Aboitiz Air Transport No Longer Subject to 5% Franchise Tax but to 10% VAT on Its Gross Receipts from Cargo Transport

March 10, 1999 BIR RULING NO. 028-99 RAs 8241, 8424, 105-000-00-028-99 Balmeo Bautista & Peasales Law Offices Room 309 Margarita Building J.P. Rizal cor. Cardona Streets 1208 Makati City Attention: Atty . Leonides F . Balmeo Gentlemen : This refers to your letter dated February 2, 1999 stating that your client, Aboitiz Air Transport Corporation (AATC), is a domestic corporation engaged in the business of carriage of goods, mail, cargoes and other property by air and is licensed under its franchise (R.A. No. 7583) "to establish, operate and maintain transport services for carriage of goods, mail and other property by air, both domestic and international"; that in consideration of the grant of such franchise, Section 11 of R.A. No. 7583 requires AATC to pay 5% franchise tax on its gross revenues; that the said Section, provides: "SEC. 11. Tax Provisions . In consideration of the franchise and the rights hereby granted, 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." LibLex that R.A. No. 8241, otherwise known as an "Amendment to Expanded Value Added Tax Law" which took effect January 1, 1997 amended R.A. No. 7716, the Expanded Value Added Tax Law; that specifically Section 3 of R.A. No. 8421 amended Section 102 of the EVAT Law and provides as follows: "SEC. 3. Section 102 of the National Internal Revenue Code, as amended, is hereby further amended to read as follows: "SEC. 102. Value-Added Tax on Sale of Services and Use or Lease of Properties . (a) Rate and base of tax. There shall be levied assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. cdll "The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors; stock, real estate, commercial, customs and immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for others; proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common carrier by land, air, and water relative to their transport of goods or cargoes; services of franchise grantees of telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 117 of this Code; services of banks, non-bank financial intermediaries and finance companies; and non-life insurance companies (except their crop insurances) including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties." and that the aforecited Section 102 of the Tax Code of 1997 was retained by R.A. No. 8424, and forms part of the same Code. Based on the foregoing, you now request for a ruling on the following: "1) AATC is not anymore liable for 5% franchise tax but instead is subject to 10% value added tax on its gross receipts from its transport business i.e. as "transportation contractor on its transport of goods or cargoes" including its business of "the transport of goods or cargoes for hire" and its business of acting as "domestic common carrier by" "air" relative to its "transport of goods or cargoes"; "2) AATC is no longer subject to the 5% franchise tax under the aforecited Section 11 of its franchise tax because the 5% franchise tax was replaced by 10% VAT and therefore at present Section 11 of its existing franchise (RA 7583) imposing a 5% franchise tax should be read in conjunction with Section 102 of the NIRC of 1997 imposing 10% VAT, thus the "5% franchise tax" under Sec. 11 of RA 7583 should be replaced with "10% value added tax"; and "3) AATC can pass on to its customers or shippers the said 10% value added tax." In reply, please be informed that Section 7(B), Title XIV Final Provisions of R.A. No. 8424 provides, viz: "(B) The provisions of the National Internal Revenue Code, as amended, and all other laws, including charters of government-owned or controlled corporations, decrees, orders or regulations or parts thereof, that are inconsistent with this Act are hereby repealed or amended accordingly." On the other hand, Section 13 of R.A. No. 8241 provides, thus: "SEC. 13. Repealing Clause . The provisions of Republic Act No. 6938, otherwise known as the Cooperative Code of the Philippines, authorizing the exemption of cooperatives from the sales or value-added tax are hereby repealed. All other laws , orders , issuances , rules and regulations or parts thereof which are not consistent with this Act are hereby repealed , amended or modified accordingly ." Accordingly, based on the foregoing provisions, AATC is no longer subject to the 5% franchise tax but instead is subject to 10% value added tax on its gross receipts from its transport of cargoes since franchise tax was replaced by VAT by operation of law. Thus, VAT, being an indirect tax, the amount of the tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. (Section 105, Tax Code of 1997) Once shifted, it is no longer a tax but an additional cost which the purchaser has to pay to obtain the goods or services. (Philippine Acetylene Co. vs. Commissioner of Internal Revenue, G.R. No. L-19707, August 17, 1967) (BIR Ruling No. 127-96 dated November 26, 1996) 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. prcd Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue