Commissioner of Internal Revenue vs. Robertson et al.

A United States national employed in the Philippines in connection with the construction, maintenance, operation, or defense of U.S. military bases, who resides in the Philippines by reason only of such employment and derives income solely from the U.S. Government, is exempt from Philippine income tax under Article XII, Paragraph 2 of the RP-US Military Bases Agreement of 1947, regardless of whether he was born in the Philippines or in the United States; the exemption is not defeated by ownership of residential property, retirement status, or length of stay where the residence is by reason of assigned duties at the U.S. bases.

Article XII, Paragraph 2 of the RP-US Military Bases Agreement of 1947 exempts from Philippine income tax certain United States nationals employed in connection with U.S. military bases in the Philippines, together with their dependents, except as to income from Philippine or non-U.S. sources. The respondents are four U.S. citizens who worked as civilian employees at U.S. military installations in the Philippines. The Commissioner of Internal Revenue is the petitioner.

The respondents are four citizens of the United States who were employed as civilian personnel in connection with U.S. military bases in the Philippines. Frank Robertson was born in the Philippines on July 8, 1924, resided there until he was repatriated to the United States in 1945, and established residence in Long Beach, California. Soon after, he was employed by the U.S. Federal Government at the U.S. Navy, and his work brought him to various U.S. Navy installations overseas until he was eventually assigned in 1962 to the U.S. Naval Ship Repair Facility at Subic Bay, Olongapo, Philippines. James W. Robertson, Frank’s brother, was born in the Philippines on December 22, 1918, resided there until his repatriation to the United States in 1945, and established his domicile there. He worked at the U.S. Navy Shipyard in Long Beach, California as a U.S. Federal Civil Service employee, and returned to the Philippines in 1958 with an assignment at the U.S. Naval Base at Subic Bay, Olongapo, where he remained through 1972.

Robert H. Cathey was born in the United States and first came to the Philippines with the U.S. liberation force in 1944; upon discharge from military service in 1946, he became a U.S. Navy civilian employee stationed at Makati, Metro Manila. John L. Garrison was a Philippine-born American citizen who was repatriated to the United States in 1945 and established his domicile in San Francisco, California. He was soon employed by the U.S. Federal Government in its military installations and returned to the Philippines in 1952, assigned to the U.S. Naval Base at Subic Bay.

The Court of Tax Appeals found as undisputed that all four were citizens of the United States, holders of American passports, and admitted as Special Temporary Visitors under Section 9(a) visa of the Philippine Immigration Act of 1940, as amended. They were civilian employees in the U.S. military base in the Philippines in connection with its construction, maintenance, operation, and defense, and their incomes were solely derived from salaries from the U.S. government by reason of their employment in the U.S. bases in the Philippines.

The Commissioner of Internal Revenue assessed deficiency income taxes against them for taxable years 1969–1972, inclusive of interests and penalties: Frank Robertson, ₱132,750.65; James W. Robertson, ₱190,433.17; Robert H. Cathey, ₱92,013.17; and John L. Garrison, ₱196,754.32. The assessments were challenged in separate cases before the Court of Tax Appeals, which consolidated them. The Court of Tax Appeals, after due hearing, rendered judgment in favor of the respondents, cancelling and setting aside the assessments. It found that the respondents had acquired domicile and residency in the United States upon repatriation in 1945, obtained employment with the U.S. Federal Service, and returned to the Philippines by reason of assigned duties with the U.S. military bases where they were gainfully employed by the U.S. Federal Government, and that their circumstances before the questioned ruling remained obtaining through the taxable years 1969–1972.

