SECOND DIVISION
G.R. No. 169507, January 11, 2016
AIR CANADA, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
D E C I S I O N
LEONEN, J.:
An offline international air carrier selling passage tickets in the Philippines, through a general sales agent, is a resident foreign corporation doing business in the Philippines. As such, it is taxable under Section 28(A)(1), and not Section 28(A)(3) of the 1997 National Internal Revenue Code, subject to any applicable tax treaty to which the Philippines is a signatory. Pursuant to Article 8 of the Republic of the Philippines-Canada Tax Treaty, Air Canada may only be imposed a maximum tax of 1 1/2% of its gross revenues earned from the sale of its tickets in the Philippines.
This is a Petition for Review1 appealing the August 26, 2005 Decision2 of the Court of Tax Appeals En Banc, which in turn affirmed the December 22, 2004 Decision3 and April 8, 2005 Resolution4 of the Court of Tax Appeals First Division denying Air Canada's claim for refund.
Air Canada is a "foreign corporation organized and existing under the laws of Canada[.]"5 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, 2005.6 "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[.]"7
On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel) as its general sales agent in the Philippines.8 Aerotel "sells [Air Canada's] passage documents in the Philippines."9
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 P5,185,676.77,10 detailed as follows:chanRoblesvirtualLawlibrary
Applicable Quarter[/]Year Date Filed/Paid Amount of Tax
3rd Qtr 2000 November 29,2000 P 395,165.00
Annual ITR 2000 April 16, 2001 381,893.59
1st Qtr 2001 May 30,2001 522,465.39
2nd Qtr 2001 August 29,2001 1,033,423.34
3rd Qtr 2001 November 29,2001 765,021.28
Annual ITR 2001 April 15, 2002 328,193.93
1st Qtr 2002 May 30,2002 594,850.13
2nd Qtr 2002 August 29,2002 1,164,664.11
TOTAL P 5,185,676.77"cralawlawlibrary
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:chanRoblesvirtualLawlibrary
(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)cralawlawlibrary
WHEREFORE, premises considered, the instant petition is hereby DENIED DUE COURSE, and accordingly, DISMISSED for lack of merit.28cralawlawlibrary
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)cralawlawlibrary
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%54). (Emphasis supplied)cralawlawlibrary
Sec. 24. Rates of tax on corporations. — . . .
(b) Tax on foreign corporations. — . . .
(2) Resident corporations. — A corporation organized, authorized, or existing under the laws of any foreign country, except a foreign life insurance company, engaged in trade or business within the Philippines, shall be taxable as provided in subsection (a) of this section upon the total net income received in the preceding taxable year from all sources within the Philippines.56 (Emphasis supplied)cralawlawlibrary
There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged in the light of its peculiar environmental circumstances. The term implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business organization. "In order that a foreign corporation may be regarded as doing business within a State, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character. ["]
BOAC, during the periods covered by the subject-assessments, maintained a general sales agent in the Philippines. That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into series of trips — each trip in the series corresponding to a different airline company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the various airline companies on the basis of their participation in the services rendered through the mode of interline settlement as prescribed by Article VI of the Resolution No. 850 of the IATA Agreement." Those activities were in exercise of the functions which are normally incident to, and are in progressive pursuit of, the purpose and object of its organization as an international air carrier. In fact, the regular sale of tickets, its main activity, is the very lifeWood of the airline business, the generation of sales being the paramount objective. There should be no doubt then that BOAC was "engaged in" business in the Philippines through a local agent during the period covered by the assessments. Accordingly, it is a resident foreign corporation subject to tax upon its total net income received in the preceding taxable year from all sources within the Philippines.60 (Emphasis supplied, citations omitted)cralawlawlibrary
d. the phrase "doing business" shall include soliciting orders, service contracts, opening offices, whether called "liaison" offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization: Provided, however, That' the phrase "doing business" shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account[.]61 (Emphasis supplied)cralawlawlibrary
The purpose of these international agreements is to reconcile the national fiscal legislations of the contracting parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions. More precisely, the tax conventions are drafted with a view towards the elimination of international juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods.
The apparent rationale for doing away with double taxation is to encourage the free flow of goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic economies. Foreign investments will only thrive in a fairly predictable and reasonable international investment climate and the protection against double taxation is crucial in creating such a climate.75 (Emphasis in the original, citations omitted)cralawlawlibrary
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.
Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting parties and, in turn, help the taxpayer avoid simultaneous taxations in two different jurisdictions." CIR v. S.C. Johnson and Son, Inc. further clarifies that "tax conventions are drafted with a view towards the elimination of international juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods. The apparent rationale for doing away with double taxation is to encourage the free flow of goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic economies. Foreign investments will only thrive in a fairly predictable and reasonable international investment climate and the protection against double taxation is crucial in creating such a climate." Simply put, tax treaties are entered into to minimize, if not eliminate the harshness of international juridical double taxation, which is why they are also known as double tax treaty or double tax agreements.
"A state that has contracted valid international obligations is bound to make in its legislations those modifications that may be necessary to ensure the fulfillment of the obligations undertaken. " Thus, laws and issuances must ensure that the reliefs granted under tax treaties are accorded to the parties entitled thereto. The BIR must not impose additional requirements that would negate the availment of the reliefs provided for under international agreements. More so, when the RP-Germany Tax Treaty does not provide for any pre-requisite for the availment of the benefits under said agreement.
. . . .
Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty relief as required by RMO No. 1 -2000 should not operate to divest entitlement to the relief as it would constitute a violation of the duty required by good faith in complying with a tax treaty. The denial of the availment of tax relief for the failure of a taxpayer to apply within the prescribed period under the administrative issuance would impair the value of the tax treaty. At most, the application for a tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-2000. Logically, noncompliance with tax treaties has negative implications on international relations, and unduly discourages foreign investors. While the consequences sought to be prevented by RMO No. 1-2000 involve an administrative procedure, these may be remedied through other system management processes, e.g., the imposition of a fine or penalty. But we cannot totally deprive those who are entitled to the benefit of a treaty for failure to strictly comply with an administrative issuance requiring prior application for tax treaty relief.81 (Emphasis supplied, citations omitted)cralawlawlibrary
ARTICLE 7
GSA SERVICES
The GSA [Aerotel Ltd., Corp.] shall perform on behalf of AC [Air Canada] the following services:chanRoblesvirtualLawlibrary
a) Be the fiduciary of AC and in such capacity act solely and entirely for the benefit of AC in every matter relating to this Agreement;
. . . .
c) Promotion of passenger transportation on AC;
. . . .
e) Without the need for endorsement by AC, arrange for the reissuance, in the Territory of the GSA [Philippines], of traffic documents issued by AC outside the said territory of the GSA [Philippines], as required by the passenger(s);
. . . .
h) Distribution among passenger sales agents and display of timetables, fare sheets, tariffs and publicity material provided by AC in accordance with the reasonable requirements of AC;
. . . .
j) Distribution of official press releases provided by AC to media and reference of any press or public relations inquiries to AC;
. . . .
o) Submission for AC's approval, of an annual written sales plan on or before a date to be determined by AC and in a form acceptable to AC;
. . . .
q) Submission of proposals for AC's approval of passenger sales agent incentive plans at a reasonable time in advance of proposed implementation.
. . . .
r) Provision of assistance on request, in its relations with Governmental and other authorities, offices and agencies in the Territory [Philippines].
. . . .
u) Follow AC guidelines for the handling of baggage claims and customer complaints and, unless otherwise stated in the guidelines, refer all such claims and complaints to AC.91cralawlawlibrary
SECTION 21. No treaty or international agreement shall be valid and effective unless concurred in by at least two-thirds of all the Members of the Senate.cralawlawlibrary
ARTICLE XVI
(Taxation)
The Contracting Parties shall act in accordance with the provisions of Article VIII of the Convention between the Philippines and Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed at Manila on March 31, 1976 and entered into force on December 21, 1977, and any amendments thereto, in respect of the operation of aircraft in international traffic.123cralawlawlibrary
Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to 6% capital gains tax or other taxes at the first instance. The Court of Tax Appeals has no power to make an assessment.
As earlier established, the Court of Tax Appeals has no assessment powers. In stating that petitioner's transactions are subject to capital gains tax, however, the Court of Tax Appeals was not making an assessment. It was merely determining the proper category of tax that petitioner should have paid, in view of its claim that it erroneously imposed upon itself and paid the 5% final tax imposed upon PEZA-registered enterprises.
The determination of the proper category of tax that petitioner should have paid is an incidental matter necessary for the resolution of the principal issue, which is whether petitioner was entitled to a refund.
The issue of petitioner's claim for tax refund is intertwined with the issue of the proper taxes that are due from petitioner. A claim for tax refund carries the assumption that the tax returns filed were correct. If the tax return filed was not proper, the correctness of the amount paid and, therefore, the claim for refund become questionable. In that case, the court must determine if a taxpayer claiming refund of erroneously paid taxes is more properly liable for taxes other than that paid.
In South African Airways v. Commissioner of Internal Revenue, South African Airways claimed for refund of its erroneously paid 2 1/2% taxes on its gross Philippine billings. This court did not immediately grant South African's claim for refund. This is because although this court found that South African Airways was not subject to the 2 1/2% tax on its gross Philippine billings, this court also found that it was subject to 32% tax on its taxable income.
In this case, petitioner's claim that it erroneously paid the 5% final tax is an admission that the quarterly tax return it filed in 2000 was improper. Hence, to determine if petitioner was entitled to the refund being claimed, the Court of Tax Appeals has the duty to determine if petitioner was indeed not liable for the 5% final tax and, instead, liable for taxes other than the 5% final tax. As in South African Airways, petitioner's request for refund can neither be granted nor denied outright without such determination.
If the taxpayer is found liable for taxes other than the erroneously paid 5% final tax, the amount of the taxpayer's liability should be computed and deducted from the refundable amount.
Any liability in excess of the refundable amount, however, may not be collected in a case involving solely the issue of the taxpayer's entitlement to refund. The question of tax deficiency is distinct and unrelated to the question of petitioner's entitlement to refund. Tax deficiencies should be subject to assessment procedures and the rules of prescription. The court cannot be expected to perform the BIR's duties whenever it fails to do so either through neglect or oversight. Neither can court processes be used as a tool to circumvent laws protecting the rights of taxpayers.132cralawlawlibrary
[A]ppellant and appellee are not mutually creditors and debtors of each other. Consequently, the law on compensation is inapplicable. On this point, the trial court correctly observed:chanRoblesvirtualLawlibraryUnder Article 1278, NCC, compensation should take place when two persons in their own right are creditors and debtors of each other. With respect to the forest charges which the defendant Mambulao Lumber Company has paid to the government, they are in the coffers of the government as taxes collected, and the government does not owe anything to defendant Mambulao Lumber Company. So, it is crystal clear that the Republic of the Philippines and the Mambulao Lumber Company are not creditors and debtors of each other, because compensation refers to mutual debts. * * *.cralawlawlibrary
And the weight of authority is to the effect that internal revenue taxes, such as the forest charges in question, can not be the subject of set-off or compensation.A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or municipality to one who is liable to the state or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out of the contract or transaction sued on. * * *. (80 C.J.S. 73-74.)cralawlawlibrary
The general rule, based on grounds of public policy is well-settled that no set-off is admissible against demands for taxes levied for general or local governmental purposes. The reason on which the general rule is based, is that taxes are not in the nature of contracts between the party and party but grow out of a duty to, and are the positive acts of the government, to the making and enforcing of which, the personal consent of individual taxpayers is not required. * * * If the taxpayer can properly refuse to pay his tax when called upon by the Collector, because he has a claim against the governmental body which is not included in the tax levy, it is plain that some legitimate and necessary expenditure must be curtailed. If the taxpayer's claim is disputed, the collection of the tax must await and abide the result of a lawsuit, and meanwhile the financial affairs of the government will be thrown into great confusion. (47 Am. Jur. 766-767.)135 (Emphasis supplied)
There is no legal basis for the contention. By legal compensation, obligations of persons, who in their own right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the requirements provided by Article 1279, to wit:chanRoblesvirtualLawlibrary(1) that each one of the obligors be bound principally and that he be at the same time a principal creditor of the other;xxx xxx xxx cralawlawlibrary
(3) that the two debts be due.xxx xxx xxx
This principal contention of the petitioner has no merit. We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government.
. . . .
There are other factors which compel us to rule against the petitioner. The tax was due to the city government while the expropriation was effected by the national government. Moreover, the amount of P4,116.00 paid by the national government for the 125 square meter portion of his lot was deposited with the Philippine National Bank long before the sale at public auction of his remaining property. Notice of the deposit dated September 28, 1977 was received by the petitioner on September 30, 1977. The petitioner admitted in his testimony that he knew about the P4,116.00 deposited with the bank but he did not withdraw it. It would have been an easy matter to withdraw P2,400.00 from the deposit so that he could pay the tax obligation thus aborting the sale at public auction.140cralawlawlibrary
[A] taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to beset-off.143 (Citations omitted)cralawlawlibrary
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a pending tax claim for refund or credit against the government which has not yet been granted. It must be noted that a distinguishing feature of a tax is that it is compulsory rather than a matter of bargain. Hence, a tax does not depend upon the consent of the taxpayer. If any tax payer can defer the payment of taxes by raising the defense that it still has a pending claim for refund or credit, this would adversely affect the government revenue system. A taxpayer cannot refuse to pay his taxes when they fall due simply because he has a claim against the government or that the collection of the tax is contingent on the result of the lawsuit it filed against the government. Moreover, Philex's theory that would automatically apply its VAT input credit/refund against its tax liabilities can easily give rise to confusion and abuse, depriving the government of authority over the manner by which taxpayers credit and offset their tax liabilities.145 (Citations omitted)
cralawlawlibrary
Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted the offsetting of a tax refund with a tax deficiency in this wise:chanRoblesvirtualLawlibraryFurther, it is also worth noting that the Court of Tax Appeals erred in denying petitioner's supplemental motion for reconsideration alleging bringing to said court's attention the existence of the deficiency income and business tax assessment against Citytrust. The fact of such deficiency assessment is intimately related to and inextricably intertwined with the right of respondent bank to claim for a tax refund for the same year. To award such refund despite the existence of that deficiency assessment is an absurdity and a polarity in conceptual effects. Herein private respondent cannot be entitled to refund and at the same time be liable for a tax deficiency assessment for the same year.
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.
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the applicable law when the claim of Citytrust was filed, provides that "(w)hen an assessment is made in case of any list, statement, or return, which in the opinion of the Commissioner of Internal Revenue was false or fraudulent or contained any understatement or undervaluation, no tax collected under such assessment shall be recovered by any suits unless it is proved that the said list, statement, or return was not false nor fraudulent and did not contain any understatement or undervaluation; but this provision shall not apply to statements or returns made or to be made in good faith regarding annual depreciation of oil or gas wells and mines."
Moreover, to grant the refund without determination of the proper assessment and the tax due would inevitably result in multiplicity of proceedings or suits. If the deficiency assessment should subsequently be upheld, the Government will be forced to institute anew a proceeding for the recovery of erroneously refunded taxes which recourse must be filed within the prescriptive period of ten years after discovery of the falsity, fraud or omission in the false or fraudulent return involved. This would necessarily require and entail additional efforts and expenses on the part of the Government, impose a burden on and a drain of government funds, and impede or delay the collection of much-needed revenue for governmental operations.
Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically necessary and legally appropriate that the issue of the deficiency tax assessment against Citytrust be resolved jointly with its claim for tax refund, to determine once and for all in a single proceeding the true and correct amount of tax due or refundable.
In fact, as the Court of Tax Appeals itself has heretofore conceded, it would be only just and fair that the taxpayer and the Government alike be given equal opportunities to avail of remedies under the law to defeat each other's claim and to determine all matters of dispute between them in one single case. It is important to note that in determining whether or not petitioner is entitled to the refund of the amount paid, it would [be] necessary to determine how much the Government is entitled to collect as taxes. This would necessarily include the determination of the correct liability of the taxpayer and, certainly, a determination of this case would constitute res judicata on both parties as to all the matters subject thereof or necessarily involved therein.cralawlawlibrary
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC. The above pronouncements are, therefore, still applicable today.
Here, petitioner's similar tax refund claim assumes that the tax return that it filed was correct. Given, however, the finding of the CTA that petitioner, although not liable under Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(1), the correctness of the return filed by petitioner is now put in doubt. As such, we cannot grant the prayer for a refund.146 (Emphasis supplied, citation omitted)cralawlawlibrary
Endnotes:
1Rollo, pp. 9-40. The Petition was filed pursuant to Rule 45 of the Rules of Court.
2 Id. at 57-72. The Decision was penned by Associate Justice Olga Palanca-Enriquez and concurred in by Presiding Justice Ernesto D. Acosta and Associate Justices Lovell R. Bautista, Erlinda P. Uy, and Caesar A. Casanova. Associate Justice Juanito C. Castaneda, Jr. voluntarily inhibited himself.
3 Id. at 41-5 1. The Decision was penned by Associate Justice Lovell R. Bautista and concurred in by Presiding Justice Ernesto D. Acosta and Associate Justice Caesar A. Casanova.
4 Id. at 52-56. The Resolution was signed by Presiding Justice Ernesto D. Acosta and Associate Justices Lovell R. Bautista and Caesar A. Casanova.
5 Id. at 59, Court of Tax Appeals En Bane Decision.
6 Id. at 78, Civil Aeronautics Board Executive Director's Letter.
7 Id. at 300, Air Canada's Memorandum.
8 Id. at 118-140, Passenger General Sales Agency Agreement Between Air Canada and Aerotel Ltd., Corp.
9 Id. at 300, Air Canada's Memorandum.
10 Id. at 59-60, Court of Tax Appeals En Bane Decision.
11 Id.
12 Id. at 60.
13 Id. at 13, Petition.
14 Pres. Decree No. 1355 (1978), sec. 1 defines Gross Philippine Billings as: "Gross Philippine billings" includes gross revenue realized from uplifts anywhere in the world by any international carrier doing business in the Philippines of passage documents sold therein, whether for passenger, excess baggage or mail, provided the cargo or mail originates from the Philippines. The gross revenue realized from the said cargo or mail shall include the gross freight charge up to final destination. Gross revenues from chartered flights originating from the Philippines shall likewise form part of "gross Philippine billings" regardless of the place of sale or payment of the passage documents. For purposes of determining the taxability of revenues from chartered flights, the term "originating from the Philippines" shall include flight of passengers who stay in the Philippines for more than forty-eight (48) hours prior to embarkation." (Emphasis supplied)
15 Rollo, p. 60, Court of Tax Appeals En Banc Decision.
16 Id. at 41, Court of Tax Appeals First Division Decision.
17 Id. at 51.
18 Id. at 47-48.
19 Id. at 51.
20 Id. at 50.
21 Id. at 51.
22 Id. at 53 and 56, Court of Tax Appeals First Division Resolution.
23 Id. at 54.
24 Id. at 16, Petition.
25 Id.
26 Id. at 71, Court of Tax Appeals En Banc Decision.
27 Id. at 67-68.
28 Id. at 71.
29 The Petition was received by the court on October 20, 2005. Respondent filed its Comment (Id. at 252-261) on August 6, 2007. Subsequently, pursuant to the court's Resolution (Id. at 282-283) dated November 28, 2007, petitioner filed its Memorandum (Id. at 284-328) on February 21, 2008 and respondent filed its Manifestation (Id. at 349-350) on January 5, 2009, stating that it is adopting its Comment as its Memorandum.
30 Pursuant to Rep. Act No. 9337 (2005), the rate is reduced to 30% beginning January 1, 2009.
31Rollo, pp. 22, Petition, and 307, Air Canada's Memorandum.
32 Id.
33 Id. at 28, Petition.
34 Id. at 23-24, Petition, and 315, Air Canada's Memorandum.
35 Id. at 319, Air Canada's Memorandum.
36 Id. at 28-29, Petition.
37 Id. at 29. According to Senator Juan Ponce Enrile, "the gross Philippine billings of international air carriers must refer to flown revenue because this is an income from services and this will make the determination of the tax base a lot easier by following the same rule in determining the liability of the carrier for common carrier's tax." (Minutes of the Bicameral Conference Committee on House Bill No. 9077 [Comprehensive Tax Reform Program], 10 October 1997, pp. 19-20).
38 Id.
39 Id. at 313, Air Canada's Memorandum.
40 Id. at 35, Petition.
41 Id. at 35, Petition, and 322, Air Canada's Memorandum.
42 Id. at 321, Air Canada's Memorandum.
43 Id. at 35, Petition.
44 Id. at 35-36, Petition, and 322-323, Air Canada's Memorandum.
45 Id. at 37, Petition, and 325, Air Canada's Memorandum.
46 Id. at 37, Petition, and 325-326, Air Canada's Memorandum.
47 Id. at 256, Commissioner of Internal Revenue's Comment.
48 259 Phil. 757 (1989) [Per J. Regalado, Second Division].
49Rollo, p. 258, Commissioner of Internal Revenue's Comment.
50 Id. at 257.
51 Id. at 260.
52 Id. at 260-261.
53 Pursuant to Rep. Act No. 9337 (2005), the rate is reduced to 30% beginning January 1, 2009.
54 Pursuant to Rep. Act No. 9337 (2005), the rate is reduced to 30% beginning January 1, 2009.
55 Com. Act No. 466 (1939), sec. 84(g).
56Commissioner of Internal Revenue v. British Overseas Airways Corporation, 233 Phil. 406, 421 (1987) [Per J. Melencio-Herrera, En Bane], citing Tax Code, sec. 24(b)(2), as amended by Rep. Act No. 6110 (1969).
57 Pres. Decree No. 1158-A (1977), sec. 1.
58 233 Phil. 406 (1987) [Per J. Melencio-Herrera, En Bane], cited in Commissioner of Internal Revenue v. Air India, 241 Phil. 689, 694-696 (1988) [Per J. Gancayco, First Division].
59 Id. at 420-421.
60 Id.
61 Rep. Act No. 7042(1991), sec 3(d).
62 Implementing Rules and Regulations of Rep. Act No. 7042 (1991), sec l(f).
63 Civil Aeronautics Board Economic Regulation No. 4, chap. I, sec. 2(b).
64 Civil Aeronautics Board Economic Regulation No. 4, chap. Ill, sec. 26.
65 Civil Aeronautics Board Economic Regulation No. 4, chap. Ill, sec. 30.
66 Cf. Cargill, Inc. v. Intra Strata Assurance Corporation, 629 Phil. 320, 332 (2010) [Per J. Carpio, Second Division], citing National Sugar Trading Corporation v. Court of Appeals, 316 Phil. 562, 568-569 (1995) [Per J. Quiason, First Division].
67 Rollo, p. 122, Passenger General Sales Agency Agreement Between Air Canada and Aerotel Ltd., Corp.
68 Id. at 126.
69 Id. at 78, Civil Aeronautics Board Executive Director Guia Martinez's letter to Aerotel Limited Corporation.
70 626 Phil. 566 (2010) [Per J. Velasco, Jr., Third Division]. The case was also cited in United Airlines, Inc. v. Commissioner of Internal Revenue, 646 Phil. 184, 193 (2010) [Per J. Villarama, Jr., Third Division].
71South African Airways v. Commissioner of Internal Revenue, 626 Phil. 566, 574-575 (2010) [Per J. Velasco, Jr., Third Division].
72 Id. at 575.
73 J. Paras, Dissenting Opinion in Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation, G.R. No. 66838, December 2, 1991, 204 SCRA 377, 411 [Per J. Feliciano, En Banc].
74 368 Phil. 388 (1999) [Per J. Gonzaga-Reyes, Third Division].
75 Id. at 404-405.
76 CONST., art. II, sec. 2.
77 Tanada v. Angara, 338 Phil. 546, 591-592 (1997) [Per J. Panganiban, En Bane]: "[Wjhile sovereignty has traditionally been deemed absolute and all-encompassing on the domestic level, it is however subject to restrictions and limitations voluntarily agreed to by the Philippines, expressly or impliedly, as a member of the family of nations. Unquestionably, the Constitution did not envision a hermit-type isolation of the country from the rest of the world. In its Declaration of Principles and State Policies, the Constitution "adopts the generally accepted principles of international law as part of the law of the land, and adheres to the policy of peace, equality, justice, freedom, cooperation and amity, with all nations." By the doctrine of incorporation, the country is bound by generally accepted principles of international law, which are considered to be automatically part of our own laws. One of the oldest and most fundamental rules in international law is pacta sunt servanda — international agreements must be performed in good faith. "A treaty engagement is not a mere moral obligation but creates a legally binding obligation on the parties. . . . A state which has contracted valid international obligations is bound to make in its legislations such modifications as may be necessary to ensure the fulfillment of the obligations undertaken." (Citations omitted)
78 G.R. No. 188550, August 28, 2013, 704 SCRA 216 [Per C.J. Sereno, First Division]. Also cited in CBK Power Company Limited v. Commissioner of Internal Revenue, G.R. Nos. 193383-84, January 14, 2015 7-8 [Per J. Perlas-Bernabe, First Division].
79Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue, G.R. No. 188550, August 28, 2013, 704 SCRA 216, 223 [Per C.J. Sereno, First Division]. The Bureau of Internal Revenue "issued RMO No. 1-2000, which requires that any availment of the tax treaty relief must be preceded by an application with ITAD at least 15 days before the transaction. The Order was issued to streamline the processing of the application of tax treaty relief in order to improve efficiency and service to the taxpayers. Further, it also aims to prevent the consequences of an erroneous interpretation and/or application of the treaty provisions (i.e., filing a claim for a tax refund/credit for the overpayment of taxes or for deficiency tax liabilities for underpayment)." (Citation omitted)
80 Id.
81 Id. at 227-228.
82Convention with Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, March 11, 1976 (1977) (visited July 21, 2015). Cesar Virata signed for the government of the Republic of the Philippines, while Donald Jamieson signed for the government of Canada.
83 Convention with Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, art. V provides:chanRoblesvirtualLawlibrary
Article V
Permanent Establishment
- For the purposes of this Convention, the term "permanent establishment" means a fixed place of business in which the business of the enterprise is wholly or partly carried on.
- The term "permanent establishment" shall include especially:chanRoblesvirtualLawlibrary
a) a place of management;
b) a branch;
c) an office;
d) a factory;
e) a workshop;
f) a mine, quarry or other place of extraction of natural resources;
g) a building or construction site or supervisory activities in connection therewith, where such activities continue for a period more than six months;
h) an assembly or installation project which exists for more than three months;
i) premises used as a sales outlet;
j) a warehouse, in relation to a person providing storage facilities for others.- The term "permanent establishment" shall not be deemed to include:chanRoblesvirtualLawlibrary
a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;
b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;
c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;
d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or for collecting information for the enterprise;
e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research, or for similar activities which have a preparatory or auxiliary character, for the enterprise.- A person acting in a Contracting State on behalf of an enterprise of the other Contracting State (other than an agent of independent status to whom paragraph 6 applies) shall be deemed to be a permanent establishment in the first-mentioned State if:chanRoblesvirtualLawlibrary
a) he has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for that enterprise; or
b) he has no such authority, but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise.- An insurance enterprise of a Contracting State shall, except in regard to re-insurance, be deemed to have a permanent establishment in the other State if it collects premiums in the territory of that State or insures risks situated therein through an employee or through a representative who is not an agent of independent status within the meaning of paragraph 6.
- An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business.
- The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute for either company a permanent establishment of the other. (Emphasis supplied)
84 Convention with Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, art. V(1).
85 CIVIL CODE, art. 1868 provides:chanRoblesvirtualLawlibrary
Article 1868. By the contract of agency a person binds himself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter.
86 Convention with Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, art. XV provides:chanRoblesvirtualLawlibrary
Article XV
Dependent Personal Services
- Subject to the provisions of Articles XVI, XVIII and XIX, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.
- Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if the recipient is present in the other Contracting State for a period or periods not exceeding in the aggregate 183 days in the calendar year concerned, and either
a) the remuneration earned in the other Contracting State in the calendar year concerned does not exceed two thousand five hundred Canadian dollars ($2,500) or its equivalent in Philippine pesos or such other amount as may be specified and agreed in letters exchanged between the competent authorities of the Contracting States; or
b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and such remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State.- Notwithstanding the preceding provisions of this Article, remuneration in respect of employment as a member of the regular crew or complement of a ship or aircraft operated in international traffic by an enterprise of a Contracting State, shall be taxable only in that State.
87 Among the four elements of an employer-employee relationship (i.e., (i) the selection and engagement of the employee; (ii) the payment of wages; (iii) the power of dismissal; and (iv) the power of control of the employees conduct), the control test is regarded as the most important. Under this test, an employer-employee relationship exists if the employer has reserved the right to control the employee not only as to the result of the work done but also as to the means and methods by which the same is to be accomplished. See Fuji Television Network, Inc. v. Espiritu, G.R. Nos. 204944^1-5, December 3, 2014 19-20 [Per J. Leonen, Second Division]; Royale Homes Marketing Corporation v. Alcantara, G.R. No. 195190, July 28, 2014, 731 SCRA 147, 162 [Per J. Del Castillo, Second Division]; Tongko v. The Manufacturers Life Insurance Co. (Phils.), Inc., 655 Phil. 384, 400-401 (2011) [Per J. Brion, En Banc]; Sonza v. ABS-CBN Broadcasting Corporation, G.R. No. 138051, June 10, 2004, 431 SCRA 583, 594-595 [Per J. Carpio, First Division]; Dr. Sara v. Agarrado, 248 Phil. 847, 851 (1988) [Per C.J. Fernan, Third Division], and Investment Planning Corporation of the Philippines v. Social Security System, 129 Phil. 143, 147 (1967) [Per J. Makalintal, En Banc], cited in Insular Life Assurance Co., Ltd. v. National Labor Relations Commission, 259 Phil. 65, 72 (1989) [Per J. Narvasa, First Division].
88 Rep. Act No. 776(1952), sec.1(jj), as amended by Pres. Decree No. 1462 (1978), sec. 1.
89 Rep. Act No. 776 (1952), sec. 10(A), as amended by Pres. Decree No. 1462 (1978), sec. 6.
90 Rep. Act No. 776 (1952), sec. 11, as amended by Pres. Decree No. 1462 (1978), sec. 7.
91 Rollo, pp. 124-125, Passenger General Sales Agency Agreement Between Air Canada and Aerotel Ltd., Corp.
92 Id. at 126.
93 Id. at 122.
94 Id. at 127.
95 Id. at 128.
96 Id. at 130.
97 Id. at 122.
98 Id.
99 Id. at 137.
100 Id.
101 Id. at 122.
102 Id. at 123.
103 Id.
104 Id.
105 Id. at 122.
106 Id. at 126.
107 Id.
108 Id.
109 Id. at 129.
110 Id. at 131.
111 Id. at 132.
112Cf. Steelcase, Inc. v. Design International Selections, Inc., G.R. No. 171995, April 18, 2012, 670 SCRA 64 [Per J. Mendoza, Third Division]. This couit held that "the appointment of a distributor in the Philippines is not sufficient to constitute 'doing business' unless it is under the full control of the foreign corporation. On the other hand, if the distributor is an independent entity which buys and distributes products, other than those of the foreign corporation, for its own name and its own account, A the latter cannot be considered to be doing business in the Philippines. It should be kept in mind that the determination of whether a foreign corporation is doing business in the Philippines must be judged in light of the attendant circumstances." (Id. at 74, citations omitted) This court found that Design International Selections, Inc. "was an independent contractor, distributing various products of Steelcase and of other companies, acting in its own name and for its own account." (Id. at 75) "As a result, Steelcase cannot be considered to be doing business in the Philippines by its act of appointing a distributor as it falls under one of the exceptions under R.A. No. 7042." (Id. at 77).
113 Convention with Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, art. VII provides:chanRoblesvirtualLawlibrary
Article VII
Business Profits
- The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on or has carried on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to:chanRoblesvirtualLawlibrary
a) that permanent establishment; or
b) sales of goods or merchandise of the same or similar kind as those sold, or from other business activities of the same or similar kind as those affected, through that permanent establishment.- Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall be attributed to that permanent establishment profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment.
- In the determination of the profits of a permanent establishment, there shall be allowed those ' deductible expenses which are incurred for the purposes of the permanent establishment including executive and general administrative expenses, whether incurred in the State in which the permanent establishment is situated or elsewhere.
- No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.
- For the purposes of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary.
- Where profits include items of income which are dealt with separately in other Articles of this Convention, then, the provisions of those Articles shall not be affected by the provisions of this Article.
114 Convention with Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, art. VII, par. 6 provides:chanRoblesvirtualLawlibrary
- Where profits include items of income which are dealt with separately in other Articles of this Convention, then, the provisions of those Articles shall not be affected by the provisions of this Article.
115 Convention with Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, art. VIII provides:chanRoblesvirtualLawlibrary
Article VIII
Shipping and Air Transport
- Profits derived by an enterprise of a Contracting State from the operation of ships or aircraft shall be taxable only in that State.
- Notwithstanding the provisions of paragraph 1, profits from sources within a Contracting State • derived by an enterprise of the other Contracting State from the operation of ships or aircraft in international traffic may be taxed in the first-mentioned State but the tax so charged shall not exceed the lesser of
a) one and one-half per cent of the gross revenues derived from sources in that State; and
b) the lowest rate of Philippine tax imposed on such profits derived by an enterprise of a third State.
116 TAX CODE, sec. 31 provides:chanRoblesvirtualLawlibrary
SEC. 31. Taxable Income Defined. - The term 'taxable income' means the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code or other special laws.
117Rollo, p. 59, Court of Tax Appeals En Bane Decision.
118 Const., an. II, sec. 2.
119 Lex specialis derogat generali; See BAYAN (Bagong Alyansang Makabayan) v. Exec. Sec. Zamora, 396 Phil. 623, 652 (2000) [Per J. Buena, En Banc], citing Manila Railroad Co. v Collector of Customs, 52 Phil. 950, 952 (1929) [Per J. Malcolm, En Banc] and Leveriza v. Intermediate Appellate Court, 241 Phil. 285, 299 (1988) [Per J. Bidin, Third Division], cited in Republic v. Sandiganbayan, First Division, 255 Phil. 71, 83-84 (1989) [Per J. Gutierrez, Jr., En Banc].
120 TAX CODE, sec. 28(A)(1), as amended by Rep. Act No. 9337 (2005), sec. 2.
121See Bureau of Internal Revenue website (visited July 21,2015).
122 See Herman v. Radio Corporation of the Philippines, 50 Phil. 490, 498 (1927) [Per J. Street, En Banc] in that the later legislative expression prevails when two statutes apply.
123Agreement Between the Government of Canada and the Government of the Republic of the Philippines on Air Transport, Global Affairs Canada (visited July 21, 2015).
124 Marubeni Corporation v. Commissioner of Internal Revenue, 258 Phil. 295, 306 (1989) [Per CJ. Fernan, Third Division].
125Rollo, pp. 325-326, Air Canada's Memorandum.
126 Id. at 323-325.
127 114 Phil. 549, 554-555 (1962) [Per J. Barrera, En Banc].
128 245 Phil. 717, 722-723 (1988) [Per J. Gutierrez, Jr., Third Division].
129 G.R. No. 175410, November 12, 2014 [Per J. Leonen, Second Division],
130 Id. at 1.
131 Id.
132 Id. at 9-10.
133Republic v. Mambulao Lumber Co., et al., 114 Phil. 549, 552 (1962) [Per J. Barrera, En Banc] and Francia v. Intermediate Appellate Court, 245 Phil. 717, 722 (1988) [Per J. Gutierrez, Jr., Third Division].
134 Republic v. Mambulao Lumber Co., et al, 114 Phil. 549, 552 (1962) [Per J. Barrera, En Banc].
135 Id. at 554-555.
136Francia v. Intermediate Appellate Court, 245 Phil. 717, 722 (1988) [Per J. Gutierrez, Jr., Third Division].
137 Id. at 719.
138 Id. at 720.
139 Id. at 722.
140 Id. at 722-723.
141 G.R. No. 92585, May 8, 1992, 208 SCRA 726 [Per J. Davide, Jr., En Banc].
142 356 Phil. 189 (1998) [Per J. Romero, Third Division].
143Caltex Philippines, Inc. v. Commission on Audit, G.R. No. 92585, May 8, 1992, 208 SCRA 726, 756 [Per J. Davide, Jr., En Banc].
144Philex Mining Corporation v. Commissioner of Internal Revenue, 356 Phil. 189, 198 (1998) [Per J. Romero, Third Division], citing Commissioner of Internal Revenue v. Palanca, Jr., 124 Phil. 1102, 1107 (1966) [Per J. Regala, En Banc].
145 Id. at 200.
146 South African Airways v. Commissioner of Internal Revenue, 626 Phil. 566, 577 (2010) [Per J. Velasco, Jr., Third Division].
147 646 Phil. 184 (2010) [Per J. Villarama. Jr., Third Division].
148 Id. at 198-199.
149Rollo, pp. 79-105, Air Canada's Quarterly and Annual Income Tax Returns.