CTA Case No. 383

DECISION -

C.T.A. CASE NC, 383 -~2-

(1) Gross receipts from outgoing freights and passengers from Phil- ippine perts <-<~-<..-. B 1,943,099.41

(2) Gress receipts from eutgoing freights and passengers from all ports other than the Philippines <<<... 12,732. 899.33 .

(3) Total expenses and deductions of the Co.

as a whole, including these incurred by Phil- ippine of fice ~-««8--— 14,331,937.57 “After applying the formula author- ized under Section 163 of Kevenue Regula- ticns No. 2, which implemented the provi- sions of Section 37(e) of the “ational internal Revenue Code, it claimed as Phil- ippine expenses, the amount of ?1,897,545.78, computed as followss orld's Gross income x World Expenses, or pee x P14,331,937.07 = Pp ry , ” lecated Phil. ex- penses )

Philippine Gress Income ~- Allocated Phil-

jr expenses, #1 ,943,099.41 ~- #1,897,545.76 = 245,553.63 (Phil. net income ) "On the basis wf the above figures, petitioner reported a net income from Phi ine sources in the amount of ”45 ,553.63 ws | and income tax due in the amount of ®9,110.73. The amount of 29,110.73 was paid by the petitioner un- der Official Receipt No. 654112 dated "Pursuant to the established policy of the Bureau of internal Revenue to verify income tax returns of this nature, an investigation was conducted to verify the cerrectness of petitioner's returns for the fiscal year ending May 31, 1955 358

DECISICW -

C. 1 •• CASE NO. 383 - 3 - •The exa i ner roceed ith the veri- ficaticm applying t r in the n.w t •ory that unless a forei n corp r ion is regis- tore to do bu iness in the P ilippines pursuant to ction 8 of ~h Corpor tion La it is not entitl d to de ucti ns nor to the aoplication of ection 63 of v- nue e lations No. 2.

vnse u nt!y , the all eated e nses claim b) tn peti- tioner as • uc ion its F •i ippin in- co was disallowed c .. l tely an e de- fici ncy aG& &ir. ont for th am unt of 738,509 . ~ (Lxh. 4 , P• 6, BIR re • ) w iasu ~ aya nst p t tion r, it iz d follows• Gr s fro fr ights nd p' ngera p r r turn •• -•943.099. 41 L ass £ 2nses incurred local- ly$

(1) Loc 1 int r- ialand fr ig ts ...

{? ) Li~hterage------...-.::;....&:.;:::;.;;.:;..;;.;.;;::;. Total adjust ent et income as p r in- v tigati n ••••••••••••••• ount subject t tax •• ••••• nd 28/ incc t x th ron ••• •••••• •••••• 1,384.00

L

s ,ount of tax elready aR s d paid •• • fici ncy inco e tax • • ••••• surchar e •••••••• •••••••

Compromis

•••••••••••••• •••·

TAL TAX DUE ••••• •• •• ••• •••

nal 389 com-

DECISI~ -

C. T . A. CASE tO. 383 Dep rt ent to th Collector vtn dat d c .b r 24 , 1957, of hieh is h reto ttac ed s /~n and .• de n int gr 1 p xt hertof• rnal co y

X

t J\ t

(1) Foieign snipping co ~ni st submit •t tern.nts of world o eration6 duly cartifi d by t he tax authoriti of t hei r respect v governments or, if the am are not v llabl , f ln~neiel s ate. nts certified by independent certified pu lie accountants.

In both eases , the state- ments must bo uthenticated by Philippin cons 1 r • Fer i n ffai~s Offici ls.

In th~ absence thereof , only v .rified Philip ine deductions shculd b all •

(2) Every foreign sh!pping co any with stips touchina Philip ine ports sh uld r gistcr Nith th£ Bur au of lnt~rnal ev- enu , pur uant to S ctio ?

of the T x Cca , tating also the nam and ddress of ita a ent in this country. " s r gards the fir t re uir , nt, th Bureau of Internal evenu h ub- sequently allowed authentication by the u.s. Consulate wh n there a1e no Philip- pine Ccnsu ar or other for ign aff•irs of- ficl.als l.n t e coun,.y v.111er such corpora ...

tions are domiciled. • {pp. l-4, orandum for Respondent. )

Petition r is a foreign s ipping co ny which transact bu&ine~s ..:.n th l ilio ine t ugh it local a nt , th Royal Inter- ce~n Lines.

