BIR Ruling [DA-209-04]

April 12, 2004 BIR RULING [DA-209-04] S. 28 (A) (3); 120-86/7-22-86 Quisumbing Torres 11th Floor, Pacific Star Building Makati Ave. cor. Sen. Gil J. Puyat Makati City Attention: Dennis G. Dimagiba Lou Zelie M. Salanga Gentlemen : This refers to your letter dated May 22, 2002 requesting, on behalf of your client, United Airlines, Inc. (UAL for brevity) for a confirmation of your opinion that the gross revenue of international air carriers that are not 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 do not form part of "Gross Philippine Billings" and hence, are not subject to Philippine income tax imposed under Section 28(A)(3) of the 1997 Tax Code. You further request confirmation that such gross revenue of offline international air carriers are not subject to creditable withholding tax under Section 57 of the 1997 Tax Code and Revenue Regulations No. 2-98, as amended. The facts, as you represent, are as follows: UAL is a corporation organized and existing under the laws of the State of Delaware, U.S.A. and is engaged in the international airline business. It used to be an online international carrier of passenger and cargo, i.e., it used to operate passenger and cargo flights originating from the Philippines. UAL ceased operating passenger flights to and from the Philippines beginning 21 February 1998. Upon cessation of passenger flights into and out of the Philippines; UAI appointed a general sales agent in the Philippines Aerotel LTD., Corp. (Aerotel for brevity). On 31 January 2001, UAL also ceased operating cargo flights from the Philippines. Notwithstanding the cessation of passenger and cargo flights originating from the Philippines, Aerotel and other airlines with an interline arrangement with UAL, continued to sell UAL passenger and cargo tickets in the Philippines, which were serviced by UAL airplanes beginning on transshipment points outside the Philippines and on flight legs that originated elsewhere. As a general sales agent, Aerotel sells passage tickets in the Philippines and complies with the BIR's reportorial and filing requirements on behalf of UAL. Aerotel is an independent general sales agent in the Philippines, representing several international airline companies. Since UAL does not operate flights originating from the Philippines, you believe that UAL does not derive revenues or Gross Philippine Billings from the carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, under Section 28(A)(3)(a) of the 1997 Tax Code. Hence, revenues from the sale of passenger and cargo tickets sold by Aerotel and other airlines with an interline arrangement with UAL are not subject to Philippine income tax. In reply, please be informed that under Section 28 (A)(3) of the 1997 Tax Code, in relation to Article 9 of the Convention between the Government of the Republic of the Philippines and the Government of the United States of America with respect to Taxes on Income (RP-US Tax Treaty for brevity), an international carrier which is resident of the United States, shall pay a tax of 1 % on its Gross Philippine Billings. The 1997 Tax Code defines the term "Gross Philippine Billings" as follows: `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 they 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.' (Emphasis supplied) Under the aforesaid definition, for Passenger and Cargo Revenues form part of Gross Philippine Billings, such revenues must be derived from the carriage of persons and the carriage of cargo originating from the Philippines in a continuous and uninterrupted flight. This rule applies irrespective of the plane of sale or issue and the place of payment of the tickets or passage documents. It is important to note that the definition of `Gross Philippine Billings' under the 1997 Tax Code differs significantly from the definition under the National Internal Revenue Code of 1977 ("1977 Tax Code"). The 1993 and 1977 Tax Codes provided that: ` Gross Philippine Billings' mean gross revenue realized from uplifts of passengers anywhere in the world and excess baggage, cargo and mail originating from the Philippines, covered by passage documents sold in the Philippines : Provided, That documents sold outside the Philippines under a "prepaid ticket advice" scheme for passengers originating from the Philippines shall be considered as documents sold in the Philippines. Gross revenue from chartered flights originating from the Philippines shall likewise form part of the "Gross Philippine Billings" regardless of the place of sale or payment of the passage documents. For purposes of determining the taxability of revenue from chartered flights, the term `originating from the Philippines' shall include flights of passengers who stay in the Philippines for more than forty-eight (48) hours prior to embarkation.' (Emphasis supplied) The change it the definition of `Gross Philippine Billings' expresses the legislative intent to treat Gross Philippine Billings as income from services, i.e. , from the carriage of persons and cargo, not from the sale of tickets, and to include only revenue from the carriage of persons and cargo originating from the Philippines. In this connection, it has been held that the important factor that determines the source of income from services, for purposes of income taxation, is the place where services are actually rendered. In fact, Section 42 of the 1997 Tax Code provides that compensation for labor or services performed in the Philippines shall be treated as gross income from sources within the Philippines while compensation for labor or personal services performed without the Philippines shall be treated as income from sources without the Philippines. The legislative intent in changing the definition of `Gross Philippine Billings' is manifest in the deliberation of the Bicameral Conference Committee on House Bill No. 9077 (Comprehensive Tax