CASE DIGEST: Air Canda vs. CIR (G.R. No. 169507; January 11, 2016)

CASE DIGEST: AIR CANADA, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent. (G.R. No. 169507; January 11, 2016)

FACTS: Air Canada is an offline air carrier selling passage tickets in the Philippines, through a general sales agent, Aerotel. 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[.]

Air Canada filed a claim for refund for more than 5 million pesos. It claims that there was overpayment, saying that the applicable tax rate against it is 2.5% under the law on tax on Resident Foreign Corporations (RFCs) for international carriers. It argues that, as an international carrier doing business in the Philippines, it is not subject to tax at the regular rate of 32%.

Air Canada also claims that it is not taxable because its income is taxable only in Canada because of the Philippines-Canada Treaty (treaty). According to it, even if taxable, the rate should not exceed 1.5% as stated in said treaty.

However, the CTA ruled 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%.

The CTA also said that Air Canada cannot avail of the lower tax rate under the treaty because it has a "permanent establishment" in the Philippines. Hence, Air Canada cannot avail of the tax exemption under the treaty.

[1] Is Air Canada, an offline international carrier selling passage documents through Aerotel, a RFC?
[2] As an offline international carrier selling passage documents, is Air Canada subject to 2.5% tax on Gross Philippine Billings or to the regular 32% tax?
[3] Can Air Canada benefit from the treaty's elimination of double taxation in favor of Canada or the preferential rate of 1.5%?
[4] Can Air Canada validly refuse to pay its tax deficiency on the ground that there is a pending tax credit proceeding it has filed?
[5] Is Air Canada entitled to the tax refund claimed at more than 5 million pesos?
[1] Yes, Air Canada is a resident foreign corporation. Although there is no one rule in determining what "doing business in the Philippines" means, the appointment of an agent or an employee is a good indicator. This is especially true when there is effective control, similar to that of employer-employee relationship. This is true between Air Canada and Aerotel. Hence, Air Canada is a RFC.

[2] No, because the 2.5% tax on Gross Philippine Billings applies only to carriers maintaining flights to and from the Philippines. Air Canada's appointment of a general sales agent, Aerotel, here is only for the purpose of selling passage documents. However, this is not the complete answer since the treaty is the latter law that prevails in this case.

[3] Air Canada cannot avail of the elimination of double taxation in favor of Canada since the treaty expressly excludes Canadian carriers with "permanent establishment." Through the appointment of Aerotel as its local sales agent, petitioner is deemed to have created a "permanent establishment" in the Philippines as defined under the Republic of the Philippines-Canada Tax Treaty.

This is especially true since Aerotel has no "independent status" beacuse Air Canada exercises comprehensive control and detailed instructions over the means and results of the activities of the former.

[4] No, it cannot. Even if Air Canada succeeds in claiming tax refund, the general rule prevails that there can be not setting off of taxes since the Government and the taxpayer are not creditors and debtors of each other.

[5] No, Air Canada is not entitled to refund. The P5,185,676.77 Gross Philippine Billings tax paid by petitioner was computed at the rate of 1 ½% of its gross revenues amounting to P345,711,806.08149 from the third quarter of 2000 to the second quarter of 2002. It is quite apparent that the tax imposable under Section 28(A)(l) of the 1997 National Internal Revenue Code [32% of taxable income, that is, gross income less deductions] will exceed the maximum ceiling of 1 ½% of gross revenues as decreed in Article VIII of the Republic of the Philippines-Canada Tax Treaty. Hence, no refund is forthcoming.