BIR Ruling [DA-438-05]

October 21, 2005 BIR RULING [DA-438-05] 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 19, 2005, requesting confirmation of your opinion that the petroleum products imported by Cebu Air, Inc. ("Cebu Pacific") from abroad for use in its international operations are exempt from the payment of all taxes imposed under the National Internal Revenue Code of 1997. 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; and that in order to maintain its competitiveness in the market and to assure the riding public of the most reasonable air fares, Cebu Pacific imports aviation gas, fuel, oil and other petroleum products for use in its international operations. In reply, please be informed that Section 135 of the Tax Code of 1997 provides that: "SEC. 135. Petroleum Products Sold to International Carriers and Exempt Entities or Agencies . Petroleum products sold to the following are exempt from excise tax: (a) International carriers of Philippine or foreign registry on their use or consumption outside the Philippines: Provided, That the petroleum products sold to these international carriers shall be stored in a bonded storage tank and may be disposed of only in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner; (b) Exempt entities or agencies covered by tax treaties, conventions and other international agreements for their use or consumption: Provided, however, That the country of said foreign international carrier or exempt entities or agencies exempts from similar taxes petroleum products sold to Philippine carriers, entities or agencies; and aIEDAC (c) Entities which are by law exempt from direct and indirect taxes." Furthermore, Section 11 of Republic Act (RA) No. 7151, otherwise known as "An Act Granting Cebu Air, Inc., a Franchise 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", also provides that: "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." (Underscoring ours) After a careful scrutiny of the above-cited provisions of Section 135 of the Tax Code of 1997, in relation to Section 11 of RA No. 7151, this Office opines that to be entitled to exemption from the excise tax imposed therein, the following must be present: (1) the petroleum products are sold to an international carrier for its use and consumption outside the Philippines; (2) that the petroleum products sold to these international carriers shall be stored in a bonded storage tank aid may be disposed of only in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner; and (3) that in the case of international, carriers of foreign registry, the country of said foreign international carrier exempts from similar taxes petroleum products sold to Philippine carriers. The language of Section 135(a) of the Tax Code of 1997 is broad enough to include petroleum products sold by nonresidents to an international carrier of Philippine registry such as Cebu Pacific for use in its international flights. There is nothing in the aforesaid provision of the Tax Code that requires that the sale, to be exempt from excise tax, be made by a domestic corporation to the international carrier or that the same take place within the Philippines. Settled is the rule that where the law does not distinguish, we should not distinguish. (Colgate-Palmolive (Phils.), Inc. vs. Gimenez ,1 SCRA 267 [1961]).The obvious intent of the law is to grant the exemption to the international air carrier and not to the seller of the petroleum products. This is because the excise tax is essentially an indirect tax which is borne by the purchaser or consumer although collected from the seller. ( BIR Ruling No. 201-99 dated December 16, 1999 ) Thus, to impose an excise tax on petroleum products directly imported from abroad by international carriers such as Cebu Pacific would render for naught the intention of Section 135(a) of the Tax Code exempting petroleum products purchased by international carriers from excise tax. ( See BIR Ruling Nos. DA-427-04 dated August 10, 2004; DA-038-98 dated February 5, 1998 ) In view of the foregoing, this Office holds that the petroleum products imported by Cebu Pacific for use in its international operations is exempt from specific and ad valorem taxes imposed under the Tax Code of 1997 pursuant to Section 135(a) of the same Code, as. implemented by Revenue Regulations No. 13-77, as amended by Revenue Regulations No. 5-78. Very truly yours, (SGD.) JOSE MARIO C. BUAG OIC, Commissioner of Internal Revenue