Liability of Trans World Airlines for 1.5% Tax on Gross Revenue Derived in the Philippines

February 17, 1984 BIR RULING NO. 039-84 24-b-000-00-039-84 Gentlemen : This is with reference to your request of January 12, 1984, on behalf of Inc. (TWA) for a re-consideration of the ruling of this Office dated January 5, 1983 that under Article 9(1) of the RP-US Tax Treaty, TWA is subject to the 1.5% tax on gross revenue derived in the Philippines inclusive of the 15% branch profit remittance tax. It is represented that TWA is a foreign corporation organized under the laws of the United States; that it is engaged in business as an international carrier but does not have landing rights for traffic purposes in the Philippines; that the activity of its Philippine branch is limited only to promotion and issuance of TWA tickets in behalf of its head office; and therefore, since it has no flights to or from the Philippines, no portion of its income from operation of its aircraft in international traffic can be treated as from sources within the Philippines, hence not subject to Philippine taxation in accordance with the said treaty. Section 24, (b)(2)(i) of the National Internal Revenue Code provides ". . . , Provided, however , That international carriers will pay a tax of two and one-half per cent (2-%) on their gross Philippine billings: Gross Philippine Billings include gross revenue realized from uplifts anywhere in the world by any international carrier doing business in the Philippines of passage documents sold therein, whether for passenger, excess baggage or mail, . . ." For the above purpose, the phrase "doing business in the Philippines" is defined by Revenue Regulations No. 3-76 to "include the regular sale of tickets in the Philippines by off-line international airlines either by themselves or through their agents." The same Regulations further provides that "In the case of off-line airlines, there general sales agents (GSA) or duly authorized representatives in the Philippines are hereby constituted as withholding agents pursuant to Section 53 of the National Internal Revenue Code." From the above-quoted provisions of the law and its implementing regulations, it is clearly established that income from sale of "passage of documents sold in the Philippines" are from sources in the Philippines hence taxable in this jurisdiction. The source rule of the RP-US Tax Treaty, Article 4(7), cited in your letter treating "as income from sources within a Contracting State to the extent that they are derived from the outgoing traffic originating from that State," refers only to "Gross Revenue from the operation of ships in international traffic." The phrase "or aircraft" does not appear in the text of the cited rule. The RP-US Tax Treaty does not provide a source rule with respect to revenue from the operation of aircraft in international traffic. Therefore, considering that Article 2, par. 2 of the same Treaty provides that "Any other term used in this Convention and not defined in this Convention shall, unless the context otherwise requires, have the meaning which it has under the laws of the Contracting State whose tax is being determined. . . .", the above-quoted Section 24(b)(2)(1) of the Tax Code and Revenue Regulations No. 3-76 implementing the same, remains as the applicable rule in locating the source of revenue from the operation of aircraft in international traffic. The decision of the Court of Tax Appeals in the British Overseas Airways Corporation vs. Commissioner of Internal Revenue (CTA Cases 2373 and 2561, January 26, 1983) you cited, can not serve as the basis to support your stand because the same is not yet final being still on appeal to the Supreme Court. In view thereof, your request for re-consideration is denied. atdc Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner