G.R. No. L-19727 and L-19903, May 20, 1965
THE COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PHOENIX ASSURANCE CO., LTD., respondent. (and the converse case)

FACTS

Phoenix Assurance Co., Ltd., a foreign insurance corporation licensed to do business in the Philippines, entered into worldwide reinsurance treaties in London with various foreign insurance companies not doing business in the Philippines. Pursuant to these treaties, it ceded portions of premiums earned from its Philippine underwriting business for the years 1952, 1953, and 1954. The Commissioner of Internal Revenue assessed withholding tax on these ceded premiums. Separately, the Commissioner issued deficiency income tax assessments against Phoenix for the years 1950, 1952, and 1954, primarily involving the disallowance of portions of claimed deductions for: (1) net addition to marine insurance reserve for 1950; and (2) head office expenses allocable to its Philippine business for 1952, 1953, and 1954. The Commissioner computed the allowable head office expenses at 5% of net Philippine income, while Phoenix claimed 5% of gross Philippine income. Phoenix protested the assessments. The Court of Tax Appeals ruled partially in favor of both parties. Both the Commissioner and Phoenix appealed.

ISSUE

1. Whether reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines under contracts executed abroad are subject to withholding tax.
2. Whether the Commissioner’s right to assess deficiency income tax for 1952 had prescribed.
3. Whether the deduction claimed by Phoenix as net addition to marine insurance reserve for 1950 was excessive.
4. Whether the deductions claimed for head office expenses allocable to Philippine business for 1952, 1953, and 1954 were excessive.

RULING

1. Yes. Reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines are income from sources within the Philippines and are subject to withholding tax under Sections 53 and 54 of the Tax Code, as held in the precedent case British Traders’ Insurance Co., Ltd. v. Commissioner of Internal Revenue.
2. No. The Commissioner’s right to assess deficiency income tax for 1952 had not prescribed. The prescriptive period under Section 331 of the Tax Code should be counted from the filing of the amended return on August 30, 1955, not the original return, because the deficiency could only be determined after the amended return was filed. The assessment on July 24, 1958, was within the five-year period.
3. No. The deduction claimed for net addition to marine insurance reserve for 1950 was not excessive. The Commissioner’s disallowance, based on an assumption about the time required for shipments to reach destination, was not justified. The reserve, being a liability for contingent losses, is a proper deduction.
4. Yes. The deductions claimed for head office expenses were excessive. The allowable deduction for head office expenses under Section 30 of the Tax Code is limited to expenses incurred in carrying on a business within the Philippines. The Commissioner correctly limited the deduction to 5% of the net income from Philippine business, not gross income.
MODIFIED JUDGMENT: Phoenix Assurance Co., Ltd. is ordered to pay the Commissioner of Internal Revenue withholding taxes for 1952, 1953, and 1954, and deficiency income taxes for 1952 and 1954. The Commissioner is ordered to refund the overpaid income tax for 1953.