Whether the Federal Express Corporation's (FEC) Aircraft Crew are Subject to Philippine Income Tax on Income/Remuneration Received for Crew Services Rendered to FEC Pursuant to Article 16(3) of the RP US Tax Treaty

April 11, 1995 BIR RULING NO. 069-95 22 000-00 069-95 Federal Express Corporation 2185 Democrat Road Memphis, TN 38132 Attention: Mr . Alan B . Graf, Jr . Senior VP & Chief Financial Officer Gentlemen : This refers to your letter dated January 17, 1995 representing that Federal Express Corporation (FEC) is a resident of the United States and is engaged in the international airline business; that in response to President V. Ramos' invitation to foreign enterprises to invest in the Philippines, FEC, a U.S. corporation has decided to establish a hub facility in the Subic Bay Freeport Zone (SBF); that as part of the hub operations at the SBF, FEC will have inbound and outbound flights from the Philippines; that these flights shall exclusively be in connection with FEC's international air traffic operations; that in accordance with the 1980 Air Transport Agreement between the U.S. and the Philippine Governments, FEC will have international flight operations to and from the Philippines and such points outside the Philippines including but not limited to Japan, Korea, Taiwan, Thailand, Malaysia, Singapore and Indonesia; that for the hub operations, FEC aircraft are flown into the SBF hub facility carrying shipments destined to points inside and outside the Philippines; that after sorting of the shipments, the FEAC aircraft shall depart from the SBF hub facility carrying shipments destined to points outside the Philippines; that for this purpose, FEC will require the service of a crew consisting of pilots; that FEC will base approximately 50 pilots in the Philippines; that the aircraft crew/pilots will each be licensed and certified by the United States Federal Aviation Administration to operate FEC aircraft; that the crew/pilots are all employees of FEC; that none of the aircraft crew/pilots will be of Philippine citizenship; that some of the crew will have their residence outside of the Philippines while other aircraft crew/pilots will have their residence at locations within the Philippines; that each flight will have a regular complement or two to three pilots; that as a member of the regular complement of FEC aircraft, the crew/pilots will be rendering crew service consisting of the actual flight of the aircraft, completion of the required flight paperwork, and any required layover; that for these services, the crew/pilots will receive remuneration from FEC; and that the remuneration will include benefits such as relocation allowances and bonuses. You now request for a confirmation of your following opinions: 1. Pursuant to Article 16(3) of the RP US Tax Treaty, FEC's aircraft crew are not subject to Philippine income tax on income/remuneration received for crew services rendered to FEC; and 2. FEC is not required/obliged to withhold personal income tax on income/remuneration paid to its aircraft crew in connection with the service rendered. In reply, please be informed that Article 16(3) of the RP-US Tax Treaty provides as follows: "Article 16. 3. Notwithstanding the preceding provisions of this article, remuneration derived by an employee of a resident of one of the Contracting States for labor or personal services performed as a member of the regular complement of a ship or aircraft operated in international traffic by a resident of the Contracting State may be fixed only by that Contracting State. Considering the foregoing, your opinion that FEC's aircraft crew/pilots are not subject to Philippine income tax on income/remuneration received for crew services rendered to FEC is hereby confirmed. Consequently, FEC is not required/obliged to withhold personal income tax on income/remuneration paid to its aircraft crew/pilot in connection with the service rendered. 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. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue