Air Canada v. CIR

Facts: Air Canada is a foreign corporation organized and existing under the laws of Canada. It was granted an authority to operate as an offline carrier by the Civil Aeronautics Board. As an offline carrier, Air Canada does not have flights originating from or coming to the Philippines and does not operate any airplane in the Philippines. Air Canada engaged the services of Aerotel as its general sales agent in the Philippines. Aerotel sells Air Canada’s passage documents in the Philippines. Air Canada, through Aerotel, filed quarterly and annual income tax returns and paid the income tax on Gross Philippine Billings. Air Canada filed refund of alleged erroneously paid income taxes with the BIR, assailing Section 28(A)(3)(a) of the 1997 NIRC. To prevent the running of the prescriptive period, Air Canada filed a PetRev before the CTA but it was denied. CTA First Division 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 should be taxed as a resident foreign corporation at the regular rate of 32%. Air Canada was deemed to have established a permanent establishment in the Philippines under Article V(2)(i) of the Republic of the Philippines-Canada Tax Treaty by the appointment of the local sales agent, in which the petitioner uses its premises as an outlet where sales of airline tickets are made. MR was denied. Air Canada filed an appeal with the CTA En Banc which ruled that Air Canada is subject to tax as resident foreign corporation doing business in the Philippines since it sold airline tickets to the Philippines.

Issues: 

First, whether petitioner Air Canada, as an offline international carrier selling passage documents through a general sales agent in the Philippines, is a resident foreign corporation within the meaning of Section 28(A)(1) of the 1997 National Internal Revenue Code; 

Second, whether petitioner Air Canada is subject to the 2 1/2% tax on Gross Philippine Billings pursuant to Section 28(A) (3). If not, whether an offline international carrier selling passage documents through a general sales agent can be subject to the regular corporate income tax of 32% on taxable income pursuant to Section 28(A)(1); 

Third, whether the Republic of the Philippines-Canada Tax Treaty applies, specifically: 

• Whether the Republic of the Philippines-Canada Tax Treaty is enforceable; 
• Whether the appointment of a local general sales agent in the Philippines falls under the definition of “permanent establishment” under Article V(2)(i) of the Republic of the Philippines-Canada Tax Treaty; and 

Lastly, whether petitioner Air Canada is entitled to the refund to erroneously paid tax on Gross Philippine Billings.

Held:

1. SC affirmed the CTA’s ruling that petitioner, as an offline international carrier with no landing rights in the Philippines, is not liable to tax on Gross Philippine Billings under Section 28(A)(3) of the 1997. Under the foregoing provision, 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. Petitioner, an offline carrier, is a resident foreign corporation for income tax purposes. Petitioner falls within the definition of resident foreign corporation under Section 28(A)(1) of the 1997 National Internal Revenue Code, thus, it may be subject to 32% tax on its taxable income. Petitioner is an RFC that is taxable on its income derived from sources within the Philippines. Petitioner’s income from sale of airline tickets, through Aerotel, is income realized from the pursuit of its business activities in the Philippines. 
3. In this case, there is a tax treaty that must be taken into consideration to determine the proper tax rate. A tax treaty is an agreement entered into between sovereign states “for purposes of eliminating double taxation on income and capital, preventing fiscal evasion, promoting mutual trade and investment, and according fair and equitable tax treatment to foreign residents or nationals.” Hence, the application of the provisions of the National Internal Revenue Code must be subject to the provisions of tax treaties entered into by the Philippines with foreign countries. 
4. While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) of the 1997 National Internal Revenue Code on its taxable income from sale of airline tickets in the Philippines, it could only be taxed at a maximum of 1 1/2% 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[.]” In this case, the provisions of the Republic of the Philippines-Canada Tax Treaty are more specific than the provisions found in the National Internal Revenue Code. Petitioner’s income from sale of ticket for international carriage of passenger is income derived from international operation of aircraft. The sale of tickets is closely related to the international operation of aircraft that it is considered incidental thereto. “[B]y reason of our bilateral negotiations with [Canada], we have agreed to have our right to tax limited to a certain extent[.]” Thus, we are bound to extend to a Canadian air carrier doing business in the Philippines through a local sales agent the benefit of a lower tax equivalent to 1 1/2% on business profits derived from sale of international air transportation. 
5. CTA properly denied petitioner’s claim for refund of allegedly erroneously paid tax on its Gross Philippine Billings, on the ground that it was liable instead for the regular 32% tax on its taxable income received from sources within the Philippines. Its determination of petitioner’s liability for the 32% regular income tax was made merely for the purpose of ascertaining petitioner’s entitlement to a tax refund and not for imposing any deficiency tax.