Facts:

The case involves Air Canada as the petitioner and the Commissioner of Internal Revenue as the respondent. The decision was rendered on January 11, 2016, by the Second Division of the Supreme Court of the Philippines. Air Canada, a foreign corporation organized under Canadian law, was granted authority to operate as an offline international air carrier by the Civil Aeronautics Board on April 24, 2000, with the authority set to expire on April 24, 2005. As an offline carrier, Air Canada did not operate flights to or from the Philippines but engaged Aerotel Ltd., Corp. (Aerotel) as its general sales agent in the Philippines on July 1, 1999. Aerotel was responsible for selling Air Canada's passage documents in the Philippines.

From the third quarter of 2000 to the second quarter of 2002, Air Canada filed quarterly and annual income tax returns, paying a total of P5,185,676.77 in income tax on its Gross Philippine Billings. On November 28, 2002, Air Canada filed a claim for...

Facts:

Parties and Background

• Petitioner: Air Canada, a foreign corporation organized and existing under the laws of Canada.
• Respondent: Commissioner of Internal Revenue.
• Air Canada operates as an offline international air carrier which does not have aircraft or flights originating from or arriving in the Philippines.
• It conducts its business activities in the Philippines through a local general sales agent, Aerotel Ltd., Corp.

Operation and Sales Arrangement

• On July 1, 1999, Air Canada appointed Aerotel as its general sales agent to sell its airline tickets in the Philippines.
• Aerotel’s role includes the sale, issuance, and management of tickets; handling reservations; and performing related functions described in the Passenger General Sales Agency Agreement.
• By engaging Aerotel, Air Canada effectively extended its operations in the Philippines, which later became a significant factor in determining its tax liability.

Tax Filings, Payments, and Refund Claim

• From the third quarter of 2000 to the second quarter of 2002, Air Canada filed quarterly and annual income tax returns, paying taxes on its Gross Philippine Billings amounting to P5,185,676.77.
• The payments were computed on the basis of a provision for international carriers under Section 28(A)(3) of the 1997 National Internal Revenue Code (NIRC), which provided for a 2½% tax on gross revenues generated in a continuous flight originating from the Philippines.
• Air Canada later filed a written claim for refund of the total tax paid on the ground that it erroneously paid tax under Section 28(A)(3) rather than the regular corporate income tax under Section 28(A)(1).
• To forestall the prescription period, a Petition for Review was filed before the Court of Tax Appeals, with prior decisions on the matter by both the First Division and the En Banc.

Legal and Regulatory Framework

• The 1997 National Internal Revenue Code distinguishes between the tax regimes of resident foreign corporations under Section 28(A)(1) (imposing a regular income tax rate of 32%) and international carriers under Section 28(A)(3) (imposing a tax on gross Philippine billings at 2½%).
• The definition of “resident foreign corporation” includes any foreign corporation engaged in trade or business within the Philippines. Historical and regulatory provisions further clarify that the appointment of a local agent may create a permanent establishment, thereby subjecting the foreign corporation to the regular income tax scheme.
• Relevant jurisprudence and prior cases, including those involving British Overseas Airways Corporation and Air India, provide the interpretive framework used in determining taxability.

Appointment of the Local Sales Agent and Establishment

• Aerotel, as the appointed general sales agent, performed various functions under a detailed Passenger General Sales Agency Agreement which stipulated:
• Promotion of passenger transportation.
• Handling ticket reissuance and related administrative functions.
• Maintaining operational standards and reporting requirements.
• The nature, structure, and dependency of Aerotel’s services led the court to determine that Air Canada had effectively established a “permanent establishment” in the Philippines.

International Tax Treaty and Applicability Issues

• The Republic of the Philippines-Canada Tax Treaty, particularly Article VIII, provides that a foreign carrier’s income from the operation of aircraft in international traffic should be taxed at a maximum of 1½% of the gross revenue from Philippine sources.
• Air Canada argued that, because it is an offline carrier with no flights to or from the Philippines, it should be subject to the lower treaty tax rate and not the regular corporate income tax rate of 32% under Section 28(A)(1).
• Petitioner further contended that its income from ticket sales represented income from services rendered outside the Philippines, thereby justifying exclusion from domestic income tax under the treaty provisions.

Procedural History and Prior Rulings

• The Court of Tax Appeals First Division ruled that despite not being liable for the Gross Philippine Billings tax under Section 28(A)(3), Air Canada was engaged in business in the Philippines and was therefore taxable as a resident foreign corporation under Section 28(A)(1) at 32%.
• A subsequent resolution by the Court of Tax Appeals First Division denied the refund claim, and the En Banc later affirmed this decision.
• Air Canada further raised arguments regarding improper assessment and the potential for tax offset or compensation, which were also addressed by the lower courts.

Issue:

• Whether Air Canada, as an offline international air carrier selling passage tickets through a general sales agent in the Philippines, qualifies as a resident foreign corporation under Section 28(A)(1) of the 1997 National Internal Revenue Code.
• Whether Air Canada is subject to the 2½% tax on Gross Philippine Billings under Section 28(A)(3) or to the regular corporate income tax of 32% under Section 28(A)(1).
• Whether the appointment of its local general sales agent, Aerotel, creates a “permanent establishment” in the Philippines pursuant to Article V(2)(i) of the Republic of the Philippines-Canada Tax Treaty.
• Whether imposing the regular 32% income tax rate contravenes the tax treaty provisions which limit the tax on revenues derived from the operation of aircraft to a maximum of 1½% of gross revenue.
• Whether Air Canada is entitled to a refund of the P5,185,676.77 paid for Gross Philippine Billings tax, given the contention that such tax was erroneously applied.

Ruling:

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Ratio:

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Doctrine:

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