(Taxation)

CASE DIGESTS

1. CIR v. Acosta
G.R. No. 154068 August 3, 2007

FACTS:

Rosemary Acosta, an employee of Intel Manufacturing Phils. Inc. assigned in a foreign

country filed on March 21, 1977 for a period of January 1, 1996-December 31, 1996, a Joint
Individual Income Tax Return with her husband on October 8, 1997, she filed an amended return
indicating an overpayment of P 358,274 due to the income taxes withheld and paid by Intel.

April 15, 1999: She filed a petition for review with the CTA who dismissed her petition
for failing to file a written claim for refund required under Sec. 230 of the old tax code. Also,
the omission of the date of filing the final adjustment return deprived the court of its jurisdiction
over the subject matter of the case.

CA: reversed the CTA holding that the filing of an amended return indicating an
overpayment was sufficient compliance with the requirement of a written claim for refund.

Applying sec. 204 (c) of the 1997 NIRC, the CIR sought reconsideration but was denied
so it elevated the matter with the SC

ISSUES:

(1) Whether or not the amended return is sufficient compliance of written claim.

(2) Whether or not the 1997 tax reform can be applied retrospectively.

HELD:

(1) No. The requirements under Section 230 for refund claims are as follows:

a. A written claim for refund or tax credit must be filed by the taxpayer with the
Commissioner;

b. The claim for refund must be a categorical demand for reimbursement; and
 c. The claim for refund or tax credit must be filed, or the suit or proceeding therefor
must be commenced in court within 2 years from date of payment of the tax or penalty regardless
of any supervening cause

It is intended to afford the CIR an opportunity to correct the action of its subordinate
officers and to be notified. Tax refunds are in the nature of tax exemptions which are construed
strictissimi juris against the taxpayer and liberally in favor of the government

As tax refund involve a return of revenue from the government, the claimant must show
the specific provision of law as basis of her right

(2) No. Tax laws are prospective in operation, unless the language of the statute clearly
provides otherwise. Moreover, a party seeking an administrative remedy must not merely
initiate the prescribed administrative procedure to obtain relief, but also pursue it to its
appropriate conclusion before seeking judicial intervention in order to give the administrative
agency an opportunity to decide the matter itself correctly and prevent unnecessary and
premature resort to court action. Revenue statutes are substantive laws and in no sense must
their application be equated with that of remedial laws which must be faithfully and strictly
implemented.

2. CIR vs BPI
GR 134062, 17 April 2007

FACTS:

On 28 October 1988 petitioner Commissioner of Internal Revenue (CIR) assessed

respondent Bank of the Philippine Islands’ (BPI) deficiency percentage and documentary stamp
taxes in the total amount of P129,488,656.63. BPI requested for the CIR to state or to inform the
taxpayer why he is being assessed a deficiency, and as to what particular percentage tax the
assessment refers to. Subsequently, BPI received a letter on 27 June 1991 dated May 8, 1991
from CIR stating that it constitutes the final decision on the matter, and the basis of the
assessments.

BPI filed a petition for review in the CTA but the latter dismissed the case for lack of
jurisdiction since the subject assessments had become final and unappealable. The CTA ruled
that BPI failed to protest on time under Section 270 of the National Internal Revenue Code
(NIRC) and Section 7 in relation to Section 11 of RA 1125.

On appeal, the CA reversed the tax court’s decision and resolution and remanded the case
to the CTA for a decision on the merits. It ruled that the October 28, 1988 notices were not valid
assessments because they did not inform the taxpayer of the legal and factual bases. It declared
that the proper assessments were those contained in the May 8, 1991 letter which provided the
reasons for the claimed deficiencies. Thus, it held that BPI filed the petition for review in CTA
on time. Hence, CIR filed this case.

ISSUE:

Whether or not the October 28, 1988 notices valid assessments.

RULING:

Yes. The notices sufficiently met the requirements of a valid assessment under the old
law and jurisprudence.

