AIR CANADA V Cir Final Case Digest

AIR CANADA v.
CIR
G.R. 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 ₱5,185,676.77.
On November 28, 2002, Air Canada filed a written claim for refund of alleged erroneously paid income
taxes amounting to ₱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)1.
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 Division.
ISSUES & HELD:

1) Whether Air Canada is subject to the 2½% tax on Gross Philippine Billings pursuant to Section
28(A)(3).
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) If not, 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);
YES. Petitioner falls within the definition of resident foreign corporation under Section 28(A)(1) 2, 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 certificated 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 for sale any air transportation in behalf of said foreign air carrier and/or others, or negotiate for,
or holds itself out by solicitation, advertisement, or otherwise sells, provides, furnishes, contracts, or
arranges for such transportation.”
2
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.
SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -
....
(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 1/2%) on its ‘Gross
Philippine Billings’ as defined hereunder:
(a) International Air Carrier. - ‘Gross Philippine Billings’ refers to the amount of gross revenue derived from carriage of persons, excess baggage,
cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place
of payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline
form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further, That for a flight
which originates from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, only the
aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross
Philippine Billings. (Emphasis supplied)
3) Whether the Republic of the Philippines-Canada Tax Treaty is enforceable;
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 1½% of
gross revenues, pursuant to Article VIII of the Republic 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.
(Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue).
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign
country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the
taxable income derived in the preceding taxable year from all sources within the Philippines: Provided, That effective January 1, 1998, the rate
of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1,
2000 and thereafter, the rate shall be thirty-two percent (32%). (Emphasis supplied)
4) Whether petitioner Air Canada is entitled to the refund.
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 P5,185,676.77 Gross Philippine Billings tax paid by petitioner was computed at the rate of
1 ½% of its gross revenues amounting to P345,711,806.08149 from the third quarter of 2000 to the second
quarter of 2002. It is quite apparent that the tax imposable under Section 28(A)(l) 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.

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AIR CANADA v.

ISSUES & HELD:

SEC. 28. Rates of Income Tax on Foreign Corporations. -

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

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

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

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