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April 30, 1987 J. Melencio-Herrera Mabel Africa

SUMMARY: The CIR made an assessment of BOACs deficiency income taxes. The period covered by the disputed assessments included the time when BOAC had no landing rights in the Philippines but still maintained a general sales agent. BOAC protested the computed amounts. CIR then produced a new assessment which BOAC paid under protest. BOAC then demanded a refund but was denied. The Tax Court subsequently reversed the CIR decision on the ground that the sales of BOAC passage tickets in the Philippines do not constitute income from the Philippines, and thus, is not subject to Philippine income tax. This Tax Court decision is being assailed in the case at bar. The SC set aside this Tax Court decision and concluded that since the source of income is made in the Philippines, it is covered by our tax laws. DOCTRINE: The tax imposed upon BOAC is an excise tax, and such can be levied by the State only when the acts, privileges or businesses are done or performed within the jurisdiction of the Philippines. The test of taxability is the source; and the source of an income is that activity which produced the income. FACTS: 1. BOAC 100% British Government-owned corporation; international airline business that operates air transportation service & sells transportation tickets 2. CIR assessed BOAC a. Included in the assessment periods when BOAC had no landing rights in the Philippines because a Certificate of Public Convenience has not been granted by the Civil Aeronautics Board 3. But during that period when BOAC had no landing rights, they maintained a general sales agent in the Philippines a. BOAC was still able to sell tickets in the Philippines 4. 2 cases arise from the assessment



First case CIR protested the amount a new assessment amount was given BOAC paid the new assessment under protest BOAC asked for refund CIR denied the petition for refund b. Second case BOAC was assessed deficiency income taxes, interests, and penalty BOAC requested that the assessment be countermanded & set aside CIR denied the request BOAC filed the second case before the Tax court requesting to be absolved from liability Tax Court decision a. Reversed the CIR b. Held that the sale of tickets in the Philippines is not subject to Philippine income tax because the source of income is not the Philippines since BOAC had no service of carriage of passengers or freight was performed in the country Petition for Review on certiorari of the decision of the tax court


ISSUES: Whether or not the revenue from sales of tickets by BOAC in the Philippines constitutes income from Philippine sources and, accordingly, taxable under our income tax laws. RATIO: Yes, it is covered by the Philippine tax laws since the source of income is the Philippines. RULING: 1. Due to the continuity of commercial dealings on BOAC in the Philippines, it is deemed a resident foreign corporation. This is pursuant to Section 20 of the 1977 Tax Code. 2. The regular sale of tickets is the main income-generating activity of BOAC. This activity is done in the Philippines. Hence, BOACs income was derived from the Philippines. Therefore, it is taxable. a. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine government. Inconsideration of such protection, the flow of wealth



should share the burden of supporting the government. The absence of flight operations in the Philippines is not an element of BOACs income tax.

DISPOSITIVE: Wherefore, the appealed joint Decision of the Court of Tax Appeals is hereby SET ASIDE. Private respondent, the BOAC, is hereby ordered to pay the amount of P534,132.08 as deficiency income tax for the fiscal years 1968-69 to 1970-71 plus 5% surcharge, and 1% monthly interest from April 16, 1972 for a period not to exceed of P858,307.79 is hereby denied. Without costs. DISSENTING OPINION: J. Feliciano The statute presently applicable to international carriers is Section 24 (b)(2) of the Tax Code, as amended by PD 69 & PD 1355 o international carriers shall pay a tax of 2 % of their gross Philippine billings Under this statute, the basis of billings shall be the passengers & cargo originating from the Philippines, regardless of their embarkation & debarkation place. 2 % is a tax on gross receipts and not an income tax The Tax Court decision shall be affirmed CONCURRING OPINION: CJ Teehankee Agrees that the assessments of deficiency income taxes made by the CIR shall be upheld J. Felicianos dissent regarding the proper characterization of the taxable income is already moot by PD 69, the rate of income tax on foreign corporations (BOAC included) has been reduced to 2 % as well. There is no longer substantial difference.