt, tax laws are construed strictly against the government and in favor of the taxpayer.

Disposition

The Supreme Court denied the petition and affirmed the decision of the Court of Appeals, so the insurance companies won and kept their refund.

Remember This

The single line worth memorizing is that an insurer that lends money at interest is not thereby transformed into a lending investor, because lending is merely incidental to the insurance business. Examiners like to use this case to test the rule that tax impositions are construed strictly against the government, and that a taxpayer already taxed on its main business is not taxed again on an activity that is part of that same business.