N.V. Reederij "Amsterdam" v. Commissioner of Internal Revenue
REITERATIONFacts
The Antecedents: Petitioners N.V. Reederij "AMSTERDAM" (a foreign shipping corporation) and its husbanding agent Royal Interocean Lines are challenging the income tax assessment made by the Commissioner of Internal Revenue (CIR). N.V. Reederij "AMSTERDAM"'s vessels, MV Amstelmeer and MV "Amstelkroon," called on Philippine ports in 1963 and 1964 to load cargoes for foreign destinations. Freight fees totaling US $98,175.00 in 1963 and US $137,193.00 in 1964 were paid abroad. Royal Interocean Lines acted as the husbanding agent for a fee. Procedural History: The CIR assessed N.V. Reederij "AMSTERDAM" for deficiency income tax for 1963 and 1964, treating it as a non-resident foreign corporation not engaged in trade or business in the Philippines. Petitioners, assuming it was engaged in business, filed returns and paid taxes under Section 24(b)(2) of the Tax Code. They protested the assessment, which was denied. They then filed a petition for review with the Court of Tax Appeals (CTA), praying for the cancellation of the assessment. The CTA modified the assessment by eliminating fraud compromise penalties. Petitioners' motion for reconsideration was denied, leading to this petition for review. The Petition: Petitioners raise two main issues: (A) whether N.V. Reederij "AMSTERDAM" should be taxed as a foreign corporation not engaged in trade or business under Section 24(b)(1) or as one engaged in trade or business under Section 24(b)(2) of the Tax Code, considering it had no office in the Philippines and only made two calls; and (B) whether its foreign exchange receipts should be converted at P2.00 to US $1.00 or P3.90 to US $1.00.
Issue(s)
Whether N.V. Reederij "AMSTERDAM", a foreign corporation without an office in the Philippines that made only two calls to load cargo, should be taxed as a foreign corporation not engaged in trade or business under Section 24(b)(1) or as one engaged in trade or business under Section 24(b)(2) of the Tax Code. Whether the foreign exchange receipts of N.V. Reederij "AMSTERDAM" should be converted into Philippine Pesos at the rate of P2.00 to US $1.00 or at P3.90 to US $1.00.
Ruling
The petition is denied. The Supreme Court affirmed the decision of the Court of Tax Appeals, holding that N.V. Reederij "AMSTERDAM" is a non-resident foreign corporation not engaged in trade or business in the Philippines and that its income should be converted at the prevailing free market rate of P3.90 to US $1.00.
Ratio Decidendi
On the classification of N.V. Reederij "AMSTERDAM" as a non-resident foreign corporation not engaged in trade or business: The Court held that for a foreign corporation to be considered engaged in trade or business in the Philippines, its business transactions must be continuous. A casual business activity, such as the two calls made by the petitioner's vessels to load cargo for foreign destinations, does not amount to engaging in trade or business for income tax purposes. The Court reiterated the definitions of resident and non-resident foreign corporations under the Tax Code, emphasizing that a non-resident foreign corporation is one not engaged in trade or business within the Philippines and not having any office or place of business therein. Consequently, such a corporation is taxable on its gross income from all sources within the Philippines. The provisions cited by the petitioner (Sections 24(b)(2) and 37(B)(e) of the Tax Code and Section 163 of Revenue Regulations No. 2) pertain to foreign corporations engaged in trade or business, and thus are inapplicable to the petitioner's situation. The Court found no basis to assert that Section 37(e) applies to non-resident foreign corporations not engaged in business, as its purpose is to determine the net income of foreign steamship companies doing business in the Philippines. The taxable income of non-resident foreign corporations, as in this case, consists of its gross income from all sources within the Philippines, and the tax rate is applied to this gross income. On the conversion rate of foreign exchange: The Court ruled that the conversion rate of P3.90 to US $1.00, which was the prevailing free market conversion rate during the taxable years 1963 and 1964, should be applied. This is in accordance with Republic Act No. 2609, which authorized the Monetary Board to fix the legal conversion rate. The Court cited its previous ruling in Commissioner of Internal Revenue vs. Royal Interocean Lines and the Court of Tax Appeals (G.R. No. L-26806, July 30, 1970), which distinguished transactions before and after the enactment of R.A. 2609. For transactions after R.A. 2609, the free market conversion rate, which had been fixed in open trading, was applicable. Furthermore, the Court noted that the petitioner itself used the P3.90 to US $1.00 conversion rate when paying its agency fees, estopping it from claiming otherwise.
Main Doctrine
A foreign corporation making only casual business activities in the Philippines, such as calling on Philippine ports to load cargoes for foreign destinations, is considered a non-resident foreign corporation not engaged in trade or business in the Philippines for income tax purposes. Its taxable income consists of its gross income from all sources within the Philippines, and the conversion rate for foreign exchange should be the prevailing free market rate at the time of the transaction.