Case Digest by: Mawile, Vanessa R. JD-1Air Canada v. CIR G.R. No. 169507, January 11, 2016

 

Air Canada v. CIR

G.R. No. 169507, January 11, 2016

FACTS:

          Air Canada is a foreign corporation organized and existing under the laws of Canada. On April 24, 2000, it was granted an authority to operate as an offline carrier by the Civil Aeronautics Board, subject to certain conditions, which authority would expire on April 24, 2005. As an off-line carrier, Air Canada does not have flights originating from or coming to the Philippines and does not operate any airplane in the Philippines.

          On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel) as its general sales agent in the Philippines. Aerotel sells Air Canada’s passage documents in the Philippines.

          For the period ranging from the third quarter of 2000 to the second quarter of 2002, Air Canada, through Aerotel, filed quarterly and annual income tax returns and paid the income tax on Gross Philippine Billings in the total amount of Php 5, 185, 676.77.

          On November 28, 2002, Air Canada filed a written claim for refund of alleged erroneously paid income taxes amounting to Php 5, 185, 676.77 before the Bureau of Internal Revenue (BIR). It’s basis was found in the revised definition of Gross Philippine Billings under Section 28(A)(3)(a) of the 1997 National Internal Revenue Code (NIRC).

          The CTA denied the petition. It found that Air Canada was engaged in business in the Philippines through a local agent that sells airline tickets on its behalf. As such, it held that while Air Canada was not liable for tax on its Gross Philippine Billings under Section 28(A)(3), it was nevertheless liable to pay the 32% corporate income tax on income derived from the sale of airline tickets within the Philippines pursuant to Section 28(A)(1). On appeal, the CTA En Banc affirmed the ruling of the CTA First Divsion.

 

ISSUES:

          1. Whether Air Canada is subject to the 2 & ½ % tax on Gross Philippine Billings pursuant to Section 28 (A)(3).

          2. Whether Air Canada is a resident foreign corporation engaged in trade or business and thus, can be subject to the regular corporate income tax of 32% pursuant to Section 28(A)(1).

3. Whether the Republic of the Philippines-Canada Tax Treaty is enforceable.

4. Whether petitioner Air Canada is entitled to the refund.

 

RULING:

 

          1. No. Air Canada is not liable to tax on Gross Philippine Billings under Section (28)(A)(3). the tax attaches only when the carriage of persons, excess baggage, cargo, and mail originated from the Philippines in a continuous and uninterrupted flight, regardless of where the passage documents were sold. Not having flights to and from the Philippines, petitioner is clearly not liable for the Gross Philippine Billings Tax.

          2. Yes. Petitioner falls within the definition of resident foreign corporation under Section 28(A)(1), thus, it may be subject to 32% tax on its taxable income.

          The Court in Commissioner of Internal Revenue v. British Overseas Airways Corporation declared British Overseas Airways Corporation, an international air carrier with no landing rights in the Philippines, as a resident foreign corporation engaged in business in the Philippines through its local sales agent that sold and issued tickets for the airline company.

          An offline carrier is “any foreign air carrier not certified by the Civil Aeronautics Board, but who maintains office or who has designated or appointed agents or employees in the Philippines, who sells or offers any air transportation in behalf of said foreign air carrier and/or others, or negotiable for, or holds itself out by solicitation, advertisement, or otherwise sells, provides, furnishes, contracts, or arranges for such transportation.”

          Petitioner is undoubtedly “doing business’ or “engaged in trade or business” in the Philippines. In the case at hand, Aerotel performs acts or works or exercises functions that are incidental and beneficial to the purpose of petitioner’s business. The activities of Aerotel bring direct receipts or profits to petitioner. Further, petitioner was issued by the Civil Aeronautics Board an authority to operate as an offline carrier in the Philippines for a period of five years. Petitioner is, therefore, a resident foreign corporation that is taxable on its income derived from sources within the Philippines.

3. Yes. While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) on its taxable income from sale of airline tickets in the Philippines, it could only be taxed at a maximum of 1 & ½ % of gross revenues, pursuant to Article VIII of the Philippines-Canada Tax Treaty that applies to petitioner as a “foreign corporation organized and existing under the laws of Canada.”

Our Constitution provides for adherence to the general principles of International law as part of the law of the land. The time-honored international principle of pacta sunt servanda  demands the performance in good faith of treaty obligations on the part of the states that enter into the agreement. Every treaty in force is binding upon the parties, and obligations under the treaty must be performed by them in good faith. More importantly, treaties have the force and effect of law in this jurisdiction.

4. No. As discussed in South African Airways, the grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated therein are true and correct. the deficiency assessment, although not yet final, created a doubt as to and constitutes a challenge against the truth and accuracy of the facts stated in said return which, by itself and without unquestionable evidence, cannot be the basis for the grant of the refund.

In this case, the Php 5, 185, 676.77 Gross Philippine Billings tax paid by petitioner was computed at the rate of 1 & ½ % of its gross revenues amounting to Php 345, 711, 806.08149 from the third quarter of 2000 to the second quarter of 2002. It is quite apparent that the tax imposable under Section 28 (A)(1) of the 1997 NIRC 32%of taxable income, that is, gross income less deductions will exceed the maximum ceiling of 1 & ½ % of gross revenues as decreed in Article VIII of the Republic of the Philippines-Canada Tax Treaty. Hence, no refund is forthcoming.

 

Case Digest by: Mawile, Vanessa R. JD-1