• Strict Construction and Burden of Proof: Petitioner argued that tax exemptions are construed strictissimi juris against the taxpayer and that the burden of proof was on private respondents to establish that their residence in the country was by reason only of employment in connection with the construction, maintenance, operation, or defense of the U.S. bases in the Philippines.
• Failure to Prove Requisite Residence: Petitioner maintained that respondents failed to discharge that burden, citing (1) Frank and James Robertson’s ownership of residential properties respectively declared in the name of James and in the name of Frank’s wife for taxation purposes; (2) James Robertson’s status as a retired Federal Civil Service employee presently living with his family in Olongapo City; (3) Robert H. Cathey’s ownership of the house in Quezon City where he resided; (4) John L. Garrison’s uninterrupted stay after returning in 1948 except for a two-year stint in Okinawa from 1950 to 1952; and (5) the issuance of a Voter’s Certificate to Garrison in San Francisco, California, in 1945, which did not indicate U.S. residence in 1969–1972.
• Reliance on Reagan: Petitioner relied on Reagan vs. Commissioner of Internal Revenue (30 SCRA 968) in support of the government’s claim.
• Assigned Error: Petitioner assigned as the sole error that the Court of Tax Appeals erred in holding that private respondents are exempt from Philippine income tax under Article XII, Paragraph 2 of the RP-US Military Bases Agreement of 1947.

• Tax Exemption under the RP-US Military Bases Agreement: Whether the Court of Tax Appeals erred in holding that private respondents are exempt from Philippine income tax under Article XII, Paragraph 2 of the RP-US Military Bases Agreement of 1947.
• Residence by Reason Only of Employment: Whether private respondents’ ownership of residential properties, retirement, and continued stay in the Philippines negate the requirement that their residence be by reason only of employment in the U.S. military bases.

• Tax Exemption under the RP-US Military Bases Agreement: No. The Court of Tax Appeals correctly cancelled the assessments; all requisites for exemption under Article XII, Paragraph 2 were present.
• Residence by Reason Only of Employment: No. The circumstances cited by petitioner did not negate the exemption; the respondents’ residence was by reason of their assigned duties with the U.S. military bases.

• Tax Exemption under the RP-US Military Bases Agreement: Article XII, Paragraph 2 of the RP-US Military Bases Agreement of 1947 requires that the claimant be a national of the United States employed in connection with the construction, maintenance, operation, or defense of the bases, residing in the Philippines by reason of such employment, and that the income derived be from the U.S. Government. The Court of Tax Appeals found as undisputed that all four respondents were U.S. citizens, holders of American passports, admitted as Special Temporary Visitors under Section 9(a) of the Philippine Immigration Act of 1940, civilian employees in the U.S. military base in connection with its construction, maintenance, operation, and defense, and that their incomes were solely derived from salaries from the U.S. government by reason of their employment in the U.S. bases. The Supreme Court found all these circumstances present and no justifiable reason to disturb the findings and rulings of the lower court. The plain and clear tenor of the treaty provision does not distinguish between U.S. citizens born locally and those born in the United States; under the maxim ubi lex non distinguit nec nos distinguere debemos, the Court would not graft a distinction not made by the law. The treaty obligation must also be fulfilled in good faith, with its stipulations observed in spirit and according to their letter. Reagan vs. Commissioner of Internal Revenue was distinguished because it involved a civilian employee of an American corporation providing technical assistance to the U.S. Air Force who questioned income tax on the sale of his automobile at Clark Field Air Base on the theory that the sale occurred outside Philippine territory, not the Article XII exemption for U.S. nationals employed at U.S. bases.
• Residence by Reason Only of Employment: The petitioner’s contentions regarding property ownership, retirement, and length of stay did not impress the Court as meritorious. The Court of Tax Appeals found that the respondents had acquired domicile and residency in the United States upon repatriation in 1945, obtained employment with the U.S. Federal Service, and returned to the Philippines by reason of taking up assigned duties with the U.S. military bases where they were gainfully employed by the U.S. Federal Government. Their situation was no different from that of other U.S. civilian employees who continued to enjoy the benefits of tax exemption under the Agreement. The Court refused to hold them straight-jacketed to an irreversible situs of birth constraint and denied them the tax relief accorded in the Agreement. The possibility of their coming to roost in the country upon termination of their tour of duty was not foreclosed, but only then may the bridge be crossed for tax purposes.

