Filipinas Life Assurance Company vs. Court of Tax Appeals

Domestic and resident foreign life insurance companies are entitled to the benefits of the 25% dividend exclusion under Section 24 of the National Internal Revenue Code, even though the proviso granting it appears in subsection (A) rather than subsection (B), because the 1957 amendment’s legislative history shows no intent to withdraw that exclusion.

Filipinas Life Assurance Company is a domestic life insurance company subject to income tax under Section 24 of the National Internal Revenue Code. The Commissioner of Internal Revenue is the respondent in the case. Section 24 had been amended several times; Republic Act No. 1855 in 1957 added subsection (B), “Rate of Tax on Life Insurance Companies,” while the 25% dividend-exclusion proviso remained in subsection (A). Until 1957 there had been no question that the proviso on dividend exclusion applied to all domestic and resident foreign life insurance companies.

Filipinas Life Assurance Company, a domestic life insurance company, filed its income tax return for 1958 on March 18, 1959. The return showed gross income from interest of P5,186.44 and from dividends of P57,105.29, for total gross income of P62,202.36; total deductions were P10,317.47, leaving net income of P51,974.89; the tax assessable as a life insurance company was P3,378.00, and the total tax due was P3,378.00.

Later, it filed an amended return showing gross income from interest of P5,186.44 and from dividends of P15,242.55, for total gross income of P20,186.44; total deductions remained P10,317.47, leaving net income of P10,111.52; the tax assessable as a life insurance company was P657.00, and the total tax due was P657.00. The amended return was accompanied by a claim for refund of P2,721, the difference between the P3,378 paid under the original return and the P657 claimed as the correct amount due. The difference arose because the original return reported the full P57,105.29 in dividends, while the amended return reported only 25%, or P15,242.55, of the dividends from domestic corporations.

The claim for refund was filed with the Commissioner of Internal Revenue, but because he had not been heard from, Filipinas Life Assurance Company took the matter to the Court of Tax Appeals to avoid prescription of its action.

• Dividend Exclusion: Petitioner argued, on the basis of the history of the proviso, that the benefits of dividend exclusion are available to all domestic and resident foreign corporations regardless of the business in which they may be engaged.

• Prematurity: Respondent Commissioner claimed that the action filed with the CTA was premature.
• Dividend Exclusion: Respondent maintained that life insurance companies must report their dividend income in full because the proviso is found in subsection (A), while life insurance companies are dealt with in subsection (B).

• Dividend Exclusion: Whether domestic and resident foreign life insurance companies are entitled to the 25% dividend exclusion under Section 24 of the National Internal Revenue Code, as amended by Republic Act No. 1855, even though the proviso granting it appears in subsection (A) while life insurance companies are taxed under subsection (B).

• Dividend Exclusion: Yes. The SC held that domestic and resident foreign life insurance companies are entitled to the benefits of dividend exclusion, the position of the proviso notwithstanding, because the 1957 amendment’s history shows no intent to withdraw the privilege.

• Dividend Exclusion: The SC began from the rule that the position of a proviso is not necessarily controlling; a purely syntactical approach is hardly a safe guide to statutory meaning, and position cannot override intention, which is ascertained through legislative history. Section 24 had been amended repeatedly and haphazardly, so its grammatical construction was unsafe. The 1957 amendment by Republic Act No. 1855 had a two-fold purpose: to change the tax base of life insurance companies from premium income to investment income and to lower the tax on them to encourage growth and investment in the national economy. Premium receipts are not true income; they are savings deposits of policyholders and are already subject to the 3% tax under Section 255, so including them in gross income would double tax them. The lower 6.5% rate recognized that a life insurance company derives profit from investment income only to the extent it exceeds the rate of interest at which the reserve must be maintained. Congressman Ferdinand Marcos described the bill as placing life insurance companies in the same class as other companies, with a lower rate. The SC reasoned that if the purpose was to place life insurance companies at par with other companies by taxing them on their true income, Congress could not have intended to withdraw a privilege they had enjoyed in common with non-life insurance companies. The proviso also continued to speak of “the tax imposed by this section,” not a subsection. The respondent’s interpretation would discriminate against domestic life insurance companies: a resident foreign corporation with P100,000 in dividends would return only 25%, or P25,000, and pay P5,000 at 20%, while a domestic life insurance company reporting all dividends would pay P6,500 at 6.5%, or P1,500 more despite the lower rate. Congress intended preferential treatment for life insurance companies, as shown by the rate remaining at 6.5%, the lowest among corporations. The exception clause in subsection (A) was awkward because it related to the entire section, but life insurance companies are deemed corporations under Section 84(b), and the exception did not exempt them from corporate income tax. Since nothing in the history of the 1957 amendment or the rationale of dividend exclusion indicated otherwise, the SC held that domestic and resident foreign life insurance companies are entitled to the benefits of dividend exclusion.

• Legislative History Over Grammatical Construction — The position of a proviso is not necessarily controlling; statutory intention, especially as revealed by legislative history, prevails over syntax. The SC applied this because Section 24 had been amended haphazardly and the proviso’s location in subsection (A) did not show an intent to withdraw the dividend exclusion from life insurance companies.
• Dividend Exclusion for Domestic and Resident Foreign Life Insurance Companies — The 25% dividend exclusion under Section 24 of the National Internal Revenue Code extends to domestic and resident foreign life insurance companies despite the proviso appearing in subsection (A), because the 1957 amendment intended only to shift the tax base to investment income and lower the tax rate, not to remove the exclusion.
• Dividend Exclusion as a Device Against Double Taxation — The 25% dividend exclusion reduces extra or double taxation of distributed earnings, since dividends are taxed at the corporate level and again at the shareholder level; the decision to tax only part of dividends also discourages complicated corporate structures and parent-subsidiary arrangements adopted to achieve a lower effective corporate income tax rate. The SC used this rationale to confirm that the exclusion should not be withdrawn from life insurance companies.
• Taxation of Life Insurance Companies on Investment Income — Life insurance companies are taxed on investment income from interest, dividends, and rents, not on premium receipts, because premiums are savings deposits of policyholders and are already subject to the 3% tax under Section 255; the 6.5% rate is lower because profit exists only to the extent investment income exceeds the reserve interest rate. This supported the SC’s reading of the 1957 amendment.

• “But a purely syntactical approach is hardly a safe guide to the meaning of a statute. The position of a proviso, for instance, although possessed of considerable influence, is not necessarily controlling. The proviso may apply to sections or portions thereof which follow it or even to the entire statute.” — The SC rejected the CTA’s reliance on the proviso’s location in subsection (A).
• “Position, after all, cannot override intention, in the ascertainment of which the legislative history of a statute is extremely more important.” — The SC prioritized legislative intent over the grammatical placement of the proviso.
• “If the purpose of the 1957 amendment was to place life insurance companies at par with other companies by taking them on their true income, then the legislature could not have intended to withdraw from them a privilege which they had then been enjoying in common with non-life insurance companies.” — The SC used this to infer that the 1957 amendment did not remove the dividend exclusion.
• “Since nothing in the history of the 1957 amendment or in the rationale of dividend exclusion indicates the contrary, we hold that domestic and resident foreign life insurance companies are entitled to the benefits of dividend exclusion, the position of the proviso allowing it notwithstanding.” — This is the ratio decidendi of the decision.

• Section 24, National Internal Revenue Code, as amended by Republic Act No. 1855 — Subsection (A) imposed corporate income tax and contained the 25% dividend-exclusion proviso; subsection (B) imposed a 6.5% tax on life insurance companies’ investment income. The SC held the proviso applies to life insurance companies despite its location.
• Section 255, National Internal Revenue Code — Premiums received by life insurance companies are subject to a 3% tax; the SC used this to explain why including premiums in gross income would double tax them and why the 1957 amendment shifted to investment income.
• Section 26, National Internal Revenue Code — General copartnerships are taxed only in their individual capacity; the SC cited this to show that the exception clause in subsection (A) related to the coverage of the entire section, not just a subsection.
• Section 84(b), National Internal Revenue Code — Life insurance companies are deemed corporations for purposes of the Code; the SC used this to reject the implication that the exception clause exempted them from corporate income tax.