GR 153793; (August, 2006) (Digest)
G.R. No. 153793 August 29, 2006
COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. JULIANE BAIER-NICKEL, Respondent.
FACTS
Respondent Juliane Baier-Nickel, a non-resident German citizen, was the President of JUBANITEX, Inc., a domestic corporation. She was also separately appointed as a commission agent, entitled to a 10% commission on sales concluded through her efforts. In 1995, she received commission income of P1,707,772.64, from which JUBANITEX withheld and remitted P170,777.26 as income tax. Respondent filed a claim for refund, arguing her commission income was not taxable in the Philippines as it was compensation for marketing services rendered entirely in Germany, thus constituting income from sources outside the Philippines.
The Court of Tax Appeals (CTA) denied the refund, ruling the commissions were remuneration for her services as President, making the income taxable since JUBANITEX was a domestic source. The Court of Appeals reversed the CTA, holding respondent received the income as a sales agent and the source was her activity in Germany, thus not subject to Philippine income tax. The Commissioner of Internal Revenue appealed to the Supreme Court.
ISSUE
Whether the sales commission income received by respondent, a non-resident alien, is taxable in the Philippines.
RULING
The Supreme Court REVERSED the Court of Appeals and REINSTATED the CTA decision, denying the tax refund. The Court held the income was taxable from sources within the Philippines. For non-resident aliens, taxability under the National Internal Revenue Code depends on whether the income is from “sources within the Philippines.” The Court rejected the “activity test” (looking at the place where the service was performed) and applied the “source of the income” rule, which looks to the property, activity, or service that gave rise to the income. The legal source of the commission income was the separate contract of agency with JUBANITEX, a domestic corporation. The income therefore originated from the business operations of this Philippine-based entity. Since the income flowed from a source—the domestic corporation—within the Philippines, it was subject to Philippine income tax, regardless of where respondent performed her marketing services. The Court emphasized that the situs of taxation is the source, not the place of payment or performance of service.