The CIR merely relied on the provisions of the former Section 270 prior to its
amendment by RA 8424 (Tax Reform Act of 1997). Accordingly, when the assessments were
made pursuant to the former Section 270, the only requirement was for the CIR to “notify” or
inform the taxpayer of his “findings.” Nothing in the old law required a written statement to the
taxpayer of the law and facts on which the assessments were based. Jurisprudence, on the other
hand, simply required that the assessments contain a computation of tax liabilities, the amount
the taxpayer was to pay and a demand for payment within a prescribed period. The sentence
“The taxpayers shall be informed in writing of the law and the facts on which the assessments is
made; otherwise, the assessments shall be void” was not in the old Section of 270 but was later
on inserted in the renumbered Section 228 in 1997.

3. NATIONAL POWER CORPORATION vs. CITY OF CABANATUAN

G.R. No. 149110, April 9, 2003

FACTS:

Petitioner is a government-owned and controlled corporation created under

Commonwealth Act No. 120, as amended.

Petitioner sells electric power to the residents of Cabanatuan City, posting a gross income
of P107,814,187.96 in 1992.7 Pursuant to section 37 of Ordinance No. 165-92,8 the respondent
assessed the petitioner a franchise tax amounting to P808,606.41, representing 75% of 1% of the
latter’s gross receipts for the preceding year.

Petitioner refused to pay the tax assessment arguing that the respondent has no authority
to impose tax on government entities. Petitioner also contended that as a non-profit organization,
it is exempted from the payment of all forms of taxes, charges, duties or fees in accordance with
sec. 13 of Rep. Act No. 6395, as amended.

The respondent filed a collection suit in the RTC, demanding that petitioner pay the
assessed tax due, plus surcharge. Respondent alleged that petitioner’s exemption from local taxes
has been repealed by section 193 of the LGC, which reads as follows:

“Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in this
Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether
natural or juridical, including government owned or controlled corporations, except local water
districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals
and educational institutions, are hereby withdrawn upon the effectivity of this Code.”

RTC upheld NPC’s tax exemption. On appeal the CA reversed the trial court’s Order on
the ground that section 193, in relation to sections 137 and 151 of the LGC, expressly withdrew
the exemptions granted to the petitioner.

ISSUE:

Whether or not the respondent city government has the authority to issue Ordinance No.
165-92 and impose an annual tax on “businesses enjoying a franchise.

RULING:

Yes. Taxes are the lifeblood of the government, for without taxes, the government can
neither exist nor endure. A principal attribute of sovereignty, the exercise of taxing power
derives its source from the very existence of the state whose social contract with its citizens
obliges it to promote public interest and common good. The theory behind the exercise of the
power to tax emanates from necessity;32 without taxes, government cannot fulfill its mandate of
promoting the general welfare and well-being of the people.

Section 137 of the LGC clearly states that the LGUs can impose franchise tax
“notwithstanding any exemption granted by any law or other special law.” This particular
provision of the LGC does not admit any exception. In City Government of San Pablo, Laguna v.
Reyes,74 MERALCO’s exemption from the payment of franchise taxes was brought as an issue
before this Court. The same issue was involved in the subsequent case of Manila Electric
Company v. Province of Laguna.75 Ruling in favor of the local government in both instances,
we ruled that the franchise tax in question is imposable despite any exemption enjoyed by
MERALCO under special laws.

Needless to say, the power to tax is the most effective instrument to raise needed
revenues to finance and support myriad activities of the local government units for the delivery
of basic services essential to the promotion of the general welfare and the enhancement of peace,
progress, and prosperity of the people. As this Court observed in the Mactan case, “the original
reasons for the withdrawal of tax exemption privileges granted to government-owned or
controlled corporations and all other units of government were that such privilege resulted in
serious tax base erosion and distortions in the tax treatment of similarly situated enterprises.”
With the added burden of devolution, it is even more imperative for government entities to share
in the requirements of development, fiscal or otherwise, by paying taxes or other charges due
from them.

4. EUSEBIO VILLANUEVA, ET AL., vs. CITY OF ILOILO

G.R. No. L-26521 December 28, 1968

FACTS:

On January 15, 1960 the municipal board of Iloilo City, believing, obviously, that with
the passage of Republic Act2264, otherwise known as the Local Autonomy Act, it had acquired
the authority or power to enact an ordinance similar to that previously declared by this Court as
ultra vires (taxing tenement houses), enacted Ordinance 11,series of 1960 which taxes those
involve in the business of renting apartment houses. In Iloilo City, the appellees Eusebio
Villanueva and Remedios S. Villanueva are owners of five tenement houses, aggregately
containing 43 apartments, while the other appellees and the same Remedios S. Villanueva are
owners of ten apartments. On July 11, 1962 and April 24, 1964, the plaintiffs-appellees filed a
complaint, and an amended complaint, respectively, against the City of Iloilo, in the
aforementioned court, praying that Ordinance 11, series of 1960, be declared "invalid for being
beyond the powers of the Municipal Council of the City of Iloilo to enact, and unconstitutional
for being violative of the rule as to uniformity of taxation and for depriving said plaintiffs of the
equal protection clause of the Constitution," and that the City be ordered to refund the amounts
collected from them under the said ordinance. On March 30, 1966,1 the lower court rendered
judgment declaring the ordinance illegal.

ISSUE:
 Whether or not Ordinance 11, series of 1960, of the City of Iloilo, is illegal because it
imposes double taxation.

HELD:

There is no double taxation. It is a well-settled rule that a license tax may be levied upon
a business or occupation although the land or property used in connection therewith is subject to
property tax. In order to constitute double taxation in the objectionable or prohibited sense the
same property must be taxed twice when it should be taxed but once; both taxes must be imposed
on the same property or subject-matter, for the same purpose, by the same State, Government, or
taxing authority, within the same jurisdiction or taxing district, during the same taxing period,
and they must be the same kind or character of tax." It has been shown that a real estate tax and
the tenement tax imposed by the ordinance, although imposed by the same taxing authority, are
not of the same kind or character.

5. CIR vs. Citytrust Investment Phils.

G.R. Nos. 139786, 140857, September 27, 2006

FACTS:

Citytrust is a domestic corporation engaged in quasi-banking activities. In 1994, it

reported the amount ofP110,788,542.30 as its total gross receipts and paid the amount of
P5,539,427.11 corresponding to its 5%GRT.Meanwhile, on January 30, 1996, the CTA, in Asian
Bank Corporation v. Commissioner of Internal Revenue(ASIAN BANK case), ruled that the
basis in computing the 5% GRT is the gross receipts minus the 20%FWT. In other words, the
20% FWT on a bank's passive income does not form part of the taxable gross receipts. On July
19, 1996, Citytrust, inspired by the above-mentioned CTA ruling, filed with the Commissioner a
written claim for the tax refund or credit in the amount of P326,007.01. It alleged that its
reported total gross receipts included the 20% FWT on its passive income amounting to
P32,600,701.25. Thus, it sought to be reimbursed of the 5% GRT it paid on the portion of 20%
FWT or the amount of P326,007.01.On the same boat is Asian bank, a domestic corporation also
engaged in banking business. For the taxable quarters ending June 30, 1994 to June 30, 1996,
Asian bank filed and remitted to the Bureau of Internal Revenue (BIR) the 5% GRT on its total
gross receipts. On the strength of the January 30, 1996 CTA Decision in the ASIAN BANK case,
Asian bank, likewise, filed with the Commissioner a claim for refund of the overpaid GRT
amounting to P2,022,485.78.
 ISSUE:

Does the twenty percent (20%) final withholding tax (FWT) on a bank's passive income
form part of the taxable gross receipts for the purpose of computing the five percent (5%) gross
receipts tax (GRT)?

HELD:

Yes. The issue of whether the 20% FWT on a bank's interest income forms part of the
taxable gross receipts for the purpose of computing the 5% GRT has been previously resolved in
a catena of cases, such as China Banking Corporation v. Court of Appeals, Commissioner of
Internal Revenue v. Solidbank Corporation, Commissioner of Internal Revenue v. Bank of
Commerce, and the latest, Commissioner of Internal Revenue. Bank of the Philippine Islands.
The above cases are unanimous in defining "gross receipts" as "the entire receipts without any
deduction. “From these cases, "gross receipts" refer to the total, as opposed to the net income.
These are therefore the total receipts before any deduction for the expenses of management.
Webster's New International Dictionary, in fact, defines gross as "whole or entire."

6. CIR vs BPI
G.R. No. 147375, 26 June 2006

FACTS:

Domestic corporate taxpayers, including banks, are levied a 20% final withholding tax on
bank deposits under Section 24€(1)2 in relation to Section 50(a)3 of Presidential Decree No.
1158, otherwise known as the National Internal Revenue Code of 1977 (“Tax Code”). Banks are
also liable for a tax on gross receipts derived from sources within the Philippines under Section
1194 of the Tax Code.

As a domestic corporation, the interest earned by respondent Bank of the Philippine

Islands (BPI) from deposits and similar arrangements are subjected to a final withholding tax of
20%.

As a bank, BPI is furthermore liable for a 5% gross receipts tax on all its income.

For the four (4) quarters of the year 1996, BPI computed its 5% gross receipts tax
payments by including in its tax base the 20% final tax on interest income that had been withheld
and remitted directly to the Bureau of Internal Revenue (BIR).
 BPI wrote the BIR a letter, citing the CTA Decision in Asian Bank and requesting a
refund of alleged overpayment of taxes.

Inaction by the BIR on this request prompted BPI to file a Petition for Review against the
Commissioner of Internal Revenue (Commissioner) with the CTA. Conceding its claim for the
first three quarters of the year as having been barred by prescription, BPI only claimed alleged
overpaid taxes for the final quarter of 1996.

The Commissioner seeks to annul the adverse Decisions of the CTA and the Court of
Appeals and raises the sole issue of whether the 20% final tax withheld on a bank’s passive
income should be included in the computation of the gross receipts tax.

BPI argues that to include the 20% final tax withheld in its gross receipts tax base would
be to tax twice its passive income and would constitute double taxation. Granted that interest
income is being taxed twice.

ISSUE:

Whether or not there is a double taxation.

HELD:

There is no double taxation if the law imposes two different taxes on the same income,
business or property.

Double taxation means taxing the same property twice when it should be taxed only once;
that is, “x x x taxing the same person twice by the same jurisdiction for the same thing.” It is
obnoxious when the taxpayer is taxed twice, when it should be but once.

Otherwise described as “direct duplicate taxation,” the two taxes must be imposed on the
same subject matter, for the same purpose, by the same taxing authority, within the same
jurisdiction, during the same taxing period; and they must be of the same kind or character.

Here, there is no double taxation, because there is no taxing twice, by the same taxing
authority, within the same jurisdiction, for the same purpose, in different taxing periods, some of
the property in the territory. Subjecting interest income to a 20% FWT and including it in the
computation of the 5% GRT is clearly not double taxation.37

Therefore, despite the fact that that interest income is taxed twice, there is no double
taxation present in this case.
 Petitioner Commissioner of Internal Revenue’s denial of respondent Bank of Philippine
Islands’ claim for refund is SUSTAINED.

7. PEPSI-COLA BOTTLING COMPANY OF PHILIPPINES v. MUNICIPALITY OF

TANAUAN
GR No. L-31156, 27 February 1976

FACTS:

February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the

Philippines, Inc., commenced a complaint with preliminary injunction before the Court of First
Instance of Leyte for that court to declare Section 2 of Republic Act No. 2264, otherwise known
as the Local Autonomy Act, unconstitutional as an undue delegation of taxing authority as well
as to declare Ordinances Nos. 23 and 27, series of 1962, of the Municipality of Tanauan, Leyte,
null and void.

Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25,
1962, levies and collects "from soft drinks producers and manufacturers a tax of one-sixteenth
(1/16) of a centavo for every bottle of soft drink corked. For the purpose of computing the taxes
due, the person, firm, company or corporation producing soft drinks shall submit to the
Municipal Treasurer a monthly report of the total number or bottles produced and corked during
the month.

However, Municipal Ordinance No. 27, which was approved on October 28, 1962, levies
and collects "on soft drinks produced or manufactured within the territorial jurisdiction of this
municipality a tax of ONE CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.) of
volume capacity. For the purpose of computing the taxes due, the person, firm, company,
partnership, corporation or plant producing soft drinks shall submit to the Municipal Treasurer a
monthly report of the total number of gallons produced or manufactured during the month. The
tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production tax."

ISSUE:

Whether or not Section 2, Republic Act No. 2264 an undue delegation of power,
confiscatory and oppressive.

HELD:
 The constitutionality of Section 2 of Republic Act No. 2264, otherwise known as the
Local Autonomy Act, as amended, is hereby upheld and Municipal Ordinance No. 27 of the
Municipality of Tanauan, Leyte, series of 1962, repealing Municipal Ordinance No. 23, same
series, is hereby declared of valid and legal effect.

The power of taxation is an essential and inherent attribute of sovereignty, belonging as a

matter of right to every independent government, without being expressly conferred by the
people. It is a power that is purely legislative and which... the central legislative body cannot
delegate either to the executive or judicial department of the government without infringing upon
the theory of separation of powers. The exception, however, lies in the case of municipal
corporations, to which, said theory does not apply.

Legislative powers may be delegated to local governments in respect of matters of local

concern. This is sanctioned by immemorial practice. By necessary implication, the legislative
power to create political corporations for purposes of local self-government carries with it the
power to confer on such local governmental agencies the power to tax.

8. ERICSSON TELECOM vs. PASIG

G.R. NO. 176667 November 22, 2007

FACTS:

Ericsson Telecommunications, Inc. (petitioner), a corporation with principal office in

Pasig City (respondent), is engaged in the design, engineering, and marketing of
telecommunication facilities/system. In an Assessment Notice dated October 25, 2000 issued by
the City Treasurer of Pasig City, petitioner was assessed a business tax deficiency for the years
1998 and 1999 amounting to P9,466,885.00 and P4,993,682.00, respectively, based on its gross
revenues as reported in its audited financial statements for the years 1997 and 1998. Petitioner
filed a Protest claiming that the computation of the local business tax should be based on gross
receipts and not on gross revenue.

Respondent issued another Notice of Assessment to petitioner on November 19, 2001,

this time based on business tax deficiencies for the years 2000 and 2001, amounting to
P4,665,775.51 and P4,710,242.93, respectively, based on its gross revenues for the years 1999
and 2000. Again, petitioner filed a Protest, reiterating its position that the local business tax
should be based on gross receipts and not gross revenue. Respondent denied petitioner’s protest
and gave the latter 30 days within which to appeal the denial.

Petitioner filed a petition for review with the RTC of Pasig, praying for the annulment
and cancellation of petitioner’s deficiency local business taxes totaling P17,262,205.66.
 ISSUE:

What is the extent of the Power of Local Taxation?

HELD:

The power to tax is primarily vested in the Congress; however, it may be exercised by
local legislative bodies pursuant to direct authority conferred by Section 5, Article X of the
Constitution. Under the latter, the exercise of the power may be subject to such guidelines and
limitations as Congress may provide. Respondent assessed deficiency local business taxes on
petitioner based on the latter’s gross revenue as reported in its financial statements, arguing that
gross receipts is synonymous with gross earnings/revenue, which, in turn, includes uncollected
earnings. Petitioner, however, contends that only the portion of the revenues which were
actually and constructively received should be considered in determining its tax base.

Thus, respondent committed a palpable error when it assessed petitioner’s local business
tax based on its gross revenue as reported in its audited financial statements, as Section 143 of
the Local Government Code and Section 22(e) of the Pasig Revenue Code clearly provide that
the tax should be computed based on gross receipts.

9. COMMISSIONER OF INTERNAL REVENUE vs. THE ESTATE OF BENIGNO

P. TODA, JR.,
G.R. No. 147188; September 14, 2004

FACTS:

The CIR wants to assail the decision of the CTA holding the Estate of Toda not liable for
the deficiency IT of Cibeles Insurance Corporation (CIC) in the amount of 79 million pesos for
1989, and ordered the cancellation and setting aside of the CIR's assessment.

