The Supreme Court ruled that international air carriers operating in the Philippines, even without direct flights to or from the country, are subject to a 32% income tax on their earnings derived from activities within the Philippines. This decision clarifies that the absence of direct flights does not exempt these carriers from Philippine income tax obligations. The ruling emphasizes that if an international air carrier doesn’t fall under the 2 1/2% Gross Philippine Billings (GPB) tax, the general rule of 32% income tax applies to their Philippine-sourced income. This ensures that foreign corporations engaged in trade or business within the Philippines contribute their fair share in taxes.

Navigating Tax Laws: When Off-Line Air Carriers Enter Philippine Commerce

South African Airways (SAA), a foreign corporation without landing rights in the Philippines, sold passenger and cargo tickets through its general sales agent, Aerotel Limited Corporation. SAA filed income tax returns for its off-line flights for the taxable year 2000. Believing it was erroneously taxed on its Gross Philippine Billings (GPB), SAA sought a refund of PhP 1,727,766.38, which was denied by the Bureau of Internal Revenue (BIR). The central legal question was whether an international carrier selling passage documents through an independent agent in the Philippines, but without flights to or from the country, is subject to the 32% income tax under Section 28(A)(1) of the 1997 National Internal Revenue Code (NIRC). This case delves into the interpretation of Philippine tax laws concerning international carriers and their income derived from activities within the country.

The Court of Tax Appeals (CTA) initially ruled that SAA was a resident foreign corporation engaged in trade or business in the Philippines, making it liable for the 32% income tax on its sales of passage documents, although not the GPB tax. The Supreme Court agreed with this assessment, emphasizing that SAA had failed to prove its exemption from taxation. In tax law, exemptions must be explicitly stated and convincingly demonstrated by the claimant, as highlighted in Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation, where the Court stated, “Since an action for a tax refund partakes of the nature of an exemption, which cannot be allowed unless granted in the most explicit and categorical language, it is strictly construed against the claimant who must discharge such burden convincingly.” SAA did not meet this burden, leading to a closer examination of the applicable tax laws.

The definition of GPB has evolved over the years. Before the 1997 NIRC, GPB included revenues from uplifts anywhere in the world, provided the passage documents were sold in the Philippines. However, the 1997 NIRC shifted the focus to the place of uplift, defining GPB under Sec. 28(A)(3)(a) as: “Gross Philippine Billings refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document.” Thus, the Supreme Court acknowledged that SAA was not taxable under Sec. 28(A)(3)(a) because it does not maintain flights to or from the Philippines. Nevertheless, this did not exempt SAA from all other forms of income tax. The Court referred to Commissioner of Internal Revenue v. British Overseas Airways Corporation (British Overseas Airways), which held that off-line air carriers with general sales agents in the Philippines are engaged in business in the Philippines and their income from sales of passage documents here is Philippine-source income.

SAA argued that the British Overseas Airways case, decided under the 1939 NIRC, was not applicable under the 1997 NIRC. They contended that because they do not have flights to or from the Philippines, they should be exempt from income tax altogether. The Supreme Court rejected this argument, clarifying that Sec. 28(A)(3)(a) of the 1997 NIRC does not explicitly exempt all international air carriers from the general income tax rule under Sec. 28(A)(1). Instead, the Court explained that if Sec. 28(A)(3)(a) applies, then Sec. 28(A)(1) does not; however, if Sec. 28(A)(3)(a) does not apply, the resident foreign corporation remains liable under Sec. 28(A)(1). The ruling was clear: the general provision under Sec. 28(A)(1) still applies to SAA’s income derived from the Philippines.

The Court also addressed SAA’s reliance on statements made by Senator Juan Ponce Enrile during the deliberations of the 1997 NIRC, which SAA claimed showed Congress’s intention to exempt off-line air carriers from income tax. The Supreme Court dismissed this argument, citing Espino v. Cleofe, which established that statements made by individual members of Congress do not necessarily reflect the intent of the entire legislative body and are not controlling in the interpretation of laws. The Court emphasized that the meaning and intention of the law-making body must primarily be sought in the words of the statute itself, read and considered in their natural, ordinary, commonly-accepted, and most obvious significations.

The Supreme Court provided a structured explanation of the relationship between Sec. 28(A)(1) and Sec. 28(A)(3)(a) of the 1997 NIRC. Sec. 28(A)(1) outlines the general rule that resident foreign corporations are liable for a 32% tax on all income from sources within the Philippines. Sec. 28(A)(3) provides an exception to this general rule for international carriers, stating they shall pay a tax of 2 1/2% on their GPB. An exception is defined as that which would otherwise be included in the provision from which it is excepted. In this context, international carriers that derive income from carriage of persons, excess baggage, cargo, and mail originating from the Philippines fall under the exception, while others, like SAA, remain under the general rule. This principle is captured in the Latin maxim, exception firmat regulam in casibus non exceptis, meaning a thing not being excepted must be regarded as coming within the purview of the general rule.

Regarding SAA’s claim for a refund, the CTA had denied it based on SAA’s liability under Sec. 28(A)(1) of the 1997 NIRC. SAA argued that this was an improper offsetting of its tax refund with a tax deficiency, as there had been no formal assessment of its obligation under Sec. 28(A)(1). The Supreme Court acknowledged that under Article 1279 of the Civil Code, legal compensation requires that both debts be due, liquidated, and demandable, which was not the case here. Citing Philex Mining Corporation v. Commissioner of Internal Revenue, the Court reiterated that taxes cannot be subject to compensation because the government and the taxpayer are not creditors and debtors of each other.

However, the Court then referenced Commissioner of Internal Revenue v. Court of Tax Appeals, which allowed the offsetting of a tax refund with a tax deficiency. The Court said that the grant of a refund is founded on the assumption that the tax return is valid, and a deficiency assessment creates doubt as to the truth and accuracy of the facts stated in the return. The Court stated that to grant the refund without determination of the proper assessment and the tax due would inevitably result in multiplicity of proceedings or suits, which would be inefficient. The Court, therefore, set aside the CTA’s decision and remanded the case for further proceedings. It directed the CTA to receive evidence to establish SAA’s taxable income under Sec. 28(A)(1) to determine whether a tax refund or deficiency existed. This ruling highlights the importance of accurate tax returns and the need for a comprehensive assessment before granting tax refunds.

FAQs

In conclusion, the Supreme Court’s decision in South African Airways v. Commissioner of Internal Revenue clarifies the tax obligations of international air carriers operating in the Philippines, ensuring that those earning income within the country contribute to the Philippine tax system, regardless of whether they have direct flights to the country or not. This ruling underscores the principle that exemptions from taxation must be explicitly provided by law and convincingly demonstrated by the claimant, and that the general rule of income taxation applies unless a specific exemption is met.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: South African Airways vs. Commissioner of Internal Revenue, G.R. No. 180356, February 16, 2010