Reform Program), which eventually became the 1997 Tax Code. According to Senator Enrile, "The gross Philippine billings of international air carriers must refer to flown revenue because this is an income from services and this will make the determination of the tax base a lot easier by following the same rule in determining the liability of the carrier for common carrier's tax ." (Minutes of the Bicameral Conference Committee on House Bill No. 9077 [Comprehensive Tax Reform Program), 10 October 1997, pp. 1920] (Emphasis supplied). Senator Enrile's ratiocination that gross Philippine billings must refer to "flown revenue because this is an income from services" clearly expenses the legislative intent to treat the gross revenue derived from air carriage as income from services and the carriage of passenger or cargo as the activity or service that generates the income. In this connection, it is imperative to call to mind the established principle in income taxation that the situs of taxation of income from services is the place where the services are actually rendered. ( American Airlines, Inc. v. Collector of Internal Revenue , CTA Case No. 3046, 16 April 1984 citing Mertens, Laws of Federal Taxation, Vol. 8, Chapter 45, p. 141). Applying this principle, it bears to note that Section 42 of the 1998 Tax Code provides that compensation for labor or personal services performed in the Philippines shall be treated a gross income from sources within the Philippines while compensation for labor or personal services performed without the Philippines shall be treated as income from sources without the Philippines. Moreover, Senator Enrile's pronouncement in the Bicameral Conference cited above that the change in the definition of `Gross Philippine Billings' "will make the determination of the tax base a lot easier by following the same rule in determining the liability of the carrier for common carrier's tax," also reflects the legislative intent to subject to income tax only the gross revenue derived from the carriage of persons and cargo originating from the Philippines. This legislative intent is obvious in view of the nature of common carrier's tax and how the Philippine government determines the liability for such tax. The Supreme Court had the occasion to enunciate the nature of common carrier's tax in the case of Japan Airlines, Inc. v. Commissioner of Internal Revenue (G.R. No. L-30041 dated 3 February 1969), reiterated in Commissioner of Internal Revenue v. Japan Air Lines, Inc. (G.R. No. 60714 dated 4 October 1991 and Commissioner of Internal Revenue v. British Overseas Airways Corporation (G.R. No. L-65773-74 dated 30 April 1987).' In the cited cases, the Supreme Court affirmed the ruling of the Court of Tax Appeals that the mere sale of tickets, unaccompanied by the physical act of carriage of transportation, does not render the taxpayer therein subject to the common carrier's tax. The Supreme Court stated that the common carrier's tax is an excise tax, being a tax on the activity of transporting, conveying or removing passengers and cargo from one place to another. It purports to tax the business of transportation. Being an excise tax, the same can be levied by the State only when the acts, privileges or businesses are done or performed within the jurisdiction of the Philippines. For purposes of imposing the common carrier's tax, this Office has consistently ruled that common carrier's tax on international air and shipping carriers is imposed on gross receipts derived from outgoing freight and passenger service, i.e., originating from the Philippines ( BIR Ruling No. 120-86 dated 22 July 1986; BIR ruling No. 019, s. 1968 ). Evidently, by applying the rules on common carrier's tax, the legislative policy in the new definition of "Gross Philippine Billings" under the 1997 Tax Code is subject to income tax only the gross revenue derived from the carriage of persons and cargo originating from the Philippines. UAL's claim also finds support in the RP-US Tax Treaty. Article 9 of the RP-US Tax Treaty provides that profits derived by a resident of one of the Contracting States from sources within the other Contracting State from the operation of aircraft in international traffic may be taxed by the other Contracting State. However, Article 4 of the RP-US Tax Treaty, in defining the source of income, provides that: "Gross revenue from the operation of ships in international traffic shall be treated as income from sources within a Contracting State to the extent that they are derived from outgoing traffic is originating in that State ." (Emphasis supplied) Anent your request for confirmation that such gross revenue of offline international air carriers are not subject to creditable withholding tax under Section 57 of the 1997 Tax Code and Revenue Regulations No. 2-98, as amended, Revenue Regulations No. 2-98, as amended by Revenue Regulations Nos. 6-01 and 12-01, in relation to Section 57 of the 1997 Tax Code generally requires payors to withhold a creditable income tax from its income payments to persons residing in the Philippines. However from the time UAL became an off-line cargo carrier, its freight or cargo revenues do not form part of its Gross Philippine Billings. Thus, such revenues are not subject to income tax. CTSDAI Consequently, there is no liability to pay the 1 % (under the RP-US Tax Treaty) income tax on Gross Philippine Billings if the carriage of persons, excess baggage, cargo and mail does not originate from the Philippines in a continuous and uninterrupted flight. Thus, passenger and freight charges paid to UAL are not subject to income tax and therefore, should not be subject to any creditable withholding income tax. Hence, no deductions for such creditable withholding taxes should be made from the passenger and cargo charges due to UAL. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group