Request for Reconsideration of BIR Ruling No. 175-143-92-328-92 to the Effect that the Philippine Airlines (PAL) is Exempt from All Taxes on Income Derived from Activities Connected with its Franchised Business

April 13, 1994 BIR RULING NO. 097-94 173 UN 35-94 097-94 Philippine Airlines P. O. Box 1955 M a n i l a Attention: Mr . Patricio C . Alcaraz Vice President Treasury Gentlemen : This refers to your request for reconsideration of BIR Ruling No. 175-143-92-328-92 dated November 17, 1992 to the effect that the Philippine Airlines (PAL) is exempt from all taxes on income derived from activities connected with its franchised business. Hence, documentary stamp tax on bank notes/documents having no direct relevance to income on franchise activities, is not covered by PAL's tax exemption. It is contended that under Section 13 of Presidential Decree No. 1590 (PAL's franchise), PAL is unqualifiedly not subject to the documentary stamp tax and, therefore, the Philippine National Bank (PNB), the Landbank and such other banks, in whose favor PAL's promissory notes are executed, shall be liable to the payment of the documentary stamp tax pursuant to Section 173 of the Tax Code, as amended. cdtech In reply, quoted hereunder is Section 13 of P.D. No. 1590, PAL's franchise, reading: "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 grantees from all sources, without distinction as to transport or nontransport corporations, provided that with respect to international air-transport service, only the gross passengers, 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 the following: "(1) All taxes, duties, charges, royalties, or fees due on local purchases by the grantee of aviation gas, fuel, and oil, whether refined or in crude form, and whether such taxes, duties, charges, royalties, or fees are directly due from or imposable upon the purchaser or the seller, producer, manufacturer, or importer of said petroleum products but are billed or passed on to the grantee either as part of the price or cost thereof or by mutual agreement or other arrangement; provided, that all such purchases by, sales or deliveries of aviation gas, fuel, and oil to the grantee shall be for exclusive use in its transport and nontransport operations and other activities incidental thereto; "(2) All taxes, including compensating taxes, duties, charges, royalties, or fees due on all importations by the grantee of aircraft, engines, equipment, machinery, spare parts, accessories, commissary and catering supplies, aviation gas, fuel, and oil, whether refined or in crude form and other articles, supplies, or materials; provided, that such articles or supplies or materials are imported for the use of the grantee in its transport and nontransport operations and other activities incidental thereto and are not locally available in reasonable quantity, quality, or price; "(3) All taxes on lease rentals, interest, fees, and other charges payable to lessors, whether foreign or domestic, of aircraft, engines, equipment, machinery, spare parts, and other property rented, leased, or chartered by the grantee where the payment of such taxes is assumed by the grantee; "(4) All taxes on interest, fees, and other charges on foreign loans obtained and other obligations incurred by the grantee where the payment of such taxes is assumed by the grantee; "(5) All taxes, fees and other charges on the registration, licensing, acquisition, and transfer of aircraft, equipment, motor vehicles, and all other personal and real property of the grantee; and "(6) The corporate development tax under Presidential Decree No. 1158-A. " The grantee, shall, however, PAY THE TAX ON ITS REAL PROPERTY IN CONFORMITY WITH EXISTING LAW ." (Capitalization and emphasis supplied.) The " IN LIEU OF ALL TAXES " clause under the above-quoted provision of Section 13 of P. D. 1590 clearly exempts PAL from all taxes including documentary stamp tax on bank notes/documents executed by it in favor of the Philippine National Bank, Landbank and such other banks, necessary in the conduct of its business covered by the franchise, except the aforementioned tax on its real property for which PAL is expressly made liable. This matter has been ventilated in your very own CTA Case No. 45 dated February 28, 1956 wherein the Court of Tax Appeals ruled that a provision of law imposing a tax in lieu of all taxes of any kind, nature or description, has been generally considered a commutation tax, that is, it is a combination of two or more taxes, as an excise or franchise tax, payment of which would give rise to a privilege exemption from all other taxes . (BIR Ruling UN-035-94 dated February 3, 1994) In the case of the Philippine National Railways vs. Nolting (34 Phil. 401), the Supreme Court held that the "in lieu of" clause in PNR's franchise exempted it from the documentary stamp tax imposed on bills of lading issued by railway companies, PNR's franchise provided that the annual payment for which PNR is liable, when promptly and fully made "shall be in lieu of all taxes of every name and nature, municipal, provincial or central upon its capital stock, franchise, right of way, earnings and all other property owned or operated by the grantee, under this concession or franchise. In upholding PNR's exemption from DST on bills of lading it had issued, the Supreme Court said: "The phrase 'all taxes of every name and nature' is a very inclusive statement, especially when it names, in connection therewith, the only government entities who have a right to collect taxes, it not only includes all payments which might be regarded as taxes, but it excludes everything which might by any possibility, be denominated taxes. . . . " Thus, the payment by PAL of 2% franchise tax based on gross revenues shall be in lieu of all taxes, and therefore, documentary stamp tax which is excluded in the enumeration of taxes it shall pay is deemed included in the term taxes of the "in lieu of" clause to which PAL shall not be subject. Furthermore, a letter addressed to you from the Office of the President of the Philippines dated March 30, 1988 stated, among others: "Under Section 13 of PD No. 1590, PAL, in consideration of its franchise and other rights granted therein, is obliged to pay either a franchise tax of 2% of gross revenues or the basic corporate tax under the National Internal Revenue Code, as amended, whichever is lower, in lieu of all other taxes, duties, licenses, royalties, registration and other fees and charges, except tax on its real property. Furthermore, it is provided under Section 24 of the same decree that "[PAL's] franchise, as amended, or any section or provision hereof may only be modified, amended, or repealed expressly by a special law or decree that shall specifically modify, amend, or repeal, this franchise or any section or provision thereof." In view of the foregoing, your request for reconsideration is hereby granted. Accordingly, since PAL is exempt from documentary stamp tax, the Philippine National Bank, Landbank and such other banks in whose favor the promissory notes and/or documents are executed by PAL, shall be liable for the payment of the corresponding documentary stamp taxes pursuant to Section 173 of the Tax Code which provides that "whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax." This supersedes BIR Ruling No. 175-143-92-328-92 dated November 17, 1992 insofar as it limits PAL's exemption from documentary stamp tax only to such bank notes/documents having direct relevance to income derived from franchised business/activities. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue