Revocation of BIR Ruling No. 110-99 Re: Tax Exemption of Cebu Air's Petroleum Product Purchases

January 7, 2000 BIR RULING NO. 013-00 R.A. 7151 110-99 013-200 Romulo Mabanta Buenaventura Sayoc & de los Angeles 30th Floor Citibank Tower Paseo de Roxas, Makati City Attention: Attys . Perry L . Pe and Jason L . Fernandez Gentlemen : This refers to BIR Ruling No. 110-99 dated July 20, 1999 wherein this Office ruled that your client, Cebu Air, Inc. (CAI for brevity) is exempt from the payment of all taxes imposed under the National Internal Revenue Code of 1997 on the petroleum products purchased or imported by it for use in its domestic operations. prcd The said ruling, it appears, was issued by virtue of the ipso facto clause under Section 11 of R.A. No. 7151 (franchise of CAI) in relation to Section 13 of P.D. No. 1590 (franchise of Philippine Airlines) whereby CAI is allowed to benefit from the tax privileges being enjoyed by PAL, which includes exemption from all taxes due on all its importations of aircraft, engines, equipment, machinery, spare parts, accessories and other articles, supplies, or materials. After a review thereof, this Office finds that the said ruling has no legal basis. Section 13 of P.D. No. 1590 which contains the tax privileges granted to PAL provides, viz: "Sec. 13. In consideration of the franchise and rights 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 provisions of the National Internal Revenue Code; and cdll (b) A franchise tax of two percent (2%) of the gross revenues derived by the grantee from all sources, without distinction as to transport or non-transport operations, provided, that with respect to international air-transport service, only the gross passenger, 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, including but not limited to the following: "(1) All taxes, duties, charges, royalties, or fees due on local purchases by the grantee of aviation gas, fuel, and oil, whether refined or in crude form . . . "(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 crude form . . ." prcd It is clear from the foregoing, that the exemption of PAL from the payment of taxes on imported aviation gas, fuel and oil is specific and expressly granted under Section 13 of its franchise. On the other hand, CAI's tax exemption on similarly imported fuel products is based merely on Section 15 of PAL's franchise. Had Congress intended to exempt CAI from the payment of taxes, specifically specific tax on its importation of aviation gas, fuel and oil whether refined or in its crude form, it would have so stated in the tax provisions of its franchise. The principle is that the grant of any tax exemption must be clear and categorical and must not admit of any doubt. "Unless it appears clearly and manifestly that an exemption is intended, the provision is to be construed strictly against the party claiming exemption. It is held that exemptions from taxation are highly disfavored in law; and he who claims exemption must be able to justify his claim by the clearest grant of organic or statute law." An exemption from the common burden cannot be permitted to exist upon vague implication." ( Consuelo Borja vs . Collector of Internal Revenue , G.R. No. L-12134, November 30, 1961, citing Asiatic Petroleum vs . Lanes , 49 Phil. 466; House vs . Posadas , 53 Phil. 338; Collector of Internal Revenue vs . Manila Jockey Club , Inc ., G.R. No. L-8755, March 24, 1956) "The rule applied with undeviating rigidity in the Philippines is that for a tax exemption to exist, it must be so categorically declared in words that admit of no doubt." ( Commissioner of Internal Revenue vs . A . D . Guerrero , G.R. No. L-20942, September 22, 1967, 21 SCRA 180) The blanket provision in CAI's franchise to the effect that it shall ipso facto be entitled to any tax privileges that may be enjoyed by any competing individual, partnership or corporation applies prospectively and does not refer to PAL, the franchise of which antedates that of CAI's. PAL was first granted a franchise to establish, operate and maintain air transport services under Act No. 4271 enacted in 1935. Prior to the expiration of Act No. 4271 in November 1985, PD No. 1590 was issued on June 11, 1978 granting PAL a new franchise to continue its air transportation business. On the other hand, R.A. No. 7151, which granted CAI a franchise to establish, operate and maintain transport services by air was passed into law on August 20, 1991. The wording of Section 11 of the franchise of CAI clearly suggests that it is intended to apply prospectively, or "in the event that" another airline established in the future is granted tax privileges that are more favorable than those given to CAI and which would put the latter at a disadvantage. It clearly does not apply to PAL whose franchise was granted earlier. In view of the foregoing, BIR Ruling No. 110-99 dated July 20, 1999 is hereby revoked, subject to the non-retroactivity provisions of Section 246 of the Tax Code of 1997. cdlex Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue