BIR Ruling [DA-219-97]

June 6, 1997 BIR RULING [DA-219-97] Romulo, Mabanta, Buenaventura Sayoc & de los Angeles Attorneys at Law 30th Floor, Citibank Tower 8741 Paseo de Roxas Makati City Attention: Attys . Perry L . Pe, Amado R . Santiago III & Jayson L . Fernandez Gentlemen : This refers to your letter dated May 16, 1997, requesting for confirmation that the importation of aircraft equipment , engines, machinery, spare parts and accessories by your client, Cebu Air, Inc. (CAI), is exempt from value-added tax. It appears that CAI is a grantee of a legislative franchise under R.A. No. 7151 approved on August 30, 1991 primarily to establish, operate and maintain transport services for the carriage of passengers, mail, goods and property by air domestic and international, with Cebu as its base; that as part of CAI's expansion program it intends to import, either by purchase or lease, various aircraft (such as Boeing 747, 757 & 767; Airbus 310 & 320; DC 10 and MD 11) for use in both its domestic and international operations as additions to its existing fleet of seven (7) DC-9-32 aircraft; that CAI also intends to import various aircraft equipment, engines, machinery, spare parts, and accessories which are necessary for its day to day operations to ensure the safety and worthiness of its various aircraft; that such aircraft, aircraft equipment engines, machinery, spare parts, and accessories are not available in the Philippines in reasonable quantity, quality, or price. cdta In reply, please be informed that under Section 11 of R.A. 7151 (franchise of CAI) which provides for the tax provisions of CAI, it reads: "Sec. 11. Tax Provisions . The grantee shall pay to the Philippine Government during the life of this franchise tax of five (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 provision shall be deemed ipso facto part hereof and 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 laws revenues earned from activities other than air transportation." (Emphasis ours.) The underscored second paragraph of the above-quoted provision should be read in conjunction with Section 13 of P.D. No. 1590 (franchise of Philippine Airlines) which expressly sets forth the grant of exemption to PAL from all taxes, save those mentioned therein, to wit: "Sec. 13. 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) The basic corporate income tax based on the grantee's annual net taxable income computed in accordance with the provision of the national Internal Revenue Code; or (b) A franchise tax of two percent (2%) of the gross revenue derived by the grantees from all sources, without distinction as to transport or nontransport service, only the gross passengers, mail, and freight revenues from its outgoing flights shall be subject to this tax. cdtech 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 fees and charges of any kind, nature or description, imposed, levied, established, assessed, or collected by any municipal, city, provincial, or national authority or government agency, nor or in the future including but not limited to the following : (1) . . . (2) All taxes, including compensating taxes, duties, charges, royalties, or fees due on all importations by the grantee of aircraft, engines, equipment, machinery, spare parts, accessories, commissary and catering supplies aviation gas, fuel and oil, whether refined or in the crude form and other articles, supplies, or materials ; provided, that such articles or supplies or materials are imported for the use of the grantee in its transport and nontransport operations and other activities incidental thereto and are not locally available in reasonable quantity, quality, or price. xxx xxx xxx (Emphasis ours.) Read together, therefore, the grant of tax exemption privileges to Philippine Airlines, particularly the exemption from all taxes on all importation of aircraft, engines, equipment, machinery, spare parts, accessories and other articles, supplies, or materials, should be extended to Cebu Air, Inc. (CAI), your client being a competitor of PAL in the industry. Such being the case and based on the aforequoted provisions, the importation of aircraft, aircraft equipment, engines, machinery, spare parts and accessories by CAI is not subject to the value-added tax imposed under Section 101 (a) of the Tax Code, as amended by R.A. Nos. 7716 and 8241. (BIR Ruling No. 3-95, January 6, 1995) aisadc Very truly yours, SIXTO S. ESQUIVIAS IV OIC, Assistant Commissioner (Legal Service) By: ESTHER R. IBAEZ OIC-Head Revenue Executive Assistant (Legal Service)