BIR Ruling [DA-202-02]

November 13, 2002 BIR RULING [DA-202-02] R.A. 7909 3-95 Pacific Airways Corporation 3110 Domestic Airport Road MIA Pasay City Attention: Mr. Rodolfo A. Isidro President Gentlemen : This refers to your letter dated July 3, 2002 requesting for a ruling that the tax privileges of Philippine Airlines (PAL) as provided in Presidential Decree 1590, PAL's legislative franchise be applied to Pacific Airways Corporation (PACIFICAIR) in view of the parity provision (Section 14) of Republic Act 7909, which grants PACIFICAIR the privilege of parity treatment with those of other airlines presently enjoying benefits. It is represented that PACIFICAIR is a domestic corporation engaged in the business of air transport services for the carriage of passengers, cargo, mail and related services in and between municipalities, cities and provinces, as well as, all points and places throughout the Philippines; that it was granted a legislative franchise by virtue of Republic Act No. 7909, Section 14 which provides: "Sec. 14. This franchise shall not be interpreted to mean as exclusive grant of the privileges herein provided for. However, in the event any competing individual partnership, or corporation shall receive a similar permit or franchise with terms and/or provisions more favorable than those herein granted or which tend to place the grantee herein at any disadvantage, then such terms and/or provisions shall ipso facto become part thereof and shall operate equally in favor of the grantee herein ." that PACIFICAIR's services cover mostly the remote areas of the country not presently serviced by the major airlines; that while these routes are considered unprofitable by the major airlines, nevertheless, PACIFICAIR continues to service these areas, despite difficulties and oftentimes unprofitable flights, just to provide these rural and remote areas much needed access to air transportation; and that government subsidies are not being sought, but only the application of a level playing field for all airlines. In reply, please be informed that in BIR Ruling No. 3-95 dated January 6, 1995, this Office ruled that: "In reply, please be informed that under the pertinent provisions of Section 11 of R.A. No. 7151 in relation to Section 13 of P.D. No. 1590 (franchise of Philippine Airlines) which state as follows: "SEC. 11. Tax Provisions . The grantee shall pay to the Philippine Government during the life of this franchise a franchise tax of five percent (5%) of the gross revenues derived by the grantee from transport operations. " In the event that any competing individual, partnership or corporation receives and enjoys tax privileges and other favorable terms which tend to place the herein grantee at any disadvantage, then such provisions shall operate equally in favor of the grantee . "The grantee shall, however, be subject to income tax levied under Title II of the National Internal Revenue Code, as amended, and tax on its real property under existing revenues earned from activities other than air transportation". (Emphasis ours) "SEC. 13. (PAL's franchise) In consideration of the franchise and rights hereby granted, the grantee shall pay to the Philippine Government during the life of this franchise whichever of subsections (a) and (b) hereunder will result in a lower tax: (a) . . . (b) A franchise tax of two per cent (2%) of the gross revenues derived by the grantee from all sources, without distinction as to transport or non-transport operation, provided, that with respect to international air transport service, only the gross passenger, mail, and freight revenues from its outgoing flights shall be subject to this tax. "The tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes, duties, royalties, registration, license and other charges of any kind, nature and description, imposed levied, established, assessed, or collected by any municipal, city, provincial, or national authority or government agency, now or in the future . . ." the tax exemption privileges granted to Philippine Airlines shall automatically become part of your franchise and shall operate equally in your favor." For this purpose the term "gross revenues" is herein defined as the total gross income earned by the grantee from: (a) transport, non-transport, and other services; (b) earnings realized from investments in money-market placements, bank deposits, investments in shares of stock and other securities, and other investments; (c) total gains net of total losses realized from the disposition of assets and foreign-exchange transactions; and (d) gross income from other sources. ( Sec. 14, P.D. 1590 ) Thus, following the above-mentioned ruling, this Office reiterates that the tax exemption privileges granted to PAL shall automatically become part of PACIFICAIR's franchise and shall operate equally in PACIFICAIR's favor. However, considering that services rendered by PAL on its transport of goods or cargoes is subject to VAT, pursuant to Section 108(A) of the Tax Code of 1997, in relation to Section 109(q) of the same Code, PACIFICAIR shall likewise be subject to VAT on its transport of goods and cargoes. 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, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group