GR 26379; (December, 1969) (Digest)
G.R. No. L-26379 December 27, 1969
WILLIAM C. REAGAN, ETC., petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent.
FACTS
Petitioner William C. Reagan, a U.S. citizen and civilian employee of Bendix Radio (providing technical assistance to the U.S. Air Force), was assigned to Clark Air Base, Philippines. On April 22, 1960, he imported a tax-free 1960 Cadillac. On July 11, 1960, with a permit from the Base Commander, he sold the car for $6,600.00 to Pfc. Willie Johnson, Jr., a member of the U.S. Marine Corps, at Clark Air Base. Johnson then sold the car to Fred Meneses in Manila. The Commissioner of Internal Revenue assessed and collected an income tax of P2,979.00 from Reagan on the taxable net income from the sale. Reagan paid but sought a refund, claiming the sale occurred on foreign soil (Clark Air Base) and was thus beyond Philippine tax jurisdiction. The Court of Tax Appeals denied the refund.
ISSUE
Whether the sale of the automobile at Clark Air Base is subject to Philippine income tax, i.e., whether Clark Air Base is foreign territory beyond Philippine tax jurisdiction.
RULING
No. The sale is subject to Philippine income tax. Clark Air Base is not foreign territory; it remains part of Philippine territory, and the Philippine government retains jurisdiction, including the power to tax, unless expressly restricted. The Supreme Court affirmed the decision of the Court of Tax Appeals, denying the refund. The Court held that the Philippines, as a sovereign state, has exclusive and absolute jurisdiction over its entire domain, including areas leased as military bases. Any limitations on sovereignty, such as tax exemptions, must arise from consent (e.g., treaties) and are construed strictly. The Military Bases Agreement of 1947 did not convert the bases into foreign soil; it only provided specific tax exemptions, which did not apply to Reagan’s income from the sale. The observation in prior cases that bases are “outside the Philippines” was merely an obiter dictum and a legal fiction for specific contexts, not a general principle. Thus, the sale, occurring within Philippine territory, generated income from Philippine sources, making Reagan liable for income tax.