KILOSBAYAN et al v. GUINGONA 1.
On the issue of nationality, it seems that PGMC’s foreign
G.R. No. 113375
Davide Jr., J.
FACTS:
In 1993, the Philippine Charity Sweepstakes Office decided to put up an on-
line lottery system which will establish a national network system that will
in turn expand PCSO’s source of income.
A bidding was made. Philippine Gaming Management Corporation (PGMC)
won it. A contract of lease was awarded in favor of PGMC.
Kilosbayan opposed the said agreement between PCSO and PGMC as it
alleged that:
1. PGMC does not meet the nationality requirement because it is
75% foreign owned (owned by a Malaysian firm Berjaya Group
Berhad);
2. PCSO, under Section 1 of its charter (RA 1169), is prohibited from
holding and conducting lotteries “in collaboration, association or
joint venture with any person, association, company or entity”;
3. The network system sought to be built by PGMC for PCSO is a
telecommunications network. Under the law (Act No. 3846), a
franchise is needed to be granted by the Congress before any
person may be allowed to set up such;
4. PGMC’s articles of incorporation, as well as the Foreign
Investments Act (R.A. No. 7042) does not allow it to install,
establish and operate the on-line lotto and telecommunications
systems.
PGMC and PCSO, through Teofisto Guingona, Jr. and Renato Corona,
Executive Secretary and Asst. Executive Secretary respectively, alleged that
PGMC is not a collaborator but merely a contractor for a piece of work, i.e.,
the building of the network; that PGMC is a mere lessor of the network it
will build as evidenced by the nature of the contract agreed upon, i.e.,
Contract of Lease.
ISSUE: Whether or not Kilosbayan is correct.
HELD: Yes, but only on issues 2, 3, and 4.
ownership was reduced to 40% though.
2. On issues 2, 3, and 4, Section 1 of R.A. No. 1169, as amended by
B.P. Blg. 42, prohibits the PCSO from holding and conducting
lotteries “in collaboration, association or joint venture with any
person, association, company or entity, whether domestic or
foreign.” There is undoubtedly a collaboration between PCSO and
PGMC and not merely a contract of lease. The relations between
PCSO and PGMC cannot be defined simply by the designation they
used, i.e., a contract of lease. Pursuant to the wordings of their
agreement, PGMC at its own expense shall build, operate, and
manage the network system including its facilities needed to
operate a nationwide online lottery system. PCSO bears no risk
and all it does is to provide its franchise – in violation of its charter.
Necessarily, the use of such franchise by PGMC is a violation of Act
No. 3846.
FACTS:
The PCSO decided to establish an online lottery system for the purpose of
increasing its revenue base and diversifying its sources of funds. Sometime
before March 1993, after learning that the PCSO was interested in
operating on an online lottery system, the Berjaya Group Berhad, with its
affiliate, the International Totalizator Systems, Inc. became interested to
offer its services and resources to PCSO. Considering the citizenship
requirement, the PGMC claims that Berjaya Group undertook to reduce its
equity stakes in PGMC to 40% by selling 35% out of the original 75% foreign
stockholdings to local investors. An open letter was sent to President
Ramos strongly opposing the setting up of an online lottery system due to
ethical and moral concerns, however the project pushed through.
ISSUES:
1. Whether the petitioners have locus standi (legal standing); and
2. Whether the Contract of Lease is legal and valid in light of Sec. 1 of
R.A. 1169 as amended by B.P. Blg. 42.
RULING:
AFISCO INSURANCE CORP. v. COURT OF APPEALS
1. The petitioners have locus standi due to the transcendental
G.R. No. 112675
importance to the public that the case demands. The
ramifications of such issues immeasurably affect the social, Panganiban, J.
economic and moral well-being of the people. The legal standing
then of the petitioners deserves recognition, and in the exercise of DOCTRINE:
its sound discretion, the Court brushes aside the procedural
Unregistered Partnerships and associations are considered as corporations
barrier.
for tax purposes – Under the old internal revenue code, “A tax is hereby
2. Sec. 1 of R.A. No. 1169, as amended by B.P. Blg. 42, prohibits the
imposed upon the taxable net income received during each taxable year
PCSO from holding and conducting lotteries “in collaboration,
from all sources by every corporation organized in, or existing under the
association or joint venture with any person, association,
laws of the Philippines, no matter how created or organized, xxx.”
company, or entity, whether domestic or foreign.” The language
Ineludibly, the Philippine legislature included in the concept of corporations
of the section is clear that with respect to its franchise or privilege
those entities that resembled them such as unregistered partnerships and
“to hold and conduct charity sweepstakes races, lotteries and
associations.
other similar activities,” the PCSO cannot exercise it “in
collaboration, association or joint venture” with any other party.
This is the unequivocal meaning and import of the phrase. By the Insurance pool in the case at bar is deemed a partnership or association
exception explicitly made, the PCSO cannot share its franchise taxable as a corporation – In the case at bar, petitioners-insurance
with another by way of the methods mentioned, nor can it companies formed a Pool Agreement, or an association that would handle
transfer, assign or lease such franchise. all the insurance businesses covered under their quota-share reinsurance
treaty and surplus reinsurance treaty with Munich is considered a
partnership or association which may be taxed as a ccorporation.

Double Taxation is not Present in the Case at Bar – Double taxation means
“taxing the same person twice by the same jurisdiction 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. The tax on its
income is obviously different from the tax on the dividends received by the
companies. There is no double taxation.

FACTS:
The petitioners are 41 non-life domestic insurance corporations. They
issued risk insurance policies for machines. The petitioners in 1965 entered
into a Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty
with the Munchener Ruckversicherungs-Gesselschaft (hereafter called
Munich), a non-resident foreign insurance corporation. The reinsurance
treaties required petitioners to form a pool, which they complied with.
In 1976, the pool of machinery insurers submitted a financial statement
and filed an “Information Return of Organization Exempt from Income Tax”
for 1975. On the basis of this, the CIR assessed a deficiency of
P1,843,273.60, and withholding taxes in the amount of P1,768,799.39 and
P89,438.68 on dividends paid to Munich and to the petitioners,
respectively.
The Court of Tax Appeal sustained the petitioner's liability. The Court of
Appeals dismissed their appeal.
The CA ruled in that the pool of machinery insurers was a partnership
taxable as a corporation, and that the latter’s collection of premiums on
behalf of its members, the ceding companies, was taxable income.
ISSUE/S:
1. Whether or not the pool is taxable as a corporation.
2. Whether or not there is double taxation.
HELD:
1) Yes: Pool taxable as a corporation
Argument of Petitioner: The reinsurance policies were written by them
“individually and separately,” and that their liability was limited to the
extent of their allocated share in the original risks thus reinsured. Hence,
the pool did not act or earn income as a reinsurer. Its role was limited to its
principal function of “allocating and distributing the risk(s) arising from the
original insurance among the signatories to the treaty or the members of
the pool based on their ability to absorb the risk(s) ceded[;] as well as the
performance of incidental functions, such as records, maintenance,
collection and custody of funds, etc.”
Argument of SC: According to Section 24 of the NIRC of 1975:
“SEC. 24. Rate of tax on corporations. -- (a) 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 organized in, or
existing under the laws of the Philippines, no matter how created or
organized, but not including duly registered general co-partnership
(compañias colectivas), 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 NIRC’s inclusion of such entities in the tax on
corporations was made even clearer by the Tax Reform Act of 1997 Sec. 27
read together with Sec. 22 reads:
“SEC. 27. Rates of Income Tax on Domestic Corporations. --
(A) In General. -- Except as otherwise provided in this Code, an income
tax of thirty-five percent (35%) is hereby imposed upon the taxable income
derived during each taxable year from all sources within and without the
Philippines by every corporation, as defined in Section 22 (B) of this Code,
and taxable under this Title as a corporation xxx.”
“SEC. 22. -- Definition. -- When used in this Title:
xxx xxx xxx
(B) The term ‘corporation’ shall include partnerships, no matter how
created or organized, joint-stock companies, joint accounts (cuentas en
participacion), associations, or insurance companies, but does not include
general professional partnerships [or] a joint venture or consortium formed
for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an
operating or consortium agreement under a service contract without the
Government. ‘General professional partnerships’ are partnerships formed
by persons for the sole purpose of exercising their common profession, no
part of the income of which is derived from engaging in any trade or
business.
Thus, the Court in Evangelista v. Collector of Internal Revenue held that
Section 24 covered these unregistered partnerships and even associations
or joint accounts, which had no legal personalities apart from their
individual members.
Furthermore, Pool Agreement or an association that would handle all the
insurance businesses covered under their quota-share reinsurance treaty
and surplus reinsurance treaty with Munich may be considered a
partnership because it contains the following elements: (1) The pool has a
common fund, consisting of money and other valuables that are deposited
in the name and credit of the pool. This common fund pays for the
administration and operation expenses of the pool. (2) The pool functions
through an executive board, which resembles the board of directors of a
corporation, composed of one representative for each of the ceding
companies. (3) While, the pool itself is not a reinsurer and does not issue
any policies; its work is indispensable, beneficial and economically useful to
the business of the ceding companies and Munich, because without it they
would not have received their premiums pursuant to the agreement with