It

d rives its inc me mainly from t ut o el'ati of ts v ssela wnich tt uch Philippir oorts.

Ther

is no qu stion t1at sa foreign corpo.r tion trans- acting business in th~ Phil ppin s, it l.S s ject to incon tax at th rates cf 20 and 28% provided in Section 24 of th ~etional Internal Revenu Code , - and t t it s tax ble only on its inco e from source 'ithin t Regs.

o. 2, 39 • Philippines. • ( ecticn 16, Hev.

• 325. )

,> 3 9 0

DECISICN •

C. T. A. C E NO. 383 - 5 - S ctiun 37 of t he Revenue Cod defines •gross i nc u* and •net income• frorn sources within the Phi l ip ines and ross incot.e" and "net income• fro soc.cces withcut the Philippines. '~1 t h respect t income frou scurccc cartly wit. in and pa t l y wit out t h Ph~lip·inos, ~in thP- c o cf the in- com of putH.icnc_ from the ooc::ati.on of it int er- ace n vessels, p ~agr ph (e) of said s ction pro- videsJ

X

X

X

X

• ( ) n o~e f ro s !!w!n pf\rt.bY .• w:}.j; o _ _t _the hj li()p ;l.ne~ . - t erns of gros i ncorn , xpensos , losses and deduct ions , other than t hose speci- fied in subs ction~ (a) and (c ) of thi section shall be allocated or ao ort i oned t o sourc s fit hin Ol' 11·1t .out the hilip- pin r- , und r t he rul s ~nd r egulations r escribed hy t l Secretary c± Finance.

Vhero i t r:.s of gr ss inccn e ar e sep r at - l y allocat ed to uources ~i t in the Phil - ippines , ttcrc ~ ~ 11 be d ducted (f r he pu pos of co ut ing t he n t incorr.e th . ef~ o .) t~e xpcnses . l oeses, and other d ductions properly apporti on d or allocat #d ther to and a a t able pert of other exp ns .-, loss ~s or ot her d - ~ ~ tlon hich c nnot d finitely b al- located t s o .e item or clasG of ross i r e . e.

Th

remai nder , if any , sh ll be in luded i n xull as n t income f ro ourc s with n the Philip ines. I n t h case of ros inco £ derived from sources artly i t hin and pertly without the Philippines , th 1 t !n·co may first be computed by deducting th• xn nses , lOS$8S , or oth r de uc ion& apportion d -ex alloc t d th re t and r atable rt of any exoenses , l osa •• ox other de- ction~ hich can ot defi ni tel y be 1- locat d to o e i teus or class f groa ·nco e; and th port ion o! uch n t inc- co.

ttributab e t o &ourc s wit hin th the hi l ippi nes may be d t ermined by ro- ~e s se s or f rmulas f gon ra! a port on- ment preacrib d by the Seer t ary of 1 1- nance.

Gains . profit , and i ncom fro 391

L

DECISI

- C. T •• CA E NO. 383 -.-

(1) t r n~portotion or other service ren- de= d portly withln .nJ artly without the P ilipo!nes , or (2) .rom ~h~ sal of per onal '1rC",e. ty prt~duced (in w1c1e or in part ) by the taxpayar ~ithin nd sold •ithout the • h.i.lippines. or produced (in whole or in part) by th taxpayer •ithout nd sold ittdn t. • hili pines , shell treated 8 der1v d p rtly from sourco !thin and ·rtly .rc. so r c _s with ut the Philippines. Gains , refits, and inc me deriv from t. e pure .. se of personal property \tithin and 1 tG sale •rithout the hil Jines o from th p r- chas of personal ro rt y witn t and it sal \athin t c Philippines s all be tre t d as derived entire! from urces wit in tha country in whi h old. "

In vi w ~f the difficul y of providitg in the law in· precis -te:rr:1 '.That portion of t 1e inco derived partly fro ¥~thin nd pertly rom itho t the Philip ines is inco 10 fr m sourc s ithin t e

Philippin

• and tho expens s, losses nd deductions allocable ther to, ~ection 37{e ) provid that "t he potticn of tch net incc~ ottribur ble to sources within the hilip ines may b& eterminecl by proc ss s ox for ulas of general a portionment prescrib d by tho Secretary of Finance. •

