Non-Inclusion of Machinery in Assessment of, and Tax on, Real and Personal Property

November 23, 2005 ITAD RULING NO. 142-05 Sycip Gorres Velayo & Co . 6760 Ayala Avenue 1226 Makati City Attention: Atty. Romulo S. Danao, Jr. Partner, Tax Services Gentlemen : This refers to your letter dated July 29, 2005 requesting confirmation that the gross revenues derived from sources in the Philippines of Singapore Airlines Cargo Pte. Ltd. (Singapore Airlines), through its branch, Singapore Airlines Cargo Pte. Ltd, Philippine Branch (Philippine Branch) , are subject to one and one-half percent (1 1/2%) income tax pursuant to Article 8 (Shipping and Air Transport) of the Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Philippines-Singapore tax treaty), and a refund and/or tax credit of the amount of PHP5,713,743.86 representing overpaid income tax of the Philippine Branch for the fiscal year ending March 31, 2004. It is represented that Singapore Airlines is a foreign corporation, organized and existing under the laws of Singapore, with principal office at 05-J, Airfreight Terminal 5, 30 Airline Road Singapore 819830, as confirmed by its Application with the Securities and Exchange Commission to Establish a Branch Office in the Philippines dated June 1, 2001; that Singapore Airlines ' primary activity is to establish, develop and carry on a business of airline transport and carriage of freight, as confirmed by the relevant Certificate dated June 22, 2005 issued by the Singapore Accounting and Corporate Regulatory Authority; that Singapore Airlines is duly licensed by the Securities and Exchange Commission (Commission) to establish a branch office in the Philippines ( Philippine Branch ) to engage in the business of transportation of airfreight and mail without operating domestic freighter flights, as confirmed by the License To Transact Business In the Philippines dated June 19, 2001 issued by the Commission; and that the registered address of the Philippine Branch is at the 2nd Floor, PAIR-PAGS Center, Ninoy Aquino Avenue, Pasay City 1300, Philippines. In reply, please be informed that paragraph 1, Article 8 (Shipping and Air Transport) of the Philippines-Singapore tax treaty provides: " Article 8 SHIPPING AND AIR TRANSPORT 1. 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 whichever is the lesser of either AHTICD a) one and one-half per cent of the gross revenues derived from sources in that State; or b) the lowest rate of Philippine tax that may be imposed on profits of the same kind derived under similar circumstances by a resident of a third State . xxx xxx xxx" Paragraph 1 states that profits derived by Singapore Airlines from the operation of aircraft in international traffic from sources in the Philippines may be taxed in the Philippines at the rate of one and one-half percent (1 1/2%) or at the lowest rate imposed by the Philippines on such profits derived under similar circumstances by a resident of a third State (the most-favored-nation tax rate). Accordingly, since the Philippines, as of this date, has not yet granted to a resident of a third State a most-favored-nation tax rate on profits from the operation of aircraft in international traffic, such profits derived by Singapore Airlines from sources within the Philippines shall be subject to 1 1/2% income tax, based on the gross amount thereof. (BIR Ruling No. DA-ITAD 91-04 dated August 31, 2004) The term "profits" as used in paragraph 2 of Article 8, although for tax treaty purposes may include profits other than those from the carriage of passengers and cargoes (e.g., profits from the sale of passage tickets on behalf of other enterprises and profits from the transportation of goods by a truck connecting a depot with an airport), shall mean only profits as described in Section 28(A)(3)(a) of the National Internal Revenue Code of 1997 (Tax Code) (as explained in detail in Revenue Regulations No. 15-02 1 dated May 30, 2002): "SEC. 28. Rates of Income Tax on Foreign Corporations . (A) Tax on Resident Foreign Corporations . xxx xxx xxx (3) International Carrier . An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 1/2%) on its 'Gross Philippine billings' as defined hereunder: (a) International Air Carrier . 'Gross Philippine Billings' refers to the amount of gross revenue derived from the 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; Provided, that tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further, That for a flight which originates from the Philippine, but transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings. SEcTHA xxx xxx xxx" Any profits outside the scope of Gross Philippine Billings shall not be subject to the preferential rate of 1 1/2% but to the rate of 32%, the tax rate imposed on the taxable income of a resident foreign corporation under Section 28(A)(1) of the Tax Code: "SEC. 28. Rates of Income Tax on Foreign Corporations . (A) Tax on Resident Foreign Corporations . (1) In General . Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 199, the rate shall be thirty-three (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). xxx xxx xxx" 2 Finally, aside from income tax, the Philippine Branch is liable to pay a tax of three percent (3%) of its quarterly gross receipts, under Section 118 of the Tax Code: "SEC. 118. Percentage Tax on International Carriers . (A) International air carriers doing business in the Philippines shall pay a tax of three percent (3%) of their quarterly gross receipts . xxx xxx xxx" The base of the tax shall be the same as that for the 1 1/2% income tax on Gross Philippine Billings, as mentioned in Section 10 of Revenue Regulations No. 15-02. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. On the other hand, the determination on whether your request for tax refund should be given due course is upon the Office which will be conducting the investigation for that purpose. Thus, the docket pertaining thereto (including a copy of this ruling) shall be endorsed to the proper Office for processing and investigation. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner, Legal Service Footnotes 1. Revenue Regulations Governing the Imposition of Income Tax on the Gross Philippine Billings, Other Income of International Air Carriers and Common Carrier's Tax Pursuant to Section 28(A)(3)(a), 28(A)(1), and 118 of the National Internal Revenue Code of 1997 as well as the Manner of Claiming Deductions on Travel Expenses and Freight Charges Incurred Pursuant to Section 32 of the Same Code. 2. Republic Act No. 9337 (An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 151, 236, 237 And 288 Of The National Internal Revenue Code Of 1997, As Amended, And For Other Purposes), which was signed into law on May 24, 2005, amends Section 28(A), thus: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Resident Foreign Corporations. (1) In General . Except as otherwise provided in this Code, a corporation organized, authorized or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx