Baier-Nickel v. Commissioner of Internal Revenue

FOURTEENTH DIVISION [CA-G.R. SP No. 59794. January 18, 2002.] JULIANE BAIER-NICKEL, as represented by MARINA Q. GUZMAN (Attorney-in-fact) , petitioner-appellant , vs . COMMISSIONER OF INTERNAL REVENUE , respondent-appellee . D E C I S I O N VALDEZ, JR. , J p : An appeal from the decision 1 of the Court of Tax Appeals dated June 28, 2000 in CTA Case No. 5633 entitled "MS JULIANE BAIER-NICKEL, as represented by MARINA Q. GUZMAN (Attorney-in-Fact), Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent" denying petitioner's claim for income tax refund in the amount of P170,777.26. The facts, as found by the respondent court, remain undisputed, to wit: "Herein petitioner is a non-resident German citizen whose services were engaged by JUBANITEX to market their products in Germany and other parts of Europe. JUBANITEX, on the other hand, is a domestic corporation involved in the manufacturing and exporting of tablecloth, linens and other embroidered products. In exchange for the marketing services rendered, herein petitioner received through JUBANITEX, 10% commission based on the volume of sales produced through her efforts (TSN, October 8, 1998, p. 2). Petitioner likewise admitted that she is the President and stockholder of Jubanitex but claims that she does not receive any compensation as such (TSN, November 10, 1998). "For the taxable year 1995, the Petitioner received the total amount of P1,707,772.64 representing the total commission income she received from the sales of Jubanitex products in the German and European markets. A withholding tax of 10% amounting to P170,777.26 was withheld therefrom and duly remitted by Jubanitex to the Respondent (TSN, November 10, 1998, p. 2). A certificate of Creditable Withholding Tax was duly issued by Jubanitex to the Petitioner (Exhibit B). "On October 17, 1997, Petitioner filed her income tax return with the Metropolitan Bank and Trust Co. (MBTC) Makati Ave. Branch, reporting a taxable income of P1,707,772.64 and a tax due of P170,777.26 using the rate of 10%. Attached therewith is the Certificate of Creditable Withholding Tax issued by Jubanitex. "On April 14, 1998, Petitioner filed a claim for tax refund with the BIR (Exhibit Q) on the ground that having rendered marketing services for Jubanitex in Germany and other parts of Europe, any income which she received for said personal services is considered as income sourced outside the Philippines pursuant to Section 36(c)(3) of the Tax Code. Hence, said commission income is not taxable in the Philippines. "Petitioner filed this appeal on April 15, 1998 or a day after she filed the claim for refund with the Bureau of Internal Revenue. "Respondent, in his Answer, propounded the following Special and Affirmative defenses: "5.) That the above-mentioned petitioner is not the real party in interest and has no personality to file the instant petition, hence the same should be dismissed. "6.) That the instant petition has already prescribed. "7.) That the Petitioner has no cause of action. "Petitioner maintains in her memorandum that her instant claim for refund has been filed within the 2-year prescriptive period under Section 230 of the Tax Code and that she has complied with the substantiation requirements as prescribed in Revenue Regulations (sic) No. 6-85 as amended." 2 While recognizing the legal personality of the petitioner as well as the timeliness of her claim for tax refund, the Court of Tax Appeals, through Presiding Judge Ernesto D. Acosta and Associate Judge Ramon O. De Vera, denied the petition for lack of merit. Associate Judge Amancio Q. Saga dissented and expressed the view that petitioner's claim for tax refund in the amount of P170,777.26 should be granted. According to Judge Saga, "considering that herein Petitioner is a non-resident alien and considering further that the commission income she earned in 1995 was for services performed in the Federal Republic of Germany and other parts of Europe, such income is taxable in West Germany where she is a resident national." 3 Dissatisfied with the decision against her, petitioner is now before us alleging the following errors committed by the court a quo , to wit: "ASSIGNMENT OF ERRORS "THE COURT A QUO ERRED IN APPLYING SECTION 22(a)(1) AND SECTION 22(b) of the 1995 PHILIPPINE TAX CODE TO THE CASE OF THE PETITIONER WHO IS A RESIDENT OF 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 COURT A QUO ERRED IN ITS INTERPRETATION AND APPRECIATION OF PARAGRAPH 1 OF ARTICLE 15 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 APPLYING THE "SOURCE OF INCOME RULE" AS HELD IN THE CASE OF NATIONAL DEVELOPMENT COMPANY VS. COMMISSIONER OF INTERNAL REVENUE, (151 SCRA 472) IN FINDING PETITIONER LIABLE FOR INCOME TAX ON REMUNERATION RECEIVED FROM HER MARKETING SERVICES RENDERED IN GERMANY AND OTHER PARTS OF EUROPE." 4 Anent the first assigned error, petitioner faults the respondent court for dismissing her petition based on Sections 22(a)(1) and 22(b) of the 1995 Philippine Tax Code (should be National Internal Revenue Code of 1977, as amended, hereafter referred to as the NIRC), to wit: "SECTION 22. Tax on nonresident alien individuals . "(a) Nonresident alien engaged in trade or business within the Philippines: (1) In general. Nonresident aliens engaged in trade or business in the Philippines shall be subject to tax in the same manner as resident citizens and aliens on taxable income received from all sources within the Philippines, . . . Provided, that for purposes of this Title, a nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than 180 days during any calendar year shall be deemed a nonresident alien doing business in the Philippines, Section 20(g) of this Code notwithstanding. xxx xxx xxx "(b) Nonresident aliens not engaged in trade or business within the Philippines . There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines . . . " Petitioner claims that the above provisions of the NIRC are inapplicable to the case at bar as she is not a subject of Philippine taxation. Being a non-resident alien, specifically a citizen and resident of Germany, a country with whom the Philippines has a bilateral tax treaty, petitioner maintains that the provisions of the Republic of the Philippines (R.P.)-Germany Tax Treaty should govern the instant case instead. The NIRC is a special law dealing with the general subject of taxation. A tax treaty, on the other hand, is a bilateral convention (but may be made multilateral) entered into between sovereign states for purposes of eliminating double taxation on income and capital, preventing fiscal evasion, promoting mutual trade and investment, and according fair and equitable tax treatment to foreign residents or nationals. 5 While the NIRC deals with taxation in broad terms, tax treaties contain provisions covering the specific tax relations between its signatories. It is a rule in statutory construction that where one statute deals with a subject in general terms and another in a more detailed manner, they shall be harmonized if possible and if not, the latter shall prevail regardless of whether it was passed prior to the general statute. 6 In the case at bar, we see no conflict between the abovequoted provisions of the NIRC and Article 15 of the R.P.-Germany Tax Treaty cited by respondent court, to wit: "Article 15 "Dependent Personal Services "1. Subject to the provisions of Article 16, 18 and 19, salaries, wages and other remunerations 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. "2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first mentioned State if: "a. the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the calendar year concerned; and "b. the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and "c. the remuneration is not borne by a permanent establishment of a fixed base which the employer has in the other State." 7 Under both the NIRC and the R.P.-Germany Tax Treaty, petitioner is required to pay taxes in the Philippines based on income derived from employment exercised in the country. Put in another way, petitioner is subject to tax only on income received from Philippines sources. Having said that, we now proceed to the rest of the assigned errors, all of which boil down to the question of petitioner's source of income. Petitioner cites two grounds to support her claim that the remuneration or commission she received for rendering marketing services overseas is not taxable in the Philippines. First, the source of her income is Germany and other parts of Europe, not the Philippines. Second, petitioner is a non-resident alien, having stayed in the Philippines for the taxable year 1995 for only eighty-nine (89) days. As a non-resident alien, petitioner avers that the commission she received for services performed overseas should be taxed only in Germany where she is a resident national. Respondent court, on the other hand, finds incredulous petitioner's assertion that she is only a marketing representative of Jubanitex who earns purely commission income from sales made in Germany and other European countries. As president and majority stockholder of Jubanitex, a domestic corporation, respondent court ruled that income derived by petitioner from her marketing activities is taxable in the Philippines, thus: "Corollary to the conclusion that petitioner is not merely a marketing representative but is no less than the President and majority stockholder of a corporation (Jubanitex, Inc.) based in the Philippines, the concept of the source of income is altogether altered to mean the place of residence of the payor of the income, in this case Jubanitex Inc., therefore income derived by petitioner therefrom is taxable here in the Philippines. "The emphasis made by herein petitioner that she is merely a marketing representative of Jubanitex, Inc., is an attempt to focus our attention on the place where the "marketing" activity is performed such that the source becomes the place of activity." 8 In Commissioner of Internal Revenue vs. British Overseas Airways Corporation (BOAC) , the Supreme Court defined "source of income" in this manner, to wit: "The source of an income is the property, activity or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produced the income. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government." 9 As applied to the instant case then, we agree with both petitioner and the dissenting opinion of Judge Saga that the 10% tax withheld by the Bureau of Internal Revenue from the income petitioner received from promoting the products of Jubanitex in Germany and other parts of Europe should be refunded to her. Facts clearly show that petitioner's source of income is the German and European market, not the Philippines. It was in Germany and other parts of Europe that petitioner sourced clients for the products of Jubanitex. It was also in Germany and other European countries that petitioner performed the marketing activity for which she was paid commissions. Since the income which petitioner received was not derived from Philippine sources, said income cannot be taxed in the country under Sections 22(a)(1) and 22(b) of the NIRC and Article 15 of the R.P.