Taxability of the Importation of One (1) Yokovlev 42D Trijet Aircraft under a Lease Agreement

April 11, 1994 BIR RULING NO. 089-94 25 (b) (4) 50 (a) 000-00 089-94 Silangan Airways, Inc. Facilities Center, 548 Shaw Blvd. Mandaluyong, Metro Manila Attention: Mr . Vicente Alejandro Araneta Chairman and Chief Executive Officer Gentlemen : This refers to your letter dated March 28, 1994 requesting for a ruling on the taxability of your importation of one (1) Yokovlev 42D Trijet Aircraft under a lease agreement between your company and Aviaexport of Moscow. cdta It appears that Silangan Airways, Inc. is a grantee of a legislative franchise under Republic Act No. 7349 approved on April 2, 1992, to establish, operate and maintain transport services for carriage of passenger, mails, goods and property by air, both domestic and international; that pursuant to a Lease Contract No. 76-024/05001 dated January 25, 1994, entered into by and between V/O Aviaexport Public Limited Company, Moscow, the Russian Federation as lessor and Silangan Airways, Inc., Manila, Philippines as lessee, the lessee has agreed to pay and take on lease from the lessor YAK-42 aircraft with D-36 engine installed on the leased aircraft and equipment for carrying and transportation of passengers; that the Lessor shall provide the Leased Aircraft with such personnel (flight crew and field staff) which may be required for its servicing, operation and maintenance; that the Leased Period commences from the date of beginning the flight of the Leased Aircraft from the basic airport of the Lessor, the Russian Federation to the Philippines and shall subsist for a period of six months from the said date; that the contract shall be terminated after expiration of the said Leased Period and the aircraft shall be returned back to the Russian Federation; that the parties to the contract can prolong the lease period stipulated only upon signing of an additional mutual agreement by their authorized representatives; that the price of leasing under the lease contract is U.S. $120,000 (One hundred twenty thousand U.S. Dollars) per month; that payment under the present contract is to be effected in U.S. Dollars fifteen (15) days prior to the delivery of Leased Aircraft; and that the lessee will pay to the lessor the amount of U.S. $360,000.00 (Three hundred sixty thousand U.S. Dollars only) in cash or in acceptable guarantee. In reply, please be informed that under the pertinent provisions of Sections 11 and 12 of R.A. 7349 in relation to Section 13 of P.D. 1590 (franchise of Philippine Airlines) which state as follows: "Sec. 11. Tax Provisions . 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. " In the event any competing individual, partnership and corporation receives and enjoys tax privileges which tend to place the grantee herein at any disadvantage, then such provisions shall be deemed part hereof and shall operate equally in favor of the grantee . (emphasis supplied) xxx xxx xxx "Sec. 12. Interpretation of Franchise . This franchise shall not be interpreted to mean as an exclusive grant of the privileges herein provided for. However, 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 the herein grantee at any disadvantage, then such term and/or provision shall be deemed part hereof and shall operate equally in favor of the grantee herein . "Sec. 13. (PAL's franchise) In consideration of the franchise and rights hereby 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) . . . "(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 nontransport 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 . . .". the tax exemption privileges granted to Philippine Airlines shall automatically become part of the franchise of Silangan Airways, Inc. and shall operate equally in its favor. Such being the case, your lease of the subject aircraft under the lease agreement shall not be subject to the value-added tax imposed under Section 101(a) of the Tax Code, as amended. However, the rentals to be paid to Aviaexport of Moscow shall be subject to the final withholding tax at-source of 7 1/2% pursuant to Section 25(b)(4) in relation to Section 50(a) both of the Tax Code, as amended. cdtech Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue