William Reagan vs Commissioner of Internal Revenue

G.R. No. L-26379 – 30 SCRA 968 – Political Law – Basic Concepts – Elements of a State – Sovereignty – The Philippines has Sovereignty over US Military Bases within Philippine Territory

William Reagan is a US citizen assigned at Clark Air Base to help provide technical assistance to the US Air Force (USAF). In April 1960 Reagan imported a 1960 Cadillac car valued at $6,. Two months later, he got permission to sell the same car provided that he would sell the car to a US citizen or a member of the USAF. He sold it to Willie Johnson, Jr. for $6, as shown by a Bill of Sale. The sale took place within Clark Air Base. As a result of this transaction, the Commissioner of Internal Revenue calculated the net taxable income of Reagan to be at P17, and that his income tax would be P2,. Reagan paid the assessed tax but at the same time he sought for a refund because he claims that he is exempt. Reagan claims that the sale took place in foreign soil since Clark Air Base, in legal contemplation is a base outside the Philippines. Reagan also cited that under the Military Bases Agreement, he, by nature of his employment, is exempt from Philippine taxation.

ISSUE: Is the sale considered done in a foreign soil not subject to Philippine income tax?

HELD: No. The Philippines is independent and sovereign, its authority may be exercised over its entire domain. There is no portion thereof that is beyond its power. Within its limits, its decrees are supreme, its commands paramount. Its laws govern therein, and everyone to whom it applies must submit to its terms. That is the extent of its jurisdiction, both territorial and personal. On the other hand, there is nothing in the Military Bases Agreement that lends support to Reagan’s assertion. The Base has not become foreign soil or territory. This country’s jurisdictional rights therein, certainly not excluding the power to tax, have been preserved, the Philippines merely consents that the US exercise jurisdiction in certain cases – this is just a matter of comity, courtesy and expediency. It is likewise noted that he indeed is employed by the USAF and his income is derived from US source but the income derived from the sale is not of US source hence taxable.

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