Pursuant

to S ction 27 and 33 , th eecretary of "inane • upon r~co ndstion of th Collector of Internal evenue, promul ted p blish d in t he Cff1cial Re ulations o. 2, zette of ·ebruary 11, 1941 (39 O.G. 325), .. ection 163 of which pro- vide t of f ship cc pnni s \.', osc v ssel touch port of the Philip lnes should includ , a~ 392

OECI I QI -

C. T.A. C S& NO. 383 gross incom , the total rece pts of 11 o t;oing busin s wh ther freight or passengers.

i th t e ross inccme thus ascertained, the ratio exi ting between it and t he gross inco e from all ports , both thin and ithout the Phil ip inea of all ve sel • w th r touching ports of t.

ilip ines or not , hould b determined as th ba is upon ·hich al- low ble deduction y be co ut d, the pr1nc1pl~ b ing th t Slowable doductiona shall b c uted u on a basis thich recogniz 1 t at tne income arising nd accruing r b in ss done in ny fr this country sh 11 r its are , d no or , of er.pe , incident t e earning or ere tio of uch income , in the ratio that th~ ross inc~ ri in in and fro this co try bear to th entire ross inco ri ng fro buai- ness don both within and ithou this country.

In other words , th n t in- co.e of • foreign &te oship co any doin businea in or from this count%y is sc rtain f r the purp se of the income tax, by deducting fro the groa r cei ts f ro outgoing busin ss such a portion f th 9 r g te xpens s, lo es , etc. , as ch recei t be to the a gr te rece1 ts from al l port of all Yes els, including in each case in- co o of a nonshipping character but in- cidental to the shi ping business s ch as dividends fro inv t nts , intez sta on d po its , tc.

or x mpl -- a) ro r ceipt fr out- go i n freight nd p s- a n era fro . I. ports • • • it20 ,COO. OO · '~b) ross receipts from out- going freig ts nd pas- sengers fro 11 orts oth r th n tlose of P. i •••• {c) Interests n other non- s ipping inc re eived by P. I . offic • • • • • • • • • • • • 5, d) Interests , dividends, and oth r nonshi ing in-

COl

eceived by all of- fices other tl n tho e n • I . • • • • • • • • • • • • • • • • • • ~ .

.oo

(a) ot l expe sea nd d due- ions of the c any as

w. ole, including thoa incurred by • I . office •• 1 .oo 393 ' DECI SION.

C.T.A. CASE NO. 383 sta "COMPUTATION OF P. Je NET INCOME “f£) P. I. gross incomes Freights and passengers... ®20,000,00 Interests and other in-~ come @eeseeeoCGeavaeenaepenus eves Total cecccccscecsece pees “(g) P.Ie expenses;

falta gross = x World's expenses, or x 150,000 °° SS x 190,000 g 13,636

(h) Pal. net incomes P.I. gross income less P.1. expenses, or 925,000 less P13,636 = 11,364."

| Respondent admits that the determination of petitioner's income and expenses 2s shown in its income tax return for its fiscal year ending May 31, 1955 is in accordance with Section 37(e) of the Revenue Cede and Sectien 163 of Revenue Kegula- tions No. 2. It is, however, contended that in order thet the formule for determining net incone under Section 163 of Revenue Aequiations No. 2 may be availed of by a foreign shipping company, it is necessary that two conditions be complied with, viz:

(1) submission cf a statement of world operations certified by the tax suthorities of the government ef the fereign country in which the foreign corpora- tion is domiciled, or, if the same is not available, a financial statement certified by an independent certified public accountant, and authenticated in beth cases by a Philippine consular or foreign af- 394 ae

DECISIW -

C. T. • CASE NO. 383 - 9 - fairs official or , in the absence thereof , by an American consul r official J and (2) re istration of t he forei n shipping eo any with tne ureau of Internal Revenue , pursuant to Section 203 of the venue Code.

Thes

condition r e 1~odied in a memorandum of the Chief, Legal artment

of the Bureau of Internal

venue dat d Dec M• ber 24, 1957 and epprov by th Collector of In- terna1 evenue.

They are n ing apPli~d to the ineo~~ ta retu~n of p titi n r for the fis- cal y ar ending ay 31, 19o5, wnich return was filed with the Bur au of Internal Rev nue on ct- ober 8, 19~5.

y zeapondent limit t he applica- tion of ection 1 3 of venu Aeg lations No. 2 by 1 osing additional con itiona or r equir nta and r· Jlying th n require. nts retxoaetiv ly? ~ection 37(e) of the ~v nue Cod authorizes the S crt ry of _inance to pr scribe the proc as- es or formulas oi ene~al pportionment for t e purp s of d termining t e t income of foreign corpol.'ations tran acting bus.~.ness in t

Philip-

pin s whose gioss iDcome is derived fr sources p rtly w1 thin and partly dt out th Philippines. N si ilar authority ls grant d to th (no Commis ioner) of In rnal venue.

11 etor ection 163 of nu gulati na o. 2 was pro ulgated by virtue of such authority.

Th

authoxity o prescribe th processes or fo ula& fer deter- .• 395 \

DECISI CN -

C.T.A. C ~e NO. 383 - 10- mining the net income .of foreign corporat ions transacting busi ness in the Philippines having been conferred by Congress; on the Secretary of Finance, and the said Secratary having coxercieed such authority, x spondent has no powor to li t or enlarge tne application of 'Che processes or formulas prescribed by his superior officer .

If

respondent believes t t Section 163 of .~venu Regulations o. 2 has out liv d its usefulness , the roper procedur is for him to r co nd ita r.- repeal or amendment.j Not only h re$pondent encroached upon tho power of t e eeer tary of Finance hut he s sought to pply to petition r's incor e tax return for 1955 the n w requirements d v!s~d and c n- ceived only in ce ber, 19~7 .

To cnp i t all, respondent con iders t e incowe tax rQturn of peti- tioner for 19 5 fraudulent for failure t co ply with the n requirement$ and is seeking to collect fro petitioner the ~ fraud nalty.

In addi- tion , petitio r is bain required to pay . 00 as •co romis • for an une~~laine violation of the Nation 1 lnt ernal I~venue C d , hich we as- sum . is also for non.co li nee quire ents , ~ca ·se respondent t h the new r - mit that pet i - tioner's i nc tax return was filed in accor dance with law and the reg'..tl tion h for the advent of the new requirements. ( S

p. 3 , supra. ) The sole nuroose of respondent in prescrib- ing t he new r equirement s 1•• as admitted by r es - 396 DECISION ...

C. T •• CASH NO. 383 - ll - pendent t hr ou h his counsel , •the de!ii! to ;ai§l • W do not bcl i ev that r pondent has power or authority t o raise more r venue f or the support o t he overru nt by eans or m t ds which the Constitution and t h laws do not per- mit.

lfh p~ver to rair.e r ev nue is an exclusive prerogative of Congress. ut ven Congress y not , for the purpose of reiaing r v nu , r vide for t he retroactive pplie ion of a t xing •t t- ute and p ' alize axpay r for vio t i. n t r of in resp ct to pa&t transact ions.

Th

reaaon ia obvious.

Sue

a st~t te would • an ex post fa ,~o l a\V.

Ass

ing t. a the ne requirements ~r val d , petitioner conwends t t t has fully complied with th S3 .

• spond nt , however , claim th t while petition r A& t;Oft!J')lied ith the s cond re- quirement (. egistration under Section 2 3 o the venue ode ) , 1 t s failed to co~ply :~ith the fir st by not submittlng a stotement of .or ld ope.ratio s.

P tition .r su mitte xniblt G, a statement of its wor ld income for fiscal year 19~-1955, cert ifi by "I ember of the ed r- l ands Instituut van Ac ount nts , nd Exhibit G-1.

a &tat em nt of ·orld exp nses for fisc~l year 1954- 1955. also certified by a ·~ mber of the Ne- derl nd Instit ut van ceo ntants.

Both st t - ments wer auth~ntic t d by a lc Consul of tl uP!ted t ate$ (Exhs. G-2 and -3).

o q ti n ,I 3 9 7 - C. T. A. C~! NO. 393 - 12 - has een r !sed a to the corr etne a of the en- trie• eont incd in said t~te .ents , Exh~. G and G-1.

Aft r goin ov ~ the said statements , we fin that th y are in for and i n substance in accordanc ith tho roquir ~en t of respondent. inding the defici ncy inco~ t~x aosess- m nt against titioner rbitrary and ill gal. th decision appealed from is h roby r versed.

No

ronounc r.1 nt t costs.

60 0 ERED.

nila, August ~. 1958.

ca c • ...

398