BIR Ruling [DA-154-04]

March 31, 2004 BIR RULING [DA-154-04] Punongbayan & Araullo 20th Floor, Tower I The Enterprise Center 6766 Ayala Avenue Makati City Attention: Atty. Romeo H. Duran Tax Principal Gentlemen : This refers to your letter dated February 27, 2004 stating that your client, American Airlines, Inc. (AAI) is a foreign corporation organized and existing under the laws of Delaware, USA; that AAI obtained a Board of Investments (BOI) Certificate of Authority No. 267 as well as a license issued by the Securities and Exchange Commission (SEC) dated July 31, 1973, to establish a liaison office in the Philippines for passenger and freight information and reservation as well as to render ticketing services in the country; that the license to operate a liaison office was granted under Act 1459 of the Philippine Commission, as amended, otherwise known as the Corporation Law of the Philippines: that AAI is an off-line international carrier without any flight originating from or coming into the Philippines: that it has a sales office and a ticket office in the Philippines that there are only minimal sales at its ticket office ( i.e. ,most refund tickets),the bulk of ticket sales being undertaken by designated sales agents in the Philippines; that on December 19, 1989, the Philippine Supreme Court promulgated a decision confirming the validity of an assessment made by the Bureau of Internal Revenue (BIR) which treated AAI as a resident foreign corporation engaged in business in the Philippines and deriving income from Philippine sources and was subjected to income tax on Gross Philippine Billings and common carrier's tax; and that the aforesaid decision of the Supreme Court, contemplated to tax all transactions of an international carrier, including the sale of tickets even in the absence of flight operations within the Philippine territory, because the law then covered all uplifts of passengers anywhere in the world. In connection therewith, you now request for an opinion that based on Revenue Regulations No. 15-02, implementing Sections 28(A)(1) and 28(A)(3)(a) of the Tax Code of 1997, AAI being an international off-line air carrier is considered a non-resident foreign corporation not engaged in trade or business in the Philippines, notwithstanding the sale of AAI tickets in the Philippines, is exempt from the payment of the Gross Philippine Billings (GPB) and the common carrier's tax. In reply thereto, Section 28(A)(3)(a) of the Tax Code of 1997 provides that Gross Philippine Billings' refers to the amount of gross revenue derived from 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 Philippines, 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. Section 2(g) of Revenue Regulations No. 15-02, the phrase "Originating from the Philippines" shall include the following: (1) Where passengers, their excess baggage, cargo and/or mail originally commence their flight from any Philippine port to any other port or point outside the Philippines; (2) Chartered flights of passengers, their excess baggage, cargo and/or mail originally commencing their flights from any foreign port and whose stay in the Philippines is for more than forty-eight (48) hours prior to embarkation save in cases where the flight of the airplane belonging to the same airline company failed to depart within forty-eight (48) hours by reason of force majeure . (3) Chartered flights of passengers, their excess baggage, cargo and/or mail originally commencing their flights from any Philippine port to any foreign port; and (4) Where a passenger, his excess baggage, cargo and/or mail originally commencing his flight from a foreign port alights or is discharged in any Philippine port and thereafter boards or is loaded on another aircraft, owned by the same airline company, the flight from the Philippines to any foreign port shall not be considered originating from the Philippines, unless the time intervening between arrival and departure of said passenger, his excess baggage, cargo and/or mail from the Philippines exceeds forty-eight (48) hours, except, however, when the failure to depart within forty-eight (48) hours is due to reasons beyond his control, such as, when the only next available flight leaves beyond forty-eight (48) hours for by force majeure .Provided, however, that if the second aircraft belongs to a different airline company, the flight from the Philippines to any foreign port shall be considered originating from the Philippines regardless of the intervening period between the arrival and departure from the Philippines by said passenger, his excess baggage, cargo and/or mail. The phrase "Continuous and Uninterrupted Flight" refers to a flight in the carrier of the same airline company from the moment a passenger, excess baggage, cargo, and/or mail is lifted from the Philippines up to the point of final destination of the passenger, excess baggage, cargo and/or mail. The flight is not considered continuous and uninterrupted if transshipment of passenger, excess baggage, cargo and/or mail takes place at any port outside the Philippines on another aircraft belonging to a different airline company. (Sec. 2(h), Rev. Reg. No. 15-02) The above-cited regulations enumerates four (4) distinct and separate circumstances, the presence of any of which immediately gives rise to the presumption that the flight is originating from the Philippines and therefore revenue derived by the said carrier is subject to the 2.5% Gross Philippine Billings, conversely, if the flight is not covered by the exclusive enumeration, it is not considered as originating from the Philippines and consequently not subject to the Gross Philippine Billings imposed under Section 28(A)(3)(a) of the Tax Code of 1997, as implemented by Revenue Regulations No. 15-02. On the other hand, the flight is continuous and uninterrupted from the moment a passenger, excess baggage, cargo, and/or mail is lifted from the Philippines up to the point of final destination, otherwise, it is not considered continuous and uninterrupted if the transshipment takes place at any port outside the Philippines on another aircraft belonging to a different airline company. It is clear from the foregoing that AAI is an off-line carrier, as it is not engaged in continuous and uninterrupted flight originating from the Philippines and consequently does not derive any income subject to the Gross Philippine Billings under Section 28(A)(3)(a) of the Tax Code of 1997. This notwithstanding that AAI has a sales office and ticket office in the Philippines although majority of the ticket sales being undertaken by its agents for as long as the tickets sold are exclusively AAI tickets. SUCH BEING THE CASE, this Office holds that AAI, an off-line international air carrier, is not considered as engaged in business as an international air carrier and therefore not subject to the Gross Philippine Billings tax under Section 28(A)(3)(a) and the Common Carrier's tax under Section 118(A) of the Tax Code of 1997. aEAIDH This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group