KILOSBAYAN et al v. GUINGONA used, i.e., a contract of lease.
Pursuant to the wordings of their agreement,
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.
1. On the issue of nationality, it seems that PGMC’s foreign 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
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:
1. The petitioners have locus standi due to the transcendental importance to
the public that the case demands. The ramifications of such issues
immeasurably affect the social, economic and moral well-being of the
people. The legal standing then of the petitioners deserves recognition, and
in the exercise of its sound discretion, the Court brushes aside the
procedural barrier.
2. Sec. 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.” The language of the section is clear that with respect to its
franchise or privilege “to hold and conduct charity sweepstakes races,
lotteries and 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 exception explicitly
made, the PCSO cannot share its franchise with another by way of the
methods mentioned, nor can it transfer, assign or lease such franchise.
 AFISCO INSURANCE CORP. v. COURT OF APPEALS
G.R. No. 112675
Panganiban, J.
DOCTRINE:
Unregistered Partnerships and associations are considered as corporations for tax
purposes – Under the old internal revenue code, “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, xxx.” Ineludibly, the Philippine legislature included in the
concept of corporations those entities that resembled them such as unregistered
partnerships and associations.
Insurance pool in the case at bar is deemed a partnership or association taxable as a
corporation – In the case at bar, petitioners-insurance companies formed a 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 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.