Philippine Airlines Can Carry Over as Deduction from Taxable Income, Net Losses Incurred in Immediately Preceding Years

June 25, 1985 BIR RULING NO. 097-85 24-a 000-00 097-85 Gentlemen : This refers to your letter dated April 11, 1985 requesting a ruling as to whether the Philippine Airlines, Inc. (PAL) can carry over as deduction from taxable income for 1984, and for subsequent years, whatever net losses it may have incurred in any of the immediately preceding five years, i.e., 1979, 1980, 1981, 1982 and 1983 pursuant Section 13 of P.D. No. 1590, PAL's new franchise. cdt It appears that the franchise of PAL to establish, operate and maintain air transport services within the Philippines and between the Philippines and other countries was originally granted under Act No. 4271; that the term of said franchise under Act No. 4271 as amended by P.D. No. 1294 is supposed to expire in November, 1985; that the ownership, control and management of PAL have been reacquired by the Philippine Government; that on June 11, 1978, the President issued P.D. No. 1590 entitled "An Act Granting a New Franchise to Philippine Airlines, Inc . to Establish, Operate and Maintain Air-Transport Services in the Philippines and Between the Philippines and Other Countries" for a term of fifty (50) years from the date of the acceptance of the said franchise by the grantee; and that PAL manifested its formal acceptance of the franchise (P.D. No. 1590) only on November 28, 1984. In reply, please be informed that your query is answered in the affirmative. Section 13 of P.D. No. 1590 partly provides as follows: "Sec. 13. 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) 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, or "(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. 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 . . .: xxx xxx xxx For purposes of computing the basic corporate income tax as provided herein, the grantee is authorized: "a. To depreciate its assets to the extent of not more than twice as fast the normal rate of depreciation; and "b. To carry over as a deduction from taxable income any net loss incurred in any year up to five years following the year of such loss." Under the above-quoted provision, PAL shall pay as tax to the Philippine Government during the life of its new franchise either the basic corporate income tax or the 2% franchise tax, whichever is lower; and that if PAL opts to pay the basic corporate income tax, it can claim as deduction from its taxable income (a) accelerated depreciation on its assets, and (b) any net loss incurred in any year up to five years following the year of such loss. Accordingly, since the aforesaid provisions became operative on November 28, 1984, PAL can claim in its income tax returns required by law to be filed on or after said date, the aforesaid deductions consisting of the accelerated depreciation and the carry over net losses, if it opts to pay the corporate income tax provided that the carry over of any net loss does not exceed five years following the year of loss. cdt Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner