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.

ISSUES:
[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?

HELD:
[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.
National Development Company v CIR (1987)

National Development Company v CIR GR No L-53961, June 30, 1987 

FACTS:
The National Development Company (NDC) entered into contracts in Tokyo with
several Japanese shipbuilding companies for the construction of 12 ocean-going
vessels. Initial payments were made in cash and through irrevocable letters of credit.
When the vessels were completed and delivered to the NDC in Tokyo, the latter
remitted to the shipbuilders the amount of US$ 4,066,580.70 as interest on the balance
of the purchase price. No tax was withheld. The Commissioner then held the NDC liable
on such tax in the total sum of P5,115,234.74. Negotiations followed but failed. NDC
went to CTA. BIR was sustained by CTA. BIR was sustained by CTA. Hence, this
petition for certiorari. 

ISSUE:
Is NDC liable for the tax? 

RULING:
Yes.
Although NDC is not the one taxed since it was the Japanese shipbuilders who were
liable on the interest remitted to them under Section 37 of the Tax Code, still, the
imposition is valid. 
The imposition of the deficiency taxes on NDC is a penalty for its failure to withhold the
same from the Japanese shipbuilders. Such liability is imposed by Section 53c of the
Tax Code. NDC was remiss in the discharge of its obligation as the withholding agent of
the government and so should be liable for the omission. 

NDC vs. CIR

The NDC entered into contract in Tokyo with several Japanese shipbuilding companies
for the construction of its 12 ocean-going vessels.  The purchase price was to come
from the proceeds of bonds issued by the Central Bank.  Initial payments were made in
cash and through irrevocable letter of credit.  Fourteen (14) promissory notes were
signed for the balance by the NDC guaranteed by Republic of the Philippines.

Pursuant thereto, the remaining payments and the interest thereon were remitted in due
time by the NDC to Tokyo.  The NDC remitted to the ship builders in Tokyo the total
amount of US$4,066,580 as interest on the balance of the purchase price.  No tax was
withheld.

The Commissioner then held the NDC liable on such tax in the total sum of
PhP5,115,234.74.  The BIR thereupon served on the NDC a warrant of distraint and
levy to enforcce collection of the claimed amount.

Petitioner argues that the Japanese ship builders were not subject to tax under the sec.
37 of the Tax Code because all the related activities- the signing of the contract, the
construction of the vessels, the payment of the stipulated price, and their delivery to the
NDC - were done in Tokyo.

ISSUE: WON the Tokyo shipbuilders are subject to tax?

HELD:
  The law specifies: interest derived from sources within the Philippines, and interest on
bonds, notes, or other interest-bearing obligation of resident, corporate or otherwise.
Nothing there speak of the 'acts or activity' of non-residential corporation in the
Philippines, or place where the contract is signed.

The residence of the obligor who pays the interest rather than the physical location of
the securities, bonds or notes or the place of payment, is the determining factor of the
source of interest income.  Accordingly, if the obligor is a resident of the Philippines the
interest payment paid by him can have no other source than within the Philippines.  The
interest is paid not by the bond note or other interest-bearing obligations, but by the
obligor.

FACTS

The National Development Company (NDC) entered into contracts with various
Japanese shipbuilding companies for the construction of 12 ocean-going vessels. Upon
the completion of the vessels, the NDC remitted to the shipbuilders in Tokyo the total
amount of US$4,066,580.70 as interest on the balance of the purchase price with zero
tax withheld.

Subsequently, the CIR held the NDC liable on the tax due. NDC refused to pay, arguing
that it was merely an administrator of the funds of the Republic of the Philippines and
that the interest payments were obligations of the Republic. It also argued that the
promissory notes of the NDC were government securities exempt from taxation under
Section 29(b)(4) of the Tax Code.

The CTA sustained the validity of CIR’s assessment.

RULING

The Supreme Court ruled in favor of CIR.

Under Sec. 37 of the Tax Code, the Japanese shipbuilders were liable to pay for tax on
the interest remitted to them by NDC. Under the terms of the law, the Government’s
right to levy and collect income tax on interest received by foreign corporations not
engaged in trade or business within the Philippines is not planted upon the condition
that the activity or labor — and the sale from which the (interest) income flowed – had
its situs in the Philippines.
The law specifies: “Interest derived from sources within the Philippines, and interest on
bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise.”
By failing to withhold the taxes due, NDC was remiss in the discharge of its obligation
as the withholding agent of the government and so should be held liable for its
omission.