Philippine Airlines

May 25, 2009 BIR RULING [DA-(EXT-002) 248-09] 129; 135 (a); #190-91; DA-038-98; #001-2004; DA-427-2004; DA-438-2005 Philippine Airlines Post Office Box 1344 Makati City Attention: Mr. Jaime J. Bautista President & Chief Operations Officer and Mr. Roberto Cecilio O. Lim VP-Legal Affairs & Corporate Compliance Officer Gentlemen : This refers to your letter dated April 27, 2009 requesting for confirmation that Philippine Airlines, Inc. (PAL) aviation fuel uplifts for its (i) international route/voyage particularly flights originating in the Philippines bound for Taiwan (Manila-Taiwan flights), (ii) and/or all other flights originating in the Philippines for international destination from within the Philippines purchased or sourced from a domestic/local manufacturer/seller are not subject to excise taxes pursuant to Section 135 (a) in relation to Section 129 of the National Internal Revenue Code (NIRC) of 1997, as amended. Background: PAL is a corporation organized and existing under the laws of the Republic of the Philippines. It was incorporated on February 25, 1941 by way of franchise under Presidential Decree No. 1590 valid up to year 2034. It is the national flag carrier of the Philippines, the principal activity of which is to provide air transportation for passengers and cargo within and outside the country. Just like any other airline, bulk of its operational costs is for the purchase of aviation fuel for its aircraft fleet. Fuel uplifts or aviation fuel loaded into PAL planes originating in the Philippines for foreign destinations is sourced (locally) from a domestic manufacturer/supplier. In reply, please be informed that Section 135 of the Tax Code of 1997, as amended, states "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; EICSTa (b) Exempt entities or agencies covered by tax treaties, conventions and other international agreements for their use of 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 . . ." In BIR Ruling No. DA-438-2005 dated October 21, 2005, it was ruled that: "After a careful scrutiny of the above-cited provisions of Section 135 of the Tax Code of 1997, in relation to Section 11 of R.A. 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 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; 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) " (Emphasis supplied) ScCIaA Likewise, in BIR Ruling No. 001-2004 dated January 12, 2004, the same conditions were laid down in the case of Caltex (Philippines) Inc., to wit: "Based on the foregoing, it is our opinion that the sale of petroleum products to international marine vessels shall be exempt from excise tax if and only if the following conditions laid down in the Petroleum Products Regulations (Revenue Regulations (RR) 13-77 as amended by RR No. 5-78) are present: 1. The petroleum products are sold or to be sold directly to an international carrier (Section 135 of the Tax Code of 1997) ; 2. The international carrier shall utilize such petroleum products for their use or consumption outside the Philippines (Section 135(A) of the Tax Code of 1997); 3. The country of the international carrier to whom the petroleum products are sold, exempts from tax petroleum products sold to Philippine carriers (Section 135(B) of the Tax Code of 1997; Section 2 of Revenue Regulations No. 13-77 as amended by Revenue Regulations No. 5-78) ;" (Emphasis supplied) From the afore-quoted Tax Code provision and BIR Rulings, it is clear that aviation fuel purchased and/or sourced from a domestic/local manufacturer/seller by an international carrier of Philippine Registry for its international flights outside of the Philippine territory, like PAL, is not subject to excise tax. In view of the foregoing, this Office is of the opinion that the aviation fuel uplifts of PAL for its international route/voyage particularly flights originating in the Philippines bound for Taiwan (Manila-Taiwan flights) and/or all other flights originating in the Philippines for international destination from within the Philippines purchased or sourced from a domestic/local manufacturer/seller are not subject to excise taxes pursuant to Section 135 (a), subject to the conditions laid down in BIR Ruling No. DA-438-2005 dated October 21, 2005. SEDICa 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service