Denial of Air Philippines' Request for Tax Exemption on Imported Fuel Products

January 7, 2000 BIR RULING NO. 015-00 P.D. 1590 R.A. 8339 000-00 015-2000 Air Philippines Corporation 15/F Multinational Bancorporation Centre 6805 Ayala Avenue, Makati City Attention: Mr . Morris Stephen B . Pineda Vice President-Finance Gentlemen : This refers to your letter dated February 17, 1999 requesting for a confirmation of your opinion that the same preferential tax treatment granted to Philippine Airlines be extended and deemed to operate in favor of Air Philippines Corporation (Air Philippines). LibLex Your request is based principally on Section 15 of your legislative franchise (R.A. No. 8339), which in part, pertinently reads: ". . . in the event that any competing individual, partnership or corporation shall receive a similar permit or franchise with terms and/or provisions more favorable than those herein granted or which tend to place herein grantee at any disadvantage, then such terms and/or provisions shall be deemed part hereof and shall operate equally in favor of the herein grantee." Since Philippine Airlines, Inc. (PAL) is a "competing corporation" you contend that the more favorable terms and/or provisions in PAL's franchise (P.D. 1590), specifically Section 13 thereof should be deemed part of and should operate equally in favor of Air Philippines. In further support of your request, you alleged that Department of Finance already recognizes this incentive in favor of Air Philippines, using as basis Section 105(u) of the Tariff and Customs Code. We find no merit in your request. Section 13 of P.D. 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 "(b) A franchise tax of two per cent (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. LibLex "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 . . ." 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, Air Philippines is seeking tax exemption on similarly imported fuel products based merely on Section 15 of PAL's franchise. Had Congress intended to exempt Air Philippines from the payment of taxes, specifically specific tax on its importation of aviation gas, fuel and oil whether refined or 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 Air Philippines 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 Air Philippines. 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. 8339, which granted Air Philippines a franchise to establish, operate and maintain transport services by air was passed into law on August 11, 1997. The wording of Section 15 of the Air Philippines franchise 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 Air Philippines and which would put the latter at a disadvantage. It clearly does not apply to PAL whose franchise was granted earlier. Finally your reliance on the Department of Finance ruling that Air Philippines is exempt from the payment of import duties is misplaced. The said ruling, as pointed out in your letter, was based on Section 105(u) of the Tariff and Customs Code. The ruling did not involve an interpretation, much less the application, of Section 15 of the franchise of Air Philippines. In view of the foregoing, your request for a ruling for Air Philippines to be exempt from the payment of taxes, including but not limited to specific taxes like excise taxes in the importation of aviation gas, fuel and oil, whether refined or in crude form, is hereby denied for lack of legal basis. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue