Baier-Nickel v. Commissioner of Internal Revenue

THIRD DIVISION [CA-G.R. SP No. 57382. December 10, 2002.] MS. JULIANNE BAIER-NICKEL As represented by MARINA Q. GUZMAN (Attorney-in-Fact) , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N RIVERA, C. , J p : In this Petition for Review , filed under Rule 43 of the 1997 Rules on Civil Procedure, Petitioner seeks the reversal of the court of Tax Appeal's Decision , dated April 29, 1999, issued in CTA Case No. 5514, which denied Petitioner's claim for income tax refund in the amount of P512,313.66; as well as its Resolution , dated January 27, 2000, which denied Petitioner's Motion for Reconsideration of the earlier Resolution . As culled from the records, the petition at bench stemmed from the following factual backdrop. Petitioner, a non-resident German Citizen engaged in the garment business and marketing services, was contracted by Jubanitex, Inc. (hereinafter referred to as "Jubanitex", for brevity), a domestic corporation engaged in the export of embroidered products, to look for customers in Germany and other parts of Europe and to sell its products to those customers. For providing said services, Petitioner received from Jubanitex a commission based on the volume of sales, concluded through her efforts, in Germany and other parts of Europe. For the taxable year 1994, Petitioner received from Jubanitex the amount of P1,707,712.22 representing commissions on sales of Jubanitex's products which were made possible through Petitioner's marketing efforts in Germany and other European countries. The corresponding withholding tax of 10% amounting to P170,771.20 was then withheld by Jubanitex on these commissions and remitted to the Respondent. On April 17, 1995, Petitioner filed with Respondent her income tax return ( Rollo, page 64 ), together with the certificate of creditable withholding tax ( Rollo, page 66 ), reporting a taxable income of P1,707,712.22 and a tax due of P512,313.66 based on the tax rate of 30% provided in Section 22(b) of the Tax Code. Petitioner accordingly paid the Respondent the amount of P341,542.44, representing the difference between the tax due and the tax previously withheld and remitted by Jubanitex. On November 8, 1995, Petitioner filed with Respondent a claim for tax refund ( Rollo, pages 6768 ) on the ground that, having rendered the marketing services of Jubanitex's products in Germany and other parts of Europe, the compensation for said personal services is considered as income from sources outside the Philippines which, pursuant to Section 36(c)(3) of the Tax Code, is not taxable in the Philippines. Within the two (2)-year prescriptive period within which to file a claim for refund of erroneously paid income taxes, and no action having been taken by Respondent on Petitioner's aforesaid claim, Petitioner filed a Petition for Review with the Court of Tax Appeals (hereinafter referred to as the "CTA", for brevity) on April 15, 1997, which was docketed as CTA Case No. 5514 ( Rollo, pages 54-60 ). On April 29, 1999, the CTA rendered judgment denying the Petitioner's claim ( Annex "A" of the Petition ). A Motion for Reconsideration ( Annex "C" of the Petition ) having been denied by the CTA in a Resolution, dated January 27, 2000, Petitioner instituted the present recourse before this Court assigning to the CTA the following errors: THE COURT A QUO ERRED IN ITS INTERPRETATION AND APPRECIATION OF PARAGRAPH I OF ARTICLE IS OF THE PHILIPPINE-GERMANY TAX TREATY AS IT APPLIES TO THE TAXABILITY OF PETITIONER'S REMUNERATION FROM HER MARKETING SERVICES RENDERED IN GERMANY. THE COURT A QUO ERRED IN CONSIDERING THE REMUNERATION OR COMMISSION RECEIVED BY THE PETITIONER FOR RENDERING MARKETING SERVICES IN GERMANY AS CONNECTED WITH HER EMPLOYMENT AS PRESIDENT OR SHAREHOLDER OF JUBANITEX, INC. The petition is impressed with merit. Our tax laws are clear that a non-resident alien individual is taxable only on income derived from sources within the Philippines. (Sections 22(a)(1) and 22(b) of the NIRC of 1993; Sections 25(A)(1), 25(B) and 23(D) of the NIRC of 1997). Petitioner's status as a non-resident German national being duly admitted by the parties, the only considerable issue for resolution in the present recourse is: whether or not the P1,707,712.22 received by Petitioner from Jubanitex as commission payments are considered as derived from sources within the Philippines and therefore subject to the tax rate of 30% in accordance with Section 22(b) of the 1993 NIRC ( now Section 25(B) of the NIRC of 1997 ). For purposes of income taxation, it is well to bear in mind that the "source of income" relates not to the physical sourcing of a flow of money or the physical situs of payment but rather to the "property, activity or service which produced the income." ( Commissioner of Internal Revenue versus British Overseas Airways Corporation, G.R. Nos. 65773-74, April 30, 1987, 149 SCRA 395. ) In case of an income derived from labor (services) the factor which determines the source of the income is not the residence of the payor, or the place where the contract for the services is entered into, or the place of payment but the place where the service is actually rendered. In other words, the source of the income is the situs of the income-producing service. ( BIR Ruling, June 4, 1974. ) In the instant case, Petitioner's marketing services is the activity that produces the income. Accordingly, the commissions paid to Petitioner by virtue of her contract with Jubanitex had for their source Petitioner's undertaking to market Jubanitex's products in Germany and other parts of Europe. Said undertaking is the activity that gave rise to the payment of Petitioner's commissions, and since the same took place in Germany where Petitioner was a resident, the income derived therefrom is not taxable in the Philippines. Thus, Section 36(c)(3) of the NIRC of 1993 [now Section 42(C)(3) of the NIRC of 1997] explicitly provides that compensation for labor or personal services performed without the Philippines is income sourced from without the Philippines , hence, taxable only in the country where the taxpayer is a resident national. Under the same cited provision, the income is considered derived from sources outside the Philippines although the compensation is remitted from the Philippines ( BIR Ruling No. 170, September 30, 1983 ). The CTA, therefore, speciously applied, as basis for the denial of Petitioner's claim for refund, paragraph 1 of Article 15 of the Philippine-Germany Tax Treaty which states that: ". . . salaries, wages and other remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State ". If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State. Hence, applying the above-quoted provision, Petitioner's employment which consisted of the marketing services for Jubanitex, for which she was paid commissions as remuneration, was exercised in Germany of which Petitioner was a resident. Hence, it is in that state where the remuneration is taxable. The Tax Court a quo , however, predicated that the "commission" income earned by Petitioner was in the nature of a compensation and remuneration derived from her employment as president of Jubanitex, a domestic firm, hence taxable in the Philippines pursuant to Article 15 above-quoted. This finding, however, is belied by the evidence on the record. Thus, as correctly observed by CTA Associate Judge Amancio Q Saga in his dissenting opinion to the majority view: "Petitioner's Individual Income Tax Return does not reflect any compensation income earned during the relevant period contrary to what was declared by the majority opinion. What was however clear from this income Tax Return is that Petitioner derived business or professional income suggesting that she only earned commission income for services performed abroad which as earlier discussed is not taxable in the Philippines. "The fact that Plaintiff was the President of Jubanitex, Inc. and a stockholder (owned one share only) of said corporation during the taxable year in question is of no moment. As President of the company and as holder of one share of stock during the year in review, no evidence was presented by the Respondent to show proof that Petitioner had received any salary and/or dividend income from her allegedly controlled Philippine Corporation." ( Rollo, pages 3940 ) IN THE LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The herein assailed Decision of the Court of Tax Appeals, dated April 29, 1999, in CTA Case No. 5514, is REVERSED and SET ASIDE. Respondent Commissioner is hereby directed to ISSUE a REFUND in favor of the Petitioner in the amount of P512,313.66. SO ORDERED. Verzola and Tolentino, JJ., concur.