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AFISCO INSURANCE CORP. V CA 302 SCRA 1 (January 25, 1999)

Monday, January 26, 2009 Posted by Coffeeholic Writes

Labels:Case Digests,Taxation

Facts: AFISCO and 40 other non-life insurance companies entered into a Quota Share Reinsurance Treaties with

Munich, a non-resident foreign insurance corporation, to cover for All Risk Insurance Policiesover machinery erection

breakdown and boiler explosion. The treaties required petitioners to form a pool, to which AFISCO and the otherscomplied. On April 14, 1976, the pool of machinery insurers submitteda financial statement and filed an

Information Return of Organization Exempt from Income Tax for the year ending 1975, on the basis of which, it was

assessed by the commissioner of Internal Revenue deficiency corporate taxes. A protest was filed but denied by the CIR.

Petitioners contend that they cannot be taxed as a corporation, because (a) the reinsurance policies were written by them

individually and separately, (b) their liability was limited to the extent of their allocated share in the original risks insured

and not solidary, (c) there was no common fund, (d) the executive board of the pool did not exercise control and

management of its funds, unlike the board of a corporation, (e) the pool or clearing house was not and could not possiblyhave engaged in the business of reinsurance from which it could have derived income for itself. They further contend that

remittances to Munich are not dividends and to subject it to tax would be tantamount to an illegal double taxation, as it

would result to taxing the same premium income twice in the hands of the same taxpayer. Finally, petitioners argue that

the governments right to assess and collect the subject Information Return was filed by the pool on April 14, 1976. On the

basis of this return, the BIR telephoned petitioners on November 11, 1981 to give them notice of its letter

ofassessment dated March 27, 1981. Thus, the petitioners contend that the five-year prescriptive period then provided in

the NIRC had already lapsed, and that the internal revenue commissioner was already barred by prescription from making

an assessment.

Held: A pool is considered a corporation for taxation purposes. Citing the case of Evangelista v. CIR, the court held that

Sec. 24 of the NIRC covered these unregistered partnerships and even associations or joint accounts, which had no lega

personalities apart from individualmembers. Further, the pool is a partnership as evidence by a common fund, the

existence of executive board and the fact that while the pool is not in itself, a reinsurer and does not issue any insurance

policy, its work is indispensable, beneficial and economically useful to thebusiness of the ceding companies and Munich,

because without it they would not have received their premiums

As to the claim of double taxation, the pool is a taxable entity distinct from the individual corporate entities of the ceding

companies. The tax on its income is obviously different from the tax on the dividends received by the said companies

Clearly, there is no double taxation

As to the argument on prescription, the prescriptive period was totaled under the Section 333 of the NIRC, because the

taxpayer cannot be located at the address given in the information return filed and for which reason there was delay in

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sending the assessment. Further, the law clearly states that the prescriptive period will be suspended only if the taxpayer

informs the CIR of any change in the address.