National Development Company vs. CIR

G.R. No. 53961; June 30, 1987

FACTS:

National Development Company entered into contracts in Tokyo with several Japanese shipbuilding companies for the construction of twelve ocean-going vessels. Upon completion, the NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70 as interest on the balance of the purchase price. No tax was withheld. 

The Commissioner then held the NDC liable for such tax in the total sum of P5,115,234.74.

The BIR thereupon served on the NDC a warrant of distraint and levy to enforce collection of the claimed amount.  

CTA sustained the assessment of BIR except for a slight reduction of the tax deficiency in the sum of P900.00, representing the compromise penalty.

NDC then came to this Court in a petition for certiorari. The petitioner argues that the Japanese shipbuilders were not subject to tax because all the related activities — the signing of the contract, the construction of the vessels, the payment of the stipulated price, and their delivery to the NDC — were done in Tokyo

ISSUE:

Whether the NDC should have had withheld tax from interest payments made to a foreign corporation.

HELD:

YES. The law, however, does not speak of activity but of “source,” (the source of the income) which in this case is the NDC. This is a domestic and resident corporation with principal offices in Manila. 

SEC. 37. Income from sources within the Philippines. — (a) Gross income from sources within the Philippines. — The following items of gross income shall be treated as gross income from sources within the Philippines:

(1) Interest. — Interest derived from sources within the Philippines, and interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise;

The Government’s right to levy and collect income tax on interest received by foreign corporations not engaged in trade or business within the Philippines is not planted upon the condition that ‘the activity or labor — and the sale from which the (interest) income flowed had its situs’ in the Philippines.  The residence of the obligor who pays the interest rather than the physical location of the securities, bonds or notes or the place of payment, is the determining factor of the source of interest income.

It is not the NDC that is being taxed. The tax was due on the interests earned by the Japanese shipbuilders. It was the income of these companies and not the Republic of the Philippines that was subject to the tax the NDC did not withhold. In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure to withhold the same from the Japanese shipbuilders. Such liability is imposed by Section 53(c) of the Tax Code.

DOCTRINE:

The residence of the obligor who pays the interest rather than the physical location of the securities, bonds or notes or the place of payment, is the determining factor of the source of interest income.