THE PHILIPPINE GUARANTY CO., INC., PETITIONER, VS. THE COMMISSIONER OF INTERNAL REVENUE AND THE COURT OF TAX APPEALS, RESPONDENTS.

The Philippine Guaranty Co.,
Inc., a domestic insurance company, entered into reinsurance contracts, on
various dates, with foreign insurance companies not doing business in the
Philippines, namely: Imperio Compania de Seguros, La Union y El
Fenix Espafiol, Overseas
Assurances Corp., Ltd., Sociedad Anonima de Reaseguros Alianza, Tokio Marine & Fire
Insurance Co., Ltd., Union Assurance Society Ltd., Swiss Reinsurance Company and
Tariff Reinsurance Limited. Philippine Guaranty Co., Inc., thereby agreed to
cede to the foreign reinsurers a portion of the
premiums on insurances it has originally underwritten in the
Philippines, in consideration for the
assumption by the latter of liability on an equivalent portion of the risks
insured. Said reinsurance contracts were signed by Philippine Guaranty Co., Inc.
in Manila and by the foreign reinsurers outside the
Philippines, except the contract with Swiss
Reinsurance Company, which was signed by both parties in
Switzerland.

The reinsurance contracts made
the commencement o the reinsurers‘ liability
simultaneous with that of Philippine Guaranty Co., Inc. under the original
insurance. Philippine Guaranty Co., Inc. was required to keep a register in
Manila where the risks ceded to the
foreign reinsurers were entered, and entry therein was
binding upon the reinsurers. A proportionate amount of
taxes on insurance premiums not recovered from the original assured were to be
paid for by the foreign reinsurers. The foreign reinsurers further agreed, in consideration for managing or
administering their affairs in the Philippines, to compensate the Philippine
Guaranty Co., Inc. in an amount equal to 5% of the reinsurance premiums.
Conflicts and or differences between the parties under the reinsurance contracts
were to be arbitrated in Manila. Philippine Guaranty Co., Inc.
and Swiss Reinsurance Company stipulated that their contract shall be construed
by the laws of the Philippines.

Pursuant to the aforesaid
reinsurance contracts Philippine Guaranty Co., Inc. ceded to the foreign reinsurers the following premiums:

Said premiums were excluded by
Philippine Guaranty Co., Inc. from its gross income when it filed its income tax
returns for 1953 and 1951. Furthermore, it did not withhold or pay tax on them.
Consequently, per letter dated April 13,
1959, the
Commissioner of Internal Revenue assessed against Philippine Guaranty Co., Inc.
withholding tax on the ceded reinsurance premiums, thus:

Philippine Guaranty Co., Inc.
protested the assessment on the ground that reinsurance premiums ceded to
foreign reinsurers not doing business in the
Philippines are not subject to withholding
tax. Its protest was denied and it appealed to the Court of Tax Appeals.

On July 6,
1963, the
Court of Tax Appeals rendered judgment with this dispositive portion:

“In view of the foregoing
considerations, petitioner Philippine Guaranty Co., Inc. is hereby ordered to
pay to the Commissioner of Internal Revenue the respective sums of P202,192.00
and P173,153.00 for the total sum of P375,345.00 as withholding income taxes for
the years 1953 and 1954, plus the statutory delinquency penalties thereon. With costs against
petitioner.”

Philippine Guaranty Co., Inc., has appealed, questioning the legality of the Commissioner
of Internal Revenue’s assessment for withholding tax on the reinsurance premiums
ceded in 1953 and 1954 to the foreign reinsurers.

Petitioner maintains that the
reinsurance premiums in question did not constitute income from sources within
the Philippines because the foreign reinsurers did not engage in business in the
Philippines, nor did they have office here.

The reinsurance contracts however
show that the transactions or activities that constituted the undertaking to
reinsure Philippine Guaranty Co., Inc. against losses arising from the original
insurances in the Philippines were performed in the
Philippines. The liability of the foreign
reinsurers commenced simultaneously with the liability
of Philippine Guaranty Co., Inc. under the original insurances. Philippine
Guaranty Co., lnc, kept in
Manila a register of the risks ceded to
the foreign reinsurers. Entries made in such register
bound the foreign reinsurers, localizing in the
Philippines the actual cession of the risks
and premiums and assumption of the reinsurance undertaking by the foreign reinsurers. Taxes on premiums imposed by Section 255 of the
Tax Code for the privilege of doing insurance business in the
Philippines were payable by the foreign
reinsurers when the same were not recoverable from the
original assured. The foreign reinsurers paid
Philippine Guaranty Co., Inc. an amount equivalent to 5% of the ceded premiums,
in consideration for administration and management by the latter of the affairs
of the former in the Philippines in regard to their reinsurance
activities here. Disputes and differences between the parties were subject to
arbitration in the City of Manila. AH the reinsurance contracts,
except that with Swiss Reinsurance Company, were signed by Philippine Guaranty
Co., Inc. in the Philippines and later signed by the foreign
reinsurers abroad. Although the contract between
Philippine Guaranty Co., Inc. and Swiss Reinsurance Company was signed by both
parties in Switzerland, the same specifically provided
that its provision shall be construed according to the laws of the
Philippines, thereby manifesting a clear
intention of the parties lo subject themselves to Philippine laws.

Section 24 of the Tax Code
subjects foreign corporations to tax on their income from sources within the
Philippines. The word “sources” has been
interpreted as the activity, property or service giving rise to the income.^[1] The reinsurance premiums were income created
from the undertaking of the foreign reinsurance companies to reinsure Philippine
Guaranty Co., Inc. against liability for loss under original insurances. Such
undertaking, as explained above, took place in the
Philippines. These insurance premiums
therefore came from sources within the
Philippines and, hence, are subject to
corporate income tax.

The foreign insurers place of business should not be confused with their
place of activity. Business implies continuity and progression of transactions^[2] while activity may consist of only a single
transaction. An activity may occur outside the place of business. Section 24 of
the Tax Code does not require a foreign corporation to engage in business in the
Philippines in subjecting its income to tax.
It suffices that the activity creating the income is performed or done in the
Philippines. What is controlling, therefore,
is not the place of business but the place of activity that
created an income.

Petitioner further contends that
the reinsurance premiums are not income from sources within the
Philippines because they are not
specifically mentioned in Section 37 of the Tax Cede. Section 37 is not an all
inclusive enumeration, for it merely directs that the kinds of income mentioned
therein should be treated as income from sources within the
Philippines but it does not require that
other kinds of income should not be considered likewise.

The power to lax is an attribute
of sovereignty. It is a power emanating from necessity. It is a necessary burden
to preserve the State’s sovereignty and a means to give the citizenry an army to
resist an aggression, a navy to defend its shores from invasion, a corps of
civil servants to serve, public improvements designed for the enjoyment of the
citizenry and those which come within the State’s territory, and facilities and
protection which a government is supposed to provide. Considering that the
reinsurance premiums in question were afforded protection by the government and
the recipient foreign reinsurers exercised rights and privileges guaranteed
by our laws, such reinsurance premiums and reinsurers
should share the burden of maintaining the state.

Petitioner would wish to stress
that its reliance in good faith on the rulings of the Commissioner of Internal
Revenue requiring no withholding of the tax due on the reinsurance premiums in
question relieved it of the duty to pay the corresponding withholding tax
thereon. This defense of petitioner may free it from the payment of surcharges
or penalties imposed for failure to pay the corresponding withholding tax, but
it certainly would not exculpate it from liability to pay such withholding tax.
The Government is not estopped from collecting taxes
by the mistakes or errors of its agents.^[3]

In respect to the question of
whether or not reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines are subject
to withholding tax under Sections 53 and 54 of the Tax Code, suffice it to state
that this question has already been answered in the affirmative in Alexander
Howden & Co., Ltd. vs. Collector of
Internal Revenue, L-19392, April 11, 1965.

Finally, petitioner contends that
the withholding tax should be computed from the amount actually remitted to the
foreign reinsurers instead of from the total amount
ceded. And since it did not remit any amount to its foreign insurers in 1953 and
1954, no withholding tax was due.

The pertinent section of the Tax
Code states:

“Sec.
54. Payment of corporation income tax at source
.—In the case of foreign corporation subject to taxation under this
Title not engaged in trade or business within the Philippines and not having any
office or place of business therein, there shall be deducted and withheld at the
source in the same manner and upon the same items as is provided in section
fifty-three a tax equal to twenty-four per centum thereof, and such tax shall
be returned and paid in the same manner and subject to the same conditions as
provided in that Action.”

The applicable portion of Section
53 provides:

“(b) Non-resident aliens.—All persons, corporations and
general copartnerships (companias colectivas), in whatever
capacity acting, including lessees or mortgagors of real or personal property,
trustees acting in any trust capacity, executors, administrators receivers,
conservators, fiduciaries, employers, and all officers and employees of the
Government of the Philippines having the control, receipt, custody, disposal, or
payment of interest, dividends, rents, salaries, wages, premiums, annuities,
compensation, remunerations, emoluments, or other fixed or determinable annual
or periodical gains, profits, and income of any non-resident alien individual,
not engaged in trade or business within the Philippines and not having any
office or place of business therein, shall (except) in the cases provided for in
subsection (a) of this section) deduct and withhold from such annual or
periodical gains, profits, and income a tax equal to twelve per centum
hereof: Provided, That no such deduction or withholding shall be required in the
case of dividends paid by a foreign corporation unless (1) such corporation is
engaged in trade or business within the Philippines or has an office or place of
business therein, and (2) more than eighty-five per centum of the gross
income of such corporation for the three-year period ending with the lose of its
taxable year preceding the declaration of such dividends (or for such part of
such period as the corporation has been in existence) was derived from sources
within the Philippines as determined under the provisions of section
thirty-seven: Provided, further. That the Collector of Internal Revenue
may authorize such tax to be deducted and withheld from the interest upon any
securities the owners of which are not known to the withholding agent.”

The above-quoted provisions allow
no deduction from the income therein enumerated in determining the amount to be
withheld. Accordingly, in computing the withholding tax due on the reinsurance
premiums in question, no deduction shall be recognized.

WHEREFORE, in affirming the decision
appealed from, the Philippine Guaranty Co., Inc. is hereby ordered to pay to the
Commissioner of Internal Revenue the sums of P202.192.00 and P173.153.00, or a
total amount of P375 345.00, as withholding tax for the years 1953 and 1954,
respectively. If the amount of P375.345.00 is not paid within 30 days from the
date this judgment becomes final there shall be collected a surcharge of 5% on
the amount 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
three (3) years. With costs against petitioner.

SO
ORDERED.

Bengzon, C. J., Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon and Regala, JJ., concur.

^[1] Mertens, Jr., Jacob. Law On Federal
Income Taxation, Vol. 8, Section 45.27.

^[2] Imperial vs. Collector of
Internal Revenue, L-7924, September 30,
1955.

^[3] Hilado
vs. Collector of Internal Revenue, 100 Phil, 288; 53 Off. Gaz., 241; Koppel
(Philippines), Inc. vs.
Collector of Internal Revenue, L-10550, September 19,
1961; Compañia General de Tobacos de
Filipinas vs. City of Manila, L-161619,
June 29,
1963.

R E S O L U T I O N

BENGZON, J.P.,
J.:

The Philippine Guaranty Company,
Inc. moves for the reconsideration of our decision, promulgated on
April 30,
1965,
holding it liable for the payment of income tax which it should have withheld
and remitted to the Bureau of Internal Revenue in the total sum of P375,345.00.

The grounds raised in the instant
motion all spring from movant’s view that the Court of
Tax Appeals as well as this Court found it “innocent of the charges of
violating, wilfully or negligently, sub-section (c) of
Section 53 and Section 51 of the National Internal Revenue Code.” Hence, it
cannot subsequently be held liable for the assessment of P375.315.00 based on
said sections.

The premise of movant’s reasoning cannot be accepted. The Court of Tax
Appeals and this Court did not find that it did not violate Section r>3(c)
and 54 of the Tax Code. On the contrary, movant was
found to have violated Section 53 violation was due to a
reasonable cause—namely, reliance on the advice of its
auditors and opinion of the Commissioner of Internal Revenue—no surcharge to the 764 PHILIPPINE REPORTS Phil.
Guaranty Co., Inc. vs. Comm. of Int. Rev. and CTA tax was imposed. Section 72 of
the Tax Code provides:

“Sec.
72. Surcharges for failure to render returns and for
rendering false and fraudulent returns.—The Commissioner of
Internal Revenue shall assess all income taxes. In case of willful neglect to
file the return or list within the time prescribed by law, or in case a false or
fraudulent return or list is willfully made, the Commissioner of Internal
Revenue shall add to the tax or to the deficiency tax, in case any payment has
been made on the basis of such return before the discovery of the falsity or
fraud, a surcharge of fifty per centum of the amount of such tax or deficiency
tax. In case of any failure to make and file a return or list within the time
prescribed by law or by the Commissioner or other internal revenue officer, not
due to willful neglect, the Commissioner of Internal Revenue shall add to the
tax twenty-five per centum of
its amount, except that, when a return is voluntarily and without notice from
the Commissioner or other officer filed after such time, and it is shown that
the failure to file it was due to a reasonable cause, no such addition shall be
made to the tax. * * *”

It will be noted that the first
half of the above-quoted section covers failure to file a return, willingly
and/or due to negligence, in which case the surcharge is 50%. In the second part
of the law it covers failure to make and file a return “not due to willful
neglect”, in which case only 25% surcharge should be added. As a further
concession to the taxpayer the above-quoted section provides that if “it is
shown that the failure to, file it was due to a reasonable cause, no such
addition shall be made to the tax”.

It would, therefore, be incorrect
for movant to state that it was found “innocent of the
charges of violating, willfully or negligently, sub-section (c) of Section 53
and Section 54”. For, precisely, the mere fact that it was exempted from paying
the penalty necessarily implies violation of Section 53(c). Violating Section
53(c) is one thing; imposing the penalty for such violation under Section
72^[*] is another. If it is found that
the failure to file is due to a reasonable cause, then exemption from surcharge
sets in but never exemption from payment o the tax due.

Since movant failed to pay the tax due, in the sum of P375,345.00, this Court ordered it to pay the same. Simply
because movant was relieved from paying the surcharge
for failure to file the necessary returns, it now wants us to absolve it from
paying even the tax. This, we cannot do. The non-imposition of the 25%
surcharge does not carry with it remission of the tax.

Movant argues that it could not be
expected to withhold the tax, for as early as August
18, 1953
the Board of Tax Appeals held in the case of Franklin Baker^[1] that the reinsurance premiums in question
were not subject to withholding. On top of that, movant maintains, the Commissioner of Internal Revenue, in
reply to the query of its accountants and auditors, issued on September 5,
1953 an
opinion subscribing to the ruling in the Franklin Baker case. As already
explained in our decision a mistake committed by Government agents is not
binding on the Government.

Inasmuch as movant insists on this point in its motion for
reconsideration, we shall further elaborate on the same. Section 200 of the
Income Tax Regulations expressly grants protection to him only if and when he
follows strictly what has been provided therein.

Section 53 (c) makes the
withholding agent personally liable for the income tax withheld under Section
54. It states:

“Sec. 53 (c) Return and payment.—Every
person required to deduct and withhold any tax under this section shall make
return thereof, in duplicate, on or before the fifteenth day of April of each
year, and, on or before the time fixed by law for the payment of the tax, shall
pay the amount withheld to the officer of the Government of the Philippines
authorized to receive it. Every such person is made personally liable for such
tax, and is indemnified against the claims and demands of any person for the
amount of any payments made in accordance with the provisions of this
section.”

The law sets no condition for the
personal liability of the withholding agent to attach. The reason is to compel
the withholding agent to withhold the tax under all circumstances. In effect,
the responsibility for the collection of the tax as well as the payment thereof
is concentrated upon the person over whom the Government has jurisdiction. Thus,
the withholding agent is constituted the agent of both the Government and the
taxpayer. With respect to the collection and/or withholding of the tax, he is
the Government’s agent. In regard to the filing of the necessary income tax
return and the payment of the tax to the Government, he is the agent of the
taxpayer. The withholding agent, therefore, is no ordinary government agent
especially because under Section 53 (c) he is held personally liable for the tax
he is duty bound to withhold; whereas, the Commissioner of Internal Revenue and
his deputies are not made liable by law. Movant then
further contends that as agent of the Government it was released from liability
for the tax after it was advised by the Commissioner of Internal Revenue that
the reinsurance premiums involved were not subject to withholding. It relies on
the provisions of the second paragraph of Section 200 of the Income Tax
Regulations, which states:

“In case of doubt, a withholding
agent may always protect himself by withholding the tax due, and promptly
causing a query to be addressed to the Commissioner of Internal Revenue for the
determination of whether or not the income paid to an individual is not subject
to withholding. In case the Commissioner of Internal Revenue decides that the
income paid to an individual is not subject to withholding. The withholding
agent may thereupon remit the amount of tax withheld.”

