DIGESTS – Income Tax
Corporations (In general)
Separate corporate personality or the lack thereof
Indeed, fundamental is the rule in corporation law that a corporation is clothed with a personality separate and distinct from its stockholders; and the mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality.
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In a number of cases, the Court has shredded the veil of corporate identity and ruled that where a corporation is merely an adjunct, business conduit or alter ego of another corporation or when they practice fraud on our internal revenue laws, the fiction of their separate and distinct corporate identities shall be disregarded, and both entities treated as one taxable person, subject to assessment for the same taxable transaction.
The Court considers the presence of the following circumstances, to wit: when the owner of one directs and controls the operations of the other, and the payments effected or received by one are for the accounts due from or payable to the other; or when the properties or products of one are all sold to the other, which in turn immediately sells them to the public, as substantial evidence in support of the finding that the two are actually one juridical taxable personality.
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Components of corporate income tax liability
The statutory basis for the income tax on corporations is found in Sections 27 to 30 of the NIRC of 1997 under Chapter IV: “Tax on Corporations.” Section 27 enumerates the rate of income tax on domestic corporations; Section 28, the rates for foreign corporations; Section 29, the taxes on improperly accumulated earnings; and Section 30, the corporations exempt from tax.
The NIRC also imposes final taxes on certain passive incomes, as follows: (1) 20 percent on the interests on currency bank deposits, other monetary benefits from deposit substitutes, trust funds and similar arrangements, and royalties derived from sources within the Philippines; (2) 5 percent and 10 percent on the net capital gains realized from the sale of shares of stock in a domestic corporation not traded in the stock exchange; (3) 10 percent on income derived by a depositary bank under the expanded foreign currency deposit system; and (4) 6 percent on the gain presumed to be realized on the sale or disposition of lands and buildings treated as capital assets. These final taxes are withheld at source.
A corporate income tax liability, therefore, has two components: the general rate of 35 percent; and the specific final rates for certain passive incomes.
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“Corporations”, to include unregistered partnerships and associations
Ineludibly, the Philippine legislature included in the concept of corporations those entities that resembled them such as unregistered partnerships and associations. Parenthetically, the NIRC’s inclusion of such entities in the tax on corporations was made even clearer by the Tax Reform Act of 1997 [referring to Sections 27(A) and 22(B) of the NIRC of 1997], which amended the Tax Code.
Thus, the Court in Evangelista v. Collector of Internal Revenue [102 Phil. 140 (1957)] held that Section 24 covered these unregistered partnerships and even associations or joint accounts, which had no legal personalities apart from their individual members.
Article 1767 of the Civil Code recognizes the creation of a contract of partnership when “two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves.” Its requisites are: (1) mutual contribution to a common stock, and (2) a joint interest in the profits. In other words, a partnership is formed when persons contract “to devote to a common purpose either money, property, or labor with the intention of dividing the profits between themselves.” Meanwhile, an association implies associates who enter into a “joint enterprise x x x for the transaction of business.”
In the case before us, the ceding companies entered into a Pool Agreement or an association that would handle all the insurance businesses covered under their quota-share reinsurance treaty and surplus reinsurance treaty with Munich. The following unmistakably indicates a partnership or an association covered by Section 24 of the NIRC:
(1) The pool has a common fund, consisting of money and other valuables that are deposited in the name and credit of the pool. This common fund pays for the administration and operation expenses of the pool.
(2) The pool functions through an executive board, which resembles the board of directors of a corporation, composed of one representative for each of the ceding companies.
(3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its work is indispensable, beneficial and economically useful to the business of the ceding companies and Munich, because without it they would not have received their premiums. The ceding companies share “in the business ceded to the pool” and in the “expenses” according to a “Rules of Distribution” annexed to the Pool Agreement. Profit motive or business is, therefore, the primordial reason for the pool’s formation.
The petitioners’ reliance on Pascual v. Commissioner (166 SCRA 560, 18 October 1988) is misplaced, because the facts obtaining therein are not on all fours with the present case. In Pascual, there was no unregistered partnership, but merely a co-ownership which took up only two isolated transactions.
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What constitutes “doing business” (relative to foreign corporations)?
In the old case of The Mentholatum Co. v. Mangaliman [72 Phil. 524 (1941)], the Court discussed the test to determine whether a foreign company is “doing business” in the Philippines, thus:
No general rule or governing principle can be laid down as to what constitutes “doing” or “engaging in” or “transacting” business. Indeed, each case must be judged in the light of its peculiar environmental circumstances. The true test, however, seems to be whether the foreign corporation is continuing the body or substance of the business or enterprise for which it was organized or whether it has substantially retired from it and turned it over to another. The term implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of, the purpose and object of its organization. (Citations omitted)
The foregoing definition found its way in RA No. 7042, otherwise known as the Foreign Investments Act of 1991, which repealed Articles 44-56, Book II of the Omnibus Investments Code of 1987. Said law enumerated not only the acts or activities which constitute “doing business,” but also those activities which are not deemed “doing business.” Thus, Section 3(d) of RA No. 7042 provides:
SEC. 3. Definitions. – x x x
x x x x
d) The phrase “doing business” shall include soliciting orders, service contracts, opening offices, whether called “liaison” offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization: Provided, however, That the phrase “doing business” shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account[.] (Underscoring supplied)
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Gross Philippine Billings (GPB).
Sec. 28(b)(2) of the 1939 NIRC provided:
(2) Resident Corporations. – A corporation organized, authorized, or existing under the laws of a foreign country, engaged in trade or business within the Philippines, shall be taxable as provided in subsection (a) of this section upon the total net income received in the preceding taxable year from all sources within the Philippines: Provided, however, that international carriers shall pay a tax of two and one-half percent on their gross Philippine billings.
This provision was later amended by Sec. 24(B)(2) of the 1977 NIRC, which defined GPB as follows:
“Gross Philippine billings” include gross revenue realized from uplifts anywhere in the world by any international carrier doing business in the Philippines of passage documents sold therein, whether for passenger, excess baggage or mail, provided the cargo or mail originates from the Philippines.
In the 1986 and 1993 NIRCs, the definition of GPB was further changed to read:
“Gross Philippine Billings” means gross revenue realized from uplifts of passengers anywhere in the world and excess baggage, cargo and mail originating from the Philippines, covered by passage documents sold in the Philippines.
Essentially, prior to the 1997 NIRC, GPB referred to revenues from uplifts anywhere in the world, provided that the passage documents were sold in the Philippines. Legislature departed from such concept in the 1997 NIRC where GPB is now defined under Sec. 28(A)(3)(a):
“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.
Now, it is the place of sale that is irrelevant; as long as the uplifts of passengers and cargo occur to or from the Philippines, income is included in GPB.
~~~South African Airways vs. CIR (G.R. No. 180356, 16 February 2010, 3rd Div., J. Velasco, Jr.)
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Income taxation of offline international air carrier selling passage tickets in the Philippines; Resident foreign corporations; RP-Canada Tax Treaty
An offline international air carrier selling passage tickets in the Philippines, through a general sales agent, is a resident foreign corporation doing business in the Philippines. As such, it is taxable under Section 28(A)(1), and not Section 28(A)(3) of the 1997 NIRC, subject to any applicable tax treaty to which the Philippines is a signatory. Pursuant to Article 8 of the Republic of the Philippines-Canada Tax Treaty, Air Canada may only be imposed a maximum tax of 1 1/2% of its gross revenues earned from the sale of its tickets in the Philippines.
At the outset, we affirm the CTA’s ruling that petitioner, as an offline international carrier with no landing rights in the Philippines, is not liable to tax on GPB under Section 28(A)(3) of the 1997 NIRC.
Under [this] provision, the tax attaches only when the carriage of persons, excess baggage, cargo, and mail originated from the Philippines in a continuous and uninterrupted flight, regardless of where the passage documents were sold.
Not having flights to and from the Philippines, petitioner is clearly not liable for the GPB tax.
Petitioner, an offline carrier, is a resident foreign corporation for income tax purposes. Petitioner falls within the definition of resident foreign corporation under Section 28(A)(1) of the 1997 NIRC, thus, it may be subject to 32% tax on its taxable income.
The definition of “resident foreign corporation” has not substantially changed throughout the amendments of the NIRC. All versions refer to “a foreign corporation engaged in trade or business within the Philippines.”
Commonwealth Act No. 466, known as the NIRC and approved on June 15, 1939, defined “resident foreign corporation” as applying to “a foreign corporation engaged in trade or business within the Philippines or having an office or place of business therein.”
Section 24(b)(2) of the NIRC, as amended by RA No. 6110, approved on August 4, 1969.
PD No. 1158-A took effect on June 3, 1977 amending certain sections of the 1939 NIRC. Section 24(b)(2) on foreign resident corporations was amended, but it still provides that “[a] corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be taxable as provided in subsection (a) of this section upon the total net income received in the preceding taxable year from all sources within the Philippines[.]”
As early as 1987, this court in Commissioner of Internal Revenue v. British Overseas Airways Corporation [233 Phil. 406 (1987)] declared British Overseas Airways Corporation, an international air carrier with no landing rights in the Philippines, as a resident foreign corporation engaged in business in the Philippines through its local sales agent that sold and issued tickets for the airline company. This court discussed that:
There is no specific criterion as to what constitutes “doing” or “engaging in” or “transacting” business. Each case must be judged in the light of its peculiar environmental circumstances. The term implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business organization. “In order that a foreign corporation may be regarded as doing business within a State, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character. [“]
BOAC, during the periods covered by the subject-assessments, maintained a general sales agent in the Philippines. That general sales agent, from 1959 to 1971, “was engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into series of trips — each trip in the series corresponding to a different airline company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the various airline companies on the basis of their participation in the services rendered through the mode of interline settlement as prescribed by Article VI of the Resolution No. 850 of the IATA Agreement.” Those activities were in exercise of the functions which are normally incident to, and are in progressive pursuit of, the purpose and object of its organization as an international air carrier. In fact, the regular sale of tickets, its main activity, is the very lifeWood of the airline business, the generation of sales being the paramount objective. There should be no doubt then that BOAC was “engaged in” business in the Philippines through a local agent during the period covered by the assessments. Accordingly, it is a resident foreign corporation subject to tax upon its total net income received in the preceding taxable year from all sources within the Philippines. (Emphasis supplied, citations omitted)
RA No. 7042 or the Foreign Investments Act of 1991 also provides guidance with its definition of “doing business” with regard to foreign corporations. Section 3(d) of the law enumerates the activities that constitute doing business:
d. the phrase “doing business” shall include soliciting orders, service contracts, opening offices, whether called “liaison” offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization: Provided, however, That’ the phrase “doing business” shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account[.] (Emphasis supplied)
While Section 3(d) above states that “appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account” is not considered as “doing business,” the Implementing Rules and Regulations of Republic Act No. 7042 clarifies that “doing business” includes “appointing representatives or distributors, operating under full control of the foreign corporation, domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling one hundred eighty (180) days or more[.]”
An offline carrier is “any foreign air carrier not certificated by the [Civil Aeronautics] Board, but who maintains office or who has designated or appointed agents or employees in the Philippines, who sells or offers for sale any air transportation in behalf of said foreign air carrier and/or others, or negotiate for, or holds itself out by solicitation, advertisement, or otherwise sells, provides, furnishes, contracts, or arranges for such transportation.”
“Anyone desiring to engage in the activities of an off-line carrier [must] apply to the [Civil Aeronautics] Board for such authority.” Each offline carrier must file with the Civil Aeronautics Board a monthly report containing information on the tickets sold, such as the origin and destination of the passengers, carriers involved, and commissions received.
Petitioner is undoubtedly “doing business” or “engaged in trade or business” in the Philippines.
Aerotel performs acts or works or exercises functions that are incidental and beneficial to the purpose of petitioner’s business. The activities of Aerotel bring direct receipts or profits to petitioner. There is nothing on record to show that Aerotel solicited orders alone and for its own account and without interference from, let alone direction of, petitioner. On the contrary, Aerotel cannot “enter into any contract on behalf of [petitioner Air Canada] without the express written consent of [the latter,]” and it must perform its functions according to the standards required by petitioner. Through Aerotel, petitioner is able to engage in an economic activity in the Philippines.
Further, petitioner was issued by the Civil Aeronautics Board an authority to operate as an offline carrier in the Philippines for a period of five years, or from April 24, 2000 until April 24, 2005.
Petitioner is, therefore, a resident foreign corporation that is taxable on its income derived from sources within the Philippines. Petitioner’s income from sale of airline tickets, through Aerotel, is income realized from the pursuit of its business activities in the Philippines.
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The British Overseas Airways case is still applicable even under the NIRC of 1997; Rules on the income taxation of resident foreign corporations.
In Commissioner of Internal Revenue v. British Overseas Airways Corporation (British Overseas Airways) [No. L-65773-74, 30 April 1987, 149 SCRA 395], which was decided under similar factual circumstances, this Court ruled that off-line air carriers having general sales agents in the Philippines are engaged in or doing business in the Philippines and that their income from sales of passage documents here is income from within the Philippines. Thus, in that case, we held the off-line air carrier liable for the 32% tax on its taxable income.
Petitioner argues, however, that because British Overseas Airways was decided under the 1939 NIRC, it does not apply to the instant case, which must be decided under the 1997 NIRC. Petitioner alleges that the 1939 NIRC taxes resident foreign corporations, such as itself, on all income from sources within the Philippines. Petitioner’s interpretation of Sec. 28(A)(3)(a) of the 1997 NIRC is that, since it is an international carrier that does not maintain flights to or from the Philippines, thereby having no GPB as defined, it is exempt from paying any income tax at all. In other words, the existence of Sec. 28(A)(3)(a) according to petitioner precludes the application of Sec. 28(A)(1) to it.
Its argument has no merit.
First, the difference cited by petitioner between the 1939 and 1997 NIRCs with regard to the taxation of off-line air carriers is more apparent than real.
We point out that Sec. 28(A)(3)(a) of the 1997 NIRC does not, in any categorical term, exempt all international air carriers from the coverage of Sec. 28(A)(1) of the 1997 NIRC. Certainly, had legislature’s intentions been to completely exclude all international air carriers from the application of the general rule under Sec. 28(A)(1), it would have used the appropriate language to do so; but the legislature did not. Thus, the logical interpretation of such provisions is that, if Sec. 28(A)(3)(a) is applicable to a taxpayer, then the general rule under Sec. 28(A)(1) would not apply. If, however, Sec. 28(A)(3)(a) does not apply, a resident foreign corporation, whether an international air carrier or not, would be liable for the tax under Sec. 28(A)(1).
Clearly, no difference exists between British Overseas Airways and the instant case, wherein petitioner claims that the former case does not apply. Thus, British Overseas Airways applies to the instant case. The findings therein that an off-line air carrier is doing business in the Philippines and that income from the sale of passage documents here is Philippine-source income must be upheld.
Petitioner further reiterates its argument that the intention of Congress in amending the definition of GPB is to exempt off-line air carriers from income tax by citing the pronouncements made by Senator Juan Ponce Enrile during the deliberations on the provisions of the 1997 NIRC. Such pronouncements, however, are not controlling on this Court.
A cardinal rule in the interpretation of statutes is that the meaning and intention of the law-making body must be sought, first of all, in the words of the statute itself, read and considered in their natural, ordinary, commonly-accepted and most obvious significations, according to good and approved usage and without resorting to forced or subtle construction. Courts, therefore, as a rule, cannot presume that the law-making body does not know the meaning of words and rules of grammar. Consequently, the grammatical reading of a statute must be presumed to yield its correct sense. It is also a well-settled doctrine in this jurisdiction that statements made by individual members of Congress in the consideration of a bill do not necessarily reflect the sense of that body and are, consequently, not controlling in the interpretation of law.
Moreover, an examination of the subject provisions of the law would show that petitioner’s interpretation of those provisions is erroneous.
Sec. 28(A)(1) of the 1997 NIRC is a general rule that resident foreign corporations are liable for 32% tax on all income from sources within the Philippines. Sec. 28(A)(3) is an exception to this general rule.
An exception is defined as “that which would otherwise be included in the provision from which it is excepted. It is a clause which exempts something from the operation of a statue by express words.” Further, “an exception need not be introduced by the words ‘except’ or ‘unless.’ An exception will be construed as such if it removes something from the operation of a provision of law.”
In the instant case, the general rule is that resident foreign corporations shall be liable for a 32% income tax on their income from within the Philippines, except for resident foreign corporations that are international carriers that derive income “from carriage of persons, excess baggage, cargo and mail originating from the Philippines” which shall be taxed at 2 1/2% of their Gross Philippine Billings. Petitioner, being an international carrier with no flights originating from the Philippines, does not fall under the exception. As such, petitioner must fall under the general rule. This principle is embodied in the Latin maxim, exception firmat regulam in casibus non exceptis, which means, a thing not being excepted must be regarded as coming within the purview of the general rule.
To reiterate, the correct interpretation of the above provisions is that, if an international air carrier maintains flights to and from the Philippines, it shall be taxed at the rate of 2 1/2% of its Gross Philippine Billings, while international air carriers that do not have flights to and from the Philippines but nonetheless earn income from other activities in the country will be taxed at the rate of 32% of such income.
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Tax Treaty considerations in the imposition of the regular income rate of 32% under Section 28(A)(1) of the NIRC of 1997; RP- Canada Tax Treaty
The application of the regular 32% tax rate under Section 28(A)(1) of the 1997 NIRC must consider the existence of an effective tax treaty between the Philippines and the home country of the foreign air carrier.
In the earlier case of South African Airways v. Commissioner of Internal Revenue, this court held that Section 28(A)(3)(a) does not categorically exempt all international air carriers from the coverage of Section 28(A)(1). Thus, if Section 28(A)(3)(a) is applicable to a taxpayer, then the general rule under Section 28(A)(1) does not apply. If, however, Section 28(A)(3)(a) does not apply, an international air carrier would be liable for the tax under Section 28(A)(1).[71]
This court in South African Airways declared that the correct interpretation of these provisions is that: “international air carrier[s] maintaining] flights to and from the Philippines . . . shall be taxed at the rate of 21/2% of its Gross Philippine Billings[;] while international air carriers that do not have flights to and from the Philippines but nonetheless earn income from other activities in the country [like sale of airline tickets] will be taxed at the rate of 32% of such [taxable] income.”
In this case, there is a tax treaty that must be taken into consideration to determine the proper tax rate.
Hence, the application of the provisions of the NIRC must be subject to the provisions of tax treaties entered into by the Philippines with foreign countries.
On March 11, 1976, the representatives for the government of the Republic of the Philippines and for the government of Canada signed the Convention between the Philippines and Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Republic of the Philippines-Canada Tax Treaty). This treaty entered into force on December 21, 1977.
Article V of the Republic of the Philippines-Canada Tax Treaty defines “permanent establishment” as a “fixed place of business in which the business of the enterprise is wholly or partly carried on.”
Even though there is no fixed place of business, an enterprise of a Contracting State is deemed to have a permanent establishment in the other Contracting State if under certain conditions there is a person acting for it.
Specifically, Article V(4) of the Republic of the Philippines-Canada Tax Treaty states that “[a] person acting in a Contracting State on behalf of an enterprise of the other Contracting State (other than an agent of independent status to whom paragraph 6 applies) shall be deemed to be a permanent establishment in the first-mentioned State if . . . he has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for that enterprise[.]” The provision seems to refer to one who would be considered an agent under Article 1868 of the Civil Code of the Philippines.
On the other hand, Article V(6) provides that “[a]n enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business.”
Considering Article XV of the same Treaty, which covers dependent personal services, the term “dependent” would imply a relationship between the principal and the agent that is akin to an employer-employee relationship.
Thus, an agent may be considered to be dependent on the principal where the latter exercises comprehensive control and detailed instructions over the means and results of the activities of the agent.
Section 3 of RA No. 776, as amended, also known as The Civil Aeronautics Act of the Philippines, defines a general sales agent as “a person, not a bonafide employee of an air carrier, who pursuant to an authority from an airline, by itself or through an agent, sells or offers for sale any air transportation, or negotiates for, or holds himself out by solicitation, advertisement or otherwise as one who sells, provides, furnishes, contracts or arranges for, such air transportation.” General sales agents and their property, property rights, equipment, facilities, and franchise are subject to the regulation and control of the Civil Aeronautics Board. A permit or authorization issued by the Civil Aeronautics Board is required before a general sales agent may engage in such an activity.
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.
Petitioner appointed Aerotel as its passenger general sales agent to perform the sale of transportation on petitioner and handle reservations, appointment, and supervision of International Air Transport Association-approved and petitioner-approved sales agents.
Under the terms of the Passenger General Sales Agency Agreement, Aerotel will “provide at its own expense and acceptable to [petitioner Air Canada], adequate and suitable premises, qualified staff, equipment, documentation, facilities and supervision and in consideration of the remuneration and expenses payable[,] [will] defray all costs and expenses of and incidental to the Agency.” “[I]t is the sole employer of its employees and . . . is responsible for [their] actions … or those of any subcontractor.” In remuneration for its services, Aerotel would be paid by petitioner a commission on sales of transportation plus override commission on flown revenues. Aerotel would also be reimbursed “for all authorized expenses supported by original supplier invoices.”
Aerotel is required to keep “separate books and records of account, including supporting documents, regarding all transactions at, through or in any way connected with [petitioner Air Canada] business.”
“If representing more than one carrier, [Aerotel must] represent all carriers in an unbiased way.” Aerotel cannot “accept additional appointments as General Sales Agent of any other carrier without the prior written consent of [petitioner Air Canada].”
The Passenger General Sales Agency Agreement “may be terminated by either party without cause upon [no] less than 60 days’ prior notice in writing[.]“ In case of breach of any provisions of the Agreement, petitioner may require Aerotel “to cure the breach in 30 days failing which [petitioner Air Canada] may terminate [the] Agreement[.]“
The following terms are indicative of Aerotel’s dependent status:
First, Aerotel must give petitioner written notice “within 7 days of the date [it] acquires or takes control of another entity or merges with or is acquired or controlled by another person or entity[,]” Except with the written consent of petitioner, Aerotel must not acquire a substantial interest in the ownership, management, or profits of a passenger sales agent affiliated with the International Air Transport Association or a non-affiliated passenger sales agent nor shall an affiliated passenger sales agent acquire a substantial interest in Aerotel as to influence its commercial policy and/or management decisions. Aerotel must also provide petitioner “with a report on any interests held by [it], its owners, directors, officers, employees and their immediate families in companies and other entities in the aviation industry or … industries related to it[.]” Petitioner may require that any interest be divested within a set period of time.
Second, in carrying out the services, Aerotel cannot enter into any contract on behalf of petitioner without the express written consent of the latter; it must act according to the standards required by petitioner; “follow the terms and provisions of the [petitioner Air Canada] GS A Manual [and all] written instructions of [petitioner Air Canada;]“ and “[i]n the absence of an applicable provision in the Manual or instructions, [Aerotel must] carry out its functions in accordance with [its own] standard practices and procedures[.]“
Third, Aerotel must only “issue traffic documents approved by [petitioner Air Canada] for all transportation over [its] services[.]“ All use of petitioner’s name, logo, and marks must be with the written consent of petitioner and according to petitioner’s corporate standards and guidelines set out in the Manual.
Fourth, all claims, liabilities, fines, and expenses arising from or in connection with the transportation sold by Aerotel are for the account of petitioner, except in the case of negligence of Aerotel.
Aerotel is a dependent agent of petitioner pursuant to the terms of the Passenger General Sales Agency Agreement executed between the parties. It has the authority or power to conclude contracts or bind petitioner to contracts entered into in the Philippines. A third-party liability on contracts of Aerotel is to petitioner as the principal, and not to Aerotei, and liability to such third party is enforceable against petitioner. While Aerotel maintains a certain independence and its activities may not be devoted wholly to petitioner, nonetheless, when representing petitioner pursuant to the Agreement, it must carry out its functions solely for the benefit of petitioner and according to the latter’s Manual and written instructions. Aerotel is required to submit its annual sales plan for petitioner’s approval.
In essence, Aerotel extends to the Philippines the transportation business of petitioner. It is a conduit or outlet through which petitioner’s airline tickets are sold.
Under Article VII (Business Profits) of the Republic of the Philippines-Canada Tax Treaty, the “business profits” of an enterprise of a Contracting State is “taxable only in that State[,] unless the enterprise carries on business in the other Contracting State through a permanent establishment)[.]” Thus, income attributable to Aerotel or from business activities effected by petitioner through Aerotel may be taxed in the Philippines. However, pursuant to the last paragraph of Article VII in relation to Article VIII (Shipping and Air Transport) of the same Treaty, the tax imposed on income derived from the operation of ships or aircraft in international traffic should not exceed 1 1/2% of gross revenues derived from Philippine sources.
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While petitioner (an airline company) is taxable as a resident foreign corporation under Section 28(A)(1) of the 1997 NIRC, it could only be taxed at a maximum of 1 1/2% of its gross revenues
While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) of the 1997 NIRC on its taxable income from sale of airline tickets in the Philippines, it could only be taxed at a maximum of 1 1/2% of gross revenues, pursuant to Article VIII of the Republic of the Philippines-Canada Tax Treaty that applies to petitioner as a “foreign corporation organized and existing under the laws of Canada[.]“
Tax treaties form part of the law of the land, and jurisprudence has applied the statutory construction principle that specific laws prevail over general ones.
The Republic of the Philippines-Canada Tax Treaty was ratified on December 21, 1977 and became valid and effective on that date. On the other hand, the applicable provision relating to the taxability of resident foreign corporations and the rate of such tax found in the NIRC became effective on January 1, 1998. Ordinarily, the later provision governs over the earlier one. In this case, however, the provisions of the Republic of the Philippines-Canada Tax Treaty are more specific than the provisions found in the NIRC.
These rules of interpretation apply even though one of the sources is a treaty and not simply a statute.
Article VII, Section 21 of the Constitution provides:
SECTION 21. No treaty or international agreement shall be valid and effective unless concurred in by at least two-thirds of all the Members of the Senate.
This provision states the second of two ways through which international obligations become binding. Article II, Section 2 of the Constitution deals with international obligations that are incorporated, while Article VII, Section 21 deals with international obligations that become binding through ratification.
“Valid and effective” means that treaty provisions that define rights and duties as well as definite prestations have effects equivalent to a statute. Thus, these specific treaty provisions may amend statutory provisions. Statutory provisions may also amend these types of treaty obligations.
We only deal here with bilateral treaty state obligations that are not international obligations erga omnes. We are also not required to rule in this case on the effect of international customary norms especially those with jus cogenscharacter.
The second paragraph of Article VIII states that “profits from sources within a Contracting State derived by an enterprise of the other Contracting State from the operation of ships or aircraft in international traffic may be taxed in the first-mentioned State but the tax so charged shall not exceed the lesser of a) one and one-half per cent of the gross revenues derived from sources in that State; and b) the lowest rate of Philippine tax imposed on such profits derived by an enterprise of a third State.”
The Agreement between the government of the Republic of the Philippines and the government of Canada on Air Transport, entered into on January 14, 1997, reiterates the effectivity of Article VIII of the Republic of the Philippines-Canada Tax Treaty.:
ARTICLE XVI
(Taxation)
The Contracting Parties shall act in accordance with the provisions of Article VIII of the Convention between the Philippines and Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed at Manila on March 31, 1976 and entered into force on December 21, 1977, and any amendments thereto, in respect of the operation of aircraft in international traffic.
Petitioner’s income from sale of ticket for international carriage of passenger is income derived from international operation of aircraft. The sale of tickets is closely related to the international operation of aircraft that it is considered incidental thereto.
“[B]y reason of our bilateral negotiations with [Canada], we have agreed to have our right to tax limited to a certain extent[.]” Thus, we are bound to extend to a Canadian air carrier doing business in the Philippines through a local sales agent the benefit of a lower tax equivalent to 1 1/2% on business profits derived from sale of international air transportation.
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Imposition of tax of dividends under Section 28(B)(1) of the 1997 NIRC, in relation to Section 28(B)(5)(b) thereof, and Article 11(2)(b) of the RP-US Tax Treaty.
The tax treatment of dividends earned by a foreign corporation, not engaged in trade of business in the Philippines, from Philippine sources is provided under Section 28(B)(1) of the Tax Code.
However, the ordinary 35% tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation, goes down to 15% if the country of domicile of the foreign stockholder corporation “shall allow” such foreign corporation a tax credit for “taxes deemed paid in the Philippines,” applicable against the tax payable to the domiciliary country by the foreign stockholder corporation, [pursuant to Section 28(B)(5)(b) of the Tax Code].
As it is recognized, the application of the provisions of the NIRC must be subject to the provisions of tax treaties entered into by the Philippines with foreign countries. It remains only to note that under the Philippines-US Convention “With Respect to Taxes on Income,” the Philippines, by a treaty commitment, reduced the regular rate of dividend tax to a maximum of 20% of the gross amount of dividends paid to US parent corporations. Thus, the RP-US Tax Treaty which applies on income derived or which accrued beginning January 1, 1983 provides:
Article 11
DIVIDENDS
x x x x
(2) The rate of tax imposed by one of the Contracting States on dividends derived from sources within that Contracting State by a resident of the other Contracting State shall not exceed —
(a) 25 percent of the gross amount of the dividend; or
(b) When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of the paying corporation’s taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10 percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation. (Italics supplied)
The foregoing RP-US Tax Treaty, at the same time, created a treaty obligation on the part of the US that it “shall allow” to a US parent corporation receiving dividends from its Philippine subsidiary a tax credit for the appropriate amount of taxes paid or accrued to the Philippines by the said Philippine subsidiary. The US allowed a “deemed paid” tax credit to US corporations on dividends received from foreign corporation. Thus, Section 902 of the US Internal Revenue Code, as amended, provides:
SEC. 902 — CREDIT FOR CORPORATE STOCKHOLDERS IN FOREIGN CORPORATION.
(A) Treatment of Taxes Paid by Foreign Corporation — For purposes of this subject, a domestic corporation which owns at least 10 percent of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall —
(1) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in subsection (c) (1) (a)] of a year for which such foreign corporation is not a less developed country corporation, be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any possession of the United States on or with respect to such accumulated profits, which the amount of such dividends (determined without regard to Section 78) bears to the amount of such accumulated profits in excess of such income, war profits, and excess profits taxes (other than those deemed paid); and
(2) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in subsection (c) (1) (b)] of a year for which such foreign corporation is a less developed country corporation, be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any possession of the United States on or with respect to such accumulated profits, which the amount of such dividends bears to the amount of such accumulated profits.
For this reason, it was established on the part of the Philippines a deliberate undertaking to reduce the regular dividend tax rate of 35%.
This goes to show that the IGC, being a non-resident US corporation is qualified to avail of the aforesaid 15% preferential tax rate on the dividends it earned from the Philippines. It was proven that the country which it was domiciled shall grant similar tax relief/credit against the tax due upon the dividends earned from sources within the Philippines. Clearly, the IGC has made an overpayment of its tax due of FWT by using the 35% tax rate.
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Demurrage and detention fees are regular income subject to regular income tax rate; They are not within the ambit of GPB.
In treating demurrage and detention fees as regular income subject to regular income tax rate, the Secretary of Finance relied on Section 28(A)(I)(3a) of the NIRC, as amended by RA 10378.
This provision is still in effect since it was not amended by RA 10963 or the Tax Reform for Acceleration and Inclusion law.
To determine whether demurrage and detention fees are subject to the preferential 2.5% rate, we refer to the definition of GPB under Section 28(A)(I)(3a) of the NIRC, as amended by RA 10378, viz.: “gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents.”
RR 15-2013 echoes this definition, thus:
B) Determination of Gross Philippine Billings of International Sea Carriers. — In computing for “Gross Philippine Billings” of international sea carriers, there shall be included the total amount of gross revenue whether for passenger, cargo, and/or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents.
xxx
Verily, the GPB covers gross revenue derived from transportation of passengers, cargo and/or mail originating from the Philippines up to the final destination. Any other income, therefore, is subject to the regular income tax rate. When the law is clear, there is no other recourse but to apply it regardless of its perceived harshness. Dura lex sed lex.
Under RR 15-2013, demurrage and detention fees are not deemed within the scope of GPB. For demurrage fees “which are in the nature of rent for the use of property of the carrier in the Philippines, is considered income from Philippine source and is subject to income tax under the regular rate as the other types of income of the on-line carrier.” On the other hand, detention fees and other charges “relating to outbound cargoes and inbound cargoes are all considered Philippine-sourced income of international sea carriers they being collected for the use of property or rendition of services in the Philippines, and are subject to the Philippine income tax under the regular rate.”
Demurrage fee is the allowance or compensation due to the master or owners of a ship, by the freighter, for the time the vessel may have been detained beyond the time specified or implied in the contract of affreightment or the charter-party. It is only an extended freight or reward to the vessel, in compensation for the earnings the carrier is improperly caused to lose.
Detention occurs when the consignee holds on to the carrier’s container outside of the port, terminal, or depot beyond the free time that is allotted. Detention fee is charged when import containers have been picked up, but the container (regardless if it is full or empty) is still in the possession of the consignee and has not been returned within the allotted time. Detention fee is also charged for export containers in which the empty container has been picked up for loading, and the loaded container is returned to the steamship line after the allotted free time.
Indeed, the exclusion of demurrage and detention fees from the preferential rate of 2.5% is proper since they are not considered income derived from transportation of persons, goods and/or mail, in accordance with the rule expressio unios est exclusio alterius.
Demurrage and detention fees definitely form part of an international sea carrier’s gross income. For they are acquired in the normal course of trade or business. The phrase “in the course of trade or business” means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity.
Surely, gross income means income derived from whatever source, including compensation for services; the conduct of trade or business or the exercise of a profession; dealings in property; interests; rents; royalties; dividends; annuities; prizes and winnings; pensions; and a partner’s distributive share in the net income of a general professional partnership, among others. Demurrage and detention fees fall within the definition of “gross income” – the former is considered as rent payment for the vessel; and the latter, compensation for use of a carrier’s container.
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Imposition of capital gains tax (CGT) under Section 27(D)(2).
Section 27(A) of the NIRC of 1997, as amended, provides that except as otherwise provided in this Code, an income tax shall be imposed on the taxable income derived by domestic corporations. Relevantly, paragraph (D)(2) thereof states that a final tax at the rates of 5% or 10% shall be imposed on the net capital gains realized during the taxable year from the sale, exchange or other disposition of shares of stock in a domestic corporation not traded in the stock exchange. Revenue Regulation 6-2008, which implements the aforesaid provision, echoes Section 27(D)(2) and provides for rules on the determination of gain or loss for the purpose of the imposition of CGT. In other words, the amount of the gain realized from the sale of shares of stock not traded through the local stock exchange, is in lieu of the regular corporate income tax. Moreover, in Commissioner of Internal Revenue v. Ocier, this Court clarified that the CGT for the sale of shares of stocks not listed in the stock exchange refers to the final tax based on the net capital gains realized during the taxable year. Hence, a taxpayer is liable to pay CGT for the sale, barter or other disposition of shares of stock in a domestic corporation except if the sale or disposition is through the stock exchange.
Notably, in several rulings issued by the Bureau of Internal Revenue, it was recognized that the gain realized from the sale of shares acquired through a tax-free exchange transaction is subject to CGT.
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Basic corporate income tax and minimum corporate income tax (MCIT)
Income tax on domestic corporations is covered by Section 27 of the NIRC of 1997.
A domestic corporation must pay whichever is higher of: (1) the income tax under Section 27(A) of the NIRC of 1997, computed by applying the tax rate therein to the taxable income of the corporation; or (2) the MCIT under Section 27(E), also of the NIRC of 1997, equivalent to 2% of the gross income of the corporation.
Taxable income is defined under Section 31 of the NIRC of 1997 as the pertinent items of gross income specified in the said Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the same Code or other special laws. The gross income, referred to in Section 31, is described in Section 32 of the NIRC of 1997 as income from whatever source, including compensation for services; the conduct of trade or business or the exercise of profession; dealings in property; interests; rents; royalties; dividends; annuities; prizes and winnings; pensions; and a partner’s distributive share in the net income of a general professional partnership.
Pursuant to the NIRC of 1997, the taxable income of a domestic corporation may be arrived at by subtracting from gross income deductions authorized, not just by the NIRC of 1997, but also by special laws. In comparison, the 2% MCIT under Section 27(E) of the NIRC of 1997 shall be based on the gross income of the domestic corporation. The Court notes that gross income, as the basis for MCIT, is given a special definition under Section 27(E)(4) of the NIRC of 1997, different from the general one under Section 34 of the same Code.
According to the last paragraph of Section 27(E)(4) of the NIRC of 1997, gross income of a domestic corporation engaged in the sale of service means gross receipts, less sales returns, allowances, discounts and cost of services. “Cost of services” refers to all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (a) salaries and employee benefits of personnel, consultants, and specialists directly rendering the service; and (b) cost of facilities directly utilized in providing the service, such as depreciation or rental of equipment used and cost of supplies. Noticeably, inclusions in and exclusions/deductions from gross income for MCIT purposes are limited to those directly arising from the conduct of the taxpayer’s business. It is, thus, more limited than the gross income used in the computation of basic corporate income tax.
