In Gulf Air Company v. Commissioner of Internal Revenue, the Supreme Court addressed the definition of “gross receipts” for calculating the 3% percentage tax imposed on international air carriers operating in the Philippines. The Court upheld the validity of Revenue Regulations No. 6-66, which mandates that gross receipts be computed based on the cost of a single one-way fare as approved by the Civil Aeronautics Board (CAB). This ruling affirmed the Commissioner of Internal Revenue’s assessment, emphasizing that tax regulations issued by the Secretary of Finance are to be respected unless inconsistent with the National Internal Revenue Code (NIRC). Ultimately, the Court denied Gulf Air’s petition, reinforcing the principle that tax refunds are construed strictly against the taxpayer.

CAB-Approved Fares vs. Actual Revenue: How Should Airlines Be Taxed?

The case originated from a deficiency percentage tax assessment issued against Gulf Air Company, Philippine Branch (GF) for the first, second, and fourth quarters of 2000. GF contested this assessment, arguing that the “gross receipts” used to compute the 3% percentage tax under Section 118(A) of the 1997 National Internal Revenue Code (NIRC) should be based on the actual amount they received, not the fares approved by the CAB. This led to a legal battle that ultimately reached the Supreme Court, requiring a close examination of tax regulations and their interpretation.

At the heart of the dispute was the interpretation of “gross receipts.” GF insisted that it should be based on the “net net” amount – the amount actually received, derived, collected, and realized from passengers, cargo, and excess baggage. They claimed that the CAB-approved fares were merely notional and did not reflect the actual revenue they derived from their business as an international air carrier. To support their argument, GF pointed to Revenue Regulations No. 15-2002, which they believed validated their construction of “gross receipts.”

However, the Court clarified that Revenue Regulations No. 6-66 was the prevailing rule during the taxable period in question. This regulation explicitly stated that gross receipts should be computed based on the cost of the single one-way fare as approved by the CAB. Section 5 of Revenue Regulations No. 6-66 provides:

Sec. 5. Gross Receipts, how determined. – The total amount of gross receipts derived from passage of persons, excess baggage, freight or cargo, including, mail cargo, 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, shall be subject to the common carrier’s percentage tax (Sec. 192, Tax Code). The gross receipts shall be computed on the cost of the single one way fare as approved by the Civil Aeronautics Board on the continuous and uninterrupted flight of passengers, excess baggage, freight or cargo, including mail, as reflected on the plane manifest of the carrier.

The Court emphasized that while Revenue Regulations No. 15-2002, which took effect later, did provide a different method for calculating gross receipts, it could not be applied retroactively to the taxable period in question. The Supreme Court cited BPI Leasing Corporation v. Court of Appeals, stating that tax laws, including rules and regulations, operate prospectively unless otherwise legislatively intended by express terms or by necessary implication. The petitioner also admitted that they did not seek the retroactive application of Revenue Regulations No. 15-2002.

The Court also addressed GF’s argument that Revenue Regulations No. 6-66 was inconsistent with Section 118(A) of the NIRC. The Supreme Court underscored that rules and regulations interpreting the tax code, promulgated by the Secretary of Finance, are to be given significant weight and respect, citing Chamber of Real Estate and Builders’ Associations, Inc. v. The Hon. Executive Secretary Alberto Romulo:

…deserve to be given weight and respect by the courts in view of the rule-making authority given to those who formulate them and their specific expertise in their respective fields.

Absent any clear inconsistency between Revenue Regulations No. 6-66 and the NIRC, the Court upheld its validity and applied it accordingly. Furthermore, the principle of legislative approval by re-enactment supported the validity of the regulations. The Court noted that the provision on common carrier’s tax, found in Section 192 of Commonwealth Act No. 466 (National Internal Revenue Code of 1939), had been substantially reproduced with every amendment of the NIRC, up until its recent reincarnation in Section 118. This indicated that the legislature was aware of the existing revenue regulations and implicitly endorsed their interpretation of the NIRC.

The Court also addressed Gulf Air’s claim for a tax refund, reminding that tax refunds are akin to tax exemptions, which are strictly construed against the taxpayer and liberally in favor of the State. The taxpayer must unequivocally prove their entitlement to a refund. Since GF failed to provide such clear proof, their claim was denied.

FAQs

What was the key issue in this case?	The central issue was the definition of “gross receipts” for calculating the 3% percentage tax on international air carriers under Section 118(A) of the 1997 NIRC. The dispute centered on whether to base this calculation on CAB-approved fares or the actual revenue received by the airline.
What is Revenue Regulations No. 6-66?	Revenue Regulations No. 6-66 is a regulation that stipulates how to determine gross receipts for common carrier’s tax purposes. It states that gross receipts should be computed based on the cost of a single one-way fare as approved by the Civil Aeronautics Board (CAB).
What is Revenue Regulations No. 15-2002?	Revenue Regulations No. 15-2002 is a later regulation that prescribes “gross receipts” for the purpose of determining Common Carrier’s Tax shall be the same as the tax base for calculating Gross Philippine Billings Tax. It computes gross revenues based on the actual amount received by the airline company as reflected on the plane ticket.
Why was Revenue Regulations No. 6-66 applied in this case?	Revenue Regulations No. 6-66 was applied because it was the prevailing rule during the taxable period in question (first, second, and fourth quarters of 2000). Although Revenue Regulations No. 15-2002 provided a different method, it could not be applied retroactively.
What does the principle of legislative approval by re-enactment mean?	This principle means that when a statute is interpreted by a government agency and the legislature re-enacts the statute without substantial change, it confirms that the agency’s interpretation aligns with the legislative purpose. This was applied to support the validity of Revenue Regulations No. 6-66.
Why are tax refunds construed strictly against the taxpayer?	Tax refunds are viewed as tax exemptions, which are a derogation of the State’s power of taxation. Therefore, the burden is on the taxpayer to unequivocally prove their entitlement to a refund, as exemptions are construed strictly against the claimant.
What was Gulf Air’s main argument in this case?	Gulf Air argued that “gross receipts” should be based on the actual amount they received, not the CAB-approved fares. They also argued that Revenue Regulations No. 15-2002 validated their interpretation and that Revenue Regulations No. 6-66 conflicted with Section 118 of the NIRC.
What was the final ruling of the Supreme Court?	The Supreme Court denied Gulf Air’s petition and affirmed the decision of the Court of Tax Appeals. The Court upheld the validity of Revenue Regulations No. 6-66 and its application to the case, requiring Gulf Air to pay the assessed deficiency percentage tax.

In conclusion, the Supreme Court’s decision in Gulf Air Company v. Commissioner of Internal Revenue reinforces the importance of adhering to existing tax regulations and the principle of legislative approval by re-enactment. This ruling underscores that tax regulations issued by the Secretary of Finance deserve deference, and that taxpayers seeking refunds must provide unequivocal proof of their entitlement.

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: GULF AIR COMPANY, PHILIPPINE BRANCH (GF), VS. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 182045, September 19, 2012