Air Canada vs.

CIR (2005)

Doctrine:

A foreign airline company selling tickets inthe Philippines through their local agents shall
beconsidered as resident foreign corporation engaged intrade or business in the countr
y. The absence of flightoperations within the Philippine territory cannot alterthe fact that
the income received was derived fromactivities within the Philippines. The test of taxabili
ty is thesource, and the source is that activity which produced the income.

ISSUES:

1. WON the revenue derived by an international aircarrier from sales of tickets in the Phi
lippines for airtransportation, while having no landing rights in thecountry, constitutes inc
ome of said international aircarrier from Philippine source, and accordingly, taxableunde
r Sec. 24(b)(2) of the National Revenue Code.

HELD:

YES. Such revenue constitutes taxable income.

This issue has already been laid to rest in anumber of cases by the SC, one of which is
the landmark case of CIR v. British Overseas Airways Corporation.
Although Air Canada is not liable to pay the taxas an international air carrier (2.5% on gross P
hil.Billings), it is still liable to pay income tax as aresident foreign corporation.An off-
line international carrier with a GeneralSales Agent (GSA) in the Philippines may becon
sidered a resident foreign corporationtaxable at 32% on taxable income derived fromPhi
lippine sources.

The GSA’s functions include,amongothers,solicitation, promotion and sale of air passen

ger services.

Such activities show continuity ofcommercial dealings and the exercise offunctions in pu
rsuit of commercial gain.Moreover, Revenue Regulations No. 6-78 has

elaborated that the phrase “doing business in the Philippines” includes “regular sale

of tickets in thePhilippines by offline international airlines, either by the passenger

services through their agents.”
On the other hand, income from sale oftickets in the Philippines is consideredPhilippine sourc
ed.

The test of taxability is the “source” and the source of an income is the activity which
produced the income.

The sale of tickets in the Philippines is theactivity that produces the income.Further, by
appointment of a GSA whosepremises are used as outlet for selling tickets, theoff-
line carrier may be deemed to have apermanent establishment in the Philippines,hence
taxable on Philippine sourced income.

DISPOSITIVE:

The petition is DENIED and DISMISSED