In light of the foregoing, there is an apparent distinction under the NIRC of 1997 between taxable income, which is the basis for basic corporate income tax under Section 27(A); and gross income, which is the basis for the MCIT under Section 27(E). The two terms have their respective technical meanings, and cannot be used interchangeably.
Even if the basic corporate income tax and the MCIT are both income taxes under Section 27 of the NIRC of 1997, and one is paid in place of the other, the two are distinct and separate taxes.
Although both are income taxes, the MCIT is different from the basic corporate income tax, not just in the rates, but also in the bases for their computation.
That, under general circumstances, the MCIT is paid in place of the basic corporate income tax, when the former is higher than the latter, does not mean that these two income taxes are one and the same. The said taxes are merely paid in the alternative, giving the Government the opportunity to collect the higher amount between the two.
~~~CIR vs. Philippine Airlines, Inc. (G.R. No. 180066, 7 July 2009, 3rd Div., J. Chico-Nazario)
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Annual ITR.
Indeed, an annual ITR contains the total taxable income earned for the four (4) quarters of a taxable year, as well as deductions and tax credits previously reported or carried over in the quarterly income tax returns for the subject period. A quick look at the Annual ITR reveals this fact:
Aggregate Income Tax Due
Less Tax Credits/Payments
Prior Year’s excess Credits – Taxes withheld
Tax Payment (s) for the Previous Quarter (s) of the same taxable year other than MCIT
xxx xxx xxx
Creditable Tax Withheld for the Previous Quarter (s)
Creditable Tax Withheld Per BIR Form No. 2307 for this Quarter
xxx xxx xxx
Section 76 of the NIRC requires a corporation to file a Final Adjustment Return (or Annual ITR) covering the total taxable income for the preceding calendar or fiscal year. The total taxable income contains the combined income for the four quarters of the taxable year, as well as the deductions and excess tax credits carried over in the quarterly income tax returns for the same period.
If the excess tax credits of the preceding year were deducted, whether in whole or in part, from the estimated income tax liabilities of any of the taxable quarters of the succeeding taxable year, the total amount of the tax credits deducted for the entire taxable year should appear in the Annual ITR under the item “Prior Year’s Excess Credits.” Otherwise, or if the tax credits were carried over to the succeeding quarters and the corporation did not report it in the annual ITR, there would be a discrepancy in the amounts of combined income and tax credits carried over for all quarters and the corporation would end up shouldering a bigger tax payable. It must be remembered that taxes computed in the quarterly returns are mere estimates. It is the annual ITR which shows the aggregate amounts of income, deductions, and credits for all quarters of the taxable year. It is the final adjustment return which shows whether a corporation incurred a loss or gained a profit during the taxable quarter.
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Net capital gains/Redemption price vs. Dividends.
Petitioner asserts that the net capital gain derived by GTRC from the redemption of its 3,729,216 preferred shares should be subject to 15% FWT on dividends; She claims that while the payment of the original subscription price could not be taxed as it represented a return of capital, the additional amount, however, or the component of the redemption price representing the amount of P97,732,314.00 should not be treated as a mere premium and part of the subscription price, but as accumulated dividend in arrears, and, hence, subject to 15% FWT.
Again, the assertions are wrong.
The imposition of 15% FWT on intercorporate dividends received by a non-resident foreign corporation is found in Section 28 (B) (5) (b) of the Tax Code.
It must be noted, however, that GTRC is a non-resident foreign corporation, specifically a resident of the US. Thus, pursuant to the cardinal principle that treaties have the force and effect of law in this jurisdiction, the RP-US Tax Treaty complementarily governs the tax implications of respondent’s transactions with GTRC.
Under Article 11 (5) of the RP-US Tax Treaty, the term “dividends” should be understood according to the taxation law of the State in which the corporation making the distribution is a resident, which, in this case, pertains to respondent, a resident of the Philippines. Accordingly, attention should be drawn to the statutory definition of what constitutes “dividends,” pursuant to Section 73 (A) of the Tax Code which provides that “[t]he term ‘dividends’ x x x means any distribution made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders, whether in money or in other property.”
In light of the foregoing, the Court therefore holds that the redemption price representing the amount of P97,732,314.00 received by GTRC could not be treated as accumulated dividends in arrears that could be subjected to 15% FWT. Verily, respondent’s AFS covering the years 2003 to 2009 show that it did not have unrestricted retained earnings, and in fact, operated from a position of deficit. Thus, absent the availability of unrestricted retained earnings, the board of directors of respondent had no power to issue dividends. Consistent with Section 73 (A) of the Tax Code, this rule on dividend declaration – i.e., that it is dependent upon the availability of unrestricted retained earnings – was further edified in Section 43 of The Corporation Code of the Philippines.
It is also worth mentioning that one of the primary features of an ordinary dividend is that the distribution should be in the nature of a recurring return on stock which, however, does not obtain in this case. As aptly pointed out by the CTA En Banc, the amount of P97,732,314.00 received by GTRC did not represent a periodic distribution of dividend, but rather a payment by respondent for the redemption of GTRC’s 3,729,216 preferred shares.
All told, the amount of P97,732,314.00 received by GTRC from respondent for the redemption of its 3,729,216 preferred shares were not accumulated dividends in arrears. Contrary to petitioner’s claims, it is therefore not subject to 15% FWT on dividends in accordance with Section 28 (B) (5) (b) of the Tax Code.
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