BIR Ruling No. 099-11

April 6, 2011 BIR RULING NO. 099-11 Sec. 108 (B) (4) of the Tax Code of 1997; RR 16-05 & 4-07, RMC 046-08; BIR Ruling No. DA-(VAT-057) 552-08; BIR Ruling No. * ; VAT Ruling No. 021-01; BIR Ruling No. DA-(VAT-003) 016-10 Follosco Moralos & Herce 25th Floor, 88 Corporate Center 141 Valero St. corner Sedeo St. Salcedo Village, Makati City Attention: Rachel P. Follosco & Lovely E. Lim Gentlemen : This refers to your letter dated August 10, 2010 requesting confirmation of your opinion that the sale of services rendered to persons engaged in international air transport operations, such as services provided by local suppliers to Delta Air Lines for the accommodation/lodging including meals of its pilots and cabin crews shall be subject to the value-added tax (VAT) at zero percent (0%) rate. DTAIaH The facts as represented are as follows: Delta Air Lines, Inc. is a foreign company organized and existing under the laws of Delaware, United States of America and has branch office in the Philippines engaged in international air transportation services; that it is registered with the Securities and Exchange Commission (SEC) under Registration No. FS200920070. In the ordinary course of operating its business, Delta regularly procures accommodation and lodging, including meals for pilots and cabin crew during flight layovers in the Philippines. From the foregoing, it is your opinion that the sale of the aforementioned hotel services to international airlines which are engaged exclusively in international air transport operations are subject to zero-rated VAT in accordance with Section 108 (B) (4) of the National Internal Revenue Code of 1997, as amended. In reply, please be informed that Section 108 (B) (4) of the 1997 Tax Code, as amended by Republic Act (RA) No. 9337 provides that: "SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. xxx xxx xxx (B) Transactions Subject to Zero Percent (0%) Rate The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate. xxx xxx xxx (4) Services rendered to vessels engaged in international shipping or international air transport operations, including leases of property for use thereof;" The above provision must be read in connection with Section 4.108-5 (b) (4) of Revenue Regulations (RR) No. 16-2005, as amended by RR 4-2007, to wit: "Sec. 4.108-5. Zero-Rated Sale of Services. xxx xxx xxx (b) Transactions Subject to Zero Percent (0%) Rate The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: xxx xxx xxx (4) Services rendered to persons engaged in international shipping or air transport operations, including leases of property for use thereof; Provided, however, that the services referred to herein shall not pertain to those made to common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines, the same being subject to twelve percent (12%) VAT under Sec. 108 of the Tax Code starting Feb. 1, 2006;" The rule on zero-rating of a sale of service to international air carriers is further clarified in Revenue Memorandum Circular No. 046-08 dated February 1, 2008, Q & A 11 states thus: HCISED "REVENUE MEMORANDUM CIRCULAR NO. 046-08 SUBJECT : Clarification of Issues Concerning Common Carrier by Air and Their Agents Relative to the Revenue and Receipt from Transport of Passengers, Goods/Cargoes and Mail, and from Excess Baggage xxx xxx xxx Q-11: Are sales of goods, supplies, equipment, fuel and services to persons engaged in international air transport operation subject to VAT? A-11: The sale of goods, supplies, equipment, fuel and services (including leases of property) to the common carrier to be used in its international air transport operations is zero-rated. Provided, that the same is limited to goods, supplies, equipment, fuel and services pertaining to or attributable to the transport of goods and passengers from a port in the Philippines directly to a foreign port without docking or stopping at any other port in the Philippines to unload passengers and/or cargoes loaded in and from another domestic port; Provided, further, that if any portion of such fuel, equipment, goods or supplies and services is used for purposes other than that mentioned in this paragraph, such portion of fuel, equipment, goods, supplies and services shall be subject to 12% VAT." (emphasis supplied) Based on the foregoing, in order to qualify for zero-rating, the services rendered by a VAT-registered person to a person engaged in international air transport operations must pertain to or must be attributable to the transport of goods and passengers from a port in the Philippines directly to a foreign port without docking or stopping at any port in the Philippines. It is worthy to mention that in the case of international vessels, for which the same rule on zero-rating is applied, this Office held that the VAT zero-rated services contemplated in the VAT law only refer to services rendered to the international vessel itself. Examples of such services are crewing, repair, catering, and other similar arrangements. (VAT Ruling No. 021-01 dated May 15, 2001) Inasmuch as this rule applies as well to international air carriers, it is our opinion, therefore, that for purposes of zero-rating the sale of service to international air carriers, such service must be rendered to the aircraft itself. In the instant case, the services provided by the Hotel to its clients engaged in international air transport operations pertain to room accommodations and food and beverage services. As they are rendered within the Hotel's premises, they have no direct connection with the transport of goods or passengers, and as such, they cannot be considered as services directly attributable to the transport of goods and passengers from a Philippine port directly to a foreign port entitled to zero-rating. Such being the case, the sale of the foregoing services by the Hotel is not zero rated, but is appropriately subject to the 12% VAT. 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. HTDcCE Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue