University of the Philippines College of Law

Taxation Law 1 H; [JBVG]

AFISCO INSURANCE CORPORATION; CCC INSURANCE CORPORATION; CHARTER INSURANCE CO.,

INC.; CIBELES INSURANCE CORPORATION; COMMONWEALTH INSURANCE COMPANY;
CONSOLIDATED INSURANCE CO., INC.; DEVELOPMENT INSURANCE & SURETY CORPORATION;
DOMESTIC INSURANCE COMPANY OF THE PHILIPPINES; EASTERN ASSURANCE COMPANY & SURETY
CORP.; EMPIRE INSURANCE COMPANY; EQUITABLE INSURANCE CORPORATION; FEDERAL
INSURANCE CORPORATION INC.; FGU INSURANCE CORPORATION; FIDELITY & SURETY COMPANY OF
THE PHILS., INC.; FILIPINO MERCHANTS' INSURANCE CO., INC.; GOVERNMENT SERVICE INSURANCE
SYSTEM; MALAYAN INSURANCE CO., INC.; MALAYAN ZURICH INSURANCE CO., INC.; MERCANTILE
INSURANCE CO., INC.; METROPOLITAN INSURANCE COMPANY; METRO-TAISHO INSURANCE
CORPORATION; NEW ZEALAND INSURANCE CO., LTD.; PAN-MALAYAN INSURANCE CORPORATION;
Case Name PARAMOUNT INSURANCE CORPORATION; PEOPLE'S TRANS-EAST ASIA INSURANCE CORPORATION;
PERLA COMPANIA DE SEGUROS, INC.; PHILIPPINE BRITISH ASSURANCE CO., INC.; PHILIPPINE FIRST
INSURANCE CO., INC.; PIONEER INSURANCE & SURETY CORP.; PIONEER INTERCONTINENTAL
INSURANCE CORPORATION; PROVIDENT INSURANCE COMPANY OF THE PHILIPPINES; PYRAMID
INSURANCE CO., INC.; RELIANCE SURETY & INSURANCE COMPANY; RIZAL SURETY & INSURANCE
COMPANY; SANPIRO INSURANCE CORPORATION; SEABOARD EASTERN INSURANCE CO., INC.; SOLID
GUARANTY, INC.; SOUTH SEA SURETY & INSURANCE CO., INC.; STATE BONDING & INSURANCE CO.,
INC.; SUMMA INSURANCE CORPORATION; TABACALERA INSURANCE CO., INC. — all assessed as "POOL
OF MACHINERY INSURERS," petitioners, vs . COURT OF APPEALS, COURT OF TAX APPEALS and
COMMISSIONER OF INTERNAL REVENUE, respondents
Topic Tax on Domestic Corporations
Case No. | Date G.R. No. 112675 | January 25, 1999
Ponente Panganiban, J.
Petitioners contended that the CA erred in finding that the pool or clearing house was an informal
partnership, which was taxable as a corporation under the NIRC. Petitioners further claimed that
the remittances of the pool to the ceding companies and Munich are not dividends subject to tax.
They insisted that taxing such remittances contravene Sections 24 (b) (I) and 263 of the 1977 NIRC
and would be tantamount to an illegal double taxation. Moreover, petitioners argued that since
Munich was not a signatory to the Pool Agreement, the remittances it received from the pool cannot
be deemed dividends.
Case Summary SC ruled that the pool is a taxable entity distinct from the individual corporate entities of the ceding
companies. The tax on its income is different from the tax on the dividends received by the said
companies. The tax exemptions claimed by petitioners cannot be granted. Petitioners' claim that
Munich is tax-exempt based on the RP-West German Tax Treaty is likewise unpersuasive, because
the Internal Revenue Commissioner assessed the pool for corporate taxes on the basis of the
information return it had submitted for the year ending 1975, a taxable year when said treaty was
not yet in effect. Petitioners likewise failed to comply with the requirement of Section 333 of the
NIRC for the suspension of the prescriptive period.
WHEREFORE, the petition is DENIED. The Resolutions of the Court of Appeals dated October
Decision
11, 1993 and November 15, 1993 are hereby AFFIRMED.
 The following unmistakably indicates a partnership or an association covered by Section 24,
NIRC:
(1) The pool has a common fund, consisting of money and other valuables that are deposited
in the name and credit of the pool. This common fund pays for the administration and
operation expenses of the pool
Doctrine (2) The pool functions through an executive board, which resembles the board of directors
of a corporation, composed of one representative for each of the ceding companies
(3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however,
its work is indispensable, beneficial and economically useful to the business of the
ceding companies and Munich, because without it they would not have received their
premiums. The ceding companies share "in the business ceded to the pool" and in the
 University of the Philippines College of Law
Taxation Law 1 H; [JBVG]
"expenses" according to a "Rules of Distribution" annexed to the Pool Agreement. Profit
motive or business is, therefore, the primordial reason for the pool's formation.
● Unregistered Partnerships and Associations are considered corporations for tax purposes (See
Sec. 24, NIRC

RELEVANT FACTS
● Petitioners are 41 non-life insurance corporations, organized and existing under the laws of the PH. Upon
issuance by them of Erection, Machinery Breakdown, Boiler Explosion and Contractors' All Risk insurance
policies
● Aug. 1, 1965: they entered into a Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the
Munchener Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-resident foreign insurance
corporation, requiring the petitioners to form a pool which was formed the same day
● Apr. 14, 1976: the pool of machinery insurers submitted a financial statement and filed an "Information
Return of Organization Exempt from Income Tax" for 1975 on the basis of which it was assessed by the CIR
deficiency corporate taxes (P1,843,273.60), and withholding taxes (P1,768,799.39), and on dividends paid
(P89,438.68) to Munich and to the petitioners
○ Petitioners protested these assessments through its auditors Sycip, Gorres, Velayo and Co
● Jan. 27, 1986: CIR denied the protest and ordered the petitioners, assessed as "Pool of Machinery Insurers," to
pay deficiency income tax, interest, and withholding tax (see NOTES for itemization)
● CA:
○ pool of machinery insurers was a partnership taxable as a corporation
○ That the latter's collection of premiums on behalf of its members, the ceding companies, was taxable
income
○ prescription did not bar the BIR from collecting the taxes due, because "the taxpayer cannot be
located at the address given in the information return

RATIO DECIDENDI
Issue Ratio
W/N the Clearing ● Petitioners:
House, acting as a o the CA erred in finding that the pool or clearing house was an informal
mere agent and partnership, which was taxable as a corporation
performing strictly o the reinsurance policies were written by them "individually and separately,"
administrative and that their liability was limited to the extent of their allocated share in the
functions, and which original risks thus reinsured. Hence, the pool did not act or earn income as a
did not insure or reinsurer
assume any risk in its o it’s role is limited to its principal function of "allocating and distributing the
own name, was a risk(s) arising from the original insurance among the signatories to the treaty
partnership or or the members of the pool based on their ability to absorb the risk(s) ceded[;]
association subject to as well as the performance of incidental functions, such as records,
tax as a corporation; maintenance, collection and custody of funds, etc
o No partnership existing because:
1) they, the reinsurers, did not share the same risk or solidary liability;
(2) there was no common fund;
(3) the executive board of the pool did not exercise control and management of
its funds, unlike the board of directors of a corporation;
(4) the pool or clearing house "was not and could not possibly have engaged in
the business of reinsurance from which it could have derived income for itself
 SC: CIR’s opinion or ruling is accorded much weight and even finality, when there is
no showing that it is patently wrong
 University of the Philippines College of Law
Taxation Law 1 H; [JBVG]
 The Court cited Sec. 24, NIRC (see NOTES)
 The PH legislature included in the concept of corporations those entities that resembled
them such as unregistered partnerships and associations. Parenthetically, the NLRC's
inclusion of such entities in the tax on corporations was made even clearer by the Tax
Reform Act of 1997, which amended the Tax Code (see NOTES)
 The CA correctly applied Evangelista v. CIR where it was held:
o Section 24 covered these unregistered partnerships and even associations or
joint accounts, which had no legal personalities apart from their individual
members
o The term 'partnership' includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business,
financial operation, or venture is carried on . . .
 Article 1767, NCC recognizes the creation of a contract of partnership when "two or
more persons bind themselves to contribute money, property, or industry to a common
fund, with the intention of dividing the profits among themselves."
o Requisites:
(1) mutual contribution to a common stock, and
(2) a joint interest in the profits."
o In other words, a partnership is formed when persons contract "to devote to a
common purpose either money, property, or labor with the intention of dividing
the profits between themselves
 Association - implies associates who enter into a "joint enterprise . . . for the transaction
of business
 The following unmistakably indicates a partnership or an association covered by
Section 24, NIRC:
(4) The pool has a common fund, consisting of money and other valuables that are
deposited in the name and credit of the pool. This common fund pays for the
administration and operation expenses of the pool
(5) The pool functions through an executive board, which resembles the board of
directors of a corporation, composed of one representative for each of the ceding
companies
(6) True, the pool itself is not a reinsurer and does not issue any insurance policy;
however, its work is indispensable, beneficial and economically useful to the
business of the ceding companies and Munich, because without it they would not
have received their premiums. The ceding companies share "in the business
ceded to the pool" and in the "expenses" according to a "Rules of Distribution"
annexed to the Pool Agreement. Profit motive or business is, therefore, the
primordial reason for the pool's formation.
o their association or coaction was indispensable [to] the transaction of the
business… If together they have conducted business, profit must have been the
object as, indeed, profit was earned. Though the profit was apportioned among
the members, this is only a matter of consequence, as it implies that profit actually
resulted
 Petitioners' reliance on Pascual v. Commissioner is misplaced
o Facts obtaining therein are not on all fours with the present case.
o In this case, there was no unregistered partnership, but merely a co-ownership
which took up only two isolated transactions
W/M the remittances ● Petitioners:
to petitioners and o remittances of the pool to the ceding companies and Munich are not dividends
MUNICHRE of their subject to tax; taxing such remittances contravene Sections 24 (b) (I) and 263 of
respective shares of the 1977 NIRC and "would be tantamount to an illegal double taxation, as it
reinsurance
 University of the Philippines College of Law
Taxation Law 1 H; [JBVG]
premiums, pertaining would result in taxing the same premium income twice in the hands of the same
to their individual and taxpayer
separate contracts of o since Munich was not a signatory to the Pool Agreement, the remittances it
reinsurance, were received from the pool cannot be deemed dividend
"dividends" subject to o even if such remittances were treated as dividends, they would have been exempt
tax; under the previously mentioned sections of the 1977 NIRC, as well as Article 7
of paragraph 1 and Article 5 of paragraph 5 of the RP-West German Tax Treaty.
 The pool is a taxable entity distinct from the individual corporate entities of the ceding
companies. The tax on its income is obviously different from the tax on the dividends
received by the said companies. Clearly, there is no double taxation here
 "Exemptions therefrom are highly disfavored in law and he who claims tax exemption
must be able to justify his claim or right."
 Petitioners have failed to discharge this burden of proof. The sections of the 1977 NIRC
which they cite are inapplicable, because these were not yet in effect when the income
was earned and when the subject information return for the year ending 1975 was filed.
 Section 255 provides that no tax shall ". . . be paid upon reinsurance by any company
that has already paid the tax . . . ." This cannot be applied to the present case because,
as previously discussed, the pool is a taxable entity distinct from the ceding companies;
therefore, the latter cannot individually claim the income tax paid by the former as their
own
 On the other hand, Section 24 (b) (1) pertains to tax on foreign corporations; hence, it
cannot be claimed by the ceding companies which are domestic corporations. Nor can
Munich, a foreign corporation, be granted exemption based solely on this provision of
the Tax Code, because the same subsection specifically taxes dividends, the type of
remittances forwarded to it by the pool.
o Although not a signatory to the Pool Agreement, Munich is patently an associate
of the ceding companies in the entity formed, pursuant to their reinsurance
treaties which required the creation of said pool.
 Under its pool arrangement with the ceding companies, Munich shared in their income
and loss. This is manifest from a reading of Articles 3 and 10
of the Quota-Share Reinsurance Treaty and Articles 3 and 10 of the Surplus
Reinsurance Treaty.
 The foregoing interpretation of Section 24 (b) (1) is in line with the doctrine that a tax
exemption must be construed strictissimi juris, and the statutory exemption claimed
must be expressed in a language too plain to be mistaken
 Petitioners: Munich is tax-exempt based on the RP-West German Tax Treaty
 SC: CIR assessed the pool for corporate taxes on the basis of the information return it
had submitted for the year ending 1975, a taxable year when said treaty was not yet in
effect. Although petitioners omitted in their pleadings the date of effectivity of the
treaty, the Court takes judicial notice that it took effect only later, on December 14,
1984
W/N the respondent ● Petitioners:
Commissioner's right o the subject information return was led by the pool on April 14, 1976. On the basis
to assess the Clearing of this return, the BIR telephoned petitioners on November 11, 1981, to give them
House had already notice of its letter of assessment dated March 27, 1981.
prescribed o the 5-year statute of limitations then provided in the NIRC had already lapsed, and
that the internal revenue commissioner was already barred by prescription from
making an assessment
 CA and CTA correctly found that prescriptive period was tolled under then Section 333,
NIRC, because " the taxpayer cannot be located at the address given in the information
return filed and for which reason there was delay in sending the assessment
 University of the Philippines College of Law
Taxation Law 1 H; [JBVG]
 Whether the government's right to collect and assess the tax has prescribed involves
facts which have been ruled upon by the lower courts. It is axiomatic that in the absence
of a clear showing of palpable error or grave abuse of discretion, as in this case, this
Court must not overturn the findings of the CA and CTA
 Petitioners admitted in their Motion for Reconsideration before the CA that the pool
changed its address, for they stated that the pool's information return filed in 1980
indicated therein its "present address
o this falls short of the requirement of Section 333 of the NIRC for the suspension
of the prescriptive period
 The law clearly states that the said period will be suspended only "if the taxpayer
informs the CIR of any change in the address

RULING
WHEREFORE, the petition is DENIED. The Resolutions of the Court of Appeals dated
October 11, 1993 and November 15, 1993 are hereby AFFIRMED.
NOTES

Itemization

Net income per information return P3,737,370.00

===========
Income tax due thereon P1,298,080.00
Add: 14% Int. fr. 4/15/76
to 4/15/79 545,193.60
––––––––––––
TOTAL AMOUNT DUE & P1,843,273.60
COLLECTIBLE
===========
Dividend paid to Munich
Reinsurance Company P3,728,412.00
===========
35% withholding tax at source due thereon P1,304,944.20
Add: 25% surcharge 326,236.05
14% interest from
1/25/76 to 1/25/79 137,019.14
Compromise
penalty-non-filing of return 300.00
late payment 300.00
––––––––––––
TOTAL AMOUNT DUE & P1,768,799.39
COLLECTIBLE
===========
Dividend paid to Pool Members P655,636.00
===========
10% withholding tax at
source due thereon P65,563.60
 University of the Philippines College of Law
Taxation Law 1 H; [JBVG]
Add: 25% surcharge 16,390.90
14% interest from
1/25/76 to 1/25/79 6,884.18
Compromise
penalty-non-filing of return 300.00
late payment 300.00
––––––––––––
TOTAL AMOUNT DUE & P89,438.68
COLLECTIBLE
=========="

SEC. 24, NIRC

Rate of tax on corporations. — (a) Tax on domestic corporations. —
A tax is hereby imposed upon the taxable net income received during each taxable year from all sources by every
corporation organized in, or existing under the laws of the Philippines, no matter how created or organized, but not
including duly registered general co-partnership (compañias colectivas), general professional partnerships, private
educational institutions, and building and loan associations . . . ."

Tax Reform Act of 1997

SEC. 27. Rates of Income Tax on Domestic Corporations. — (A) In General. —
Except as otherwise provided in this Code, an income tax of thirty-ve percent (35%) is hereby imposed upon the
taxable income derived during each taxable year from all sources within and without the
Philippines by every corporation, as dened in Section 22 (B) of this Code, and taxable under this Title as a corporation
. . . ."

"SEC. 22. Definition. — When used in this Title: xxx xxx xxx (B)
The term 'corporation' shall include partnerships, no matter how created or organized, joint-stock companies, joint
accounts (cuentas en participacion), associations, or insurance companies, but does not include general professional
partnerships [or] a joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to
an operating or consortium agreement under a service contract without the Government. 'General professional
partnerships' are partnerships formed by persons for the sole purpose of exercising their common profession, no part
of the income of which is derived from engaging in any trade or business.