CIR vs.

BAIER-NICKEL
11FEB
GR No. 153793 | August 29, 2006 | J. Ynares-Santiago

Facts:
CIR appeals the CA decision, which granted the tax refund of respondent and reversed
that of the CTA. Juliane Baier-Nickel, a non-resident German, is the president of
Jubanitex, a domestic corporation engaged in the manufacturing, marketing and
selling of embroidered textile products. Through Jubanitex’s general manager, Marina
Guzman, the company appointed respondent as commission agent with 10% sales
commission on all sales actually concluded and collected through her efforts.
In 1995, respondent received P1, 707, 772. 64 as sales commission from w/c
Jubanitex deducted the 10% withholding tax of P170, 777.26 and remitted to BIR.
Respondent filed her income tax return but then claimed a refund from BIR for the
P170K, alleging this was mistakenly withheld by Jubanitex and that her sales
commission income was compensation for services rendered in Germany not
Philippines and thus not taxable here.
She filed a petition for review with CTA for alleged non-action by BIR. CTA denied
her claim but decision was reversed by CA on appeal, holding that the commission
was received as sales agent not as President and that the “source” of income arose
from marketing activities in Germany.

Issue: W/N respondent is entitled to refund

Held:
No. Pursuant to Sec 25 of NIRC, non-resident aliens, whether or not engaged in trade
or business, are subject to the Philippine income taxation on their income received
from all sources in the Philippines. In determining the meaning of “source”, the Court
resorted to origin of Act 2833 (the first Philippine income tax law), the US Revenue
Law of 1916, as amended in 1917.
US SC has said that income may be derived from three possible sources only: (1)
capital and/or (2) labor; and/or (3) the sale of capital assets. If the income is from
labor, the place where the labor is done should be decisive; if it is done in this country,
the income should be from “sources within the United States.” If the income is from
capital, the place where the capital is employed should be decisive; if it is employed
in this country, the income should be from “sources within the United States.” If the
income is from the sale of capital assets, the place where the sale is made should be
likewise decisive. “Source” is not a place, it is an activity or property. As such, it has a
situs or location, and if that situs or location is within the United States the resulting
income is taxable to nonresident aliens and foreign corporations.
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.
The settled rule is that tax refunds are in the nature of tax exemptions and are to be
construed strictissimi juris against the taxpayer. To those therefore, who claim a
refund rest the burden of proving that the transaction subjected to tax is actually
exempt from taxation.
In the instant case, respondent failed to give substantial evidence to prove that she
performed the incoming producing service in Germany, which would have entitled her
to a tax exemption for income from sources outside the Philippines. Petition granted.