The section above-quoted relaxes
the application of the stringent provisions of Section 63 of the Tax Code.
Accordingly, it grants exemption from tax liability, and in so doing, it lays
down steps to be taken by the withholding agent, namely, (1) that he withholds
the tax due, (2) that he promptly addresses a query to the Commissioner of
Internal Revenue for determination whether or not the income paid to an
individual is subject to withholding; and (3) that the Commissioner of Internal
Revenue decides that such income is not subject to withholding. Strict
observance of said steps is required of a withholding agent before he could be
released from liability. Generally, the law frowns upon exemption from taxation,
hence, an ex- empting provision should be construed strictissimi juris.^[2]

It may be illuminating to mention
here however that the Income Tax Regulations was issued by the Secretary of
Finance upon his authority, “to promulgate all needful rules and regulations of
the effective enforcement” of the provisions of the Tax Code.^[3] The mission therefore of Section 200, quoted
above, is to implement Section 53 of the Tax Code for no other purpose than to
enforce its provisions effectively. It should also be noted, that Section 53
provides for no exemption from the duty to withhold except in the cases of
tax-free covenant bonds and dividends.

The facts in this case do not
support a finding that movant complied with Section
200. For, it has not been shown that it withheld the amount of tax due
before it inquired from the Bureau of Internal Revenue as to the
taxability of the reinsurance premiums involved. As a matter of fact, the Court
of Tax Appeals found that “upon advice of its accountants and auditors, * * *
petitioner did not collect and remit to the Commissioner of Internal Revenue the
withholding tax”. This finding of fact of the lower court, unchallenged as it
is, may not be disturbed.^[4]

The requirement in Section 200
that the withholding agent should first withhold the tax before
addressing a query to the Commissioner of Internal Revenue is not without a
meaning for it is in keeping with the general operation of our tax laws: payment
precedes defense. Prior to the creation of the Court of Tax Appeals, the remedy
of a taxpayer was to pay an internal revenue tax first and file a claim for
refund later.^[5] This remedy has not been
abrogated, for the law creating the Court of Tax Appeals merely gives to the
taxpayer an additional remedy. With respect to customs duties the consignee or
importer concerned is required to pay them under protest, before he is allowed
to question legality of the imposition.^[6]
Likewise, validity of a realty tax cannot be assailed until after the taxpayer
has paid the tax under protest.^[7] The
legislature, in adopting such measures in our tax laws, only wanted to be
assured that taxes are paid and collected without delay. For taxes are the lifeblood of government. Also, such measures tend to
prevent collusion between the taxpayer and the tax collector. By questioning a
tax’s legality without first paying it, a taxpayer, in collusion with B.l.R. officials, can unduly delay, if not totally evade, the payment of such tax.

Ofcourse, in this case there was
absolutely no such collusion. Precisely, the Philippine Guaranty Company, Inc.
was absolved from the payment of the 25% surcharge for non-filing of income tax
returns inasmuch as the Tax Court as well as this Court believes that its
omission was due to a reasonable cause.

WHEREFORE, the motion for reconsideration
is denied.

SO
ORDERED.

BengzonC.J., Bautista Angelo,
Concepcion, Reyes, J.B.L., Dizon, Regala, Makalintal, and Zaldivar,
JJ., concur.

[*] Not Section 256 of the Tax Code
as claimed by movant.

^[1] Umali, Roman N., Decisions of the
Board of Tax Appeals, Vol. 2, pp. 303-307.

^2] La Carlota Sugar Central vs.
Jimenez, L-12436, May 31,
1961.

^[3] Section 338, National Internal
Revenue Code.

^[4] This case was appealed upon
questions of law.

^[5] Section 306, Revised
Administrative Code.

^[6] Section 1370, Revised
Administrative Code.

^[7] Section 54, Commonwealth Act 470.