Afisco Insurance Corporation Et - Al

Title: Afisco Insurance Corporation et.al vs. CA (G.R. No.
112675 January 25, 1999)

Ponente: J. Panganiban
Doctrine to Remember
Unregistered Partnerships and associations are considered as corporations for tax purposes –
Under the old internal revenue code, “A tax is hereby imposed upon the taxable net income received
during each taxable year from all sources by every corporation organized in, or existing under
the laws of the Philippines, no matter how created or organized, xxx.” Ineludibly, the Philippine
legislature included in the concept of corporations those entities that resembled them such
as unregistered partnerships and associations.
Insurance pool in the case at bar is deemed a partnership or association taxable as a corporation
– In the case at bar, petitioners-insurance companies formed a Pool Agreement, or an association
that would handle all the insurance businesses covered under their quota-share reinsurance treaty
and surplus reinsurance treaty with Munich is considered a partnership or association which may be
taxed as a corporation.
Facts
 The petitioners are 41 non-life domestic insurance corporations. They issued risk insurance
policies for machines. The petitioners in 1965 entered into a Quota Share Reinsurance Treaty
and a Surplus Reinsurance Treaty with the Munchener Ruckversicherungs-Gesselschaft
(hereafter called Munich), a non-resident foreign insurance corporation. The reinsurance
treaties required petitioners to form a pool, which they complied with.
 In 1976, the pool of machinery insurers submitted a financial statement and filed an “Information
Return of Organization Exempt from Income Tax” for 1975. On the basis of this, the CIR
assessed a deficiency of P1,843,273.60, and withholding taxes in the amount of P1,768,799.39
and P89,438.68 on dividends paid to Munich and to the petitioners, respectively.
 The Court of Tax Appeal sustained the petitioner's liability. The Court of Appeals dismissed their
appeal.
 The CA ruled in that the pool of machinery insurers was a partnership taxable as a corporation,
and that the latter’s collection of premiums on behalf of its members, the ceding companies, was
taxable income.
Issues Articles/Law Involved
Whether or not the pool is taxable as a  Sec. 22 (B) NIRC
corporation.  Sec. 27 (A) NIRC
Rulings
Yes: Pool taxable as a corporation
Argument of Petitioner: The reinsurance policies were written by them “individually and separately,”
and that their liability was limited to the extent of their allocated share in the original risks thus
reinsured. Hence, the pool did not act or earn income as a reinsurer. Its role was limited to its
principal function of “allocating and distributing the risk(s) arising from the original insurance among
the signatories to the treaty or the members of the pool based on their ability to absorb the risk(s)
ceded[;] as well as the performance of incidental functions, such as records, maintenance, collection
and custody of funds, etc.”
Argument of SC: According to Section 24 of the NIRC of 1975:
“SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic corporations. -- A tax is hereby

imposed upon the taxable net income received during each taxable year from all sources by every
corporation organized in, or existing under the laws of the Philippines, no matter how created or
organized, but not including duly registered general co-partnership (compañias colectivas), general
professional partnerships, private educational institutions, and building and loan associations xxx.”
Ineludibly, the Philippine legislature included in the concept of corporations those entities that
resembled them such as unregistered partnerships and associations. Interestingly, the NIRC’s
inclusion of such entities in the tax on corporations was made even clearer by the Tax Reform Act of
1997 Sec. 27 read together with Sec. 22 reads:
“SEC. 27. Rates of Income Tax on Domestic Corporations. --

(A) In General. -- Except as otherwise provided in this Code, an income tax of thirty-five percent
(35%) is hereby imposed upon the taxable income derived during each taxable year from all sources
within and without the Philippines by every corporation, as defined in Section 22 (B) of this Code,
and taxable under this Title as a corporation xxx.”
“SEC. 22. -- Definition. -- When used in this Title:
xxx xxx xxx
(B) The term ‘corporation’ shall include partnerships, no matter how created or organized, joint-
stock companies, joint accounts (cuentas en participacion), associations, or insurance companies,
but does not include general professional partnerships [or] a joint venture or consortium formed for
the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and
other energy operations pursuant to an operating or consortium agreement under a service contract
without the Government. ‘General professional partnerships’ are partnerships formed by persons
for the sole purpose of exercising their common profession, no part of the income of which is derived
from engaging in any trade or business.
Thus, the Court in Evangelista v. Collector of Internal Revenue held that Section 24 covered these
unregistered partnerships and even associations or joint accounts, which had no legal personalities
apart from their individual members.
Furthermore, Pool Agreement or an association that would handle all the insurance businesses
covered under their quota-share reinsurance treaty and surplus reinsurance treaty with Munich may
be considered a partnership because it contains the following elements: (1) The pool has a common
fund, consisting of money and other valuables that are deposited in the name and credit of the pool.
This common fund pays for the administration and operation expenses of the pool. (2) The pool
functions through an executive board, which resembles the board of directors of a corporation,
composed of one representative for each of the ceding companies. (3) While, the pool itself is not a
reinsurer and does not issue any policies; its work is indispensable, beneficial and economically
useful to the business of the ceding companies and Munich, because without it they would not have
received their premiums pursuant to the agreement with Munich. Profit motive or business is,
therefore, the primordial reason for the pool’s formation.

Afisco Insurance Corporation Et - Al

Uploaded by

Copyright:

Available Formats

Afisco Insurance Corporation Et - Al

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Afisco Insurance Corporation Et - Al

Uploaded by

Copyright:

Available Formats

Title: Afisco Insurance Corporation et.al vs. CA (G.R. No.

112675 January 25, 1999)

Argument of SC: According to Section 24 of the NIRC of 1975:

“SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic corporations. -- A tax is hereby

“SEC. 27. Rates of Income Tax on Domestic Corporations. --

You might also like