G.R. No. L-20501 April 30, 1965
BRITISH TRADERS’ INSURANCE CO., LTD., petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent.

FACTS

British Traders’ Insurance Co., Ltd., a Hongkong corporation doing business in the Philippines, along with other companies (collectively, the Union Companies), entered into worldwide reinsurance treaties with various foreign insurance companies. These treaties, negotiated and signed outside the Philippines, involved ceding a portion of premiums from originally underwritten Philippine insurances in exchange for the reinsurers assuming an equivalent portion of the risks. Payment of claims and premiums was stipulated to be in London. A key provision required the Union Companies to keep registers where entry of risks ceded constituted a binding cession on the reinsurers. The treaties made the reinsurers’ liability coterminous with the Union Companies’ and bound them to adjustments or settlements made by the Union Companies.
For 1954 and 1955, the Philippine office of British Traders ceded reinsurance premiums (P244,480.35 and P243,636.19, respectively) to foreign reinsurers not doing business in the Philippines. British Traders did not include these amounts in its gross income or withhold income tax on them. The Commissioner of Internal Revenue assessed withholding tax, including surcharges, under Sections 53 and 54 of the Tax Code. British Traders protested, arguing the cessions were not subject to withholding tax. The Court of Tax Appeals sustained the assessments.
Subsequently, on March 1, 1962, British Traders, on behalf of its non-resident reinsurers, filed income tax returns for 1954 and 1955, declaring the reinsurance premiums and paying the corresponding income tax for 1954 (P6,212.50; no tax due for 1955). Before the Tax Court’s decision became final, British Traders attempted to file a supplemental petition alleging the filing of the returns and praying for relief from withholding tax under Section 53(e). The Tax Court denied leave to file, holding it would change the theory of the case and reopen proceedings.

ISSUE

1. Whether reinsurance premiums ceded to non-resident foreign insurance companies under treaties negotiated and executed abroad are subject to Philippine income and/or withholding tax.
2. Whether the Court of Tax Appeals committed reversible error in denying leave to file a supplemental petition for review.

RULING

1. Yes, the reinsurance premiums are subject to Philippine income tax and withholding tax. The Supreme Court held that the source of the reinsurance premiums is the Philippines. Although the treaties were signed abroad, significant activities under the treaties were performed in the Philippines: the entry of ceded risks in a register kept in Manila (which constituted binding cession), computation of retention, determination of the amount ceded, remittance of premiums, adjustment of losses, and payment of applicable taxes. These activities localized the income source within Philippine territory. The place of contracting is not the sole criterion; the place of activity controls. Section 24 of the Tax Code taxes foreign corporations on income from sources within the Philippines, which is determined by the locus of the activity, property, or service producing the income. The fact that the foreign reinsurers were not doing business in the Philippines is precisely why the withholding mechanism under Sections 53 and 54 applies, to ensure tax collection from income earned in the Philippines by entities without a local office or agent. The enumeration in Section 37 of the Tax Code is not exclusive. The Court cited its ruling in Howden vs. Commissioner of Internal Revenue affirming that such reinsurance premiums are subject to withholding tax.
2. No, the Court of Tax Appeals did not commit reversible error. The admission of a supplemental pleading is discretionary under the Rules of Court. The Tax Court properly exercised its discretion in denying the petition, as it was filed after the court had rendered its decision and would have entirely changed the theory of the case from challenging the taxability to claiming relief based on subsequent payment. Allowing it would sanction speculation and could put government agencies in contradictory positions, potentially hindering the Bureau of Internal Revenue from verifying the late returns and collecting any deficiency tax. Supplemental pleadings are meant to supply deficiencies in aid of an original pleading, not to substitute it entirely.
The decision of the Court of Tax Appeals was affirmed.