G.R. No. 169507 January 11, 2016
AIR CANADA, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.

FACTS

Air Canada is a foreign corporation organized under Canadian laws, authorized by the Civil Aeronautics Board to operate as an offline carrier in the Philippines from April 24, 2000, to April 24, 2005. As an offline carrier, it does not operate flights to or from the Philippines. On July 1, 1999, it engaged Aerotel Ltd., Corp. as its general sales agent in the Philippines to sell its passage documents. For the period 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 income tax on Gross Philippine Billings totaling ₱5,185,676.77. On November 28, 2002, Air Canada filed a claim for refund of this amount with the Bureau of Internal Revenue, arguing that under the revised definition in Section 28(A)(3)(a) of the 1997 National Internal Revenue Code, its revenue from ticket sales in the Philippines did not constitute “Gross Philippine Billings” since it had no flights originating from the Philippines. To prevent the prescriptive period from running, it filed a Petition for Review with the Court of Tax Appeals (CTA) on November 29, 2002. The CTA First Division denied the petition and the claim for refund on December 22, 2004, ruling that Air Canada was engaged in business in the Philippines through a local agent and was thus taxable as a resident foreign corporation at the regular rate of 32%. It also found that Air Canada had a “permanent establishment” in the Philippines under the Philippines-Canada Tax Treaty due to its appointment of a local sales agent. The CTA First Division denied Air Canada’s Motion for Reconsideration on April 8, 2005. The CTA En Banc affirmed the First Division’s decision on August 26, 2005. Air Canada then filed the present Petition for Review.

ISSUE

1. Whether Air Canada, as an offline international carrier selling tickets through a general sales agent in the Philippines, is a resident foreign corporation under Section 28(A)(1) of the 1997 National Internal Revenue Code.
2. Whether Air Canada is subject to the 2½% tax on Gross Philippine Billings under Section 28(A)(3) or, if not, whether it can be subject to the regular 32% corporate income tax under Section 28(A)(1).
3. Whether the Republic of the Philippines-Canada Tax Treaty applies, specifically:
a. Whether the treaty is enforceable.
b. Whether the appointment of a local general sales agent constitutes a “permanent establishment” under Article V(2)(i) of the treaty.
4. Whether Air Canada is entitled to a refund of ₱5,185,676.77 for allegedly erroneously paid tax on Gross Philippine Billings.

RULING

1. Yes. 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. The regular sale of tickets, either by itself or through an agent, constitutes “doing business.” Thus, it falls under Section 28(A)(1) as a resident foreign corporation engaged in trade or business.
2. No, Air Canada is not subject to the 2½% tax on Gross Philippine Billings under Section 28(A)(3). The definition of “Gross Philippine Billings” under Section 28(A)(3)(a) applies only to revenue derived from carriage originating from the Philippines. As an offline carrier with no flights originating from the Philippines, Air Canada does not fall under this special tax regime. However, it is subject to the regular corporate income tax under Section 28(A)(1) as a resident foreign corporation, at the rate of 32% (the applicable rate at the time) on its taxable income.
3. Yes, the Philippines-Canada Tax Treaty applies and is enforceable.
a. The treaty is enforceable as part of the law of the land.
b. The appointment of a local general sales agent does not, by itself, constitute a “permanent establishment” under Article V of the treaty, especially if the agent is independent and acts in the ordinary course of its business. However, this does not exempt Air Canada from being taxed as a resident foreign corporation doing business in the Philippines under domestic law. The treaty’s provisions, particularly Article 8 on shipping and air transport, limit the tax imposable on profits from the operation of aircraft in international traffic to a maximum of 1½% of gross revenues derived from sources within the Philippines. This treaty rate prevails over the domestic regular corporate income tax rate.
4. No, Air Canada is not entitled to a refund of the full ₱5,185,676.77 it paid as tax on Gross Philippine Billings. Since it is liable for income tax as a resident foreign corporation under Section 28(A)(1), subject to the treaty rate of 1½% on gross revenues from Philippine sources, the amount it paid may be applied to its correct tax liability. The claim for refund of the entire amount as erroneously paid is denied, as it was not shown that the payments exceeded its correct tax liability under the applicable treaty rate.