• Tax Exemption under Article XII, Paragraph 2 of the RP-US Military Bases Agreement of 1947 — A United States national employed in the Philippines in connection with the construction, maintenance, operation, or defense of U.S. military bases, who resides in the Philippines by reason only of such employment and derives income from the U.S. Government, is exempt from Philippine income tax. The requisites are: (a) nationality of the United States; (b) employment in connection with the construction, maintenance, operation, or defense of the bases; (c) residence in the Philippines by reason only of such employment; and (d) income derived from the U.S. Government. The Court found all requisites present in this case.
• Ubi lex non distinguit nec nos distinguere debemos — Where the law does not distinguish, courts must not distinguish. The Court applied this maxim to the treaty exemption, holding that the provision exempts all U.S. citizens working in the military bases without distinction as to whether they were born locally or born in their country of origin.
• Pacta sunt servanda / Good Faith in Treaty Observance — The obligation to fulfill in good faith a treaty engagement requires that its stipulations be observed in their spirit as well as according to their letter, and that what has been promised be performed without evasion or subterfuge, honestly and to the best of the ability of the party making the promise. The Court relied on this principle in refusing to lift the tax exemption privilege from the respondents.
• Residence by Reason Only of Employment — The tax exemption is not defeated by prior U.S. domicile, ownership of residential property, retirement status, or length of stay, where the return to and residence in the Philippines are by reason of assigned duties with the U.S. military bases. The Court held that the respondents’ circumstances before the questioned ruling remained obtaining through the taxable years 1969–1972.

• "No national of the United States serving in or employed in the Philippines in connection with the construction, maintenance, operation or defense of the bases and residing in the Philippines by reason only of such employment, or his spouse and minor children and dependent parents of either spouse, shall be liable to pay income tax in the Philippines except in respect of income derived from Philippine sources or sources other than the United States sources." — This is the treaty provision at issue, defining the scope of the income tax exemption under Article XII, Paragraph 2 of the RP-US Military Bases Agreement of 1947.
• "In order to avail oneself of the tax exemption under the RP-US Military Bases Agreement: he must be a national of the United States employed in connection with the construction, maintenance, operation or defense, of the bases, residing in the Philippines by reason of such employment, and the income derived is from the U.S. Government (Art. XII par. 2 of PI-US Military Bases Agreement of 1947). Said circumstances are all present in the case at bar." — This passage states the requisites for the exemption and the Court’s conclusion that all were satisfied by the respondents.
• "We find nothing in the said treaty provision that justified the lifting of the tax exemption privilege of the petitioners (private respondents herein). Respondent (petitioner herein) has grafted a meaning other than that conveyed by the plain and clear tenor of the Agreement. An examination of the words used and the circumstances in which they were used, shows the basic intendment 'to exempt all U.S. citizens working in the Military Bases from the burden of paying Philippine Income Tax without distinction as to whether born locally or born in their country of origin.'" — This passage, quoted from the Court of Tax Appeals, articulates the plain-meaning interpretation of the treaty exemption and the rule that no distinction may be read into it.
• "The circumstances in the case of Reagan vs. Commissioner of Internal Revenue (30 SCRA 968) relied upon by petitioner in support of the government's claim are different from the circumstances of the case herein and the ruling obtained in the former case cannot be invoked or applied in support of petitioner's contention." — This passage distinguishes the precedent relied upon by the Commissioner, explaining that Reagan involved a different factual and legal issue.

• Reagan vs. Commissioner of Internal Revenue, 30 SCRA 968 — Cited by petitioner; distinguished by the Court because Reagan involved a civilian employee of an American corporation providing technical assistance to the U.S. Air Force who questioned income tax on the sale of his automobile at Clark Field Air Base on the theory that the sale occurred outside Philippine territory, not the Article XII exemption for U.S. nationals employed at U.S. bases.

• Article XII, Paragraph 2, RP-US Military Bases Agreement of 1947 — Provides that no national of the United States serving in or employed in the Philippines in connection with the construction, maintenance, operation, or defense of the bases, and residing in the Philippines by reason only of such employment, or his spouse and minor children and dependent parents of either spouse, shall be liable to pay income tax in the Philippines except in respect of income derived from Philippine sources or sources other than United States sources. The Court applied this provision to exempt the respondents from Philippine income tax because all requisites were present.
• Section 9(a), Philippine Immigration Act of 1940, as amended — Mentioned as the visa category under which the respondents were admitted as Special Temporary Visitors. It formed part of the undisputed facts regarding their status in the Philippines.

Feria (Chairman), Fernan, Alampay, and Gutierrez, Jr., JJ., concur.