-Germany Tax Treaty. This is further buttressed by Section 36(c)(3) of the NIRC cited by petitioner which provides that compensation for labor or personal service performed without the Philippines is considered gross income from sources outside the Philippines. Thus, as a non-resident alien, petitioner cannot be taxed in the Philippines on income derived from services she performed abroad. We find respondent court's reliance on National Development Company vs. Commissioner of Internal Revenue 10 misplaced. The NDC case involves tax on interest derived from sources within the Philippines. 11 Here, the Supreme Court ruled that "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." 12 The instant case is entirely different from the NDC case as we are not dealing here with tax on interest, but on income tax on commission for services performed. That petitioner is the president and majority stockholder of Jubanitex; a domestic corporation, does not, at all, alter the source of her income. Petitioner faults respondent court for ruling that the remuneration received by petitioner is taxable in the Philippines, the same having stemmed from her employment, not as sales agent of Jubanitex, but, as president thereof. We find merit in petitioner's argument. To qualify as president of a corporation, one must be a stockholder and a duly elected director thereof. 13 As a general rule, directors are not entitled to salary or other compensation when they perform nothing more than the usual and ordinary duties of their office. This is made clear in Section 30 of the Corporation Code of the Philippines, to wit: "Sec. 30. Compensation of Directors. In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable per diems: Provided, however, that any such compensation (other than per diems) may be granted to directors by the vote of the stockholder representing at least a majority of the outstanding capital stock at a regular or special stockholders' meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) per cent of the net income before income tax of the corporation during the preceding year." The above rule is founded upon a presumption that directors render service gratuitously, and that the return upon their shares adequately furnishes the motives for service, without compensation. 14 There are, however, exceptions, thus: ". . . Worthy of note is the clear phraseology of Section 30 which states: ". . . [T]he directors shall not receive any compensation, as such directors , . . . ". The phrase as such directors is not without significance for it delimits the scope of the prohibition to compensation given to them for services performed purely in their capacity as directors or trustees. The unambiguous implication is that members of the board may receive compensation, in addition to reasonable per diems, when they render services to the corporation in a capacity other than as directors/trustees." 15 In the case at bar, there is no showing that petitioner was granted compensation as president of Jubanitex. There are only two (2) ways by which members of the board can be granted compensation apart from reasonable per diems: (1) when there is a provision in the by-laws fixing their compensation; and (2) when the stockholders representing a majority of the outstanding capital stock at regular or special stockholders' meeting agree to give it to them. 16 None of these are present in the case at bar. What the facts clearly show is that petitioner received commission as sales agent of Jubanitex. Selling the products of Jubanitex in Germany and other European countries is separate and distinct from petitioner's position as president of the company. As succinctly explained by petitioner: "As a sales agent who is responsible for sourcing clients for Jubanitex in Germany and other parts of Europe, she receives commission for all sales consummated through her efforts. In fact, if she did not secure any order or sale from the German or the European market, she will not receive any remuneration or commission from Jubanitex. Commission on business practice is generally based on certain percentage of the sales value, as in this case ( People vs. Lopez, 5952-R, May 8, 1952 ). On the other hand, "salary" or "compensation" connotes a fixed compensation. Thus, the nature of petitioner-appellant's services outside the Philippines in sourcing clients for Jubanitex is clearly one of a sales agent rather than that of an employee of the company". 17 WHEREFORE, premises considered, the assailed decision of the Court of Tax Appeals dated June 28, 2000 is hereby REVERSED and SET ASIDE and the respondent court is hereby directed to grant petitioner a tax refund in the amount of Php170,177.26. SO ORDERED. Gozo-Dadole and Enriquez, Jr . , JJ . , concur. Footnotes 1. Annex "A", Petition for Review, Rollo , pp. 24-32. 2. Ibid. , pp. 24-26. 3. Dissenting Opinion, Rollo , p. 35. 4. Petition for Review, Rollo , pp. 12-13. 5. Commissioner of Internal Revenue vs. Procter & Gamble Philippine Manufacturing Corporation , 204 SCRA 377, 411 (1991). 6. Ruperto G. Martin, Statutory Construction, 6th ed., 1984, p. 147. 7. Annex "A", Petition, supra , p. 31. 8. Ibid. , p. 32. 9. 149 SCRA 395, 407 (1987). 10. 151 SCRA 472 (1987). 11. Section 37(1) of the NIRC. 12. National Development Company vs. Commissioner of Internal Revenue, Ibid. , p. 476. 13. Section 25, Corporation Code of the Philippines. 14. Western Institute of Technology, Inc. vs. Salas , 278 SCRA 216, 223 (1997). 15. Ibid. , pp. 223-224. 16. Ibid. , p. 223. 17. Petition for Review, supra , p. 15.