CHAPTER 27: TAXATION
PRINCIPLES AND CASES IN PRIVATE INTERNATIONAL LAW:
A PROCEDURAL APPROACH
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MARK ANGELO S. DELA PEÑA
To cite this online book, please use the following:
Dela Peña. 2023. "Principles and Cases in Private International Law: A Procedural Approach." Published by Project Jurisprudence - Philippines. Published: September 17, 2023. Link: [Insert link] Last accessed: [Insert date of access].
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Taxation, a dreaded law school subject, is also a rich source of private international law problems, especially because of the rules surrounding what constitutes income and what the applicable tax treatment is for residents, non-residents, citizens and aliens. This is aggravated by the fact that, in this modern world, a person or corporation registered, domiciled or situated in a foreign state may be deriving income from online or other activities in the Philippines such as but not limited to websites, advertisements, streaming services, online shopping platforms, and other such transboundary activities. What constitutes as a taxable “activity,” of course, is best left to the tax law experts of whom this author is far from being part.
CIR V. AIR INDIA
In the case of Commission of Internal Revenue v. Air India,[1] the principal issue raised was whether or not the revenue derived by an international air carrier from sales of tickets in the Philippines for air transportation through its agent who/which is a domestic corporation, while having no landing rights in the country, constitutes income of the said international air carrier from Philippine sources and, accordingly, taxable under Section 24 (b) (2) of the National Internal Revenue Code. The Supreme Court ruled in the affirmative.
Yes, the revenue derived by Air India from the sales of airplane tickets though its agent Philippine Air Lines, Inc., in the Philippines, must be considered taxable income. The absence of flight operations to and from the Philippines is not determinative of the source of income or the situs of income taxation. The test of taxability is the “source” of the income, which is the activity that produced the income.[2] If tickets were sold in the Philippines and the revenue therefrom was derived from a business activity regularly pursued within the Philippines, even if the tickets sold covered only the transport of passengers and cargo to and from foreign cities, it cannot alter the fact that income from the sale of tickets was derived from the Philippines. The word “source” conveys one essential idea, i.e., origin, and the origin of the income is the Philippines in this case.
CIR V. BOAC
The case of Commissioner of Internal Revenue v. British Overseas Airways Corporation (BOAC) is best discussed from the level of the Court of Tax Appeals (CTA). The Tax Court held that the proceeds of sales of BOAC passage tickets in the Philippines by Warner Barnes and Company, Ltd., and later by Qantas Airways, during a certain period, could not be considered as BOAC income from Philippine sources because no service of carriage of passengers or freight was performed by BOAC within the Philippines. The CTA concluded that said income should not be subjected to Philippine income tax. It was also the CTA’s position that income from transportation should be considered as income from services so that the place of rendition of services should determine the source.
CIR v. BOAC was actually the basis of the ruling in CIR v. Air India. According to the Supreme Court, BOAC should be considered a resident foreign corporation. In this connection, the Court explained that there is no specific criterion as to what constitutes “doing” or “engaging in” or “transacting” business in the Philippines. Each case must be decided in the light of its peculiar surrounding circumstances. Nonetheless, the term “doing business” implies a continuity of commercial dealings and arrangements, and it contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive furtherance of commercial gain or for the purpose and object of the business organization.[3] In order that a foreign corporation may be regarded as doing business within a state, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character.[4]
In resolving the BOAC case, the Supreme Court held asked the following question. Was there a “flow of wealth” from “sources within the Philippines”? The answer was yes.
The source of an income is the property, activity or service that produced the income.[5] To consider the source of income as coming from the Philippines, it is sufficient that the income is derived from an activity within the Philippines. In BOAC’s case, the sale of tickets in the Philippines was the activity that produced the income. The tickets exchanged hands in this jurisdiction and payments for fares were also made here in Philippine currency. The situs of the source of payments was the Philippines. The flow of wealth proceeded from and occurred within the Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government.
CIR V. FISHER
Commissioner of Internal Revenue (CIR) v. Fisher[6] was a case about the determination and settlement of the hereditary estate left by the deceased Walter G. Stevenson, and the laws applicable thereto. The CIR was involved because of the estate tax assessed against the said estate. In this case, the lower court deducted half of the conjugal property in determining the hereditary estate left by the deceased Stevenson, which would be the basis for the gross estate from which the estate tax should be computed. The CIR did not agree with the lower court because it wanted a larger gross estate as basis for estate tax.
This case should be studied, first, from the marriage laws applicable to it. The marriage of the Stevensons, both English nationals, took place in the Philippines in 1909; hence, the applicable law was Article 1325 of the old Civil Code, not Article 124 of the New Civil Code which became effective only in 1950. While both provisions under the old and under the new adhere to the nationality theory of determining the property relation of spouses where one of them is a foreigner if they made no prior agreement as to the administration, disposition, and ownership of their conjugal properties through a prenuptial agreement, in both the old and in the new, the national law of the husband was held to be the dominant law in determining the property relation of the spouses. There is, however, a difference between the two articles in that Article 124 of the New Civil Code expressly provides that it shall be applicable regardless of whether the marriage was celebrated in the Philippines or abroad, while Article 1325 of the old Civil Code limited its operation to marriages contracted in a foreign land. For ease of reference, the said provisions are quoted as follows:
“Article 1325. Should the marriage be contracted in a foreign country, between a Spaniard and a foreign woman or between a foreigner and a Spanish woman, and the contracting parties should not make any statement or stipulation with respect to their property, it shall be understood, when the husband is a Spaniard, that he marries under the system of the legal conjugal partnership, and when the wife is a Spaniard, that she marries under the system of law in force in the husband's country, all without prejudice to the provisions of this code with respect to real property.”[7]
“Article 124. If the marriage is between a citizen of the Philippines and a foreigner, whether celebrated in the Philippines or abroad, the following rules shall prevail: (a) if the husband is a citizen of the Philippines while the wife is a foreigner, the provisions of this Code shall govern their property relations; (b) if the husband is a foreigner and the wife is a citizen of the Philippines, the laws of the husband’s country shall be followed, without prejudice to the provisions of this Code with regard to immovable property.”[8]
The said provisions apply to mixed marriages between a Filipino citizen and a foreigner. In the case of CIR v. Fisher, however, both spouses were foreigners who married in the Philippines.
If Manresa’s view[9] were to be adopted, the law determinative of the property relation of the Stevensons, married in 1909, would be English law even if the marriage was celebrated in the Philippines, both of them being foreigners. However, if the pertinent English law that allegedly vested in the decedent husband full ownership of the properties acquired during the marriage is not properly pleaded and proved, Wharton’s[10] “processual presumption” should be applied and the law of England should be considered the same as Philippine law.
The Supreme Court went on to explain in the same case that Article 16 of the New Civil Code (Article 10 of the old Civil Code) did not apply. Said provision does not encompass or contemplate to govern the question of property relation between spouses. Said article distinctly speaks of amount of successional rights and this term properly refers to the extent or amount of property that each heir is legally entitled to inherit from the estate available for distribution. The property relations of spouses, as distinguished from their successional rights, are governed differently by different provisions of law.
Another issue in the CIR v. Fisher case was whether the estate should be considered exempt from transfer or death taxes, considering the reciprocity of exemption between the State of California and the Philippines.
In the Philippines, upon the death of any citizen or resident, or non-resident with properties in its jurisdiction, there are imposed upon the estate and its settlement certain kinds of taxes such as an estate tax. Under the laws of California, only inheritance tax is imposed. On the other hand, the Federal Internal Revenue Code imposes an estate tax on non-residents not citizens of the United States, but does not provide for any exemption on the basis of reciprocity. If a Californian who is a non-resident in the Philippines but has intangible personal properties here, his/her estate will be subject to the payment of an estate tax, although exempt from the payment of the inheritance tax.[11] This being the case, will a Filipino who is a non-resident of California, but with intangible personal properties there, be entitled to the exemption clause of the California law, since the Californian has not been exempted from every character of legacy, succession, or death tax because he is, under our law, under obligation to pay an estate tax? Upon the other hand, if a Californian is exempt from paying estate tax, is a Filipino exempt from a similar estate tax in California because, under the the United States Federal Law, which is equally enforceable in California, s/he is bound to pay the same, there being no reciprocity recognized in respect thereto? In both instances, the Filipino citizen is always at a disadvantage. The Philippine Legislature cannot be presumed to have intended such an unfair situation to the detriment of its government and its own people. Reciprocity must be total; hence, exemption would apply only if the law of the other grants an exemption from legacy, succession, or death taxes of every character. There can be no partial reciprocity. It would have to be total or none at all. Therefore, the Supreme Court found that the estate of Walter G. Stevenson was not exempt from inheritance tax.
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[1] G.R. No. 72443, January 29, 1988, 241 Phil. 689.
[2] Howden & Co., Ltd. v. Collector of Internal Revenue, 13 SCRA 601 (1965).
[3] Mentholatum Co., Inc., et al. vs. Anacleto Mangaliman, et al., 72 Phil. 524 (1941).
[4] Pacific Micronesian Line, Inc. vs. Del Rosario and Peligon, 96 Phil. 23, 30, citing Thompson on Corporations, Vol. 8, 3rd ed., pp. 844-847 and Fisher's Philippine Law of Stock Corporation, p. 415.
[5] Mertens, Jr., Jacob, Law on Federal Income Taxation, Vol. 8, Section 45.27; cited in Howden & Co., Ltd. vs. Collector of Internal Revenue, 13 SCRA 601 (1965).
[6] 110 Phil. 686 [ G.R. Nos. L-11622 and L-11668. January 28, 1961 ].
[7] Old Civil Code of the Philippines.
[8] New Civil Code of the Philippines.
[9] IX Manresa, Comentarios al Codigo Civil Español, p. 202.
[10] Mentioned in Manalo, P. R. (2015). (Dis) Proving Foreign Law: Understanding Processual Presumption in the Philippines and Arguing for a Confrontational Approach on Dealing with Conflict Cases. Phil. LJ, 89, 430.
[11] Note that, under the present state of Philippine tax laws, inheritance taxes are not longer levied.