The case at bar stemmed from a NOA sent to CIC arising from an alleged simulated sale
of a 16-storey commercial building known as Cibeles Building, situated on two parcels of land
on Ayala Avenue, Makati City. It is undisputed that CIC authorized Toda, Jr., President and
owner of 99.991% of CIC, to sell the Cibeles Building and the two parcels of land on which the
building stands for an amount of not less than P90 million. Toda sold it to Altonaga for 100
million pesos who then sold it on the same day to Royal Match Inc. (RMI) for 200 million. All
these transactions are evidenced by notarized deeds of sale. For the sale of the property to RMI,
Altonaga paid capital gains tax in the amount of P10 million. CIC paid 26 million pesos for its
gains from the sale of said property. 3 years before Toda died, he had sold his entire shares of
stocks in CIC to Choa for 12.5 million pesos. The BIR issued the 79-million NOA and demand
letter against CIC. CIC moved to reconsider because it has a new set of stockholders which it
called "new CIC." It also pointed out Toda's undertaking to keep CIC and its stockholdings free
from all tax liabilities during the period within which the realty was sold.

The issued a NOA against the Estate of Toda. The Estate filed a protest but the BIR
rejected arguing that a fraudulent scheme was deliberately perpetuated by the CIC wholly owned
and controlled by Toda by covering up the additional gain of P100 million, which resulted in the
change in the income structure of the proceeds of the sale of the two parcels of land and the
building thereon to an individual capital gains, thus evading the higher corporate income tax rate
of 35%.

ISSUES:

(1) Is this a case of tax evasion or tax avoidance?

(2) Has the period for assessment of deficiency income tax for the year 1989 prescribed?
and

(3) Can respondent Estate be held liable for the deficiency IT of CIC for the year 1989, if
any?

RULING:

(1) Yes, there is tax evasion in this case.

Tax evasion connotes the integration of three factors: (1) payment of tax less than legally
due; (2) a state of mind being evil, in bad faith, willful, or deliberate and not accidental; and (3)
unlawful course of action.

The intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the
mitigation of tax liabilities than for legitimate business purposes, constitutes one of tax evasion.

Generally, a sale or exchange of assets will have an income tax incidence only when it is
consummated. The incidence of taxation depends upon the substance of a transaction. The tax
consequences arising from gains from a sale of property are not finally to be determined solely
by the means employed to transfer legal title. Rather, the transaction must be viewed as a whole,
and each step from the commencement of negotiations to the consummation of the sale is
relevant. A sale by one person cannot be transformed for tax purposes into a sale by another by
using the latter as a conduit through which to pass title.

To allow a taxpayer to deny tax liability on the ground that the sale was made through
another and distinct entity when it is proved that the latter was merely a conduit is to sanction a
circumvention of our tax laws. Hence, the sale to Altonaga should be disregarded for income tax
purposes.

(2) No, the period has not prescribed.

According to the Tax Code, in cases of (1) fraudulent returns; (2) false returns with intent
to evade tax; and (3) failure to file a return, the period within which to assess tax is ten years
from discovery of the fraud, falsification or omission, as the case may be.

In this case, the false return was filed on 15 April 1990, and the falsity thereof was
claimed to have been discovered only on 8 March 1991. The assessment for the 1989 deficiency
income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the correct assessment
for deficiency income tax was well within the prescriptive period.

(3) Yes, the Estate of Toda can be held liable for the deficiency IT of CIC.Generally, a
corporation has a juridical personality distinct and separate from the persons owning or
composing it. However, certain instances in which personal liability may arise.

Here, when the late Toda undertook and agreed to hold the BUYER and Cibeles free
from any all income tax liabilities of Cibeles for the fiscal years 1987, 1988, and 1989, he
thereby voluntarily held himself personally liable therefor. Respondent estate cannot, therefore,
deny liability for CICs deficiency income tax for the year 1989 by invoking the separate
corporate personality of CIC, since its obligation arose from Todas contractual undertaking, as
contained in the Deed of Sale of Shares of Stock.

10. AIR CANADA vs. COMMISSIONER OF INTERNAL REVENUE

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?

RULINGS:

(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.