Munich. Profit motive or business is, therefore, the primordial reason for
the pool’s formation.
2) No: There is no double taxation.
Argument of Petitioner: Remittances of the pool to the ceding companies
and Munich are not dividends subject to tax. Imposing a tax “would be
tantamount to an illegal double taxation, as it would result in taxing the
same premium income twice in the hands of the same taxpayer.”
Furthermore, even if such remittances were treated as dividends, they
would have been exempt under tSections 24 (b) (I) and 263 of the 1977
NIRC , as well as Article 7 of paragraph 1and Article 5 of paragraph 5 of the
RP-West German Tax Treaty.
Argument of Supreme Court: Double taxation means “taxing the same
person twice by the same jurisdiction 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. The tax on its income is
obviously different from the tax on the dividends received by the
companies. There is no double taxation.
Tax exemption cannot be claimed by non-resident foreign insurance
corporattion; tax exemption construed strictly against the taxpayer -
Section 24 (b) (1) pertains to tax on foreign corporations; hence, it cannot
be claimed by the ceding companies which are domestic corporations. Nor
can Munich, a foreign corporation, be granted exemption based solely on
this provision of the Tax Code because the same subsection specifically
taxes dividends, the type of remittances forwarded to it by the pool. The
foregoing interpretation of Section 24 (b) (1) is in line with the doctrine
that a tax exemption must be construed strictissimi juris, and the statutory
exemption claimed must be expressed in a language too plain to be
mistaken.
Facts: AFISCO and 40 other non-life insurance companies entered into a
Quota Share Reinsurance Treaties with Munich, a non-resident foreign
insurance corporation, to cover for All Risk Insurance Policies over
machinery erection, breakdown and boiler explosion. The treaties required
petitioners to form a pool, to which AFISCO and the others complied. On
April 14, 1976, the pool of machinery insurers submitted a financial
statement and filed an “Information Return of Organization Exempt from
Income Tax” for the year ending 1975, on the basis of which, it was
assessed by the commissioner of Internal Revenue deficiency corporate
taxes. A protest was filed but denied by the CIR.
Petitioners contend that they cannot be taxed as a corporation, because (a)
the reinsurance policies were written by them individually and separately,
(b) their liability was limited to the extent of their allocated share in the
original risks insured and not solidary, (c) there was no common fund, (d)
the executive board of the pool did not exercise control and management
of its funds, unlike the board of a corporation, (e) the pool or clearing
house was not and could not possibly have engaged in the business of
reinsurance from which it could have derived income for itself. They further
contend that remittances to Munich are not dividends and to subject it to
tax would be tantamount to an illegal double taxation, as it would result to
taxing the same premium income twice in the hands of the same taxpayer.
Finally, petitioners argue that the government’s right to assess and collect
the subject Information Return was filed by the pool on April 14, 1976. On
the basis of this return, the BIR telephoned petitioners on November 11,
1981 to give them notice of its letter of assessment dated March 27, 1981.
Thus, the petitioners contend that the five-year prescriptive period then
provided in the NIRC had already lapsed, and that the internal revenue
commissioner was already barred by prescription from making an
assessment.

Held: A pool is considered a corporation for taxation purposes. Citing the

case of Evangelista v. CIR, the court held that Sec. 24 of the NIRC covered
these unregistered partnerships and even associations or joint accounts,
which had no legal personalities apart from individual members. Further,
the pool is a partnership as evidence by a common fund, the existence of
executive board and the fact that while the pool is not in itself, a reinsurer
and does not issue any insurance policy, its work is indispensable,
beneficial and economically useful to the business of the ceding companies
and Munich, because without it they would not have received their
premiums.

As to the claim of double taxation, the pool is a taxable entity distinct from
the individual corporate entities of the ceding companies. The tax on its
income is obviously different from the tax on the dividends received by the
said companies. Clearly, there is no double taxation.

As to the argument on prescription, the prescriptive period was totaled

under the Section 333 of the NIRC, because the taxpayer cannot be located
at the address given in the information return filed and for which reason
there was delay in sending the assessment. Further, the law clearly states
that the prescriptive period will be suspended only if the taxpayer informs
the CIR of any change in the address.