2016 (Taxation) Bar Exam Questions: Question 5

[Answer/discuss the question below, or see 2016 bar exam Taxation Instructions; 2016 Labor Law Questions:   1234678910111213141516171819, and 20; See also 2016 Bar Exam: Information, Discussions, Tips, Questions and Results]


Sure Arrival Airways (SAA) is a foreign corporation, organized under the laws of the Republic of Nigeria. Its commercial airplanes do not operate within Philippine territory, or service passengers embarking from Philippine airports. The firm is represented in the Philippines by its general agent, Narotel.

SAA sells airplane tickets through Narotel, and these tickets are serviced by SAA airplanesoutsidethePhilippines. The total sales of airplane tickets transacted by Narotel for SAA in 2012 amounted to Pl0,000,000.00. The Commissioner of Internal Revenue (CIR) assessed SAA deficiency income taxes at the rate of 30% on its taxable income, finding that SAA’s airline ticket sales constituted income derived from sources within the Philippines.

SAA filed a protest on the ground that the alleged deficiency income taxes should be considered as income derived exclusively from sources outside the Philippines since SAA only serviced passengers outside Philippine territory. It, thus, asserted that the imposition of such income taxes violated the principle o f territoriality in taxation.

Is the theory of SAA tenable? Explain. (5%)

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