THE Court of Tax Appeals En Banc in South African Airways vs. Commissioner of Internal Revenue, CTA EB No. 211, promulgated on June 7, 2007 a decision tackling the already resolved issue of whether or not revenue from ticket sales derived by an international air carrier with no landing rights in the Philippines constitutes taxable income in the Philippines.
This case would have been a good opportunity for the court to revisit previous decisions of the Supreme Court involving the same issue and doing so would have already been sufficient to resolve the case. However, the court seems to be “off-course” from settled jurisprudence.
Briefly, South African Airways (“SAA”) claimed to be a nonresident foreign corporation with no flight operations to and from the Philippines but maintained a general sales agent in the country that sells tickets for flights outside the Philippines. After filing tax returns for the year 2002, SAA filed an application for refund for the recovery of the taxes paid on Gross Philippine Billings on the returns it filed on 2002, of which was denied.
The Court of Tax Appeals considered SAA as a resident foreign corporation subject to the income tax rate of 32 percent on its sale of passage documents in the Philippines. SAA was deemed residing in the Philippines when it designated an agent in the promotion and solicitation of its airline tickets in the Philippines on a regular basis. Such designation was considered to be SAA’s intention of continuing commercial dealings in the country.
This issue was first tackled by the Supreme Court in the landmark case of CIR vs. British Overseas Airways Corporation, 149 SCRA 395 (“BOAC Ruling”), where it ruled that revenue derived by a resident foreign airline from the sale of airplane tickets through an agent should be considered taxable income.
The court in BOAC in definite terms stated that in order for a foreign corporation to be regarded as a resident and doing business within the Philippines, 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. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. The sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The SAA Ruling is consistent with the BOAC Ruling in this aspect.
The BOAC Ruling, however, applied the 2-1/2% tax on gross Philippine billings for resident foreign airlines consistent with Section 28(A)(3)(a) of the Tax Code instead of the 32% corporate income tax under Section 28(A)(1) of the Tax Code as applied in the SAA Ruling. The tax on gross Philippine billings was correctly considered as a type of income tax. The court also made the observation that if Congress had indeed intended said tax as an excise or percentage tax, then it would have been place under Title V of the Tax Code covering Taxes on Business.
The Court of Tax Appeals, being an inferior court, has the obligation to respect and apply the decisions of the Supreme Court. There is therefore a high probability that, if appealed to the Supreme Court, this decision will be reversed. The BOAC Ruling, having the force of law, should have been applied consistent with the principle of stare decisis considering the similarities in facts and issues involving the BOAC and SAA cases.
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