BIR Ruling [DA-393-05]

September 20, 2005 BIR RULING [DA-393-05] 195; R.A. 7151; #097-94; #072-91; #007-2000; DA-107-2001; DA-285-2003 Romulo Mabanta Buenaventura Sayoc & de los Angeles 30/F Citibank Tower 8741 Paseo de Roxas Makati City Attention: Attys. Perry L. Pe and Jayson L. Fernandez Gentlemen : This refers to your letter dated September 5, 2005, requesting confirmation of your opinion that the chattel mortgage to be constituted over the twelve (12) Airbus A319-100 aircraft to be acquired by Cebu Air, Inc. (Cebu Pacific) in connection with its refleeting program is exempt from the documentary stamp tax (DST) imposed under Section 195 of the National Internal Revenue Code ("NIRC"), as amended by Republic Act No. 9243. It is represented that Cebu Pacific is a corporation organized and existing under the laws of the Republic of the Philippines; that it is the holder of a legislative franchise granted under Republic Act No. 7151 to establish, operate and maintain transport services for the carriage of passengers, mail, goods and property by air, both domestic and international, with Cebu as its base; that as part of its long-term refleeting and modernization program, Cebu Pacific executed an Aircraft Purchase Agreement with Airbus S.A.S. over twelve (12) A319-100 aircraft for use in both its domestic and international operations; that financing for the transaction will be provided by various French, German and British financial institutions with payments under the relevant loan agreements guaranteed or insured with COFACE, Euler Hermes and Export Credits Guarantee Department (ECDG); that to comply with one of the lenders' conditions for the extension of the loan package, Cebu Pacific assigned the Aircraft Purchase Agreement to a special purpose corporation (SPC) domiciled outside the Philippines which shall hold title to the aircraft and act as the borrower under the relevant loan agreements; that Cebu Pacific shall then enter into a finance lease arrangement with SPC; and that as the ultimate borrower in the above-described financing transaction, Cebu Pacific has assumed and will bear all the costs relating to the registration and any applicable taxes of the chattel mortgage and other security documents to be constituted over the aircraft by SPC in favor of the lenders. aCIHAD In the light of the foregoing, you now request for confirmation of your opinion that no DST is due on the finance lease agreement between SPC and Cebu Pacific and on the chattel mortgage and other security arrangements to be constituted over the aircraft in favor of the lenders pursuant to Sec. 11 of Republic Act No. 7151 in relation to Sec. 13 of Presidential Decree No. 1590. In reply, please be informed that under the pertinent provisions of Section 11 of RA No. 7151 (franchise of Cebu Pacific) in relation to Section 13 of PD 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 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 on revenue earned from activities other than air transportation." (Section 11, Republic Act No. 7151; underscoring ours) "Sec. 13. (Philippine Airlines 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 percent (2%) of the gross revenues derived by the grantee from all sources, without distinction as to the transport or nontransport corporation provided that with respect to international air transport service, only the gross passengers, 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 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, now or in the future . . ." (Sec. 13(b), PD No. 1590) the tax exemption privileges granted to Philippine Airlines, Inc. (PAL) shall automatically become part of Cebu Pacific's franchise and shall operate equally in Cebu Pacific's favor ( BIR Ruling No. 3-95 dated January 6, 1995 ). IEcDCa In BIR Ruling No. 097-94 dated April 13, 1994, this office ruled that: ". . . , the payment by PAL of 2% franchise tax based on gross revenues shall be in lieu of all taxes, and therefore, documentary stamp tax which is excluded in the enumeration of taxes it shall pay is deemed included in the term taxes of the "in-lieu of" clause to which PAL shall not be subject. In view of the foregoing, your request for reconsideration is hereby granted. Accordingly, since PAL is exempt from documentary stamp tax, the Philippine National Bank, Landbank and such other banks in whose favor the promissory notes and/or documents are executed by PAL, shall be liable for the payment of the corresponding documentary stamp taxes pursuant to Section 173 of the Tax Code which provides that "whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax." The foregoing ruling was reaffirmed in BIR Ruling No. DA-285-03 dated August 29, 2003, when this office stated: "WHEREFORE, this Office holds that BIR Ruling No. 097-94 dated April 13, 1994 exempting PAL from the payment of documentary stamp tax on bank notes and other documents is still true and correct." A finance lease is essentially a mode of extending credit, similar to a direct loan (ITAD Ruling No. 135-03 dated August 29, 2003). In BA Finance Corporation v. Hon. Intermediate Appellate Court and Rene Tan (G.R. No. 76497 [1993]), the Supreme Court explained the nature of a financing lease contract, to wit: "The sale of the equipment by the supplier thereof to the financial lessor and the latter's legal ownership thereof are intended to secure the repayment over time of the purchase price of the equipment, plus financing charges, though the payment of lease rentals; that legal title is the upfront security held by the financial lessor, a security probably superior in some instances to a chattel mortgagee's lien." Since Cebu Pacific is entitled to all the tax exemption benefits enjoyed by PAL pursuant to the ipso facto clause under Section 11 of RA No. 7151 no DST is due on the finance lease to be executed between SPC and Cebu Pacific and on the chattel mortgage and other security documents to be constituted over the twelve Airbus A319-100 aircraft in favor of the lenders pursuant to Section 11 of RA No. 7151 in relation to Section 13 of PD No. 1590. Section 173 of the Tax Code states that whenever one party to the taxable document enjoys exemption from documentary stamp taxes, the other party who is not exempt shall be the one directly liable for the tax. However, no documentary stamp tax will be imposed where such other contracting party is likewise exempt from liability for documentary stamp taxes. Since the lenders and the SPC are all non-resident foreign corporations, they are not liable to pay the documentary stamp tax that may be due on the finance lease and the chattel mortgage and other security arrangements because such non-resident entities are beyond the Philippine taxing jurisdiction. This follows from the inherent limitation of taxation it can only be exercised within the territorial jurisdiction of the taxing authority. ( BIR Ruling No. DA-107-2001 dated June 1, 2001 ) 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. CcSTHI Very truly yours, (SGD.) JOSE MARIO C. BUAG OIC, Commissioner of Internal Revenue