AFISCO INSURANCE CORP. et al. vs.

COURT OF APPEALS
[G.R. No. 112675. January 25, 1999]
DOCTRINE:
Unregistered Partnerships and associations are considered as corporations for tax purposes Under the old internal revenue code, 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 o the !hilippines, no "atter how created or organized, xxx. Ineludibly, the Philippine legislature included in the concept of corporations those entities that resembled them such as unregistered partnerships and associations. Insurance pool in the case at bar is deemed a partnership or association taxable as a corporation In the case at bar, petitioners insurance companies formed a Pool Agreement, or an association that !ould handle all the insurance businesses covered under their "uota share reinsurance treaty and surplus reinsurance treaty !ith #unich is considered a partnership or association !hich may be taxed as a ccorporation. Double Taxation is not Present in the Case at Bar $ouble taxation means taxing the same person t!ice by the same %urisdiction for the same thing. In the instant case, the insurance pool is a taxable entity distince from the individual corporate entities of the ceding companies. &he tax on its income is obviously different from the tax on the dividends received by the companies. &here is no double taxation. #$CT%: &he petitioners are '( non life domestic insurance corporations. &hey issued ris) insurance policies for machines. &he petitioners in (*+, entered into a &uota %hare Reinsurance Treaty and a %urplus Reinsurance Treaty !ith the #unchener -uc)versicherungs .esselschaft /hereafter called #unich0, a non resident foreign insurance corporation. &he reinsurance treaties re"uired petitioners to form a pool, !hich they complied !ith. In (*1+, the pool of machinery insurers submitted a financial statement and filed an Information -eturn of 2rgani3ation 4xempt from Income &ax for (*1,. 2n the basis of this, the 5I- assessed a deficiency of P(,6'7,817.+9, and !ithholding taxes in the amount of P(,1+6,1**.7* and P6*,'76.+6 on dividends paid to #unich and to the petitioners, respectively. &he 5ourt of &ax Appeal sustained the petitioner:s liability. &he 5ourt of Appeals dismissed their appeal. &he 5A ruled in that the pool of machinery insurers !as a partnership taxable as a corporation, and that the latter;s collection of premiums on behalf of its members, the ceding companies, !as taxable income. I%%'E(%: (. <hether or not the pool is taxable as a corporation. 8. )E*D: (0 =es> Pool taxable as a corporation <hether or not there is double taxation.

Argument of Petitioner> &he reinsurance policies !ere !ritten by them individually and separately, and that their liability !as limited to the extent of their allocated share in the original ris)s thus reinsured. ?ence, the pool did not act or earn income as a reinsurer. Its role !as limited to its principal function of allocating and distributing the ris)/s0 arising from the original insurance among the signatories to the treaty or the members of the pool based on their ability to absorb the ris)/s0 ceded@AB as !ell as the performance of incidental functions, such as records, maintenance, collection and custody of funds, etc. Argument of C5> According to Cection 8' of the DI-5 of (*1,> C45. 8'. Rate of tax on corporations. /a0 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 organi3ed in, or existing under the la!s of the Philippines, no matter ho! created or organi3ed, but not including duly registered general co partnership /compaias colecti as0, general professional partnerships, private educational institutions, and building and loan associations xxx. Ineludibly, the Philippine legislature included in the concept of corporations those entities that resembled them such as unregistered partnerships and associations. Interestingly, the DI-5;s inclusion of such entities in the tax on corporations !as made even clearer by the &ax -eform Act of (**1 Cec. 81 read together !ith Cec. 88 reads> C45. 81. Rates of Income Tax on Domestic Corporations. !! /A0 In "eneral. 4xcept as other!ise provided in this 5ode, an income tax of thirty five percent /7,E0 is hereby imposed upon the taxable income derived during each taxable year from all sources !ithin and !ithout the Philippines by every corporation, as defined in Cection 88 /F0 of this 5ode, and taxable under this &itle as a corporation xxx. C45. 88. Definition. <hen used in this &itle> xxx xxx xxx /F0 &he term Gcorporation+ shall include partnerships, no matter ho! created or organi3ed, %oint stoc) companies, %oint accounts /cuentas en participacion0, associations, or insurance companies, but does not include general professional partnerships @orB a %oint venture or consortium formed for the purpose of underta)ing construction pro%ects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract !ithout the .overnment. G,eneral pro essional partnerships; are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of !hich is derived from engaging in any trade or business. &hus, the 5ourt in # angelista . Collector of Internal Re enue held that Cection 8' covered these unregistered partnerships and even associations or %oint accounts, !hich had no legal personalities apart from their individual members. Hurthermore, Pool Agreement or an association that !ould handle all the insurance businesses covered under their "uota share reinsurance treaty and surplus reinsurance treaty !ith #unich may be considered a partnership because it contains the follo!ing elements> /(0 &he pool has a common fund, consisting of money and other valuables that are deposited in the name and credit of the pool. &his common fund pays for the administration and operation expenses of the pool. /80 &he pool functions through an executive board, !hich resembles the board of directors of a corporation, composed of one representative for each of the ceding companies. /70 <hile, the pool itself is not a reinsurer and does not issue any policiesA its !or) is indispensable, beneficial and economically useful to the business of the ceding companies and #unich, because !ithout it they !ould not

have received their premiums pursuant to the agreement !ith #unich. Profit motive or business is, therefore, the primordial reason for the pool;s formation. 80 Do> &here is no double taxation. Argument of Petitioner> -emittances of the pool to the ceding companies and #unich are not dividends sub%ect to tax. Imposing a tax !ould be tantamount to an illegal double taxation, as it !ould result in taxing the same premium income t!ice in the hands of the same taxpayer. Hurthermore, even if such remittances !ere treated as dividends, they !ould have been exempt under tCections 8' /b0 /I0 and 8+7 of the (*11 DI-5 , as !ell as Article 1 of paragraph (and Article , of paragraph , of the -P <est .erman &ax &reaty. Argument of Cupreme 5ourt> $ouble taxation means taxing the same person t!ice by the same %urisdiction for the same thing. In the instant case, the insurance pool is a taxable entity distince from the individual corporate entities of the ceding companies. &he tax on its income is obviously different from the tax on the dividends received by the companies. &here is no double taxation. &ax exemption cannot be claimed by non resident foreign insurance corporattionA tax exemption construed strictly against the taxpayer Cection 8' /b0 /(0 pertains to tax on foreign corporationsA hence, it cannot be claimed by the ceding companies !hich are domestic corporations. Dor can #unich, a foreign corporation, be granted exemption based solely on this provision of the &ax 5ode because the same subsection specifically taxes dividends, the type of remittances for!arded to it by the pool. &he foregoing interpretation of Cection 8' /b0 /(0 is in line !ith the doctrine that a tax exemption must be construedstrictissimi $uris, and the statutory exemption claimed must be expressed in a language too plain to be mista)en.