Case Summary (G.R. No. 215950)
Petitioner
Air Canada holds no flight operations to or from the Philippines but engages in ticket sales through Aerotel, which sells passage documents on its behalf and remits commissions.
Respondent
The CIR assesses income tax liabilities and administers refund claims under the National Internal Revenue Code and applicable tax treaties.
Key Dates
• July 1, 1999 – Aerotel appointed general sales agent.
• April 24, 2000 to April 24, 2005 – Civil Aeronautics Board authority period for offline carrier operations.
• Third Quarter 2000–Second Quarter 2002 – Period during which Air Canada paid income tax on Gross Philippine Billings totaling ₱5,185,676.77.
• November 28, 2002 – Written claim for refund filed with BIR.
• December 22, 2004 & April 8, 2005 – CTA First Division decision and resolution denying refund.
• August 26, 2005 – CTA En Banc decision affirming denial.
• January 11, 2016 – Supreme Court decision on petition for review.
Applicable Law
• 1987 Constitution of the Republic of the Philippines (Article II, Section 2; Article VII, Section 21).
• 1997 National Internal Revenue Code, Sections 28(A)(1) and 28(A)(3).
• Republic of the Philippines–Canada Tax Treaty (Articles V, VII, VIII).
• Civil Aeronautics Act and implementing regulations governing offline carriers and general sales agents.
Offline Carrier and Gross Philippine Billings Tax
Under Section 28(A)(3)(a) of the 1997 NIRC, the 2½% Gross Philippine Billings tax applies only to carriers whose flights originate in the Philippines on continuous, uninterrupted services. As an offline carrier with no flights to or from the Philippines, Air Canada’s ticket sales do not meet the statutory definition of Gross Philippine Billings. Consequently, the CTA correctly ruled that Section 28(A)(3) is inapplicable and that Air Canada is not entitled to any refund under that provision.
Status as Resident Foreign Corporation
Section 28(A)(1) of the 1997 NIRC defines a “resident foreign corporation” as any foreign corporation engaged in trade or business within the Philippines. Through Aerotel’s continuous and controlled ticket‐selling activities—subject to Air Canada’s standards, manuals, and contractual direction—Air Canada has a Philippine economic presence. Historical precedents (e.g., British Overseas Airways Corporation, American Airlines, Air India, and South African Airways) uniformly held that foreign airlines selling tickets via local agents constitute resident foreign corporations. Accordingly, Air Canada falls within Section 28(A)(1) and is prima facie subject to the regular corporate income tax.
Binding Effect of Tax Treaty Principles
The Constitution incorporates generally accepted principles of international law. Under the principle pacta sunt servanda, valid treaties bind the Philippines and prevail over inconsistent domestic legislation in matters of specific application. Tax treaties aim to eliminate double taxation and foster cross‐border trade and investment by setting definitive taxing rights. Administrative or statutory rules must yield to treaty provisions granting relief.
Permanent Establishment via Dependent Sales Agent
The PH–Canada Tax Treaty defines “permanent establishment” to include a fixed place of business or, in the absence of a fixed place, a person habitually exercising authority to conclude contracts on behalf of the enterprise (Article V(4)). Independent agents acting in their own name are exempt (Article V(6)). Aerotel’s appointment under a detailed General Sales Agency Agreement—empowering it to bind Air Canada, perform fiduciary functions, follow Air Canada’s manuals, and represent Air Canada exclusively—demonstrates dependent‐agent status. Aerotel habitually exercises authority to enter contracts and generate revenue for Air Canada, thereby creating a permanent establishment in the Philippines under the treaty.
Treaty Limitation to 1½% Tax Rate
Article VIII of the PH–Canada Tax Treaty provides that profits from the operation of aircraft in international traffic “may be taxed” by
...continue readingCase Syllabus (G.R. No. 215950)
Facts and Procedural History
- Petitioner Air Canada is a “foreign corporation organized and existing under the laws of Canada,” granted authority to operate as an offline international carrier in the Philippines from April 24, 2000 to April 24, 2005 by the Civil Aeronautics Board.
- Air Canada sells passage tickets in the Philippines through its general sales agent, Aerotel Ltd. Corp., appointed on July 1, 1999. Aerotel has no authority to contract on Air Canada’s behalf without express written consent and must follow Air Canada’s guidelines.
- From the third quarter of 2000 to the second quarter of 2002, Air Canada filed quarterly and annual income tax returns on its Gross Philippine Billings and paid a total of ₱5,185,676.77.
- On November 28, 2002, Air Canada filed a claim for refund of the entire ₱5,185,676.77, asserting erroneous payment under Section 28(A)(3)(a) of the 1997 National Internal Revenue Code (NIRC).
- Petitioner filed a petition for review with the Court of Tax Appeals (CTA) on November 29, 2002 (CTA Case No. 6572). The CTA First Division denied relief in its December 22, 2004 Decision and April 8, 2005 Resolution.
- Air Canada appealed to the CTA En Banc (CTAEB No. 86), which on August 26, 2005 affirmed the First Division’s rulings and dismissed the petition for lack of merit.
- Air Canada filed its petition for review under Rule 45 of the Rules of Court on October 20, 2005, seeking reversal of the CTA decisions and refund of ₱5,185,676.77.
Issues
- Whether 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 NIRC.
- Whether such a carrier qualifies for the 2½% tax on Gross Philippine Billings under Section 28(A)(3). If not, whether it must pay the 32% regular corporate income tax under Section 28(A)(1).
- Whether the Philippines–Canada Tax Treaty (1976) applies to limit Air Canada’s tax:
- Is the treaty enforceable in Philippine law?
- Does appointment of a general sales agent constitute a “permanent establishment” under Article V(4) of the treaty or is it excluded under Article V(6)?
- Whether Air Canada is entitled to refund of ₱5,185,676.77 allegedly erroneously paid.
Petitioner’s Contentions
- Offline carriers have no flights to/from the Philippines and therefore are not subject to the Gross Philippine Billings tax under Section 28(A)(3)(a); this exclusion likewise precludes application of Section 28(A)(1).
- Imposing the 32% regular in