Manila Electric Company vs. Yatco

The Commonwealth of the Philippines has the power to impose a tax upon the insured for premiums paid to foreign insurers, regardless of where the contract is executed, when the insured is within the Philippines, the risk insured against is within the Philippines, and certain incidents of the contract are to be attended to in the Philippines.

Manila Electric Company is a corporation organized under the laws of the Philippines with its principal office and place of business in Manila. It insured its real and personal properties situated in the Philippines with the City of New York Insurance Company and the United States Guaranty Company, which are foreign corporations not licensed to do business in the Philippines and having no agents therein. The Collector of Internal Revenue assessed a 1% tax on the premiums paid for these policies under Section 192 of Act No. 2427, as amended.

In 1935, Manila Electric Company, a domestic corporation, insured its real and personal properties situated in the Philippines with the City of New York Insurance Company and the United States Guaranty Company. The insurance was arranged by the company's broker in New York City. The foreign insurance companies were not licensed to do business in the Philippines and maintained no agents there. The policies contained provisions for the settlement and payment of losses upon the occurrence of any insured risk. Specifically, the stipulations required the insured to exhibit the remains of any property and submit to examination under oath by a person designated by the company, producing books of accounts at a reasonable time and place. In case of disagreement as to the amount of loss requiring appraisers, the contract provided that the appraisers would select a competent umpire, and failing agreement, the umpire would be selected by a judge of the court of record in the state where the insured property was located.

Through its broker, Manila Electric Company paid premiums totaling ₱91,696 in New York to the foreign insurance companies. The Collector of Internal Revenue, pursuant to Section 192 of Act No. 2427, as amended, assessed and levied a tax of one per centum on the premiums. The company paid the tax under protest. After the protest was overruled, Manila Electric Company instituted an action to recover the amount paid. The trial court dismissed the complaint, prompting the present appeal.

• Unconstitutionality: Petitioner maintained that the second paragraph of the provisions of Section 192 of Act No. 2427 is unconstitutional, relying on the United States Supreme Court ruling in Compania General de Tabacos vs. Collector of Internal Revenue, which invalidated a similar tax on premiums paid to a foreign insurer where the contract had no situs in the Philippines.
• Contingency of Adjustment: Petitioner argued that the sending of an adjuster to the Philippines to fix the amount of losses is a mere contingency and not an actual fact, and therefore cannot serve as a ground for holding that the foreign insurance companies subjected themselves to the taxing jurisdiction of the Philippines.

• Validity of the Tax: Whether the 1% tax imposed on insurance premiums paid to foreign insurers for properties located in the Philippines is valid, notwithstanding the contract was executed abroad and premiums paid in a foreign country.
• Jurisdiction to Tax: Whether the Commonwealth of the Philippines has jurisdiction to impose the tax when the insured and the insured properties are within the Philippines, but the contract was made and performed abroad.

• Validity of the Tax: Yes. The tax is valid because substantial elements of the contract are situated in the Philippines, giving the government the power to tax.
• Jurisdiction to Tax: Yes. The Commonwealth has the power to impose the tax upon the insured, regardless of where the contract is executed, when the insured and the risk are within the Philippines, and certain contract incidents are to be attended to locally.

• Validity of the Tax: The tax is valid because the insured is a domestic corporation, the risk insured against is located in the Philippines, and the policy stipulations require local activities such as examination under oath and adjustment of losses. By analogy to the London Company portion of the Compania General de Tabacos case, making and carrying out policies covering risks located in the Philippines subjects the foreign corporation to the taxing jurisdiction of the Philippines. The fact that an adjuster might never actually be sent is a mere contingency, but the stipulations to that effect were held sufficient to bring the foreign corporation within the taxing jurisdiction.
• Jurisdiction to Tax: Jurisdiction exists because the foreign corporation, through the stipulations of its contract covering local risks, subjected itself to the taxing jurisdiction of the Philippines. Even if the tax on the insured is ultimately passed on to the insurer as an indirect tax, it remains valid. The Commonwealth protects the insured properties, benefiting the foreign corporation, which should justly contribute. Holding otherwise would discriminate against domestic corporations, which are subject to the tax when issuing policies.

• Situs of Taxation for Insurance Premiums — The jurisdiction to tax insurance premiums exists where the insured, the risk insured against, and certain incidents of the contract (such as payment of dividends, sending of an adjuster, or making proof of loss) are located. The execution of the contract abroad with a foreign corporation does not deprive the local government of the power to tax if substantial elements of the contract are situated locally.
• Doing Business in the Philippines — A foreign insurance company may be considered to be doing business in the Philippines when it issues policies covering risks on property within the Philippines that may require adjustment or the making of proof of loss therein, even if it has no license or agents in the country.

• "where the insured is within the Philippines, the risk insured against also within the Philippines, and certain incidents of the contract are to be attended to in the Philippines, such as, payment of dividends when received in cash, sending of an adjuster into the Philippines in case of dispute, or making of proof of loss, the Commonwealth of the Philippines has the power to impose the tax upon the insured, regardless of whether the contract is executed in a foreign country and with a foreign corporation." — This passage states the ratio decidendi, defining the conditions under which the Commonwealth may validly exercise its taxing power over insurance premiums paid abroad.
• "And, even if it be assumed that the tax imposed upon the insured will ultimately be passed on to the insurer, thus constituting an indirect tax upon the foreign corporation, it would still be valid, because the foreign corporation, by the stipulations of its contract, has subjected itself to the taxing jurisdiction of the Philippines." — This explains why the tax remains valid even if its incidence falls on the foreign insurer.

• Compania General de Tabacos vs. Collector of Internal Revenue, 275 U.S. 87 — Distinguished. The portion invalidating the tax on premiums paid to the Paris Company was held inapplicable because, in that case, the contract was executed abroad and the merchandise was in transit to Spain with nothing to be done in the Philippines. The portion sustaining the tax on premiums paid to the London Company was applied by analogy, as the policy covered local risks requiring potential local adjustment.
• Equitable Life Assurance Society vs. Pennsylvania, 238 U.S. 143 — Followed. The case established that an insurance company is doing business in a state when it pays dividends, sends an adjuster, or makes proof of death there, thereby subjecting itself to the state's jurisdiction.
• Allgeyer vs. Louisiana, 165 U.S. 578 — Cited in the Compania case to illustrate the due process limitation on taxing contracts made and performed outside the state, which the present case distinguishes based on the local situs of the risk and contract incidents.

• Section 192, Act No. 2427 (The Insurance Law) — This section makes it unlawful to procure insurance from unauthorized companies but allows owners to obtain insurance directly from foreign companies, provided they report to the insurance commissioner and Collector of Internal Revenue and pay a 1% tax on the premium paid. The court upheld the constitutionality and applicability of this tax to the petitioner.

Avancena, C.J., Villa-Real, Imperial, Diaz, Laurel, and Concepcion, JJ., concur.