The NDC entered into contract in Tokyo with several Japanese shipbuilding companies for the construction of its 12 ocean-going vessels. The purchase price was to come from the proceeds of bonds issued by the Central Bank. Initial payments were made in cash and through irrevocable letter of credit. Fourteen (14) promissory notes were signed for the balance by the NDC guaranteed by Republic of the Philippines.
Pursuant thereto, the remaining payments and the interest thereon were remitted in due time by the NDC to Tokyo. The NDC remitted to the ship builders in Tokyo the total amount of US$4,066,580 as interest on the balance of the purchase price. No tax was withheld.
The Commissioner then held the NDC liable on such tax in the total sum of PhP5,115,234.74. The BIR thereupon served on the NDC a warrant of distraint and levy to enforcce collection of the claimed amount.
Petitioner argues that the Japanese ship builders were not subject to tax under the sec. 37 of the Tax Code because all the related activities- the signing of the contract, the construction of the vessels, the payment of the stipulated price, and their delivery to the NDC - were done in Tokyo.
ISSUE: WON the Tokyo shipbuilders are subject to tax?
HELD:
The law specifies: interest derived from sources within the Philippines, and interest on bonds, notes, or other interest-bearing obligation of resident, corporate or otherwise. Nothing there speak of the 'acts or activity' of non-residential corporation in the Philippines, or place where the contract is signed.
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. Accordingly, if the obligor is a resident of the Philippines the interest payment paid by him can have no other source than within the Philippines. The interest is paid not by the bond note or other interest-bearing obligations, but by the obligor.
Pursuant thereto, the remaining payments and the interest thereon were remitted in due time by the NDC to Tokyo. The NDC remitted to the ship builders in Tokyo the total amount of US$4,066,580 as interest on the balance of the purchase price. No tax was withheld.
The Commissioner then held the NDC liable on such tax in the total sum of PhP5,115,234.74. The BIR thereupon served on the NDC a warrant of distraint and levy to enforcce collection of the claimed amount.
Petitioner argues that the Japanese ship builders were not subject to tax under the sec. 37 of the Tax Code because all the related activities- the signing of the contract, the construction of the vessels, the payment of the stipulated price, and their delivery to the NDC - were done in Tokyo.
ISSUE: WON the Tokyo shipbuilders are subject to tax?
HELD:
The law specifies: interest derived from sources within the Philippines, and interest on bonds, notes, or other interest-bearing obligation of resident, corporate or otherwise. Nothing there speak of the 'acts or activity' of non-residential corporation in the Philippines, or place where the contract is signed.
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. Accordingly, if the obligor is a resident of the Philippines the interest payment paid by him can have no other source than within the Philippines. The interest is paid not by the bond note or other interest-bearing obligations, but by the obligor.
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